IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

Legal Practitioners - professional misconduct - borrowing moneys from client - fiduciary nature of relationship between solicitor and client - need for client to take independent legal advice.

Legal Practitioners - existence of relationship of solicitor and client - Law Society's Guide to Professional Conduct and Etiquette - prohibited borrowing transactions - requirement of certificate of advice from independent practitioner.

Law Society of New South Wales v. Harvey (1976) 2 NSWLR 154 per Hutley JA at 171

Law Society of New South Wales v. Moulton (1981) 2 NSWLR 736, Hope JA at 739

Re Bannister (1975) 5 ACTR 100

Way v. Bishop (1928) Ch 647 at 660

Ex parte The Attorney-General; Re a Barrister and Solicitor (1972) 20 FLR 234 at 245

practise in the Australian Capital Territory for a

period of two years.

(2) Recommends to the Law Society that it not issue an

unrestricted practising certificate to either

practitioner until it is satisfied that he has,

since the expiration of the suspension, spent at

least twelve months as an employee in a

solicitor's office.

(3) Orders that the practitioners each pay one half of

the Law Society's costs of these proceedings.

By notice of motion dated 30 January 1989 the Law Society of the Australian Capital Territory applied for orders against Christian Paulus Fabricius and John Andrew McLaren to show cause why they "should not be dealt with by this court for misconduct or conduct unbefitting a barrister and solicitor" pursuant to s.41 of the Legal Practitioners Ordinance 1970. The relevant portions of s.41 provide:

"41. (1) Where it is proved to the satisfaction of

the Court that the conduct of a barrister and solicitor

has been such as to justify it in so doing, the Court

may, by order -

(a) reprimand the barrister and solicitor;

(b) impose on the barrister and solicitor a fine not

exceeding One thousand dollars;

(c) suspend the right of the barrister and solicitor

to practise in the Territory for such period as

the Court thinks proper; or

(d) direct that the name of the barrister and

solicitor be removed from the Roll of Barristers

and Solicitors.

(2) The Law Society is entitled to be represented

in proceedings for an order under this section.

(3) Where, in proceedings before the Court

arising out of the furnishing by the Disciplinary

Committee of a report in relation to the professional

behaviour of a barrister and solicitor, the Court makes

an order under sub-section (1) of this section against

the barrister and solicitor, the Court may, in addition

to any order that it makes in relation to the costs of

the proceedings before the Court, order the barrister

and solicitor to pay to the Law Society the costs of

the inquiry before the Disciplinary Committee or such

part of those costs as are specified in the order.

(4) ..."

2. The application came on for hearing on 3 October 1989. The Law Society and Fabricius were represented by counsel on the hearing of the application. McLaren appeared in person. The evidence was in affidavit form supplemented by the oral testimony of both legal practitioners.

3. The following facts were undisputed. Fabricius entered articles of clerkship in about February 1982 with a Canberra firm of solicitors, having completed the Australian National University Bachelor of Laws degree course in 1981. He remained in the employ of that firm of solicitors until August 1984. He was admitted as a barrister and solicitor of this court on 4 February 1983 and held a restricted practising certificate from 8 February 1983 until 2 September 1984 when he began to practise in partnership with McLaren. He was issued with an unrestricted practising certificate on 3 September 1984. He has held an unrestricted practising certificate continuously since that time.

4. McLaren was admitted as a barrister and solicitor of this court on 15 December 1981. He was first issued with an unrestricted practising certificate on 21 February 1984. He continued to hold an unrestricted practising certificate until 30 June 1988. He did not apply for renewal of his practising certificate thereafter and does not currently hold a practising certificate. He was made bankrupt on 3 January 1989 and is now a full time student at Monash University in the State of Victoria.

5. Francis Gordon Cole, pensioner, was formerly a client of the firm of solicitors to which Fabricius was articled. He had been a client of that firm since at least April 1980, remained a client of that firm while Fabricius was an articled clerk in the employment of the firm and later when Fabricius was employed as a solicitor by the same firm at their Belconnen office.

6. In August 1982 the firm of solicitors acted for Cole in relation to a motor vehicle claim against a service station. There is no evidence that Fabricius acted for Cole in that matter. It appears that the matter was handled by another employee of the firm who successfully negotiated settlement of Cole's claim against the service station. That employee of the firm passed the file to Fabricius on or about 17 March 1983 for him to account to Cole for the settlement moneys and attend to the question of costs. Fabricius completed the matter as requested, sending a letter to Cole dated 25 March 1983 and a memorandum of fees.

