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[2009] VSCA 187
Court of Appeal (Vic)
2009-08-25
BUCHANAN and NEAVE JJA and KYROU AJA
Original judgment source is linked above.
LEGAL PRACTITIONERS - Whether lending of trust funds on the security of a first mortgage over real estate was in the course of or in connection with legal practice - Defalcation - Indicia of legal practice - Whether losses covered by Fidelity Fund - Legal Practice Act 1996, s 208.
WORDS AND PHRASES - 'In the course of or in connection with legal practice' - 'Money given for the purpose of investment or re-investment by the practitioner' - 'Merely incidental to the legal practice'.
1 I would dismiss the appeal for the reasons stated by Kyrou AJA.
2 I agree that the appeal should be dismissed, for the reasons given by Kyrou AJA.
3 This is an appeal from a decision of a trial division judge (Pagone J) dismissing a proceeding brought by the appellants, Gerald Vaughan and Patricia Ralph, against the respondent, the Legal Services Board ('Board').[1]
4 The proceeding sought declarations and orders to the effect that Mr Vaughan and Ms Ralph were entitled to be paid compensation by the Board from the Fidelity Fund ('Fund') established under the Legal Practice Act 1996 (Vic) ('1996 Act'). The 1996 Act has been repealed by the Legal Profession Act 2004 (Vic) ('2004 Act') but the Fund has been continued by the 2004 Act. The claim for compensation arose from a series of defalcations committed by a solicitor, Julie Anne Laird.
5 Between December 2000 and June 2001, Mr Vaughan and Ms Ralph transferred various sums of money to Mrs Laird to fund investments that Mrs Laird had proposed. The investments involved lending money to a range of borrowers on the security of first mortgages over real property. However, the investments were fictitious. Mrs Laird misappropriated the funds provided by Mr Vaughan and Ms Ralph.
6 The judge decided that the trust moneys were provided by Mr Vaughan and Ms Ralph in the course of and in connection with Mrs Laird's legal practice within
the meaning of s 208(2) of the 1996 Act. However, he held that Mr Vaughan and Ms Ralph were not entitled to claim on the Fund because they fell within the exception in s 208(2)(b) of the 1996 Act on the basis that the defalcation arose out of investment or reinvestment by Mrs Laird that was not merely incidental to her legal practice. Mr Vaughan and Ms Ralph have appealed from that judgment.
7 For the reasons that follow, I have concluded that the judge's decision was correct and that the appeal should be dismissed.
8 Under s 388 of the 1996 Act, the predecessor to the Board, the Legal Practice Board ('former Board'), was required to establish and maintain the Fund. Claims on the Fund were governed by division 2 of part 7 of the 1996 Act. On 12 December 2005, the 1996 Act was repealed by the 2004 Act, which transferred the Fund to the Board and provided that division 2 of part 7 of the 1996 Act continued to apply to claims made before 12 December 2005. The claims in the present case were made before that date.
208 Entitlement to claim against the Fidelity Fund
(1) The Fidelity Fund is held, and is to be applied ... for the purpose of compensating persons who suffer pecuniary loss from a defalcation of, or in relation to, any money or other property to which this section applies committed -
(a) by a current practitioner (being a natural person) ...
(2) This section applies to trust money ... that was, in the course of or in connection with the practitioner's ... legal practice ... given or paid to, or received by, a person or body referred to in sub-section (1)(a) ... -
(a) for or on behalf of a person or body other than the practitioner ...
...
(3) A claim does not lie against the Fidelity Fund -
(a) in respect of a defalcation arising out of anything done or omitted to be done by a practitioner ... in connection with a nominee mortgage; or
(b) in respect of a defalcation of, or in relation to, any money given to a practitioner ... for the purpose of investment or re-investment by the practitioner ... other than an investment or re-investment that is -
(i) merely incidental to the legal practice of the practitioner ...
10 Section 212 of the 1996 Act enabled a person whose claim on the Fund was disallowed by the former Board to commence a proceeding against the former Board to assert a claim against the Fund. Section 214 of the 1996 Act provided that the amount that could be claimed against the Fund was the actual pecuniary loss suffered by the claimant, less any amounts received in reduction of the loss from any other source.
11 During the relevant period, Mrs Laird was a 'current practitioner' as defined in the 1996 Act. She practised under the name 'Julie Anne Laird Lawyers'.
12 Mr Vaughan is the son of Ms Ralph. He held an enduring power of attorney from her at all material times.
13 Towards the end of 2000, Mr Vaughan's accountant, Kevin O'Loughlin, was told by another client that Mrs Laird was looking to attract money from investors who were prepared to invest with her on the security of first mortgages. The client told Mr O'Loughlin that the client would receive a procurement fee from Mrs Laird on funds he introduced, which fee was to be paid by the borrower.
14 On 14 December 2000, Mr O'Loughlin received a fax from Julie Anne Laird Lawyers providing details of the scheme. Mr O'Loughlin decided that he was not interested in it himself, but thought that it might interest Ms Ralph. On the same day, Mr O'Loughlin faxed the document to Mr Vaughan, together with a handwritten note stating:
This kind of investment may suit mum. A former client of mine receives a fee from the borrower.
15 Mr Vaughan subsequently telephoned Mr O'Loughlin, and they discussed the investment proposal, particularly the risk to the lender. Mr O'Loughlin told Mr Vaughan that since Mr Vaughan would be lending money secured against first mortgages, the risk would be minimal. He also told Mr Vaughan that he should check and confirm that the dealings were covered by the Fund in case anything went wrong.
Investment proposals made by Mrs Laird to Mr Vaughan and Ms Ralph
16 Mr Vaughan did not know Mrs Laird and had no previous experience with her. He spoke to Ms Ralph about the investment proposal and subsequently contacted Mrs Laird to obtain more information. As a result, on 22 December 2000, Mr Vaughan received a fax from Julie Anne Laird Lawyers which relevantly stated:
Mortgage Backed Securities
I have discussed with Kevin O'Loughlin an opportunity to place bridging finance until 23 June 2001 and Kevin has asked me to discuss the matter with you. It is a secure investment with an attractive interest rate.
The prospective borrower is an Australian Permanent Resident living in Hong Kong who wishes to borrow bridging finance in Australia rather than make foreign exchange transactions in the present market. The borrower is seeking $351,000.00 which can be split into two loans ($165,000.00 & $186,000.00) as two properties are offered as security. In view of the potential loss to the lender on exchange I am authorised to negotiate bridging finance up to 13.25% including commissions.
Two properties owned by the borrower at 469 St Kilda Road Melbourne are offered as first mortgage security for the bridging finance. The funds are required for draw down in late December 2000. The money will be repaid on 23 June 2001 from the proceeds of an unconditional sale of another property in Melbourne. There are no mortgages on this title and a caveat will be lodged on that title to protect the interest of the person who provides the bridging finance.
The apartments offered as security were completed in 1997. The apartments are on the 6th and 11th floors and both have views over Faulkner Park in South Yarra. Apartment 602 is valued at $376,000.00 and apartment 1101 at $490,000.00. Both apartments are leased and one apartment is let to the body corporate on a three-year lease and is occupied by the resident manager of the building.
