61 It is instructive to consider the decision of the English Court of Appeal in Armitage v Nurse [1998] Ch 241, in particular the judgment of Millett LJ. This appeal involved an exclusion clause for trustee liability which absolved the trustee from any liability for loss to the plaintiff's fund from any cause, unless caused by fraud. Was the clause repugnant to the trust or void on grounds of public policy? The Court held that it was open to the parties to exclude liability for negligence, even for gross negligence. Even if the trustees deliberately breached the trust by consciously acting beyond power, their conduct was not fraudulent if they did so in good faith and in the honest belief that they acted in the interests of the beneficiaries.
62 After quoting from Maugham J in In re Vickery [1931] 1 Ch 572 at 583, Millett LJ said at 252:
… But if he [the trustee] consciously takes the risk in good faith and with the best intentions, honestly believing that the risk is one which ought to be taken in the interests of the beneficiaries , there is no reason why he should not be protected by an exemption clause which excludes liability for wilful default. (Emphasis added)
63 His Lordship accepted that there was an irreducible core of obligations owed by trustees to beneficiaries and enforceable by them. While these core obligations did not include skill and care, prudence and diligence, the duty was to 'perform the trusts honestly and in good faith for the benefit of the beneficiaries'.
64 The common law, unlike civil law, did not draw the line between liability for ordinary negligence and gross negligence. English law had always drawn 'a sharp distinction between negligence, however gross … and fraud, bad faith and wilful misconduct'. Millett LJ pointed out that while gross negligence may be evidence of mala fides, it was not the same thing, citing Goodman v Harvey (1836) 4 A & E 870 at 876 per Lord Denman CJ.
65 In Walker v Stones [2001] 2 WLR 623 Sir Christopher Slade considered Armitage v Nurse. The trial judge had stated the proposition that a trustee's conduct could not be categorised as 'dishonest' even if he knew he was acting in breach of trust, if he acted in a genuine belief that what he was doing was for the benefit of the beneficiaries. The proposition was said to be supported by Armitage wherein Millett LJ had said at 251:
… if they do in good faith and in the honest belief that they are acting in the interests of the beneficiaries their conduct is not fraudulent.
66 Of this proposition Sir Christopher said:
… I find myself unable to agree with the third proposition, if stated without qualification. At least in the case of a solicitor-trustee, a qualification must in my opinion be necessary to take account of the case where the trustee's so-called "honest belief", though actually held, is so unreasonable that, by any objective standard, no reasonable solicitor-trustee could have thought that what he did or agreed to do was for the benefit of the beneficiaries. [at 657]
67 The learned judge then referred to accessory liability for breach of trust in the decision of the Privy Council in Royal Brunei Airways Sdn Bhd v Tan [1995] 2 AC 378. He said that he could see no grounds for a different test of honesty in the context of a trustee exemption clause from that applicable to the liability of an accessory in a breach of trust, see 659.
68 Sir Christopher continued:
… Millett LJ was directing his mind to the not uncommon case of what Selwyn LJ had once described as "judicious breaches of trust". I think it most unlikely that he would have intended this dictum to apply in a case where a solicitor-trustee's perception of the interests of the beneficiaries was so unreasonable that no reasonable solicitor-trustee could have held such belief. Indeed in my opinion such a construction of the clause could well render it inconsistent with the very existence of an effective trust. [at 659 - 660]
69 He added that Millett LJ's analysis of trustee exemption clauses emphasised the need for courts to construe such clauses no more widely than their language requires on a fair reading.
70 Accordingly, he concluded that the clause did not exempt trustees from liability for breach of trust, even if committed in the genuine belief that it was in the interests of the beneficiaries, if the belief was so unreasonable that no reasonable solicitor-trustee could have held it. [at 660]
71 Turning to the instant appeal, it is submitted on behalf of the appellants that the conscious breach of trust by the solicitors as found by his Honour, was still, in the belief of the solicitors, for the benefit of the beneficiaries. Mr Lewis believed that he had found another way of achieving protection for the beneficiaries, in lieu of the bearer Deposit Certificate required by the Subscription Agreement.
