HIGH COURT OF AUSTRALIA
GLEESON CJ,
GAUDRON, KIRBY, HAYNE AND CALLINAN JJHARRY KEVIN McCANN (for himself and
representing each of the persons identified in
Schedule 1 to the notice of appeal) APPELLANTAND
SWITZERLAND INSURANCE
AUSTRALIA LIMITED & ORS RESPONDENTSMcCann v Switzerland Insurance Australia Limited
[2000] HCA 65
14 December 2000
S229/1999ORDER
Appeal dismissed with costs
On appeal from the Supreme Court of New South Wales
Representation:
A J Meagher SC with I McN Jackman for the appellant (instructed by Allen Allen & Hemsley)
N J Young QC with J T Gleeson for the respondents (instructed by Phillips Fox)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
CATCHWORDS
McCann v Switzerland Insurance Australia Limited
Insurance – Professional indemnity insurance – Exclusion for liability brought about by dishonest or fraudulent act or omission of the assured – Loss to client of the appellant – Claim against professional indemnity policy – Whether respondents entitled to rely on the exclusion.
Words and phrases – "brought about by", "dishonest or fraudulent act or omission".
GLEESON CJ. The issue in this appeal concerns the meaning and effect of an exclusion clause in each of three policies of professional indemnity insurance.
The appellants, partners in the legal firm of Allen Allen & Hemsley ("Allens"), incurred civil liability to a client, Nauru Phosphate Royalties Trust, ("the Nauru Trust" or "the Trust"), in an amount which included the sum of $US8.7 million. The dispute concerns part of that sum, $US8.55 million. For reasons that will appear, there is no dispute as to the balance of $US150,000. The respondents, the insurers under the policies, are liable to indemnify the appellants against loss arising from any claims made against them during the relevant period in respect of any description of civil liability incurred in connection with their practice. The Nauru Trust made such a claim. It was settled on terms which gave Allens an entitlement to indemnity, subject to what follows.
Each policy contained an exclusion clause in the following terms:
"5(f)This Insurance shall not indemnify the Assured in respect of any liability:-
…
(v)brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured. Save that this exclusion shall not apply to liability arising out of any claim brought about by the dishonest or fraudulent act or omission of any person employed in connection with the Practice [including any articled clerk and any solicitor who is a Consultant or Associate with the Firm];
…"
Allens had a London office. At the relevant time, a partner (now a former partner) of the firm, Mr Powles, was in charge of that office. The sum of $US8.7 million was paid by the Nauru Trust into a bank account in London in the name of Allens which Mr Powles maintained and controlled without the knowledge of his partners. The Trust erroneously believed it was an Allens trust account. Mr Powles and two other persons arranged between themselves to take secret commissions in respect of the transaction in a total of $US150,000. Mr Powles later applied the sum of $US150,000 for that fraudulent purpose. To that extent, Allens' entitlement to indemnity is excluded by cl 5(f). The issue is as to the balance of $US8.55 million; but the fraudulent misapplication of $US150,000 is not irrelevant to that issue.
The detailed facts of the case are set out in the reasons for judgment of Hayne J.
The liability which Allens incurred to the Nauru Trust in respect of the amount of $US8.55 million is not in dispute. However, in order to consider the operation of the insurance policies it is necessary to identify the basis of that liability.
As appears from the facts recounted by Hayne J, the Trust had been induced to invest $US8.7 million to purchase an "instrument" (a letter of credit) with a face value of $US10 million. The "market" in which this transaction was to be entered into was fictitious; but the trial judge, Hunter J, found that Mr Powles believed in it. He sought to take advantage of it, not only to make profits for his clients, but also to obtain secret commissions for himself. His need for money arose from a series of previous defalcations.
The Nauru Trust was introduced to the transaction by Linpar Ltd. That company, in turn, had the support of a reference and commendation from Mr Powles on Allens' letterhead. It is plain that the Trust relied, and was entitled to rely, upon the standing and reputation of Allens, and believed that the fact that its investment would be made through the medium of an Allens trust account gave it protection. The Court of Appeal found, correctly, that the duty of Mr Powles, as solicitor for the Nauru Trust, "was to ensure that the funds [US$8.7 million] were used only for the purpose of acquiring the letter of credit and to safeguard the funds pending delivery of the instrument or security."
In breach of that duty, Mr Powles instructed his bank to transfer $US8.55 million to an account in the name of one Glasby with Barclays Bank. He received no letter of credit or other security in return. He lost control of the funds at that time. Thereafter the $US8.55 million passed through other accounts, over which Mr Powles had no control, into and through the Swiss banking system. They were never recovered. The Nauru Trust never received any letter of credit. As was noted above, the balance of $US150,000 was misappropriated by Mr Powles for himself and others.
The Court of Appeal made the following findings, which were not challenged on appeal to this Court (although the characterisation of Mr Powles' conduct based on the findings was disputed).
"There is no room for any doubt that Powles received the US$8.7 million from the Nauruan Trust and paid away US$8.55 million of it in serious conflict of interest and in breach of trust. His duty was to ensure that the funds were used only for the purpose of acquiring the letter of credit and to safeguard the funds pending delivery of the instrument or security. However, Powles' self-interest was to obtain a transaction so he could earn commissions in fraud of his partners on this and, he hoped, subsequent transactions. The trial judge was correct to characterise Powles' conflict as exacerbated by his great need for substantial funds to cover his fraud of clients' trust moneys and to say that his propensity was to prefer his own interest to that of the Trust if they clashed. …
As Hunter J found, the moneys were paid away by Powles with undue haste and with no attempt whatsoever to check the credentials of [the recipient]. …
On consideration of all the relevant evidence, the irresistible conclusion to which we are driven is that Powles must have appreciated the real risk of loss of the moneys."
Both Hunter J and the Court of Appeal found that Mr Powles was dishonest. To that finding it will be necessary to return.
The Court of Appeal went on:
"Further, Powles was in breach of his fiduciary duty to the Trust in the manner in which he paid away the funds. He failed to ensure that he retained control over the funds without obtaining the required bank instrument. In this regard, he failed to safeguard the funds pending delivery of the instrument. Powles parted with control of the funds in circumstances where he knew (or must have known) that he was placing them at a real and considerable risk of loss. He must have known that parting with the funds, without having acquired the instrument, would seriously endanger any successful recovery of the moneys."
The arguments for the appellants commenced by seeking to draw a sharp distinction between the liability of Allens to the Nauru Trust in respect of $US8.55 million and the liability in respect of $US150,000. The respondents described this distinction as artificial. It is understandable that Allens should resist the notion that the attempt by Mr Powles and his associates to misappropriate $US150,000 should deny them insurance cover in respect of the loss of $US8.55 million. However, as the findings of the Court of Appeal show, there is a relationship between the amounts, and the various aspects of Mr Powles' behaviour, that cannot be disregarded.
As to the liability in respect of the $US8.55 million, it is denied that the acts and omissions which brought about the liability were dishonest or fraudulent. This was treated as giving rise to two questions. Was the conduct of Mr Powles in relation to the $US8.55 million dishonest or fraudulent? If so, was there a sufficient connection between the dishonesty or fraud and the liability of Allens to the Nauru Trust to lead to the conclusion that the liability was brought about by the dishonest or fraudulent act or omission?
The first question is to be considered in the light of the findings of fact set out above. It is also to be considered in the light of an understanding of Mr Powles' fiduciary responsibilities. What was involved was not merely a negligent payment away of moneys entrusted to him by a client. What was involved was a misapplication of such moneys, in disregard of the client's interests, and in pursuit of his own, conflicting, interests.
The principle that a solicitor "shall not be permitted to make a gain for himself at the expense of his client" was said by the Lord Chancellor, Lord Westbury, in Tyrrell v Bank of London[1], to be one strictly requiring a faithful and honourable observance. In Law Society of NSW v Harvey[2] the Court of Appeal of New South Wales observed that an appreciation of a solicitor's duty not to prefer his or her interest to that of the client rests, not upon some technical instruction, but upon understanding and applying the ordinary concepts of fair dealing. It was said of the solicitor's conduct in that case[3]:
"He recklessly disregarded the need to protect his clients' property, by failing to provide adequate securities. Moneys were invested in ventures, upon securities, or with the lack of them, and upon terms that no reputable solicitor acting independently could have contemplated. So investing clients' moneys and advising and permitting clients to so invest was not due to any lack of commercial or legal experience, but to the pressure of his own self interest. …
Although the moneys of clients were, for the most part, applied in the form of loans and fell within the general or particular discretion which the defendant extracted from his clients, there is little to distinguish much of the defendant's conduct in point of moral culpability from that found in a misappropriation of clients' moneys for use in a solicitor's private speculative ventures, with the intent of restoring the same upon the expected success of the ventures".
[1](1862) 10 HLC 26 at 39, 44 [11 ER 934 at 940, 941].
[2][1976] 2 NSWLR 154 at 170.
[3][1976] 2 NSWLR 154 at 172-173.
The same can be said of the present case. Mr Powles did not intend that the Nauru Trust should lose the $US8.55 million. But he paid it away, in breach of his fiduciary responsibilities, without proper (or any) security, knowing there was a risk of its loss, and impelled by his own need for money. He preferred his personal interests to those of his client. He permitted his urgent need to make a secret commission to prevail over his duty to protect his client's funds. The Court of Appeal was right to find that his conduct in relation to the entire $US8.7 million was obviously dishonest and probably fraudulent.
The next question is whether there was sufficient causal connection between the liability of Allens to the Nauru Trust in relation to the amount of $US8.55 million and the dishonest or fraudulent act or omission by Mr Powles to lead to the conclusion that the liability was brought about by the dishonest or fraudulent act or omission.
A negative answer to that question does not follow from the circumstance that there were also dishonest or fraudulent acts of third parties which resulted in the disappearance of the funds after they left Mr Powles' bank account[4]. The money was not lost to the Trust because it was embezzled by some fraudulent employee of Mr Powles' bank. The misapplication of the money by Mr Powles placed it at risk. His fiduciary obligation was to deal with the money in the interests of his client, disregarding his own conflicting interests. Execution of that duty required keeping the money under his control until his client obtained the security in which it was investing. There was a direct causal connection between his dishonest and fraudulent breach of that obligation and the liability of Allens to the Nauru Trust. The liability resulted from the breach of duty. The breach of duty was not merely negligent. The acts and omissions constituting the breach were dishonest and fraudulent.