I take this opportunity to confirm that I do not act for the borrower and that it is the responsibility of my firm to:
The mortgage transaction is carried out by me in my business as a solicitor and all funds are negotiated through my trust account. My work as a solicitor is covered by my professional and fidelity insurance.
When the borrower has provided the necessary security I issue a solicitor's certificate to the investor confirming the security is binding and enforceable.
I look forward to discussing the matter with you.
17 After receiving that fax, Mr Vaughan had a further conversation with Mrs Laird in which he asked her a number of questions concerning the investment, including about the valuation, the form of the security and the net return to the lender. She told him that she would be receiving a 2 percent commission from the borrower as her fee. He understood that the borrower would be paying Mrs Laird an interest rate that was 2 percent higher than the rate to be received by the lender. Mr Vaughan had never previously and nor has he since seen such a commission being paid to a solicitor.
18 Mrs Laird provided further information in subsequent correspondence and conversations with Mr Vaughan. On 10 January 2001, she sent Mr Vaughan a fax attaching copies of the certificates of title to the proposed security properties and a draft epitome of proposed mortgage. These documents indicated that the borrowers were named Nguyen and Tsui.
19 Between 10 and 15 January 2001, Mr Vaughan told Mrs Laird to prepare the relevant documentation. On 15 January 2001, Mrs Laird sent Mr Vaughan a letter enclosing a solicitor's certificate. The certificate was in the following form for this investment and in similar form for subsequent investments:
SOLICITORS CERTIFICATE
TO: GERALD WILLIAM VAUGHAN ...
I, JULIE ANNE LAIRD being a principal in the firm of JULIE ANNE LAIRD LAWYERS HEREBY CERTIFY AND WARRANT:
DATED 15th day of January 2001
[Signed]
JULIE ANNE LAIRD
Principal of the firm of JULIE ANNE LAIRD LAWYERS
Solicitors for the Lender
20 The schedule to the certificate set out details of the mortgagors, the title details of the security properties, particulars of any outstanding mortgages, charges or encumbrances, the loan amount, the security documents, any additional security and any covenants, easements and other restrictions not registered on title. Following receipt of the certificate, Mr Vaughan instructed Mrs Laird to make the investment and arranged for the transmission of funds into her trust account. He believed it was a good opportunity to earn an attractive return, as interest rates being paid by the banks at that time were low.
21 By letter dated 9 February 2001, Mrs Laird informed Mr Vaughan of another investment opportunity, involving Golden Phoenix Developments Pty Ltd ('Golden Phoenix') as borrower. During a telephone conversation on 20 February 2001, she informed him of a further investment opportunity involving a borrower named Taylor. On 21 February 2001, Mr Vaughan told Mrs Laird to prepare documentation on behalf of Ms Ralph in relation to these proposed loans. Mrs Laird sent him certificates of title, solicitor's certificates addressed to Ms Ralph and epitomes of mortgages on 23 February 2001.
22 Mr Vaughan discussed the Golden Phoenix and Taylor investment opportunities with Ms Ralph. Ms Ralph looked at the security property for the Golden Phoenix loan (which was then under construction) and told Mr Vaughan to go ahead with both investments. Mr Vaughan duly informed Mrs Laird and arrangements were made to transfer the funds from Ms Ralph's account to Mrs Laird's trust account.
23 By fax dated 15 March 2001, Mrs Laird informed Mr Vaughan of another investment opportunity. The borrower's name was Morton. Mr Vaughan expressed interest via an email dated 17 March 2001. On 21 March 2001, Mr Vaughan received a fax from Mrs Laird attaching an epitome of mortgage and a solicitor's certificate addressed to him. That day, Mr Vaughan arranged the transfer of funds to Mrs Laird's trust account. On 30 March 2001, Mrs Laird told Mr Vaughan that she had transferred an amount for prepaid interest on the Morton loan into Mr Vaughan's account.
24 On 9 April 2001, Mr Vaughan received an email from Mrs Laird stating that an interest payment from Nguyen and Tsui had been received and would be transferred to Mr Vaughan's account.
25 Mr Vaughan responded on 11 April 2001, asking for copies of the titles to the security properties showing the registered mortgages. Mrs Laird replied by email stating that the documents he requested were not yet available due to delays at the Land Titles Office. In a further email dated 10 May 2001, Mrs Laird provided an update on developments at the Land Titles Office.
26 Mr Vaughan received a letter dated 28 May 2001 from Mrs Laird addressed to Ms Ralph, which stated that the interest payments for the Golden Phoenix and Taylor loans had been paid to Ms Ralph's account on 25 May 2001.
27 On 8 June 2001, Mr Vaughan received an email from Mrs Laird which stated that she was preparing a discharge of the Nguyen and Tsui mortgage in anticipation of repayment of the funds lent to them, due on 25 June 2001. Mrs Laird subsequently sent Mr Vaughan a discharge of mortgage and a withdrawal of caveat, which he signed and returned.
28 The next investment opportunity was communicated to Mr Vaughan by fax dated 13 June 2001. The borrowers were named Bland. Mr Vaughan called Mrs Laird on 19 or 20 June 2001 and told her that he wanted to take up this opportunity by 'rolling over' the funds from the forthcoming Nguyen and Tsui settlement. On 20 June 2001, Mr Vaughan received a fax from Mrs Laird stating that the 'lawyer for the borrowers' had advised that the borrowers wished to increase the loan principal and that she had told that lawyer she would pass on the request to her 'client'. Mr Vaughan replied by email on 22 June 2001, agreeing to the increase '[p]roviding the searches are in order'.
29 On 22 June 2001, Mr Vaughan visited Mrs Laird's office and met her for the first time.
30 On 25 June 2001, Mr Vaughan received a solicitor's certificate and an epitome of mortgage for the Bland loan, under cover of a fax from Mrs Laird. On the same day, Mr Vaughan received an email from Mrs Laird which confirmed that the Nguyen and Tsui settlement had been finalised and stated that the Bland settlement would take place after she received Mr Vaughan's confirmation that the solicitor's certificate was in order. The email added that the balance of the funds (after subtracting the amount needed to fund the Bland loan) would be paid into Mr Vaughan's account the following morning.
31 The following morning, Mr Vaughan emailed Mrs Laird and asked her to proceed with the settlement of the Bland loan. Later that day, Mr Vaughan received an email from Mrs Laird stating that the settlement had occurred and the funds had been transferred. He received a further email that day describing the calculation and application of the funds.
32 On 12 July 2001, Mr Vaughan received a fax from Mrs Laird attaching two letters. The first letter was addressed to Mr Vaughan and described interest payments received or due on the Nguyen and Tsui, Morton and Bland loans. The second letter was addressed to Ms Ralph and contained similar information in relation to the Golden Phoenix and Taylor loans.
33 On the same day, Mr Vaughan spoke to Mrs Laird by telephone about a recent television program he had seen which discussed problems with mortgage schemes in Queensland. Mrs Laird reassured Mr Vaughan about Victorian mortgage securities based on the stringent regulation that applied in the State, including six-monthly audits of trust accounts and random inspections by the Law Institute of Victoria ('LIV'). Mr Vaughan repeated his previous request for copies of the registered mortgages.