72 In support of this submission the appellants rely on the contents of paragraph 12 of the statement of Mr Lewis, which they submitted largely survived his Honour's findings. The paragraph is as follows:
By 18 October 1993 I formed the view (rightly or wrongly) that, in relation to future settlements, a satisfactory procedure for protecting the capital investment of the investors was in place. I assumed that the requirements of the Subscription Agreements would be complied with. If there was error by me it was because I did not look at the form of the certificates of deposit by comparison to the definition in the Subscription Agreements. I assumed that the irrevocable direction, in relation to which I had given advice to ECCCL, together with the Deed of Confirmation and the Paying Agency Agreement, protected the investors and would be followed in relation to future settlement. If I had not formed that view, I would not have permitted Minter Ellison to disburse the funds held by it under the Subscription Agreements in relation to the subsequent settlements which occurred on and from 19 October 1993.
73 Counsel for the solicitors also relies on a passage in his Honour's judgment under the heading 'Causation'. It is as follows:
Mr Pembroke submitted that if Minter Ellison were guilty of any of the breaches alleged, no damage flowed from them because the chain of causation was broken. This submission proceeded on the basis that there were two events, either of which brought about that result. Firstly, he submitted that had [Perpetual] become aware that conforming Deposit Certificates were not being furnished, they would have insisted that they should be and, upon that happening, ECCC would have issued such certificates in which case the loss would not have occurred. I do not accept this submission, essentially for the reasons I have given. Notwithstanding the persistent efforts by Minter Ellison to have ECCC provide conforming Deposit Certificates, it failed to do so. That occurred in the context that it had received tax advice that such certificates would not provide the best result, and that in any event Minter Ellison were of the view that the Deed of Confirmation and Irrevocable Authority would provide equivalent security to the conforming Deposit Certificate.
74 In my opinion, a careful reading of his Honour's lengthy examination of the evidence of Mr Lewis reveals that nothing in paragraph 12 of his statement survived to establish that Mr Lewis honestly believed that he had put in place an alternative means of protecting the investors and was conducting himself in good faith and for the benefit of the beneficiaries. In any event the supposed alternative protection took, according to Mr Lewis, until 18 October 1993, to be put in place.
75 One of the difficulties with the evidence of Mr Lewis is the abundance of internal inconsistencies. For example, in the paragraph relied upon, he says that he assumed that the requirements of the Subscription Agreement would be complied with and any error on his part (if there was one) was only that he did not look at the form of the Deposit Certificate to see if it complied. However, these sentences are completely at odds with the letters which the solicitors sent to ECCC on the 13 and 31 May 1993 and indeed, inconsistent with other evidence which Mr Lewis gave at trial.
76 Rolfe J made many findings which were highly critical of the evidence of Mr Lewis. I mention only a few.
77 His Honour found that the continued failure of the solicitors to advise Perpetual that conforming Deposit Certificates were not being obtained was inexcusable. Moreover, he found that it was not an oversight. Accordingly, I interpolate, that it was deliberate.
78 Further, Mr Lewis knew, at least by June 1993, that ECCC did not intend to comply with the Subscription Agreement and provide the requisite Deposit Certificates. Notwithstanding, Mr Lewis made no amendments to the documents. His only response was to say that he either lost sight or failed to appreciate what was required, and, from June 1993, thought that the investors were protected by the Deed of Confirmation, the Paying Agency Agreement and the irrevocable direction from ECCC to Dresdner.
