Mccann v Switzerland Insuranceaustralia Ltd

• Jurisdiction: Australia Federal only
• Judge: Gleeson CJ,Gaudron J,Kirby J,Hayne J,Callinan J
• Judgment Date: 14 December 2000
• Neutral Citation: [2000] HCA 65,2000-1214 HCA B
• Court: High Court
• Docket Number: S229/1999
• Date: 14 December 2000

[2000] HCA 65

HIGH COURT OF AUSTRALIA

Gleeson CJ, Gaudron, Kirby, Hayne and Callinan JJ

S229/1999

Harry Kevin McCann (for himself and representing each of the persons identified in Schedule 1 to the notice of appeal)

Appellant

and

Switzerland Insurance Australia Limited & Ors

Respondents

Representation:

A J Meagher SC with I McN Jackman for the appellant (instructed by Allen Allen & Hemsley)

N J Young QC with J T Gleeson for the respondents (instructed by Phillips Fox)

McCann v Switzerland Insurance Australia Limited

Insurance — Professional indemnity insurance — Exclusion for liability brought about by dishonest or fraudulent act or omission of the assured — Loss to client of the appellant — Claim against professional indemnity policy — Whether respondents entitled to rely on the exclusion.

Words and phrases — ‘brought about by’, ‘dishonest or fraudulent act or omission’.

ORDER

Appeal dismissed with costs

1 Gleeson CJ. The issue in this appeal concerns the meaning and effect of an exclusion clause in each of three policies of professional indemnity insurance.

2 The appellants, partners in the legal firm of Allen Allen & Hemsley (‘Allens’), incurred civil liability to a client, Nauru Phosphate Royalties Trust, (‘the Nauru Trust’ or ‘the Trust’), in an amount which included the sum of $US8.7 million. The dispute concerns part of that sum, $US8.55 million. For reasons that will appear, there is no dispute as to the balance of $US150,000. The respondents, the insurers under the policies, are liable to indemnify the appellants against loss arising from any claims made against them during the relevant period in respect of any description of civil liability incurred in connection with their practice. The Nauru Trust made such a claim. It was settled on terms which gave Allens an entitlement to indemnity, subject to what follows.

3 Each policy contained an exclusion clause in the following terms:

‘5(f) This Insurance shall not indemnify the Assured in respect of any liability: —

…

(v) brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured. Save that this exclusion shall not apply to liability arising out of any claim brought about by the dishonest or fraudulent act or omission of any person employed in connection with the Practice [including any articled clerk and any solicitor who is a Consultant or Associate with the Firm];

…’

4 Allens had a London office. At the relevant time, a partner (now a former partner) of the firm, Mr Powles, was in charge of that office. The sum of $US8.7 million was paid by the Nauru Trust into a bank account in London in the name of Allens which Mr Powles maintained and controlled without the knowledge of his partners. The Trust erroneously believed it was an Allens trust account. Mr Powles and two other persons arranged between themselves to take secret commissions in respect of the transaction in a total of $US150,000. Mr Powles later applied the sum of $US150,000 for that fraudulent purpose. To that extent, Allens' entitlement to indemnity is excluded by cl 5(f). The issue is as to the balance of $US8.55 million; but the fraudulent misapplication of $US150,000 is not irrelevant to that issue.

5 The detailed facts of the case are set out in the reasons for judgment of Hayne J.

6 The liability which Allens incurred to the Nauru Trust in respect of the amount of $US8.55 million is not in dispute. However, in order to consider the operation of the insurance policies it is necessary to identify the basis of that liability.

7 As appears from the facts recounted by Hayne J, the Trust had been induced to invest $US8.7 million to purchase an ‘instrument’ (a letter of credit) with a face value of $US10 million. The ‘market’ in which this transaction was to be entered into was fictitious; but the trial judge, Hunter J, found that Mr Powles believed in it. He sought to take advantage of it, not only to make profits for his clients, but also to obtain secret commissions for himself. His need for money arose from a series of previous defalcations.

8 The Nauru Trust was introduced to the transaction by Linpar Ltd. That company, in turn, had the support of a reference and commendation from Mr Powles on Allens' letterhead. It is plain that the Trust relied, and was entitled to rely, upon the standing and reputation of Allens, and believed that the fact that its investment would be made through the medium of an Allens trust account gave it protection. The Court of Appeal found, correctly, that the duty of Mr Powles, as solicitor for the Nauru Trust, ‘was to ensure that the funds [US$8.7 million] were used only for the purpose of acquiring the letter of credit and to safeguard the funds pending delivery of the instrument or security.’