7. Fabricius then acted for Cole as an employed solicitor on the sale of a property at Holt in the Australian Capital Territory. The sale was completed on 3 May 1984. Fabricius next acted for Cole in relation to the preparation and execution of a will in May 1984 and at about the same time acted for him in relation to his matrimonial affairs, including some representation to the Australian Legal Aid Office in connection with those matters.

8. In about July 1984 McLaren approached Fabricius with an offer of partnership and the offer was accepted by Fabricius in the first fortnight of August 1984. Fabricius and McLaren set up partnership at an office in Belconnen early in September 1984. A short time later the partnership purchased the Belconnen practice of the firm of solicitors by whom Fabricius had previously been employed for $40,000 borrowed from a bank. They practised under the firm name of "McLaren and Fabricius" and moved office to the former office of the firm of solicitors from whom they had purchased the practice. Prior to leaving his former employer, Fabricius told Cole of his intention to join McLaren in partnership and of the purchase of the Belconnen practice of the firm of solicitors.

9. The evidence does not clearly establish who initiated the loan transaction whereby Cole lent the sum of $20,000 to the partnership. According to the affidavit of Cole sworn 12 January 1989, he wanted to invest $20,000 and sought the advice of McLaren and Fabricius in that respect. They told him that they needed money to establish their practice and that they were prepared to borrow the money from him at 10 percent interest repayable monthly in cash so that it would not affect his pension.

10. However, according to the affidavit of Fabricius sworn 3 October 1989, Cole telephoned Fabricius saying that he had $20,000 to invest and that he wanted to see Fabricius and McLaren together about investing that sum. Fabricius denied that Cole had approached him for advice about the manner of investment of the $20,000. He stated that he did not suggest to Cole any other forms of investment, whether his funds would be secured or unsecured, whether the money should be lent on interest only terms for a specific term, invested on debenture or on fixed deposit, or whether there were income tax or social security implications involved. What is patently clear is that neither Fabricius nor McLaren suggested in any way to Cole that he seek independent legal advice. Nor did he do so.

11. It is common ground that Cole lent the partnership the sum of $20,000 at 10 percent interest. The transaction was evidenced by an agreement drafted by Fabricius and executed on 16 November 1984 in the following terms:

"THIS AGREEMENT made the 16th day of November, 1984

BETWEEN FRANCIS GORDON COLE of 8 Corrie Close, Hawker

in the Australian Capital Territory (hereinafter called

the Lender) of the first part AND JOHN ANDREW McLAREN

of 146 Kalgoorlie Crescent, Fisher in the said

Territory and CHRISTIAN PAULUS FABRICIUS of 119 Empire

Circuit, Yarralumla in the said Territory (hereinafter

called the Guarantors) of the second part.

IN CONSIDERATION of the Lender agreeing to advance and

advancing to the Guarantors at their request the sum of

Twenty thousand dollars ($20,000) (hereinafter referred

to as 'the Principal Sum') we hereby jointly and

severally agree as follows:-

1. The Guarantors shall be liable for the repayment

of the sum of Ten thousand dollars ($10,000) each

to the Lender and that sum shall be payable upon

the expiration of a period of twelve (12) months

as from the date hereof.

2. Interest shall be payable on the Principal Sum at

the rate of ten percent (10%) per annum, such

interest payments to be paid by the Guarantors to

the Lender on a monthly basis.

SIGNED SEALED AND DELIVERED ) signed J. McLaren

by the Guarantors at)--------------

Canberra this 16th day of) signed C. Fabricius

November, 1984. )--------------

Before me

(Sgd)

------------------

SIGNED SEALED AND DELIVERED ) signed Frank. G. Cole

by the Lender at Canberra)--------------

this 16th day of November, )

1984. )

Before me

(Sgd)

------------------"

12. Cole advanced the moneys to the partnership and was paid interest at the rate of 10 percent per annum when he called at the office of the partnership each month to receive payment. The rate of 10 percent for interest was less than the current bank overdraft rate of interest. Those facts were pointed out to Cole by the legal practitioners at the time of the loan, but he expressed no concern in that respect. Cole told the legal practitioners that a rate of 10 percent would give him $200 per month (which was wrong) and that that was all he needed to maintain his lifestyle while not affecting his pension entitlements. He told the legal practitioners that he knew he could trust them. It was in that state of affairs that he executed the document set out above and advanced the money to the partnership.

13. In December 1984 the firm of "McLaren and Fabricius" received instructions from Cole in relation to a loan of $10,000 to Timothy James Sly and Sandra Joy Sly. The firm acted for Cole in relation to that transaction on a solicitor/client basis and charged a professional fee for their services.

14. The partnership of "McLaren and Fabricius" was dissolved on 18 August 1985, by which time the principal sum of $20,000 under the loan agreement had been reduced to $18,000. The partners executed a deed of dissolution of partnership providing, inter alia, that McLaren was to assume responsibility for all debts of the partnership, including the debt owing to Cole and excepting certain professional negligence debts. The balance of the principal owing was not paid by McLaren on the due date, namely 16 November 1985.

15. At the time of dissolution of the partnership Fabricius thought that McLaren had assumed total responsibility to Cole for the liability. He conceded in his evidence that he was wrong about that and said that he now understands that he remains liable to the estate of Cole for the outstanding principal and interest. He has deposited $10,000 on fixed deposit expiring on 11 October 1989 and he has offered that sum in partial satisfaction of his indebtedness. Since the hearing he has paid that sum into the trust account of the Law Society's solicitors for payment out to the estate of Cole.

16. On 14 March 1986 Cole and McLaren executed another loan agreement which was intended to reflect the fact that McLaren had taken over the responsibility for the loan made to McLaren and Fabricius. At that stage the interest was in arrears and McLaren was concerned about the low interest rate of 10 percent which had been part of the original agreement between Cole and the two legal practitioners. McLaren's concern was that the original loan had been made by Cole because of his friendship with Fabricius and that he, McLaren, had been able to have the benefit of that loan for that reason. As he was taking over the loan and indemnifying Fabricius, he thought that the rate of interest should be a more realistically commercial rate and that because there had been a delay between the departure of Fabricius from the partnership and formalising a new loan arrangement with Cole, he decided to add $3,000 to the $18,000 then owing under the original agreement. Accordingly the new agreement executed on 14 March 1986 provided that the principal sum owing by McLaren to Cole was $21,000 and the rate of interest was to be 16 percent. Under the new agreement McLaren paid increased instalments of interest to Cole each month.

17. Cole continued to use McLaren as his solicitor and in the middle of 1986 gave McLaren instructions to prepare a new will, which McLaren did. McLaren also prepared some letters for Cole from time to time when Cole needed legal assistance in his affairs.

18. At the end of 1987 when he called at McLaren's office to collect interest, Cole was told that McLaren had left the practice. He then consulted a new firm of solicitors for advice about recovering the principal of $21,000. On 23 November 1987 those solicitors sent a letter on behalf of Cole to the Law Society of the Australian Capital Territory, which caused the Society to make enquiries. Certain correspondence was exchanged between the Law Society and both legal practitioners which resulted in the institution of the present proceedings. No further payments of principal or interest were paid to Cole. He died on 21 June 1989 at the age of 90 years. As stated earlier, McLaren was made bankrupt on 3 January 1989.

19. On 17 February 1984 the Council of the Law Society approved and adopted a Guide to Professional Conduct and Etiquette which was distributed to members of the Law Society. The date upon which the guide was distributed could not be established on the hearing of the application, but we note that in his letter dated 14 February 1988 to the Law Society McLaren stated that at the time of the loan by Cole to the partnership he was acutely aware of the provisions of the Guide and made sure that Cole had not been a client of Fabricius or himself when the partnership was formed.

20. In his oral evidence McLaren did not adhere to the contents of the letter of 14 February 1988 and said that he looked at the section of the Guide on borrowing from clients some month or two after the original loan in November 1984 and satisfied himself that he had done nothing wrong because Cole was not a client. He also denied that he had thought that Cole had been a client of Fabricius when Fabricius was working for the firm of solicitors.

"7. BORROWING FROM CLIENT

7.1 For the purposes of this Section:-

(a) 'prohibited borrowing transaction' means:

(i) any transaction under or by virtue of which

money is borrowed (directly or indirectly and

whether with or without security) by a

Practitioner from his or her client or by an

associated party from that client unless the

client is an excepted person;

(ii) ...

(b) ...

(c) ...

(d) ...

(e) 'client' means any person between whom and a

Practitioner or partner at any time of a

Practitioner or employer of a Practitioner any

relationship of solicitor and client exists and

also includes any person seeking to invest money

through a Practitioner or approached by or on

behalf of a Practitioner for that purpose.

