Court of Appeal (WA)|2015-03-05|Before: Lure P, Newnes JA, Beech J, Miere J

THE HANCOCK FAMILY MEMORIAL FOUNDATION LTD -v- LOWE [2015] WASCA 38 (5 March 2015)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : THE HANCOCK FAMILY MEMORIAL FOUNDATION LTD -v- LOWE [2015] WASCA 38

BETWEEN : THE HANCOCK FAMILY MEMORIAL FOUNDATION LTD

for DR LOWE as representative on behalf of the underwriting members of LLOYD'S SYNDICATE 657

for RJ WALLACE as representative on behalf of the underwriting members of LLOYD'S SYNDICATE 683

for AM SHARPE as representative on behalf of the underwriting members of LLOYD'S SYNDICATE 839

for JH BENTON as representative on behalf of the underwriting members of LLOYD'S SYNDICATE 376

for RJ KILN as representative on behalf of the underwriting members of LLOYD'S SYNDICATE 510

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : THE HANCOCK FAMILY MEMORIAL FOUNDATION LTD -v- FIELDHOUSE [No 5] [2013] WASC 121

Professional indemnity insurance - Liability of excess insurers - Proper construction of condition in insurance policy - Grant of indemnity - Meaning of excess insurance - Whether condition void under Insurance Contracts Act 1984 (Cth), s 52

Respondents : Mr A P Coleman SC & Ms K F Banks-Smith SC

ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue [2012] HCA 6; (2012) 245 CLR 338

Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243

Bayswater Car Rental Pty Ltd v Hannell [1999] WASCA 34

Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336

Crawley v Vero Insurance Ltd (No 2) [2012] NSWSC 1053

Crawley v Vero Insurance Ltd (No 6) [2014] NSWSC 62

Hancock Family Memorial Foundation Ltd v Fieldhouse [2005] WASCA 93; (2005) 30 WAR 398

Pegrum v Fatharly (1996) 14 WAR 92

Porteous v Donnelly [2002] FCA 862

Pukallus v Cameron [1982] HCA 63; (1982) 180 CLR 447

The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239

The Hancock Family Memorial Foundation Ltd v Fieldhouse [No 3] [2010] WASC 223

1 McLURE P: This appeal is from the judgment of Le Miere J dismissing the appellant's action against the respondents under s 51 of the Insurance Contracts Act 1984 (Cth) (the Act).

2 The primary issue below was the proper construction of a condition in two excess professional indemnity insurance contracts between the late Mr Carnegie Fieldhouse, a solicitor who practised in New South Wales, and the respondents, who are the appointed representatives of the members of five Lloyd's Syndicates. The issues raised by the appellant in this appeal travelled outside those raised before and determined by the trial judge. There is a claim in the appeal that condition C, as construed by the trial judge, is void pursuant to s 52 of the Act.

3 From around 1972 Mr Fieldhouse provided legal services to Lang Hancock and to companies under Mr Hancock's control. During his lifetime Mr Hancock controlled, inter alia, Hancock Prospecting Pty Ltd (Hancock Prospecting) and The Hancock Family Memorial Foundation Ltd, a company limited by guarantee (the Foundation).

4 Mr Hancock held Share No 1 in Hancock Prospecting, called the Life Governor's Share (LGS1). LGS1 gave Mr Hancock effective control of Hancock Prospecting and its Board.

5 By an agreement in writing dated 7 August 1991, Mr Hancock sold LGS1 to the Foundation for $20 million (the LGS1 Sale). Mr Fieldhouse acted for Mr Hancock on the LGS1 Sale. The Foundation claims Mr Fieldhouse also acted for it on the LGS1 Sale.

6 On 21 August 1995, the Foundation commenced proceedings against Mr Fieldhouse claiming that Mr Fieldhouse breached his contractual and tortious duties in failing to advise the Foundation that LGS1 was worthless or of nominal value or, alternatively, in failing to advise the directors of the Foundation (Mr D Salt and Mr K Dalby) that before determining to go ahead with the LGS1 Sale they should get independent legal and accounting advice (the Action).

7 The Foundation's claim that LGS1 was worthless was based on two matters. First, by an agreement dated 24 February 1989 between Mr Hancock and the Foundation, Mr Hancock sold his one-third shareholding in Hancock Prospecting, excluding LGS1, to the Foundation for $23.2 million (the 1989 share sale agreement). The purchase price was based on a valuation prepared by Coopers & Lybrand which expressly assumed that dividends on all ordinary shares would be declared at the same rate per share. The Foundation claimed Mr Hancock would be estopped from exercising his powers under LGS1 to declare discriminatory dividends to the detriment of the Foundation.

8 The second matter relates to Share No 2 in Hancock Prospecting held by Mr Hancock's first wife, Hope Hancock, until her death in April 1983. After her death, it was transferred to Mr Hancock. Article 3B of the Articles of Association (Articles) of Hancock Prospecting provided that on the transfer of Share No 2 from the original holder to Mr Hancock it should be constituted and known as Life Governor's Share No 2 (LGS2) and that if Mr Hancock disposed of LGS1 (upon which it would become an ordinary A class share), LGS2 would have the same rights and privileges as LGS1.

9 Mr Fieldhouse died intestate in November 2007. As no person had applied for or been granted administration of his estate, it vested in the New South Wales Trustee under the Probate and Administration Act 1898 (NSW). At common law, the Foundation's causes of action against Mr Fieldhouse terminated on his death. However, under s 4(1) of the Law Reform (Miscellaneous Provisions) Act 1941 (WA), all causes of action subsisting against Mr Fieldhouse survived against his estate. However, no order was sought or made in the Action under O 18 r 7 of the Rules of the Supreme Court 1971 (WA) to join Mr Fieldhouse's estate as a party to the Action. After Mr Fieldhouse's death, Le Miere J ordered that the representatives of the Lloyd's Syndicates be joined as defendants.

10 The two contracts of liability insurance between Mr Fieldhouse and the Lloyd's Syndicates were in materially the same terms (the Lloyds policies). Mr Fieldhouse had made a claim under each Lloyds policy arising from the Foundation's claims against him the subject of the Action.