34 On 16 July 2001, Mr Vaughan received an email from Mrs Laird which stated that the first interest payment on the Bland loan had been paid to his account on 13 July 2001. However, Mr Vaughan later discovered that the payment was not received.
35 Between 9 February 2001 and 13 June 2001, Mrs Laird informed Mr Vaughan of three investment proposals which he ultimately did not accept. In relation to the first proposal, after initially putting forward a particular security property Mrs Laird subsequently recommended against acceptance of that security because she had discovered a possible defect in the title. Mrs Laird suggested an alternative security property but Mr Vaughan decided to reject the proposed investment because he was not satisfied with the gearing, the identity of the borrowers and the loan to value ratio. He rejected the second proposal because of the loan to value ratio. The third proposal was rejected because the amount of the loan that was required was too high.
Discovery of Mrs Laird's fraud and commencement of proceeding
36 On 22 August 2001, the LIV informed Mr Vaughan that it was investigating deficiencies in Mrs Laird's trust account and that a receiver had been appointed over her trust account. He then discovered that all the investments were fictitious. While the security properties existed, no loans were ever sought or made, and no mortgages were ever granted. Mrs Laird had simply misappropriated the funds that he and Ms Ralph had provided.
37 On 6 September 2001, Mr Vaughan and Ms Ralph made claims on the Fund. On 28 November 2001, the former Board gave notice that it had disallowed both claims.
38 On 26 February 2002, Mr Vaughan and Ms Ralph commenced a proceeding in the trial division against the former Board pursuant to s 212 of the 1996 Act.[2] On 16 December 2005, the Board was substituted for the former Board.
39 For the purpose of s 214 of the 1996 Act, the parties to the appeal agreed that the quantum of Mr Vaughan's claim is $237,136.70 and that of Ms Ralph's claim is $251,123.89.[3]
The judgment below and the issues in this appeal
40 In his evidence-in-chief, Mr Vaughan said that he relied on Mrs Laird's statements in her letter of 22 December 2000 about 'what she would undertake as a solicitor on my behalf' and the protection available under the Fund and professional indemnity insurance. During cross-examination, however, he accepted that Mrs Laird was offering him and Ms Ralph investment opportunities and that she was not offering to be their solicitor. Mrs Laird's evidence was that she had not given legal advice to Mr Vaughan and Ms Ralph. She said that what she did was purport to invest their money in her investment product in accordance with the terms outlined in her letter to Mr Vaughan dated 22 December 2000.
41 Mr Vaughan said that he relied on council valuations Mrs Laird said she had in respect of the properties offered as security. Neither he nor Ms Ralph inspected any of the security properties except for one occasion when Ms Ralph viewed one property. Also, neither Mr Vaughan nor Ms Ralph signed any of the mortgages as mortgagee and they did not receive any mortgages signed by the borrowers. Prior to the discovery of the fraud, Mr Vaughan had met Mrs Laird once while Ms Ralph had had no direct contact with her.
42 It was not in dispute at trial that Mr Vaughan and Ms Ralph never paid Mrs Laird for any legal services. Mr Vaughan gave evidence that he assumed that Mrs Laird's fees would be paid by the borrower.
43 The trial judge found that the trust moneys were given, paid or received both in connection with Mrs Laird's legal practice and in the course of that legal practice. That meant that s 208(2) was satisfied, and that Mr Vaughan and Ms Ralph were prima facie entitled to maintain their claims against the Fund. However, the judge then found that the investments or reinvestments were made by Mrs Laird and not by Mr Vaughan and Ms Ralph. This meant that the exception to s 208(2) created by s 208(3) applied unless the investment or reinvestment was 'merely incidental to the legal practice engaged in by' Mrs Laird. The judge found that the investment or reinvestment was not merely incidental to Mrs Laird's legal practice but rather was the primary activity in which she engaged vis-à-vis Mr Vaughan and Ms Ralph. Consequently, his Honour dismissed the proceeding. I discuss the judge's reasons in more detail below.
44 Before us, the parties agreed that, based on the appellants' notice of appeal and the Board's notice of contention, the following questions arise for determination in this appeal:
(a) Were the funds given to Mrs Laird 'in the course of or in connection with [her] legal practice' within the meaning of s 208(2) of the 1996 Act?
(b) Did the appellants give the money to Mrs Laird 'for the purpose of investment or re-investment by [her]' within the meaning of s 208(3)(b) of the 1996 Act?
(c) If the appellants gave the money to Mrs Laird for the purpose of investment or re-investment by her, was the investment or re-investment 'merely incidental to the legal practice of [Mrs Laird]' within the meaning of s 208(3)(b)(i) of the 1996 Act?
45 It was common ground before his Honour, as it was before us, that even though Mrs Laird's investment scheme was fictitious, the Court should treat it as fact, and that the fraud did not necessarily defeat the claim of the appellants. It was also common ground that the appellants bore the burden of proving that the trust money had been given or paid to, or received by, Mrs Laird in the course of or in connection with her legal practice.
'In the course of or in connection with' the legal practice
46 The trial judge referred to Solicitors' Liability Committee v Gray[4] and said:
The scope and content of "legal practice" is a mixed question of fact and law that is not to be construed or constrained by a priori reasoning or artificial constructions. Its scope may helpfully be informed by the many decided cases about the conduct of a solicitor's practice and, where appropriate, perhaps by expert evidence. Its scope and content may alter over time as legal practices evolve and change. In this case it was contended for the Board that the trust money was not given or paid to, or received by, Mrs Laird in the course of or in connection with her legal practice but, rather, in connection with some other activity described generally as her "investment scheme". I do not agree.[5]
47 His Honour referred to the Board's submission that Mrs Laird's activities in attracting funds were separate from her legal practice and therefore did not fall within s 208(2), and then continued:
I do not think the facts in this case support that contention sufficiently to be upheld. Mrs Laird was a solicitor and was introduced to the plaintiffs as a solicitor by their accountant who had premises nearby. Correspondence to the plaintiffs from her at all times purported to be in her capacity as a lawyer and she purported to undertake various steps for the plaintiffs as lender of a kind ordinarily undertaken by lawyers acting as solicitors for a lender. She described the responsibility of her "firm" to carry out all necessary searches and enquiries on behalf of the lender, to prepare the mortgage and all other necessary documents on behalf of the lender, to ensure that the lender obtained proper and enforceable security, and to arrange the draw down of the loan when the security had been given and that all documents were in order to give the lender proper security. She specifically said that the mortgage transaction would be carried out by her "in my business as a solicitor" and that all funds were to be negotiated through her trust account. In that context she represented that her work as a solicitor was covered by her professional and fidelity insurance. She also said that she would provide a "solicitor's certificate" to the lender confirming that the security was binding and enforceable.
Most, if not all, of what Mrs Laird promised to do was, of course, fictitious and did not occur. However, upon the hypothesis that Mrs Laird was acting as she said, what was offered to the plaintiffs was relevantly in the course of, or at least, in connection with her legal practice. The words "in connection with" in the section are in addition to the words "in the course of" and extend the operation of the section. ... [T]he representations to the plaintiffs were that she had available opportunities arising from the legal practice, and that the transactions were at least connected with her legal practice if not in the course of it. Mrs Laird represented ... that she had investment opportunities in the course of her legal practice which she offered to investors and for whom she would undertake the necessary legal work. The evidence in this case was that the plaintiffs' payment of their money to Mrs Laird was in the course of her legal practice or, at very least, connected with her legal practice.