(f) 'independent advice' means advice by a

Practitioner not being a party to the transaction

nor the solicitor for any associated party and

where the Practitioner certified in writing that

he or she has given such advice.

(g) 'full disclosure' means such disclosure in writing

by the Practitioner as would be necessary if the

transaction were a trustee transaction.

7.2 Subject to sub-Section 7.3 a Practitioner shall

not:

(a) enter into a prohibited borrowing transaction; or

(b) instruct, procure, secure, arrange for or (if in

the Practitioner's power to prevent it) knowingly

suffer an associated party to enter into a

prohibited borrowing transaction.

7.3 Sub-Section 7.2 shall not apply to any transaction

in respect of which:

(a) (i) all parties thereto other than the

Practitioner or the associated party have

received independent advice and the

certificate referred to in paragraph 7.1(f)

hereof as to that advice has been given prior

to the transaction being entered into; and

(ii) the Practitioner shall have made full

disclosure of any interest of the

Practitioner and of any associated party;

(b) the Practitioner does not act for the client in

relation to the transaction but the client is

represented by an independent Practitioner; or

(c) the Council determines (either before or after the

transaction is entered into) that it shall not

apply to that particular transaction.

7.4 This Section shall not limit or restrict any duty

or obligation of a Practitioner or any right or

remedy of any person which otherwise exists or may

arise."

22. The relationship existing between a solicitor and his client is recognised in equity as a fiduciary one imposing upon the solicitor special obligations. In his dealings with his client the solicitor must exercise the utmost good faith, and in any financial transaction with his client there will be a presumption that such transaction P'N should not be upheld unless the solicitor can establish that it was effected by the free exercise of the client's will and without any influence on the part of the solicitor (Cordery on Solicitors, 8th Ed., p 10).

23. Quite apart from the terms of the Law Society's Guide to Professional Conduct and Etiquette which, in our view, correctly states the relevant principles which govern a solicitor/client relationship, courts of the highest authority have said over and over again that a solicitor who deals with his client while remaining his solicitor undertakes a heavy burden and it will be a rare case where he should not at least advise his client to take independent legal advice (see for example Law Society of New South Wales v. Harvey (1976) 2 NSWLR 154 per Hutley JA at 171).

24. In Law Society of New South Wales v. Moulton (1981) 2 NSWLR 736, Hope JA said at 739:

"... a solicitor stands in a fiduciary relationship to

his clients. If he is to have business dealings with

them on his own account, and in particular if he is to

borrow money from them, the requirements of the law are

rigorous. The need for that rigour is obvious.

Commonly to a great extent, always to some extent, the

solicitor is in a position of special influence in

respect of his client. Clients must be able to rely

upon the professional advice of their solicitor and to

place in him the fullest confidence that he will

protect them and handle their affairs in their

interests. Where a solicitor wishes to borrow from a

client, the client must be put in a position to make a

free and informed decision about the proposed

transaction. Since in these circumstances the

interests of the client and of the solicitor can and

generally must conflict, the best and easiest way to

achieve this result is to insist that the client have

independent and informed advice. If this does not

happen, a heavy burden indeed lies upon the solicitor

to show that he has done everything in his power to

protect the interests of his client and to ensure that

the client is aware of every circumstance that is or

might be relevant to his decision. If a solicitor

wishes to use his client's money to finance some

business he is carrying on, it is almost impossible to

see how the client can be adequately protected and

advised without insisting that he gets independent

advice. Moreover it must be borne in mind that many

clients are not able effectively to decide whether an

investment is a prudent one, no matter what information

is given to them, and that the greater the trust of the

client in the solicitor the greater is the need for

independent advice where a conflict of interest may

arise."

25. None of those statements of principle was contested by either practitioner. However, it was submitted on behalf of Fabricius that at the time of the loan of $20,000 to the partnership there was no solicitor/client relationship between Fabricius and Cole. The submission was that when Fabricius did any legal work for Cole while employed as a solicitor at the Belconnen practice of the firm of solicitors, the contract of retainer was between Cole and that firm of solicitors and that accordingly there was no solicitor/client relationship between Fabricius and Cole. Counsel referred to the fact that the retainer between Cole and the firm of solicitors pre-existed any legal work performed by Fabricius for Cole. At no stage, so the argument went, did Fabricius have the retainer transferred to himself.

