BELL, GAGELER AND KEANE JJ.
Introduction
A client pays money to a law practice on account of legal costs, including barristers' fees and other disbursements, to be incurred in the course of the law practice providing legal services. The law practice misappropriates the money. Can a barrister retained by the law practice recover unpaid fees from the Legal Practitioners Fidelity Fund maintained under the Legal Profession Act 2004 (Vic) ("the Act")?
That is the ultimate question that arises in respect of a claim made against the Fidelity Fund by Mr Simon Gillespie-Jones, a member of the Victorian Bar. The claim was disallowed by the Legal Services Board ("the Board") but upheld on appeal by Mr Gillespie-Jones to the County Court of Victoria (Judge Kennedy) and on further appeal by the Board to the Court of Appeal of the Supreme Court of Victoria (Nettle, Redlich and Hansen JJA).
The Board now appeals, by special leave, to this Court from the decision of the Court of Appeal. The result is that the ultimate question should be answered in the negative, the appeal should be allowed, and orders should be made having the effect of restoring the Board's disallowance of the claim.
Facts
Mr Gillespie-Jones was retained by Mr Michael Grey, an Australian legal practitioner engaged in legal practice on his own account in Victoria. The retainer, between December 2006 and April 2007, was to defend a client of Mr Grey. The client was an individual charged with criminal offences. There was no written agreement between Mr Gillespie-Jones and Mr Grey or between the client and either Mr Gillespie-Jones or Mr Grey.
Judge Kennedy found that the retainer constituted a contract between Mr Gillespie-Jones and Mr Grey. Implicit in that finding was that Mr Gillespie-Jones agreed to provide legal services to the client in consideration of Mr Grey paying Mr Gillespie-Jones the fair and reasonable value of those legal services when billed to Mr Grey.
Mr Gillespie-Jones billed Mr Grey $53,610 between December 2006 and April 2007. There is now no dispute between the parties that the amount so billed was the fair and reasonable value of the legal services Mr Gillespie-Jones provided to the client with the result that Mr Grey became indebted to Mr Gillespie-Jones in that amount.
Mr Grey received from the client $85,100, paid directly or indirectly between August 2006 and May 2007. The payment was in two main tranches. Before Mr Gillespie-Jones was retained by Mr Grey, the client paid $21,700 to Mr Grey partly in cash and partly by cheque and a barrister's clerk, to whom the client had made a direct payment, refunded $8,400 to Mr Grey. After Mr Gillespie-Jones was retained by Mr Grey, the client paid $55,000 into Mr Grey's general trust account by electronic transfer in discrete amounts of $5,000, each accompanied by the client's contemporaneous written explanation that the transfer was for "Grey & Jones" or "Sjg [that is, Mr Gillespie-Jones] via Grey" or some variant of those two alternatives.
Notwithstanding those variations in the method and timing of payment, Judge Kennedy found, in respect of the total amount of $85,100 the client paid to Mr Grey, that the client "was paying on account of any legal costs in relation to his defence, including 'everybody that was to come and help him' in his defence", a category of persons which "might include Mr Grey himself" as well as medical experts to be engaged by Mr Grey. Her Honour specifically found that Mr Grey did not receive any part of the amount paid to him by the client subject to instructions to pay or deliver it to Mr Gillespie-Jones. Those findings accord with the written explanation Mr Gillespie-Jones gave when making his claim against the Fidelity Fund that the client "paid the money to Mr Grey for legal services including disbursements (barristers fees and other out of pocket expenses)". The evidence before Judge Kennedy established that, when paying to Mr Grey, the client did not know what amounts had been sought to be charged by Mr Grey, by Mr Gillespie-Jones, or by any medical expert and that, as at April 2007, the client expected to be repaid some of the money he had paid to Mr Grey because he believed that he had paid Mr Grey more than his actual costs.
Of the total amount of $53,610 Mr Gillespie-Jones billed to Mr Grey, Mr Grey paid to Mr Gillespie-Jones $4,070 in January 2007 and $18,000 in May 2007, leaving $31,540 unpaid. There is no dispute between the parties that Mr Grey dishonestly disbursed the remaining $63,030 of the $85,100 paid to him by the client for purposes of his own. The evidence before Judge Kennedy established that Mr Grey did so by keeping for himself some of the cash the client paid him and otherwise by making unauthorised withdrawals from his general trust account.
Mr Gillespie-Jones made his claim against the Fidelity Fund on 14 January 2008. As later refined, his claim was for an amount corresponding to the $31,540 in unpaid fees in respect of which Mr Grey had become indebted to Mr Gillespie-Jones. The basis of the claim was that, but for the dishonesty of Mr Grey, the amount would have been paid to him by Mr Grey from the remaining $63,030 paid to Mr Grey by the client. Mr Grey had not billed the client for any work he may have done. The only other disbursement Mr Grey incurred in the course of providing legal services to the client was in respect of a medical expert he had retained. That medical expert too made a claim against the Fidelity Fund, in an amount of $16,880.
County Court
Judge Kennedy implicitly accepted that Mr Grey had held the money paid to him by the client on trust for the client and that Mr Gillespie-Jones had no equitable interest in any part of the amount misappropriated by Mr Grey.
Judge Kennedy concluded that Mr Gillespie-Jones was entitled to compensation from the Fidelity Fund on the basis that he was a person who suffered pecuniary loss because of the default constituted by Mr Grey's disbursal of money entrusted to him by the client contrary to the instructions of the client.
According to her Honour, the amount of the unpaid fees claimed by Mr Gillespie-Jones was a pecuniary loss Mr Gillespie-Jones was entitled to claim from the Fidelity Fund because of that default in that: using a "common sense approach", Mr Gillespie-Jones had not been paid those fees "because Mr Grey disbursed money designated for legal costs contrary to [the client's] instructions"; and "but for" the default there would have been sufficient funds available to meet all of the client's legal costs including the outstanding fees of Mr Gillespie-Jones. Her Honour found that the amount of the unpaid fees was not reasonably available to Mr Gillespie-Jones from any source other than the Fidelity Fund, in circumstances where Mr Gillespie-Jones had already pursued Mr Grey to bankruptcy.
Court of Appeal
The Court of Appeal held that Judge Kennedy was wrong to consider that Mr Gillespie-Jones did not need to be a person "for or on whose behalf" the client paid money to Mr Grey to be entitled to claim from the Fidelity Fund.
The Court of Appeal went on to find that the money paid to Mr Grey by the client had been held by Mr Grey on trust for persons, including Mr Gillespie-Jones, to whom Mr Grey was to become indebted in the course of providing legal services to the client.
According to the Court of Appeal:
"In the reality of the circumstances which obtained, the logical and most probable inference is that the client impliedly put the funds beyond his power of immediate recall and thus subjected them to a trust for payment to counsel and other persons retained to assist in the defence."
"[T]he relationship thereby established", held the Court of Appeal, "was a Quistclose trust creating an interest by [Mr Gillespie-Jones] in the trust money" (footnote omitted).
Having observed that it appeared to have been implicit in the arrangement between the client and Mr Grey that the "rights" of Mr Gillespie-Jones and other persons to receive payments out of the fund held by Mr Grey "were conditional upon [Mr Gillespie-Jones] and those other persons having a present right to payment", the Court of Appeal continued:
"Under the terms of the trust so constituted, the solicitor [that is, Mr Grey] had an obligation to pay the respondent [that is, Mr Gillespie-Jones] out of the fund when and if the respondent rendered a memorandum of fees in enforceable form. But the respondent's 'interest' did not depend upon the existence of a present unfulfilled obligation to pay and deliver the money. Even before his fees fell due, the respondent had a contingent interest in the fund, in that it was held on trust for payment to him when his fees became due. The respondent, therefore, had an enforceable right to due administration of the fund and, ultimately, to have the solicitor account to the respondent out of the fund for the amount found to be due upon a memorandum of fees being rendered in enforceable form." (footnote omitted)
The conclusion of the Court of Appeal was that Judge Kennedy was correct, in the result, to hold Mr Gillespie-Jones entitled to compensation from the Fidelity Fund. The result was justified, it said, on the basis that there had been a failure by Mr Grey to pay or deliver to Mr Gillespie-Jones "trust money that was received by [Mr Grey] in the course of legal practice and held for or on behalf of [Mr Gillespie-Jones]".
Issues in the appeal
The Board challenges the finding of the Court of Appeal that Mr Grey held the money paid to him by the client on trust for persons who included Mr Gillespie-Jones.
Mr Gillespie-Jones challenges by notice of contention the holding of the Court of Appeal that he needed to be a person "for or on whose behalf" the client paid money to Mr Grey in order to claim from the Fidelity Fund. Mr Gillespie-Jones thereby relies on the approach adopted by Judge Kennedy.
Accordingly, the issues in the appeal are:
(1) Was the whole or any part of the money paid to Mr Grey by the client held by Mr Grey on trust for the benefit of Mr Gillespie-Jones?
(2) If not, was Mr Gillespie-Jones nevertheless entitled to compensation from the Fidelity Fund?
The resolution of those issues turns in substantial measure on the construction and operation of provisions of the Act and of the Legal Profession Regulations 2005 (Vic) ("the Regulations") made under the Act.
