Vaughan v Legal Practice Board
[2004] VSC 89
•25 March 2004
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
No. 4569 of 2002
| GERALD VAUGHAN AND PATRICIA RALPH | Plaintiffs |
| v | |
| THE LEGAL PRACTICE BOARD AND OTHERS | Defendants |
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JUDGE: | OSBORN J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 4 MARCH 2004 | |
DATE OF JUDGMENT: | 25 MARCH 2004 | |
CASE MAY BE CITED AS: | VAUGHAN v THE LEGAL PRACTICE BOARD | |
MEDIUM NEUTRAL CITATION: | [2004] VSC 89 | |
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Application for summary dismissal - Appeal against Master's order – Defalcations – Trust Account Audit - Duty of care – Misrepresentation by silence – Auditor acting in trade or commerce – Claim in negligence – Negligent misstatement.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | L. Glick SC with R. Randall | Strongman & Crouch |
| For the Third Defendant | J. Dixon | Moray & Agnew |
HIS HONOUR:
The plaintiffs in this matter seek relief with respect to moneys lost by them as a result of defalcations in 2001 by the secondnamed defendant with respect to moneys held by her as their solicitor in her trust account.
The application before me is an appeal against the order of Master Wheeler made on 9 December 2003 striking out the amended statement of claim dated 14 July 2003 insofar as it relates to the thirdnamed defendant and dismissing the plaintiffs' claim against him pursuant to r.23.01 of the Rules of the Supreme Court. Such an appeal is by way of rehearing.
It was conceded before the Master that the amended statement of claim dated 14 July 2003 was deficient and argument both before him and in turn before me has proceeded by reference to a proposed further amended statement of claim being Exhibit CIF2 to the affidavit of Cameron Ian Forrester sworn 16 October 2003.
By that statement of claim it is in substance alleged:
(a)the thirdnamed defendant was formerly an ‘auditor’ as that expression was used in the Legal Profession Practice Act 1958[1], and has since been an ‘approved auditor’ within the meaning of s.3 of the Legal Practice Act 1996.
[1]See Jackson v Renowden [1965] VR 314
(b)at all material times the solicitor was required to have her trust account audited annually and to lodge with the relevant authority a report of that annual audit.
(c)the solicitor was required to apply annually for a renewal of her practising certificate and "subject to certain provisions" the regulatory authority ("the RPA") was required to refuse to issue a practising certificate to the solicitor authorising receipt of trust moneys by her if:
(i)the solicitor defendant failed to lodge an audit report as required; or
(ii)any audit revealed a deficiency in the solicitor's trust account had not been rectified.
(d)the thirdnamed defendant was retained to audit the solicitor's trust account from 1992 onwards, and from 1993 up until 31 October 2000 ("the period of audits") reported that he was of the opinion the solicitor had, during the period of each annual audit, complied with the requirements of the relevant legislation.
(e)in each year during the period of audits the solicitor had a deficiency in her trust account or failed to account for trust moneys received from a client.
(f)at all material times the thirdnamed defendant knew that if his audit reports identified a deficiency in the solicitor's trust account or a failure to account for any trust money, renewal of the solicitor's practising certificate would be refused.
(g)at all material times the thirdnamed defendant knew or ought to have known the plaintiffs, as members of an identified class being the clients of the solicitor would rely upon:
(i)the solicitor being a current practitioner; or
(ii)the solicitor's trust account "previously being properly audited".
(h)the thirdnamed defendant knew or ought to have known that the effect of each of his audit reports for the years during the period of audits would be communicated to the plaintiffs.
(i)by reason of the above matters the thirdnamed defendant owed the plaintiffs a duty of care in auditing the trust account during the period of audits and providing audit reports during that period.
(j)the auditor carried out the annual audits of the solicitor's trust account negligently.
(k)alternatively the provision of audit reports without qualification during the period of audits constituted a representation by silence that there had not been any deficiency in the trust account or a failure to account for trust moneys.
(l)the carrying out of each annual audit and the provision of each audit report occurred in trade and commerce and was misleading and deceptive in breach of s.9 of the Fair Trading Act 1999.
(m)the plaintiffs have suffered loss and damage as a result of the thirdnamed defendants' breach of duty of care or such conduct.