11 The Foundation's only claim advanced at trial was against the respondents under s 51(1) of the Act which, as it then stood, relevantly provided:

Where:

(a) the insured under a contract of liability insurance is liable in damages to a person (in this section called 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.

12 Under s 51(2)(b) a payment under s 51(1) discharges, to the extent of the payment, the liability of the insured or of the insured's legal representative to the third party.

13 Mr Fieldhouse was required to hold professional indemnity insurance under the Legal Profession Act 1987 (NSW) (LPA). The trial judge's unchallenged summary of the statutory scheme is as follows:

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 [Solicitors Mutual Indemnity Fund (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.

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.

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.

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 [44] - [47].

14 Thus the Fund was for the payment of claims up to $1.1 million until the aggregate of all claims exceeded $58 million, after which claims were met by the insurers under the Master Policy. The claims in the relevant period did not exceed $58 million.

15 The total limit of indemnity under the Lloyds policies is $10 million in the relevant policy period (1 July 1995 to 30 June 1996).

16 The unchallenged findings of the trial judge are as follows:

(1) the Master Policy and Certificate of Insurance issued by the New South Wales Law Society on 1 July 1995 to Mr Fieldhouse constituted or gave rise to a contract or contracts of insurance between the solicitor and the insurers HIH, FAI, GIO and Sun Alliance;

(2) the Master Policy and the Certificate of Insurance 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;

(3) there was no contract between the Law Society and Mr Fieldhouse and even if that was wrong, it was not a contract of liability insurance for the purposes of s 51(1) of the Act.

17 LawCover granted indemnity to Mr Fieldhouse subject to a reservation of its rights with respect to any liability brought about by fraud. LawCover gave notice of that indemnity in a letter dated 4 June 2008 from its solicitors to the solicitor acting for the Foundation (the LawCover indemnity letter) which 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.

18 The respondents initially relied on the fraud exclusion in their defence but withdrew it prior to trial.

19 A central issue between the Foundation and the respondents concerns the construction of condition C in the policy schedule of the Lloyds policies. Condition C provides:

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.

20 It was common ground that the insurers under the Master Policy (HIH, FAI, GIO, Sun Alliance) are Underlying Insurers. The unchallenged finding of the trial judge is that the Fund is also an Underlying Insurer. He said:

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.

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 [58] - [59].

21 It is undisputed that there has been no payment from the Fund of the full amount of any indemnity payable to Mr Fieldhouse. Further, in the absence of a judgment against Mr Fieldhouse's estate (and perhaps LawCover) nor will there be in the future.

22 The trial judge construed condition C to mean that it was a condition precedent to the obligation to indemnify under the Lloyds policies that (at least) one of the three specified conditions be met. The first of the three alternative conditions in condition C is that the Underlying Insurers have paid the full amount of the indemnity (condition 1). The second is that the Underlying Insurers have admitted liability to pay the full amount of the indemnity (condition 2). The third is that the Underlying Insurers have been held liable to pay the full amount of the indemnity (condition 3) [62]. The first condition had not been satisfied.

23 The Foundation contended at trial that condition 2 was satisfied because LawCover, as manager of the Fund, had admitted liability to indemnify in the LawCover indemnity letter. LawCover had also taken over Mr Fieldhouse's defence of the Action. Solicitors instructed by LawCover filed Mr Fieldhouse's first defence on 20 February 2006.

24 The trial judge found that the effect of the LawCover indemnity letter, together with LawCover's conduct of the defence of the Action on behalf of Mr Fieldhouse, amounted to an admission that the Fund was liable to indemnify Mr Fieldhouse against any liability to the Foundation [69]. However, LawCover did not admit that Mr Fieldhouse was liable to the Foundation, instead defending that claim [70]. The trial judge found that condition 2 was not satisfied. He said:

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 ... At the time LawCover agreed to indemnify Mr Fieldhouse, and in subsequently conducting Mr Fieldhouse's defence to the claim against it by the [Foundation], neither Mr Fieldhouse nor LawCover had admitted liability or been held liable to pay to the [Foundation] 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 [Foundation] 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 [72].

25 The trial judge also held that condition 3 was not satisfied. He said:

[T]he 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 [73].

26 As the respondents were not liable under the Lloyds policies in respect of Mr Fieldhouse's liability in damages to the Foundation, the Foundation was not entitled to recover under s 51(1) of the Act [74]. That is, the precondition in s 51(1)(c) of the Act had not been met.

27 The trial judge also held that s 51(1) of the 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 [78]. There is no challenge to that construction of the Act.

28 Although it was not strictly necessary to consider whether Mr Fieldhouse or his estate was liable in damages to the Foundation, the trial judge made findings on all relevant issues. In particular, he found there was no contract of retainer, express or implied, between Mr Fieldhouse and the Foundation in connection with the LGS1 Sale and, as a result, Mr Fieldhouse did not owe the Foundation a contractual or tortious duty to exercise reasonable care in connection therewith.

29 The trial judge also found that if there was such a duty of care, it had been breached by Mr Fieldhouse overlooking the existence and effect of LGS2 [118] and in failing to advise the Foundation to obtain valuation advice as to the value of LGS1 from a qualified valuer, the valuation not being in accordance with any proper valuation methodology [135]. He also held that the breaches caused the Foundation to suffer loss and damage of at least $10 million and that it was entitled to interest under s 32 of the Supreme Court Act 1935 (WA) [136] - [139], [144].

30 The Foundation's grounds of appeal in its appellant's case are to the following effect:

(1) the trial judge erred in finding that condition 3 could not be satisfied when he should have found that, the claim having been brought under s 51 of the Act, or alternatively on its proper construction, condition 3 could be satisfied by a finding in the Action;

(1A) the trial judge erred in finding that condition 2 could not be satisfied when he should have found that when the Underlying Insurers granted indemnity to Mr Fieldhouse the condition had been satisfied;

(2) the trial judge erred in finding that proof of an implied retainer will only be satisfied if the relationship of solicitor and client is a necessary and clear inference from the proved facts when he should have found that an implied retainer could be proved in the same manner as any implied contract, that is as a matter of inference according to the civil standard of proof;

(3) the trial judge erred in finding there was no implied retainer;

(4) if grounds 1 or 1A and 3 are upheld, the trial judge erred in failing to uphold the appellant's claim because if there was an implied retainer, then as a matter of law Mr Fieldhouse owed a duty to exercise reasonable care in acting for the Foundation in the transaction concerning the sale of LGS1 (there being findings that any such duty had been breached and the breach caused the Foundation to suffer loss and damage at least to the full extent of the excess layer of indemnity).