[4]Maguire v Makaronis (1997) 188 CLR 449 at 470 per Brennan CJ, Gaudron, McHugh and Gummow JJ.
It was submitted for the appellants that, in a case where a dishonest act was not of itself sufficient to bring about the loss resulting in liability to the client, then the exclusion clause will only apply if the act was intended to result in such loss. On this argument, liability is only brought about by a dishonest or fraudulent act or omission if it results, without any intervening or additional cause, from the act or omission, or if there is such an intervening or additional cause, the loss was intended by the partner whose act or omission is in question.
Solicitors and other fiduciary agents who fraudulently misapply moneys of their clients often expect, or hope, that no loss will ultimately result to the client. If loss results, that places them at risk of exposure. As was indicated in Law Society of NSW v Harvey[5], a common case of fraudulent misappropriation is one involving use of a client's money in a solicitor's private speculative venture, with the intent of restoring the money upon the success of the venture. Liability resulting from such conduct might be expected to be in the contemplation of the parties to policies of the kind presently in question. The loss giving rise to such liability would usually require some intervening or additional cause, such as the failure of the solicitor's venture. And the solicitor would rarely intend that loss should result.
[5][1976] 2 NSWLR 154 at 173.
A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation[6]. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure[7].
[6]Hydarnes Steamship Co v Indemnity Mutual Marine Assurance Co [1895] 1 QB 500 at 504 per Lord Esher MR.
[7]Lake v Simmons [1927] AC 487 at 509 per Viscount Sumner.
The language of the exclusion clause does not require the interpretation for which the appellants contend. They seek to read into it words that are not there. Furthermore, for the reasons given above, the liability of a solicitor to a client brought about by a dishonest or fraudulent act will frequently arise in circumstances where the solicitor did not intend that there should be loss to the client, and where there were additional causes of the loss. If the clause had the meaning for which the appellants contend, it would not apply to common cases of liability involving fraudulent misapplication of a client's funds. Such cases form part of the ordinary circumstances which a clause such as this is likely to have been intended to address. To give it the appellants' construction does not make business sense.
The exclusion clause applies. The appeal must be dismissed with costs.
GAUDRON J. The question in this appeal is whether the respondents, which companies were, at the relevant time, the excess professional indemnity insurers of the appellants, the partners of Allen Allen & Hemsley ("Allens"), are entitled to rely on exclusion clauses contained in the insurance policies issued by them. As the policies are in identical form, it is convenient to proceed as if there were but one insurer, one policy and one exclusion clause.
The policy and the exclusion clause
Under the policy, the insurer agreed, subject to terms and conditions, to indemnify Allens "against all loss ... in respect of any description of civil liability whatsoever incurred in connection with the Practice". The exclusion clause in issue in this appeal relevantly provides:
"This Insurance shall not indemnify the Assured in respect of any liability:-
...
(v)brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured".
It is not in issue that, for the purposes of the policy, Allens suffered a loss by reason of their civil liability to the Nauru Phosphate Royalties Trust ("Nauru Trust"). Nor is it in issue that that liability arose directly out of the acts and omissions of one of their partners, Ronald Adrian Powles. The only question in this appeal is whether their liability was "brought about by [a] dishonest or fraudulent act or omission" on his part.
The facts
A detailed account of the facts is set out in other judgments and they are repeated only to the extent necessary to make clear my reasons for holding that this appeal should be dismissed.
In 1989, Mr Powles became Allens' resident partner in London. By that stage, he had already defrauded a number of his clients. His fraudulent behaviour continued in London in 1990 and 1991 and, as Hunter J found at first instance[8], "the extent of [his] defalcations as at the end of 1991 ... left him in need of several million dollars, if his frauds were to remain concealed."
[8]McCann v Switzerland Insurance Australia Ltd unreported, Supreme Court of New South Wales, 26 June 1998.
Allens maintained two bank accounts in London for the working needs of their London office. Neither was to be used as a trust account. Without authority from his partners, Mr Powles opened a third account in Allens' name in December 1990. That account has come to be known as "the US dollar account" and it is convenient to refer to it as such. The account was not a trust account and Mr Powles had no authority from his partners to open it or operate upon it.
Mr Powles used the US dollar account for a number of financial transactions, including attempts to purchase a prime bank instrument ("pbi"). Many, if not all, of those attempts were undertaken at the request of or on the instructions of a Mr Madden or companies with which Mr Madden was associated. One of those companies was Linpar Limited ("Linpar"). None of the attempts to purchase a pbi was successful and, in some cases, money was lost. Moreover, in the course of those attempts, Mr Powles became aware of the existence of fraudsters operating in the pbi market.
From August 1991, there was an arrangement between Mr Powles and Mr Madden that, in relation to any purchase of a pbi, Allens would be paid for legal services and Mr Powles would be paid $US100,000 for his "personal contribution". At first instance, Hunter J characterised that arrangement as one involving a "secret commission" payable to Mr Powles and, in that respect, a fraud on his partners.
Some time prior to December 1991, Mr Madden and Linpar put forward a proposal, or, perhaps, a series of proposals, to the Nauru Trust for it to invest in the pbi market. The proposal that ultimately evolved was one in which Linpar would purchase pbis with moneys paid by the Nauru Trust to Allens' London office. The Nauru Trust was given details of the number of the US dollar account for that purpose.
The Nauru Trust ultimately decided to proceed with Mr Madden's proposal. For that purpose, it caused $US8.7 million to be paid into the US dollar account on 23 December 1991. That money was to be used for the purchase by Linpar of a pbi in the form of a standby letter of credit with a face value of $US10 million. The letter of credit was to be sold within a short period and the proceeds "rolled over" in successive transactions in the pbi market. It was also envisaged that other payments would be made by the Nauru Trust to the US dollar account and would be utilised in the same manner.
As already pointed out, there was an agreement between Mr Powles and Mr Madden that Mr Powles would receive a secret commission of $US100,000 in connection with the purchase of each pbi. There is evidence to suggest that the agreed secret commission on each purchase for the Nauru Trust may have been $US150,000. There was no precise finding to this effect at first instance, but Hunter J held that that evidence "confirmed [Mr] Powles' financial interest in the dealing, over and above any legal fee entitlement".
The Nauru Trust later made other payments to the US dollar account for the purpose of other transactions. From those moneys, Mr Powles made a number of dishonest or fraudulent withdrawals. This appeal relates solely to the sum of $US8.7 million paid on 23 December 1991 and not to any other amount subsequently deposited by the Nauru Trust in the US dollar account.
The appeal is in fact concerned only with the sum of $US8.55 million. Mr Powles authorised the payment of that sum out of the US dollar account for the purpose of purchasing a standby letter of credit in the name of the Nauru Trust. However, no letter of credit was obtained. Rather, the money was stolen by third parties. The remaining $US150,000 was withdrawn from the US dollar account for the payment of secret commissions and is not the subject of this appeal.
It is important to note certain events between the payment of the $US8.7 million into the US dollar account on 23 December 1991 and 15 January 1992. During that period, there was an unsuccessful attempt by Linpar or those associated with that company to purchase a pbi in the name of the Nauru Trust. In the course of that attempt, Mr Powles authorised the payment out of $US8.525 million from the US dollar account. It was subsequently transferred back into that account on 13 January 1992. The detail of that attempt was not communicated to the Nauru Trust. On the contrary, on 16 January 1992, Mr Powles informed the Nauru Trust, by facsimile, that a pbi had, in fact, been purchased when that was not the case. Moreover, it was held at first instance that that statement did not represent "a truthful expression of [Mr Powles'] understanding of the state of the transaction".
It was on 15 January 1992, the day prior to the dishonest facsimile to the Nauru Trust, that, in a final unsuccessful attempt to purchase a standby letter of credit, Mr Powles authorised the transfer of $US8.55 million to Barclays Bank for ultimate transmission to the Commonwealth National Bank in Antigua. As a result of incorrect information as to the number of the Barclays Bank account to which that money was to be paid, the money was not transferred until 17 January. It did not arrive in Antigua. It was stolen by third parties on or after 28 January 1992 when it left the English banking system and entered the Swiss banking system.
The decision at first instance
It seems likely that no pbi market ever existed. However, it was found by Hunter J at first instance that, notwithstanding Mr Powles' earlier unsuccessful attempts to enter that market, he believed in its existence at all relevant times and believed, also, that substantial profits were to be made by investing in it. His Honour also found that Mr Powles did not intend to cheat or defraud the Nauru Trust of the $US8.55 million transferred out of the US dollar account on 17 January 1992. However, his Honour found that he was in breach of his duty "to ensure that proper safeguards were in place to protect those funds from loss and to ensure the[ir] application ... for the purpose only of the acquisition of the required financial instrument."
Mr Powles' failure to protect the funds from loss was, in the view of Hunter J, dishonest but not fraudulent. It was dishonest, in his Honour's view, because the manner in which and the terms on which Mr Powles authorised their payment out of the US dollar account "were the product of [his] overriding self interest in seeing the transaction proceed". And that was so notwithstanding that, in his Honour's view, Mr Powles "believed that the payment away of the funds was conditional upon the acquisition of the required letter of credit" and did not know "that he was 'imperilling or gambling' with the Nauruan Trust's money."
Although Hunter J held that Mr Powles was dishonest in authorising the payment of $US8.55 million out of the US dollar account, in the sense explained, he concluded that that conduct did not bring about Allens' liability. Rather, in his Honour's view, "that liability ... was brought about by the calculated fraud" of those who stole the money. In so concluding, his Honour distinguished between "proximate cause and other causative factors" and construed the exclusion clause as operating only where the dishonest or fraudulent act or omission of a solicitor is the proximate cause of liability. In the result, his Honour held the insurer liable to indemnify Allens in the sum of $US8.55 million.