It is to be observed that it is not alleged the plaintiffs retained the secondnamed defendant during the period of audits. The defalcations arose out of retainers subsequent to it. In essence the plaintiffs allege that the secondnamed defendant should not have held a practising certificate at the time they retained her and but for the auditor's negligence or misleading conduct she would not have held such certificate.
As I have noted the application before the Master was argued by reference to a proposed further amended statement of claim. In argument before me Mr Glick conceded that this document was itself unsatisfactory and ultimately submitted that the claim against the thirdnamed defendant should not be dismissed but the statement of claim should be struck out pursuant to r.23.02 of the RSC, and that the plaintiffs should be directed to file and serve an amended statement of claim.
In my view the current proposed further amended statement of claim is unsatisfactory in the following respects:
(a)No particulars whatsoever are given of the deficiencies in the solicitor's trust account during the relevant years. The fact and nature of these deficiencies is the foundation of any claim against the thirdnamed defendant. The plaintiffs have had discovery and the matters relied on must be identified.
(b)The causal connection between such deficiencies and the plaintiffs' loss is not adequately pleaded. The currently proposed further amended pleading oversimplifies the relevant statutory regime. The basis of the alleged causal connection must be clearly articulated.
(c)The original statement of claim alleged negligent misstatement by the thirdnamed defendant. The ultimate allegation of negligent misrepresentation has been deleted from the amended statement of claim but the pleading remains in substance one formulated as a claim in negligent misrepresentation. It may be that this difficulty is insurmountable but insofar as the plaintiffs seek to articulate a claim in negligence with respect to the making of the audits the current pleading is unsatisfactory.
It is well established, however, that the Court should not exercise its power of summary dismissal either pursuant to r.23.01 or its inherent jurisdiction, unless the case is so untenable that it cannot possibly succeed.[2]
[2]See Dey v Victorian Railway Commissioners (1949) 78 CLR 62, General Steel Industries Inc v Commissioners for Railways (NSW) (1964) 112 CLR 125 and particularly per Barwick CJ at 130 and Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 at 271, 290-293.
The Claim under the Fair Trading Act
The thirdnamed defendant contends the claim under the Fair Trading Act must fail because the undertaking of the relevant audits and the making of the relevant auditors' reports were not conduct in trade or commerce.
It is contended the auditor expressed a professional opinion for the purpose of a regulatory requirement imposed by statute.
In Concrete Constructions (New South Wales) Pty Ltd v Nelson[3] the High Court held that the parallel provisions of s.52 of the Trade Practices Act are concerned with:
"… the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character. Such conduct includes, of course, promotional activities in relation to, or for the purposes of, the supply of goods or services to actual or potential consumers, be they identified persons or merely an unidentifiable section of the public. In some areas, the dividing line between what is and what is not conduct 'in trade or commerce' may be less clear and may require the identification of what imports a trading or commercial character to an activity which is not, without more, of that character."[4]
[3](1990) 169 CLR 594
[4]Ibid per Mason CJ, Deane, Dawson and Gaudron JJ at 604
The application of this concept will necessarily involve questions of fact and degree. In Re Ku-Ring-Gai Co-operative Building Society (No. 12) Ltd[5] Deane J stated:
"The terms 'trade' and 'commerce' are not terms of art. They are expressions of fact and terms of common knowledge. While the particular instances that may fall within them will depend upon the varying phases of development of trade, commerce and commercial communication, the terms are clearly of the widest import … They are not restricted to dealings or communications which can properly be described as being at arm's length in the sense that they are within open markets or between strangers or have a dominant objective of profit making. They are apt to include commercial or business dealings in finance between a company and its members which are not within the mainstream of ordinary commercial activities and which, while being commercial in character, are marked by a degree of altruism which is not compatible with a dominant objective of profit making."
[5](1978) 36 FLR 134 at 167
There are at least five aspects of the underlying facts in this matter which might be argued to be relevant to the characterisation of the conduct of the auditor.
(a)The auditor is said to have acted for a fee. I accept that this fact will not necessarily determine the issue but conversely it may be regarded as relevant and the weight to be given to it remains open to debate.
(b)The characterisation of the role of an auditor is itself open to debate. It might be said an auditor is a person with expertise in an aspect of commerce. If this view were taken it may be difficult to characterise what was done in the exercise of such expertise as work done other than in commerce.
