(1) If a claimant:
(a) receives a payment from the Fidelity Fund in respect of the claim, and
(b) receives or recovers from another source a payment on account of the pecuniary loss, and
(c) there is a surplus after deducting the amount of the pecuniary loss from the total amount received or recovered by the claimant,
the amount of the surplus is a debt payable by the claimant to the Law Society.
(2) If a claimant:
(a) receives or recovers a payment on account of the pecuniary loss from a source other than the Fidelity Fund, and
(b) recovers judgment against the Law Society, and
(c) there is a surplus after deducting the amount of the pecuniary loss from the total amount received or recovered by the claimant (including the amount of the judgment),
the amount of the judgment is reduced by the amount of the surplus.
64 The Society argued before Greg James J, and before us, that no recoverable pecuniary loss was suffered when the money paid by Smith was brought into account. Taking Mr Raymond de Hayr as an example, the $46,000 received from Smith by way of purported interest had to be treated as reducing the pecuniary loss stemming from the earlier defalcations now found to have been dishonest failures to account. This was so, even though New South Wales has no statutory equivalent of s24(1C)(b) of the Queensland Act.
65 In his second judgment, the primary judge rejected this submission on the following grounds ([2004] NSWSC 464 at [45]-[48]):
45 The plaintiffs have not received back the balance of the money they entrusted to the solicitor which is still outstanding after the part payment by the Law Societies of their claims.
46 It was argued in reliance on [s80A] there was no loss because the plaintiffs received monies from Mr. Smith which he led them to believe were interest payments. The plaintiffs received no refund of capital from Mr. Smith but only what was asserted to be interest. In truth, those monies were provided by way of neither repayment of capital nor payment of interest. The Queensland Act by s.24(1C) permitted deduction of those monies from the claims met by the Queensland Law Society. There is no equivalent in New South Wales. The definition [in s79C] does [not?] exclude the plaintiffs being entitled to have the sums provided to the solicitor, costs and interest calculated in accordance with s.79C(1)(c) treated as pecuniary loss. I see no basis for treating those monies paid by the solicitor as capital nor do I consider that because of that receipt the application of s.79C would require me to deduct them or deduct them with interest from the original capital sum so as to find the plaintiffs have suffered no losses they might claim.
47 So far as the determination of loss is concerned, I do not see that these sums should be deducted, much less that they should be categorised as capital and the amount outstanding as interest. I reject the submission there was no loss within the meaning of s.79A.
48 Since what is claimed here was either not claimed against or disallowed by the Queensland Law Society, no double compensation as might have attracted s.86 could occur if the claims were upheld.
66 Having thus found that Mr de Hayr's primary loss was $46,000, because only $54,000 out of the $100,000 advance had been recovered, the judge then considered what further award should be made in recognition of the fact that Smith had stopped remitting "interest" in June 1988. As indicated, his Honour adopted the Society's methodology with respect to the claims its Council had accepted, then awarded interest calculated at Supreme Court rates from the dates upon which the Society should have allowed the respective claims.
67 The judge rejected the submission that this involved payment of interest on interest in contravention of s94 of the Supreme Court Act. He held that that section did not govern. He considered the respondents' calculations to represent a fair assessment of their pecuniary loss, one that he could adopt in making such order as he thought fit (cf s90D(4) of the Legal Profession Act 1987).
68 In this Court, the Society repeats its submission that no pecuniary loss was suffered, because Smith's payments have to be brought into account along with the recoveries from the Queensland Fund. It is submitted that Greg James J erred in holding (at [45]) that Mr de Hayr did not receive back the whole of the $100,000 he had entrusted to the solicitor. The trial judge's approach was said to have permitted double recovery. It is also said to have contravened the prohibition in s79C(1)(c) of the Act which caps any interest entitlement by reference to Supreme Court rates in respect of unpaid Supreme Court judgments.
69 The respondents support the reasoning of the primary judge. They submit that the Society's argument ignores the fact that the payments made by Smith to the respondents had the character of "interest" in the hands of the respondents. The moneys paid to the respondents by Smith should not be treated as return of capital.
70 In my view, the respondents' submission should be rejected. The Society is substantially, but not wholly, correct in its criticism of the reasoning of Greg James J.
71 There were in truth no mortgage transactions, nor renewals of the same, nor genuine interest payments. Smith misappropriated the clients' money shortly after receipt. The clients lost that money and the right to contractual interest that, but for Smith's failure to account, they would have enjoyed from having the money properly invested.
72 If applicable at all in the present circumstances, s79C(1)(c) allows recovery of interest not exceeding Supreme Court rates calculated to the date on which the claim succeeds. In the present situation, it did not succeed until final orders were made in the Supreme Court. The Society's readiness to allow "pre-judgment" interest at the rate of 8 per cent simple interest would have complied with s79C(1)(c) in its capping aspects had the present claims been originally accepted.