31 At the hearing of the appeal counsel for the Foundation challenged the validity of condition C as construed by the trial judge and the classification of the Lloyds policies as true excess insurance.

Cross-appeal and notice of contention to cross-appeal

32 The respondents raise four grounds of cross-appeal. They contend the trial judge erred in finding that:

(1) following the sale of LGS1, Mr Hancock had powers attaching to LGS2 and could potentially exercise those powers when he should have found that following the sale of LGS1, Mr Hancock could not have exercised any such powers;

(2) the value of LGS1 was nominal when he ought to have found that the consideration of $20 million paid by the appellant for LGS1 was appropriate;

(3) if Mr Fieldhouse breached a duty of care owed to the Foundation, the breach caused the Foundation loss when the trial judge should have found that the transaction would have proceeded regardless and so any breach did not cause the Foundation any loss;

(4) the quantum of damages would have been $10 million plus interest pursuant to s 32 of the Supreme Court Act 1935 (WA) when he should have found that the quantum of damages to which the Foundation was entitled was $10 million inclusive of interest and costs.

33 The Foundation has conceded that the trial judge erred in including pre-judgment interest on the damages.

34 In a notice of contention to the cross-appeal, the Foundation says if ground 1 of the cross-appeal is upheld, the trial judge's finding of breach of duty of care and loss should be upheld on the following grounds:

(a) the trial judge erred in failing to conclude that following the 1989 share sale agreement Mr Hancock could be restrained from exercising his LGS1 power to cause Hancock Prospecting to declare discriminatory dividends contrary to the interests of the Foundation by reason of an estoppel by convention;

(b) on the facts found by the trial judge he should have found that, by reason of the circumstances in which the Foundation entered into the 1989 share sale agreement, there was a strong case that the Foundation could restrain Mr Hancock from exercising his rights to cause Hancock Prospecting to declare discriminatory dividends by reason of estoppel by convention (the Claim);

(c) the trial judge should have found that Mr Fieldhouse breached his duty of care by failing to inform the Foundation of the Claim and that breach caused the Foundation to suffer loss by agreeing to purchase LGS1 for $20 million when, properly advised, it would not have done so, or alternatively by paying a greatly inflated price for LGS1.

35 The respondents applied to strike out the notice of contention on the basis that the claims should be made in the appeal rather than by way of contention in the cross-appeal. I would dismiss the application, the claims being contingent on the respondents succeeding on ground 1 of the cross-appeal.

Construction of condition C - contextual matters

36 Conditions A and B of the Lloyds policies are relevant contextual material, and provide:

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 Underwriters.
NOW we, Underwriters at Lloyd's, who have hereunder subscribed our name(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.

37 The Foundation relies on condition D in its construction of condition 2. Condition D relevantly provides:

Notwithstanding anything in this Policy or in the Underlying Insurances to the contrary, Underwriters shall not be obliged to assume charge of the settlement or defence of any claim or suit brought or proceeding instituted against the Assured, but subject always to the rights of the underlying insurers, Underwriters shall have the right and be given the opportunity to associate with the Assured and the Underlying Insurers in the defence or control of any claim, suit or proceeding which appears reasonably likely to involve Underwriters in which event the Assured and Underwriters shall cooperate in all things in the defence or control of such claim, suit or proceeding, but no obligation shall be incurred on behalf of Underwriters without their consent being first obtained.

38 The Underlying Insurances include the Master Policy and the Certificate of Insurance issued thereunder by the Law Society of New South Wales (Certificate). The insuring clause in the Certificate relevantly provides:

On the terms and conditions herein contained the Insurers shall indemnify the Assured up to an amount not exceeding [$1.1 million] against amounts payable by the Assured to claimants ... arising from any claim or claims first made against the Assured during the Period of Insurance in respect of any description of civil liability whatsoever incurred in connection with the Practice[.]

39 No attention was given to the question of when the insurers under the Master Policy become liable to indemnify the assured against his or her liability to a third party claimant.

40 In my view, on its proper construction, the insuring clause in the Certificate means that the insurers' liability to indemnify arises upon establishment of the liability of the assured to the third party claimant, whether that liability be established by court judgment, arbitration award, admission, or settlement agreement.

41 The scope of the obligation to indemnify under the Master Policy informs the scope of LawCover's powers under the LPA. Section 44(1)(b) of the LPA provides that there shall be paid from the Fund:

(b) such amount as [LawCover] determines towards meeting any difference between the indemnity provided by the approved insurance policy required by section 41 and the liability of a person insured under the policy[.]

42 The purpose of s 44(1)(b) is to empower LawCover to indemnify the insured from the Fund in circumstances where the approved insurance policy (in this case the Master Policy) does not respond because the aggregate of all claims have not exceeded the agreed deductible (in this case $58 million). That is, LawCover's power arises in circumstances where, but for the application of that deductible, the assured would be covered by the Master Policy.

43 As I have had some difficulty in following the positions of the Foundation and the respondents, it is best that I attempt to summarise their submissions.

44 In oral submissions put on behalf of the Foundation at the appeal hearing, it was accepted, correctly in my view, that condition 2 requires the Underlying Insurers to 'have admitted liability ... to pay the full amount of their indemnity'.

45 The Foundation advanced two separate propositions on the scope and effect of condition 2. First, it contended that condition 2 was satisfied at the time of making the admission evidenced in the LawCover indemnity letter. The argument is as follows. Condition 2 does not require the Underlying Insurers to have admitted either the fact or extent of the insured's liability to the third party claimant. If that was required it would only occur immediately prior to actual payment the subject of condition 1. That cannot have been the parties' intention because condition C arises out of the relationship between the primary insurer(s) and the excess insurers and the excess insurers would want to get involved in the handling of the claim with both the primary insurer(s) and the insured at a much earlier stage. The latter part of this submission is predicated on the view that under condition D, the respondents do not have the right to get involved in the handling of the claim with LawCover and Mr Fieldhouse unless and until condition C is satisfied.