The parties did not seek to lead any expert evidence of the scope of a legal practice, but it has long been known that solicitors have access to money for investment and that some are commonly approached as a source to borrow funds. ... It may be, as counsel for the Board contended, that the facts in this case look more like Mrs Laird acting as a scrivener; namely, a person to whom money or other property is entrusted for the purpose of lending it out to others at a profit payable to the principal but also at a commission or bonus for the solicitor. It may also be the case that the business of a scrivener is not within "the ordinary scope of the business of a solicitor", but the placement of these moneys was at very least connected with Mrs Laird's legal practice as a solicitor. It was, in my view, also in the course of her legal practice whether or not it might have been in the ordinary scope of a legal practice.[6]
49 In Gray, a Full Federal Court considered whether two principals of a firm of solicitors were entitled to indemnity under a professional indemnity insurance contract which extended to 'civil liability in connection with the Practice'. 'Practice' was defined in the contract as 'the private practice of a solicitor'. The firm organised syndicates to acquire property and received an acquisition fee based on a percentage of the purchase price. It acquired options over the properties, arranged the necessary finance and performed any necessary legal work. An accountant was also involved. Following one such purchase, in respect of which the contract of sale named another firm as solicitors for the purchasers, the purchasers instituted proceedings against the principals of the first firm. The purchasers' claims were ultimately settled. The principals claimed indemnity from the insurer. The insurer refused to indemnify them.
50 All three members of the Court held that the activities giving rise to the solicitors' liability did not have a sufficient connection to their practice as solicitors and therefore the liability was not covered by the insurance contract. Lockhart J said:
it is important not to take a narrow view of the role of a solicitor in modern times or the scope of a solicitor's practice. ...
There must, however, be some point reached where the solicitor ceases to engage in his practice as a solicitor and enter[s] other areas of activity, particularly business activity. This case is an excellent example of the grey dividing line between the two.
... [I]t is truly the practice of a solicitor that is central to the resolution of the question before this Court, a practice which ... calls for a broad and liberal definition.
It is, however, important to view the activities of the [solicitors] as a whole, although with particular relevance to the transactions with which this case is concerned.[9]
51 Having considered the background facts of the case, Lockhart J concluded:
[The solicitors] were engaged in the business of syndicating property transactions. Any work which they did in relation to that as solicitors was peripheral to the claims made against them. The centre of activity was property syndication.[10]
52 Beaumont and Burchett JJ referred to comments made by Brennan J in Leary v Federal Commissioner of Taxation that there are significant differences between the role of a solicitor as a professional advisor and as an entrepreneur,[11] and said:
the [insuring provisions] should ... be construed so as to cover liability having some nexus with (ie "in connection with") the professional functions of a solicitor (that is "the Practice"). In other words, the cover does not extend to liability for an entrepreneurial activity which has no real nexus with the Practice.
...
When the indemnity is considered as a whole and in its statutory context, it appears that claims arising from professional functions fall within the scope of the cover, but that claims arising from entrepreneurial activities are not covered. [12]
In our opinion, when the conduct of [the solicitors] is considered as a whole, the inference should be drawn that the things they did were done as the actions of businessmen, rather than as solicitors. In other words, they acted as entrepreneurs rather than as legal professionals.
There are many indicia to support this inference. [The solicitors] first heard of the proposal, through [the accountant]. They were prepared to enter into the contract to buy through their corporate vehicle. They were also prepared to terminate that contract. In introducing the proposal to the [purchasers], they nominated an "acquisition fee" of about 10 per cent of the purchase price. They did not perform any of the legal work - the conveyancing was done by [another firm]; it was [the accountant] who gave some (limited) tax advice on the depreciation available. [The solicitors] gave no tax or any other technical or legal advice.
Significantly, [the solicitors] were not sued by the [purchasers] in respect of any legal or tax advice tendered by them. ... They never undertook any relevant professional responsibilities. Their sole interest was in obtaining the 10 per cent "acquisition fee" (that is, profit) from the [purchasers] acting at arms length from them. In all of this, they were not wearing the hat of a solicitor.[13]
54 In Carr, the New South Wales Court of Appeal again considered whether a claim against a solicitor fell within the scope of his professional indemnity policy. The policy covered civil liability 'incurred in connection with the Practice'. 'Practice' was defined as 'the business of practising as a solicitor undertaken by the Assured'. The solicitor entered into a 'Joint Venture Funds Management Agreement' with an investor under which the solicitor would manage funds provided by the investor for investment purposes ('JVA'). The solicitor transferred the funds to a third party for use in a purported investment scheme. It transpired that the third party was fraudulent and the money was lost. The investor sued the solicitor and he claimed on his policy. The insurer refused to indemnify him.
55 As in Gray, all three members of the Court held that the solicitor's liability to the investor was not covered by the insurance policy.
56 Hodgson JA said that the fact that a particular transaction is one that is not usually undertaken by the particular solicitor may be one factor bearing on the question whether or not it is within 'the business of practising as a solicitor undertaken by the Assured', but is no more than that.[14] Likewise, his Honour said, the fact that the JVA stated that the services were to be provided 'as solicitor' supports the view that they were legal services, but this was not conclusive.[15] His Honour also accepted that a solicitor's view of whether or not he or she was acting as a solicitor was not itself relevant but the objective facts underlying that view were relevant.[16] He said that there was 'some force' in the submission that the trial judge in that case had not addressed 'the cumulative effect of various features, and erred in dismissing some of them as "of no consequence" rather than taking them into account along with all the other circumstances'.[17]
57 His Honour listed the relevant objective facts as follows: the absence of a meeting or a solicitor-client relationship between the solicitor and the investor prior to the execution of the JVA, the absence of a fee disclosure, the charging of a fee based on 1 percent of profits, the non-use of a trust account for the invested funds, the description of the solicitor's role in the JVA as 'acting only in a custodial and account providing capacity', the indemnity in favour of the solicitor in the JVA and the choice of law clause in the JVA nominating the law of England and Wales as the law governing the JVA, rather than the law of New South Wales where the solicitor was qualified to practise.[18] He stated that those facts 'were all important matters to be taken into account, along with consideration of the other terms of the JVA and the characterisation of the nature of the services to be provided under it'.[19] His Honour concluded:
[W]hen considered in all the circumstances I have identified, the JVA was for provision of entrepreneurial and/or management services, to be provided by [the solicitor] otherwise than in his capacity of a solicitor.
Although the facts of this case can readily be distinguished from those of [Gray], that case does support an approach whereby all circumstances are considered and a judgment made as to whether what is done by a solicitor is done as a solicitor or in some other capacity. The factors I have referred to strongly suggest that the JVA was entered into by [the solicitor], not as part of or in the course of his practice as a solicitor, but as a distinct commercial venture in which he was playing an entrepreneurial and/or managerial role, and in which the exercise of his legal expertise was at most incidental and peripheral.[20]
58 Basten JA agreed with Hodgson JA that the policy did not cover the claim and added some further reasons for that conclusion. In the course of discussing the relevant facts and considerations, his Honour made the following comments:
At its core, practising as a solicitor involves the provision of legal services, including advice and assistance. It will involve a relationship between a person qualified and entitled to practise as a lawyer, and a client. ...