The Act
The purposes of the Act include to improve the regulation of the legal profession, in part by implementing national model provisions for the regulation of the legal profession, and to facilitate the regulation of legal practice on a national basis. The Act was enacted in 2004 following adoption that year by the Standing Committee of Commonwealth, State and Territory Attorneys-General of a national model law for the regulation of the legal profession. The Act was amended to reflect changes in that model law with effect relevantly from May 2007. In the absence of any contention of material differences before and after the amendment, it is sufficient to refer to the Act as amended in May 2007.
Within the lexicon of the Act: an "Australian legal practitioner" includes a person admitted to the legal profession under the Act who holds a current local practising certificate; a "law practice" includes an "Australian legal practitioner who is a sole practitioner" as well as a partnership consisting of Australian legal practitioners; an "associate" of a law practice includes a sole practitioner (in the case of a law practice constituted by the practitioner) as well as a partner in the law practice (in the case of a law practice constituted by a partnership of legal practitioners) and an agent or employee of a law practice; "legal services" means work done, or business transacted, in the ordinary course of legal practice; a "client" includes a person to whom legal services are provided; and "legal costs" means amounts, including disbursements, that a person has been or may be charged by, or is or may become liable to pay to, a law practice for the provision of legal services.
Chapter 3 of the Act contains provisions explained in outline as "regulating various aspects of the legal profession with the aim of ensuring that law practices and legal practitioners operate effectively in the interests of justice, their clients and the public interest". Those parts of Ch 3 of immediate relevance to the issues in the appeal are Pts 3.3 and 3.6.
Part 3.3: "trust money"
Part 3.3 bears centrally on the first issue in the appeal. In outline, the Part "regulates the receipt, handling of and accounting for clients' money by law practices". The first of its expressed purposes is "to ensure that trust money is held by law practices … in a way that protects the interests of persons for or on whose behalf money is held".
Within Pt 3.3:
"trust money, in relation to a law practice, means money entrusted to the law practice in the course of or in connection with the provision of legal services by the practice, and includes -
(a) money received by the practice on account of legal costs in advance of providing the services; and
(b) controlled money received by the practice; and
(c) transit money received by the practice; and
(d) money received by the practice, that is the subject of a power, exercisable by the practice or an associate of the practice, to deal with the money for or on behalf of another person".
"Controlled money" means "money received or held by a law practice in respect of which the practice has a written direction to deposit the money in an account (other than a general trust account) over which the practice has or will have exclusive control". "Transit money" means "money received by a law practice subject to instructions to pay or deliver it to a third party, other than an associate of the practice". A "power" includes an "authority".
That definition of "trust money" within Pt 3.3 is structured in a way that "indicates an exhaustive explanation of the content of the term" and that "also … make[s] it plain that otherwise doubtful cases do fall within its scope". The general explanation that the term "means" money "entrusted" to a law practice in the course of or in connection with the provision of legal services by the practice cannot be read narrowly or technically so as to cover only circumstances which would give rise to a relationship of trust independently of the operation of the Act. The word "entrusted" is rather to be read according to its ordinary meaning in such a context. The general explanation is therefore to be read as covering any money confided to the care or disposal of the law practice in circumstances which indicate that the money has been earmarked for purposes not being purposes of the practice itself. The further explanation that the term "includes" money received by the law practice within four specified categories indicates that money within those categories is always trust money, whether or not it would otherwise fall within the general conception of money entrusted to the law practice.
The Part applies to a law practice having an office in Victoria, in respect of trust money received by the law practice in Victoria. The law practice is obliged to maintain a general trust account with an approved authorised deposit-taking institution in Victoria. As soon as practicable after receiving trust money, the law practice is obliged to deposit the money in that general trust account. That obligation of the law practice to deposit trust money it receives in its general trust account applies except where the money is: the subject of a written direction to deal with the money otherwise than by depositing it in the account (in which case the law practice must deal with the money in accordance with the direction); controlled money (in which case the law practice must deposit the money in the account specified in the written direction relating to the money); transit money (in which case the law practice must pay or deliver the money as required by the instructions relating to the money); or money that is the subject of a power given to the practice or an associate of the practice to deal with the money for or on behalf of another person (in which case the law practice must ensure that the money is dealt with by the practice or associate only in accordance with the power relating to the money). Failure of the law practice to comply with the obligation applicable to the category of trust money received by the law practice is in each case a criminal offence.
The distinct obligations of the law practice in respect of how the law practice must deal with money within each of the specified categories of trust money indicate that those categories are to be read as mutually exclusive. Money received by the practice on account of legal costs in advance of providing the services, unless accompanied by an appropriate written direction, is not amongst those categories excluded from the general obligation to deposit trust money received in the general trust account of the practice. Money of that kind must therefore always be deposited by the law practice in its general trust account.