Before leaving the decision at first instance, it is important to note one other finding made by Hunter J. The finding was in these terms:
"I accept that, had [Mr] Powles informed the Nauruan Trust that (a) doubt hung over the ability of Linpar to effect the transaction, or (b) he was not aware of any transaction of a like nature in which Linpar had successfully obtained a prime bank instrument, or (c) he had been associated with numerous attempts to obtain such an instrument, all without success, and in some cases with the loss of fees, the Nauruan Trust would not have been interested in parting with its funds in the first place."
However, his Honour seemed to think that that was of no relevance to the issue to be decided because "that was true of [Mr] Powles' conduct long before 17 January 1992." Seemingly, his Honour was of the view that the act giving rise to Allens' liability to the Nauru Trust occurred on that day when the sum of $US8.55 million was transferred out of the US dollar account.
The decision of the Court of Appeal
The Court of Appeal held that Hunter J was correct to find that Mr Powles' conduct in authorising payment of the $US8.55 million out of the US dollar account was dishonest[9]. However, the Court of Appeal went further. It was of the view that Mr Powles knew that, in so doing, "he was placing the Trust's moneys at considerable risk."[10] Additionally, the Court of Appeal held:
"He treated the Trust in what can only be seen as a blatantly dishonest fashion, deliberately concealing information from it and intentionally concealing the truth in his reports to it. He made no disclosure to the Trust about the commissions he stood to make. [Mr] Powles also participated in arrangements for others to receive secret commissions out of his bank account. This was also kept from the Trust."[11]
This conduct was characterised by the Court of Appeal as a breach of trust and a breach of fiduciary duty, which breaches were held to be "dishonest and probably fraudulent."[12]
[9]Switzerland Insurance Australia Ltd v McCann (1999) 10 ANZ Insurance Cases ¶61-446.
[10](1999) 10 ANZ Insurance Cases ¶61-446 at 75,117 [65].
[11](1999) 10 ANZ Insurance Cases ¶61-446 at 75,118 [69].
[12](1999) 10 ANZ Insurance Cases ¶61-446 at 75,118 [70].
The Court of Appeal further held that Allens' liability was brought about by Mr Powles' dishonest breaches of his trust and fiduciary duties "[i]n allowing the funds to leave the English banking system on or about 15 January 1992, in the circumstances that [he] did"[13]. In so holding, the Court of Appeal emphasised that the exclusion clause is relevantly concerned with liability brought about by dishonest conduct, not loss caused by that conduct[14]. And that being so, there was no basis for treating that clause as concerned simply with dishonest conduct which is the real or proximate cause of the loss covered by the policy.
[13](1999) 10 ANZ Insurance Cases ¶61-446 at 75,121 [92].
[14](1999) 10 ANZ Insurance Cases ¶61-446 at 75,121 [91].
In the result the Court of Appeal allowed the appeal of the respondent companies and entered judgment in their favour[15].
[15](1999) 10 ANZ Insurance Cases ¶61-446 at 75,121 [97].
Causation: "brought about by"
In this Court, counsel for the appellants noted that, in various sub-clauses, the causal connections which activate the exclusion clause are expressed in significantly different terms. Thus, those sub-clauses relevantly refer to "liability ... for damages arising from death, bodily injury, physical loss or physical damage to property"[16], "liability ... arising from a contract other than a contract to provide services"[17], "liability ... directly or indirectly caused by or contributed to by, or arising from [radioactivity]"[18], "liability ... incurred in connection with a practice conducted wholly outside" certain named States and Territories[19] and, "liability ... incurred by the Assured in his capacity as an insurance agent."[20]
[16]Clause 5(f)(i).
[17]Clause 5(f)(ii).
[18]Clause 5(f)(vi).
[19]Clause 5(f)(vii).
[20]Clause 5(f)(viii).
By reference to the different causal connections specified in the exclusion clause, it was argued for the appellants that the expression "brought about by" signifies something more than conduct "which merely initiates or contributes to the relevant sequence of events without intentionally achieving the ultimate consequence".
Certainly, the different expressions used in the various sub-clauses of the exclusion clause convey different shades of meaning or different degrees of causal connection. This notwithstanding, each sub-clause must be read as a whole and read in its own particular context. One thing, however, is common to each of those sub-clauses: as the Court of Appeal pointed out, the sub-clauses are concerned to specify a causal connection between particular acts or events and the liability of the insured, not with the loss sustained.
It may well be that Allens' loss was sustained only when they could no longer recover the money paid out of the US dollar account (ie when the money was stolen by third parties) and, in that sense, their loss was caused by the actions of somebody other than Mr Powles. But that is not the issue posed by the sub-clause in issue in these proceedings. What that sub-clause postulates is "liability ... brought about by [an] ... act or omission". And there can be no doubt that Allens' liability to the Nauru Trust was brought about by the acts and/or omissions of Mr Powles. Once that is accepted, as it must be, the only question is whether it can be said that that liability was brought about by his "dishonest or fraudulent act or omission". And that requires an analysis of the basis of Allens' liability to the Nauru Trust.
Before turning to consider the basis of Allens' liability to the Nauru Trust, it is convenient to note one other argument advanced on behalf of the appellants. It was put that the exclusion clause does not apply where "what was 'brought about' by a partner of the insured was only a risk of loss [and] the actual loss was brought about by ... unintended theft ... by another person". Again, that argument fails to recognise that the exclusion clause is concerned with defining the circumstances in which liability arises, not the circumstances in which loss occurs. However, there is another and more fundamental reason why that argument must be rejected.
If a person breaches a legal duty to protect or warn another against a foreseeable risk of harm at the hands of a third party or, even, from a random occurrence, and, if that risk eventuates, it is contrary to common sense to treat that eventuality as having been "brought about" by that third party or, even, by happenstance. That is because, when questions of causation arise in a legal context, they are answered "in the legal framework in which they arise"[21] and not by reference to philosophical or scientific notions of causation[22]. To put the matter another way, it would be absurd for the law to impose a duty to protect or warn against a risk from a third party or an external force and, at the same time, allow that, in the event of breach, no liability attaches because the event in question was brought about by external force or by the third party.
[21]Chappel v Hart (1998) 195 CLR 232 at 238.
[22]See March v Stramare (E & M H) Pty Ltd (1991) 171 CLR 506 at 509, 515 per Mason CJ, 522-523 per Deane J. See also Fitzgerald v Penn (1954) 91 CLR 268 at 277 per Dixon CJ, Fullagar and Kitto JJ; The National Insurance Co of New Zealand Ltd v Espagne (1961) 105 CLR 569 at 591 per Windeyer J; Bennett v Minister for Community Welfare (1992) 176 CLR 408 at 428 per McHugh J.
It may be that the law does not often impose a duty to protect or warn another against a risk of harm at the hands of third parties or the risk of random occurrences. Chappel v Hart was such a case, the duty imposed in that case being a duty on the part of a medical practitioner to warn against the random risk of infection and its possible consequences[23].
[23](1998) 195 CLR 232.
The present is a case in which there was a duty to protect or warn against the risk of harm at the hands of third parties. In this respect, it is sufficient to note that if there was no duty on the part of Mr Powles to protect or warn the Nauru Trust against the risk of its funds being stolen, no liability attached to Allens. And if there was such a duty, it necessarily follows, in a legal context, that Allens' liability was brought about by breach of that duty. As it is not in issue that Mr Powles was under a duty to protect the funds of the Nauru Trust from the risk of being stolen and that he breached that duty, the only question is whether the act or omission constituting that breach was dishonest.
Dishonesty: dishonest omission
Dishonesty is an ordinary concept, not a term of art. It is, on that account, difficult to define in any comprehensive manner. However, dishonesty is a matter to be determined by reference to the mental state of the person whose conduct is in issue. It was pointed out in Peters v The Queen that "in most cases where honesty is in issue, the real question is whether an act was done with knowledge or belief of some specific thing or with some specific intent"[24]. That statement was concerned with positive acts, not with omissions.
[24](1998) 192 CLR 493 at 503 [16].
Leaving aside the situation in which there is an honest claim of right[25], the question whether a failure to act is dishonest is usually answered by considering whether that failure was motivated by a desire to conceal the truth or to obtain an advantage to which the person concerned knew he or she was not entitled.
[25]See Walden v Hensler (1987) 163 CLR 561.
There are, in my view, some difficulties with the notion that Mr Powles was dishonest in undertaking the positive act of authorising the payment out of the US dollar account of $US8.55 million on the basis found by Hunter J. And the difficulty remains whether his actions in that regard are viewed as a positive act, namely, the payment out of that money, or as an omission, namely, the failure to ensure that the money would only be paid away in exchange for a standby letter of credit.
So far as the positive act of payment out is concerned, it was done to effect the very purpose authorised by the Nauru Trust. That being so, it cannot be said to be an act which Mr Powles should not have undertaken, much less one that he knew he should not have undertaken. Nor can it be said that it was done with intent to deprive the Nauru Trust of the money involved. And even if Mr Powles was in part motivated by his desire to earn a secret commission, it is difficult to see that that, in itself, made the payment out dishonest when it was undertaken for the very purpose which the Nauru Trust intended.
So far as there was an omission by failure to ensure that the moneys would only be paid away in exchange for a standby letter of credit, the difficulties lie in the findings of Hunter J that Mr Powles believed that his authorisation of the payment out was conditional upon obtaining a standby letter of credit and, also, did not believe that he was imperilling the funds of the Nauru Trust. And in those circumstances, it is also difficult to see that the underlying motive to earn a secret commission could warrant that omission being characterised as dishonest.
There is a further difficulty with a finding of dishonesty based on Mr Powles' failure to take some step to ensure that the moneys would only be paid away in exchange for a standby letter of credit. The precise step that should have been taken was not identified in the judgments below. It is, thus, impossible to determine the state of mind that accompanied that failure to act. More to the point, however, if there was, in fact, no pbi market, as would seem to have been the case, there was no step that could have been taken which would have achieved that end.