26. It was further submitted that, when Fabricius left that firm of solicitors, any work he had done for Cole had been completed. Hence, when he entered partnership with McLaren there was no solicitor/client relationship between him and Cole. From the time Fabricius and McLaren set up partnership they did no work for Cole until they drafted the loan agreement of 16 November 1984 and subsequently the Sly loan agreement in December 1984. It was submitted that at the time of the loan to the partnership there was no solicitor/client relationship.

27. There is some force in the submission that up until the time of the loan agreement Cole was not a client of either Fabricius or McLaren. When Fabricius completed the motor vehicle claim against the service station he was an employed solicitor and not conducting his own practice. Likewise he was an employed solicitor when he acted for Cole in the conveyancing transaction relating to the property at Holt in May 1984. As this court observed in Re Bannister (1975) 5 ACTR 100 it is of the essence of the relationship of solicitor and client that the solicitor retain individual personal responsibility to his client. If the solicitor is employed by another, the retainer is with the latter (see per Fox J. at p 104 citing Russell LJ in Way v. Bishop (1928) Ch 647 at 660; (1928) All ER at 414:

"In my opinion the phrase 'practising as a solicitor'

connotes a person who is a principal; it connotes a

person who has clients".

See also per Blackburn J. at p 111 where his Honour said:

"A solicitor may, of course, be in the employ of another

solicitor, but in that case the retainer is with his

master, not with him".

"The position of the employee practitioner must be seen

as quite a subordinate one in the scheme of the

Ordinance. He can, of course, deal directly with the

public - but only as the servant of his principal who

is a solicitor with an unrestricted practising

certificate. He is not for any purpose regarded as the

client's solicitor but only as the employee of the

client's solicitor."

28. Nevertheless we are satisfied on the evidence that when Cole approached the two practitioners about investing the sum of $20,000, he did so as a client of Fabricius within the meaning of clause 7.1(e) of the Guide. In that respect he was a person between whom and an employer of a practitioner (the solicitors who employed Fabricius at the relevant time) a relationship of solicitor and client existed at some time. Cole was also a client of the partnership within clause 7.1(e) because he was a person seeking to invest money through a practitioner (McLaren and Fabricius).

29. In accordance with general principles and the terms of the Guide, the legal practitioners should not have entered into the prohibited borrowing transaction with Cole without ensuring that he received independent advice. In the later transaction McLaren should not have repeated the prohibited borrowing transaction with Cole without ensuring that he received independent advice.

30. In Ex parte The Attorney-General; Re a Barrister and Solicitor (1972) 20 FLR 234 at 245, the Court defined the sort of conduct which is contemplated by s.41 of the Legal Practitioners Ordinance as "conduct which may reasonably be held to violate, or to fall short of, to a substantial degree, the standard of professional conduct observed or approved of by members of the profession of good repute and competency". The Guide prescribes the standard of professional conduct.

31. Both have been guilty of professional conduct in that sense, justifying disciplinary action under s.41.

32. Both practitioners in entering into the prohibited borrowing transaction with Cole, and McLaren in entering into the subsequent transaction with Cole, have fallen into serious departures from proper professional standards.

33. On the other hand, we do not take the view that the legal practitioners acted disgracefully or dishonourably. Their errors arose from inexperience and general lack of understanding of a solicitor's duties to his client. In addition to the matters set out above, which we find amounted to unprofessional conduct, there were other aspects of the transactions in which the legal practitioners showed lack of knowledge of the law and of good practice in solicitors' offices. They are not matters calling for action by this Court, but they do serve to underline the danger in solicitors setting up practice after limited relevant experience.

34. On the subject of penalty, we take into account:

(1) No fees were charged to Cole in relation to either

transaction.

(2) Fabricius has made restitution to the Estate of

Cole in the sum of $10,000.

(3) The subsequent transaction by McLaren with Cole

sprang from a recognition that the earlier

transaction may not have been equitable and

McLaren evinced a desire to acknowlege that

inequity by increasing the principal sum and the

interest rate.

(4) Neither practitioner is in private practice.

Fabricius is in Public Service employment as a

salaried officer and McLaren is a full time

student unlikely to return to legal practice, at

least in the foreseeable future.

35. In the circumstances we take the view that the appropriate penalty for both practitioners is to suspend the right to practise in the Australian Capital Territory for a period of two years.

36. We recommend to the Law Society that it not issue an unrestricted practising certificate to either practitioner until it is satisfied that he has, since the expiration of the suspension, spent at least twelve months as an employee in a solicitor's office.

37. It is further ordered that the practitioners each pay one half of the Law Society's costs of these proceedings.