One relevant question is whether the business which [the solicitor] agreed to carry out pursuant to the [JVA] imposed on him obligations which could not have been performed by a person who was not a qualified lawyer. An affirmative answer to that question, in circumstances where the [JVA] did not provide for the manager to obtain legal advice as required and provide for the costs of such advice, might well suggest that at least one purpose of the [JVA] was to provide legal services. ...
...
I am not persuaded that the approach adopted by all members of the Full Court in Gray, of distinguishing between a claim arising from the practice of a solicitor, in the exercise of professional functions, and a claim arising from entrepreneurial activities of a person who happens to be a solicitor is other than a sound distinction in the context of the insurance policy. ...
...
... the centre or focus of the [JVA] was an entrepreneurial activity in which [the solicitor] was ... a joint venturer. ... At best any legal services would be peripheral to the central purpose of the [JVA].[21]
59 Beazley JA agreed with the reasons of Hodgson JA and the additional reasons of Basten JA.
60 The Board submitted that, in determining whether a practitioner's activities were in the course of or in connection with his or her legal practice, the courts look for the true character of the practitioner's activities and the relationship with the client. It contended that it is necessary to consider the entirety of the dealings between them and take account of all factors informing their relationship. It submitted that the courts have distinguished between legal practice and entrepreneurial activities, and that while the line between the two is not 'bright' or 'hard', such a line does exist.
61 The above principles appear clearly from Gray and Carr and no substantial issue was taken with their correctness by the appellants. The parties disagreed, however, on whether the question of whether Mrs Laird's activities were in the course of or in connection with her legal practice is to be determined subjectively from the client's point of view (as contended by the appellants)[22] or objectively (as contended by the Board).[23] It is not necessary for me to address this issue because, as will become apparent, my conclusion would be the same irrespective of which test is applied.
62 Although both Gray and Carr concerned insuring clauses in professional indemnity insurance policies and therefore the requisite nexus with legal practice arose in a different context from this case, they nevertheless provide useful guidance as to the relevant principles. In particular, they identify a number of indicia of the necessary nexus.
63 Senior counsel for the Board conceded that the preparation of mortgage documentation, conducting of title searches and preparation of solicitor's certificates was 'legal work' which, viewed in isolation, may be held to involve engaging in legal practice. He also accepted that Mrs Laird's provision of solicitor's certificates, in particular, is 'at face value ... very strongly indicative of a solicitor-client relationship', and that the provision of those certificates and the preparation of the mortgages are 'an important part of the mix'.
64 However, he emphasised that the relationship and activities must be looked at as a whole, and submitted that, in this case, when Mrs Laird solicited investments and received money, she was not doing so in the course of practice as a lawyer. Rather, he submitted, she did so as part of her business of promoting investment in mortgages, which was a separate entrepreneurial endeavour requiring no legal training or expertise. Conducting that business was her primary role, it was said, for which she received an ongoing commission, and any legal work she purported to do was incidental or peripheral to that role. There was an insufficient nexus, the Board contended, between the receipt of money by Mrs Laird from the appellants and her legal practice to satisfy s 208(2).
65 I agree that some of the features of the relationship between Mrs Laird and the appellants and the activities carried out by Mrs Laird point to engagement in legal practice whereas others do not. However, I do not agree that the cumulative effect of the various features is that the nexus to legal practice that is required by s 208(2) is not satisfied.
66 I will begin by considering the features supporting this nexus.
67 First, the initial direct communication between Mrs Laird and the appellants, namely the fax of 22 December 2000, was from the law firm 'Julie Anne Laird Lawyers' rather than any other business being conducted by Mrs Laird. The nature of the proposed relationship and transactions between the law firm and the appellants that was set out in the fax strongly indicated that important aspects of Mrs Laird's involvement in the making of the investments would be in the capacity of a solicitor and that a solicitor-client relationship would exist in relation to those aspects. This emerges from the following features:
(b) the fax described the responsibilities of Mrs Laird's firm (including the issuing of a 'solicitor's certificate'), and stated that the mortgage transaction would be 'carried out by [Mrs Laird in her] business as a solicitor', funds would be negotiated through her trust account, and her 'work as a solicitor [would be] covered by [her] professional and fidelity insurance';[24]
(c) many of the services set out in the fax required legal expertise; and
(d) the fax did not seek to limit Mrs Laird's role to a non-legal role (such as 'acting only in a custodial and account providing capacity') and did not require the appellants to indemnify Mrs Laird against liability she incurred in acting on their behalf.[25]
68 Secondly, the appellants did not decide whether to invest and did not transfer funds to Mrs Laird until she had prepared the mortgage documents, conducted title searches and prepared a solicitor's certificate which certified crucial legal matters to the appellants' satisfaction. The solicitor's certificates were an integral part of the transactions and each was signed as 'solicitors for the lender' or 'lawyers for the lender'.
69 Thirdly, Mrs Laird purported to provide legal advice in some of her faxes and emails to Mr Vaughan. An example is the advice about the defect in title in one of the security properties.
70 Fourthly, the solicitor's certificates could only legally be provided by a qualified lawyer.[26]
71 Fifthly, the funds were paid into Mrs Laird's trust account.[27]
72 Sixthly, Mrs Laird at all times purported to wear her solicitor's hat. She used her firm's letterhead for all her letters and most of her emails were signed off as 'Julie Anne Laird, Julie Anne Laird Lawyers'. In a purported communication with another lawyer, she described Mr Vaughan as her 'client'.
73 Finally, unlike the solicitors in Gray and Carr, Mrs Laird did not become a participant in the appellants' business activities. She did not purchase any property for on-selling to them or enter into a joint venture agreement with them. She remained an independent service provider.
74 The features suggesting that the necessary nexus was not present are as follows.
75 First, the underlying service being offered by Mrs Laird to the appellants was to apprise them of investment opportunities. She solicited funds from them for the purpose of making investments.
76 Secondly, Mrs Laird and the appellants did not have any relationship, and had not met, prior to the first investment opportunity being communicated.[28] Mr Vaughan met Mrs Laird only once, several months after the relationship commenced, and Ms Ralph had no contact with Mrs Laird.
78 When the objective features described above are considered in the context of the entirety of the dealings between Mrs Laird and the appellants, their cumulative effect is that whilst Mrs Laird's services were predominantly investment services, they were provided under the auspices of her legal practice and included legal services as an important component of the overall 'package'.
79 The situations in Gray and Carr are distinguishable from that of the present case. The critical distinction is that, unlike in Gray and Carr, it cannot be said that the legal work performed by Mrs Laird, and the exercise of legal expertise by her, were merely incidental and peripheral to the central purpose of the relationship and dealings between her and the appellants. Nor was the legal work ad hoc and irregular. On the contrary, the solicitor's certificate was integral to the arrangement between Mrs Laird and the appellants. Indeed, it was a necessary precondition to the appellants deciding to enter into any particular investment. By contrast, in Gray, the solicitors did not do any of the legal work, while in Carr, any legal services provided would have been peripheral to the central purpose of the agreement.