It does not follow that, because Mr Powles was not dishonest in the precise manner identified by Hunter J, the conduct which brought about Allens' liability to the Nauru Trust was honest. There can be no doubt that, as the solicitor engaged for the purpose of effecting the purchase of a pbi through the agency of Linpar, it was Mr Powles' duty to inform the Nauru Trust of his knowledge of the pbi market and, also, of Linpar's capacity to effect the purchase of a pbi. At the very least, he was under a duty to inform the Trust that he had not been associated with any transaction in which Linpar had been successful, that he had been associated with unsuccessful attempts which, in some cases, had resulted in the loss of moneys, and that he was aware that there were fraudsters operating in the market. Moreover, he should have informed the Trust of the unsuccessful efforts to purchase a pbi on its behalf between 28 December 1991 and 15 January 1992. He breached his duty to the Nauru Trust by paying away the moneys without informing it of those matters. That was an omission.
Moreover, the failure of Mr Powles to inform the Nauru Trust as to his knowledge of Linpar and of the pbi market and, also, of the unsuccessful attempt to purchase a pbi for it in the period prior to 15 January 1992 was a dishonest omission. That is because, as a solicitor, Mr Powles must have known that it was his duty to disclose those matters. And, on the facts found at first instance, it can only be concluded that he deliberately concealed those matters so that he could earn secret commissions from the involvement of the Nauru Trust in the pbi market.
Conclusion
The appeal should be dismissed with costs.
KIRBY J. The outcome of this appeal depends on the meaning of a phrase in an exclusion clause contained in policies of professional indemnity insurance. The key words of the clause are "brought about by". Consideration of this phrase has directed the attention of this Court, once again, to the "difficult topic of causation"[26]. Problems of causation have recently been considered by this Court in the context of the law of tort[27] and fiduciary duties owed by a professional person to a client[28]. It is necessary, in this matter, to address the issue as it is presented by contracts of insurance upon which the parties had agreed but about which they are now in dispute.
[26]Chappel v Hart (1998) 195 CLR 232 at 263 [86].
[27]Chappel v Hart (1998) 195 CLR 232. See also March v Stramare (E & M H) Pty Ltd (1991) 171 CLR 506 at 509-510.
[28]Maguire v Makaronis (1997) 188 CLR 449 at 468.
The facts, insurance policies and proceedings
The facts are sufficiently stated in the reasons of the other members of the Court[29]. So are the applicable provisions of the exclusion clause, the insuring clause[30] and other exclusion clauses with which the subject exclusion clause must be compared[31]. The issues are also stated in those reasons[32]. So is the history of the litigation[33]. In essence, the partners of a large legal firm, Allen Allen & Hemsley ("Allens"), who were indemnified by Switzerland Insurance Australia Ltd and other insurers ("the insurers") succeeded in their claim for indemnity before the primary judge, Hunter J, in the Supreme Court of New South Wales[34]. However, by a unanimous decision of the New South Wales Court of Appeal[35], they lost on appeal. Allens, by special leave, are now before this Court appealing against that Court's decision. They dispute the application of the exclusion clause and the basis upon which the Court of Appeal held that the insurers were entitled to deny them indemnity under the policies. I will not repeat any of the foregoing materials. I incorporate them all by reference.
[29]Reasons of Gleeson CJ at [2]-[9]; reasons of Gaudron J at [28]-[39]; reasons of Hayne J at [96]-[117]; reasons of Callinan J at [144]-[167].
[30]Reasons of Hayne J at [94]; reasons of Callinan J at [143]. See below at [82].
[31]Reasons of Callinan J at [200].
[32]Reasons of Hayne J at [95]; reasons of Callinan J at [143].
[33]Reasons of Gaudron J at [40]-[46]; reasons of Callinan J at [168]-[182].
[34]McCann v Switzerland Insurance Australia Ltd unreported, Supreme Court of New South Wales, 26 June 1998 ("reasons of Hunter J").
[35]Switzerland Insurance Australia Ltd v McCann (1999) 10 ANZ Insurance Cases ¶61-446. See reasons of Gleeson CJ at [10]-[12]; reasons of Gaudron J at [44]‑[46]; reasons of Callinan J at [173]-[182].
In this Court, there is a division of opinion. Callinan J would allow the appeal and restore the judgment of the primary judge. The other members of the Court would dismiss it. I agree in the conclusion of the majority. For my own part, I am not inclined to explain the meaning of the exclusion clause in terms of how the Nauru Phosphate Royalties Trust ("the Trust") could frame the claim against Allens and how such claim might be pleaded[36]. The exclusion clause is intended to operate as part of a commercial agreement between the parties without the necessity for litigation giving rise to pleading. But this is a minor point. Putting it to one side, I will explain why I agree in the conclusion that the appeal should be dismissed.
[36]Reasons of Hayne J at [127].
Common ground
The ultimate question for decision is quite a narrow one, but not without difficulty. It is narrow because of the high measure of agreement concerning the facts and the issues which those facts presented.
Thus, it was agreed that the miscreant London partner of Allens, Mr Adrian Powles, whose initiatives preceded (to use a neutral word) the losses suffered by Allens, committed many acts of dishonesty. He repeatedly stole money from clients of the firm. Moreover, because of his dishonesty, Mr Powles was constantly in need of new funds from other clients in order to cover his tracks. The bank account, opened and operated by Mr Powles with the Westpac Banking Corporation in London ("the US dollar account"), although bearing the name of Allens and appearing to clients to be a trust account of Allens, was nothing of the sort. It was a private account controlled by Mr Powles, basically for his own ends. Its creation would not have been possible but for his position as a partner of Allens. His creation and operation of the account was done dishonestly.
There was no contest about the finding of the primary judge that Mr Powles did not intend that the sum of $US8.55 million would be lost to the Trust. The primary judge considered that Mr Powles had accepted the transaction, into which he led the Trust, as unconventional but one that (despite already substantial evidence to the contrary) afforded the Trust the opportunity to gain "unusually high profits"[37]. The Trust was itself prepared to make those profits. The actions both of the Trust and of Mr Powles were contaminated by the unlawful and undisclosed purposes of an officer of the Trust, on the one hand, and of Mr Powles, on the other, to make substantial secret commissions. They aimed to do so by investing in prime bank instruments, a course which Mr Powles followed and in which he persisted to its predictable, and discreditable, loss to the Trust.
[37]Reasons of Hunter J at 126.
In the action brought by the Trust against Allens, it was not pleaded by the Trust that the loss suffered by the Trust was "brought about by" the dishonest or fraudulent act or omission of Mr Powles as a partner or former partner of Allens. There was no reason for the Trust to plead the claim in such a way. Nor was the Trust obliged to assume the additional burden of proving such an allegation. Unsurprisingly, perhaps, the claim was pleaded in terms of a breach of mandate, breach of fiduciary duty and negligence on the part of Allens. The Trust, whilst asserting (not unreasonably) that it was induced into the transaction by the high reputation of Allens, the deposit of the funds in Allens' "trust account" in London and "the professional indemnity cover that [Allens] undoubtedly provides"[38], was not concerned, as such, with Allens' entitlement to insurance indemnity. The liability of the insurers to partners of a legal practice indemnified by such insurance could not depend on the way in which the client formulated its claim against the legal practitioners[39].
[38]Letter from the Trust to Allens, 27 October 1992, set out in the reasons of Callinan J at [165].
[39]cf reasons of Hayne J at [127].
In the event, Allens compromised the claim brought by the Trust against them. No question arises in these proceedings as to the reasonableness of that compromise or as to its amount. Nor was it suggested that the insurers had any defence on the footing that they were not appropriately made aware of negotiation of the compromise[40]. This Court has not been concerned with possible questions of double insurance, having regard to the existence of other forms of indemnity relevant to the case. Nor has the Court been addressed on the liability inter se of the several insurers.
[40]cf Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603.
The precise identity of the ultimate recipients of the Trust's deposit in the US dollar account, when that fund finally moved from that account through the United Kingdom banks into the Swiss banking system, is not known. It was not claimed that Mr Powles himself was the ultimate recipient of the fund. But this much is clear. The fund was lost when it left the US dollar account. Allens were liable to the Trust in respect of that loss. Allens properly paid the Trust the amount now claimed against the insurers. The loss of the fund proved to be Mr Powles' ultimate undoing. This is usually the case for those who embark on such a course of deception and breach of trust.
General principles of construing the policies
The disputed phrase, "brought about by", is ambiguous. It imports notions of causation which are inherently disputable. The ambiguity is evidenced in the differences between the courts below and now in this Court. It is useful, therefore, to return to the basic principles which govern the resolution of such ambiguities.
In Johnson v American Home Assurance Co[41], I collected some of those principles. That was a case involving an injury and sickness insurance policy, with maximum liabilities of comparatively modest sums. The present case concerns substantial policies in respect of the professional liability of one of the largest firms of legal practitioners in Australia. But the principles are relevantly the same. They include the following:
[41](1998) 192 CLR 266 at 272-276 [19].
1.As a species of commercial contract, an insurance policy must be interpreted to give to the words used their ordinary and fair meaning[42]. Although the basic cover in the applicable policies was of a kind required by Pt 3 of the Legal Profession Act 1987 (NSW), as extended by excess provisions agreed on between the parties, it was not suggested that any special statutory rules governed the approach to the interpretation of the policies[43].
2.The meaning to be given to an insurance policy must take into account the commercial and social purposes for which it was written[44]. Under the guise of giving the language of a policy its ordinary and fair meaning, a court is not entitled to make a new contract for the parties at odds with that upon which they have agreed[45]. Maxims and rules of construction, developed as tools to aid the task of interpretation, are subordinate to the primary duty, which is to uphold the contract between the parties. Without the authority of statute[46], no court is authorised to attribute a different meaning to the words of a policy simply because the court regards the meaning as otherwise working a hardship on one of the parties.
3.Where, especially in an insurance contract written for application in different jurisdictions, language has been used which enjoys a settled meaning, courts will ordinarily endeavour to adhere to such a meaning, particularly in a policy of a commercial character upon which the parties might have been expected to obtain expert advice from lawyers or insurance brokers[47]. In the present case, there is no decision of this Court, or of any other final court, on the meaning of the phrase "brought about by" in the context of the exclusion clause invoked by the insurers. However, a number of earlier decisions of State courts in Australia[48] were referred to in argument. Only one of those cases was specifically addressed to the particular phrase in an identical policy[49]. The most that this earlier case established was that the phrase connoted ideas of causation which extended beyond the "but for" test as expressed in tort[50]. The insurers accepted that this conclusion was correct, and that the words "brought about by" required a causal connection between the dishonest or fraudulent conduct of Mr Powles and the liability of Allens to the Trust which involved more than proving that the dishonesty or fraud was a sine qua non[51] for the liability. Past authority could not therefore be called in aid of having "settled" the meaning of the terms of the exclusion clause in a way to which the parties should be held in this case.