Two restrictions imposed by the Part on the holding of trust money deposited in a general trust account of a law practice are of particular importance.
First, the law practice is obliged by s 3.3.14 to hold the trust money so deposited "exclusively for the person on whose behalf it is received" and must "disburse the trust money only in accordance with a direction given by the person". Failure of the law practice to comply is, again, a criminal offence. While the word "for", like the expression "on behalf of", "may be used in conjunction with a wide range of relationships", the word is undoubtedly used in that context to "describe a relationship of trustee and cestui que trust". The statutory obligation of the law practice, in other words, is to hold trust money deposited in its general trust account exclusively for the benefit of the person (or persons) on whose behalf the money was received by the law practice and to disburse that money only at the direction of that person (or those persons).
Secondly, by s 3.3.18 the money "is not available for the payment of debts of the practice or any of its associates" save in respect of money to which the law practice or an associate of the law practice "is entitled".
By s 3.3.20(1)(b), a law practice is empowered to withdraw money held in its general trust account "for payment to the practice's account for legal costs owing to the practice if the relevant procedures or requirements prescribed by [the Act and the Regulations] are complied with". It accords with ordinary principles of construction, and furthers the protective purpose of Pt 3.3, to read that specific power as limiting the general power of a law practice to disburse money from its general trust account in accordance with a direction given by the person on whose behalf the money was received by the law practice. Whether or not that person has directed that the money be withdrawn for payment of legal costs (including disbursements) owing to the practice, the effect of s 3.3.20(1)(b) is that the money cannot be withdrawn by the legal practice from its general trust account for that purpose save on two conditions. One is that the withdrawal is for payment to the practice's own account. The other is that the withdrawal is in compliance with the relevant requirements of the Act and the procedures prescribed by the Regulations.
The relevant requirements of the Act are principally those that arise under Pt 3.4, the purposes of which include to regulate the billing of costs for legal services and to provide a mechanism for review of those costs. The requirements of Pt 3.4 ordinarily have the effect that (if not the subject of disclosure made by the practice and a written agreement about the payment of costs entered into between the law practice and the client) legal costs owing to a law practice need not be paid by the client unless they are reviewed by a taxing master and are not recoverable by the law practice unless they accord with the fair and reasonable value of the services provided.
The procedures prescribed by the Regulations allow a law practice to withdraw trust money for payment of legal costs owing to the practice by the person for whom the trust money was paid into the general trust account in two relevant circumstances. One is where the money is withdrawn in accordance with a costs agreement or instructions authorising the withdrawal, or is owed to the practice by way of reimbursement of money already paid by the practice on behalf of the person, provided that, before effecting the withdrawal, the practice gives or sends to the person a request for payment, referring to the withdrawal, or a written notice of withdrawal. The other is where the law practice has given the person a bill relating to the money and the person has not within a specified time objected to the withdrawal of the money or the person has objected but has not within a further specified time applied for review of the legal costs or the money otherwise becomes legally payable.
In relation to trust money held in its general trust account, a law practice is authorised by s 3.3.20(1)(a) of the Act to "exercise a lien, including a general retaining lien, for the amount of legal costs reasonably due and owing by the person to the practice". The incidents of a general retaining lien of a law practice over money held on trust for a client are well understood. The lien is a common law right, implied by law, to retain the money until the costs of the law practice are paid. It is wholly passive and possessory in nature. It "does not mean that the money is not beneficially the money of the client" and it does not mean that the law practice can pay any part of the money to itself.
Part 3.6: the Fidelity Fund
Part 3.6 bears centrally on the second issue in the appeal. In outline, the Part "establishes a system for compensating clients who suffer loss because of a default of a law practice". It has as its expressed purpose, relevantly, "to compensate clients for loss arising out of defaults by law practices arising from acts or omissions of associates". The system it establishes is for claims to be made against the Fidelity Fund, which the Board is obliged to maintain, into which the Board is obliged to pay annual contributions and levies from legal practitioners, and from which the Board is obliged to pay any claim allowed or established against the Fidelity Fund.
The Part applies to a "default" of a law practice arising from or constituted by an act or omission of one or more associates of the practice. "Default" relevantly means:
"a failure of the practice to pay or deliver trust money … that was received by the practice in the course of legal practice by the practice, where the failure arises from or is constituted by an act or omission of an associate that involves dishonesty".
Entitlement to claim against the Fidelity Fund to the Board "about the default" is conferred by s 3.6.7 on "[a] person who suffers pecuniary loss because of a default to which [the] Part applies". "Pecuniary loss" relevantly means, in relation to a default, "the amount of trust money … that is not paid or delivered" or "the amount of money that a person loses or is deprived of".
