Plaintiffs v Defendants

Supreme Court of Victoria|2008-06-11|Before: PAGONE J

LEGAL PRACTITIONERS - Fidelity fund - Scope and content of 'legal practice' - Meaning of 'in the course of or in connection with' - Whether money invested or reinvested by solicitor - ss 208(2) and 208(3)(b) Legal Practice Act 1996

1 Gerald Vaughan and his mother Patricia Ralph have been the victims of a fraudulent misappropriation of funds by a solicitor. The only remaining issue in this proceeding is whether they may recover the moneys lost against the fidelity fund in accordance with Division 2 of Part 7 of the Legal Practice Act 1996 ("the Act").

2 Section 388 of the Act (subsequently substituted by new legislation) provided for the establishment of the fidelity fund into which contributions and levies were paid. Section 208 of the Act, as it stood at the relevant time, and as relevant to this proceeding, provides that the fidelity fund was held, and was to be applied, by the Board for the purpose of compensating persons who suffered pecuniary loss from a defalcation by a legal practitioner of, or in relation to, any money or other property to which the section applies. Section 208(2) provides that the section applies:

[T]o trust money or other property that was, in the course of or in connection with the practitioner's or firm's legal practice ... , given or paid to, or received by, a person or body referred to in sub-section (1)(a)(b)(c)(d) or (e) -

(a) for or on behalf of a person or body other than the current practitioner, the firm, a partner of the firm or the approved clerk.

In this case it is accepted that Julie Ann Laird, a solicitor, was a person contemplated by the section who was given or paid, or who received, trust money on behalf of Gerald Vaughan and Patricia Ralph. The parties dispute, however, whether the money was given or paid to, or received by, Mrs Laird "in the course of or in connection with" her "legal practice". If it was received in the course of or in connection with her legal practice, the parties then dispute whether or not the plaintiffs' claim is defeated by the exclusion from claims provided for by s 208(3).

A. In the course of or in connection with a legal person

3 The Act does not provide a definition of "legal practice". Counsel for the Board point to the difference in language between the Act and its predecessor which has been considered in earlier cases. Section 64 of the Legal Profession Practice Act 1958, for example, provided for payment from a similar fund (the Solicitors' Guarantee Fund) by way of compensation to persons who had suffered pecuniary loss from a defalcation committed by a solicitor in the course of or in connection with "the solicitor's practice". Thus, counsel for the Board contended that the difference in description of the professional activity in respect of which the respective fidelity funds were applied, indicated that the scope and meaning of "legal practice" under the Act was intended to be different from, and indeed narrower, than had been encompassed by the words "solicitor's practice". The Board's submission went on to contend that the cases dealing with the meaning of "solicitor's practice" were of no assistance in informing the meaning of the words "legal practice" in s 208(2) of the Act. I do not agree with either submission.

4 The Act requires that trust money, which may be the subject of a claim against the fidelity fund, has a sufficient connection with a "legal practice". The meaning to be given to those words is not defined by the Act and should be given their natural meaning consistent with the way in which those words are used throughout the Act. The Act does not only provide for the payment of money from a fidelity fund but, more broadly, for the regulation of the legal profession throughout the State of Victoria. The words "legal practice" appear throughout the Act in many different contexts and should not be understood or given a narrow meaning. In Solicitors' Liability Committee v Gray[1] Lockhart J said about the scope of the practice of a solicitor:

There are many decided cases on the question of what constitutes the practice of a solicitor. We were referred to a large number of them in the course of argument and in the written submissions of counsel for both parties. What is important, however, is to remember that we are considering the scope of the practice of a solicitor in the 1990s, in particular in Australia. The scope of a solicitor's practice has widened considerably in recent time, reflecting the increasing involvement of the Commonwealth Parliament, the Parliaments of the States and Territories and their respective executive governments in human affairs. Virtually nothing today is free from the influence of legislation or decisions of the executive governments and administration. Necessarily, therefore, solicitors are involved in advising their clients in these burgeoning areas of government activity, appearing for them in court cases and instructing counsel.

It is well known and has been so for many years that some solicitors accept appointments to the boards of companies including blue chip public companies. Indeed, this is expressly recognised by the insurance policy in this case in para (h) of the definition of 'practice' mentioned earlier. Work of solicitors in advisory matters ranges from advice in relation to complex international financial transactions to the country solicitor who advises his or her client on matters that are perhaps not strictly within the scope of the solicitor in the usual sense but include, for example, certain advice with respect to investments. The country solicitor is usually a respected figure whose advice is valued by his clients and whose wisdom is respected.