46 The Foundation contends condition 2 is satisfied at the time the admission of liability is made even if it is conditional on there being a finding of liability for, or up to, the full amount of the indemnity.

47 The Foundation relies upon Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 in support of this construction of condition 2. In that case S had made a claim against B relating to subsidence of the seawalls of the third runway at Sydney Airport that had been constructed by B. Layers of professional indemnity insurance covered B and other contractors involved in the project. HIH underwrote the bottom layer, insuring the first $20 million and Gordian Runoff Ltd (Gordian) provided the next $10 million layer. In June 2002 S commenced proceedings against B for damages arising from the defective seawalls. In June 2004 the proceedings were settled, B undertaking to rectify the defects at an estimated sum exceeding the levels at which Gordian and the next layer of insurance above Gordian would fully respond. Gordian's policy contained a clause in the same terms as condition C. B contended that condition 2 was satisfied because HIH had admitted liability. On 16 December 2003 the entity administering HIH's claims after its liquidation wrote to B's solicitors referring to the 'imminent settlement with [S]'. The letter relevantly provided:

HIH grants indemnity to [B] ... for the above claim subject to policy terms, conditions and exclusions and based on the facts presently known to HIH;
HIH agrees that the proposed 'without prejudice' settlement as detailed in the ... Review dated 26 November 2003 is reasonable and consents to [B] entering into the settlement agreement ...
HIH agrees that the quantum of the settlement exceeds the excess and level of cover available under the HIH policy[.]

48 The court concluded that condition 2 was satisfied notwithstanding that the grant of indemnity was conditional, it being subject to the policy terms, conditions and exclusions. Allsop P (with whom Beazley and Campbell JJA agreed) focused attention on whether HIH had admitted liability not on whether it had admitted liability to pay the full amount of its indemnity. I infer that was because it is clear from the terms of the letter that the HIH admission related to the full amount of its indemnity.

49 Alternatively, the Foundation contends that condition 2 is satisfied as a result of LawCover's admission of liability to indemnify Mr Fieldhouse together with the finding sought in this appeal that Mr Fieldhouse is liable to the Foundation in an amount well in excess of the full extent of the indemnity granted by LawCover.

50 As to condition 3, the Foundation puts its case on two bases. The first is, in effect, that the expression 'have been held liable to pay the full amount of their indemnity' must be read down to include a finding in proceedings to which Mr Fieldhouse and/or LawCover were not parties, at least in circumstances in which s 51(1) of the Act applied.

51 The alternative proposition mirrors that in relation to condition 2. The Foundation claims that in circumstances where the Fund had admitted liability to indemnify Mr Fieldhouse if there was a finding that he was liable to the Foundation, then upon a finding by the court as between the Foundation and the respondents that Mr Fieldhouse had breached his duty to the Foundation, condition 3 had been satisfied. It did not require a determination as between Mr Fieldhouse and the Foundation or LawCover.

52 Finally, the Foundation claims that if the trial judge's construction of condition C is correct, it is an attempt to contract out of the operation of s 51(1) which renders the condition void under s 52 of the Act. The submission was made for the first time in oral submissions in the appeal and not fully developed.

53 The respondents in their written submissions support the reasoning of the trial judge in finding that condition 2 was not satisfied. They also say in their written submissions that even if the Fund had admitted liability to indemnify Mr Fieldhouse if the claim by the Foundation was subsequently made out, that did not amount to an admission of liability to pay the full amount of the indemnity to Mr Fieldhouse (respondents' case, [27] and [28]). However, after some changes in position at the hearing, senior counsel for the respondents appears to have accepted that condition 2 would be satisfied if the effect of LawCover's admission was that it would indemnify Mr Fieldhouse to the limit of the indemnity if it was subsequently established that Mr Fieldhouse was liable to the Foundation for at least $1.1 million (ts 70, 74). The respondents' position was that the evidence did not support that construction of LawCover's admission, relying in part on LawCover's discretion in LPA s 44(1)(b) as to what amount it would pay Mr Fieldhouse or his estate. However, it was clear from exchanges between the bench and counsel for the Foundation that the Foundation's construction of condition 2 was in question (ts 7 - 13).

54 The respondents support the reasoning of the trial judge relating to condition 3. They contend the Foundation's construction ignores the nature of excess insurance, which does not operate until the indemnity of the lower layers are exhausted. That cannot happen in this case because there cannot be a finding that LawCover must pay Mr Fieldhouse the full extent of the indemnity granted to him. To order that the respondents are liable simply because the court found that Mr Fieldhouse was liable in damages to the Foundation exceeding the amount of the lower layer of indemnity would put the Foundation in a better position against the respondents as excess insurers than the estate of Mr Fieldhouse.

55 In answer to the Foundation's reliance on s 52 of the Act, the respondents rely on s 51(1)(c) which they contend preserves the full scope and effect of condition C of the Lloyds policies.

56 As noted above, the respondents contend that under LPA s 44(1)(b), LawCover has a discretion as to the amount it will pay pursuant to any grant of indemnity, which discretion is said to be recognised by the trial judge in [46] of his reasons set out above. In fact, that paragraph in the judgment goes no further than merely summarising the statutory text. There is no express finding in the judgment that, following its grant of indemnity, LawCover retained a discretion as to the amount the subject of its indemnity.

57 At the hearing of the appeal this court was at a disadvantage as a result of its unfamiliarity with an interlocutory judgment, accepted as correct by the parties at trial and not addressed in any detail in their written or oral submission in this appeal, going to the nature and extent of the legal relationship between Mr Fieldhouse and the Fund and the powers of LawCover.

58 Those issues were addressed by the trial judge in The Hancock Family Memorial Foundation Ltd v Fieldhouse [No 3] [2010] WASC 223 (the interlocutory joinder judgment). That decision was in connection with the Foundation's application for leave to join the New South Wales (NSW) Law Society and the respondents as defendants in the Action. The Fund is the property of the NSW Law Society (LPA, s 40(3)) however it is managed by LawCover (LPA, s 40(1)).

