Trenorth Ltd v Mallesons Stephen Jaques

[1999] HCATrans 295

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M100 of 1998

B e t w e e n -

TRENORTH LIMITED (formerly known as Eurolynx Properties Limited)

Applicant

and

MALLESONS STEPHEN JAQUES

Respondent

Application for special leave to appeal

McHUGH J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 10 SEPTEMBER 1999, AT 10.45 AM

Copyright in the High Court of Australia

MR N.J. YOUNG, QC:   May it please the Court, I appear with MR M.D. WYLES for the applicant.  (instructed by Arnold Bloch Leibler)

MR W.F. LALLY, QC:   If the Court pleases, I appear with my learned friend, MR N.D. HOPKINS.  (instructed by Phillips Fox)

McHUGH J:   Yes, Mr Young.

MR YOUNG:   May it please the Court, it is our submission that the Court of Appeal’s decision in this case involves a radical and, we say, dubious extension of the principle of novus actus interveniens.  The particular basis upon which we seek special leave is that the Court of Appeal in its judgment purports to recognise and apply a general principle or rule on the issue of novus actus.  We would state that rule in these terms, namely that the chain of causation between, on the one hand, a professional adviser’s negligent advice and documentation and, on the other hand, financial losses suffered by the client in consequence of acting on that advice and using the document will be broken if the financial losses result in the client’s liability to a third party for the making of fraudulent misrepresentations by the provision of the document.

It seems from the Court of Appeal’s decision that the chain of causation in such circumstances would not be broken if liability arises under some other head such as section 52 or negligent misrepresentation or even statutory rescission pursuant to ‑ ‑ ‑

McHUGH J:   Would you argue that the Court of Appeal’s decision was wrong if Gilbert had had the wrongful state of mind?

MR YOUNG:   Yes, your Honour.

McHUGH J:   You would still argue that?

MR YOUNG:   Yes, your Honour.  We would say it does not matter whether the wrongful state of mind is the result of aggregation of the minds of a number of different corporate representatives or employees or whether it inheres in a single corporate agent.

McHUGH J:   It seemed to me that perhaps the point of principle that might be involved in a case to be stated is something like this, that is a solicitor’s negligence causally connected with a client corporation’s loss when the solicitor’s negligence caused or failed to prevent an otherwise innocent agent of the corporation from performing an act which, when combined with the knowledge and acts of other agents of the corporation, constituted a fraud for which the corporation was responsible.  So it seemed to me that your strongest point here was the innocence, in that sense, of Gilbert.  He knew of the agreement but he did not have the knowledge.

MR YOUNG:   We agree with your Honour that the proposition for which the case stands can be stated in those terms.  But it is our view of the judgment, our submission, that the judgment is actually founded on an even wider flaw.

McHUGH J:   I know it is, I know it is, yes.

MR YOUNG:   It really does raise the proposition that fraud, of its inherent nature, is always so irregular a basis for liability that a client suffers because it relies on the advice or uses the document, that the chain of causation will ordinarily be broken.  The Court of Appeal put it that way because their analysis was undertaken at a high level of abstraction.  They never focused upon the particular representation and the fact that Mallesons drafted a representation, they knew it left out the separate agreement, and Justice Eames said they knew it was false, and it was that representation that went into the document that was then circulated.

McHUGH J:   It went into the document after it had been seen by Gilbert, did it not?

MR YOUNG:   Yes, but his evidence was accepted that he simply relied upon the advice that it was appropriate not to ‑ ‑ ‑

McHUGH J:   Yes, you have a finding of fact in your favour that he would not have approved of it if he had been told.

MR YOUNG:   Yes, but the point I was endeavouring to make, your Honour, is that the Court of Appeal’s analysis was not an analysis of the particular duty of care or of the particular breach.  Rather, it was an analysis in terms of a fraud, or the fraud, or any fraudulent conduct, or fraud ordinarily will operate to break the chain of causation. 

McHUGH J:   They did refer to the fraud as so irregular.  I do not quite understand what significance the words “so irregular” meant.

MR YOUNG:   Your Honour is right.  The references I had in mind include that one.  Can I take the Court to the critical pages in the Court of Appeal’s reasons at page 112 and following.  The passage your Honour has in mind is at 114 line 13.

McHUGH J:   Yes.

MR YOUNG:   The point I was making, your Honour, can be demonstrated by the section that leads to that.

I do not think it can be said, as a matter of common sense and experience, that the perpetration of a fraud –

not the use of a document containing a misstatement that is rendered fraudulent by an aggregation of knowledge but “the perpetration of a fraud” -

was something which “in the ordinary course of things” was likely to occur if Mallesons was negligent –

Then “supervening act”, without any examination of what the supervening act was and how it was causally connected to Mallesons’ conduct, leads into the next sentence about irregularity. 