79 His Honour records that at one stage in his evidence Mr Lewis said that he thought the Deposit Certificate received on 1 June 1993 conformed to the definition in the Agreement. He also said that it was not apparent to him that it had to be a bearer certificate. Rolfe J found this answer 'strange' since Minters drafted the agreement. Mr Lewis, however, accepted that paragraph 38 of his statement to the ASC was true and that it was apparent to him in December 1992 and May 1993 that the Deposit Certificates were not in bearer form. His Honour then noted that 'Mr Lewis backtracked and said that it was not apparent to him because he did not recall examining the Deposit Certificates. His Honour said that at this point Mr Lewis' evidence 'became unacceptable' and that 'Mr Lewis was aware from at least December 1992 that ECCC had not furnished conforming Deposit Certificates and was disinclined to do so'.
80 Rolfe J said that Mr Lewis' evidence that he did not recognise that the certificates were not in proper form or the problem to which it gave rise, or that he simply lost sight of or failed to appreciate the situation, was not credible.
81 These findings must dispose of the second and third sentences of paragraph 12 of Mr Lewis' statement.
82 Rolfe J also found that Mr Lewis 'did not consider in any realistic way the position of the investor'. This left Mr Lewis with his statements that his firm was giving ECCC every opportunity to correct the position whilst, according to his Honour, leaving the investor unsecured and at risk. Rolfe J noted that Mr Lewis sought to explain the situation by saying that they had an obligation to their client to allow it to produce a 'better certificate'. In this regard, his Honour categorised some of Mr Lewis' answers as 'simply incorrect'. His Honour then noted the totally inconsistent evidence by the witness on this topic.
83 The judge was also critical of Mr Lewis' evidence that even by 31 May 1993, when it was clear (at the latest) that the investor had a right to rescind and have its money back, he had no obligation to tell the investor of the true position. Mr Lewis provided no reason which his Honour found to be acceptable for this stance.
84 His Honour found that Mr Lewis' evidence created:
… the very serious difficulty that to his knowledge Minter Ellison were receiving non-conforming Deposit Certificates, without any authority from the investors but because it suited ECCC, and were not only not advising the investors but were putting forward those Certificates as conforming. The breach of trust was blatant.
85 After agreeing in cross-examination that the document received from Dresdner on 1 June 1993 was the same as that received on settlement in December 1992 and that it was not a bearer certificate, Mr Lewis gave what the judge described as 'some very strange evidence'. This is set out at pp 615 - 616 of Rolfe J's judgment. It is to the effect that ECCC did not intend to provide a bearer certificate for tax reasons.
86 Rolfe J noted the obvious difficulties with this evidence. First, there had never been any change in the contractual arrangements which the solicitors had put in place on ECCC's instructions. Secondly, the obligation of the solicitors, as the Perpetual's agent on settlement, to obtain a bearer certificate, had not changed. Thirdly, from December 1992 Mr Lewis had been aware that ECCC did not want to provide a bearer certificate. Fourthly, there was absolutely no evidence that between 31 May and 1 June 1993 Mr Lewis became aware of any changed requirement. Moreover, Mr Lewis' evidence was totally inconsistent with the solicitors' letter to the client of 31 May 1993. His Honour said:
If Mr Lewis' evidence is to be accepted on this point, he was not merely breaching the trust duties and being negligent but he was, in my opinion, acting in complete disregard to the interests of the investor , and in a way which, on any view of the matter, could not be justified. [My emphasis]
87 The judge added that in 'a totally unconvincing piece of evidence' Mr Lewis said that one implied from the Deed of Confirmation that the Deposit Certificate was not to be a bearer document. His Honour said that Mr Lewis' evidence on this matter was unacceptable and accordingly rejected.
88 His Honour noted that Mr Lewis attempted to clutch at straws and 'clung to the suggestion' that 'another interpretation' that a bearer certificate was not required was possible. In this regard his Honour said:
I regret to say that this evidence did no credit to Mr Lewis. It tended to point up the view I had formed earlier that he was prepared, on several occasions, to say anything that came into his mind that might, as he saw it, assist his position.