80 Mrs Laird's evidence that she did not give any legal advice to the appellants cannot be accepted, as she clearly purported to give such advice. In any event, as Carr[31] makes clear, the solicitor's subjective view is not relevant. Likewise, Mr Vaughan's concession in cross-examination that Mrs Laird was offering him an investment opportunity and not offering to become his solicitor is not of any significance. When his evidence is considered as a whole, it is clear that his subjective view was that Mrs Laird was acting as his solicitor and that the investment services provided by her were provided in the context of her legal practice. In my opinion, his view was justified by the assumed objective features of their relationship.
81 For the reasons given above, in my view, the funds were given by the appellants to Mrs Laird at least in connection with her legal practice. As this conclusion is sufficient to resolve the first issue in favour of the appellants, it is not necessary for me to express a view on whether the funds were given to Mrs Laird in the course of her legal practice.
'Money given ... for the purpose of investment or re-investment by the practitioner'
82 The trial judge set out the appellants' contention that s 208(3)(b) should only apply where money is given to a legal practitioner for investment or reinvestment by the practitioner and not where the investment or reinvestment was made by the client, and that in this case, the moneys were invested or reinvested by the appellants through Mrs Laird, rather than by Mrs Laird herself. His Honour then continued:
I am unable to accept this construction of the section as either the natural meaning to be given to the words or as falling within the evident purpose behind their enactment. The words in s 208(3)(b) are simple and clear. They are directed to defalcations arising "out of the investment or reinvestment of any money by", amongst others, people like Mrs Laird. The factual precondition to the operation of the exclusion is that the defalcation arose out of investment or reinvestment by the legal practitioner. There is nothing in the words to suggest that the words should be restricted to circumstances where the client does no more than hand over money to the practitioner without further involvement. Indeed, to restrict the words in that way would create the curious anomaly that the provision might have inconsistent operation as between circumstances that were identical in all respects except that one client was more diligent or curious in knowing how the funds were applied whilst another client was not. In other words that the plaintiffs' claim would have been defeated if, all other things [having] been equal, Mr Vaughan had relied wholly on Mrs Laird and done nothing. The exclusion could also easily be defeated by a legal practitioner (if the construction be correct) by adopting the relatively simple expedient of drawing attention to his or her proposed investments and seeking from the "investor" what may ultimately be little more than formal approval or agreement. The construction urged upon me by the plaintiffs, in my view, is also inconsistent with the inference to be drawn from the very limited exception to the exclusion found in s 208(3)(b)(i). By that provision the exclusion is not made to operate in the case of an investment or reinvestment that was "merely incidental to the legal practice engaged in by the practitioner". That suggests to me that the primary exclusion in s 208(3)(b) was intended to be more broad than the plaintiffs contended. In my view the investment and reinvestment of the plaintiffs' money was undertaken by Mrs Laird as contemplated by the provision. The plaintiffs transferred money to her which she first placed into her trust account and then (as the hypothesis requires) was invested by her in first mortgage loans on their behalf.
In any event, I do not consider the facts to support the plaintiffs' conclusion even if I were to adopt their construction. Essential to their construction is that any investment or reinvestment was not made by Mrs Laird but, rather, that the investment or reinvestment was made by them. They point to what they described as their selection of the loans and their giving of instructions as to whether or not to proceed with the loans; however, the activities constituting "investment or reinvestment" in this case involved much more than that. The effective selection of the loans was by Mrs Laird. It was she who informed Gerald Vaughan of what she had available for them to invest. It was she who said that she would make all necessary searches and enquiries on behalf of the lender and who purported to provide details about the properties including council valuations. The plaintiffs' role was little more than that of giving formal instructions for her to invest or reinvest their money: they undertook no separate checking or verification of the loan, the security or the lender. In addition, and in any event, the construction urged for the plaintiffs proceeds upon the false premise of a necessary dichotomy between an investment or reinvestment by the plaintiffs and one by her: an investment and reinvestment by her might also be capable of description simultaneously as an investment or reinvestment on their behalf by Mrs Laird; as elementary principles in the law of agency shows.[32]
83 The appellants sought to impugn his Honour's findings by reference to the wording of s 208(3)(b), construed in the context of s 208 as a whole, and the legislative history of the 1996 Act.
The wording of s 208(3)(b) of the 1996 Act and its legislative context
84 The appellants submitted that 'investment', which is not defined in the 1996 Act, connotes the purposive application of funds. For the words 'by the practitioner' to have any work to do, it was said, they must require not only that the practitioner physically pay out the funds but also that it is the practitioner who has the relevant purpose. The appellants submitted that the words 'by the practitioner' direct attention to the person 'by' whom the investment is made. If s 208(3)(b) is construed to include a situation where the purpose is chosen by the client, so that the practitioner's role is purely ministerial, it was said, the words 'by the practitioner' would have no operation.
85 The appellants contended that, contrary to the judge's statement, such a construction would cause the operation of the section to hinge not on the client's level of diligence or curiosity, but rather on the client's level of participation or involvement in the decision to apply the funds. They submitted that a superficial inquiry by the practitioner and merely formal approval by a client would not suffice, as the substance and not the form of the decision is relevant. They contrasted that hypothetical situation to the present case, where the appellants considered the investment opportunities and decided to take up some but not others.
86 The appellants submitted that an investment cannot simultaneously be 'by' both the client and the practitioner.[33] In the present case, it was said, the operative purpose was that of the client, as the practitioner's purpose was to act on her client's instructions. The appellants contended that if a joint purpose were possible, the words 'by the practitioner' would have no work to do, because in every such case the purpose could be said to be joint.
87 The appellants also submitted that their interpretation gives real meaning to the exception in s 208(3)(b)(i). They gave the example of a temporary investment of money at the practitioner's discretion pending settlement of a conveyance, which would be caught by s 208(3)(b) on their interpretation but excepted by s 208(3)(b)(i).
88 In my opinion, the appellants' submissions should be rejected. The key phrase in s 208(3)(b) is 'for the purpose of investment or re-investment'. The purpose referred to is the client's purpose. Subject to the exceptions in the subparagraphs that follow it, s 208(3)(b) has the effect of excluding claims against the Fund where a practitioner misappropriates money given to the practitioner by a client for the purpose of investment or reinvestment by the practitioner. As long as a client gives money to the practitioner for that purpose it does not matter whether the money is actually invested or reinvested. And if it is, it does not matter how active the client is in selecting the investment.
89 This construction of s 208(3)(b) arises from the natural meaning of the words used by Parliament. It neither involves reading in words that are not there nor ignoring any words that are there.
90 There is nothing in the language of s 208(3)(b) which indicates that the degree of involvement by the client in the selection of the investment is relevant, let alone determinative. To read the provision in the manner suggested by the appellants would be tantamount to adding the words 'at the practitioner's discretion' after the words 'by the practitioner'. It is a strong thing to read words into a statute and in the absence of clear necessity, it should not be done.[34] Not only is there no such necessity in this case, it is difficult to conceive of a rational policy reason why the protection offered by the Fund should apply where the practitioner is not actively involved in the making of the investment and for it not to apply where the practitioner is actively involved.