The same point can be demonstrated, your Honour, at the next page, 115, in several places.  The first two sentences in the last paragraph commencing at line 31.  There is a dismissal of the finding of fact in our favour.  The basis for it is stated to be:

The effect of the decision below was effectively to exculpate Trenorth by concluding that Mallesons had not simply a duty to inquire into the prior negotiations (as to which I say nothing) but also a duty to remove the risk of any fraudulent conduct on its client’s part.

GUMMOW J:   Yes.  There is some discussion of that sort of problem in paragraph 448 of the secondary statement in Torts.

MR YOUNG:   Yes.  This kind of elevation of fraud is something which, of its inherent nature, will ordinary break the chain of causation.  It is not something that finds support in the law of the United States or the law of Canada or, hitherto, in the law of Australia of England.  There are principles that have been enunciated in this Court on numerous occasions which could best be described as guiding principles as to how to access the causal significance of an alleged intervening act.  They include the scope of the risk, whether the risk was increased, what would have happened if the negligence had not occurred.  That was a point that was dismissed in this judgment by Justice Kenny as equating to a mere application of the “but for” test. 

But Bennett’s Case is clear that when you have an intervening act you must ask what would have happened had there been no negligence, because it is only by doing so that you can determine whether the negligence that precipitated the false document was continuing to be an operating cause. 

McHUGH J:   Confirm my recollection of Krakowski, but it was only the final act of Gilbert in agreeing to the section 32 statement or approving of it which completed the elements of the fraud of the company.

MR YOUNG:   Yes, your Honour.  The facts are clear that it was the element of intention, that is an intention that the document should be understood as conveying a representation that the instrument of lease was the whole of the relevant agreements with the tenant.  That that intention that the document should be so understood was found by going to an aggregation of the state of mind of the negotiators, Cini and Ryan, and aggregating that with the innocent state of mind of Gilbert, but he knew what the document contained and he was the one who acted on the solicitors’ advice and approved the document.  That was the step and, indeed, in Krakowski, it is clear from this passage at 583 point 6:

Even if Gilbert, not knowing of the prior conversations between Mermelstein and Cini and Ryan, did not perceive that the s 32 statement would be taken to represent that the lease contained the whole agreement, an inference that Eurolynx intended or was willing that that representation be conveyed should be drawn against Eurolynx.  In the absence of evidence from Cini or Ryan –

et cetera.  So that was the critical step.  What it really amounts to is this, that the intervening act, the fraud in the abstract way the Court of Appeal talks about it, really consisted of no more than relying on the solicitors’ advice to do exactly what the solicitors advised the client to do, providing the document to the other contracting party which the solicitors had drawn and which they knew excluded the separate agreement, providing it in accordance with the solicitors’ advice.  And the only element you add to that to get liability in deceit, rather than section 52, is the aggregate knowledge and intention of the company’s agents.

McHUGH J:   Yes, it seems to me at the moment that the strongest point going for you is that the solicitors’ negligence, in effect, marched hand in hand with the act which constituted the fraud.

MR YOUNG:   Exactly, your Honour.  It was, in the language of Medlin, a direct or indirect contributing cause to the very intervening act, on any view of things. 

McHUGH J:   Yes.  I do not think we need hear you any further, Mr Young.

MR YOUNG:   If the Court pleases.

McHUGH J:   Yes, Mr Lally.

MR LALLY:   If the Court pleases, special leave is inappropriate in this case because the factual determinations that needed to be made were made after the “but for” test was answered.  It is a case where the negative answer to that does not provide the ultimate solution.

McHUGH J:   Is that so?  On the facts as found, as a matter of law, would not one be able to say that the solicitors were a cause of the applicant’s loss if their act caused or failed to prevent Gilbert, an otherwise innocent agent, from performing an act which, combined with the knowledge and acts of other employees of the corporation, constituted the fraud for which the corporation was liable in damages?

MR LALLY:   But the client is the company.

McHUGH J:   I appreciate that.

MR LALLY:   And the determination of the question whether, given that negligence is a cause in that – applying the “but for” test, it is a necessary precondition, to determine whether or not in the circumstances as in accordance with the finding of this Court there is then an act which is deliberate or voluntary, one has to go to the question of whether or not that event, or that is the very risk that materialised.  So that the reference to Bennett’s Case, Chappel v Hart, exposes that point that if there is a Rogers v Whitaker duty to warn a patient, and it is the failure to warn, and that very risk emanates, it can be said that because that risk was foreseeable there was that duty to advise in respect of it.

McHUGH J:   This seems to be getting very close to an argument about remoteness, which is an outstanding issue. 