89 Mr Lewis suggested that the problem was corrected on 1 June 1993 by the document Dresdner issued. His Honour continued:
… He agreed they were wrong in accepting a non-bearer certificate and he said the error Minter Ellison made was that the arrangement connected with the taxation advice was something which could be accepted in lieu of a Bearer Deposit Certificate. That answer compelled him to agree that that state of mind required an appreciation that the Bearer Deposit Certificate would not be provided, and:-
"Q. So it was quite plain to Minters that if this new arrangement existed, it involved a different security arrangement?
A. It should have been plain, but unfortunately it wasn't.
Q. I am putting to you that it was plain by virtue of the very appreciation of this arrangement that the Bearer Certificate was not going to be provided?
A. If it had been plain, we would have done something about it": TP.248.
It is very difficult to accept that neither Mr Lewis nor Mr Gaffney appreciated what was happening and that the numerous settlements, which happened after May 1993, proceeded without any proper appreciation of the position, and I do not accept it.
90 His Honour noted that Mr Lewis agreed that the intended replacement procedure had fundamental defects, which were not communicated to Perpetual, that there should have been a complete restructuring of the documents, and that the investor should have been told of the problems. The correspondence made it clear that the solicitors knew that they should communicate with Perpetual. His Honour identified answers from Mr Lewis which acknowledged a belated recognition of the rights of the beneficiaries.
91 In summing-up his appreciation of Mr Lewis' evidence, his Honour said that he found certain aspects of his evidence to be 'unsatisfactory, contradictory and unacceptable'. In particular, his Honour expressly rejected the contention that Mr Lewis had lost sight of or failed to appreciate the significance of the requirement for bearer certificates.
92 These were findings which were completely open to his Honour and are not challenged. While his Honour did not make an express finding that Mr Lewis believed (by October 1993) that a satisfactory procedure to protect the investors was in place, his findings on the lack of credibility of Mr Lewis' evidence make it almost impossible to accept at face value the claims made in the first and fourth sentences of paragraph 12 of the statement.
93 Nor do I accept that anything said by his Honour under the heading 'Causation', referred to earlier, constitutes a positive finding by his Honour that Mr Lewis honestly believed that he had found another means of protecting the beneficiaries and that he was, accordingly, acting in their best interests. The statement by his Honour is far from an acceptance of Mr Lewis' assertions in paragraph 12. It does not correspond with his Honour's finding that the solicitors were derelict in their duty as agent for Perpetual, which dereliction constituted a blatant breach of trust, as well as his subsequent finding that the solicitors' conduct amounted to a gross breach of trust.
94 The argument advanced by Mr Pembroke, of behalf of the appellants, may be ingenious but it cannot be accepted when one takes account of his Honour's findings on the lack of credibility of Mr Lewis in almost every respect. It cannot be concluded on the evidence that a finding could be made that Mr Lewis honestly believed that he had achieved an alternative means of protecting the beneficiaries to the extent required by the agreement and thus believed that he was acting in their best interests and in good faith.
95 I am driven to the inevitable conclusion that the conduct of the solicitors was in bad faith for a number of reasons. Plainly the solicitors consciously and deliberately preferred the interests of their client (ECCC) over that of Perpetual and the beneficiaries. It cannot be gainsaid that they had a very substantial conflict of interest, and so much is acknowledged. It is obvious that the solicitors paid absolutely no heed to their trust duties to Perpetual or to the plight of the beneficiaries. The solicitors proceeded with settlements over a period of around 2 ½ years knowing, on each occasion, that no bearer Deposit Certificate would be forthcoming from ECCC. They knew that their client was in breach of the Subscription Agreement on each occasion. They knew that what they were doing could not possibly be in the interests of the beneficiaries.
96 I have already rejected the proposition that the solicitors honestly or genuinely believed that the beneficiaries were protected. It seems to me that they neither knew nor cared. The breach of trust was conscious and, as his Honour found, blatant. Their conduct in not telling Perpetual about the breach was plainly carried out with the intention of deceiving it into believing that all was well.