59 The questions in issue were whether the NSW Law Society was an insurer and whether there was a contract of liability insurance (as required by s 51(1)) between Mr Fieldhouse and the NSW Law Society. The trial judge answered both those questions in the negative and dismissed the application to join the NSW Law Society. He construed s 44(1)(b) of the LPA as not giving rise to a right of indemnity for the difference between the indemnity provided by the approved insurance policy and the liability of a person insured under that policy, saying:

I do not think it can be maintained that the person insured under the approved insurance policy has a right to be paid the difference between the indemnity provided by the approved insurance policy and his liability insured under the policy or any amount. Section 44(1) provides that the amount to be paid is 'such amount as the company determines'. That is, the company has a discretion as to what amount it shall pay [59].

60 The trial judge's construction of LPA s 44(1)(b) is consistent with NSW authorities on the subject: Lee v Phair (Unreported, NSWSC, 31 October 1996); Crawley v Vero Insurance Ltd (No 2) [2012] NSWSC 1053; Crawley v Vero Insurance Ltd (No 6) [2014] NSWSC 62.

61 All parties accepted the trial judge's interlocutory determination as to the proper construction of s 44(1)(b) of the LPA. However, it is important to recognise that the trial judge in the interlocutory joinder judgment did not consider or determine whether, following LawCover's grant of indemnity, it was under a duty to grant indemnity if all relevant questions of liability had been established.

62 However, it is clear from the trial judge's final judgment as a whole that he concluded that LawCover had made a determination under s 44(1)(b), as evidenced by the LawCover indemnity letter, which bound LawCover vis-a-vis Mr Fieldhouse in relation to the Foundation's claims. That is, as a result of the grant of indemnity Mr Fieldhouse and, after his death, his estate had an enforceable entitlement against LawCover that was indistinguishable from that of other Underlying Insurers under the Master Policy. The trial judge's observation in [73] of his final judgment relating to the non-joinder of LawCover in the Action only makes sense if LawCover was liable to indemnify Mr Fieldhouse's estate in accordance with the terms of the Master Policy.

63 Indeed, acceptance of this proposition is implicit in the respondents' written submissions relating to the s 44(1)(b) discretion. Those submissions are narrowly formulated as follows. LawCover has a discretion as to what amount it would pay Mr Fieldhouse or his estate up to $1.1 million which had to be reached prior to the respondents' policies kicking in. LawCover had granted indemnity subject to the reservation of rights for fraud. It was unknown how LawCover would have chosen to run the matter or whether it would have pursued any allegation that Mr Fieldhouse had engaged in fraud so as to exercise its discretion not to pay some or all of the $1.1 million from the Fund (respondents' case, [28]). Thus the focus is on the express reservation in the LawCover indemnity letter not on the absence of any entitlement.

64 The trial judge accepted the description of excess insurance in Derrington and Ashton, The Law of Liability Insurance (2nd ed, 2005). It is described in that textbook as follows:

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 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 ...

Primary and excess policies inherently serve different functions, cover different risks and attach at different stages ... In analysing whether a policy is an excess one, the focus must not be solely on the other insurance clauses but must construe the policies as a whole and review the underlying policy considerations [11-547] - [11-548].

65 If, in the administration of a claim, the primary insurer breaches its duty to the insured and the excess insurer suffers loss, the excess insurer will be subrogated to the rights of the insured in respect of the breach: Derrington [11-552].

66 The Foundation submitted in the appeal that the Lloyds policies are not 'true' excess policies because LawCover was not an insurer and, I interpolate, there is no contract of liability insurance with Mr Fieldhouse, in which event s 51(1) of the Act does not apply to the primary layer in this case. That submission appears to be in support of the Foundation's claim, raised for the first time in the appeal, that condition C as construed by the trial judge is void.

67 There can be no doubt that the Lloyds policies are excess policies. In particular:

(a) the respondents' liability to indemnify does not arise until the Underlying Insurers liability for the full extent of their indemnity is established in one or more of the ways specified in condition C;

(b) otherwise, the nature and scope of cover under, and the terms of, the Lloyds policies are relevantly the same as the Underlying Insurances (condition B);

68 There is no challenge to the trial judge's finding that the Fund is an Underlying Insurer.

69 Care must be taken to distinguish between the two components of liability that are elements of a cause of action under a liability policy. They are first, the insured's liability to the claimant for the wrong and second, the insurer's liability to indemnify the insured in respect of the first liability.

70 In a liability insurance claim three questions arise for consideration by insurers (Derrington [1-17]). The first question is whether an insured is liable to the claimant for its loss. The second question is whether the loss is of a kind covered by the policy (is the loss within the scope of the cover). The third question is whether the insurer is liable to the insured for the claimed loss (which directs attention to other policy terms, conditions and exclusions).

71 It is not possible to establish (by judgment, award, settlement or admission) the existence and extent of the Underlying Insurers' liability to Mr Fieldhouse in respect of the Foundation's $20 million claim against him without first establishing Mr Fieldhouse's liability for that claim.

72 Based on its text and purpose (and putting Baulderstone to one side for the moment), condition C is directed at all questions connected with liability. If the Underlying Insurers have paid the full amount of the indemnity, that would be pursuant to a judgment or award against the insured or (absent any reservations to the contrary) be an admission on all three questions of liability. If the Underlying Insurers have admitted liability to pay the full amount of their indemnity, that must (absent any reservations to the contrary) also be an admission on all three questions of liability. If the Underlying Insurers have been held liable to pay the full extent of their indemnity that must result from binding findings against the Underlying Insurers on all three questions of liability.

73 The facts in Baulderstone are unusual. HIH, in liquidation at the time, had admitted liability to the full extent of its indemnity for the purpose of giving the green light to an imminent settlement of the third party claim against the insured, yet reserved its rights in connection with the third question of liability in the event of new information. The reservation of rights was a pro forma exercise, not one based on known facts. As discussed in the next section, that is a far cry from the facts in this case. In those circumstances it is unnecessary to determine its correctness.

