40 Hunter J then addressed the other insurance issues. First, his Honour had no doubt that the liability of Allens to the Nauruan Trust was 'incurred in connection with the practice'. His Honour said:
I have taken the view that, having regard to the nature of Allens' retainer by Linpar, and, in particular, the intertwined nature of the custodial activities conducted by Powles in the name of Allens, together with the legal services required to be provided by Allens under that arrangement, that the requisite connection between the liability and the practice of Allens has been established.
41 His Honour then considered the general exclusion clause, 5(f) (ii). Was the liability with respect to which Allens sought indemnification a liability 'arising from a contract other than a contract to provide services within the definition of "the Practice" '?
42 In answer to the question Hunter J said:
Clearly, in my view, the liability should not be so characterised. The only contract that bears upon the question is that arising out of the retainer of Allens by Linpar to provide legal services and to act as custodian of the Nauruan Trust funds for the purposes of Linpar's commercial arrangements with the Nauruan Trust. So understood, Allens' retainer falls outside "a contract other than a contract to provide services within the definition of 'the Practice'."
43 The trial judge then moved to the insurers' submission regarding Special Exclusions cl 8 b) of the policies. The argument revolved around the knowledge of the assured of Powles acting in fraud of the firm. His Honour said that it was difficult to see how the subject matter of Powles' fraud on Allens should be taken as being within the knowledge of Allens for the purpose of cl 8 b) where Powles' conduct was aimed at secreting his fraudulent activities from them. Further, there was no presumption of communication of his knowledge to his partners. His Honour made reference to s 16 of the Partnership Act 1892 as confirmatory of the position. By reason of the interpretation clause of the policies, the non-disclosure misrepresentation exclusion was part of the terms and conditions of the policies. Clause 8 b), so construed, was not inconsistent with the non-disclosure/mis-representation exclusion. These conclusions made it unnecessary to deal with alternative submissions by Allens relying on s 54 of the Insurance Contracts Act 1984 (Cth).
44 Hunter J then considered issues of quantum. At this time, it is unnecessary to record his Honour's findings on issues of damages.
Discussion of facts relevant to dishonesty, fraud and the exclusion
45 At the outset, one central feature of the evidence should be noted. The evidence at the trial was almost completely documentary. Neither Powles, nor any other player involved in the transactions, gave evidence. The conclusions of fact come down to an interpretation of the mass of documentary material and the inferences to be drawn therefrom. No issues of credit of witnesses arose. In this respect, the trial judge had no special advantage, Abalos v Australian Postal Commission (1990) 171 CLR 167 and SRA v Earthline Constructions Pty Ltd (1999) 73 ALJR 306.
46 Hunter J found that Powles had a vested interest in the subject transaction in that he stood to make a secret commission. There was ample evidence to support such a finding. In particular, this is to be found in the correspondence between Powles and Madden. Powles was to receive a 'personal contribution' of US$100,000 for each transaction (Madden to Powles 17 August 1991) and Linpar was to pay Powles 25% of the net commissions it earned for each transaction. In addition, Powles distributed the differential on the first transaction by paying part of it to his company Hilstar, being the same amount he disbursed to each of the other participants.
47 Moreover, there was an abundance of evidence to support his Honour's findings that Powles' conflict of interest was exacerbated by his great need for substantial funds to conceal his frauds. Madden knew that Powles was acting in fraud of his partners in agreeing to take secret commissions and Powles learnt, on 16 January 1992 or earlier, that a secret commission was to be paid to Dr Voellmin of Fides. Also, Powles learnt that Linpar had promised secret commissions to Mr Dougall, an officer of the Nauruan Trust, and had instructed Westpac to pay Sophie Dougall (Dougall's daughter) $4,000 on 17 January 1992 out of the US dollar account, which he knew was a bribe to Mr Dougall.
48 Powles repeatedly gave false or dishonest references to persons seeking to deal in the pbi market. He gave them, quite obviously, because of his own self-interest in making secret commissions out of the transactions. The evidence records eight such references starting from 13 August 1990, for Contec and Debenham. In particular, during a six week period from 6 November to 19 December 1991, Powles gave six such references, including two for Linpar. The most important of these was the letter dated 4 December 1991 to the Nauruan Trust, referred to earlier.
49 With respect to this reference, Hunter J found that it was sparked by self-interest and was imprudent when Powles was aware of the irregular dealings by Madden through Powles in the US dollar account. Self-interest, quite clearly, motivated the reference.
50 We think that on a close analysis of the letter, further inferences may be reasonably drawn. The reference stated that 'to my personal knowledge, Mr Madden has qualified personnel working with him with extensive banking and financial background'. The only persons Powles knew in Linpar were Madden and his partner Mr Gopal. Powles knew that they had repeatedly sought access to the pbi market, for well over a year, without any success whatsoever.
51 Powles' reference said that 'we are holding in trust substantial moneys, in US dollars, for various transactions involving Linpar'. However, at the relevant time, the truth was that only $252,000 was held and this was the balance of the moneys of Tyler James and Blueberry, which were about to be misappropriated by Madden and Powles, and the money of the Ermineskin band held in the US dollar No 2 account, which could not be accessed. Further, it is plain that Allens was not holding any such moneys in trust, rather Powles was purporting to do so but for his own dishonest private business.
52 The reference to the Trust stated that 'I can confirm that Linpar is capable, in my opinion of fulfilling its stated objective to and for your trust'. This was not an opinion which Powles could properly hold because he knew that on all occasions when he had received moneys and paid them away on Linpar's instructions, no instrument had been obtained and, on occasions, the money had been lost.
53 An honest disclosure to the Nauruan Trust would have included divulging that he had been attempting to access the pbi market for nearly 2 years without success. Indeed, nor was he aware of success of any transaction such as the Trust was contemplating.
54 Moreover, at the time Powles gave the reference, no doubt given to induce the transaction, Powles knew that the Bank of England denied the existence of the market and did not regulate it. This was not disclosed. Nor did Powles disclose that in order to access the market one needed to deal through intermediaries, many of whom Powles knew were dishonest and untrustworthy. Nor did Powles disclose that the moneys to be invested would not be placed in Allens' trust account but was part of Powles' private business, in fraud of his partners, and in order to make secret commissions. Further, Powles did not tell the Nauruan Trust that it was part of the arrangement with Madden that the instrument would be purchased for less than the Nauruan Trust's funds and the difference shared between him and Madden.
55 It may also be observed that after the 4 December 1991 reference, and prior to 15 January 1992, there were two further failed transactions, Ward Investments and Mellows, where in each case $50,000 was lost. Nor did Powles give the Trust truthful reports on the subject transaction between 4 December 1991 and 15 January 1992. In fact, the reports were patently false and dishonest.
56 His Honour was correct to take account of the earlier transactions which Powles participated in prior to the paying away of the subject moneys on 15 January 1992. These were numerous and ranged over a period of 18 months. They included the Clayton transaction in August 1990, where $200,000 was lost from the Allens No 2 account with Westpac. This transaction undoubtedly brought home to Powles that Malcolm Wynn was incompetent and probably dishonest, yet Powles was willing to continue to deal with him. The Austchip transaction in February 1991 failed and $200,000 from the Allens No 2 account at Westpac almost certainly disappeared. In February 1991 Powles, on Madden's instructions, advanced $75,000 out of the US dollar account to Gerry O'Donohue. The money was lost and Powles had reason to believe that O'Donohue was dishonest. $150,000 was advanced by Powles on 8 May 1991 out of the US dollar account and, on Madden's instructions, paid to Wynn. No instrument eventuated and the moneys were lost. In the Ward Investments transaction Powles paid away $50,000 on the instructions of Madden and Searle. Again no instrument eventuated and the moneys were lost. Further, Powles paid away $50,000 to Mellows on 10 December 1991, again on Madden's instructions, which was also lost. In addition, there were another nine attempted transactions where no instrument was obtained but no moneys were lost.
57 To summarise, prior to 15 January 1992, Powles was involved in up to 17 transactions in the pbi market and no instrument was ever obtained. Further, by that time, at least US$700,000 had been lost. Powles experience in trying to access the market led him to form the view, or he was told by others, that dealers in the market were fraudsters or untrustworthy. These included at least eight people, including Wynn, Searle, Blair and Tobias.
58 The evidence is persuasive of the modus operandi of Powles, Madden, Gopal and others to represent to an investor that an instrument could be purchased for a sum of money representing a discount to face value, ie. a $10 million letter of credit could be bought for $8.7 million. This, so it was represented, could be rapidly on-sold for a substantial profit on the cost price and this profit would be divided between Linpar and the investor. In fact, the instrument was sought to be acquired at substantially less than the cost price represented to the investor, thus creating a secret differential in the account controlled by Powles, which would then be distributed between Linpar, Powles and others without any knowledge or informed consent of the investor. To this extent Powles was to receive secret commissions out of the investor's funds.
59 Contrary to what was being planned and attempted, virtually all communications between Powles and the Nauruan Trust were on the basis that the US$8.7 million (of which the subject US$8.55 million is part) would be used for the sole purpose of obtaining a letter of credit. As Hunter J found, Powles owed a duty to the Trust to ensure that its funds were used only for the purpose of acquiring the instrument. In paying out the differential to Madden, Gopal and himself, Powles breached that duty.
60 There is no room for any doubt that Powles received the US$8.7 million from the Nauruan Trust and paid away US$8.55 million of it in serious conflict of interest and in breach of trust. His duty was to ensure that the funds were used only for the purpose of acquiring the letter of credit and to safeguard the funds pending delivery of the instrument or security. However, Powles' self-interest was to obtain a transaction so he could earn commissions in fraud of his partners on this and, he hoped, subsequent transactions. The trial judge was correct to characterise Powles' conflict as exacerbated by his great need for substantial funds to cover his fraud of clients' trust moneys and to say that his propensity was to prefer his own interest to that of the Trust if they clashed. The reference given to the Trust on 4 December 1991 is a powerful illustration of Powles preference for his own self-interest. In our opinion, the reference was more than imprudent, it was dishonest. As we have already mentioned, many of the statements in the letter were clearly false to Powles' knowledge. Importantly, the reference deliberately concealed information from the Trust which was very relevant for it to know - for example, the presence of fraudsters in the market, Linpar's poor track-record and that the Trust's moneys would not be in Allens' safe custody, rather in Powles', who was seeking to make commissions out of a transaction kept secret from Allens (and the Trust). These were serious omissions. Nor did Powles reveal that, subsequent to 4 December 1991, moneys had been lost on two further occasions involving Madden and Searle. In addition, the reports which Powles gave to the Trust, or acquiesced in up to 14 January 1992, did not disclose the true position of the failed attempts to acquire an instrument. Those reports were also dishonest.
61 As Hunter J found, the moneys were paid away by Powles with undue haste and with no attempt whatsoever to check the credentials of the Commonwealth. Further, Powles took no steps to do any more than mirror the instructions of Madden and Searle, the latter being known to Powles as probably dishonest and certainly unreliable, and notwithstanding the 'seamy' relationship found by his Honour to exist between him and Madden. Powles also failed to seek to impose any unambiguous condition that the funds be held until receipt of the security and in a situation where he knew that the market had more than its share of predators.
62 His Honour made some findings favourable to Powles in relation to his belief that the Commonwealth was required to retain the funds pending delivery of the security and that Powles did not know or imagine that there was a risk of loss of the funds; further, that Powles believed in the market from which substantial profits could be made, notwithstanding its difficulty of access and presence of fraudsters. Even if this be accepted, Powles' actions were still dishonest, as Hunter J makes plain in relation to Powles' preference for his own self-interest.
63 There are, however, weighty reasons to find that Powles knew that the moneys were not to be kept in the Commonwealth pending receipt of the security, see for example, the Commonwealth's notice on 17 January 1992 that RTIC had issued instructions for a conditional 'swift' transfer of the funds, and also the facsimiles from Madden and Searle on 21 January 1992 that Barclays had wired the funds to AMRO. Powles was prepared to place the fate of the moneys in the hands of Searle, someone he knew, at the very least, to be of dubious integrity. In any event, the Commonwealth was an offshore bank (in Antigua) about which Powles knew nothing, except that it was dealing in a market not recognised or regulated by the Bank of England. Nor did he make any inquiries about the Commonwealth until it was too late. One is driven to the conclusion that Powles was so obsessed with the market that he was blind to normal prudential inquiries of a solicitor when entrusted with significant funds. Threats by Powles to call in enforcement agencies were, as he well knew, empty and idle, since they would risk exposure of his entire fraud.
64 On consideration of all the relevant evidence, the irresistible conclusion to which we are driven is that Powles must have appreciated the real risk of loss of the moneys. That Powles may have deluded himself into believing in the existence of the pbi market and that the market could be accessed without loss, must be offset against the abundance of evidence which told him that this was no more than wishful thinking, probably wishful thinking engendered by his own desperate situation. Plainly Powles would have known his duty to seek the fully informed consent of the Trust to the commission he stood to make. This dishonesty was compounded by his complicity in an arrangement whereby Dougall, a Trust officer, would receive secret commissions, as would Voellmin, with Powles as the paymaster out of the US dollar account. To this may be added the patently false reports he made to the Trust on the status of the transaction as late as 16 January 1992 and, subsequent to 17 January 1992, in failing to reveal to the Trust the fate of its moneys. For example, on 3 February 1992 Powles gave a completely false confirmation to the Trust of the success of the transaction.
65 The conclusion is irresistible that Powles knew, because of the circumstances mentioned, that he was placing the Trust's moneys at considerable risk. The appellants suggest that the payment away of the moneys was an overt act pursuant to a conspiracy between Powles, Madden and others to make false representations to the Trust and to conceal material facts from it, in order to make secret commissions from the transactions. It is unnecessary to make such a finding and we stay from doing so, notwithstanding that it may be that such a conclusion was available on the evidence.
66 Summarising to this point, in our opinion, Hunter J was correct to find that Powles was dishonest in terms of the policy exclusion. The respondents' contention to the contrary is untenable. However, we would go further than his Honour and find that the evidence and inferences readily available to be drawn are compelling that Powles was also dishonest, indeed fraudulent, in relation to the further matters discussed above. It is readily apparent that Powles was in breach of the trust he owed to the Nauruan Trust. His breach of trust involved dishonesty on his part. Powles breached his mandate, which was to deal with the funds solely in accordance with the basis upon which they had been entrusted to him.
67 Further, Powles was in breach of his fiduciary duty to the Trust in the manner in which he paid away the funds. He failed to ensure that he retained control over the funds without obtaining the required bank instrument. In this regard, he failed to safeguard the funds pending delivery of the instrument. Powles parted with control of the funds in circumstances where he knew (or must have known) that he was placing them at a real and considerable risk of loss. He must have known that parting with the funds, without having acquired the instrument, would seriously endanger any successful recovery of the moneys.
68 In acting as he did, Powles exhibited much more than undue haste. Powles made no inquiries at all about the offshore bank in Antigua, about which he knew nothing. At every turn, Powles manifestly put his own interests above those of the Trust.
69 He failed to use the funds solely for the purpose of purchasing a bank instrument. He treated the Trust in what can only be seen as a blatantly dishonest fashion, deliberately concealing information from it and intentionally concealing the truth in his reports to it. He made no disclosure to the Trust about the commissions he stood to make. Powles also participated in arrangements for others to receive secret commissions out of his bank account. This was also kept from the Trust.