4.Notwithstanding the primary duty of courts to give meaning to the words in an insurance policy, it has been recognised that, in cases of ambiguity, a "liberal approach"[52] will generally be adopted in the construction of insurance contracts[53]. There are several reasons for this approach. They go back to very old legal authority[54]. In the past, they were commonly summed up in the maxim verba chartarum fortius accipiuntur contra proferentem[55]. Courts now generally regard the contra proferentem rule (as it is called) as one of last resort because it is widely accepted that it is preferable that judges should struggle with the words actually used as applied to the unique circumstances of the case and reach their own conclusions by reference to the logic of the matter, rather than by using mechanical formulae[56]. Nevertheless, dictionaries, facts and logic alone will sometimes not provide an answer to the contest before the court[57]. In those cases:
"it is not unreasonable for an insured to contend that, if the insurer proffers a document which is ambiguous, it and not the insured should bear the consequences of the ambiguity because the insurer is usually in the superior position to add a word or a clause clarifying the promise of insurance which it is offering"[58].
5.Whilst the meaning of the words in an insurance policy is for the tribunal of fact to determine, if the judge misdirects a jury (or where sitting alone misdirects himself or herself) about the meaning to which the words in question are susceptible, an appellate court may intervene to correct the error[59]. These proceedings were conducted upon the basis that it was the duty of all of the judges concerned to construe the exclusion clause. Appropriate deference should be paid to such of the findings of fact of the primary judge as depended on advantages which that judge enjoyed. However, this consideration did not loom large in the present matter. The trial was substantially conducted on agreed statements of facts[60]. On this footing, the advantage of the primary judge to which appellate deference should be paid is the greater time which the primary judge had to absorb a vast amount of written material, to listen to detailed argument about it, to consider it in its totality and, against that background, to reach conclusions about the meaning of the clause in question[61].
The Court of Appeal and this Court may, in theory, be in as good a position to evaluate the facts and to construe the policies as the primary judge. However, the realities of selective appellate advocacy mean that there are still reasons for restraint in appellate disturbance of a reasoned conclusion reached at trial. Those constraints apply apart from traditional considerations of credibility. In an appeal such as this, error must be shown. However, in the end, the phrase in question in the policies remains to be construed. The general approach is that which I have outlined. It applies as much to this Court, in considering whether error is shown by the Court of Appeal, as it did to the Court of Appeal in deciding the appeal to it from the judgment of the primary judge.
[42]Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520-521, 525.
[43]Such as Marine Insurance Act 1909 (Cth), Sched 2.
[44]Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 at 394, 405.
[45]Johnson v American Home Assurance Co (1998) 192 CLR 266 at 272 [19].
[46]eg Trade Practices Act 1974 (Cth), Contracts Review Act 1980 (NSW), Insurance Contracts Act 1984 (Cth).
[47]Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 at 394; Johnson v American Home Assurance Co (1998) 192 CLR 266 at 273 [19].
[48]Crowe v Wheeler & Reynolds (a firm) [1988] 1 Qd R 40 at 44; H G & R Nominees Pty Ltd v Fava [1997] 2 VR 368 at 420-421; Comino v Manettas (1993) 7 ANZ Insurance Cases ¶61-162.
[49]Comino v Manettas (1993) 7 ANZ Insurance Cases ¶61-162.
[50]Comino v Manettas (1993) 7 ANZ Insurance Cases ¶61-162 at 77,869-77,870 per Mahoney JA.
[51]An event without which liability would not have arisen: see Comino v Manettas (1993) 7 ANZ Insurance Cases ¶61-162 at 77,869; Chittick v Maxwell (1993) 118 ALR 728 at 748; H G & R Nominees Pty Ltd v Fava [1997] 2 VR 368 at 418-420.
[52]Johnson v American Home Assurance Co (1998) 192 CLR 266 at 274 [19].
[53]As this Court did in Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520.
[54]Co Lit 36a: see Western Australian Bank v Royal Insurance Co (1908) 5 CLR 533 at 574.
[55]The words of the document are to be construed against the party who has prepared it: see Western Australian Bank v Royal Insurance Co (1908) 5 CLR 533 at 559, 574.
[56]An analogous development may be seen in State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In Liq) (1999) 73 ALJR 306 at 327-331 [88]-[92]; 160 ALR 588 at 615-620; cf Young, "Current Issues", (2000) 74 Australian Law Journal 795 at 797.
[57]Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520; Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 at 394-395.
[58]Johnson v American Home Assurance Co (1998) 192 CLR 266 at 275 [19].
[59]Johnson v American Home Assurance Co (1998) 192 CLR 266 at 275 [19].
[60]See reasons of Callinan J at [168].
[61]State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In Liq) (1999) 73 ALJR 306 at 330-331 [89]-[92]; 160 ALR 588 at 619-620; cf Lend Lease Development Pty Ltd v Zemlicka (1985) 3 NSWLR 207 at 209-210.
Reasons for adopting the construction of Allens
In his reasons, Callinan J has persuasively (if I may respectfully say so) collected the reasons that lead him to the conclusion that the primary judge was correct and that his judgment should be restored. In order to ensure that my consideration is addressed accurately to the main factors which support that conclusion, let me state the considerations which seem to me to tell most strongly in favour of the construction of the policies urged by Allens.
First, I regard it as important that the policies are ones required by legislation[62]. They are required for important social purposes. These are not confined to protecting particular legal practitioners, such as the partners in this case. They are intended to protect clients of legal practitioners where such practitioners would not be able otherwise to meet liability from their own resources. Such clients would then be dependent upon the existence and availability of insurance indemnity. Such clients may, in some circumstances, have direct entitlements against the insurers, where the legal practitioners concerned have died or disappeared, or are insolvent[63]. The relevant terms of the exclusion clause must be approached in light of these important social purposes. Whilst it is true that the exclusion clause appears in policies approved for a statutory purpose, an overly broad ambit should not be attributed to it, at least if doing so would undermine the objectives for which the insurance was required in the first place.
[62]Legal Profession Act 1987 (NSW), Pt 3.
[63]Law Reform (Miscellaneous Provisions) Act 1946 (NSW), s 6; Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399; cf New South Wales Medical Defence Union Ltd v Crawford (1993) 31 NSWLR 469 at 479-482.
Secondly, an additional consideration favouring a restrained approach to the ambit of the exclusion for dishonest or fraudulent acts or omissions is that this Court must consider the application of the exclusion clause to the infinite variety of cases in which such indemnity might be claimed. Dishonest or fraudulent acts will include the sustained, premeditated conduct on a large scale over a long period that occurred in this case. But it will also include minor acts of dishonesty or fraud which may be no more than partly relevant to the liability incurred by the insured where the exclusion would appear inapplicable or its invocation disproportionate. It is to remedy the potentially serious consequences of denying indemnity to insured legal practitioners in such cases that the language of the exclusion clause may need to be confined. The only way to do so is by avoiding the attribution to the phrase "brought about by" of an overly inclusive meaning.
Thirdly, insurers ordinarily have it within their power to ensure the broad ambit of an exclusion clause by adding words to the effect of "brought about directly or indirectly" or "substantially or in part". This argument has special significance in the present case because of the use, in the exclusion clause immediately following the one in question, of the adverbs "directly or indirectly"[64]. Where the insurers elsewhere chose to use such indications of indirect as well as direct connection, they must, so it was suggested, have meant something different in the exclusion clause invoked in the present case. Whilst the dangers of the rule of construction known as expressio unius have been acknowledged many times in this Court[65], the fact remains that the insurers had infinitely greater control over the language of the exclusion clause than did an ordinary legal practitioner. If they could make the broad ambit of the clause clear, it is open to argument that, having failed to do so, they must bear the consequences of a relatively strict construction, confining exclusion cl 5(f)(v) only to cases of direct causation of the liability in question by dishonest or fraudulent acts or omissions of a partner and nothing more.
[64]General exclusion cl 5(f)(vi) set out in the reasons of Callinan J at [200].
[65]Houssein v Under Secretary of Industrial Relations and Technology (NSW) (1982) 148 CLR 88 at 94; cf State of Tasmania v The Commonwealth of Australia and State of Victoria (1904) 1 CLR 329 at 343; Rylands Brothers (Australia) Ltd v Morgan (1927) 27 SR (NSW) 161 at 168-169.
Upon the insurers' concession that, "but for" Mr Powles' dishonesty, the liability of Allens would not have arisen, Allens submitted that it was critical to analyse the link between the dishonesty found and the loss actually giving rise to the liability. Their contention that Mr Powles' dishonesty could be severed from such loss rested, substantially, on the findings of the primary judge. The dishonesty preceded the loss in point of time. It was reprehensible. It constituted a breach of the contract of retainer, of the fiduciary duty owed to the client and of the duty of care. But all of this merely established the "liability" of Allens to the Trust and thus of the insurers to Allens under the insuring clause. In the submission of Allens, the true character of the loss of the funds of the Trust, in the facts found, was that it was brought about by dishonest acts after the fund finally left the bank in the United Kingdom. It was "brought about by" unknown third parties who moved the fund to the Swiss banking system. It was neither expected nor intended by the dishonest Mr Powles. The loss was thus not "brought about by" any dishonest or fraudulent act or omission on his part. At the most, to the extent that his acts and omissions had made it possible for others to bring about the liability of Allens, they were only a minor cause of the ultimate liability. They were no more than the causa sine qua non – without whose involvement the liability of Allens could not have arisen. Properly classified, Allens' liability was "brought about by" others. Mr Powles' dishonest acts and omissions could be severed from the loss of the funds. So went the argument for Allens.
The insurers' construction is preferred
I accept that the foregoing represents a supportable approach. However, in my view, the preferable construction of the exclusion clause is that propounded by the insurers. My main reasons for coming to this conclusion are as follows.