There is specific provision for such a claim to be made against the Fidelity Fund by a non-defaulting associate of a defaulting law practice "if the associate suffers pecuniary loss because of the default". That specific provision does not operate to give extended meaning to the expression "suffers pecuniary loss because of the default" but rather to make it clear that a person who suffers pecuniary loss because of a default by a law practice is not disqualified from making a claim by reason only of being an associate of that law practice.
The Board may determine a claim by allowing or disallowing it in whole or in part and may disallow or reduce a claim to the extent that, among other things, the negligence of the claimant contributed to the loss or the claimant knowingly assisted in or contributed towards, or was a party or accessory to, the act or omission giving rise to the claim. By force of s 3.6.15 (costs and interest aside) "[t]he amount payable to a person in respect of a default must not exceed the amount of the person's actual pecuniary loss resulting from the default".
An appeal against a decision of the Board disallowing or reducing a claim lies to a court that would have jurisdiction to determine the claim if the claim were for a debt owing to the claimant. The appeal is by way of a new hearing: the court has jurisdiction to review the merits of the Board's decision and to affirm, vary or set aside the decision of the Board and to make a new decision in substitution. Unless the Board waives the requirement, the appellant is required to establish on the appeal that the whole or part of the amount sought to be recovered from the Fidelity Fund is not reasonably available from other sources.
Issue (1): Was Mr Gillespie-Jones a beneficiary?
The terminology of a "Quistclose trust" is helpful as a reminder that legal and equitable remedies may co-exist. The terminology is not helpful if taken to suggest the possibility apart from statute of a non-express trust for non-charitable purposes. There is no reason to think that the Court of Appeal departed from orthodox trust analysis so as to contemplate such a possibility in the present case.
"[U]nless there is something in the circumstances of the case to indicate otherwise, a person who has 'the custody and administration of property on behalf of others' or who 'has received, as and for the beneficial property of another, something which he is to hold, apply or account for specifically for his benefit' is a trustee in the ordinary sense" (footnotes omitted). A legal practitioner who receives money from a client to be held for and on behalf of the client or another person archetypally answers that description.
Unsurprisingly, therefore, there was before the Court of Appeal and remains no dispute between the parties that Mr Grey held the money paid to him by the client as a trustee in the ordinary sense. The first issue is rather about the proper identification of the person or persons for whose benefit Mr Grey held that money on trust. Was the trust solely for the benefit of the client, as Judge Kennedy implicitly accepted, or was the trust for the benefit of Mr Gillespie-Jones and other persons retained by Mr Grey to assist in the client's defence, as the Court of Appeal found?
The finding of the Court of Appeal that Mr Grey held the money on a "Quistclose trust" for the benefit of Mr Gillespie-Jones and other persons retained by Mr Grey to assist in the client's defence is best seen as a finding, based on the Court of Appeal's determination of the inferred mutual intention of the client and Mr Grey, that Mr Grey held the money on an express trust having two limbs. The first limb, on which the Court of Appeal focused because, on the view it took, that limb was operative to give Mr Gillespie-Jones an interest at the time of default, was for the benefit of persons retained by Mr Grey to assist in the client's defence, the money being payable to those persons at the time Mr Grey became indebted to those persons by reason of their retainers. The second limb was for the benefit of the client if, and to the extent that, the money held by Mr Grey was not exhausted by payment in accordance with the first limb. The Court of Appeal's reference to Mr Gillespie-Jones having a "contingent interest" in the money held on trust is best understood as a reference to Mr Gillespie-Jones having an immediate interest sufficient to enforce the trust in advance of any money becoming payable to him.
It is, of course, "the established rule that in order to constitute a trust the intention to do so must be clear and that it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries".
An express trust in the terms found by the Court of Appeal would not fail for want of reasonable certainty as to who are the beneficiaries. "A trust is not uncertain merely because the actual persons to whom the distribution will be made cannot be known in advance of the date of distribution; it is sufficient that … upon that date the beneficiaries can be ascertained with certainty". It does not matter for this purpose that the date of distribution may vary between classes of beneficiaries or within a class of beneficiaries.
Nor would an express trust in the terms found by the Court of Appeal fail for want of sufficient clarity of intention on the part of the client and Mr Grey that such a trust be constituted by reason of the absence of language specifically expressing an intention to create a trust for the benefit of persons retained by Mr Grey to assist in the client's defence. "If the inference to be drawn is that the parties intended to create or protect an interest in a third party and the trust relationship is the appropriate means of creating or protecting that interest or of giving effect to the intention, then there is no reason why in a given case an intention to create a trust should not be inferred".