(c)It might be said an audit is necessarily incidental to the carrying on of a primary activity. If this be so the essential character of the audit might be regarded as turning on the characterisation of the primary activity. Thus the audit of the books of a hospital or other charitable institution might not be regarded as conduct in trade and commerce. If this view were taken the characterisation of the solicitor's practice and in particular the transactions effected through the trust account would involve as yet unresolved questions of fact.
(d)It might be said the functions of an auditor crystallise in a professional opinion and that this should be contrasted with conduct in trade and commerce.[6]
(e)It might be said the essential character of the audit report in the present case was the fulfilment of the scheme of statutory regulation under which the audit was required. As such it might be thought to have a purpose independent of the purpose of the solicitor's practice i.e. a public purpose imposed by statute. If this be the case it may be the audit is not to be regarded as conduct in trade or commerce. In this regard Mr Dixon relied on the conclusions of Von Doussa J in Chapman v Luminis Pty Ltd (No. 5)[7]. Consideration of the relevant statutory regime may, however, itself require investigation of the detailed requirements imposed under regulations over the period of time relied on. The pleadings do not currently enable this to be done satisfactorily. More fundamentally, however, it is only if this argument were to be accepted to the exclusion of arguments upon the basis of other factors to which I have referred that it could be regarded as conclusive.
[6]cf the analysis of Santow J in Prestia v Aknar 40 NSWLR 165 and in particular his discussion of the article by Professor Bernard McCabe "Revisiting Concrete Constructions" (1995) 3 Trade Practices Law Journal 161.
[7][2001] 123 FCR 62 at paras. 161-191
In Wickstead & Ors v Browne[8] Kirby P stated at p.5:
"Common experience teaches that it is usually more efficient and just to consider the viability of a cause of action when the facts said to support it are adduced and the suggested action can be judged with a full understanding of all relevant evidence. Testimony gives colour and content to the application and development of legal principle."[9]
[8](1992) 30 NSWLR 1
[9]This approach was approved by the High Court on an application for leave to appeal.
When the range of considerations which might bear on the characterisation of conduct as being "in trade or commerce" is considered it is apparent that the question should not be determined without a full understanding of the relevant evidence. Indeed it may be that considerations other than those which I have identified will emerge from such evidence. In any event I have reached the conclusion that it would be inappropriate to further address the competing arguments at this stage in the absence of the evidence.
It follows that I do not accept that the argument that the thirdnamed defendant engaged in conduct in trade or commerce is so untenable that the claim formulated on this basis should be struck out.
It was also submitted on behalf of the thirdnamed defendant that even if he were to be regarded as having acted in trade or commerce in conducting audits of the solicitor's trust account:
(a)the representations by silence relied upon by the plaintiffs could not amount to "conduct" within the meaning of the Fair Trading Act; and
(b)no causal link could be established between such audits and the plaintiffs' loss.
In my view these matters are questions of fact to be determined on the evidence. They turn in part upon the underlying facts of the alleged deficiencies in the trust account records and the terms of the audit reports. They also turn in part upon a detailed consideration of the operation and effect of the relevant statutory regime. They are not matters which at this stage demonstrate the plaintiffs' claim is clearly untenable.
It follows that the questions raised on behalf of the thirdnamed defendant in relation to the claim under the Fair Trading Act are of sufficient uncertainty to mean they cannot be properly resolved against the plaintiffs at this stage of the proceeding.
The Claim in Negligence
I have already recorded that there are some obvious difficulties with respect to the claim in negligence against the thirdnamed defendant as it is currently pleaded. Indeed I have very real reservations that the claim against the auditor can ever be articulated in terms which do not in substance amount to a claim in negligent misstatement.
The plaintiffs seek to draw a distinction between the undertaking of the audit investigation and the report consequent upon it. They seek to focus upon the undertaking of the audit as an independent activity in respect of which the thirdnamed defendant owed a duty of care. In my view this distinction must be difficult to sustain. The critical outcome of the audit under the relevant statutory scheme would appear to be the submission of a report. The audit crystallises in that report and it is only through that report that it has effect upon the exercise of the RPA's powers with respect to the grant of a practising certificate.