91 It follows that I cannot accept the appellants' submission that the operation of s 208(3)(b) hinges on the client's level of participation or involvement in the choice of investment or that the provision cannot apply where the practitioner's role in making the investment is purely ministerial. Provided the client gives money to the practitioner for the purpose of investment or reinvestment, s 208(3)(b) can apply whether the investment is selected by the client alone, the practitioner alone or by them jointly. In each of these scenarios, the words 'by the practitioner' have effect and each scenario is consistent with and can accommodate the exception in s 208(3)(b)(i).
92 The appellants also submitted that their construction is the only one that gives real effect to s 208(3)(a). That provision excludes claims in connection with nominee mortgages. 'Nominee mortgage' was relevantly defined in s 3(1) of the 1996 Act as a mortgage under which the mortgagee was a legal practitioner or a corporation over which a legal practitioner had the requisite degree of control, that secured the repayment of a loan of money given to the practitioner by one or more clients for the purpose of investment. The appellants submitted that if the exception in s 208(3)(b) is construed so widely that the receipt of money for lending to third parties secured by a nominee mortgage is excluded by the general words of s 208(3)(b), then s 208(3)(a) could not have any independent operation. They also pointed out that whereas s 208(3)(b) was qualified by the words 'by the practitioner', s 208(3)(a), when read with the definition of 'nominee mortgage', was not.
93 During argument, senior counsel for the Board accepted that the exception in s 208(3)(a) is a specific instance of the general class of exception in s 208(3)(b), and that in the absence of paragraph (a), a nominee mortgage would be caught by paragraph (b). Senior counsel initially submitted that paragraph (a) nonetheless had an independent operation, but appeared to resile from that position following questions from the Bench. The Board submitted that s 208(3)(a) was initially included as a means of ensuring direct mortgage investments were not excluded[35] and it has simply been carried forward over the course of subsequent amendments. It contended that the presence of paragraph (a) is not sufficient to read down paragraph (b) given that they are expressed as alternatives, that the words of paragraph (b) are clear, and that the 'exception to the exception' in subparagraph (i) of paragraph (b) draws attention to legal practice in dealing with investments that are merely incidental to the legal practitioner's legal practice.
94 The presence of s 208(3)(a) has caused me some difficulty. There is a presumption that Parliament intends all statutory provisions to have some meaning and effect.[36] If s 208(3)(b) is wide enough to cover any situation where a client gives money to a practitioner for the purpose of investment or reinvestment by the practitioner, it will also encompass nominee mortgages and potentially leave no room for s 208(3)(a) to have any independent operation.
95 However, the abovementioned presumption, as with the principle that 'an express reference to one matter indicates that other matters are excluded', is not of universal application, and the assistance to be gained from them varies widely.[37]
96 In the end, the difficulties associated with the overlap between ss 208(3)(b) and 208(3)(a) are not a sufficient basis for reading down the clear and unambiguous words of s 208(3)(b). Even if it were permissible to read down s 208(3)(b), such a reading down would be the minimum required to overcome the overlap and allow s 208(3)(a) to have independent operation. Section 208(3)(b) would simply not be applicable to defalcations connected with a nominee mortgage. Such a reading down would not assist the appellants, as the investments in this case were not nominee mortgages.
97 In this case, there was no doubt that when the appellants gave money to Mrs Laird, their purpose was for Mrs Laird to invest it. They were led to believe that she promoted and managed a mortgage investment scheme and that their money would be invested in mortgage loans that they selected on the security of the real estate that she represented was available for that purpose. These assumed transactions fell within s 208(3)(b) and the trial judge was correct to so find.
98 The appellants submitted that the legislative history of s 208(3) of the 1996 Act supports their interpretation. They pointed out that the exception in s 208(3)(b) was first enacted in 1995, by amendments made to the Legal Profession Practice Act 1958 (Vic) ('1958 Act') by the Legal Profession Practice (Amendment) Act 1995 (Vic) ('1995 amending Act'), preserved in the 1996 Act when it replaced the 1958 Act, and then refined by amendments to that Act which were made by the Legal Practice (Amendment) Act 1998 (Vic) ('1998 amending Act').
99 The second reading speech to the bill for the 1995 amending Act makes it clear that the purpose of the amendment was to stabilise the predecessor to the Fund, the Solicitors Guarantee Fund, in response to financial difficulties it was suffering. These difficulties were significantly contributed to by the practices of some solicitors of acting like finance brokers or financial institutions in accepting deposits from clients and lending money to borrowers on the security of mortgages. The appellants referred to comments in that speech that the amendment would exclude 'claims arising from the non-core mortgage and investment activities of solicitors'[38] while continuing to cover defalcations arising from direct mortgages where the solicitor's only involvement is limited to drawing up mortgage documentation and defalcations arising from investment that is merely incidental to practice as a solicitor.
100 The appellants also relied upon comments made in the second reading speech to the bill for the 1998 amending Act that '[i]t is not appropriate ... for the fidelity fund to act as an insurer or guarantor of bad business or investment risks and decisions taken by a client'.[39]
101 The appellants submitted that the words 'for the purpose of investment ... by the practitioner' were chosen by Parliament for the reasons apparent from the second reading speeches preceding the 1995 and 1998 amending Acts, and that effect must be given to all of those words.
102 The Board submitted that when the exception in s 208(3)(b) was introduced by the 1995 amending Act, the two-limbed form of the exception (that is, including both paragraphs (a) and (b)) was necessary because Parliament wished investment in direct mortgages[40] to remain covered by the Fund in the form of an exception within paragraph (a). If not for that fact, it was said, paragraph (a) would not have been necessary. The Board submitted that there is nothing in the extrinsic materials to indicate that the replacement of the 1958 Act by the 1996 Act was intended to change the effect of the exclusions, even though there were some drafting changes. It submitted that, while the term 'nominee mortgage' was introduced, it was defined in a way which effectively provided that direct mortgages did not fall within the exclusion.
103 The Board also referred to the statements in the second reading speech to the bill for the 1998 amending Act set out in [100] above and relied upon the following additional statements:
The aim of [the 1995] amendments was to ensure that where money was given to a solicitor for the purpose of making an investment - for instance, to earn income or obtain other direct or indirect financial benefits - the loss of such money, with certain stated exceptions, would not found a claim on the fund. The current amendments confirm and clarify that earlier objective.[41]
104 The Board submitted that the 1998 amendments broadened the scope of the exclusion to catch any money given to a legal practitioner 'for the purpose of investment or re-investment'.
105 In my opinion, as the meaning of s 208(3)(b) of the 1996 Act is clear and the second reading speeches that the parties have taken us to are equivocal, they do not provide a basis for adopting any other meaning.