97 The solicitors' conduct cannot, in my view, be the subject of exclusion from liability by the clauses relied on, primarily because it was a breach of trust committed in bad faith. A compelling indication of this is that the solicitors, once they knew that they would likely never be handed a conforming Deposit Certificate by ECCC on settlement, nonetheless proceeded to obtain the exclusions on each occasion without ever advising the Perpetual of the true situation. This was simply dishonest.
98 It matters not that the service was a voluntary one. It is not relevant that the solicitors obtained no financial gain except client fees and ECCC's business until December 1995. The solicitors duty to Perpetual was plain - to tell Perpetual right from the beginning that ECCC would not be handing over a bearer certificate on completion. Failing to carry out this duty was to act in bad faith, given the interests of the beneficiaries. Every day that the breach continued placed the beneficiaries at greater risk. The continuing silence of the solicitors compounded the breach and the potential for loss. The plain fact is that no settlement should ever have taken place.
99 I am also of the opinion that the appellants' case on construction of the exclusion clauses fails.
100 One may start with the statement of principle from the High Court in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510:
… the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.
101 The structure of the Subscription Agreement is important. Following Part 1 on 'Interpretation', the subscription for shares is provided in Part 2. Clause 2.1 creates the trust by the solicitors for the subscription moneys provided by Perpetual. The moneys are to be 'held in trust … in accordance with the provisions of this Agreement'. Clause 2.3 requires that the Company (ECCC) use the subscription moneys to procure the provision of the Deposit Certificate 'as detailed in clause 3'.
102 Clause 3 is headed 'Deposit Certificate' and, in 3.1, reiterates the requirement that the Company will procure the delivery of the Deposit Certificate 'prior to Completion, from the funds provided by the Investor to the Company's solicitors pursuant to cl 2.1'. The clause also refers to the delivery to the Paying Agent of the Deposit Certificate 'which complies with the requirements detailed in cl 3.2'. Clause 3.2 sets forth the requirements to which the Deposit Certificate must conform. Clause 3.3 authorises the solicitors to release, prior to completion, an amount up to a specified limit (50%) 'to be applied by the Company solely for the purpose of procuring the Deposit Certificate'. Then follows the exclusion clause (3.4). On its face it refers to the exclusion of liability for the 'disbursement of the funds held pursuant to cl 2.1'.
103 Clause 4, dealing with 'Completion', then follows. It covers the obligations of the Investor and the Company on completion (4.2 and 4.4 respectively). Clause 4.3 provides that on completion the solicitors will pay to ECCC the remaining funds held by them pursuant to cl 2.1. Clause 4.5 provides that the Investor will not be obliged to complete the subscription for the shares and will be entitled to a full refund if, at completion, the events in 4.3 and 4.4 do not occur. Thereafter, nine pages of the Agreement follow, dealing with diverse aspects of the transaction, including for example, waiver.
104 Schedule 4 to the Agreement is in the form of an authority for payment addressed by Perpetual to the solicitors. It authorises the disbursement by the solicitors of moneys held in accordance with cl 2 and acknowledges that an amount up to the limit may have already been disbursed pursuant to cl 3. Thereafter follows the second exclusion clause relied on by the solicitors, which has been set out earlier.
105 Why was the exclusion clause (3.4) placed within the section of the Agreement dealing with the 'Deposit Certificate'? Obviously it was to provide some protection for the solicitors in relation to the disbursement of funds held on trust pursuant to cl 2.1. The disbursement arose at two points of time. The first tranche was to enable ECCC to obtain the Deposit Certificate. At this time, the moneys were unsecured and at risk through loss by the company. The solicitors, as part of their trust obligation in relation to the funds, were obliged to form a view that a conforming Deposit Certificate would be obtained by the company. On completion, when the solicitors were required to pay over the remainder of the moneys held by them in trust pursuant to cl 2.1, the solicitors had to be satisfied that a conforming Deposit Certificate was handed over. This was particularly so given that the solicitors agreed to act as agent for Perpetual on settlement. These were basic trust obligations which could not have been intended to be excluded.