If the claim is properly characterisable as one in substance for negligent misstatement then as counsel for the plaintiffs concede the plaintiffs face fundamental difficulties. The relevant principles were summarised by Gaudron J in Perre v Apand[10]:
"It seems to me that much judicial effort has been devoted to, but little gained by, criticising the approaches that have been advanced or theories propounded in this area of the law. Rather, it seems likely that, in time, there will develop a sufficient body of case law from which it is possible to discern different categories for which the special circumstances that call a duty of care into existence can be articulated. That is what Stephen J predicted in Caltex Oil (Australia) Pty Ltd v The Dredge 'Willemstad' ((1976) 136 CLR 529 at 575).
So far as concerns the category of negligent misstatement – more accurately, the failure to provide information or advice or, usually, the failure to provide accurate information or advice – the prediction of Stephen J in Caltex Oil has largely been borne out. That category was impliedly recognised as a discrete category in San Sebastian Pty Ltd v The Minister ((1986) 162 CLR 340 at 355, per Gibbs CJ, Mason, Wilson and Dawson JJ), and expressly recognised as such by Brennan CJ and, also, by Dawson J in Hill v Van Erp ((1997) 188 CLR 159 at 170-171, 175 respectively. Note that (at 188) Toohey J agreed with Dawson J).
So far as concerns negligent misstatement, the circumstances which attract a duty of care are 'known reliance (or dependence) or the assumption of responsibility or a combination of the two' (Bryan v Maloney (1995) 182 CLR 609 at 619, per Mason CJ, Deane and Gaudron JJ, referring to Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 466-468 per Mason J; at 501-502, per Deane J, and Hawker v Clayton (1988) 164 CLR 539 at 545, per Mason CJ and Wilson J; at 576, per Deane J; at 593 per Gaudron J), the word 'known' including circumstances in which reliance or dependence ought to be known (See Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 at 252 per Brennan CJ; at 255, per Dawson J; at 261-262, per Toohey and Gaudron JJ). And in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords ((1997) 188 CLR 241 at 252, per Brennan CJ; at 254, 258 per Dawson J; at 259-260, 266, per Toohey and Gaudron JJ; at 289-291 per McHugh J; at 308-311, per Gummow J), it was not pleaded that the auditors in question knew or ought to have known that a finance provider would rely on their audited statement of accounts and, thus, it was held, on the pleadings, that no duty of care was owed by the auditors to the finance provider."
[10](1999) 198 CLR 180 at 198
Moreover Mr Dixon submitted that no arguable case sounding in negligence could in any event be articulated having regard to the decisions in R LoweLippmann Figdor & Franck v AGC (Advances) Ltd[11] and Esanda Finance Corporation Ltd v Peat Marwick Hungerfords[12].
[11][1992] 2 VR 671
[12](1997) 188 CLR 241
Nevertheless once it is accepted that the claim pursuant to the Fair Trading Act should not be struck out the better view is that it would not be appropriate to strike out the claim in negligence. Not only is it trite to say that the case in negligence must ultimately turn upon the facts as established on the evidence but the facts in issue will be substantially the same as those canvassed in the claim under the Fair Trading Act.
In Wickstead v Browne Kirby P had before him claims based both on allegations of breach of fiduciary duty and in negligence. At p.6 he stated with respect to the claim in negligence:
"The evaluation of the claim would be greatly assisted, to say the least, by the consideration of the full detail of the evidence concerning the relationship between the appellant and the respondent. That evidence will be adduced now, as relevant to the claim for breach of fiduciary duty. I see no reason why we should prematurely shut out the appellant from arguing that the same facts give rise also to a duty of care in negligence at common law."
A similar approach was adopted by Hedigan J in Law Institute of Victoria v Zanca & Anor[13] and by Hansen J in Edingbay Pty Ltd v Aroni Colman & Anor[14]:
[13][1999] VSC 494
[14][1998] VSC 191
Having regard to the above conclusions I propose to make orders pursuant to r.23.02 striking out the existing amended statement of claim. For the reasons I have stated, however, I am not prepared to dismiss the plaintiffs' claim against the thirdnamed defendant pursuant to r.23.01. Subject to the submissions of counsel I propose to order that the amended statement of claim dated 14 July 2003 be struck out insofar as it relates to the thirdnamed defendant and that the plaintiffs file and serve an amended statement of claim within 28 days.
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