First, the polices must be given meaning according to their terms, notwithstanding their statutory provenance. They remain commercial agreements[66]. Nothing in the applicable statute modifies the approach which it is proper to take to the interpretation of the exclusion clause. If it had been the purpose of Parliament to protect legal practitioners and their clients in a way different from that expressed in the terms of the policies, it could have said so. Or it could have provided for the making of policies in terms more protective of legal practitioners and clients. The context is not a sufficient reason to distort the meaning of the exclusion clause as derived from its language. That language directs attention to the true cause of the liability of Allens. That question is to be answered in a practical and realistic way, not in a way which adopts an overly fine or theoretical approach that is alien to commercial agreements.
[66]Reasons of Gleeson CJ at [22].
Secondly, by the terms of the policies[67], the exclusion clause applies not in respect to any "loss" suffered by the insured but "in respect of any liability". This takes the reader back to the insuring clause under the policies[68]. This is expressed in extremely wide language which, omitting parts that are immaterial, reads:
"[T]he Insurers shall indemnify the Assured up to an amount not exceeding the Sum Insured and Related Costs against all loss to the Assured [including claimants costs] whensoever occurring 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".
[67]Reasons of Hayne J at [94]; reasons of Callinan J at [143].
[68]cl 2.
In the modern approach to the construction of contested language[69], it is usual to look beyond the critical word ("by") or phrase ("brought about by") or sentence (the exclusion clause) to the whole policy[70]. Because the exclusion clause refers back to "liability", it incorporates, by reference, the insuring clause. It is that to which the exclusion is addressed. The insuring clause affixes the liability of the insurers, relevantly by reference to civil liability incurred "in connection with the Practice". Thus there are two large phrases of connection at work. The first, contained in the exclusion clause, is the phrase "in respect of". The second, contained in the insuring clause, is the phrase "in connection with". Given such broad expressions of connection, it seems unlikely that the notion of causation contained in the exclusion clause is to be construed narrowly.
[69]R v Brown [1996] AC 543 at 561 per Lord Hoffmann; cf Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 at 397.
[70]cf Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 at 396-397.
Thirdly, and following this point, it is important to notice that it is Allens, rather than the insurers, who seek to read into the exclusion clause words which the drafter omitted. There is nothing in the words of the exclusion clause to require that liability of the kind posited must have been brought about directly by the dishonest or fraudulent acts or omissions of a partner. Yet Allens contend that a true interpretation of the exclusion clause includes this adverb. The exclusion clause makes no mention of "direct", "immediate", "proximate" or "effective" cause, but requires only that the liability should have been "brought about by" the act or omission hypothesised. There is no good reason to add any of the adverbs proposed. It was for Allens to persuade this Court that any such words should be added. Allens have not, in my view, done so. It was sufficient for the insurers to rely on the generality of the phrase of connection actually used.
Fourthly, I am unconvinced by the argument that relies on the fact that the succeeding exclusion clause in the policies included reference to "directly or indirectly". Those words appear in a wholly exceptional provision dealing with nuclear radiation, war and like hazards. That exclusion has the hallmarks of a draft into which has been cast every imaginable circumstance of extreme societal disruption. On the other hand, the exclusion clause in question in this appeal is one which, sadly, contemplates circumstances that are all too common in the kind of insurance provided. In effect, legal practitioners are warned by this exclusion clause that they will not be indemnified in respect of liability brought about by the dishonest or fraudulent acts or omissions of partners or former partners (as distinct from employees). If they want such cover, they are obliged to secure it separately, and additionally, at the cost, no doubt, of the payment of appropriate extra premiums. The existence of such fidelity cover, separate from that of professional indemnity, lends some support to a delineation of risk consistent with the construction of the exclusion clause urged for the insurers.
Fifthly, once it is accepted that these are the approaches proper to the insuring clause and the exclusion clause agreed between the parties, there is no reason to adopt the overly fine differentiation concerning the consequences of the admitted dishonesty on the part of Mr Powles which Allens urged on this Court. Mr Powles' breaches of duty were numerous and deliberate. He knew that he was using the moneys of the Trust for a dishonest private business of his own when he had been instructed to place the moneys under the control of Allens. He knew that he was not exercising safe control over the moneys. Rational reflection for even a short time, if uncontaminated by the prospects of (and need for) dishonest secret commissions, would have led to the conclusion that the conduct in which Mr Powles was undoubtedly engaged was likely to expose the fund received from the Trust to just the kind of loss at the hands of third parties that quickly ensued[71].
[71]Switzerland Insurance Australia Ltd v McCann (1999) 10 ANZ Insurance Cases ¶61-446 at 75,117-75,118, 75,121.
It was Mr Powles' actions and omissions that made it possible for third parties to get their hands on the fund which otherwise would have been safe. It is at least open to inference that Mr Powles would not have imperilled the fund but for the dishonest self-interest which he was bent on pursuing[72]. The false or dishonest information given by Mr Powles concerning prime bank instrument transactions included a false reference on the letterhead of Allens addressed to the Trust about the very transaction which ultimately led to the loss. Had Mr Powles provided the Trust with a truthful reference, with an honest account of his past attempts to engage in the chimerical prime bank instrument transactions, and with information about the Bank of England's denial of the existence of a market in such securities, it is unthinkable that the Trust would have gone ahead with the speculative, ill-conceived and doomed transaction as it did. Its only reason for doing so, as it promptly asserted, was its faith in Allens, as "one of Australia's leading law firms" and a partnership of "integrity and professionalism"[73], and its belief that the funds were under the control of Allens.
[72]Switzerland Insurance Australia Ltd v McCann (1999) 10 ANZ Insurance Cases ¶61-446 at 75,116.
[73]Letter from the Trust to Allens dated 27 October 1992, set out in the reasons of Callinan J at [165].
In my view, the foregoing circumstances travel far beyond merely establishing the factual preconditions to the liability of Allens. At the relevant time, Mr Powles was a partner of the firm. Allens' liability was undoubtedly "incurred in connection with the Practice". It was also "brought about by" the dishonest and probably fraudulent acts of Mr Powles[74]. As such, Allens' liability was excluded from the policy.
[74]Mr Powles' conduct was dishonest for present purposes because he used means to deal with the moneys which he knew he had no right to use: Peters v The Queen (1998) 192 CLR 493 at 509-510 [33]. His conduct involved "pretence and collusion in the conscious misuse of a power": Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liq) (1965) 113 CLR 265 at 274. As well, he made payments in a manner which he knew lacked authority: Ex parte Lenehan (1948) 77 CLR 403 at 415-421.
To construe the exclusion clause so as to omit application to cases of partner dishonesty and fraud such as occurred in this case, simply because Mr Powles did not intend to lose the funds or because a further step was taken by fraudulent third parties, would seriously constrict the operation of the exclusion clause[75]. It is important to remember that Mr Powles' dishonesty is being considered in the present context for its relevance to the operation of contracts of professional indemnity insurance. Different questions might well arise if that dishonesty had to be considered in the context of a criminal prosecution of Mr Powles in relation to the loss. So far as the insurance policies are concerned, what does a practical and businesslike construction of the exclusion clause suggest? Common experience teaches that dishonesty and fraud, practised in a context of misuse of client funds, quite often spawn or attract dishonesty and fraud on the part of others. This conclusion is neither unusual nor surprising[76]. At least in relation to facts such as the present, that conclusion sustains the decision reached by the Court of Appeal. The liability on the part of Allens was brought about by the dishonest or fraudulent acts or omissions of Mr Powles. The attempt to sever his dishonesty from the loss of the funds which ensued, and to blame that loss exclusively on others, failed. The Court of Appeal was correct to so find.
[75]The absence of a positive intention that a loss will occur by reason of third parties does not prevent the operation of the exclusion; cf McMillan v Joseph (1987) 4 ANZ Insurance Cases ¶60-822 at 75,055, 75,057; Abbey National Plc v Solicitors Indemnity Fund Ltd [1997] PNLR 306 at 316.
[76]Reasons of Gleeson CJ at [23].
Order
The appeal should be dismissed with costs.
HAYNE J. The appellants, partners in the law firm Allen Allen & Hemsley ("Allens"), claimed from the respondents under policies of professional indemnity insurance. The claim was for indemnity against some, but not all, of the amount Allens had agreed to pay Nauru Phosphate Royalties Trust ("Nauru Trust") in settlement of a claim which Nauru Trust had made against Allens. The respondents denied liability to indemnify Allens under the policies, alleging that an exclusion to the cover (the "dishonesty and fraud exclusion") applied. The appellants brought action on the policy in the Supreme Court of New South Wales. At first instance, Hunter J held that the appellants were entitled to indemnity. On appeal to the Court of Appeal, that Court (Mason P, Stein and Giles JJA) held[77] that the dishonesty and fraud exclusion applied. The Court of Appeal set aside the judgment in favour of the appellants and ordered that their claim be dismissed. By special leave, the appellants now appeal to this Court.
[77]Switzerland Insurance Australia Ltd v McCann [1999] NSWCA 310.
The policies
The policies which the respondents issued were policies of excess insurance. So far as now relevant, the policies were in identical terms and it is convenient to speak of them without differentiating between them. Allens had professional indemnity insurance cover of the kind required by Pt 3 of the Legal Profession Act 1987 (NSW). That compulsory cover provided for indemnity against liability up to $1.1m (and related costs) for each claim. The excess policies provided for indemnity against liability for specified sums in excess of the amount covered by the compulsory policy.
The excess policies which the respondents issued provided that they were subject to the same terms, exclusions, conditions and definitions as the compulsory cover. It is important to notice some aspects of the insuring clauses, the associated definitions, and the dishonesty and fraud exclusion that applied to the respondents' policies.
The respondents' obligation, as insurers, was to indemnify the appellants up to a specified amount "against all loss to the Assured" arising from a claim or claims first made in the period of insurance "in respect of any description of civil liability whatsoever incurred in connection with the Practice". The "Assured" was defined as meaning "the Firm and each Partner in the Firm … and includes each person employed in connection with the Practice". The "Practice" was defined as meaning "the business of practising as a solicitor undertaken by the Assured" and the policy provided that it included (among other things) "acting as Trustee". The policy provided a number of general and special exclusions. The dishonesty and fraud exclusion provided that:
"This Insurance shall not indemnify the Assured in respect of any liability … brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured."