9 In breach of that duty, Mr Powles instructed his bank to transfer $US8.55 million to an account in the name of one Glasby with Barclays Bank. He received no letter of credit or other security in return. He lost control of the funds at that time. Thereafter the $US8.55 million passed through other accounts, over which Mr Powles had no control, into and through the Swiss banking system. They were never recovered. The Nauru Trust never received any letter of credit. As was noted above, the balance of $US150,000 was misappropriated by Mr Powles for himself and others.

10 The Court of Appeal made the following findings, which were not challenged on appeal to this Court (although the characterisation of Mr Powles' conduct based on the findings was disputed).

‘There is no room for any doubt that Powles received the US$8.7 million from the Nauruan Trust and paid away US$8.55 million of it in serious conflict of interest and in breach of trust. His duty was to ensure that the funds were used only for the purpose of acquiring the letter of credit and to safeguard the funds pending delivery of the instrument or security. However, Powles' self-interest was to obtain a transaction so he could earn commissions in fraud of his partners on this and, he hoped, subsequent transactions. The trial judge was correct to characterise Powles' conflict as exacerbated by his great need for substantial funds to cover his fraud of clients' trust moneys and to say that his propensity was to prefer his own interest to that of the Trust if they clashed. …

As Hunter J found, the moneys were paid away by Powles with undue haste and with no attempt whatsoever to check the credentials of [the recipient]. …

On consideration of all the relevant evidence, the irresistible conclusion to which we are driven is that Powles must have appreciated the real risk of loss of the moneys.’

11 Both Hunter J and the Court of Appeal found that Mr Powles was dishonest. To that finding it will be necessary to return.

12 The Court of Appeal went on:

‘Further, Powles was in breach of his fiduciary duty to the Trust in the manner in which he paid away the funds. He failed to ensure that he retained control over the funds without obtaining the required bank instrument. In this regard, he failed to safeguard the funds pending delivery of the instrument. Powles parted with control of the funds in circumstances where he knew (or must have known) that he was placing them at a real and considerable risk of loss. He must have known that parting with the funds, without having acquired the instrument, would seriously endanger any successful recovery of the moneys.’

13 The arguments for the appellants commenced by seeking to draw a sharp distinction between the liability of Allens to the Nauru Trust in respect of $US8.55 million and the liability in respect of $US150,000. The respondents described this distinction as artificial. It is understandable that Allens should resist the notion that the attempt by Mr Powles and his associates to misappropriate $US150,000 should deny them insurance cover in respect of the loss of $US8.55 million. However, as the findings of the Court of Appeal show, there is a relationship between the amounts, and the various aspects of Mr Powles' behaviour, that cannot be disregarded.

14 As to the liability in respect of the $US8.55 million, it is denied that the acts and omissions which brought about the liability were dishonest or fraudulent. This was treated as giving rise to two questions. Was the conduct of Mr Powles in relation to the $US8.55 million dishonest or fraudulent? If so, was there a sufficient connection between the dishonesty or fraud and the liability of Allens to the Nauru Trust to lead to the conclusion that the liability was brought about by the dishonest or fraudulent act or omission?

15 The first question is to be considered in the light of the findings of fact set out above. It is also to be considered in the light of an understanding of Mr Powles' fiduciary responsibilities. What was involved was not merely a negligent payment away of moneys entrusted to him by a client. What was involved was a misapplication of such moneys, in disregard of the client's interests, and in pursuit of his own, conflicting, interests.

16 The principle that a solicitor ‘shall not be permitted to make a gain for himself at the expense of his client’ was said by the Lord Chancellor, Lord Westbury, in Tyrrell v Bank of London1, to be one strictly requiring a faithful and honourable observance. In Law Society of NSW v Harvey2 the Court of Appeal of New South Wales observed that an appreciation of a solicitor's duty not to prefer his or her interest to that of the client rests, not upon some technical instruction, but upon understanding and applying the ordinary concepts of fair dealing. It was said of the solicitor's conduct in that case 3:

‘He recklessly disregarded the need to protect his clients' property, by failing to provide adequate securities. Moneys were invested...