Whether or not parties intend to create in a third party an interest that is appropriate to be created by a trust relationship falls in each case to be determined by reference to the outward manifestation of the intentions of the parties within the totality of the circumstances. Those circumstances centrally include the nature of the relationship between the parties together with such rights or obligations pertaining to that relationship as might arise under statute or at common law. "The contractual relationship provides one of the most common bases for the establishment or implication and for the definition of a trust"; a relationship established or regulated by statute can provide another basis. Such trust relationship as may arise to give effect to the inferred intention of the parties must mould to statutory rights and obligations of the parties. A trust relationship is not to be recognised or enforced, and is therefore not to be inferred, if and to the extent the trust relationship would give rise to rights or obligations inconsistent with those conferred or imposed by statute.
The real problem with the trust relationship found by the Court of Appeal lies in the difficulty of reconciling the rights and obligations to which that trust relationship would give rise with the rights conferred on the client and obligations imposed on Mr Grey by Pt 3.3 of the Act. The client is not to be inferred to have waived his statutory rights and Mr Grey is not to be inferred to have assumed trust obligations he could not perform consistently with his statutory obligations.
For the purposes of Pt 3.3 of the Act, the category of trust money comprising money received by a law practice on account of legal costs in advance of providing services comprises all money received by a law practice on account of any amount, including any disbursement, that a person may be charged by, or may become liable to pay to, the law practice for any work done or business transacted in the ordinary course of legal practice. The category therefore covers any fees for which the law practice, as distinct from the client, may become liable to pay a barrister and in respect of which, as a disbursement, the law practice may then be entitled to seek reimbursement from the client.
The critical finding of Judge Kennedy that the client "was paying on account of any legal costs in relation to his defence, including 'everybody that was to come and help him' in his defence", meant that the totality of the money paid to Mr Grey by the client fell within that category.
In respect of money within that category, the statutory obligations of Mr Grey were clear. He was to deposit the money in his general trust account and was thereafter to hold the trust money so deposited "exclusively for the person on whose behalf it [was] received" (that is to say, the client) and was to "disburse the trust money only in accordance with a direction given by [that] person". Those statutory obligations were inconsistent with Mr Grey holding the whole or any part of the money on trust for Mr Gillespie-Jones or other persons retained by Mr Grey to assist in the client's defence. They were consistent only with Mr Grey holding the money on trust exclusively for the benefit of the client and subject to the instructions of the client. Because equity regards as done that which ought to have been done, those statutory obligations resulted in Mr Grey having held all of the money exclusively on trust for the benefit of the client immediately from the time of its receipt, whether or not he deposited the money in his general trust account.
By further operation of the Act, unless and until Mr Grey became entitled to the whole or any part of it, the money so held on trust for the benefit of the client was not available for the payment of any debt of Mr Grey, including any debt Mr Grey might owe to persons he retained to assist in the client's defence. Mr Grey would become entitled to withdraw the money for the purpose of being paid legal costs owed to him by the client, including by way of reimbursement for any debts he may have incurred to persons retained to assist in the client's defence, only for payment to his own account and only upon compliance with the procedures and requirements prescribed by the Act.
In the meantime, Mr Grey had the security of his lien: his common law right to retain the money in the trust account until those legal costs were paid. Persons retained by Mr Grey to assist in the client's defence benefited indirectly from the existence of that lien without need of having any beneficial interest in the money. To the extent that the client impliedly put the money he paid to Mr Grey beyond his power of immediate recall, he did so by subjecting that money which Mr Grey was to hold on trust exclusively for him to the operation of that lien, not by subjecting that money to the operation of any trust for the benefit of any other person.
The reasoning of the Court of Appeal, treating the client's entitlement to trust money deposited or required to be deposited by a law practice in its general trust account as non-exclusive, is for the reasons stated contrary to the express terms of the Act. Further, it is apt to give rise to theoretical and practical problems that the legislature could not have intended. For example, a purchaser might entrust to a law practice funds to defray the price of a parcel of land purchased under a contract of which the vendor asserts an entitlement to specific performance, and hence an interest as beneficiary of the funds entrusted to the law practice for that purpose. Application of a "Quistclose trust" analysis would mean that the vendor in this scenario could claim a beneficial entitlement to the funds entrusted by the purchaser to the law practice, even though the purchaser, having purported to rescind the contract, demanded the return of the funds from the law practice of which the purchaser is the client. The legislature is not to be taken to have intended to facilitate the creation of the kind of conflict of interest and duty abhorred by the law, and thereby to expose clients to the expense and uncertainty of disputing with their lawyers over the beneficial ownership of trust money.