106 In relation to whether the investments were merely incidental to Mrs Laird's legal practice within the meaning of s 208(3)(b)(i), the trial judge said:
I should, perhaps for completeness, also indicate that I do not regard the defalcation as arising from investment or reinvestment which was "merely incidental to the legal practice engaged in by" Mrs Laird. On no view of the facts am I able to regard the relationship between Mrs Laird and the plaintiffs as that of solicitor and client other than in connection with the primary activity of an investment or reinvestment of funds. Mrs Laird had not previously acted as solicitor for the plaintiffs and had, it seems, met only once with Gerald Vaughan. The connection between them arose when Mrs Laird wrote to Mr [O'Loughlin], who happened to be the accountant for the plaintiffs, on 13 December 2000 informing him of "an opportunity" to place bridging finance for a short period of time. That letter was sent by the accountant to Mr Vaughan. On 22 December 2000 Mrs Laird wrote directly by facsimile transmission to Mr Vaughan repeating that she had an opportunity to place funds at favourable interest rates which she said she was authorised to negotiate. The handwritten notes of discussions between Mr Vaughan and Mrs Laird make it clear that the primary relationship between her and the plaintiffs was for the investment of money at a profit and not by way of any general or specific retainer as a solicitor. Any legal work she undertook was, at best, incidental to the primary activity of placing funds for investment rather than vice versa.[42]
107 The appellants submitted that the services provided by Mrs Laird were in the course of her legal practice, and the moneys were given to her merely so that she could draw down from her trust account when she had completed the legal work and issued the solicitor's certificate. They contended that what Mrs Laird did with the money was merely incidental to the work she performed as the lender's solicitor. They characterised the trust account as 'a mere conduit through which funds were to be paid by the appellants to purported borrowers for the purpose of making the investments which were the subject of the legal advice and legal services'.
108 In my opinion, the appellants' submissions downplay the importance of the investment services purportedly provided by Mrs Laird and exaggerate the significance of the legal services. For the reasons already discussed, the services offered by Mrs Laird were predominantly investment services. While she also provided legal services which were an important component of the overall 'package', on no view could the investment services be described as merely incidental to the legal services.
109 The word 'incidental' in s 208(3)(b)(i) makes it clear that what the exception covers are investments or reinvestments which are not made by a practitioner as a primary purpose of his or her engagement by the client but as secondary or subordinate to, or supportive of, another service of a legal nature being provided by the practitioner. The adverb 'merely' serves to emphasise that the investment or re-investment must be an outlying, rather than the pivotal, feature of the practitioner's retainer. A typical situation falling within s 208(3)(b)(i) would be where the client pays money into the practitioner's trust account in anticipation of settlement of legal proceedings or the purchase of a property and the funds are invested by the practitioner at the request of the client pending the settlement.
110 The above situation has no resemblance to the present case. The appellants gave the money to Mrs Laird for the primary purpose of investment in the mortgage investment scheme she was promoting, and not incidentally to any legal work she was performing for them. The appellants had funds available and were looking to obtain a good return for them. Mrs Laird's scheme provided them with investment opportunities with attractive interest rates and the appellants transferred funds to her in order to take advantage of those opportunities. The legal services that Mrs Laird provided arose out of the investment services that she provided and facilitated the making of the investments. The investments, however, were neither secondary or subordinate nor 'merely incidental' to the legal services.
111 For the above reasons, the judge was right to conclude that Mr Vaughan and Ms Ralph were not entitled to claim on the Fund by virtue of s 208(3)(b) of the 1996 Act and to dismiss the proceeding.
112 I would dismiss the appeal. Subject to hearing from the parties, I would order that the appellants pay the Board's costs of the appeal.
[1] Vaughan v Legal Services Board [2008] VSC 200 ('Reasons').
[2] Mrs Laird was the second defendant. On 19 July 2002, judgment for damages to be assessed was entered against her. She became a bankrupt on 16 December 2003. On 14 July 2003, the auditor of Mrs Laird's trust account was added as a defendant. This claim was settled and eventually discontinued on 6 December 2007.
[3] These amounts were calculated for each of Mr Vaughan and Ms Ralph as follows. The starting amount was the total amount provided to Mrs Laird. From that starting amount was then subtracted: amounts received from Mrs Laird; distributions from the receiver of Mrs Laird's trust account; and amounts received from the auditor of Mrs Laird's trust account following settlement of the claim against the auditor.
[4] (1997) 77 FCR 1, 14-15 ('Gray').
[6] Reasons, [8]-[10] (citations omitted).
[8] [2007] NSWCA 337 ('Carr').
[9] (1997) 77 FCR 1, 14-15.
[10] (1997) 77 FCR 1, 18.
[11] [1980] FCA 112; (1980) 32 ALR 221, 240, cited at (1997) 77 FCR 1, 36-7.
[12] (1997) 77 FCR 1, 48-9.
[13] (1997) 77 FCR 1, 49-50.
[14] [2007] NSWCA 337, [44].
[15] [2007] NSWCA 337, [50].
[16] [2007] NSWCA 337, [48].
[17] [2007] NSWCA 337, [47].
[18] [2007] NSWCA 337, [48].
[19] [2007] NSWCA 337, [49].
[20] [2007] NSWCA 337, [52]-[53] (citation omitted).
[21] [2007] NSWCA 337, [64], [65], [68], [76] (citation omitted).
[22] The appellants relied on Baker v Law Institute of Victoria [1974] VicRp 48; [1974] VR 388, 395-6; Law Institute of Victoria v Baker [1974] 48 ALJR 160; Heraudeau v Law Institute of Victoria [1991] VicRp 88; [1991] 2 VR 518, 523-5; and Weston v Registrar General (NSW) [2002] NSWSC 173, [17].
[23] The Board, in its written submissions, analysed the authorities relied on by the appellants and contended that those authorities, other than Weston, do not support the existence of a subjective test.
[24] See Carr [2007] NSWCA 337, [50].
[25] Carr [2007] NSWCA 337, [48](e), (f).
[26] Carr [2007] NSWCA 337, [65]. See s 314 of the 1996 Act and Felman v Law Institute of Victoria [1998] 4 VR 324, 349-52.
[27] Carr [2007] NSWCA 337, [48](d).
[28] Carr [2007] NSWCA 337, [48](a), [70].
[29] Gray (1997) 77 FCR 1, 50; Carr [2007] NSWCA 337, [48](c), [75].
[30] Carr [2007] NSWCA 337, [48](b).
[33] The appellants qualified this submission by saying that it was only in exceptional circumstances, such as where there was a joint venture between practitioner and client, that the investment could simultaneously be by both parties.
[34] French v Queensland Premier Mines Pty Ltd [2006] VSCA 287, [32].
[36] Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355, 382 [71].
[37] Australian Securities and Investments Commission v DB Management Pty Ltd [2000] HCA 7; (2000) 199 CLR 321, 340 [42].
[38] Victoria, Parliamentary Debates, Legislative Assembly, 26 October 1995, 904 (Jan Wade, Attorney-General).
[39] Victoria, Parliamentary Debates, Legislative Assembly, 3 September 1998, 198 (Jan Wade, Attorney-General).
[40] 'Direct mortgage' was relevantly defined in s 51(1) as a mortgage in relation to which either the mortgagee was a financial institution or the lender and the mortgagor were the only parties to the mortgage document.
[41] Victoria, Parliamentary Debates, Legislative Assembly, 3 September 1998, 198 (Jan Wade, Attorney-General).
Vaughan & Anor
Legal Services Board [2009] VSCA 187
(1997) 77 FCR 1
(1980) 32 ALR 221
(1998) 194 CLR 355
(2000) 199 CLR 321