74 In summary, the purpose of condition C is to make the existence of the liability to indemnify under the Lloyds policies conditional upon Mr Fieldhouse establishing both the fact and amount of the Fund's liability to indemnify Mr Fieldhouse's liability for the loss the subject of the claim by the Foundation.

75 The scope of LawCover's grant of indemnity is an issue in the appeal. There is no evidence as to the date on which LawCover determined to grant the indemnity and no direct evidence of the terms of the grant. The LawCover indemnity letter, relied on to evidence the grant, was written after Mr Fieldhouse's death in response to a request from the Foundation's lawyers for discovery of Mr Fieldhouse's professional indemnity insurance contracts in order to consider the joinder of the insurers in the Action under s 51 of the Act. The full factual background is detailed in the interlocutory joinder judgment at [10] - [15].

76 In 2010, following interlocutory skirmishes on the issue of discovery of the insurance contracts which eventually came before this court, the Foundation applied to join the NSW Law Society and the respondents.

77 There is no evidence to suggest and no finding was made that, at the time of the LawCover indemnity letter, LawCover knew or suspected that the Foundation would not seek to join Mr Fieldhouse's estate as a party to the Action. Surprisingly, that joinder did not occur even after the unchallenged finding in the interlocutory joinder judgment that the NSW Law Society (and the Fund) was outside the scope of s 51(1) of the Act.

78 Against that background, I turn to the construction of the grant of indemnity based on the LawCover indemnity letter. It is clear that LawCover is advising the Foundation's lawyers of a determination that had been made, probably some time around the time it took on the conduct of Mr Fieldhouse's defence in 2006. In all the circumstances, it is objectively inconceivable that, subject to the theoretical but unlikely prospect of a settlement by agreement, LawCover would have determined to pay the full extent of the indemnity in the absence of a binding judgment against Mr Fieldhouse or his estate. Based on the content of the LawCover indemnity letter and the context in which it was sent (there being no other relevant evidence relating to the satisfaction of condition 2), I would construe it to mean that:

at some time before Mr Fieldhouse's death in November 2007 LawCover had determined that it would grant indemnity to Mr Fieldhouse
if there was a finding in the Action to which Mr Fieldhouse (or his estate) was a party that he was liable to the Foundation for at least $1.1 million of its claim the subject of the Action
subject to an express reservation in respect of any liability brought about by a fraudulent act or omission of Mr Fieldhouse.

79 That is, LawCover's admission is limited to the second of the three questions (the loss is of a kind within the scope of the cover) which arise under a liability insurance contract. This is in effect what the trial judge found.

80 On the first question, the only reasonable inference is that LawCover had answered that question in the negative. I would not infer that, at the time of the grant of indemnity or at the date of the LawCover letter, LawCover had determined that the grant was conditional on a non-binding judgment that did not discharge the liabilities of Mr Fieldhouse's estate for the first $1.1 million of the Foundation's loss.

81 As to the third question, I would not draw the inference that the fraud reservation was pro forma. LawCover was not required to determine its position on this issue because the Foundation failed to join Mr Fieldhouse's estate.

82 For the reasons detailed above, condition 2 does require the Underlying Insurers, including the Fund, to have admitted both the fact and full extent (in this case $1.1 million) of the insured's liability to the third party claimant.

83 That is the only construction of the text consistent with the nature and purpose of an excess liability policy, which the Lloyds policies are. The Foundation's argument based on the commercial object of early involvement in the defence of a third party claim is inconsistent with the nature of an excess liability policy and with condition D, which does however permit the excess insurers to 'associate' with the Underlying Insurers and the insured prior to the satisfaction of condition C.

84 The only question answered by the LawCover indemnity letter is question 2 of the series of three questions for the insurer. It is an admission that the Foundation's claim falls within the scope of the Master Policy, which admission enlivens LawCover's powers under LPA s 44(1)(b). Without any shadow of a doubt, it is not an admission of the fact or extent of Mr Fieldhouse's liability to the Foundation. That always was and continues to this day to be a hotly disputed claim, both in terms of liability and the extent of any loss.

85 Even if the trial judge should have found in the Action that Mr Fieldhouse was liable to the Foundation for in excess of $1.1 million, the evidence falls well short of establishing that LawCover had admitted the full extent of the indemnity. Moreover, as neither Mr Fieldhouse's estate nor LawCover was a party to the Action, any such judgment would not bind them. I would dismiss ground 1A.

86 The trial judge's construction of condition 3 is correct. The words 'have been held liable' are referable to the Underlying Insurers and mean that the Underlying Insurers have been the subject of a binding determination of liability by a court. It is unnecessary to determine whether it applies to other binding determinations such as an arbitral award. Condition 3 applies when the insurer(s) is a party to relevant proceedings in which a judgment against it results from adverse findings on the three questions of liability constituting the cause of action against it/them. LawCover and Mr Fieldhouse's estate were not parties to the Action.

87 The fact that the Action was brought solely against the excess insurers under s 51(1) of the Act does not justify or require the text of condition 3 to be read down to cover a finding that binds only the excess insurers, not the underlying insurer. That reverses the intended relationship between the primary and excess insurers. In circumstances outside the scope of s 51(1), the obvious course was for the Foundation to do what the law requires, and that is to join Mr Fieldhouse's estate as a party to the Action so as to bind it and obtain a right of subrogation against LawCover to test its obligation to indemnify Mr Fieldhouse's estate (if a test was required). See Australian Law Reform Commission Report No 20, Insurance Contracts [338] - [339].

88 Moreover, a differential in the construction of condition C as between the Fund and other Underlying Insurers is objectively unlikely. I would dismiss ground 1.

89 The final issue is whether condition C is void under s 52 of the Act. Section 52 relevantly provides:

(1) Where a provision of a contract of insurance ... purports to exclude, restrict or modify, or would, but for this subsection, have the effect of excluding, restricting or modifying, to the prejudice of a person other than the insurer, the operation of this Act, the provision is void.

(2) Subsection (1) does not apply to or in relation to a provision the inclusion of which in the contract is expressly authorised by this Act.

