The second issue
42The LawCover policy contains the following, usual, exclusion:
"We will not indemnify an insured under this policy when the claim arises, whether directly or indirectly, from any dishonest or fraudulent act or omission of that insured."
43The meaning and effect of that exclusion were considered by Pembroke J in the instant case at [28] and [29] as follows:
"[28] The meaning and effect of an earlier version of that exclusion was considered in McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579. More recent illustrations of the scope and application of other variations of this well-known exclusion can be found in Yaktine v Perpetual Trustees Victoria Ltd [2004] NSWSC 1078, Ginelle Finance Pty Limited v Diakakis [2007] NSWSC 60 and Vaccaro v Flammia [2008] NSWSC 1322. The version of the exclusion in issue in this case is more favourable to an insurer than earlier versions but whatever version is in issue they all depend on the existence of some causally relevant dishonest act or omission by the insured. The words 'or fraudulent' add nothing. Fraudulent conduct is necessarily dishonest. And of course, the expression 'arises from' is an expression of wide import, to which the qualification 'whether directly or indirectly' adds an even broader causal dimension.
[29] Dishonest conduct by solicitors usually involves conscious impropriety in the sense of an act, omission or statement that the solicitor knows is false or misleading. It is not necessary that there be an intention to profit personally from the dishonest act. Nor is it necessary that the dishonest act or omission deprive another of money or valuable property. It is difficult to go past Lord Nicholls' masterful description of dishonesty in Royal Brunei Airlines SDN. BHD. v Philip Tan Kok Ming [1995] 2 AC 378 at 389:
...acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour..."
44His Honour's discussion of the exclusion clause arose in the context of that part of the proceedings before him, outlined by his Honour at [26] of his judgment as follows:
"[26] The third issue is the Registrar-General's defence under Section 129(2)(b). It turns, in substance, on the likely application of the dishonesty exclusion in Mr Yee's professional indemnity policy. In considering this question, I should have regard to the facts proved at the hearing before me and the inferences against Mr Yee that are available to be drawn from those facts. The burden, of course, is with the Registrar-General. And it is not a light task, for 'it involves proving facts which show the absence of any ground upon which the insurer could effectively deny liability under the policy': Chandra v Perpetual Trustees Victoria Ltd [2007] (supra) at [64] per Bryson J."
45His Honour analysed and considered Mr Yee's conduct in some detail with a view to determining whether it met the description of dishonesty within the meaning of the exclusion in the LawCover policy. His Honour's conclusions on the "dishonesty" issue before him were set forth at [34] as follows:
"[34] For those reasons, I am quite satisfied that the Registrar-General has not established that it is more probable than not that the loss is compensable under Mr Yee's professional indemnity policy. The findings of fact that I have made suggest that the opposite conclusion is more probable."
46After the commencement of these proceedings LawCover notified the Registrar-General that it had made a decision to decline indemnity under the policy upon the basis that Mr Yee "knowingly made false statements and thereby acted dishonestly in [his] dealings with Mr Panetta and [Ms Lam] in respect of [Ms Pedulla's] land, and that the claim made against [him] arises from those dishonest and/or fraudulent acts or omissions within the meaning of [the exclusion clause]." Notwithstanding that notification, and the Registrar-General's earlier (unsuccessful) attempts in the proceedings before Pembroke J to establish that Mr Yee was not dishonest and that the exclusion did not therefore apply, so that the LawCover policy of insurance potentially responded to meet the claim and defeat Ms Pedulla's proceedings against the Registrar-General, the Registrar-General continued in these proceedings to maintain that it was at least arguable that Mr Yee was not relevantly dishonest for the different purpose of establishing that a charge attached to the LawCover policy to the extent of the subrogated right.
47LawCover argued before me on the contrary that leave should be refused upon the basis that there is no arguable case for relief. The findings in the earlier proceedings, which are relied upon to establish the liability said to attract indemnity under the LawCover policy, plainly establish that indemnity is excluded on the basis that the liability arose from Mr Yee's dishonest acts. His liability cannot now be reagitated in these proceedings.