I say all this because it is important not to take a narrow view of the role of a solicitor in modern times or the scope of a solicitor's practice. This role of a solicitor must also be reflected in the interpretation of insurance policies between the solicitor and the insurer.

There must, however, be some point reached where the solicitor ceases to engage in his practice as a solicitor and enter other areas of activity, particularly business activity. This case is an excellent example of the grey dividing line between the two.[2]

This reasoning applies with equal force to the scope of a practitioner's or firm's "legal practice". I specifically reject the submissions initially put to me on behalf of the Board that the scope of legal practice was to be determined by reference to the content of a university law course entitling a person to obtain a law degree or, alternatively, by reference to the more narrow list of core subjects required as a minimum for admission to practice.

5 The scope and content of "legal practice" is a mixed question of fact and law that is not to be construed or constrained by a priori reasoning or artificial constructions. Its scope may helpfully be informed by the many decided cases about the conduct of a solicitor's practice and, where appropriate, perhaps by expert evidence.[3] Its scope and content may alter over time as legal practices evolve and change. In this case it was contended for the Board that the trust money was not given or paid to, or received by, Mrs Laird in the course of or in connection with her legal practice but, rather, in connection with some other activity described generally as her "investment scheme". I do not agree.

6 A difficulty in determining whether the trust moneys were given, paid or received "in the course of or in connection with" Mrs Laird's legal practice arises from the circumstance that Mrs Laird's investment scheme was wholly fictitious. She did receive money from Gerald Vaughan and Patricia Ralph but did so pursuant to a fictitious arrangement. Thus, for example, Mrs Laird wrote to Gerald Vaughan, who also acted on behalf of his mother under a power of attorney, saying that she had a borrower seeking funds on first mortgage security when in fact there was no-one. The plaintiffs were led to believe, and believed, that moneys they had given to Mrs Laird were then lent on their behalf as mortgagees to a borrower on the security of real estate. In fact none of that was true and the money was simply kept by Mrs Laird.

7 It is, however, common ground that I should disregard the fact that Mrs Laird's investment scheme was fictitious and, that for the purposes of this claim, I should treat the fiction as fact. The Board did not contend that Mrs Laird's fraud necessarily defeated the plaintiffs' claim (that is, it did not contend that money received under a fraud could not have been given, paid or received "in the course of or in connection with" her legal practice) because, as was correctly observed on behalf of the Board, "in every defalcation it would be said that the fraudulent acts were not 'in the course of or in connection with the legal practice'".

8 The parties also agreed, in my view correctly, that the burden fell upon the plaintiffs to prove that the trust money had been given or paid to, or was received by, Mrs Laird in the course of or in connection with her legal practice. For the Board it was submitted that Mrs Laird's activities in attracting funds were separate from her legal practice and therefore did not fall within s 208(2). I do not think the facts in this case support that contention sufficiently to be upheld. Mrs Laird was a solicitor and was introduced to the plaintiffs as a solicitor by their accountant who had premises nearby. Correspondence to the plaintiffs from her at all times purported to be in her capacity as a lawyer and she purported to undertake various steps for the plaintiffs as lender of a kind ordinarily undertaken by lawyers acting as solicitors for a lender. She described the responsibility of her "firm" to carry out all necessary searches and enquiries on behalf of the lender, to prepare the mortgage and all other necessary documents on behalf of the lender, to ensure that the lender obtained proper and enforceable security, and to arrange the draw down of the loan when the security had been given and that all documents were in order to give the lender proper security. She specifically said that the mortgage transaction would be carried out by her "in my business as a solicitor" and that all funds were to be negotiated through her trust account. In that context she represented that her work as a solicitor was covered by her professional and fidelity insurance. She also said that she would provide a "solicitor's certificate" to the lender confirming that the security was binding and enforceable.

9 Most, if not all, of what Mrs Laird promised to do was, of course, fictitious and did not occur. However, upon the hypothesis that Mrs Laird was acting as she said, what was offered to the plaintiffs was relevantly in the course of, or at least, in connection with her legal practice. The words "in connection with" in the section are in addition to the words "in the course of" and extend the operation of the section. The Board sought to rely upon material the plaintiffs had not seen, which the Board maintained showed that the opportunity offered to the plaintiffs was part of a wider entrepreneurial activity undertaken by Mrs Laird that could not be regarded as being in the course of her legal practice. That material included a print-out of a Powerpoint presentation entitled "Mortgage Backed Investments" which suggests a business activity by her of a kind that, as a separate activity, might not readily be regarded as within a solicitor's ordinary legal practice. However, it is unsafe to draw inferences from this material without evidence about the context or circumstances in which it was used. Others, who might have been aware of it, may conceivably have dealt with her in a capacity that was affected by that particular knowledge. However, the representations to the plaintiffs were that she had available opportunities arising from the legal practice, and that the transactions were at least connected with her legal practice if not in the course of it. Mrs Laird represented (even in the context of the Powerpoint presentation) that she had investment opportunities in the course of her legal practice which she offered to investors and for whom she would undertake the necessary legal work. The evidence in this case was that the plaintiffs' payment of their money to Mrs Laird was in the course of her legal practice or, at very least, connected with her legal practice.

10 The parties did not seek to lead any expert evidence of the scope of a legal practice, but it has long been known that solicitors have access to money for investment and that some are commonly approached as a source to borrow funds. As long ago as 1888 in Dooby v Watson [4] Kekewich J said:

... I put aside those cases, which apparently are not common now, if ever they were, where the solicitor is intending to make a profit if he can, and in fact acts thoroughly as a money scrivener--where he insures the money of his clients, and so long as he fulfils that insurance, and pays the specified interest, is entitled to do the best he can for himself. A solicitor cannot under any circumstances quâ; solicitor make a bargain of that kind with his client or act in that way. I apprehend, then, that the cases in which a solicitor acts in his proper character may be divided into three classes, all of common occurrence. In the first case a solicitor receives a certain sum of money in order to invest it in a particular mortgage. His client, either on his own selection, or on the advice of the solicitor, has determined to invest a particular sum on a particular mortgage, and all the solicitor does is the legal business, receiving the money and seeing, when the proper time arrives, that the deeds are executed and the money handed over to the mortgagor. His duty in that case is simple but important, and large sums very often pass in that way. In the second case the solicitor receives money in order that he may himself find mortgages to be approved by the client. He retains the money in the meantime. He from time to time reports to his client what mortgages he has found. I use the word "mortgages" only, but of course it is applicable to other investments. He does whatever business is necessary-- advises his client as to the precautions to be taken, and ultimately sees the money handed over either as a whole or in parts to the mortgagee or mortgagees. Beyond that there is a third case, equally common but distinct from the others, where the solicitor does far more than he does even in the second class--that is to say where the client, for some reason, takes little part, perhaps no part at all, in the investment. He may be abroad, as one of the cases cited here shews, the solicitor acting under a power of attorney. All the client then requires is to know that the money has been invested, and that the interest will be payable and be paid. In that case the solicitor has an onerous duty to perform, because, beyond providing the mortgages, beyond doing the mere legal business, he really undertakes the responsibility to his client of seeing that they are good mortgages, on which the money may be safely invested. That is within the ordinary duty of solicitors according to the practice of the profession, and is a more onerous duty, and one which some solicitors, I believe, decline to take.[5]

It may be, as counsel for the Board contended, that the facts in this case look more like Mrs Laird acting as a scrivener[6]; namely, a person to whom money or other property is entrusted for the purpose of lending it out to others at a profit payable to the principal but also at a commission or bonus for the solicitor. It may also be the case that the business of a scrivener is not within "the ordinary scope of the business of a solicitor"[7], but the placement of these moneys was at very least connected with Mrs Laird's legal practice as a solicitor. It was, in my view, also in the course of her legal practice whether or not it might have been in the ordinary scope of a legal practice.

B. Investment or reinvestment by a current practitioner

11 The next issue to consider is whether the claim is defeated by the exclusion in s 208(3)(b). That section provides that a claim does not lie against the fidelity fund:

(b) in respect of a defalcation arising out of the investment or reinvestment of any money by a current practitioner, a firm or a partner of a firm that is not -

(i) merely incidental to the legal practice engaged in by the practitioner or the firm ...

This provision was first introduced as an amendment to the predecessor to the Act in 1995. The amendment was the then government's response to the serious financial difficulties facing the then guarantee fund as a result of reported net deficits from previous claims. The solution adopted was to exclude from claims to the fund defalcations arising out of the investment or reinvestment of any money by a solicitor.

12 The plaintiffs contended that a purposive construction of these provisions would have them apply to circumstances where moneys are given to a legal practitioner for investment or reinvestment by the legal practitioner but would have no application where the investment or reinvestment was made by the client. In this case they say that the moneys given to Mrs Laird by the plaintiffs were not invested or reinvested "by" her but, rather, "by" the plaintiffs through her. To support this proposition they pointed to the circumstance that Gerald Vaughan, for himself and on behalf of his mother, selected loans (the availability of which were made known by Mrs Laird) and gave instructions about whether or not to proceed with them. Thus, they contended that the investment or reinvestments were made by them, not by the legal practitioner, and therefore that the exclusion was not triggered.

13 I am unable to accept this construction of the section as either the natural meaning to be given to the words or as falling within the evident purpose behind their enactment. The words in s 208(3)(b) are simple and clear. They are directed to defalcations arising "out of the investment or reinvestment of any money by", amongst others, people like Mrs Laird. The factual precondition to the operation of the exclusion is that the defalcation arose out of investment or reinvestment by the legal practitioner. There is nothing in the words to suggest that the words should be restricted to circumstances where the client does no more than hand over money to the practitioner without further involvement. Indeed, to restrict the words in that way would create the curious anomaly that the provision might have inconsistent operation as between circumstances that were identical in all respects except that one client was more diligent or curious in knowing how the funds were applied whilst another client was not. In other words that the plaintiffs' claim would have been defeated if, all other things been equal, Mr Vaughan had relied wholly on Mrs Laird and done nothing. The exclusion could also easily be defeated by a legal practitioner (if the construction be correct) by adopting the relatively simple expedient of drawing attention to his or her proposed investments and seeking from the "investor" what may ultimately be little more than formal approval or agreement. The construction urged upon me by the plaintiffs, in my view, is also inconsistent with the inference to be drawn from the very limited exception to the exclusion found in s 208(3)(b)(i). By that provision the exclusion is not made to operate in the case of an investment or reinvestment that was "merely incidental to the legal practice engaged in by the practitioner". That suggests to me that the primary exclusion in s 208(3)(b) was intended to be more broad than the plaintiffs contended. In my view the investment and reinvestment of the plaintiffs' money was undertaken by Mrs Laird as contemplated by the provision. The plaintiffs transferred money to her which she first placed into her trust account and then (as the hypothesis requires) was invested by her in first mortgage loans on their behalf.

14 In any event, I do not consider the facts to support the plaintiffs' conclusion even if I were to adopt their construction. Essential to their construction is that any investment or reinvestment was not made by Mrs Laird but, rather, that the investment or reinvestment was made by them. They point to what they described as their selection of the loans and their giving of instructions as to whether or not to proceed with the loans; however, the activities constituting "investment or reinvestment" in this case involved much more than that. The effective selection of the loans was by Mrs Laird. It was she who informed Gerald Vaughan of what she had available for them to invest. It was she who said that she would make all necessary searches and enquiries on behalf of the lender and who purported to provide details about the properties including council valuations. The plaintiffs' role was little more than that of giving formal instructions for her to invest or reinvest their money: they undertook no separate checking or verification of the loan, the security or the lender. In addition, and in any event, the construction urged for the plaintiffs proceeds upon the false premise of a necessary dichotomy between an investment or reinvestment by the plaintiffs and one by her: an investment and reinvestment by her might also be capable of description simultaneously as an investment or reinvestment on their behalf by Mrs Laird; as elementary principles in the law of agency shows.

15 I should, perhaps for completeness, also indicate that I do not regard the defalcation as arising from investment or reinvestment which was "merely incidental to the legal practice engaged in by" Mrs Laird. On no view of the facts am I able to regard the relationship between Mrs Laird and the plaintiffs as that of solicitor and client other than in connection with the primary activity of an investment or reinvestment of funds. Mrs Laird had not previously acted as solicitor for the plaintiffs and had, it seems, met only once with Gerald Vaughan. The connection between them arose when Mrs Laird wrote to Mr O'Loughlan, who happened to be the accountant for the plaintiffs, on 13 December 2000 informing him of "an opportunity" to place bridging finance for a short period of time. That letter was sent by the accountant to Mr Vaughan. On 22 December 2000 Mrs Laird wrote directly by facsimile transmission to Mr Vaughan repeating that she had an opportunity to place funds at favourable interest rates which she said she was authorised to negotiate. The handwritten notes of discussions between Mr Vaughan and Mrs Laird make it clear that the primary relationship between her and the plaintiffs was for the investment of money at a profit and not by way of any general or specific retainer as a solicitor. Any legal work she undertook was, at best, incidental to the primary activity of placing funds for investment rather than vice versa.

16 In the circumstances I will dismiss the proceeding and, subject to hearing from counsel about costs, will order that the defendants' costs be paid for by the plaintiffs.

[3] See Solicitors' Liability Committee v Gray (1997) 147 ALR 154.

[6] John James, Stroud's Judicial Dictionary of Words and Phrases (4th ed, 1974) vol 5, 2453.

Legal Practice Act 1996

Profession Practice Act 1958

At a glance

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Source

Judgment (38 paragraphs)

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Legislation Cited (3)

Cases Cited (1)