73 And there was no error, in principle, in the judge's allowance of interest at Supreme Court rates upon the sum the Society should have allowed, calculated from the date of the Council's decision to date of judgment in the Supreme Court. I agree with his Honour's reasoning on this particular matter. The judge did not err in holding that s94(2)(a) of the Supreme Court Act 1970 was not brought into play by s79C(1)(c) of the Legal Profession Act 1987. Section 94(2)(a) provides that s94 itself does not authorise the giving of interest upon interest. This stipulation does not concern the rate of interest.
74 The clients must, however, bring to account such sums as are shown by the Society to have been paid to them in reduction of their loss. In Boncristiano v Lohmann [1998] 4 VR 82 at 89, Winneke P referred to the "rule against double compensation" which he summarised in the following terms:
The law, which now embraces equity, will not permit a plaintiff, whatever procedural device is used, to recover more than the damages which have been suffered, no matter what the cause of action upon which he proceeds against the various defendants.
See also Castellan v Electric Power Transmission Pty Ltd (1967) 69 SR(NSW) 159 at 176, 187-188; Midland Montagu Australia Ltd v Harkness (1994) 35 NSWLR 150 at 159; Franklins Self Serve Pty Ltd v Wyber (1999) 48 NSWLR 249.
75 The rule against double compensation does not involve being captive to the payer's intent or the juridical reason for the payment. Thus, money recoverable under one cause of action from one defendant may be reduced because a third party owing a different legal duty (or none at all) has paid money that is viewed by the law as covering the loss for which compensation is claimed.
76 In my opinion, Smith's remittals of "interest" fell within these principles. The primary judge erred in not bringing them into account in computing the clients' pecuniary loss stemming from the defalcations.
77 The payments were not within the exceptional classes identified by Windeyer J in his influential judgment in The National Insurance Co of New Zealand Ltd v Espagne (1961) 105 CLR 569 at 598-600. They were never made as part of some contract (like a contract of insurance) stating or implying that the remitted "interest" was to be provided nothwithstanding any right against the Fund. Nor were they made voluntarily and for the benefit of the clients in the sense that gifts to an injured plaintiff are disregarded in assessing tortious compensation.
78 Smith could not have been allowed to rely upon his own wrongdoing. He therefore would not have been allowed to reclaim these payments which were forwarded by him, purportedly in connection with the original capital advances and as recompense for the clients' being kept out of the money they believed had been advanced to the mortgagors. Yet to allow the clients to pocket the benefit of those receipts, and claim on the Fund as if they had received nothing back from the dishonest solicitor, would be to allow form to triumph over substance. The "interest" payments received by the clients reduced their loss stemming from having been kept out of the misappropriated money.
79 I do not see why the fact that the clients mistakenly thought the receipts from the solicitor were on account of interest, and treated them as such in their income tax returns, should be decisive or even relevant.
80 The moneys remitted by Smith prior to 1 June 1998 were at "interest" rates higher than the 8 per cent simple interest rate adopted by the Society and the Court to compute loss of the use of the clients' money to the date of the Council's ruling on the claims. Those "interest" rates differed according to the rate represented at the time of the particular spurious mortgage transaction.
81 Since the claims on the Fund treat the capital moneys as misappropriated shortly after receipt by Smith the clients cannot themselves take advantage of the higher rates of "interest" actually received from Smith. A just compensation should follow the same logic, with the consequence that Smith's "interest" payments at higher rates should be treated as accelerating the clients' just entitlements. It was thus only some time after 1 June 1998 that the clients were entitled to be compensated by an award of interest for being kept out of their money in consequence of the defalcations. There will need to be a re-calculation referable to each monthly remittal of "interest", calculated by reference to the difference between what was "remitted" and 8 per cent simple interest on the capital sum misappropriated by Smith. The "excessive" interest remitted by Smith on this theory also means that the notional account was in credit for some time after 1 June 1998, ie until entitlements calculated according to the Law Society's approach would have failed to be met by what Smith had actually remitted before that date.
82 There was limited argument about whether there was a later or continuing failure to account within the Act, when the receivers appointed to Smith's New South Wales trust property in 1998 may have informed the clients that the cupboard was bare, so to speak. It is unnecessary to resolve this issue in the circumstances.
83 Since the Society has failed on its primary point which was a matter of general importance to the Society I consider that the Society should pay 75% of the respondents' costs of the appeal. The respondent is, nevertheless, entitled to a certificate under the Suiters' Fund Act, in accordance with the principles stated in Wyong Shire Council v MCC Energy Pty Ltd (No 2) [2005[ NSWCA 196.
84 I therefore propose the following orders: