THE HANCOCK FAMILY MEMORIAL FOUNDATION LTD -v- FIELDHOUSE [No 5] [2013] WASC 121 (12 April 2013)

Hancock Foundation case against Lloyd's syndicates

4 The second defendants are the appointed representatives of the members of five Lloyd's syndicates. Under a contract of liability insurance between Mr Fieldhouse and the second defendants, each of the second defendants provided excess professional indemnity insurance to Mr Fieldhouse in specified shares. There were two contracts of liability insurance between Mr Fieldhouse and the Lloyd's syndicates, but they are in materially the same terms and it is sufficient for the purposes of these reasons to treat them as a single policy. Mr Fieldhouse made a claim on the second defendants under each of the Lloyd's policies arising from the plaintiff's claim against Mr Fieldhouse for damages for breach of retainer or a duty of care owed by Mr Fieldhouse to the Hancock Foundation.

5 The plaintiff commenced this action against Mr Fieldhouse in 1995. Mr Fieldhouse died in November 2007. I subsequently ordered the Lloyd's syndicates be joined as defendants. The Hancock Foundation says that the second defendants, the Lloyd's syndicates, are parties to a contract of liability insurance that provides insurance cover in respect of Mr Fieldhouse's liability to the Hancock Foundation. The Foundation says that if it can prove that Mr Fieldhouse is liable in damages to it, then it may recover from the Lloyd's syndicates an amount equal to their liability under the contract, or contracts, in respect of Mr Fieldhouse's liability in damages to the Foundation by reason of s 51 of the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act).

6 Section 4(1) of the Law Reform (Miscellaneous Provisions) Act 1941 (WA) provides that, subject to qualifications and provisos not presently relevant, on the death of any person all causes of action subsisting against him shall survive against his estate. The provisions of that section are reflected in O 18 r 7(1) of the Rules of the Supreme Court 1971 (WA), which provides that where a party to an action dies but the cause of action survives, the action shall not abate by reason of the death. Order 18 r 7(2) provides that where, at any stage of the proceedings the liability of any party devolves upon some other person, the court may order that other person to be made a party and the proceedings to be carried on as if he had been substituted for the party who died. In the course of interlocutory proceedings, senior counsel for the plaintiff informed the court that Mr Fieldhouse died intestate and no person had applied for or been granted administration of his estate. Senior counsel further informed the court that Mr Fieldhouse lived and died in New South Wales, and that the effect of s 61 of the Probate and Administration Act 1898 (NSW) is that his estate vested in the New South Wales Trustee. No order has been made under O 18 r 7. Mr Fieldhouse's estate has taken no part in this action.

7 The parties submitted, in effect, that the case gives rise to the following issues:

1. Was Mr Fieldhouse retained by the Hancock Foundation?
2. In the circumstances, did Mr Fieldhouse owe the Hancock Foundation a duty of care?
3. Did Mr Fieldhouse breach his retainer or the duty of care he owed to the Hancock Foundation?
4. If so, did the Hancock Foundation suffer loss as a consequence of that breach?
5. Does the excess insurance the second defendants provided to Mr Fieldhouse provide cover in respect of any liability he may be found to have to the Hancock Foundation?

8 Before addressing those issues it is convenient to refer to the evidence and the factual circumstances giving rise to these issues.

9 No witness gave oral testimony. Most of the people involved in the relevant events died before the trial began. There were a large number of documents received in evidence. The documents included a proof of evidence of Mr Fieldhouse, and transcripts of evidence given by Mr Fieldhouse in other proceedings. I will briefly outline how those statements came into being.

10 Mr Hancock died on 27 March 1992. On 4 May 1995 this court granted probate of Mr Hancock's estate to the executors named in his will. On 8 April 1999, the Federal Court of Australia ordered that the estate be administered under pt II of the Bankruptcy Act 1966 (Cth). Mr Fieldhouse and others were examined by the trustee in bankruptcy about the affairs of the estate. Mr Fieldhouse made and signed a proof of evidence on 26 March 1997 for the purpose of the bankruptcy proceedings. Mr Fieldhouse gave evidence on 22 September 1999 and again on 12 and 13 February 2001 in the bankruptcy proceedings.

11 The Hancock Foundation lodged a proof of debt which was admitted by the trustee of the estate. The debt arose from the sale by Mr Hancock of his Life Governor's Share in Hancock Prospecting to the Hancock Foundation. The Foundation alleged that at the time of the sale the Life Governor's Share was worth, at the most, only $16,733.33, that at the time of the sale the directors of the Foundation were accustomed to act in accordance with Mr Hancock's instructions, that Mr Hancock was in effective control of the company and consequently owed fiduciary duties to the Hancock Foundation, and in breach of those duties Mr Hancock caused the Hancock Foundation to purchase the Life Governor's Share at a very substantial overvalue. The Foundation claimed that the consequential liability of Mr Hancock to compensate the Foundation was a provable debt. The trustee admitted the debt. Mrs Porteous, Mr Hancock's third wife, brought proceedings in the Federal Court to expunge the proof of debt. Mr Fieldhouse, and others, gave evidence in that proceeding.

12 Mr Fieldhouse's proof of evidence for the purposes of the bankruptcy proceedings, the transcripts of his evidence during the bankruptcy examination and the transcript of his evidence in the Federal Court proof of debt hearing were received in evidence in this action.

13 Before examining the relevant events giving rise to this action it is convenient to start by saying something of the structure of the Hancock Group of companies. The group included Hancock Prospecting, the Hancock Foundation and Zamoever Pty Ltd (Zamoever).

14 Hancock Prospecting is a proprietary company engaged in the exploration and development of mineral resources. It is the beneficiary of substantial mining royalties from Hamersley Iron Pty Ltd. The initial issued capital was one Life Governor's Share issued to Mr Hancock and one A Class share issued to his wife, Mrs Hope Hancock. The rights attached to the Life Governor's Share included:

(a) to take office as a Director and to hold such office for as long as he chooses and to exercise all the powers, authorities and discretions vested in the directors generally; and all the other directors shall be under his control and shall be bound to conform to his directions in regard to the company's business;

(b) to appoint any other persons to be directors and to define, limit and restrict their powers and to remove any director howsoever appointed;

(c) to attend and vote either in person or by proxy at all meetings of the directors whether or not he is a director;

(e) to cast 76 votes out of every 100 votes cast at a general meeting.

15 Subsequently, Hancock Prospecting issued a number of A, B and C class shares, one third to Mr Hancock, one third to Mrs Hope Hancock and one third to their daughter, Mrs Gina Rinehart. Article 3B of the Articles of Association provided that if share number 2, originally an A class share held by Mrs Hope Hancock, were to be transferred to Mr Hancock, it should be known as Life Governor's Share Number 2, and if Mr Hancock should dispose of the original Life Governor's Share, then Life Governor's Share Number 2 would have the same rights and privileges as the original Life Governor's Share. Article 3C provided that on transfer from Mr Hancock, the original Life Governor's Share was to be classified as an A class share. The articles also provided for a special class of shares known as cumulative special (CS) shares. The CS shares have special rights and privileges attached to them including special dividend rights that are triggered by the first transfer by way of sale. These shares rank for dividends and for a return of capital upon the winding up of the company in priority to all other shares.

16 The Hancock Foundation is a company limited by guarantee, and as such has members rather than shareholders. By its memorandum and articles of association it is to conduct business for charitable purposes and not for the profit of its individual members. Each class A member has the right to 15 votes out of 20 votes cast. In the absence of a class A member, each class B member has the right to 15 votes out of 20 votes cast. In the absence of any class A member or class B member, each class C member has the right to 15 votes out of 20 votes cast. Each class D member has the right to one vote. Until 22 December 1989, Mr Hancock was the only class A member and effectively had control of general meetings of the Foundation. In 1991 the Memorandum of Association was amended to allow the Foundation to make gifts to any person, including former members of the company and their relatives, by means of money or other property or other assistance. Mr Hancock resigned his membership of the Foundation on 22 December 1989.

17 Between December 1989 when Mr Hancock resigned as a member of the Foundation and March 1992 there was no class A member and Zamoever was the only class B member. Zamoever controlled the Foundation. There were only two issued shares in Zamoever. One was held by Mr Hancock. The second share was held in trust for Mr Hancock. Consequently, during his lifetime Mr Hancock controlled Zamoever. When Mr Hancock resigned his membership of the Foundation on 22 December 1989 distributions from the company could be made to him personally. Mr Hancock then controlled the Foundation through Zamoever.

18 Mrs Hope Hancock died on 2 April 1983. Her one third shareholding in Hancock Prospecting passed to Mr Hancock. There was a dispute between Mr Hancock and his daughter, Mrs Rinehart. The dispute was resolved by an agreement made between them in June 1988 which gave rise to what the parties described as the 'Plan of June 1988'. The agreement was made or evidenced by a handwritten document signed by Mr Hancock and Mrs Rinehart. The first paragraph of the agreement is that Mr Hancock 'retains his Life Governor's Share to give him continued complete control over [Hancock Prospecting] until his death'. The second paragraph provides that Mr Hancock and Mrs Rinehart are to enter into a legally binding agreement by which Mr Hancock will set up two irrevocable trusts to be called the 'Hope Hancock Trust' and the 'Hope Margaret Hancock Trust'. The beneficiaries of the Hope Hancock Trust were to be Mrs Rinehart's four children. The trustees were to be Mr Hancock during his lifetime and then Mrs Rinehart. The beneficiaries of the Hope Margaret Hancock Trust were to be Mrs Rinehart and her children. The trustees were to be Mr Hancock during his lifetime and Mrs Rinehart after his death. Mr Hancock agreed that after the grant of probate of the will of Mrs Hope Hancock was granted and her one third shareholding in Hancock Prospecting was transferred to him, he would transfer those shares to the Hope Margaret Hancock Trust by way of gift. This transfer was effected on 27 December 1988.

19 Mr Hancock agreed to sell his one third shareholding in Hancock Prospecting to the Hancock Foundation for a price of about $12 $16 million to be set by the auditors Coopers & Lybrand. The agreement provides that Mr Hancock will use part of the money paid by the Foundation for the purchase of the shares in Hancock Prospecting to pay off various family debts currently owing to the company.

20 The agreement summarises the position of Mr Hancock and Mrs Rinehart after the steps provided for in the agreement have been completed. Mrs Rinehart will hold one third of the CS shares entitling her to dividends but no votes. She will also be entitled to such income from the Hope Margaret Hancock Trust as Mr Hancock determines. On the death of Mr Hancock, Mrs Rinehart would hold one third of the CS shares plus an entitlement to 17.7% of the CS shares from the Hope Margaret Hancock Trust, giving her a total of 51% of the total CS shares. The agreement provides that as Mr Hancock's Life Governor's Share loses its controlling rights on his death, Mrs Rinehart will be in a position to control Hancock Prospecting from that time onwards. The agreement provides that so far as Mr Hancock is concerned:

he will retain control over 33.3% of the ordinary voting shares and special cumulative shares held by the Foundation because of his control over the Foundation. He will also control the 33.3% of the voting and 33.3% of the special cumulative shares held in the Hope Margaret Hancock Trust of which he is the sole trustee. He will also hold his Life Governors Share with its overall control.

21 After the agreement was made, the trusts were set up, Mr Hancock's onethird shareholding in Hancock Prospecting was sold to the Hancock Foundation, Zamoever was acquired, Mr Hancock resigned his membership in the Hancock Foundation and the articles of Hancock Prospecting were amended to permit gifts to former members and their relatives.

The sale of Mr Hancock's one third shareholding in Hancock Prospecting

22 Mr Hancock sold to the Hancock Foundation his onethird shareholding in Hancock Prospecting, consisting of class A, class C and CS shares but not including his Life Governor's Share, for $23.2 million by a written agreement dated 24 February 1989. The agreement did not contain any term prohibiting Mr Hancock from exercising his powers as holder of the Life Governor's Share to cause discriminatory dividends to be declared.

23 On 30 June 1986 Mr Forrester, financial controller of Hancock Prospecting, had written to Coopers & Lybrand stating that Mr Hancock wished to sell to the Hancock Foundation all of the shares standing in his name in Hancock Prospecting other than the Life Governor's Share and requested Coopers & Lybrand, as auditors of Hancock Prospecting, to place a value on the shares. On 6 October 1988 Mr Forrester sent a memo to Mr Hancock stating that he had received from Coopers & Lybrand their letter of valuation of Mr Hancock's A, C and CS class shares in Hancock Prospecting. Mr Forrester said 'this Valuation relates specifically to the points agreed between yourself and [Mrs Rinehart] in the June 22 Plan document'. Amongst other matters, that document made three assumptions, and if any of them were not implemented through changes to Hancock Prospecting's memorandum and articles of association, then an amended valuation would need to be undertaken by Coopers & Lybrand. One of the assumptions was that both during and after Mr Hancock's lifetime, and subject to annual dividends of $750,000 being payable on the B class shares held by Mrs Rinehart during Mr Hancock's lifetime, any other dividends will be declared at the same rate per share.

24 Coopers & Lybrand provided a number of draft valuations of Mr Hancock's shares to be sold to the Hancock Foundation. The final valuation is dated 17 March 1989. That is after the date of the share sale agreement. However, the letter of valuation commences by referring to instructions of 7 February 1989 to value Mr Hancock's shareholding in Hancock Prospecting (excluding the Life Governor's Share and preference shares) and values the shares at $23.2 million, the price for which the shares were sold by the share sale agreement. It is common ground that the price for the sale of the shares was based upon the valuation dated 17 March 1989, or a draft in substantially the same terms. The valuation states that its purpose is to attribute a fair market value to the shares which are intended to be transferred to the Hancock Foundation. It states that Cooper & Lybrand's independent opinion was sought because cl 5 of the Memorandum of Association of the Hancock Foundation precludes the payment of any benefit to a member or a member's family.

25 Paragraph 7 of the valuation states that Hancock Prospecting had advised Coopers & Lybrand of certain intentions of the present shareholders and of certain amendments to Hancock Prospecting articles of association which affect the basis of their valuation. Paragraph 7 provides:

In undertaking this valuation you have advised us of certain intentions of the present shareholders and of certain amendments to [Hancock Prospecting's] Articles of Association which affect the basis of our valuation, namely:

(a) [Mr Hancock] has set up two irrevocable trusts, namely the Hope Hancock Trust and the Hope Margaret Hancock Trust.

Hope Hancock Trust

The trustee of this trust will be [Mr Hancock] during his liefetime, and subsequently Mrs Gina Rinehart ('GHR'). At the date of our valuation, the trust has no assets.

Hope Margaret Hancock Trust

This trust will receive the shareholding of the late Mrs Hope Hancock as a gift. The trustee will be [Mr Hancock] during his lifetime, and subsequently GHR. [Mr Hancock] will be entitled to all income from these shares during his lifetime, reduced by such income as is required to pay any difference which arises between the required annual dividend to GHR of $750,000 and the dividends that GHR receives on her 'CS' shares;

(b) Both during and after the lifetime of [Mr Hancock], and subject to the dividend payable as per subparagraph (a) above, any other dividends declared by the Directors on ordinary shares will be declared at the same rate per share;

(c) [Mr Hancock] will retain the life Governor's share;

...

Article Amendments

(g) Certain amendments were made to HPPL's Articles of Association at a Board of Directors meeting held on 7 November, 1988 such that the following were deleted:

(i) paragraph 2 and 3 from Article 42;

(ii) Article 77A;

(iii) the words 'subject to the provisions of Article 77A and' from Article 77; and

(iv) the two provisos to Article 124.

26 Other relevant paragraphs of the valuation letter are as follows:

1. Our valuation is based on the assumption that the events which have not yet occurred at the date of this valuation (refer paragraph 7) will be put into effect, and that the voting control exercisable by the Life Governor under Clause 53 is not able to be used to influence dividend policy in a manner contrary to the interests of other shareholders. Once the dividend flow on the CS Shares is triggered by the proposed transfer, we have assumed that during the lifetime of [Mr Hancock], only the required minimum dividend under Article 3A(B) is received by [the Hancock Foundation].

1. We note, however, that dividend rights attaching to the various share classes are discretionary in the lifetime of [Mr Hancock] under Article 124. Whilst the Life Governor's share is held by [Mr Hancock] there is essentially 'total' control over the revenue and expenditure of [Hancock Prospecting] and its dividend policy, except in relation to dividends on the 'CS' shares.
2. If the proposed intentions are followed then during the lifetime of [Mr Hancock] the holder of the Shares:

(i) would, on transfer, have rights to at least the minimum CS dividend under Article 3A(B) equal to no less than one third of the dividends payable out of one third of the after tax royalty income.

(ii) would have no rights to any ordinary dividends except those effectively granted by [Mr Hancock] through the exercise of his discretionary power.

27 The transfer of shares was approved by Hancock Prospecting at a director's meeting on 24 February 1989.

28 After Mr Hancock sold his shares in Hancock Prospecting, other than the Life Governor's Share, in 1989, Mr Hancock, or his company Dinari, incurred substantial debts. The debts were principally debts owing to the Hancock Foundation. Mr Hancock wanted to obtain money to discharge these debts and to provide a capital sum for his ongoing needs. Mr Fieldhouse had advised Mr Hancock that there was a risk that the debts might be deemed a dividend and incur a substantial tax liability.

29 On 19 March 1991 Mr Fieldhouse sent a fax to Mr Hancock. In the fax Mr Fieldhouse said that he had an idea that he believed may be a sound way to build up Mr Hancock's estate overnight, and that if the idea 'holds water' the amount that would go to Mr Hancock would be very substantial and tax free. Mr Fieldhouse said that he intended to get a preliminary view on it from a QC. The idea that had occurred to Mr Fieldhouse was for Mr Hancock to sell his Life Governor's Share in Hancock Prospecting to the Hancock Foundation, the Trust or Mrs Rinehart.

30 Mr Fieldhouse met in conference with Mr Bloom QC on 21 and 22 March 1991. On 7 May 1991 Mr Fieldhouse delivered a brief to Mr Bloom. In the brief Mr Fieldhouse said that he acted for Mr Hancock. The brief included the following observations. Mr Hancock's sole personal asset of any value was his Life Governor's Share in Hancock Prospecting. By virtue of provisions of the memorandum and articles of association of Hancock Prospecting, through the Life Governor's Share Mr Hancock has complete control of Hancock Prospecting and, in particular, has the power to take out most of the assets of the company by way of the dividend provisions. In addition, Mr Hancock controls the Foundation through his company Zamoever and he also controls the Trust in his capacity as sole trustee. Mr Fieldhouse wrote:

In order to raise sufficient funds to meet his needs for the rest of his life my client proposes to sell or otherwise dispose of his rights under his Life Governor's Share in [Hancock Prospecting] for a substantial sum of money.

It is the purpose of this Brief to consider the most effective manner of putting my client's intentions into effect and thence to determine the maximum amount which could reasonably be paid as consideration therefore.

31 The brief enclosed a copy of the valuations dated 20 March 1989 of the A, C and CS shares held by Mr Hancock and the A and CS shares formerly held by the late Mrs Hancock. Mr Fieldhouse noted:

Under paragraph number 10 of the March 1989 valuations, they were based on the assumption that my client would not exercise his rights as Life Governing Director 'to influence dividend policy in a manner contrary to the interests of the other shareholders'.

believes that there must be some doubt as to a possible future exercise of the above right.

It is accordingly submitted that the Foundation, the Trust and even my client's daughter would place a substantial value on the removal of my client's rights whether by acquiring the Share, or otherwise dealing with the disposal of those rights.

32 In the brief Mr Fieldhouse submitted four proposals for counsel's consideration. The first was the sale of the Life Governor's Share to the Foundation. Mr Fieldhouse noted:

The purchase price for such a sale would be calculated presumably by way of a compromise to ensure to the Foundation a right to a presumed level of income by removing my client's latent right to take out assets from [Hancock Prospecting] by way of dividend.

Such a compromise would be on the basis that there is arguably an implied term in the 24 February 1989 Agreement to the effect that my client cannot exercise that right to the detriment of the Foundation and rather than litigate the issue, a compromise is reached.

Mr Fieldhouse asked Mr Bloom to advise generally on the effectiveness of the proposal and in particular to advise upon the income tax ramifications and to assist in the determination of the amount of the purchase price.

33 Before briefing Mr Bloom, Mr Fieldhouse had met with Mr Lonergan of Coopers & Lybrand in relation to a valuation of Hancock Prospecting. In a letter of 25 March 1991 to Mr Fieldhouse, Mr Lonergan said that Mr Fieldhouse had requested that Coopers & Lybrand provide an indicative valuation of the entire issued share capital of Hancock Prospecting. Mr Lonergan understood the purpose of the valuation was to assist Mr Fieldhouse's consideration of various possible restructuring alternatives. On 2 July 1991 Coopers & Lybrand provided a draft valuation to Hancock Prospecting. The draft stated:

You have advised that the purpose of this indicative valuation is to assist the directors of [Hancock Prospecting] and [Hancock Foundation] in their internal discussions and considerations of various restructuring alternatives which are currently being explored. At this stage we have not been advised of the nature of these restructuring alternatives.

The Life Governor share controls the revenue and expenditure of [Hancock Prospecting] including its dividend policy. In accordance with Clause 53 and Article 3C once [Mr Hancock] ceases to hold, or transfers the Life Governor's Share, it is then classified as an A class share. As a result, through [Mr Hancock's] ownership of the Life Governor's Share, the dividend rights attaching to the various classes of shares are discretionary during the lifetime of [Mr Hancock] with the exception of the dividends on the CS shares.

Paragraph 21 states that their approach is based on three fundamental assumptions including:

The voting control which can be exercised by [Mr Hancock] through ownership of the Life Governor's share will not be used to influence dividend policy in a manner contrary to that which has been used as a basis for this valuation.

The draft assessed the fair value of the Hancock Foundation's interest in Hancock Prospecting as follows:

Hancock Foundation's interest in Hancock Prospecting

34 The process by which the value of the Life Governor's Share was determined was later described by Mr Fieldhouse in his letter of 6 September 1991 to Mr Salt. Mr Fieldhouse said that on Mr Hancock's instructions he briefed Mr Bloom for the purpose of determining a reasonable consideration for the Life Governor's Share. Mr Fieldhouse says that Mr Bloom was of the view that a fair price for the Life Governor's Share would be 50% of the difference in the value of the A and C class shares in Hancock Prospecting given to those shares in the 20 March 1989 valuation compared to an up to date valuation. The shares to which Mr Fieldhouse referred were Mr Hancock's onethird shareholding in Hancock Prospecting which he sold to the Hancock Foundation in 1989. Mr Fieldhouse explained that Mr Bloom arrived at that view by taking into account the following matters:

1. Mr Hancock's Life Governor's Share gives him the right to declare dividends on one or more classes of shares to the exclusion of the others, and his Life Governor's Share is treated as a separate class, and article 125 empowers the directors to distribute assets of Hancock Prospecting by way of dividend.
2. As the holder of the Life Governor's Share, Mr Hancock effectively controls Hancock Prospecting.
3. It would be possible for Mr Hancock to use his powers to take out most of the assets of Hancock Prospecting by way of dividends.
4. In the 20 March 1989 valuation the A and C shares were valued on the assumption that Mr Hancock would not exercise his rights as Life Governing Director to influence dividend policy in a manner contrary to the interests of the other shareholders.
5. Based on that valuation and the assumption referred to, the Foundation acquired the shares for $23.2 million.
6. Notwithstanding the assumption, Mr Hancock could exercise his powers as holder of the Life Governor's Share to take out substantial assets from Hancock Prospecting.
7. The best course available to the Foundation to stop Mr Hancock exercising that power and thereby ensure its right to a presumed level of income on its A and C class shares would be for the Foundation to acquire the Life Governor's Share.

35 How those considerations lead to the view that a fair price for the Life Governor's Share would be 50% of the difference in the value of the A and C class shares in Hancock Prospecting given to those shares in the 1989 valuation compared to an up to date valuation is not at all obvious. Neither counsel offered any explanation of how those considerations might properly lead to the view reached by Mr Bloom for determining the value of the Life Governor's Share.

36 On 5 July 1991 Mr Fieldhouse delivered a supplemental brief to Mr Bloom to advise. The supplemental brief referred to the Coopers & Lybrand draft valuation of 2 July 1991 and noted that in the draft valuation the valuers had chosen a low value and an upper value. Mr Fieldhouse said that for the purposes of his observations he would adopt the upper value. Mr Fieldhouse said that 'my client', that is Mr Hancock, would prefer to sell his Life Governor's Share for $25 million but noted that 'one of the original thoughts of Counsel was that a fair price for that share would be 50% of the difference in the value given to the A and C class shares between the March 1989 valuation and the new valuation'. Mr Fieldhouse noted that the new valuation values the A and C class shares at $50 million, whilst the March 1989 valuation valued them at $16 million a difference of $34 million. Based on counsel's original thoughts, 50% of the difference would be only $17 million. Counsel was asked to review the proposal for the sale of the Life Governor's Share to the Foundation and to advise formally on the determination of the amount of the purchase price with particular regard to how much that price could be increased beyond $17 million.

37 Counsel subsequently advised Mr Fieldhouse that as Mr Hancock was indebted to the Foundation, it would be commercially reasonable for the Foundation to pay up to $20 million for the Life Governor's Share if Mr Hancock repaid all amounts owing by him to the Foundation. Based on that advice Mr Hancock determined to sell his Life Governor's Share to the Foundation for a purchase price of $20 million on the condition that he repay all amounts owing by him to the Foundation at the date of sale.

38 Mr Hancock agreed to sell his Life Governor's Share to the Hancock Foundation for $20 million by an agreement dated 7 August 1991. At a meeting of the directors of the Hancock Foundation on 9 August 1991, the directors resolved to accept Mr Hancock's offer for the sale of his Life Governor's Share in Hancock Prospecting for $20 million.

Right of plaintiff to recover against second defendants

39 As I have said, the plaintiff does not pursue any claim against the estate of Mr Fieldhouse. The plaintiff's only claim advanced at trial is its claim against the second defendants, the Lloyd's syndicates. That claim is based on s 51(1) of the Insurance Contracts Act.

40 The primary submission of the Lloyd's syndicates is that the contract of insurance between Mr Fieldhouse and the second defendants does not provide insurance cover in respect of Mr Fieldhouse's liability in damages to the Hancock Foundation, if such a liability is established.

41 Section 51(1) of the Insurance Contracts Act provides relevantly that where:

(a) the insured under a contract of liability insurance is liable in damages to a person (the third party);

(b) the insured has died; and

(c) the contract provides insurance cover in respect of the liability;

the third party may recover from the insurer an amount equal to the insurer's liability under the contract in respect of the insured's liability in damages.

42 To succeed in its claim for damages against the Lloyd's syndicates the Hancock Foundation must establish that Mr Fieldhouse was insured under a contract or contracts of liability insurance with the Lloyd's syndicates, and that the contract provides, or the contracts provide, insurance cover in respect of Mr Fieldhouse's claimed liability in damages to the Hancock Foundation. The Lloyd's syndicates say that the contract of insurance between them and Mr Fieldhouse does not provide insurance cover in respect of Mr Fieldhouse's claimed liability to the Hancock Foundation.

43 Mr Fieldhouse was required to hold professional indemnity insurance by reason of the provisions of the Legal Profession Act 1987 (NSW) (LPA). I considered the relevant statutory provisions and the role of the Solicitors Mutual Indemnity Fund (Fund), LawCover and the Law Society of New South Wales in The Hancock Family Memorial Foundation Ltd v Fieldhouse [No 3] [2010] WASC 223. Whilst that was done in the context of considering whether the Law Society of New South Wales had entered into a contract of insurance with Mr Fieldhouse and should be joined as a defendant, my summary of the scheme was accepted by both parties as an accurate summary of the scheme. I will repeat here what I said there.

44 In 1995 solicitors in New South Wales were required to hold a professional indemnity insurance policy which had been approved by the Attorney General: LPA s 41. The insurer was not specified but s 41(4) provided that the Law Society may negotiate with insurers and other persons in relation to the provision of the indemnity insurance and may do any other things necessary for or in connection with the Law Society's Council's functions under that section. All solicitors were required to contribute to the Fund: s 45(1). The Fund consisted of the Fund established by the Legal Practitioners Act 1898 (NSW), the money paid on account of the Fund by insurable solicitors either as annual contributions or as levies under the LPA and money earned or received from other sources: s 40(1). The purpose of the Fund is to pay the difference between an indemnity provided by an insurer to an individual solicitor, and the amount of a claim made against the solicitor: s 44(1). The Fund was administered by the company under the LPA. The company was LawCover.

45 The insurance policy which was in force in 1995 and approved by the Attorney General was the Master Policy, which was entered into with insurers by the Law Society on behalf of the insurable solicitors. The insurers were HIH, FAI, GIO and Sun Alliance.

46 The effect of the Master Policy and the Certificate of Insurance is that claims of up to $1.1 million in respect of liability of solicitors arising out of their practices will be met by the insurers under the Master Policy when the aggregate amount of claims for the year exceeds $58 million. Until that aggregate amount has been reached the insurance policy does not cover the solicitor's liability. It is common ground that the aggregate amount of claims for the year did not, and will not, exceed $58 million. Therefore, Mr Fieldhouse had to look to the Fund to indemnify him in respect of the first $1.1 million of a claim against him. Under s 44 of the LPA Mr Fieldhouse was to be paid from the Fund such amount as LawCover determined towards meeting any difference between the indemnity provided by the Master Policy and his liability.

47 It is common ground that the Lloyd's syndicates provided top up cover. That is, there was a contract of insurance between Mr Fieldhouse and the Lloyd's syndicates under which the syndicates provided insurance cover for any liability that exceeded his indemnity from the Fund and under the Master Policy.

48 In Hancock Family Memorial Foundation Ltd v Fieldhouse [No 3] I found that the Master Policy and the Certificate of Insurance constituted or gave rise to a contract, or contracts, of insurance between the solicitor and the insurers, that is HIH, FAI, GIO and Sun Alliance, and did not give rise to a contract of insurance between the solicitor and the Law Society. The solicitor's right of indemnity, if any, from the Fund arises from the statutory scheme created by the LPA. I further found that there is no contract between the Law Society and Mr Fieldhouse for the reasons stated by Cohen J in Lee v Phair (Unreported, NSWSC, 31 October 1996). I further found that if, contrary to my finding, there is a contract between Mr Fieldhouse and the Law Society in relation to Mr Fieldhouse being indemnified by the Fund, then it is not a contract of insurance for the purposes of the Insurance Contracts Act s 51(1). I make those findings for the purposes of this judgment and for the same reasons.

49 LawCover granted indemnity to Mr Fieldhouse subject to a reservation of its rights with respect to any liability brought about by fraud or dishonesty. LawCover gave notice of that indemnity in a letter dated 4 June 2008 from its solicitors to Mr Nick Brown. Mr Brown was then acting, or purporting to act, as the solicitor for the Hancock Foundation. The letter stated:

LawCover has granted indemnity in relation to the Plaintiff's claim subject to an express reservation in respect of any liability brought about by a fraudulent act or omission of its insured.

The Lloyd's syndicates initially relied on the fraud exclusion, which was incorporated into their policies, but by amendment to their defence on 24 April 2012 they deleted reference to that exclusion.

50 The Lloyd's syndicates draw attention to the nature of excess policies. They say, as is usual in excess policies, the indemnity does not operate until the indemnity of the lower layer(s) has been exhausted. They refer to the comment of the learned authors of Derrington and Ashton in 'The Law of Liability Insurance' at 11547:

A primary policy and an excess policy insure different risks. The former is triggered immediately upon the happening of the occurrence that gives rise to liability or the making of a claim on the insured (and its notification to the insurer where that is part of the cover), and it may place obligations on the insurer from that time. An excess policy attaches only after the predetermined amount of primary cover is exhausted and, for example, the insurer's obligation to contribute to the costs of the defence of the underlying claim will only fall upon it as part of the ultimate net loss against which the policy insures. These duties and the protection provided by the policy commence only when those of the primary insurance end ... The interests of the primary and excess insurers are usually mutually adverse to a substantial degree. The primary insurer has the primary duty of providing indemnity and, if there is a duty to conduct the defence, of doing that up to the point of paying the full amount of the cover. Under excess cover, the insurer's liability attaches only after a predetermined amount of primary cover has been exhausted, and the reduced risk is reflected in the cost of the policy ...

51 The central issue between the plaintiff and the second defendants concerns the construction of condition C of the policy schedule. I will set out conditions A, B and C so that condition C can be seen in context:

1. WHEREAS certain insurers (hereinafter referred to as the Underlying Insurers) have issued to the Assured named in the Schedule hereto Policies of Insurances (hereinafter called the Underlying Insurances) copies of which have been lodged with the Underwriters.
2. NOW we, Underwriters at Lloyd's who have hereunder subscribed our names(s) (hereinbefore and hereinafter called Underwriters) agree to indemnify the Assured in accordance with the applicable insuring terms conditions and exclusions of the Underlying Insurances except where amended by this Policy or by Endorsement hereto.

1. Underwriters shall only be liable in respect of the indemnity herein given after the Underlying Insurers have paid or have admitted liability or have been held liable to pay the full amount of their indemnity provided always that the liability of Underwriters under the indemnity herein given shall be limited to the amount payable in respect of each and every claim in the period of insurance stated in the Schedule. It is a condition of this Policy that the Underlying Insurances shall be maintained in full effect during the currency of this Policy. (emphasis added).

52 The plaintiff says that the Underlying Insurers are the insurers under the Master Policy and do not include the Fund. The plaintiff says that the condition that the Underwriters (the second defendants) shall only be liable in respect of the indemnity after the Underlying Insurers have paid or have admitted liability, or have been held liable to pay the full amount of their indemnity, only applies where the $58 million deductible under the Master Policy has been reached, that is, the aggregate amount of claims for the year has exceeded $58 million. Alternatively, the plaintiff says that if the Underlying Insurers includes the Fund, then the Fund have admitted liability and hence the second defendants are liable in respect of the indemnity.

53 The second defendants submit that the Underlying Insurers includes the Fund. They further submit that the LawCover letter of 4 June 2008 did not amount to an admission of liability because of the express reservation in respect of any liability brought about by a fraudulent act or omission. They further submit that the insurer granting indemnity to the insured does not amount to an admission of liability to the claimant and hence the condition is not satisfied.

54 There are difficulties with the construction advanced by each party. The Lloyd's syndicates say that the Underlying Insurers includes the Fund. However, there is no contract between Mr Fieldhouse and the Fund, or LawCover which administers the Fund, and if there is a contract between them it is not a contract of insurance because the Fund has a discretion whether or not to indemnify Mr Fieldhouse against any liability to a third party. On the other hand, if the Underlying Insurers does not include the Fund, then there will be no Underlying Insurers unless and until the aggregate amount of claims for the year exceeds $58 million.

55 The text of the excess insurance policy, like any contract, must be understood in its context. This requires that the text of the policy be read as a whole, and, ordinarily, that it be read against the background surrounding circumstances known to the parties, and the purpose and object of the transaction.

56 The contract between Mr Fieldhouse and the Underwriters was to provide professional indemnity insurance. Mr Fieldhouse was a legal practitioner in New South Wales. Legal practitioners were required to obtain and maintain a minimum level of professional indemnity insurance the compulsory layer. The purpose of the contract between Mr Fieldhouse and the Underwriters was to provide additional professional indemnity insurance ('topup' cover) over and above the compulsory layer. The compulsory layer professional indemnity insurance was linked to the issue of a practising certificate. Section 41(1) of the LPA provided that the Law Society Council must not issue a practising certificate to an insurable solicitor unless it is satisfied, amongst other things, that the solicitor has in force an approved insurance policy. At the time, the scheme for providing professional indemnity insurance to solicitors was that which I have outlined earlier in these reasons. Claims of up to $1.1 million in respect of liability of solicitors for their practices were met by the insurers under the Master Policy when the aggregate amount of claims for the year exceeds $58 million. Until that aggregate amount has been reached the Master Policy does not cover the solicitors' liability. The solicitor must look to the Fund to indemnify him in respect of the first $1.1 million of a claim against him. In those circumstances the parties to the contract between Mr Fieldhouse and the Lloyd's syndicates could not have intended that the Underlying Insurers only means the insurers under the Master Policy and not the Fund because whether or not the insurers under the Master Policy give any indemnity depends on whether or not the aggregate of claims in any year exceeds $58 million. If the Underlying Insurers refers only to the insurers under the Master Policy, then condition C could only be satisfied in years when the aggregate of claims exceeds $58 million. In other years the Underwriters would be under no liability to indemnify Mr Fieldhouse. Mr Fieldhouse would have no topup cover unless and until the aggregate claims in a year exceeded $58 million. Furthermore, it may not be known for some time after the year in which the claim was made whether or not the aggregate claims for that year would exceed $58 million. Commercial common sense dictates that the Underlying Insurers must refer to the insurers providing the compulsory layer of insurance.

57 The plaintiff argues that the Fund is not an insurer because it has a discretion whether or not to indemnify Mr Fieldhouse. The usual meaning of an insurer is a person who promises, in return for a monetary consideration, to pay to the insured a sum of money or to provide that person with a corresponding benefit upon the occurrence of one or more specified events: MacGillivray & Parkington on Insurance Law (8th ed). According to that definition the Fund is not an insurer. However, words take their meaning from their context. In Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41, 64 Gibbs CJ said:

It is trite to say that the meaning of particular words in a contract must be determined in the light of the context provided by the contract as a whole and the circumstances in which it was made, and that decisions on the effect of the same words in a different context must be viewed with caution.

And in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, 401 Brennan J said:

Both the internal and extrinsic context in which a word or phrase is used may throw light upon the meaning with which the parties must be taken to have used it.

58 The context of condition C and of the contract as a whole leads to the conclusion that the Underlying Insurers refers to the person or entity providing the compulsory layer of professional indemnity insurance. That was provided by the insurers under the Master Policy or the Fund depending on whether or not the aggregate of claims in the particular year exceeded $58 million.

59 The words Underlying Insurers point to the person or persons providing the lower layer or underlying insurance. It was known to all parties, when the contract was entered into, that the person or persons providing the primary layer of indemnity was the Fund or, when claims in the aggregate exceeded $58 million in the year, the insurers under the Master Policy.

Condition C is condition precedent to liability to indemnify

60 The effect of the text of condition C is to make payment or admission of liability by the Underlying Insurers or the Underlying Insurers having been held liable to pay the full amount of their indemnity a condition precedent of the Underwriters' liability in respect of the indemnity given under the Underwriters contract. The plaintiff argued that on the proper construction of the contract this condition should be held not to apply where the aggregate claims in a year did not exceed $58 million.

61 The plaintiff submits that this limitation on the effect of the condition would reflect the presumed intention of the parties. The contractual intentions of the parties are, however, to be derived from the language of their written contract, construed of course in the context of their business relationship and the relevant surrounding circumstances. I can see no justification for reading the proposed limitation into this contract. It is inconsistent with the express terms of condition C and is not necessary to give the contract business efficacy and would itself lead to uncertainty and inconvenience. It may not be known for some time whether or not the aggregate claims in a year exceeded $58 million and hence whether or not the condition applied. Further, that part of condition C that provides it is a condition of the Policy that the Underlying Insurances shall be maintained in full effect during the currency of this Policy points against the construction advanced by the plaintiff.

62 Condition C provides that the underwriters shall be liable in respect of the indemnity given by the excess policy if one of three conditions is met. The first condition is that the Underlying Insurers have paid the full amount of the indemnity. The second is that the Underlying Insurers have admitted liability to pay the full amount of the indemnity. The third is that the Underlying Insurers have been held liable to pay the full amount of the indemnity.

Fund did not admit liability to pay amount of indemnity

63 The plaintiff does not claim that the insurers under the Master Policy or the Fund have paid the full amount of their indemnity. However, the plaintiff contends that the second precondition was satisfied because LawCover, as manager of the Fund, have admitted liability. The plaintiff relies upon the letter of 4 June 2008 from LawCover to Mr Brown which I have referred to earlier. The plaintiff says that by that letter LawCover, on behalf of the Fund, admitted liability.

64 The plaintiff relies upon Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 in support of its argument that the 4 June 2008 letter constitutes a relevant admission. In Baulderstone the claim arose out of the design and construction of the third runway at Sydney Airport, for which Baulderstone Hornibrook Engineering (BHE) was engaged as head contractor. A reinforced earth wall had to be constructed to form the perimeter of the runway. Two years after the work was completed, subsistence was discovered behind the wall. Sydney Airport Corporation Ltd (SACL) sued BHE. That claim was settled by BHE undertaking to perform rectification work at significant cost. BHE made a claim on insurers, seeking indemnification for the rectification costs. BHE was an insured under a number of layers of professional indemnity insurance. HIH and General Insurance underwrote the primary layer. Gordian and CGU each had an excess layer. All these layers were likely to be exhausted should BHE be entitled to indemnity for the rectification costs. At first instance Einstein J found that neither the Gordian nor the CGU policy responded because the liability of BHE for SACL's claim against it under the design and construction contract could be relevantly described for the purposes of the policies as arising out of construction risks and not arising out of professional indemnity risks. On appeal BHE unsuccessfully argued that on the primary findings of fact by the trial judge the only proper conclusion was that the default by BHE and its subcontractors were of a character of engineering or design and not of a character of construction.

65 One further issue which arose in Baulderstone related to the Gordian excess layer only. Gordian's policy contained a clause in the same terms as condition C. There was no dispute that the first precondition was not satisfied because the underlying insurer, HIH, had not paid. However, BHE contended that the second precondition was satisfied because HIH had admitted liability. Reliance was placed on a letter from HIH to a solicitor acting for BHE which, relevantly, said:

We refer to the meeting on the 31st of October 2002 at your office and confirm that indemnity is granted to Baulderstone Hornibrook Engineering pursuant to policy number 9541NK18365 in relation to the claim against it by SACL resulting from the subsistence at the millstream and seawalls of the third runway at Sydney Airport.

The grant of indemnity is subject to the policy terms, conditions and exclusions and is based on the facts presently known to HIH.

Having found against BHE on the main issues, it was not necessary for either Einstein J or the Court of Appeal to determine this point, but both proceeded to do so. Einstein J found that the letter was clear, and that the effect of the second sentence was that HIH had not admitted liability. Allsop P, with whom Beasley and Campbell JJA agreed, also found that the effect of the letter was clear, but with the opposite result. Allsop P said that where an insurer is already obliged to indemnify, by virtue of entering the insurance contract in the first place, a grant of indemnity is not the assumption of a new liability. It is an admission of existing liability. Citing Thiess Pty Ltd v ERC Frankonia [2007] QSC 004, Allsop P also referred to the possibility that the circumstances may be such that the grant of indemnity rises to the level of formation of a new agreement, the insurer makes a binding promise to accept the claim in consideration for the insured forbearing to sue on the policy. As HIH's grant of indemnity was not expressed to be 'without admission' or 'without prejudice', Allsop P held that the second sentence did not deprive HIH's letter of the character of admission of liability. It was also held that the third precondition, that HIH had been held liable to pay the full amount of its indemnity, would have been satisfied if the policy had otherwise responded to BHE's claim.

66 In a case note on Baulderstone at (2009) 20 ILJ 59 Tim Faulkner wrote:

... even if there is an admission, a question of construction will still need to be addressed, namely, the extent of the admission. In its terms, HIH's admission was, amongst other things, 'subject to the policy exclusions'. It is difficult to see what work these words had to do, if they did not exclude from the admission the issue of whether the claim against BHE fell within one of the exclusions, including exclusion 1(p). Given that exclusion 1(p) was held to apply, Einstein J's conclusion on the meaning of HIH's 'admission' is compelling.

Exclusion 1(p) provided that the policy shall not indemnify the insured in respect of any claim made against them arising out of construction work performed involving the means, methods, techniques, sequences, procedures and use of equipment, of any nature whatsoever which are employed by the Insured contracting staff or others in executing any phase of any project.

67 In its letter of 4 June 2008 to Mr Brown, the solicitors for LawCover said:

... we consider it appropriate to inform you that LawCover has granted indemnity in relation to the Plaintiff's claim subject to an express reservation in respect of any liability brought about by a fraudulent act or omission of its insured.

LawCover had taken over the defence of the plaintiff's claim on behalf of Mr Fieldhouse. Solicitors instructed by LawCover filed the first defendant's defence on 20 February 2006. Mr Fieldhouse died in November 2007. On 18 November 2009 the solicitors on the record for the defendant, Mr Fieldhouse, filed an application to permanently stay the action. When the application came on for hearing on 1 April 2010 senior and junior counsel announced that they appeared for the defendant. Senior counsel explained:

The professional indemnity insurer has not declined liability in relation to this claim and so at the present time ... we have received instructions from the insurer to bring on this application (ts 422).

On the resumed hearing of the application on 3 June 2010, nearly three years after Mr Fieldhouse died, senior counsel informed the court:

We are on the record for Mr Fieldhouse and we have been appearing on, or were appearing on Mr Fieldhouse's behalf in these proceedings ... on instructions from insurers who had not declined to cover in relation to the claim (ts 495).

68 The Lloyd's syndicates were subsequently joined as second defendants. The second defendants pleaded, in effect, that if, which they denied, Mr Fieldhouse conducted himself fraudulently and dishonestly, then the Lloyd's syndicates were not liable to indemnify Mr Fieldhouse. The second defendants subsequently withdrew that plea.

69 I find that the effect of the letter of 4 June 2008, together with LawCover conducting the defence of this action on behalf of Mr Fieldhouse, amounts to an admission that the Fund was liable to indemnify Mr Fieldhouse against any liability to the plaintiff. LawCover had reserved the right to withdraw its indemnity if any liability of Mr Fieldhouse was brought about by a fraudulent act or omission of Mr Fieldhouse. However, LawCover never asserted that any liability was brought about by a fraudulent act or omission of Mr Fieldhouse and it has not been established that it was.

70 It is necessary to determine the extent of LawCover's admission. LawCover admitted liability to indemnify Mr Fieldhouse against any liability to the plaintiff. However, LawCover did not admit that Mr Fieldhouse was liable to the plaintiff. To the contrary, LawCover defended the claim by the plaintiff against Mr Fieldhouse.

71 The plaintiff submits, in effect, that an admission by LawCover that it is liable to indemnify Mr Fieldhouse against any liability to the plaintiff is sufficient to satisfy condition C. The Lloyd's syndicates say that it is not and that condition C is not satisfied unless Mr Fieldhouse, or his estate, is held liable to pay to the plaintiff the full amount of the indemnity granted by LawCover.

72 I find that condition C has not been satisfied. On the proper construction of condition C, the second precondition is that the underlying insurers have admitted liability to pay the full amount of their indemnity. LawCover have not admitted liability to pay the full amount of their indemnity. In Baulderstone, BHE had settled the claim against it by SACL before Gordian agreed to indemnify it in relation to the claim against it by SACL. In those circumstances the admission by LawCover that it was liable to indemnify BHE in relation to the claim against it by SACL was an admission of liability to pay the full amount of Gordian's indemnity. This case is different. At the time LawCover agreed to indemnify Mr Fieldhouse, and in subsequently conducting Mr Fieldhouse's defence to the claim against it by the plaintiff, neither Mr Fieldhouse nor LawCover had admitted liability or been held liable to pay to the plaintiff the full amount of Mr Fieldhouse's indemnity granted by LawCover. Neither Mr Fieldhouse nor his estate have been held liable to pay to the plaintiff the full amount of Mr Fieldhouse's indemnity granted by LawCover. That cannot be an outcome, or consequence, of this action because Mr Fieldhouse has died and his estate has not been joined as a party.

73 The third condition in condition C is not satisfied; the Underlying Insurers have not been held liable to pay the full amount of their indemnity. The words 'have been held liable' have the effect of meaning 'have been determined by a court to be liable'. That cannot happen as a result of this trial because neither LawCover nor Mr Fieldhouse or his estate are before the court.

74 For the reasons stated, condition C is not satisfied. The Lloyd's syndicates are not liable under the contract of liability insurance between them and Mr Fieldhouse in respect of Mr Fieldhouse's liability in damages to the plaintiff. The plaintiff is not entitled to recover from the Lloyd's syndicates under s 51(1) of the Insurance Contracts Act.

Liable in damages: Insurance Contracts Act s 51(1)(a)

75 There is a question whether the words 'liable in damages' in the Insurance Contracts Act s 51(1)(a) require, as a matter of construction, a third party to determine, either by way of judgment or settlement, liability against the insured before instituting proceedings against the insurer. The second defendants contend that there must be such a determination. In view of my finding that condition C of the contract of insurance between Mr Fieldhouse and the Lloyd's syndicates is not satisfied, it is not necessary to determine that issue. However, I will briefly state my conclusion on the question.

76 In The New South Wales Solicitors Mutual Indemnity Fund v Hancock Foundation Memorial Fund [No 2] [2009] WASCA 146 [23] McLure JA said that there is authority to the effect that the insured's liability to the third party and the insurer's obligation to indemnify the insured under the insurance policy can be litigated and determined in the same proceedings. The authority to which her Honour referred is Webb v Estate of Darryl Arthur Herbert [2006] WASCA 43. In that case Wheeler JA, with whom Pullin and Buss JJA agreed, referred to the decision of Beach J in Vollstedt v Calibre Enterprises Pty Ltd (1999) 10 ANZ Ins Cas 61440 where his Honour considered that it was arguable that a third party may institute proceedings against the insurer with a view to establishing the liability of the insured in that proceeding, rather than being able to proceed only where the insured's liability had already been determined. Wheeler JA also referred to Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd [2005] NSWCA 19; 62 NSWLR 148 [41] [46] (Ipp JA) and Pagnon v WorkCover Queensland [2000] QCA 421; 2 Qd R 492 [17] (McPherson JA) in which a purposive construction of s 601AG of the Corporations Act 2001 (Cth) was applied. Wheeler JA considered that s 51(1) of the Insurance Contracts Act and s 601AG of the Corporations Act, although having different wording, involved similar concepts. Her Honour concluded that it was arguable that the appellant might be able to establish that the insured 'is liable in damages' to him even though the insured was not, and could not, be a party to the action.

77 Senior counsel for the plaintiff submitted that it is not necessary that there be a determination of the liability of the insured to the third party before an insurer can be liable. Mr Newlinds submitted that must be so because the section applies when the insured cannot be found as well as when the insured is dead. A similar point was made by counsel for the sixth and seventh defendants in Vollstedt v Calibre Enterprises Pty Ltd where it was submitted that it is implicit in the section that any proceeding instituted by the third party against the insurer will be instituted before any liability of the insured has been determined. Counsel in that case submitted that that must follow from the fact that the third party has the right to recover from the insurer not only where the insured has died but where after reasonable enquiry the insured cannot be found. If an insured cannot be found, how can he be served with proceedings instituted against him by a third party and his liability to the third party be determined. Beach J found that the contentions of the sixth and seventh defendants were arguable.

78 I find that s 51(1)(a) of the Insurance Contracts Act does not require a third party to determine, either by way of judgment or settlement, liability against the insured before instituting proceedings against the insurer. The section is a remedial provision and should be given a purposive construction. Furthermore, the arguments advanced by senior counsel for the plaintiff and by counsel for the sixth and seventh defendants in Vollstedt v Calibre Enterprises Pty Ltd support that construction.

79 I have found that the plaintiff is not entitled to recover from the second defendants under s 51(1) of the Insurance Contracts Act. Accordingly, it is strictly not necessary to consider whether Mr Fieldhouse, or his estate, is liable in damages to the Hancock Foundation. However, in case the matter goes on appeal, I will briefly set out my findings and conclusions in relation to the liability of Mr Fieldhouse to the Hancock Foundation.

Mr Fieldhouse was not retained by the Hancock Foundation

80 The contract between a solicitor and client for the provision of legal services for a fee is also described as the 'retainer'. Like any other contract, a retainer may be oral or written, or implied by conduct.

81 The plaintiff pleads a partly written and partly implied general retainer by which Mr Fieldhouse was retained to provide to a number of persons and companies, including the Hancock Foundation, with legal advice and legal services in relation to their affairs generally (the General Retainer). In the course of the trial the plaintiff did not advance the General Retainer and in his closing submissions senior counsel for the plaintiff did not press the General Retainer case.

82 The plaintiff also pleads that Mr Fieldhouse's retainer by the Hancock Foundation to act as solicitor for the Foundation to advise it and provide legal services in relation to the Life Governor's Share transaction, and in particular as to whether it would operate to prevent Mr Hancock from declaring discriminatory dividends against the interests of the Foundation and whether it was in the interests of the Foundation to pay Mr Hancock $20 million for the Life Governor's Share (the Implied Retainer), is to be implied from a number of facts and circumstances. The second defendants deny that Mr Fieldhouse was retained by the Hancock Foundation for the purposes of advising it in relation to the Life Governor's Share transaction. The second defendants say that Mr Fieldhouse was advising only Mr Hancock on the transaction.

83 The plaintiff says that the following circumstances compel a finding that a retainer is to be implied:

(a) Mr Fieldhouse knew that Mr Hancock was the controlling mind of the Foundation;

(b) Mr Fieldhouse knew that the actual directors of the Foundation would act in accordance with Mr Hancock's direction so long as they were satisfied that what they were doing was legal;

(c) Mr Fieldhouse knew that the Foundation did not have any other legal or valuation advice other than what was being provided by him;

(d) Mr Fieldhouse knew that the transaction was to be between the Foundation and its controlling mind; and

(e) Mr Fieldhouse told the Foundation through its controlling mind that the transaction was 'sound'.

84 An implied retainer will only arise where on an objective consideration of all the circumstances, an intention to enter into such a contractual relationship ought fairly and properly to be imputed to the parties: Dean v Allin and Watts (a firm) [2001] EWCA Civ 758; [2001] 2 Lloyd's Rep 249, [22] (Lightman J, Robert Walker & Sedley LLJ agreeing). The onus of proof is on the person asserting the implied retainer. Such proof will only be satisfied if the relationship of solicitor and client is a necessary and clear inference from the proved facts: Pegrum v Fatharly (1996) 14 WAR 92, 95 (Ipp J). The court must undertake an objective consideration of the circumstances of the case.

85 Mr Fieldhouse knew that Mr Hancock was the controlling mind of the Foundation in the sense that Mr Hancock was able to control the Foundation. Mr Fieldhouse knew that the directors of the Foundation were accustomed to act in accordance with Mr Hancock's directions. However, there is no evidence that they had acted, or would act, in accordance with Mr Hancock's direction if to do so would be a breach of their duties as directors. Mr Fieldhouse knew that the Foundation did not receive any legal or valuation advice from someone other than him. That is not to say that Mr Fieldhouse gave any legal or valuation advice to the Foundation. Mr Fieldhouse knew that the transaction was to be between the Foundation and Mr Hancock who was its controlling mind in the sense stated earlier. I infer that Mr Fieldhouse told Mr Hancock that the transaction was sound in the sense that it would achieve its intended purpose of Mr Hancock obtaining substantial funds for his personal use and to reduce his loan obligations to the Hancock Foundation in a manner that would incur no tax. However, I am not satisfied that those matters taken alone or in combination give rise to the necessary inference that Mr Hancock acted as solicitor for the Foundation in relation to the purchase of the Life Governor's Share.

86 A principal shareholder, or person in effective control of a company, may retain a solicitor to advise him about his relationship with the company. A solicitor so retained would not necessarily be retained, that is contracted to provide legal services, to the company even though the advice or its acceptance might affect that company: Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1 [211].

87 Prior to March 1991 Mr Fieldhouse had provided legal services to companies within the Hancock Group, including the Hancock Foundation. Whether a contractual relationship existed with a client in the past is relevant to whether a retainer should be implied. The court may be readier to assume that the parties intended to resume that relationship: Dean v Allin and Watts [22] (Lightman J). However, that Mr Fieldhouse had provided legal services to the Hancock Foundation in the past does not provide much assistance in determining whether or not he acted for the Hancock Foundation in relation to the sale of the Life Governor's Share. Mr Fieldhouse's principal relationship was with Mr Hancock, and he undoubtedly acted for Mr Hancock in relation to the Life Governor's Share transaction.

88 Who is liable for the lawyers' fees is often relevant to determining whether there was a retainer. In this case there is no evidence that anyone paid Mr Fieldhouse's fees in relation to this particular transaction.

89 In my view the evidence fails to establish that Mr Fieldhouse acted for the Foundation in relation to the sale of the Life Governor's Share under an implied retainer. It is relevant to consider the origins of the transaction. Mr Hancock wanted to obtain money to discharge substantial debts and to provide a capital sum for his ongoing needs. The debts were principally owing to the Hancock Foundation. Mr Fieldhouse had advised Mr Hancock that there was a risk that the debts might be deemed a dividend and incur a substantial tax liability, that is, a liability of Mr Hancock. On 19 March 1991 Mr Fieldhouse sent a fax to Mr Hancock saying that he believed he had an idea that may be a sound way to build up Mr Hancock's estate overnight, and that the amount that would go to Mr Hancock would be very substantial and tax free. In considering ways in which the debts could be discharged and Mr Hancock could obtain a capital sum without Mr Hancock incurring any tax liability, Mr Fieldhouse was acting on behalf of and advising Mr Hancock. The question is whether the relationship of solicitor and client subsequently arose between Mr Fieldhouse and the Hancock Foundation.

90 Mr Fieldhouse proceeded to brief Mr Bloom QC to give advice in relation to the possible sale of the Life Governor's Share. Mr Fieldhouse met in conference with Mr Bloom on 21 and 22 March 1991. Mr Fieldhouse delivered a written brief on 7 May 1991 and again met in conference with Mr Bloom on 13 May 1991. He delivered a supplemental written brief on 5 July 1991 and met in conference again on 18 June and 9 and 10 July 1991. There is no evidence from which it can be inferred that in doing so Mr Fieldhouse ceased to be acting for Mr Hancock alone and started to act for Mr Hancock and the Hancock Foundation. Mr Hancock gave no such instructions. Neither Mr Hancock nor anyone else on behalf of the Hancock Foundation gave any such instructions. In his written brief to Mr Bloom, Mr Fieldhouse stated that he acted for Mr Hancock. Mr Fieldhouse stated that 'in order to raise sufficient funds to meet his needs for the rest of his life, my client proposes to sell or otherwise dispose of his rights under his Life Governor's Share in HPPL for a substantial sum of money'. Mr Fieldhouse's brief to Mr Bloom was not a brief to advise only in relation to a proposal for Mr Hancock to sell the Life Governor's Share to the Foundation. The brief asked counsel to advise generally on the effectiveness of four proposals and, in particular, to advise upon the income tax ramifications of them. The proposals Mr Bloom was asked to advise about involved the Foundation, the Trust and Mrs Rinehart. Only one of the four proposals was for Mr Hancock to sell the Life Governor's Share to the Foundation. The second proposal was for Mr Hancock to sell the Life Governor's Share to the Foundation and the Hope Margaret Hancock Trust jointly. The third proposal was for Mr Hancock to sell the Life Governor's Share to a company the shares in which would be owned by the Foundation and the Trust jointly. The fourth proposal was for the payment by one or more of the Foundation, the Trust and Mrs Rinehart to Mr Hancock in consideration of Mr Hancock arranging by way of a Special Resolution to relinquish all rights, privileges and qualities pertaining to the Life Governor's Share.

91 On the advice of Mr Bloom, Mr Fieldhouse instructed Mr Lonergan of Coopers & Lybrand to value the shares in Hancock Prospecting for the purpose of determining the value of the Life Governor's Share. Mr Lonergan's file note of a meeting with Mr Fieldhouse and Mr Salt on 22 March 1991 noted that the client was Hancock Prospecting. Mr Lonergan's initial letter of advice of 25 March 1991 was addressed to Mr Fieldhouse and stated that his instructions were to provide an indicative valuation of the entire issued share capital of Hancock Prospecting and that the purpose of the valuation was to assist Mr Fieldhouse in his consideration of various possible restructuring alternatives. I do not draw an inference from those circumstances that Mr Fieldhouse had ceased acting for Mr Hancock alone and had started to act for the Foundation as well as Mr Hancock in relation to the sale of the Life Governor's Share.

92 The plaintiff places some emphasis on the letter of 6 September 1991 in which Mr Fieldhouse wrote to Mr Salt about the Life Governor Share transaction. The letter was written after the transaction had been completed. The plaintiff says that the letter was written to Mr Salt who was a director of the Hancock Foundation. In the letter Mr Fieldhouse informs Mr Salt of the opinion that had been given orally by Mr Bloom. The plaintiff says that gives rise to the inference that Mr Fieldhouse had been acting on behalf of the Hancock Foundation. I do not draw that inference. The letter is not addressed to Mr Salt as a director of the Hancock Foundation. It is addressed to Mr Salt, Hancock Prospecting Pty Ltd. In his evidence in the bankruptcy proceedings, Mr Fieldhouse said that he wrote to Mr Salt in his capacity as group accountant. In the letter Mr Fieldhouse does not say that he was acting on behalf of the Hancock Foundation. To the contrary, he says that he briefed Mr Bloom 'on Mr Hancock's instruction'. The letter also says that at counsel's request, an up to date valuation of the A and C class shares was commissioned from Hancock Prospecting's auditors. The letter makes observations about counsel's view of the fair value of the Life Governor's Share and refers to advice from counsel. The letter concludes that based on that advice 'Mr Hancock determined to sell his Life Governor's Share to the Foundation for a purchase price of $20 million'.

93 The plaintiff places reliance on the fact that Mr Fieldhouse wrote to Corrs Chambers Westgarth (Corrs) seeking advice on stamp duty payable on the Life Governor's Share sale and that the Hancock Foundation subsequently paid the stamp duty. In a facsimile of 24 July 1991 to Corrs Mr Fieldhouse said that he confirmed that Mr Hancock wishes to sell his Life Governor's Share in Hancock Prospecting to the Hancock Foundation, and that he should be glad if Corrs would consider the stamp duty ramifications on the sale of that share. Corrs replied by letter dated 29 July 1991. On 1 August 1991 Mr Hancock responded stating that the only concern he had with Corrs' letter is the background summary on page 1 'which unfortunately distorts the background as summarised' in parts of his facsimile of 24 July 1991. Mr Fieldhouse asked Corrs to redraft the first page of their advice. On 2 August 1991 Corrs forwarded to Mr Fieldhouse their revised advice. The Foundation subsequently paid the stamp duty. I do not think that anything can be inferred from the fact that the Foundation paid the stamp duty. It is usual for the purchaser to pay the stamp duty. However, the fact that Mr Fieldhouse sought advice from Corrs in relation to stamp duty ramifications of the sale lends some support to the argument that he was acting for the Foundation. However, that Mr Fieldhouse sought advice on the stamp duty ramifications of the sale is not inconsistent with Mr Fieldhouse acting for Mr Hancock alone. It is apparent from the witness statement and evidence given by Mr Fieldhouse in the bankruptcy proceedings and the Federal Court proceedings that Mr Hancock wished to minimise the tax legally payable in respect of all transactions to which he or the companies in the Hancock Group was a party.

94 The Hancock Foundation paid certain invoices of Mr Bloom. The plaintiff says this is some indication that Mr Fieldhouse, who briefed Mr Bloom in relation to the transaction, did so on behalf of the Foundation. I do not place much significance on the payment. In Pegrum v Fatharly, Anderson J at 105 said, in relation to the payment of the solicitors' fees:

The arrangement between the parties as to who should pay for the work is seldom material to the question for whom the work is done and to whom the professional duties are owed: see Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp (at 396). It is not unusual for a person to engage a solicitor on the basis his fees are to be paid by someone else: see Morgan v Blythe (at 359).

95 In BDG Roof Bond Ltd (In Liquidation) v Douglas (1999) WL 1613219 the Chancery Division of the High Court of Justice considered when a retainer should be implied. The claimant company brought an action for professional negligence alleging that the second defendants, Dunn & Baker, a firm of solicitors had acted for it in the course of a transaction in which Mr Douglas sold his 50% shareholding in the company to the company. Park J held that Dunn & Baker were not the company's solicitors for the purposes of the transaction. Park J said:

Finally, on this aspect I should refer to Dunn & Baker's bill. As I have said in B25 above it was addressed to the Company, not to Mr Douglas, and was expressed to be for advising the Company on the purchase of the share in the name of Mr Douglas. This by itself would raise an inference that Dunn & Baker were the Company's solicitors in the transaction, but it is an inference which must be displaced in the face of the matters to which I have referred above. The fundamental point is that Dunn & Baker were only the Company's solicitors if someone instructed them to act for it, and the evidence establishes to my satisfaction that noone did instruct them to act for it. In any case I must be realistic and recognise that in the case of a small private company the shareholders are always likely to want their solicitors to bill the company rather than themselves. In that way the professional charges do not directly hit their own pockets. I have recorded Mr Hotchkiss's evidence that Mr Douglas and Mr Bailey specifically asked him to bill the matter to the Company. I have also pointed out that Veale Wasbrough did the same thing as respects their charges for advising Mr Bailey. At his request they rendered their bill to the Company (which by then was wholly owned by him), not to him, notwithstanding that at the time when some of their services were provided he, and not the Company, was their client [D(1)6].

96 The Foundation paid Mr Bloom's fees. However, as I have said, it is not unusual that legal fees are paid by nonparties to the retainer. I infer that the Foundation paid Mr Bloom's fees in accordance with some arrangement made between Mr Hancock and the Foundation. In his answers to interrogatories Mr Fieldhouse says that he did not request the Hancock Foundation to pay Mr Bloom's invoices.

97 Any inference arising from the matters to which I have referred that Mr Fieldhouse was acting for the Foundation is displaced by a consideration of how the transaction originated and proceeded. Mr Fieldhouse's instructions to advise how Mr Hancock might discharge his debts and build up his estate were given by Mr Hancock on his own behalf. After thinking of raising a substantial sum of money by realising the value of the Life Governor's Share in some way, Mr Fieldhouse continued to look into that proposal without being given any further instructions by anyone on behalf of the Foundation, including Mr Hancock. Mr Hancock subsequently determined to proceed with the sale of the Life Governor's Share. Neither Mr Hancock, nor anyone else, expressly instructed Mr Fieldhouse to act for the Foundation in relation to the transaction. A retainer will only be implied if the relationship of solicitor and client is a necessary and clear inference from the proved facts. In this case the circumstances do not give rise to a necessary and clear inference that Mr Fieldhouse was acting for the Foundation in relation to the sale of the Life Governor's Share.

Mr Fieldhouse did not owe the Foundation a duty of care

98 Generally solicitors owe no duty of care to persons who are not their clients. In Hill v Van Erp [1997] HCA 9; (1997) 188 CLR 159 Brennan CJ said:

Generally speaking, however, a solicitor's duty is owed solely to the client subject to the rules and standards of the profession. That is because the solicitor's duty is to exercise professional knowledge and skill in the lawful protection and advancement of the client's interests in the transaction in which the solicitor is retained and that duty cannot be tempered by the existence of a duty to any third person whose interests in the transaction are not coincident with the interests of the client (167).

That general rule is subject to exceptional categories or circumstances. A duty of care has been held to arise in the context of negligent misstatement causing loss: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] UKHL 4; [1964] AC 465. The law has recognised a duty of care as being owed by a solicitor to a beneficiary of a will: Hill v Van Erp.

99 There are some cases where it has been held that a duty of care was owed to an associate of the client who relied on the solicitor: eg Blackwell v Barroile Pty Ltd (1994) 123 ALR 81 where the Federal Court held that a solicitor owed a duty of care to the client's trustee in bankruptcy as a result of the reliance by the trustee on the solicitor.

100 In Hill v Van Erp the High Court recognised a duty of care owed by a solicitor to a third party beneficiary of a client testator's will, in the absence of reliance by the third party beneficiaries. The High Court emphasised the coincidence of interest between the client and the beneficiaries. Where, however, the putative duty of care owed by a solicitor to a nonclient conflicts with a duty to the client, a duty of care towards the nonclient is unlikely to be established.

101 In Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd [2001] NSWSC 448 Girvan Australia Ltd (Girvan Australia) was a member of the Girvan group of companies that included Girvan Corp (NZ) Ltd (Girvan NZ). Through a chain of subsidiaries Girvan NZ indirectly controlled one of its subsidiaries, Maronis Holdings Ltd. Maronis' principal asset was the Liverpool Truck Stop site in New South Wales. Duncan and Ambler, directors of Girvan Australia and Girvan NZ, caused Maronis to mortgage the site to Nippon Credit Australia Ltd to secure a loan of $15 million to Girvan Australia. Clayton Utz, solicitors for Girvan Australia, acted for Girvan Australia in handling various related matters including the loan transaction. Clayton Utz did not have instructions from Maronis, but corresponded with the Land Titles Office as if it acted for Maronis. Maronis issued proceedings against the directors, Clayton Utz and Nippon Credit. Bryson J, having held that there was no contractual retainer between Clayton Utz and Maronis and that no retainer could be implied, held that Clayton Utz owed no duty to Maronis to advise on the wisdom of entering into the mortgage. Bryson J found that Clayton Utz had not undertaken the conduct generally of Maronis' legal business relating to the mortgage or undertaken to give Maronis advice on the commercial wisdom of giving the mortgage or on any other matter. There was no evidence that any director or officer of Maronis relied on Clayton Utz to do any of those things. Bryson J observed that an undertaking to act in a particular way, and reliance on the undertaking or action of another person or a party embarking on performance of some task in relation to which the duty arose, or assuming responsibility for the task, are common elements in situations in which a duty of care is imposed by tort but that they were not present in that case. Bryson J held that where the putative duty of care owed by a solicitor to a nonclient conflicts with the duty to the client, that is an important factor telling against the imposition of a duty of care. Bryson J said:

The introductory allegation in paragraph 33 is 'Clayton Utz acted as solicitors for Girvan Australia in relation to the Facility Agreement, the Loan and the securities ...'. This introductory allegation is of considerable importance because when addressing whether facts and circumstances imposed a duty of any kind on Clayton Utz towards Maronis the duties owed by Clayton Utz to Girvan Australia as their client are a prominent consideration adverse to a conclusion that a duty was incurred to any other person which was in conflict with or in any way inconsistent with the full performance of professional duties owed to Girvan Australia. On the predominance of a solicitor's duty of care to his own client see Hill v Van Erp (1997) 188 CLR 159 at 167 (Brennan CJ), 196 197 (Gaudron J). The business in hand for Girvan Australia was managing the Facility Agreement and bringing it to a point where the loan could take place, and it was necessary to take steps towards the grant of the mortgage by Maronis to bring that about. It was [the solicitor's] professional duty to serve the interests of Girvan Australia in this respect, as in other respects (338).

102 Mr Fieldhouse acted for Mr Hancock in relation to the sale of the Life Governor's Share and owed duties to Mr Hancock as his client. In [26] of its statement of claim, the plaintiff pleads that prior to March 1991 Mr Fieldhouse in his capacity as a solicitor was instructed by Mr Hancock to advise him as to how he could obtain sufficient funds in the most tax effective manner in order to discharge significant debts in the order of $10 million owing by him to Hancock Prospecting amongst others, and to provide additional funds for his ongoing needs. In [27] the plaintiff pleads that on or shortly after 7 May 1991 Mr Fieldhouse advised Mr Hancock to enter into an agreement to sell his Life Governor's Share for the sum of $20 million.

103 The statement of claim puts forward two duties of care owed by Mr Fieldhouse to the Hancock Foundation. First, it is pleaded in [31] that Mr Fieldhouse owed a duty to the Foundation to take reasonable care to avoid foreseeable loss or damage to the Foundation arising from or as a result of advice and legal services given by him to the Foundation in relation to the Life Governor's Share transaction by reason of the following:

(a) the existence of the General Retainer, alternatively the 24 October Retainer, alternatively the Implied Retainer;

(b) the First Defendant's knowledge that the directors of HFMF had since about 1972 looked to him generally for advice on legal matters with which HFMF was concerned and in relation to the Life Governor's Share Transaction looked to him for legal advice as to its effectiveness and propriety in achieving the objective of constraining Mr Hancock from causing HPPL to declare discriminatory dividends against the interests of HFMF and as to the commercial reasonableness of the proposed price in purchasing the Life Governor's Share;

(c) the First Defendant's knowledge that HFMF had not received any independent legal or valuation advice concerning the Life Governor's Share Transaction.

104 The plaintiff did not press the existence of the General Retainer or the 24 October Retainer. I have found there was no Implied Retainer. Mr Fieldhouse knew that the Hancock Foundation had not received any independent or valuation advice concerning the Life Governor's Share Transaction. However, that is not of itself sufficient to give rise to the pleaded duty of care.

105 The decision to accept Mr Hancock's offer for the sale of his Life Governor's Share for a purchase price of $20 million was made by Mr Dalby and Mr Salt at a meeting of directors of the Hancock Foundation on 9 August 1991. The written agreement for the sale of the Life Governor's Share is dated 7 August 1991 and was executed by the common seal of the Hancock Foundation being affixed by the authority of the board of directors in the presence of Mr Dalby and Mr Salt. The evidence does not establish that Mr Fieldhouse knew that Mr Dalby and Mr Salt looked to him in relation to the commercial wisdom of the Life Governor's Share transaction, or looked to him for legal advice as to its effectiveness in achieving the objective of constraining Mr Hancock from causing Hancock Prospecting to declare discriminatory dividends against the interests of the Hancock Foundation and as to the commercial reasonableness of the proposed price in purchasing the Life Governor's Share.

106 Mr Dalby is deceased. Mr Salt was available to give evidence but he was unwilling to do so voluntarily. There is no evidence that he could not have been subpoenaed or that he would not have complied with the subpoena or would not have given truthful evidence. Mr Salt would be expected to be called by The Hancock Foundation. His evidence might elucidate a number of matters in issue. He could have given evidence whether or not he, or to his knowledge anyone else's, instructed Mr Fieldhouse to act for the Foundation in relation to the sale of the Life Governor's Share. He could have given evidence whether or not in deciding, as a director of the Foundation, to enter into the Life Governor's Share sale transaction he relied upon the advice of Mr Fieldhouse or upon Mr Fieldhouse to give any advice that was necessary. He could have given evidence whether he would have caused the Foundation to seek independent legal advice and whether it would have accepted and acted upon such advice. He could have been asked whether he requested Mr Fieldhouse to write the letter of 6 September 1991 and if so, why and in what capacity.

107 Two consequences can flow from the unexplained failure of a party to call a witness whom that party would be expected to call. One is that the court may infer that the evidence of the absent witness would not assist the case of that party. The other is that the court may draw an inference unfavourable to that party with greater confidence. But the court is not entitled to infer that the evidence of the absent witness would have been positively adverse to that party: Australian Securities and Investment Commission v Hellicar [2012] HCA 17 [232].

108 In this case the onus of proof is upon the plaintiff to establish an implied retainer between Mr Fieldhouse and the Foundation. In the absence of testimony by Mr Salt, and any relevant documentary evidence, there is no evidence from which it can be inferred that Mr Salt, or anyone else on behalf of The Hancock Foundation, instructed Mr Fieldhouse to act for it in relation to the Life Governor's Share sale transaction, or relied upon Mr Fieldhouse to advise it in relation to the transaction, or to advise it that it should obtain legal or valuation advice in relation to the transaction.

109 Mr Fieldhouse did not give advice or provide legal services to the Hancock Foundation in relation to the Life Governor's Share Transaction, except arguably in obtaining advice from Corrs concerning the stamp duty ramifications of the transaction. However, even if Mr Fieldhouse assumed responsibility to obtain advice in relation to the stamp duty payable by the Hancock Foundation, in doing so Mr Fieldhouse incurred a duty to take reasonable care only in obtaining that advice.

110 Secondly, in [33] the plaintiff pleads that in acting as solicitor to Mr Hancock in the proposed sale of the Life Governor's Share, Mr Fieldhouse owed the Foundation a duty of care not to be negligent in his advice to Mr Hancock in circumstances where such negligence would foreseeably cause loss and damage to the Foundation when Mr Fieldhouse knew that the directors of the Foundation were accustomed to acting on the lawful instructions of Mr Hancock. It is common ground that the directors of the Foundation were accustomed to act on the lawful instructions of Mr Hancock, and Mr Fieldhouse knew that.

111 I am not satisfied that Mr Hancock owed to the Foundation the pleaded duty of care. Mr Fieldhouse did not give advice or provide legal services to the Foundation in relation to the Life Governor's Share transaction, except arguably in obtaining advice from Corrs concerning the stamp duty ramifications of the transaction. Mr Fieldhouse did not undertake the conduct generally of the Foundation's legal business relating to the Life Governor's Share transaction, or the commercial wisdom of entering into the transaction, or its effectiveness in achieving the objective of constraining Mr Hancock from causing Hancock Prospecting to declare discriminatory dividends against the interests of the Foundation, or the commercial reasonableness of the proposed price for the Life Governor's Share. There is no evidence that the directors of the Foundation who made the decision to enter into the transaction, Mr Salt and Mr Dalby, relied upon the advice of Mr Fieldhouse about the commercial wisdom, legality, effectiveness or propriety of the transaction before they decided, on behalf of the Foundation, to enter into the transaction. I am not satisfied that Mr Fieldhouse assumed responsibility to advise the Foundation in relation to the commercial wisdom of the transaction or to advise the Foundation generally in relation to the transaction.

112 The issues of duty of care, breach and causation overlap. I will briefly set out my findings in relation to breach and causation notwithstanding my conclusion that Mr Fieldhouse did not owe any relevant duty of care to the Foundation. The second defendants' defence to the plaintiff's case of breach of duty of care has two key elements. First, the second defendants submit that Mr Fieldhouse did not breach any duty of care owed to the Foundation with respect to the sale of Life Governor's Share. Secondly, they submit that, in any event, Mr Hancock controlled the Foundation and Hancock Prospecting and would have brought about the Life Governor's Share sale regardless of any advice provided by Mr Fieldhouse as the plaintiff alleges was required.

113 The plaintiff says that Mr Fieldhouse breached his duty of care to the Foundation in failing to advise the Foundation:

(a) of the existence of the Second Life Governor's Share;

(b) that Mr Hancock would undoubtedly be held to the assumption that Mr Hancock would not use the Life Governor's Share to influence dividend policy in a manner contrary to the interests of other shareholders;

(c) that it was not in accordance with proper valuation methodology for the Life Governor's Share to be valued not by reference to its intrinsic value but by reference to another parcel of shares; and

(d) if Mr Fieldhouse did not act for the Foundation, in failing to advise the Foundation to obtain its own independent legal advice on the matter and its own independent valuation advice.

114 Share number 2 in Hancock Prospecting was originally held by Mrs Hope Hancock. After her death, it was transferred to Mr Hancock. Article 3B of the Articles of Association of Hancock Prospecting provided that on the transfer of share number 2 from the present holder to Mr Hancock it should be constituted and known as Life Governor's Share Number 2, and that if Mr Hancock should dispose of the original Life Governor's Share, then Life Governor's Share Number 2 would have the same rights and privileges as the original Life Governor's Share; in effect it would become a second Life Governor's Share. The plaintiff says that on the transfer of the original Life Governor's Share by Mr Hancock to the Foundation, the Life Governor's Share Number 2 had the same rights and privileges as the original Life Governor's Share. Thus, the transfer of the original Life Governor's Share to the Foundation was of no benefit or value to the Foundation.

115 The second defendants argue that, as a matter of construction, Mr Hancock held share number 2 only as trustee and not beneficially, and so he was not entitled to exercise any of the broad powers which may have attached to that share. They submit that cl 2(53) of the Memorandum of Association of Hancock Prospecting grants certain powers to the Life Governor's Share whilst Mr Hancock 'is the registered holder of or entitled to such share'. They submit that as a matter of construction, cl 2(53) ought be construed as attaching such powers only while Mr Hancock is its beneficial owner. That requires the clause to be read 'is the holder of and entitled to such share'. They submit that the Life Governor provisions were intended to confer the benefits and powers attaching to the Life Governor's Share on Mr Hancock only.

116 I do not accept that construction. Clause 2(53) of the Memorandum of Association sets out the rights and powers which attach to the Life Governor's Share while Mr Hancock is the registered holder of or entitled to the share. Clause 3B of the Articles of Association has two parts. First, it provides that share number 2 'upon its transfer from the present holder to [Mr Hancock] shall be constituted and known as Life Governor's Share Number 2'. Secondly, it provides that if Mr Hancock transfers or disposes of the Life Governor's Share Number 1, the Life Governor's Share Number 2 'shall have attached to it the same rights and privileges as are set out in the said cl 53 and they shall by virtue of this cl 3B apply mutatis mutandis to the Life Governor's Share Number 2'. The first part of cl 3B refers to the transfer of share number 2 from the present holder to Mr Hancock. There is no reference to beneficial ownership. The second part of the clause provides in effect that upon Mr Hancock transferring or disposing of the Life Governor's Share Number 1, then the Life Governor's Share Number 2 shall have certain rights and privileges attached to it. Those rights and privileges are identified by reference to cl 2(53) of the Memorandum of Association, but cl 3B does not incorporate any qualification relating to beneficial ownership, even if such a qualification can be found in cl 2(53) of the Memorandum. In any event, no such qualification is found in cl 2(53) of the Memorandum. There is no reason to read the phrase 'whilst the founder is the registered holder of or entitled to such share' to mean 'whilst the founder is the registered holder of and entitled to such share' (emphasis added).

117 The second defendants further argue that even if Mr Hancock had the powers attached to the Life Governor's Share Number 2 following the sale of the original Life Governor's Share, he could not have exercised them. That is because it was implicit in the sale of the Life Governor's Share that he could not do so.

118 Mr Fieldhouse said that he overlooked the existence and effect of the Life Governor's Share Number 2. In doing so he failed to exercise reasonable care to advise Mr Hancock in relation to the effect of the sale of the Life Governor's Share, and if he owed a duty to advise the Foundation in relation to the transaction then he breached that duty. The consideration for the sale of the Life Governor's Share Number 1 was to remove any doubt as to a possible future exercise by Mr Hancock of his rights as Life Governor Director to influence Hancock Prospecting's dividend policy in a manner contrary to the interests of the other shareholders and in particular the Foundation. On the transfer of the Life Governor's Share Number 1, at the very least there remained some doubt as to a possible future exercise of that right by reason of the existence and possible exercise of the rights and privileges attaching to the Life Governor's Share Number 2. In overlooking that matter Mr Fieldhouse failed to exercise reasonable care.

119 Central to the plaintiff's case is the assumption pleaded in [24] of its statement of claim where it is pleaded that the Foundation and Mr Hancock entered into the 1989 sale of Mr Hancock's shares in Hancock Prospecting, except for the Life Governor's Share, to the Hancock Foundation on a common assumption

that both during and after the lifetime of Mr Hancock any other dividends declared by the directors on ordinary shares would be declared at the same rate per share and that the voting control exercisable by the Life Governor under cl 53 of the Memorandum of Association of [Hancock Prospecting] would not be used to influence dividend policy in a manner contrary to the interests of other shareholders ('the Assumption').

120 The plaintiff pleads that Mr Fieldhouse breached his duty of care owed to the Hancock Foundation by failing to advise the Foundation that the Life Governor's Share was not worth $20 million but was in fact of little or no value by reason of the Assumption, whereby the Foundation could arguably restrain Mr Hancock from exercising his rights as Life Governor or otherwise by his shareholding and board control to cause Hancock Prospecting to declare discriminatory dividends contrary to the interests of the Hancock Foundation.

121 The plaintiff pleads that the Assumption arises from the fact that the price of $23.2 million was agreed by Mr Hancock and the Foundation based on a written valuation of Coopers & Lybrand dated 17 March 1989 and earlier drafts provided to Mr Fieldhouse, which valuation was based in part expressly on the Assumption as instructed by Mr Fieldhouse.

122 The Coopers & Lybrand valuation was addressed to the directors of Hancock Prospecting for the attention of Mr Fieldhouse. I find that the instructions for the valuation were given by Mr Fieldhouse. In his valuation letter Mr Lonergan states that 'in undertaking this valuation you have advised us of certain intentions of the present shareholders and of certain amendments to [Hancock Prospecting's] Articles of Association which affect the basis of our valuation'. One of those intentions is the Assumption. It is stated as follows:

Both during and after the lifetime of [Mr Hancock] and subject to the dividend payable as per subparagraph (a) above, any other dividends declared by the Directors on ordinary shares will be declared at the same rate per share.

123 In [9] Mr Lonergan expressly states that the valuation is based, amongst other things, 'on the assumption ... that the voting control exercisable by the Life Governor under cl 53 is not able to be used to influence dividend policy in a manner contrary to the interests of other shareholders'. The valuation contains some statements which are arguably inconsistent with the Assumption. In [13] of the valuation letter Mr Lonergan states:

[w]e note, however, that dividend rights attaching to the various share classes are discretionary in the lifetime of [Mr Hancock] under Article 124. Whilst the Life Governor's share is held by [Mr Hancock] there is essentially 'total' control over the revenue and expenditure of [Hancock Prospecting] and its dividend policy, except in relation to dividends on the 'CS' shares.

Paragraph 14 states that if the proposed intentions are followed then during the lifetime of Mr Hancock, the holder of the shares 'would have no rights to ordinary dividends except those effectively granted by [Mr Hancock] through the exercise of his discretionary power'.

124 I find that the price for the onethird shareholding in Hancock Prospecting paid by the Hancock Foundation was determined on the basis of the Coopers & Lybrand valuation of 17 March 1989. I find that, notwithstanding what Mr Lonergan says in [13] and [14] of the valuation letter, the valuation was made on the assumption that Mr Hancock would not use his Life Governor's powers to declare discriminatory dividends. Mr Fieldhouse was aware of the Assumption. He expressly referred to it in his brief of 7 May 1991 to Mr Bloom, where he stated that the valuation was based on the assumption that Mr Hancock would not exercise his rights as Life Governing Director 'to influence dividend policy in a manner contrary to the interests of the other shareholders'. However, the evidence does not establish that Mr Hancock accepted that restriction or that he undertook to be bound by the Assumption. In his brief of 7 May 1991 to Mr Bloom, Mr Fieldhouse stated that there must be some doubt as to a possible future exercise of Mr Hancock's rights as Life Governing Director.

125 In Porteous v Donnelly [2002] FCA 862 the respondent submitted that, because of the assumption in the Coopers & Lybrand valuation of 17 March 1989 on the basis of which the price of the onethird shareholding in Hancock Prospecting was determined, Mr Hancock was under a binding obligation not to act inconsistently with that assumption. Stone J held:

I accept that the price of the onethird shareholding in [Hancock Prospecting] paid by [Hancock Foundation] was determined on the basis of the Coopers & Lybrand valuation of 17 March 1989 and on the express assumption in that report that Mr Hancock would not use his Life Governor's powers to declare discriminatory dividends. While there is considerable evidence to suggest that those close to Mr Hancock were aware of the assumption and had an expectation that he would be subject to such a restriction, the evidence does not show that Mr Hancock accepted the restriction or undertook in any way to be bound by the assumption [64].

126 The price of Mr Hancock's onethird shareholding in Hancock Prospecting paid by the Hancock Foundation was determined on the basis of the Coopers & Lybrand valuation and on the basis of the Assumption. Mr Fieldhouse knew of the Assumption. The first draft of Coopers & Lybrand's valuation report was sent to Mr Fieldhouse on 21 February 1989. Mr Hancock knew of the Assumption. Mr Forrester sent him Coopers & Lybrand's letter of valuation with his memo of 6 October 1988. Senior counsel for the plaintiff, Mr Newlinds SC, submitted that Mr Hancock was estopped from denying that he could not exercise the rights attached to the Life Governor's Share to influence dividend policy in a manner contrary to the interests of the Foundation by reason of an estoppel by convention. Mr Newlinds said that in Porteous v Donnelly Stone J had applied the test for estoppel by representation, not estoppel by convention or common assumption.

127 In ConStan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226 the High Court held that there is no estoppel by convention unless an agreed or assumed state of facts has been adopted by the parties as the conventional basis of their relationship. The Court further held that the assumed state of affairs for estoppel by convention must be an assumed state of fact not law. The court said:

Estoppel by convention is a form of estoppel founded not a representation of fact made by a representor and acted upon by a representee to his detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying [1986] HCA 14; (160 CLR 226 at 244).

128 The fourth edition of Meagher, Gummow & Lehane's Equity: Doctrines and Remedies says that although that passage appeared to require the assumption to concern facts not law, it is now clear that the doctrine extends to assumptions of law, as a result of the subsequent observations made in Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387, 415 416, 432, 452, 458; Foran v Wight [1989] HCA 51; (1989) 168 CLR 385, 435, 457; Commonwealth of Australia v Verwayen [1990] HCA 39; (1990) 170 CLR 394, 413, 445, 501; and David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353. However, in Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 Gummow, Hayne, Heydon, Kiefel and Bell JJ immediately after quoting the above passage from ConStan Industries said:

The reference to an agreed or assumed state of facts (not of law) is significant.

129 Furthermore, estoppel by convention, as distinct from promissory estoppel, does not extend to expressions of intention: Commonwealth v Verwayen (409) (Mason CJ). The plaintiff's contention is, in effect, that the common assumption of Mr Hancock and the Hancock Foundation was that Mr Hancock would not, that is intended not to, exercise the rights and powers attached to the Life Governor's Share.