It can be seen that the policies require consideration of the following steps:
(a)Did the Assured suffer loss arising from a claim made in the period of insurance?
(b)Was the loss (including the claimant's costs) properly described as being in respect of any description of civil liability incurred in connection with the Practice?
(c)Was the liability "brought about by" the dishonest or fraudulent act or omission of the insured firm or a Partner in that firm?
Principal attention has been focussed in the present matter on the third of these steps.
The facts
The events which gave rise to the appellants claiming indemnity from the respondents took place in late 1991 and early 1992. At that time, Ronald Adrian Powles was a partner in Allens and was the resident partner of the firm in London. Much evidence (almost all of it documentary) was tendered at trial to demonstrate that Mr Powles did many dishonest things. The trial judge and the Court of Appeal accepted that between 1980 and 1992 Mr Powles repeatedly stole money from clients of the firm. The appellants did not, and still do not, dispute that this was so. Nor do they dispute that, in order to prevent detection of his thefts, he was, as the Court of Appeal found, "in the position that there was a constant need for funds to perpetuate his frauds"[78]. (By the end of 1991 he had misappropriated more than $3.5m from clients of the firm.)
[78][1999] NSWCA 310 [11].
Mr Powles deceived not only his clients but also his partners. Without authority from his partners he opened and operated a bank account with the London branch of Westpac Banking Corporation called "Account No 103600 Allen Allen & Hemsley – USD Short". It was an account conducted in United States dollars and was known at trial, and in the appeals to the Court of Appeal and this Court, as the "US dollar account". It is convenient to continue to refer to it in that way.
The particular transaction which gave rise to the claim which is the subject of these proceedings concerned an attempt by Mr Powles, on behalf of a client of the firm (Nauru Trust) to invest in what was called a "prime bank instrument". This was not the first attempt Mr Powles had made to buy such an instrument. He had personally been involved in up to 17 transactions in which at least $US700,000 was lost. All these attempts to buy an instrument had failed. They failed for the simple reason that the "instruments" and the "market" for such instruments did not exist.
On the earlier occasions that Mr Powles had tried to buy a prime bank instrument he had, without any authority to do so, taken for himself some of the money which he had been given to buy the instrument. Moreover, he had agreed with another man involved in those transactions (a Canadian called Patrick Madden) that in future transactions he (Powles) would be paid $US100,000 per transaction for his assistance and would share in the commissions which Mr Madden's company Linpar Ltd ("Linpar") would earn. Mr Powles did not disclose this agreement to Nauru Trust.
The particular transaction
The main features of the transaction which gave rise to the claim by the appellants on the respondents are:
(1)Following a proposal by Linpar, Nauru Trust authorised Mr Powles to buy, for a price of $US8.7m, a prime bank instrument having a face value of $US10m.
(2)Before Nauru Trust gave that authority, Mr Powles told lies to Nauru Trust about Linpar or at least did not tell Nauru Trust the whole truth about that company and about the "market" for "prime bank instruments".
(3)Nauru Trust transferred the sum of $US8.7m to the US dollar account "for the sole purpose of facilitating" the purchase of an instrument. It was not disputed that Mr Powles was under a duty to keep the money safely.
(4)In fact, Mr Powles spent $US8.55m for the purpose of buying the instrument, and he spent it unsafely by letting the funds out of his control without receiving the instrument.
(5)Mr Powles took the balance of the sum of $US8.7m ($US150,000) and applied it to his own use and the use of others. This was a sum to which he and the others were not entitled, and to which he knew they were not entitled.
(6)Mr Powles told lies to Nauru Trust about what he proposed to do and about what he had done in connection with buying the instrument.
(7)Nauru Trust lost the money which Mr Powles had spent for a prime bank instrument ($US8.55m) and never received an instrument of the kind it intended should be bought. The money was stolen by third parties after Mr Powles had paid it over in an attempt to buy an instrument.
It will be necessary to say something more about some of the features of the transaction. Before doing so, however, it is of particular importance to notice a finding of the trial judge which the Court of Appeal did not disturb. The trial judge found that Mr Powles "was taken in by the apparent legitimacy, albeit unconventional nature, of the [prime bank instrument] market" and that "[i]n this he was not alone". That is, at the time of the transaction which gives rise to these proceedings, Mr Powles believed that there was a market for prime bank instruments. Indeed, the later attempts which Mr Powles made to have Nauru Trust give him more money to invest in this "market" led almost inevitably to that conclusion. These attempts were cast in terms that were consistent only with Mr Powles still believing that by making purchases in the market he could repeatedly obtain large amounts of money by siphoning off some or all of the difference between what would be represented to be the cost price and the actual price to be paid for the instrument.
To maintain belief in the existence of the market, despite what had happened in his earlier attempts to buy such instruments, was at least very foolish. As the trial judge said, "[Powles] had every reason to be sceptical of the capacity of the market to produce the promised fruits". The judge was, nevertheless, "satisfied that Powles' background was such that, while he was able to bring some of his legal discipline to bear in making an appreciation of the subject transactions, he accepted that the transaction, although unconventional, did afford to the initiated the opportunity to gain unusually high profits".
The Nauru Trust authority and Mr Powles' reference for Linpar
On 5 October 1991, Mr Madden made a proposal to a lawyer acting for the Republic of Nauru Financial Corporation (known as "Ronfin") which spoke of "Standby Letters of Credit" and "Prime Bank Promissory Notes", issued by "Top Fifty (50) World Prime Banks", being used as security for a line of credit. The proposal suggested that a profit (described as "Net Emission") of up to $US22m for every $US100m of loan could be obtained. Thereafter, there were further discussions and exchanges between Mr Madden and Ronfin. On 22 October 1991, Mr Madden made a proposal for Nauru Trust to "place $US4,400,000 (or preferably USD $8.7 M) in trust with the law firm of Allen Allen & Hemsley in Sydney" for the purchase by Mr Powles of standby letters of credit for the Trust. The proposal to use the Sydney trust account of Allens was abandoned, though how that came about was not disclosed by the evidence. Instead, on 25 October 1991, Mr Madden sent a facsimile to Nauru Trust confirming that what was described as "the trust account of Allen Allen & Hemsley, London" should be used. In fact, the account nominated was the US dollar account operated by Mr Powles.
Slightly different language was used by their Honours a little later[108]:
"It seems crystal clear that Powles' dishonest conduct exposed Allens to a liability to the Nauruan Trust for any loss that it suffered in consequence of that conduct. It matters not that a further act by another party or parties may have been necessary to convert the risk of loss into actual loss. The loss would not have occurred if there had been no breach by Powles, but more, the breach by Powles, in circumstances of dishonesty, was causally related to the loss because it exposed Allens to liability to the Trust and the risk of loss all but inevitably became an actual loss. In our view, returning to the words of the policy, Allens' liability was brought about by Powles' dishonesty."
[108]Switzerland Insurance Australia Ltd v McCann (1999) 10 ANZ Insurance Cases ¶61-446 at 75,120.
Their Honours also said this[109]:
"In allowing the funds to leave the English banking system on or about 15 January 1992, in the circumstances that Powles did, he was in breach of his fiduciary duty and in breach of his trust to the Nauruan Trust. That created the liability, and one which was immediate in that it produced a liability in equity for Allens to restore the funds then and there[110]. Further, it was an act by Powles which, in the circumstances we have described, was so tainted by dishonesty as to engage the exclusion."
[109]Switzerland Insurance Australia Ltd v McCann (1999) 10 ANZ Insurance Cases ¶61-446 at 75,121.
[110]See Target Holdings Ltd v Redferns [1996] AC 421 at 434, 437.
And finally they stated this opinion[111]:
"We briefly refer to an alternative approach sufficient to resolve this issue. If the words 'brought about by' reflect the concept of 'proximate cause' (which we do not accept) then what is plain is that the law accepts that there may be more than one proximate cause of a loss, and a mere later fraud, closer in time to the loss, does not alter the proximate nature of the earlier dishonest act[112]. The evidence (much of which has been referred to) overwhelmingly establishes that Powles' dishonest conduct was one of the proximate causes of the loss."
[111]Switzerland Insurance Australia Ltd v McCann (1999) 10 ANZ Insurance Cases ¶61-446 at 75,121.
[112]See HIH Casualty and General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 at 609-612 per Sheller JA applying J J LloydInstruments Ltd v Northern Star Insurance Co Ltd (The "Miss Jay Jay") [1987] 1 Lloyd's Rep 32.
The Court of Appeal therefore allowed the respondents' appeal.
The Appeal to this Court
Because of the way in which the trial was conducted, substantially on written materials, the trial judge did not enjoy such advantages as may flow from seeing and hearing witnesses and as might therefore have required the Court of Appeal to exercise greater restraint in reversing his Honour's findings on the nature of Powles' conduct, and its relationship with the liability for the loss that the Trust suffered. That circumstance has the consequence that this Court also should not regard itself as being at any disadvantage in assessing Powles' conduct, and the application of the exclusion in the policy to it.
The appellant takes as a starting point that notwithstanding the conclusion of the Court of Appeal adverse to the appellant, their Honours did not disagree with the trial judge's finding of fact that Powles did not intend that the $US8.55 million would be lost. Nor did the Court of Appeal disagree with the trial judge's finding that the manner in which the $US8.55 million was paid away by Powles was in accordance with the directions of Linpar. That this was the procedure that would initially occur was also known to the Trust. (See the facsimile, Madden to the Trust, 17 December 1991, set out earlier in these reasons.)
The appellant submits that the words "brought about by the dishonest or fraudulent act or omission of the Assured" must be read as a whole: that the exclusion is concerned with the purpose of the act or omission and whether it is achieved. The appellant urges that, read as a whole, the exclusion refers to conduct which has a dishonest or fraudulent character by reason of its desired end or purpose in bringing about harm to another by an intention to cheat or deceive.
There is a body of authority to support the appellant's submission. In Crowe v Wheeler & Reynolds[113] the Full Court of Queensland, Williams J (with whom Andrews CJ and Moynihan J agreed) said this[114]:
"In my view the term 'dishonesty' should be applied in the way suggested by Fraser J. In the exclusion clause in question the term 'dishonesty' refers to an act involving some intent to deceive or cheat and that involves a question of fact to be determined in the circumstances of each particular case."