MR LALLY:   No.  With respect, it was the application of the consideration of facts that Justice Kenny had to undertake to determine, given that the “but for” test does not answer the question, what is the next stage?  It is her reasoning at page 113 that brings into play this question.  It is at paragraph 26.  Having determined that there was a deliberate and wrongful act of the company, at line 4 ‑ ‑ ‑

McHUGH J:   Yes, I appreciate that, but that seems to me to be the whole point.  I think you would be on strong ground if Gilbert had had the necessary state of mind but in this Court in Krakowski and in the Court of Appeal it was held that the did not.  But this Court went on to say, well, that did not mean that the corporation was not guilty of fraud, because you could take into account the acts and knowledge of others.  But if you ask yourself, as a matter of common sense, did Mallesons’ failure to insist on disclosure of the other agreement contribute to the fraud or contribute to the loss, surely it is at least arguable that it did.

MR LALLY:   But that is the “but for” test.

McHUGH J:   Of course it satisfies the “but for”, it has to satisfy the “but for”, otherwise it is not causally connected, but still, just as a matter of common sense, if you ask somebody in the street did Mallesons contribute to this loss.

MR LALLY:   Without Mallesons having drawn the document, of course the fraud would not have occurred.

McHUGH J:   Exactly.

MR LALLY:   But Cini and Ryan, with their negotiations, that is the start of the relevant matters of fact that determined whether or not fraud occurred here, because without the negotiations and the consciousness of the company as to the relevance of the 10 per cent return required by the purchaser, the representations constituted by the handing over of the documents would have had no effect.  They would not have been material.  It is that consciousness and intention that the company had.  The fact that ‑ ‑ ‑

McHUGH J:   I appreciate that.  That is one way if you look at it from that end.  You look at it from the other end, without Gilbert’s approval of the documents prepared by Mallesons, negligently, and Gilbert has an innocent state of mind, there would have been no fraud.  You may well be right in the end, but it does seem to me at the moment, Mr Lally, that there are some important questions of principle involved in what is a fairly unusual type of case.

MR LALLY:   It is, and that is the unusual aspect of this case, and it involved factual findings.  It can be put in this way:  can a company relieve itself of its obligations when it has all the knowledge through its proper servants and agents, its manager and the agent dealing with it, to then have somebody else deal with the solicitors who do not know that?  That is why ‑ ‑ ‑

McHUGH J:   I am not sure that is the right question to ask when you are asking about whether Mallesons’ negligence was a contributing cause to this loss.  There is no question of contributory negligence alleged here, I noticed.  I suppose after Ashley it would not have made much difference anyway.

MR LALLY:   No.  That is the relevance of why there needs to be a duty not to expose a client to the risk that materialised.  Now, I appreciate that questions of foreseeability are then dealing with remoteness but it is a level at which causation – it marks the outer limit, and it has to be that tort and its consequences that have to be foreseen.  That is the very issue that Chief Justice Mason in March v Stramare went on to deal with, that very issue, after having determined that where there is a case where there is setting of the scene and there is another act, and it does not matter whether it is subsequent or it is running in parallel, that to determine obviously “but for” the negligence the client would be saved from its fraud. 

The more difficult question then is, given that the client may be saved from its fraud, what is the critical question to ask?  The critical question then is, was there a duty?  There has to be a duty for the solicitor to guard against that.  The foundation for all of this came from Lord Wilberforce in McGhee’s Case, the coal case, the man with the dermatitis, and the starting point, at his Lordship said, was whether or not there had been a duty to protect him.  Chomentowski, as the Chief Justice referred to in March v Stramare, was a case where the head waiter of the restaurant was lodging the moneys in the overnight safe deposit and he was belted on the head.  The reason why, even though that was a deliberate and tortious act, that occurred, there was a duty on the employer to guard for his employee, his protection, whereas in this case, “Is there a duty?”- - -

McHUGH J:   Chomentowski did not turn on causation, did it, it fell on duty?  That is Chomentowski v Red Garter?

MR LALLY:   That is so.  But it demonstrates the point that when his Honour had to then consider Weld-Blundell v Stephens on this point that was taken about it being a malicious act, it raised the very question that is raised here.  It does not overcome it because there was this original duty.  That is why her Honour, in paragraph 31, goes to that point.

GUMMOW J:   Page 115?

MR LALLY:   Yes, Justice Gummow, at 115:

In this case, I do not think it is sufficient to say that Samuel would have prevented the fraud had she given correct advice.

That is the “but for” test.

The effect of the decision below was effectively to exculpate Trenorth by concluding that Mallesons had not simply a duty to inquire into the prior negotiations…..but also a duty to remove the risk of any fraudulent conduct on its client’s part.  As counsel for the appellant pointed out, it has never been alleged by Trenorth that Mallesons had a duty of care “not to expose Trenorth to a risk of injury arising from deliberate or voluntary conduct or even to guard against that risk”.  Even if Samuel knew that Gilbert would follow her advice (and the trial judge so found) this did not make fraud a likely consequence of deficient advice, especially as she did not know what had been said by Cini and Ryan in the course of those negotiations as to the rent the property was to yield.  Fraud upon a client’s part is not, in the ordinary course of events, something which is likely to flow from a solicitor’s negligent act. 