130 I am not satisfied that Mr Hancock could be restrained from exercising his legal rights to cause Hancock Prospecting to declare discriminatory dividends contrary to the interest of the Hancock Foundation by reason of estoppel by convention. First, a common assumption about the legal effect of a given course of conduct is incapable of constituting an estoppel by convention. Estoppel by convention cannot be constituted by an agreed or assumed state of law between the relevant parties, but can only be constituted by an agreed or assumed state of facts between the relevant parties. Secondly, the evidence falls short of establishing that Mr Hancock and the Hancock Foundation conducted their relations on the basis of an agreed or assumed state of affairs that Mr Hancock could not or would not exercise his legal rights to cause Hancock Prospecting to declare discriminatory dividends contrary to the interests of the Hancock Foundation.

131 The Foundation says that it was not in accordance with proper valuation methodology for the Life Governor's Share to be valued not by reference to its intrinsic value but by reference to another parcel of shares.

132 The value of the Life Governor's Share to the Hancock Foundation is related to the benefit to the Foundation of removing the right of Mr Hancock to exercise the rights and privileges attaching to the Life Governor's Share, or removing any doubt about that right. However, the evidence does not disclose that the price for the Life Governor's Share was determined by any proper valuation of the benefit to the Foundation from the extinguishment of those rights.

133 In his letter of 6 September 1991 to Mr Salt, Mr Fieldhouse says that on Mr Hancock's instructions he briefed Mr Bloom for the purpose of determining a reasonable consideration for the Life Governor's Share and that 'Counsel was of the view that a fair price for the Life Governor's Share would be 50% of the difference in the value of the A and C class shares in [Hancock Prospecting] given to those shares in the 20 March 1989 valuation thereof compared to an uptodate valuation'. There is no justification or explanation for that method of price determination in any contemporary document. Senior counsel for the Lloyd's syndicates did not attempt to advance any justification or explanation for that methodology.

134 Mr Lonergan provided a report dated 29 May 2001 setting out his opinion concerning the value of the Life Governor's Share as at 7 August 1991. Mr Lonergan refers to Mr Fieldhouse's letter of 6 September 1991 to Mr Salt in which he refers to a value of $20 million for the Life Governor's Share. Mr Lonergan says:

This value appears to have been derived on the assumption that Mr Hancock could utilise the powers of the Life Governor's Share 'to take out most of the assets of the Company by way of dividends' ...

... Mr Fieldhouse's value appears to have been calculated based on previous values of the A and C class shares in Hancock Prospecting. It appears that Mr Fieldhouse has adopted this approach on the assumption that Mr Hancock can influence the dividend policy and pay the value of the future dividend assumed to be paid to the A and C class shares in these valuations to himself.

Given that the Life Governor's Share had dividend rights then this was indeed possible. However, Mr Fieldhouse implicitly assumes that dividends could be paid to the Life Governor's Share equal to the dividends in perpetuity on the A and C class shares. As the Life Governor's Share could only control the dividend policy while Mr Hancock was alive, this is an incorrect assumption. However, a substantially adverse impact on the value of [the Hancock Foundation's] shareholding in Hancock Prospecting would arise if the assets of Hancock Prospecting were sold distributing a large proportion of the proceeds distributed to the holder of the Life Governor's Share ...

I note, however, that the methodology used by Mr Fieldhouse to arrive at the $20 million is not correct.

Firstly, the value appears to have been derived by taking 50% of the difference in values of the A and C class shares at two different valuation dates. Why Mr Fieldhouse took 50% of the difference rather than the average values of the two valuations is not clear.

Secondly, Mr Fieldhouse adjusts the $17 million value derived from the difference to reflect the fact that 'Mr Hancock is already indebted to the Foundation'. This indebtedness should have no bearing on the value of the Life Governor's Share.

On this basis, it is clear that Mr Fieldhouse's valuation has not been based on the application of the correct valuation methodology. However, an assessment of the reasonableness or otherwise of the price paid by [the Hancock Foundation] depends upon whether it is a market value or a special value which is being determined.

I also note that Mr Fieldhouse's valuation appears to ignore the fact that the purchaser only had a onethird interest in the A and C shares in Hancock Prospecting.

135 I find that the valuation of the Life Governor's Share for the purpose of its sale by Mr Hancock to the Hancock Foundation was not made in accordance with any proper valuation methodology. If Mr Fieldhouse owed a duty of care to the Foundation to advise it in relation to the Life Governor's Share transaction, then he failed to exercise reasonable care in failing to advise the Foundation to obtain valuation advice in respect of the Life Governor's Share from a qualified valuer.

136 The plaintiff asserts that by entering into the Life Governor's Share sale transaction the Foundation paid $20 million when it was worth nothing or much less than $20 million. I find that the purchase of the Life Governor's Share was of no substantial value to the Foundation. There may have been value to the Foundation in removing the possibility of Mr Hancock exercising the powers attached to the Life Governor's Share to declare discriminatory dividends. However, the sale of the Life Governor's Share did not remove the possibility of Mr Hancock exercising those powers. The effect of article 3B of the Articles of Association of Hancock Prospecting is that share number 2 that was transferred to Mr Hancock on the death of Mrs Hope Hancock became Life Governor's Share Number 2 with the same rights and privileges as Life Governor's Share Number 1 on Life Governor's Share Number 1 being disposed of by Mr Hancock.

137 The second defendants say that the plaintiff has not proved that any breach of duty by Mr Fieldhouse to the Foundation has caused it loss. That submission is primarily based on the control of the Foundation by Mr Hancock.

138 It is common ground that Mr Hancock controlled the Foundation. The second defendants submit that Mr Hancock would have brought about the Life Governor's Share sale transaction regardless of any advice provided by Mr Fieldhouse to the directors of the Hancock Foundation, or any recommendation by him that they seek an independent valuation. The second defendants say that Mr Hancock would have brought about whatever transaction he desired and could properly effect. Therefore, they submit, regardless of the advice Mr Fieldhouse may or may not have given, with Mr Hancock having decided the Life Governor's Share sale transaction ought proceed, it would have proceeded regardless.

139 I do not accept that argument. The decision for the Foundation to enter into the transaction was made by Mr Salt and Mr Dalby. If they had been advised that the transaction was of no substantial value to the Foundation, and would not have achieved the purpose of removing the possibility of Mr Hancock declaring discriminatory dividends to the disadvantage of the Foundation, then they would have acted in breach of their duties as directors by voting in favour of entering into the transaction. There is no evidence from which it may be inferred that they would have taken any such course. The failure of the plaintiff to call Mr Salt as a witness does not enable the court to infer that the evidence of Mr Salt would have been positively adverse to the plaintiff on that issue.

140 I have found that the plaintiff's claim against the second defendants fails. Accordingly, it is strictly not necessary to assess damages. However, I will briefly set out my conclusion in relation to the quantum of damages.

141 As I have said, Mr Lonergan provided a report dated 29 May 2001 of his opinion concerning the value of the Life Governor's Share as at 7 August 1991.

142 Mr Keith Jones made an expert report concerning the value of the Life Governor's Share. In addition, Mr Cully Gower issued an expert report making comments upon the reports of Mr Lonergan and Mr Jones. As ordered by the court, Mr Lonergan, Mr Jones and Mr Gower met in an experts' conference on 6 December 2011 to identify matters of agreement, matters of disagreement and the reasons for any disagreement. They issued a joint expert memorandum dated 15 December 2011. The experts agreed that the powers attached to the Life Governor's Share Number 1 provided Mr Hancock with effective control and ability to direct all, or a substantial proportion, of dividends to parties other than the Hancock Foundation or realise the assets of Hancock Prospecting and distribute the proceeds, were valuable and could undermine very substantially the value of the Hancock Foundation's shares in Hancock Prospecting. The experts agreed that in the event that either:

(a) the powers attached to the Life Governor's Share Number 1 could not be exercised in a manner which provided Mr Hancock with control in the manner summarised above as a consequence of some legal impediment; or

(b) the powers attached to the Life Governor's Share Number 1 were not extinguished on the disposal of the Life Governor's Share Number 1 as a consequence of the identical rights and privileges being immediately vested in the Life Governor's Share Number 2 which was held by Mr Hancock,

the value of the Life Governor's Share Number 1 was nominal as at 7 August 1991. Mr Lonergan expressed this value at $100 and Mr Jones as being between $2,000 and $4,000.

143 The Hancock Foundation paid Mr Hancock $20 million for the Life Governor's Share. The value of the Life Governor's Share to the Hancock Foundation was nominal. However, the loss to the Hancock Foundation was less than $20 million. Senior counsel for the second defendants, Mr Coleman SC, submitted that the loss was less than $20 million because 'at the end of the day I think that the loan account was some $3 million odd in credit, the actual loss was only $16 million odd'. Senior counsel for the plaintiff agreed.

144 The limit of indemnity under the contract of insurance between the Lloyd's syndicates and Mr Fieldhouse was $10 million. Accordingly, the damages which the plaintiff would otherwise be entitled to recover from the second defendants is the sum of $10 million plus interest pursuant to s 32 of the Supreme Court Act 1935 (WA).

145 The plaintiff's claim against the second defendants fails. The Lloyd's syndicates are not liable under the contract of liability insurance between them and Mr Fieldhouse in respect of Mr Fieldhouse's liability in damages to the plaintiff. The plaintiff is not entitled to recover from the Lloyd's syndicates under s 51(1) of the Insurance Contracts Act. The plaintiff's claim against the second defendants must be dismissed.

CITATION : THE HANCOCK FAMILY MEMORIAL FOUNDATION LTD -v- FIELDHOUSE [No 5] [2013] WASC 121 (S)

BETWEEN : THE HANCOCK FAMILY MEMORIAL FOUNDATION LTD

DR LOWE AS REPRESENTATIVE ON BEHALF OF THE UNDERWRITING MEMBERS OF LLOYD'S SYNDICATE 657

R J WALLACE AS REPRESENTATIVE ON BEHALF OF THE UNDERWRITING MEMBERS OF LLOYD'S SYNDICATE 683

A M SHARPE AS REPRESENTATIVE ON BEHALF OF THE UNDERWRITING MEMBERS OF LLOYD'S SYNDICATE 839

J H BENTON AS REPRESENTATIVE ON BEHALF OF THE UNDERWRITING MEMBERS OF LLOYD'S SYNDICATE 376

R J KILN AS REPRESENTATIVE ON BEHALF OF THE UNDERWRITING MEMBERS OF LLOYD'S SYNDICATE 510

Costs - Costs of the action - Costs incurred by other parties - Turns on own facts

Costs - Reserved costs - Unidentified reserved costs - Turns on own facts

Special costs order - Scale amount inadequate - Unusual difficulty, complexity or importance - Turns on own facts

Costs - Indemnity costs - Calderbank offer - Reasonable rejection of offer - Turns on own facts

Insurance Contracts Act 1984 (Cth), s 51

Legal Profession Act 2008 (WA), s 280

Plaintiff pay costs of the second defendants in the action

Plaintiff pay the second defendants' cost of pre-action discovery application

Plaintiff pay 50% of the second defendants' costs of this application

1 LE MIERE J: On 12 April 2013 I dismissed the claim of the plaintiff against the second defendants: The Hancock Family Memorial Foundation Ltd v Fieldhouse [No 5] [2013] WASC 121. An appeal by the plaintiff was subsequently dismissed: The Hancock Family Memorial Foundation Ltd v Lowe [2015] WASCA 38. The circumstances giving rise to the plaintiff's claim, the issues in the action, the evidence and my findings are set out in those judgments which, for convenience, I will not repeat in these reasons.

1. Action against the second defendants be dismissed.
2. The second defendants have liberty to apply within 28 days for orders in relation to costs.

3 The second defendants subsequently applied for the following orders:

1. For the period up to and including 20 April 2012, the Plaintiff pay the Second Defendants' costs of the Action, including any reserved costs, on a party and party basis, to be taxed if not agreed.
2. In relation to order 1.1 above, that the costs be assessed:

2.1. without reference to the limits provided for in respect of the following items of the Legal Practitioners (Supreme Court) (Contentious Business) Reports and Determinations 2008, 2010 and 2012 respectively ('the Scales'):

2.1.1. Item 3(b) - Defence;

2.1.2. Item 6(b) - Giving particulars of a pleading;

2.1.3. Item 10(a) - Proceedings in Chambers;

2.1.4. Item 17 - Getting up; and

2.1.5. Item 20(a), (b), (c), and (d) - Counsel fees.

2.2. without reference to the hourly rates and the daily rates provided for Senior Counsel and Junior Counsel in the Scales; and

2.3. including reasonable allowances for work undertaken by Senior Counsel.

1. There be an allowance under Order 26A rule 7(2)(a) of the Rules of the Supreme Court 1971 (WA) ('the Rules') for the costs incurred by the Second Defendants in receiving, and responding to the Plaintiff's application pursuant to Order 26A rule 4 of the Rules for non-party discovery.
2. For the period from and including 21 April 2012, the Plaintiff pay the Second Defendant's costs of and incidental to the Action, including any reserved costs, on an indemnity basis, to be taxed if not agreed.
3. In the alternative to order 4 above, the Plaintiff pay the Second Defendants' costs of the Action, including any reserved costs to be taxed if not agreed:

5.1. without reference to the limits provided for in respect of the following items of the Legal Practitioners (Supreme Court) (Contentious Business) Reports and Determination 2012:

5.1.1. Item 17 - Getting up; and

5.1.2. Item 20(a), (b), (c), and (d) - Counsel fees.

5.2. without reference to the hourly rates and the daily rates provided for Senior Counsel and Junior Counsel in the Scales; and

5.3. including reasonable allowances for work undertaken by Senior Counsel.

1. The Plaintiff pay the Second Defendants' costs of this Application, including any reserved costs, to be assessed if not agreed.
2. There be liberty to apply with 3 days notice.
3. Such further or other order as the Court considers fit.
4. The question of the First Defendant's entitlement to costs in the period prior to November 2007 be reserved.

4 The second defendants seek orders removing the relevant scale limits in relation to the specified items referred to. In addition, the second defendants seek orders that their costs be taxed without reference to the hourly rates and daily rates provided for Senior and Junior Counsel in the relevant scales and 'including reasonable allowances for work undertaken by Senior Counsel'. The second defendants further seek an order for allowance under O 26A of the Rules of the Supreme Court 1971 (WA) for the costs incurred by them in receiving and responding to the plaintiff's application pursuant to O 26A r 4 for nonparty discovery. The second defendants also seek an order that the plaintiff pay their costs on an indemnity basis from 21 April 2012 on the basis of a Calderbank letter of 28 March 2012. The written submissions of the parties give rise to a number of issues. I will address them in turn.

5 The second defendants seek an order that the plaintiff pay their costs of the action. The plaintiff submits that the appropriate costs order is that the plaintiff pay the costs of the second defendants referable to the plaintiff's claims against the second defendants. The plaintiff submits that to use the term 'costs of the action' without the qualification could have the effect that the plaintiff would become liable for the whole of the costs of the first defendant, Mr Fieldhouse, and the Proposed Parties. The Proposed Parties is a reference to the Law Society of New South Wales (as owner of the New South Wales Solicitors Mutual Indemnity Fund) which the plaintiff unsuccessfully applied to join as a party.