48LawCover submitted that the issue of Mr Yee's dishonesty had been determined once and for all in the proceedings before Pembroke J. The only issue raised for determination in these proceedings is said to be whether, on the basis of the Registrar-General's liability established in the earlier proceedings, Mr Yee is entitled to indemnity under the LawCover policy. Because the basis of the Registrar-General's liability was the establishment of Mr Yee's dishonesty, he remains correspondingly disentitled to indemnity under the LawCover policy.
49The Registrar-General's submissions in response to this argument were detailed. It is unnecessary for present purposes to repeat those submissions here. They distil essentially to the proposition that Pembroke J's decision concerning Mr Yee's dishonesty does not foreclose the Registrar-General's right to litigate the issue afresh in these proceedings. Prominent among the reasons for that contention is the argument that the question determined by Pembroke J, dealing with the availability of the Registrar-General's defence based upon s 129(2)(b) of the Real Property Act, is different to the question of whether or not Mr Yee's conduct qualifies as dishonesty so as to trigger the operation of the exclusion clause in the LawCover policy. That is said in any event to be a question that cannot, or should not, be resolved at an interlocutory stage, as per Owners - Strata Plan 50530 v Walter Construction & Ors [2006] NSWSC 552 at [29] as follows:
"[29] I am conscious of the limitations on the extent of decision making in the course of an interlocutory hearing. However, I take the relevant principle to be as expressed by McClelland J in Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533 at 535. Although his Honour was speaking in the context of an application for an interlocutory injunction, I think that the principles are at least equally, if not more, applicable to a case such as this. His Honour said, among other things, that where the fate of the entitlement to ultimate relief is uncertain, the Court is required to consider the cause of the uncertainty. Where that uncertainty depends on contested questions of fact, it cannot be resolved at an interlocutory hearing. Where it depends on a contested question of law, it may or may not be appropriate for the Court to decide that question notwithstanding that the hearing is interlocutory. Whether the Court should do so will depend on a number of circumstances including the novelty or difficulty of the question, its susceptibility to resolution on the limited evidence available and the availability of time to give proper consideration to the question."
50The Registrar-General also referred me to decisions in the Court of Appeal dealing with this issue. In Tzaidas v Child [2004] NSWCA 252; (2004) 61 NSWLR 18 at [140], Santow JA said, "all that was required was an arguable case". His Honour described that as "a relatively modest hurdle".
51In Energize Fitness Pty Ltd v Vero Insurance Ltd [2012] NSWCA 213, Campbell JA said this at [51]-[56]:
"[51]... Mr Weinberger contends that the primary judge made an error of principle in not applying the test for summary dismissal of an action contained in General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125.
[52] The judge made no such error of principle. The questions involved in an application for summary dismissal, and an application for leave under s 6 Law Reform (Miscellaneous Provisions) Act are different. In a summary judgment application, the question is whether an action that a litigant has been able to commence without any need for leave of the court should be brought to an end. In an application for leave under s 6 Law Reform (Miscellaneous Provisions) Act the question is whether the court should permit a litigant to commence an action against a party who, in the absence of such leave, the litigant has no right to sue. In a general sense, considerations about when the court should permit the curial system to be deployed against a person enter into both summary judgment applications and applications for leave under s 6, but the questions are still different.
[53] As well, the onus operates differently in the two types of application. In a summary judgment application, the evidentiary and persuasive onus of establishing that the action is doomed to fail is on the defendant who seeks the summary dismissal. By contrast, when an application for leave is made pursuant to s 6(4) the evidentiary and persuasive onus of establishing that there is an arguable case that the insured is liable, and an arguable case that the policy responds, is on the applicant for leave. Whether the court finds that there is an 'arguable case' will be very dependent on the facts and circumstances of the individual case, including any grounds on which the insurer opposes leave.