90 Condition C does not in terms purport to exclude, restrict or modify s 51(1) of the Act. The only question is whether it has the relevant effect on the operation of the Act. The respondents submit it cannot have the relevant effect when the non-application of s 51(1) is attributable to the failure to establish an element thereof, in this case the requirement in s 51(1)(c) that 'the contract provides insurance cover in respect of the liability'.

91 Compliance with condition C is a condition precedent to the central obligation of the Lloyds policies. The Foundation's assertion as to the effect of condition C on s 51(1) is inconsistent with Bayswater Car Rental Pty Ltd v Hannell [1999] WASCA 34. That case concerned an indemnity provision in a car hire agreement. The plaintiff's car was damaged by the negligent driving of the renter of a rental car from its owner, Bayswater Car Rental Pty Ltd (BCR). The plaintiff claimed directly against BCR under s 51(1) of the Act on the basis that the renter could not be found.

92 Clause 3 of the rental agreement made the entitlement to indemnity conditional 'on a Court Judgment against the Renter for third party property damages'. The majority (Kennedy & Steytler JJ, Pidgeon J contra) held that the contract between the renter and BCR was a contract of liability insurance for the purpose of s 51(1) of the Act. However, all members of the court agreed that the rental agreement did not provide insurance cover in respect of the liability because any obligation to indemnify was conditional upon the plaintiff obtaining a judgment of the court against the renter for damages. Pidgeon J expressly, and Kennedy and Steytler JJ implicitly, concluded that the parties had not contracted out of s 51(1). Pidgeon J states his conclusion without disclosing his reasons for that conclusion.

93 In my respectful opinion, the fact that the liability insurance contract does not provide insurance cover in respect of the liability for the purpose of s 51(1)(c) cannot be determinative of the question whether there has been a contracting out for the purposes of s 52. The correct approach is to first determine whether the relevant provision infringes s 52 and if so, only have regard to those terms of the liability insurance contract that are not void under s 52 for the purpose of s 51(1)(c).

94 Condition C does not in terms or effect deprive a third party of the right to claim directly against the liability insurer of a dead insured. The Foundation's claim failed in this case only because s 51(1) has no application to the Fund, the NSW Law Society or LawCover. If s 51(1) applied to LawCover's obligation to Mr Fieldhouse and LawCover had been joined as a party, condition C would not have prevented a s 51(1) claim against the excess insurers. The excess insurers liability to indemnify under the Lloyds policies is derivative and conditional on that of an underlying insurer to whom s 51 does not apply. The relevant effect in this case is a consequence of the scope of s 51(1) not of condition C. Accordingly, s 52 does not apply.

95 Moreover, condition C goes to the heart of the nature of an excess liability policy. It cannot have been the intention of the legislature in enacting s 51 to fundamentally alter the nature of the contractual relationship between an insured and his excess insurers in the event the insured dies.

96 For these reasons, I would dismiss grounds 1 and 1A and the appeal, it being unnecessary to determine the remaining grounds. However, because of the inevitability of further proceedings, I will address the remaining grounds of appeal, the cross-appeal and the notice of contention.

97 As the trial judge correctly stated, 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 be imputed to the parties [84]. The trial judge went on to say, relying on the judgment of Ipp J in Pegrum v Fatharly (1996) 14 WAR 92, 95, that:

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 [84].

98 The trial judge's statement of the law is an accurate statement of what Ipp J said in Pegrum. That is, the relationship of solicitor and client as a matter of fact has to be a necessary and clear inference from the proved facts. When the relationship of solicitor and client is so proved, there is a presumption of a contract of retainer between the solicitor and client. Anderson J, with whom Kennedy J agreed in Pegrum, made no express reference to a requirement for a necessary or clear inference of an implied contract.

99 As I understand the position of the Foundation, it is that it did not seek to establish an implied retainer by first establishing that there was a relationship of solicitor and client as a matter of fact and then relying on the presumption.

100 The distinction is meaningless in this case. An implied contract, whether of retainer or otherwise, depends upon drawing an inference from all of the relevant surrounding facts and circumstances. I cannot conceive of such an inference being drawn in this case if the evidence did not support a finding of a relationship of solicitor and client.

101 As the High Court made clear in Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336, the frequently encountered observations that a civil issue must be proved 'clearly', 'unequivocally', 'strictly' or 'with certainty', is a shorthand way of saying that satisfaction on the balance of probabilities is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved (361 - 363).

102 One might add that the nature of the evidence to prove the fact, whether direct or circumstantial, may affect the process by which reasonable satisfaction is attained. For example, if proof in a civil case depends on inference, the circumstances must raise a more probable inference in favour of the fact to be proven. Conflicting inferences of equal degrees of probability will not suffice. There are many examples in contract law where courts require clear or convincing evidence in support of an inference. Examples include rectification (Pukallus v Cameron [1982] HCA 63; (1982) 180 CLR 447, 452) and novation (ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue [2012] HCA 6; (2012) 245 CLR 338). Further, the implication of a term in fact requires, inter alia, that the term be so obvious that it goes without saying.

103 From a decision maker's perspective, statements as to degrees of proof serve only as a reminder that there is something about the facts or law that would ordinarily weigh in the balance against the inference in the fact-finding process. In the case of solicitor-client retainers it may be that some direct evidence might ordinarily be expected.

104 The trial judge's statement of the test is consistent with authority. In any event, it is clear the trial judge applied the correct test by objectively considering all of the material put before him to assess whether he was satisfied on the balance of probabilities that there was a contractual relationship of solicitor and client between the Foundation and Mr Fieldhouse. I would dismiss ground 2.

105 Further background is required in order to deal with ground 3 and the cross-appeal.

106 No witness gave oral evidence at trial. Documents received in evidence included a signed proof of evidence of Mr Fieldhouse provided for the purpose of bankruptcy proceedings relating to Mr Hancock's estate (exhibit 126), transcripts of Mr Fieldhouse's evidence in the bankruptcy proceedings and transcripts of Mr Fieldhouse's evidence in proof of debt proceedings commenced by Rose Porteous. The multitude of actions (with their overlapping issues) are detailed in Hancock Family Memorial Foundation Ltd v Fieldhouse [2005] WASCA 93; (2005) 30 WAR 398.