Mr Gillespie-Jones had no interest, present or contingent, in the whole or any part of the money paid by the client to Mr Grey.
Issue (2): Was Mr Gillespie-Jones entitled to claim against the Fidelity Fund?
In circumstances where Mr Grey held the money paid to him by the client on trust solely for the benefit of the client, the issue that next arises is whether Mr Gillespie-Jones was nevertheless entitled to compensation from the Fidelity Fund.
Under Pt 3.6 of the Act, the relevant provisions of which have already been set out, the entitlement of a person to claim against the Fidelity Fund requires: first, a "default" by a law practice; secondly, the suffering of "pecuniary loss" by the person; and thirdly, the existence of a relevant causal connection between the suffering of that pecuniary loss and that default, connoted by the words "because of". The amount payable is then limited to "the amount of the person's actual pecuniary loss resulting from the default".
Exposition of those requirements and that limitation is assisted by reference to legislative history. At the time of the adoption of the model law in 2004, different provisions for claiming compensation from fidelity funds existed in legislation regulating the legal profession in each State and Territory. Most relevant for present purposes is the legislation then existing in Victoria and New South Wales.
Legislation then existing in Victoria provided for the fidelity fund in that State to be applied "for the purpose of compensating persons who suffer pecuniary loss from a defalcation of, or in relation to", money received by a legal practitioner for or on behalf of a person, other than the practitioner, in the course of or in connection with the practitioner's legal practice. That language had been held not to require a claimant to be either a client who paid the money or a person on whose behalf the money was received. A claim was limited to "the amount of the actual pecuniary loss suffered by the person". That language had been held to refer to the loss represented by the monetary value of the money the subject of the defalcation and not to include other consequential loss resulting from the defalcation.
Legislation then existing in New South Wales provided for the fidelity fund in that State to be applied "for the purpose of compensating persons who suffer pecuniary loss because of a failure to account". It defined "failure to account" as "a failure by a solicitor to account for, pay or deliver money … received by, or entrusted to, the solicitor … in the course of the solicitor's practice". That statutory definition reflected judicial explanation of the expression "failure to account" in the Legal Practitioners Act 1898 (NSW) as a "failure to pay or deliver moneys … to or on behalf of a person entitled thereto at the time when such payment or delivery should reasonably have been made". Accordingly, there was a "failure to account" if and when, "contrary to the mandate on which he had received the moneys", a solicitor misappropriated them. The legislation in an earlier form had provided for the fidelity fund to be applied "for the purpose of reimbursing persons who may suffer pecuniary loss by reason of the theft, or fraudulent misapplication by a solicitor … of any moneys ... entrusted to the solicitor … in the course of his practice as a solicitor". It had been held in that form to confine application of the fund to the reimbursement of persons "having a legal or equitable interest in the moneys entrusted to the solicitor".
Turning first to the requirement of the model law enacted in Pt 3.6 that there be a "default" by a law practice, it is apparent that the definition of "default" in Pt 3.6 builds on the definition of "failure to account" in the previous New South Wales legislation, qualifying it to apply only to a case where the failure arises from or is constituted by an act or omission of an associate that involves dishonesty. There is a default within the meaning of the Part where a law practice, by reason of the dishonesty of an associate, fails to pay or deliver trust money according to the mandate on which the trust money was received and is held by the law practice. The default lies specifically in that failure to pay or deliver trust money, not in any broader pattern of dishonest conduct of which that failure might form part.
Turning next to the requirement of the model law enacted in Pt 3.6 that a person suffers "pecuniary loss", the definition of "pecuniary loss" in Pt 3.6 did not appear in the previous New South Wales or Victorian legislation or in the previous legislation of any other State or Territory. The first limb of the definition (referring to "the amount of trust money … that is not paid or delivered") is plainly limited to the amount of trust money that the law practice fails to pay or deliver by reason of the dishonesty of an associate. However, the second limb (referring to "the amount of money that a person loses or is deprived of") plainly extends beyond the amount of trust money that the law practice fails to pay or deliver so as to encompass a loss or deprivation of other money that results from such a failure to pay or deliver trust money.
While the model law enacted in Pt 3.6 adopts the language of the previous Victorian legislation in limiting the amount payable to "the amount of the person's actual pecuniary loss resulting from the default", that limitation must be read with the two limbs of the definition of pecuniary loss. The word "actual" no doubt serves to exclude possible or contingent pecuniary loss. However, unlike the position under the previous Victorian legislation, actual pecuniary loss is not limited to the amount of trust money that is not paid or delivered. It extends by virtue of the second limb of the definition of pecuniary loss to a consequential loss or deprivation of money.