[54] Mr Weinberger supported the applicability of the General Steel test by reference to the decision of Grove J in Bede Polding College v Limit (No 3) Limited [2008] NSWSC 887. At [6], Grove J accepted that in an application for leave under s 6:
'... the plaintiff must show three things. First, that there is an arguable case against [the insured]; second, that there is an arguable case that the policy responds and, third, that there is a real possibility that, if judgment is obtained, [the insured] would not be able to meet it: Oswald v Bailey (1987) 11 NSWLR 715; Zhang v Minox Securities [2008] NSWSC 689.'
[55] At [9], Grove J said that in determination of whether there is an arguable case:
'...I would ... follow the guidance of General Steel Industries v Commissioner for Railways (1962) 112 CLR 125. That case and Dey v Victorian Railway Commissioners (1949) 78 CLR 62 were focussed on summary dismissal but as Dixon J observed in the latter "once it appears that there is a real question whether of fact or law and that the rights of the parties depend on it, then it is not competent for the Court to dismiss the action". That test is applicable.'
[56] For the reasons given above, the litigious frame in which the General Steel test comes to operate is not the same as that in which the court considers a s 6(4) application. In considering an application under s 6(4) a judge should consider directly whether the applicant has shown that there is an arguable case on the relevant matters, without being distracted by the General Steel test. To that extent, Bede Polding should not be followed."
52Remarks to the same effect are to be found in the judgment of Johnson J in Vaccaro v Flammia [2008] NSWSC 1322 at [105]-[108].
53Limiting myself to the single identified issue of whether or not Mr Yee might be found to be dishonest for the purposes of the exclusion in the LawCover policy, it is at least arguable that the acts and omissions identified by Pembroke J, and the conclusions at which his Honour arrived, may not automatically dispose of the question. It is in my opinion at least arguable that Mr Yee's conduct does not attract the operation of the dishonesty exclusion in the LawCover policy.
54However, upon the question of whether or not to grant leave, the Registrar-General was necessarily required to confront a considerably more difficult and fundamental problem. That difficulty arises from the fact that there is an inescapable inconsistency between the proposition that the Registrar-General has a right under s 133(2) of the Real Property Act to recover from Mr Yee the "compensable loss" sustained by Ms Pedulla on the one hand, and the fact that Mr Yee's corresponding liability to the Registrar-General is the subject of indemnity under his professional indemnity policy on the other hand. That inconsistency arises in the following way.
55The expression "compensable loss" is defined, for the purposes of s 133, in s 128(1). The definition excludes from the scope of such losses loss or damage of a kind referred to in s 129(2), being loss for which indemnity is available under a solicitor's professional indemnity insurance policy. As already discussed, the Registrar-General originally sought to resist Ms Pedulla's claim upon the basis that the loss consisting of the market value of her property was loss caused by Mr Yee's negligence and was the subject of an indemnity under his professional indemnity policy. The Registrar-General failed in that defence upon the basis that, on the balance of probabilities, indemnity was not available.
56The Registrar-General wishes now to re-litigate the question of the availability of cover with a view to enforcing a charge pursuant to s 6(1). If the Registrar-General succeeds in establishing that such cover is available it will simultaneously establish that Ms Pedulla's loss was not a loss in relation to which compensation was payable: s 129(2). The original court proceedings were not therefore commenced in relation to Ms Pedulla's compensable loss, with the result that there can be no subrogation in accordance with s 133(2) and no charge capable of enforcement at the suit of the Registrar-General. In short, if the policy responds, the loss is not a compensable loss.
57In my opinion, as a result of that fundamental problem, the present application is not fairly arguable. The Registrar-General is only subrogated to Ms Pedulla's rights in respect of the recovery of the uninsured and hence "compensable loss". The Registrar-General cannot ever be, and is not now, subrogated in respect of any loss to which the LawCover policy might hypothetically or potentially respond. The Registrar-General's argument is self-defeating. Leave to commence proceedings against LawCover should be refused on this basis as well.