6 The second defendants submit that, as overall successful parties, they ought to be granted all the costs of the action notwithstanding the fact that some costs may strictly be attributable to other parties. In essence, they submit that the test ought to be whether the work would have had to have been performed for all defendants jointly, in any event, which is a question for a taxing officer to determine at the taxation of costs hearing. The second defendants further submit that they were involved in the conduct of Mr Fieldhouse's defence and the responses to the interlocutory applications following Mr Fieldhouse's death.

7 In the course of interlocutory proceedings, Senior Counsel for the plaintiff informed the court that Mr Fieldhouse died intestate and no person had applied for or been granted administration of his estate. Senior Counsel further informed the court that Mr Fieldhouse lived and died in New South Wales and that the effect of s 61 of the Probate and Administration Act 1898 (NSW) is that his estate vested in the New South Wales Trustee. No order was made under O 18 r 7 joining Mr Fieldhouse's estate. Mr Fieldhouse's estate has taken no part in the action.

8 At the trial of this action the court tried the issues between the plaintiff and the second defendants only. The appropriate order is that the plaintiff pay the costs of the second defendants. To be clear, those costs do not include any costs incurred by the second defendants, or any insurer, in conducting the defence of the first defendant, Mr Fieldhouse. Nor do those costs include any costs incurred by the Proposed Parties, or insurers on their behalf, in responding to applications to join them as defendants. It is not appropriate to award the second defendants costs incurred by other parties, or proposed parties, notwithstanding that those costs may have been borne by the second defendants as a result of the relationship between the second defendants and those parties.

9 The second defendants seek a costs order including any reserved costs. The only reserved costs order identified by the second defendants is an order for reserved costs which was made in respect of the preaction discovery order made on 8 August 2008. It is appropriate that the plaintiff pay the second defendants' costs of that application. It is not appropriate to order that the plaintiff pay other, unidentified, reserved costs. When costs are reserved it is necessarily implied that there is reserved the question of the incident of those costs, quite apart from any question whether they are to be paid by the party who is ultimately successful in the litigation. Where the reserved costs have not been identified, the court is unable to determine whether the costs should be borne by the plaintiff, the second defendants or neither.

10 As I have said, the second defendants seek a special costs order under s 280(2) of the Legal Profession Act 2008 (WA) removing the limits under the Scales in respect of certain items of work.

11 Section 280(2) of the Legal Profession Act confers on the court a discretion to order that any particular allowance in a scale be raised or a limit removed. Section 280(2) requires a twostep process. First, the court must form a view that the costs allowable in respect of a matter under a cost determination are inadequate. That opinion will usually be formed if the applicant for an order under the section shows a fairly arguable case that a bill to be presented to a taxing officer may properly tax at an amount greater than the limit imposed by the relevant costs determination because of one or other of the unusual difficulty, complexity or importance of the case: Frank Jasper Pty Ltd v Glew [No 3] [2012] WASC 24(S) [23] (Martin CJ). Second, the court must then determine whether or not that inadequacy flows from the unusual difficulty, complexity or importance of the matter. If both steps are resolved in the applicant's favour, the court has the power to make the special order, and it must then determine whether to exercise its discretion to do so. The onus of establishing that both steps are satisfied and the discretion should be exercised in favour of the applicant is on the applicant and a special order will not be lightly made.

12 The 'matter' which must be unusually difficult, complex or important in order to enliven the jurisdiction conferred by s 280(2) is the whole of the 'matter' in respect of which legal services were provided and which comes within the scope of the legal costs determination made by the Legal Costs Committee pursuant to pt 10 div 5 of the Act: Electricity Generation and Retail Corporation trading as Synergy v Woodside Energy Ltd [2014] WASC 469(S) [5] (Martin CJ). Nevertheless, the court must consider potentially applicable items in a relevant costs determination because, before the powers conferred by the subsection can be exercised, the court must form the opinion that the amount of costs allowable under the costs determination is inadequate because of the unusual difficulty, complexity or importance of the 'matter'. The question which must be addressed either in respect of individual items or a costs determination as a whole is whether the costs allowable in respect of the work done are inadequate because of the particular characteristic or characteristics of the 'matter' which has or have enlightened the jurisdiction of the court, that is, unusual difficulty, complexity or importance: Electricity Generation [12].

13 The reference to 'importance' in s 280(2) directs the court's attention to the question of whether the work done was appropriate to the significance of the issues in the litigation. That may stem from the significance of the issues to the parties, or the significance of the issues to other prospective parties or to the public or to the community generally: Heartlink Ltd v Jones [2007] WASC 254(S) [19] (Martin CJ).

14 A special costs order may be sought in relation to three aspects of the scale. First, it may be that the scale items do not cover an area of work performed in conducting the litigation that has resulted in the incurring of costs. In such a case, the special order sought would describe the area of work and state the hourly rates to be applied to that area of work. Second, the successful party might contend that the time allowed by the scale for the performance of the work is inadequate. Third, a special costs order may be made in relation to the hourly rates provided for in an item in the scale, which might be thought to be too low in the circumstances.

15 Although an applicant for a special costs order often, as in this case, submits to the court a draft bill of costs, it is unnecessary to do so. The function of the court in making a special costs order under s 280(2) of the Act is limited to setting the parameters within which the taxing officer will tax the relevant bill, and providing any specific directions which will assist the taxing officer to assess the quantum of the costs to be allowed on taxation. The quantum of costs to be allowed is to be determined by taxation. Therefore, the powers conferred upon the court by s 280(2) of the Act are to be exercised as a matter of impression rather than science, taking into account the greater expertise of taxing officers in fixing the amount of costs properly and reasonably allowed: Electricity Generation [4] (Martin CJ).

16 I am of the opinion that the amount of costs available in respect of this matter under the relevant costs determinations is inadequate. I reach that opinion on the basis of the following materials:

(a) the matters sworn to by Richard Edwards in his affidavit sworn 17 April 2015 concerning the work done by the second defendants' legal representatives;

(b) the matters sworn to by Richard Edwards in his affidavit sworn 20 July 2015 concerning the work done by the legal representatives of the second defendants and the revised bill of costs produced; and

(c) my knowledge of the matter as the case manager and trial judge.

17 I find it unnecessary to consider each item of the draft bill. My task is to form an opinion whether the amount of costs allowable in respect of the 'matter' is inadequate, not to carry out an evaluation of each item of work done by the legal representatives of the applicant party. It is, of course, a matter for the taxing officer to determine the amount that will be allowed for each item in the bill of costs presented by the second defendants. The taxing officer might determine in relation to one or more items that the proper amount to be allowed does not exceed the amount in the scale.

18 The second defendants submit that the action was one of unusual difficulty, complexity and importance. I am of the opinion that the matter was one of unusual difficulty, complexity and importance and that the amount allowable under the scale is inadequate because of the unusual difficulty, complexity and importance of the matter. I have formed that opinion having regard to the following matters. First, the amount in issue in the action was large. If the plaintiff had been successful the second defendants would have been liable to pay the plaintiff a sum in the order of $10,000,000 plus interest. Secondly, in defending the case the second defendants were concerned not only with insurance issues, which themselves raised questions of fact and interpretation of relevant insurance policies, but also questions relating to the claims against Mr Fieldhouse. In my judgment I set out that the case gave rise to the following issues:

1. Was Mr Fieldhouse retained by the plaintiff?
2. In the circumstances, did Mr Fieldhouse owe the plaintiff a duty of care?
3. Did Mr Fieldhouse breach his retainer or the duty of care he owed to the plaintiff?
4. If so, did the plaintiff suffer loss as a consequence of that breach?
5. Does the excess insurance the second defendants provided to Mr Fieldhouse provide cover in respect of any liability he may be found to have to the plaintiff?

The second defendants' defence was made more complex because Mr Fieldhouse passed away in November 2007 and was unable to provide instructions or assistance in responding to the allegations made against him. Furthermore, most of the people involved in the relevant events had passed away prior to trial including Mr Hancock and Mr Dalby in addition to Mr Fieldhouse. The action took 18 years to come to trial and concerned events dating back to 25 years before the trial. There were lengthy and complex legal submissions based upon a review of numerous authorities. Both parties engaged senior counsel. Of course, the mere fact that the second defendants engaged senior counsel does not of itself establish the unusual difficulty, complexity or importance of the case. However, that both parties engaged senior counsel is an indication that both parties considered the matter one that warranted senior counsel.

19 Having considered all of the matters I am of opinion that the matter was one of unusual difficulty and of complexity and of importance.

20 The rates charged by the solicitors and counsel for the second defendants, and incurred by those defendants, exceeds the hourly rates allowed under the scale. The court should not order that the hourly rates to apply in assessing costs should be in excess of the hourly rates allowed in the scale merely because a party's solicitor or counsel has charged at a higher rate. The rates in the scale are struck by reference to what has been charged within the profession. Those hourly rates can only be an average or median of the upper rates determined in the surveys conducted by the Legal Costs Committee in drawing the scales and there will be some cases where the unusual difficulty, complexity or importance of the case warrants the special expertise of the practitioner involved and warrants an increase in the hourly rate.

21 I have found that the matter is one of unusual difficulty, complexity and importance. In the circumstances it was reasonable for the second defendants to engage solicitors and counsel who charge rates higher than those allowed in the Scales. However, it is appropriate to raise the allowable hourly rate rather than to remove any limit on those rates. It is appropriate to raise the limit on hourly rates for solicitors and counsel by 25%.

22 The second defendants seek indemnity costs for the period from and including 21 April 2012 on the basis of a Calderbank letter of 28 March 2012. In that letter the second defendants offered to settle the action on the following terms:

1. the proceeding against the second defendants is discontinued;
2. the plaintiff and the second defendants bear their own costs in respect of the proceeding against the second defendants, including the costs of the second defendants providing nonparty discovery;
3. the settlement is to be confidential save for disclosures required by law to professional advisers or insurers or prospective insurers;
4. the settlement is to be recorded in written settlement terms which reflect the terms of the offer.

The offer was stated to be open for acceptance on or before 21 April 2012.

23 The test which must be applied in determining whether to award indemnity costs against a party who has rejected a Calderbank offer is whether the rejection was unreasonable in the circumstances: Ford Motor Company of Australia Ltd v Lo Presti [2009] WASCA 115 [23]. The onus is on the offeror to demonstrate unreasonableness: Lo Presti [21].

24 In considering whether it is unreasonable to have rejected a Calderbank offer, the court should ordinarily have regard to at least the following factors:

1. the stage of the proceedings at which the offer was received;
2. the time allowed to the offeree to consider the offer;
3. the extent of the compromise offered;
4. the offeree's prospects of success, assessed as at the date of the offer;
5. the clarity with which the terms of the offer were expressed; and
6. whether the offer foreshadowed an application for indemnity costs in the event of rejection.

25 The offer was made at a comparatively late stage in the proceedings in that the action had been on foot for 17 years when the offer was made. However, the second defendants were not joined as party to the action until 2010. The offer was made one month before the trial of the action. The offer was made at a stage of the proceedings at which the issues had sufficiently crystallized and the plaintiff was sufficiently aware of the material that would be before the court to enable it to make an informed assessment of its prospects of success at trial.

26 The offer was open for a period of 24 days. At the time it was made, the plaintiff had a proper opportunity to assess the offer and make an informed and considered decision whether or not to accept it.

27 The second defendants' offer was a 'walk away' offer. A 'walk away' offer can, in an appropriate case, exhibit the requisite element of compromise to be treated as a Calderbank offer. The compromise may be the offeror's giving up of a claim for costs, which, if the offeror succeeded at trial, may otherwise by payable by the offeree. The second defendants' offer involved giving up a claim to recoverable costs. There are circumstances where an offer to walk away does not involve any real compromise. However, in this case the walk away offer must be regarded as a genuine offer of compromise. The proceedings between the plaintiff and the second defendants had progressed for some time and the second defendants' costs would have been substantial. In its letter the second defendants said that they had incurred costs to date of approximately $400,000 in defending the proceeding brought against them. In the circumstances of this case, the second defendants' offer involved a genuine compromise.

28 The second defendants' offer was expressed clearly. Furthermore, the letter in which the offer was made set out in detail the basis of the offer and analysed the plaintiff's case against Mr Fieldhouse and the contracts of insurance between Mr Fieldhouse and the second defendants which gave rise to the plaintiff's claim against the second defendants.

29 The letter of offer foreshadowed an application for indemnity costs in the event of rejection. The letter did not expressly refer to indemnity costs but it stated if the offer was not accepted and the plaintiff recovered an amount no more favourable than the offer, the letter would be tendered in support of an application for costs against the plaintiff in accordance with the principles of Calderbank v Calderbank [1973] 3 All ER 333 and Lo Presti [115].

30 The second defendants' letter stated that for the plaintiff to recover anything from the second defendants it would need to prove that the insurance contracts cover the claim made against Mr Fieldhouse and that no exclusions apply to deny cover. The letter stated the second defendants' assertion that the insurance contracts with the second defendants:

[D]o not cover the claim because Condition C of each policy provides the underwriters for each policy will only be liable to pay after the underlying insurers have paid or admitted liability or have been held liable to pay the full amount of their indemnity under the underlying insurances ie the Underlying Layer.

The second defendants' solicitors went on, in effect, to assert that Condition C was not satisfied and the second defendants considered that they are not liable under either policy.

31 A central issue between the plaintiff and the second defendants at trial concerned the construction of Condition C. I found against the construction of Condition C advanced by the plaintiff, found that the condition was not satisfied and that therefore the second defendants were not liable under the contract of liability insurance between them and Mr Fieldhouse in respect of Mr Fieldhouse's liability in damages to the plaintiff. It followed that the plaintiff was not entitled to recover from the second defendants under s 51(1) of the Insurance Contracts Act 1984 (Cth). The plaintiff appealed against the judgment in favour of the second defendants. On appeal, the plaintiff contended that I had erred in the construction of Condition C. The Court of Appeal dismissed those grounds of appeal. However, the plaintiff's contentions were arguable. This aspect of the plaintiff's case depended on questions of construction of the relevant insurance policies, and their application to the facts.

32 In their letter of offer the second defendants also contended that the plaintiff's claim against them would fail because the plaintiffs would not establish their claim against Mr Fieldhouse. The second defendants' letter of offer sought to summarise the plaintiff's case against Mr Fieldhouse and noted: 'the obvious limitations in summarising a claim which has some complex contested issues'. In my opinion, that is a fair observation about the claim.

33 I am not satisfied that the plaintiff's rejection of the second defendants' Calderbank offer was in all the circumstances unreasonable so as to warrant an indemnity costs order. The second defendants' offer involved a genuine compromise in that it involved the second defendants abandoning its claim to substantial recoverable costs. However, from the perspective of the plaintiff the offer amounted to a capitulation. The plaintiff's claim was for a sum in excess of $10,000,000. Had it accepted the offer it would have recovered nothing and had to bear its own substantial costs. The case involved difficult and complex contested issues. Indeed, the basis of the second defendants' claim for a special costs order is that the matter is one of unusual difficulty, complexity and importance.

34 The defendant has succeeded in obtaining a special costs order but has failed in its claim for indemnity costs, all reserved costs and its claim that the costs of the action should include some of the costs incurred by the first defendant and the Proposed Parties. The appropriate order is that the plaintiff pay 50% of the second defendants' costs of this application.