That has been the test that has been followed, and it was followed again in Bennett where the phrase – and I refer to 420 to 421 in the reasons for judgment of Justice Gaudron, and this is the passage relied upon by our learned friends, that:

generally speaking, if an injury occurs within an area of foreseeable risk, then, in the absence of evidence that the breach had no effect, or that the injury would have occurred even if the duty had been performed, it will be taken that the breach of the common law duty caused or materially contributed to the injury. 

The point that they do not address – but of course, as her Honour observes, the starting point is that there has to be an injury occurring within the area of foreseeable risk.  The injury, of course, in this case has to be, as was said in Mahoney’s Case, the extract that is referred to in March v Stramare, of where you have conduct, it has to be the tortious conduct and its consequences.  So that it would have to be foreseeable that this event was going to be one, in this instance, of fraud with the consequences of a contract of sale being rescinded and restitution ‑ ‑ ‑

McHUGH J:   Well, it seems to me the very propositions you have stated themselves raise some important questions as to what extent foreseeability is an element in causation, as opposed to remoteness.

MR LALLY:   But that has been determined, with respect, in March v Stramare, in ‑ ‑ ‑

McHUGH J:   It was not determined; it is a dicta.

MR LALLY:   It is dicta, but it has been applied, and it is a question of applying those principles to the facts.  That is what has occurred here, that upon the findings of fact by this Court, it was the client that was found to be guilty of fraud but not the solicitor, whereas the facts that our learned friends would wish to pursue would be of a case where the company is not treated as a company but only a portion of that company, being the person who dealt with the solicitor at that last occasions, rather than the personnel within that company who had had the active involvement with the events that were material to the fraudulent act. 

Other than proceeding into that question of whether or not there is a duty of care, the Court would otherwise be left with the “but for” test being the sole test of causation because that is the way in which the case against us for special leave is, in effect, put when it is stripped away, that it is a contributing cause because without that work done on behalf of the client, the documentation which constituted the representation would not have gone forward and there would have been no representation.  But that is avoiding the critical issue.  Here it is not the representation but it is the fact of fraud. 

The fact of fraud came about because of the finding of this Court that there was a consciousness and there was an intention and both of those matters were findings of fact that did involve the conduct of Cini and the conduct of Ryan and that the client cannot be divided in that instance to be, for the purposes of the cause of action against the solicitors at a later time, one assumes that the client is simply Mr Gilbert because that is really the effect of our learned friend’s submission here this morning, that when it came to the question of the necessary causal link, one should not view Cini and Ryan and consciousness and the intention so important, as her Honour observe in paragraph 31 of her reasons for judgment, as relevant, but simply the person who brings the documents and takes them away. 

That demonstrates why, in our submission, it comes back to being a question of fact, of the application of the principles that are well know, that have been exemplified again recently in Chappel v Hart, and where it is explicable, not so much concerning whether or not it is remoteness, but determining what is the question that one asks after the “but for” test has been considered.  That is why, when his Honour the learned trial judge had sought to apply those principles, he was driven to the position of having to determine that – and taking your Honour’s words out of an earlier decision – “fraud was on the cards”, and that demonstrated that the proper principles were at the front of his mind, the application of the facts was not and that the reasons for judgment of Justice Kenny exemplify that, that unless you

can get to that stage of whether it be a concurrent event or a subsequent event, unless one can be satisfied that there was an existing – a duty to have that in mind, there is not the necessary causal link because, after all, causation and the quality of the link are all questions of fact.

McHUGH J:   Was it not part of Mallesons’ duty to protect the client from committing a fraud?

MR LALLY:   Not of fraud; involving using the documents that it has just prepared to perpetrate a fraud involving commercial rent, the return of a 10 per cent – an amount for lease that did not represent the commercial lease.  That was what was insidious about this case and that was the material that made the matters of intention and consciousness so vital.  They were the matters where it is said against us, well, it starts with the solicitors.  It does not.  The fraud starts with those initial negotiations where the materiality is so important.  What is the price that is going to be paid?  $1.56 million.  What is the rent that I am going to receive?  I want a 10 per cent return.  We have a tenant who is prepared to pay that 10 per cent return.  And as this Court observed, that could not be so having regard to the fact of the side agreement.  All of that was unknown to the solicitor, that part, and then to say, well, we can be exculpated because we have a cause of action in negligence, leaves that aside.  If the Court pleases.

McHUGH J:   Thank you, Mr Lally.

We need not hear you, Mr Young.  There will be a grant of special leave in this matter.

AT 11.17 AM THE MATTER WAS CONCLUDED