107 As a company limited by guarantee, the Foundation has members rather than shareholders. Mr Hancock was not a director of the Foundation at the relevant times. He was the controlling member of the Foundation, directly until December 1989, and thereafter indirectly through his company, Zamoever Pty Ltd.

108 The Foundation was a non-profit company which until 1991 was prohibited by its Articles from distributing its income to members. It was formed for tax purposes. The Foundation was used as a vehicle to enable Hancock Prospecting and companies in the Hancock group to distribute their income to the Foundation which obtained full tax rebates (exhibit 126 [8.2]).

109 After Mr Hancock's membership of the Foundation ceased in December 1989, the Foundation was permitted to make distributions to him personally.

110 The initial issued capital of Hancock Prospecting was two shares, LGS1 and one A class share issued to Hope Hancock. Subsequently, Hancock Prospecting issued a number of A, B and C class shares, one-third to Mr Hancock, one-third to Hope Hancock and one-third to Gina Rinehart.

111 At all relevant times, Mr Hancock was a director of Hancock Prospecting which was the beneficiary of very substantial mining royalties from Hamersley Iron Pty Ltd.

112 Hancock Prospecting's Articles also provided for a special class of shares known as cumulative special (CS) shares. The CS shares had special rights and privileges, including special dividend rights that are triggered by the first transfer by way of sale.

113 Article 124 provided that dividends may be declared on one or more classes of shares in Hancock Prospecting to the exclusion of the other or others and LGS1 was treated as a separate class of share. Under Article 125, the directors may resolve that any such dividend be paid wholly or in part by the distribution of the specified assets of Hancock Prospecting.

114 Only the CS shares had an entitlement to dividends because they were expressed to be entitled to share equally in the dividends payable out of specified mining royalties (the specified royalty streams).

115 The rights attaching to LGS1 included (1) to hold the office of director for as long as Mr Hancock chooses and to exercise all powers, authorities and discretions vested in the directors generally; (2) all other directors shall be under Mr Hancock's control and shall be bound to conform to his directions in regard to company business; (3) to cast 76 votes out of every 100 votes cast at a general meeting which Mr Hancock could convene at any time. Once Mr Hancock ceased to hold or transferred a LGS it became an 'A' class share (Article 3C).

116 On Hope Hancock's death in April 1983, her one-third shareholding in Hancock Prospecting passed to Mr Hancock. There was a dispute between Mr Hancock and Mrs Rinehart which was resolved by an agreement made between them in June 1988 (the 1988 Plan) which relevantly provides or acknowledges that:

- Mr Hancock will retain LGS1 to give him continued complete control over Hancock Prospecting until his death;

- Mr Hancock and Mrs Rinehart are to enter into a legally binding agreement by which Mr Hancock would set up two irrevocable trusts to be called the 'Hope Hancock Trust' (HH Trust) and 'Hope Margaret Hancock Trust' (HMH Trust);

- the beneficiaries of the HH Trust were to be Mrs Rinehart's four children and the trustees were to be Mr Hancock during his life time and then Mrs Rinehart;

- the beneficiaries of the HMH Trust were to be Mrs Rinehart and her children and the trustees were to be Mr Hancock during his life time and Mrs Rinehart after his death;

- after the grant of probate of Hope Hancock's will and her one-third shareholding in Hancock Prospecting was transferred to Mr Hancock, he would transfer those shares to the HMH Trust by way of gift;

- Mrs Rinehart would be entitled to at least $750,000 a year after tax from dividends on her CS shares with any necessary top-up coming from the income of the HMH Trust;

- Mr Hancock would sell his one-third shareholding in Hancock Prospecting to the Foundation for a price to be set by the auditors, Coopers & Lybrand;

- Mr Hancock will use part of the money paid by the Foundation for the purchase of the shares to pay off various family debts currently owing to Hancock Prospecting.

117 The 1988 Plan summarises the position of Mr Hancock and Mrs Rinehart after the steps provided for had been completed. Mrs Rinehart would hold one-third of the CS shares entitling her to dividends but no votes; she would be entitled to such income from the HMH Trust as Mr Hancock determined; on Mr Hancock's death, she would hold one-third of the CS shares plus an entitlement to 17.7% of the CS shares from the HMH Trust, giving her 51% of the total CS shares; as LGS1 loses its controlling rights on Mr Hancock's death, Mrs Rinehart would be in a position to control Hancock Prospecting thereafter.

118 By his control of the Foundation and the HMH Trust, Mr Hancock would retain control over the shares held by the Foundation and the CS and voting shares held by the HMH Trust. Mr Hancock died on 27 March 1992.

119 Coopers & Lybrand were instructed to prepare a valuation of Mr Hancock's A, C and CS shares in Hancock Prospecting based on what was agreed in the 1988 Plan. The final Coopers & Lybrand valuation is dated 17 March 1989 (the Valuation), which is after the date of the 1989 share sale agreement. However, it was common ground that the price for the sale of the shares was based on the Valuation.

120 The Valuation refers to Mr Hancock's one-third of the A, C and CS shares in Hancock Prospecting as 'the Shares'. The Valuation states that the purpose of the Valuation is to attribute a fair market value as at the date of the Valuation to the Shares which are intended to be transferred to the Foundation; the independent opinion was sought because cl 5 of the Foundation's Memorandum of Association precluded the payment of any benefits to a member or a member's family.

121 Paragraph 7 of the Valuation identifies the assumptions on which it was based. It relevantly provides (emphasis added):

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:-

Shareholder's Intentions

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

122 Other relevant paragraphs of the Valuation are as follows (emphasis added):

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 Foundation].

THE HANCOCK FAMILY MEMORIAL FOUNDATION LTD -v- LOWE [2015] WASCA 38 (5 March 2015)

At a glance

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Judgment (311 paragraphs)

THE HANCOCK FAMILY MEMORIAL FOUNDATION LTD -v- LOWE [2015] WASCA 38 (5 March 2015)

Legislation Cited (6)

Cases Cited (5)