Turning finally to the requirement of the model law enacted in Pt 3.6 that a person suffers pecuniary loss "because of" a default, it is apparent that the statutory expression is drawn from the previous New South Wales legislation. That factor is insufficient to conclude that the causal connection the statutory expression connotes can be established (as had been held in respect of the earlier form of the previous New South Wales legislation) only in the case of a person having a legal or equitable interest in the trust money that the law practice failed to pay or deliver by reason of the dishonesty of an associate.
Because causation in a legal context is always purposive, however, the class of persons capable of answering the description of those suffering pecuniary loss because of a default cannot be divorced from the purpose of Pt 3.6.
The class of persons capable of answering the description cannot be confined by reference to the expressed purpose of Pt 3.6 being "to compensate clients". That expression of purpose does not appear in the model law and is best read, as the Court of Appeal suggested, "as providing that the main or dominant purpose of Part 3.6 is to facilitate claims for compensation by clients". The entitlement to claim compensation in the operative provision in Pt 3.6 is conferred, conformably with the model law, using the undefined term "person" rather than the defined term "client".
The purpose of Pt 3.6, encompassing but not limited to the expressed purpose of compensating clients, is rather to be discerned in the relationship between Pt 3.6 and Pt 3.3. The statutory expression of the purpose of Pt 3.3 - to ensure that trust money is held by law practices "in a way that protects the interests of persons for or on whose behalf money is held" - conforms to the expression of purpose in the corresponding provision of the model law and is reflected in the substance of the rights and obligations set out in Pt 3.3. Trust money is money entrusted to a law practice to be held by the law practice for or on behalf of other persons, who may but need not be clients. In the case of trust money paid or required to be paid into the general trust account of a law practice, the persons "for or on whose behalf" the trust money is held are exclusively persons who have a beneficial interest in that trust money.
Part 3.6 provides a safety net for those whose interests are sought to be protected by Pt 3.3, conferring an entitlement to compensation if and to the extent that the protection afforded by Pt 3.3 breaks down due to the dishonesty of an associate of a law practice. The compensatory purpose of Pt 3.6 is encompassed within the protective purpose of Pt 3.3. It is within that protective purpose to compensate persons "for or on whose behalf" trust money is held by a law practice for the adverse pecuniary consequences of the practice departing, by reason of the dishonesty of an associate, from the mandate subject to which that trust money was received and is held.
The compensatory purpose of Pt 3.6 is advanced by construing the requisite causal connection between a default and the suffering of pecuniary loss as conferring an entitlement on persons "for or on whose behalf" trust money is held to claim against the Fidelity Fund for the amount of trust money that the law practice fails to pay or deliver together with any further amount of money that the person loses, or of which the person is deprived, as a consequence of that dishonest failure to pay or deliver trust money. The compensatory effect of Pt 3.6 would be extended beyond the protective purpose of Pt 3.3 were the requisite causal connection to be construed as extending to permit claims for the consequential losses of other persons.
The Court of Appeal was therefore correct to construe the entitlement to compensation conferred by Pt 3.6 as extending only to persons "for or on whose behalf" trust money is held by a law practice. In respect of trust money paid or required to be paid into the general trust account of a law practice, the Court of Appeal was also correct to equate persons "for or on whose behalf" trust money is held by the law practice with persons having a beneficial interest in that trust money.
Mr Gillespie-Jones suffered the non-payment of a debt owed by Mr Grey. He did not suffer the loss of any trust money held for him or on his behalf. The money which Mr Grey failed to pay to Mr Gillespie-Jones was not his to lose, but money to which the client was exclusively beneficially entitled.
With due respect to Judge Kennedy, who adopted the contrary view, it is in any event difficult to characterise Mr Gillespie-Jones as a person who suffered loss "because of" the failure of Mr Grey to pay trust money. Mr Gillespie-Jones was always, and could never have been other than, a creditor of Mr Grey. As between Mr Grey and Mr Gillespie-Jones it was immaterial whether Mr Grey used trust money to pay his debt to Mr Gillespie-Jones. Moreover, any payment to Mr Gillespie-Jones by Mr Grey would not have been a payment of trust money. Had he complied with s 3.3.20(1)(b) of the Act, Mr Grey would have paid trust money into the law practice's own account and drawn upon that account to pay Mr Gillespie-Jones. Mr Gillespie-Jones could not have insisted on payment of money from the trust account and Mr Grey could not have drawn money from the trust account to discharge his debt to Mr Gillespie-Jones other than by paying it into his own account.
Mr Gillespie-Jones never had any entitlement to, or expectation of, payment of trust money. He did not suffer any loss because of the failure by Mr Grey to pay trust money; he suffered a loss because of Mr Grey's failure to pay his debts.