[113][1988] 1 Qd R 40.
[114][1988] 1 Qd R 40 at 43.
His Honour's reference to Fraser J was a reference to Lynch & Co v US Fidelity & Guarantee Co in which he said[115]:
"But having the United States cases I think the weight of authority is against rather than in favour of giving the word 'dishonest' in such a policy a meaning that extends far beyond the meaning of that word in popular usage in this jurisdiction. From a review of those cases the weight of authority seems to be that there must be something of the nature of intentional deception or concealment. The Shorter Oxford Dictionary, 3rd ed, in addition to certain obsolete meanings, gives 'dishonest' the following meanings:
4.of actions etc not straightforward or honourable; underhand; now, fraudulent, knavish.
5.of persons, wanting in honesty disposed to cheat or defraud; thievish.
'Dishonest' is a word of such common use that I should not have thought that it could give rise to any serious difficulty, but in construing even plain words regard must be had to the context and circumstances in which they are used[116]. However, to try to put a gloss on an old and familiar English word which is in everyday use is often likely to complicate rather than to clarify. 'Dishonest' is normally used to describe an act where there has been some intent to deceive or cheat. To use it to describe acts which are merely reckless, disobedient or foolish is not in accordance with popular usage or the dictionary meaning. It is such a familiar word that there should be no difficulty in understanding it. In the present case there is nothing in either circumstances or the context requiring the Court to give it a meaning other than its popular sense."
[115][1971] 1 OR 28 at 37-38.
[116]The Canadian Indemnity Co v Andrews & George Co Ltd [1953] 1 SCR 19 at 24.
In H G & R Nominees Pty Ltd v Fava[117] the Supreme Court of Victoria, JD Phillips J took the view that dishonesty referred to conscious and deliberate conduct and the New South Wales Court of Appeal (Mahoney, Sheller and Cripps JJA) reached a similar conclusion in Comino v Manettas[118]. In my opinion the reasoning in those cases is correct and I would adopt it in this case.
[117][1997] 2 VR 368 at 418, 421. See also Brooks Tarlton Gilbert Douglas & Kressler v United States Fire Insurance Co 832 F 2d 1358 at 1369-1370 (1987).
[118](1993) 7 ANZ Insurance Cases ¶61-162.
In my view the respondents failed, as the trial judge held, to establish that the relevant conduct falls within the exclusion as I would construe it, giving "dishonesty" the meaning which I consider has been correctly settled by the authorities to which I have referred.
The concept of causation as it has evolved[119] (not always consistently) in the law of tort can have no automatic application, nor indeed is it able to throw much light upon the meaning of an exclusion in an insurance contract which does not contain the word "cause" and uses other language which is markedly different and quite specific. In order to fall within the exclusion, the liability must be a liability brought about by the dishonest or fraudulent acts or omissions of the assured, relevantly here Powles. The clause does not say "brought about, substantially, or partly, by dishonest or fraudulent acts or omissions, or a liability to which a dishonest or fraudulent act has made a significant[120], major, or material or dominant[121] contribution". Nor does the exclusion in terms purport to operate when conduct is, to use language employed by the Court of Appeal "tainted" by dishonesty, or when, again to adapt slightly another expression used by the Court of Appeal, there is a relationship between the conduct and the liability. The word "liability" cannot be read in a vacuum. True it is that Allens were liable to the Trust under several heads of claim, including negligence and breach of fiduciary duty, but liability under those heads did not bring about the liability for the loss the subject of the exclusion. The exclusion was not concerned with these. Its purpose was to set apart for separate treatment, and to accord relief to the insurer from, any obligation to indemnify in the case of operative dishonesty or fraud. The liability has to be a liability for something, in this case, to repay the sum of $US8.55 million to the Trust, and the relevant liability for that obligation has to be brought about, by the, or a, dishonest or fraudulent act or omission in the sense to which I have referred. There is no need to put upon the words "brought about by" the sort of gloss, that has now become firmly attached to the word "caused", that a material[122] contribution may constitute a cause, and that a contributory cause[123] may be sufficient to constitute, in effect, the cause for the purposes of the law of tort. This and the decline as an exclusive test, of the "but for" test have led to the making of value judgments by courts in assessing liability in torts. As McHugh J said in Chappel v Hart[124]:
"Consequently, value judgments and policy as well as our 'experience of the "constant conjunction" or "regular sequence" of pairs of events in nature'[125] are regarded as central to the common law's conception of causation."
[119]In Inman Steamship Company v Bischoff (1882) 7 App Cas 670 at 683 per Lord Blackburn referring to the "philosophical mazes" of cause and effect.
[120]See, in a criminal context, Royall v The Queen (1991) 172 CLR 378 at 398 per Brennan J, 441 per McHugh J and Osland v The Queen (1998) 197 CLR 316 at 403 [221] per Callinan J.
[121]La Compania Martiartu v Royal Exchange Assurance [1923] 1 KB 650 at 657 per Scrutton LJ.
[122]Chappel v Hart (1998) 195 CLR 232 at 239 [10] per Gaudron J.
[123]Fitzgerald v Penn (1954) 91 CLR 268 at 276. See also Chappel v Hart (1998) 195 CLR 232 at 243 [24] per McHugh J, and also, in a criminal context, Osland v The Queen (1998) 197 CLR 316 at 403 [221] per Callinan J.
[124](1998) 195 CLR 232 at 243 [24].
[125]Hart and Honoré, Causation in the Law, 2nd ed (1985) at 14.
In Comino v Manettas[126] Mahoney JA too (with whom Sheller and Cripps JJA agreed) in giving the words "brought about by" a fairly strict construction distinguished them from other expressions[127]:
"It is clear that 'cause' is a term which may be used to describe relationships of different kinds. The several categories of cause were recognised long ago by Aristotle. The distinctions have since been multiplied[128]. In Barnes v Hay[129], this Court considered the nature of the causal relationship existing between the giving, or failure to give legal advice and the occurrence of the event to which the advice was to be directed. More recently, the High Court in examining the nature of the causal relationship between careless driving and a subsequent collision, has considered causal issues generally[130]. It is necessary in the present case to determine whether the relationship denoted by 'brought about by' is one which includes all of these various relationships and if not which of them is that which was intended.
Counsel have not been able to refer the court to any judicial consideration of 'brought about by'. Cole J, in his consideration of this aspect of the matter, concluded that the relationship between the attestation and certification defaults, or at least the latter, was causal because 'without those dishonest acts there would have been no completed transaction. Had the certificate been true, in that the Dylcu loan agreement had been explained to the guarantors, the divergence between the GIO's requirement of a joint and several guarantee and Mr Manettas' willingness to give only a one third several guarantee would have become starkly apparent and the transaction would have terminated'.
In my respectful opinion, that relationship between the default and the liability, though in one sense causal, is not causal in the sense intended by the words 'brought about by' in the exclusion clause. It is, I think, an over-simplification to say that 'brought about by' intends a 'causa causans' causal relationship and that the one which, as his Honour pointed out, existed between these defaults and the liability was, at best, the relationship of 'causa sine qua non'. But that distinction assists, I believe, in understanding the nature of the relationship intended by 'brought about by'. The phrase looks to what actually brought about the liability, in negligence, tort or otherwise".
[126](1993) 7 ANZ Insurance Cases ¶61-162.
[127](1993) 7 ANZ Insurance Cases ¶61-162 at 77,869-77,870.
[128]Hart and Honoré, Causation in the Law, 2nd ed (1985) at 26.
[129](1988) 12 NSWLR 337.
[130]March v Stramare (E & M H) Pty Ltd (1991) 171 CLR 506.
Kirby J in Chappel v Hart[131] pointed out that for torts the "but for" test had not been completely discarded, and it may be that in some cases it will still be an appropriate test of causation. His Honour too referred to the multiplicity of expressions which have been used to qualify, and are a gloss upon the word "cause": proximate cause, direct cause, legal cause, foreseeable cause, true cause, effective cause, substantial cause or cause in fact[132]. His Honour also gave some examples of matters which might displace apparent causation, the last of which might be apposite here if different language from "brought about by" had been used in the exclusion[133]:
"In certain circumstances, the appearance that there is a causal connection between the breach and the damage, arising from the application of the 'but for' test and the proximity of the happening of the damage, has been displaced by a demonstration that:
(a)The happening of the damage was purely coincidental and had no more than a time connection with the breach[134];
(b)The damage was inevitable and would probably have occurred even without the breach, for example by the natural progression of an undetected, undiagnosed or unrevealed condition[135], or because the condition presented a life threatening emergency which demanded instant responses without time for the usual warnings and consents[136];
(c)The event was logically irrelevant to the actual damage which occurred[137];
(d)The event was the immediate result of unreasonable action on the part of the plaintiff[138]; or
(e)The event was ineffective as a cause of the damage, given that the event which occurred would probably have occurred in the same way even had the breach not happened[139]."
[131](1998) 195 CLR 232 at 269 [93].
[132]See also The Commonwealth v Butler (1958) 102 CLR 465 at 479 per Windeyer J.
[133](1998) 195 CLR 232 at 271 [93].
[134]See, for example, Central of Georgia Railway Co v Price 32 SE 77 (Ga 1898).
[135]See, for example, Hotson v East Berkshire Area Health Authority [1987] AC 750; Laferrière v Lawson [1991] 1 SCR 541.
[136]Milstein, "Causation in Medical Negligence – Recent Developments", (1997) 6 Australian Health Law Bulletin 21 at 22-23.
[137]Leask Timber and Hardware Pty Ltd v Thorne (1961) 106 CLR 33 at 39, 46.
[138]M'Kew v Holland & Hannen & Cubitts (Scotland) Ltd [1970] SC (HL) 20.
[139]Daniels v Anderson (1995) 37 NSWLR 438 at 539.
It is unnecessary, and would be wrong to bring to bear upon the construction to be placed upon the wording of the exclusion, the learning, the competing philosophies, and the different theories regarding what should or should not be a sufficient cause for the purposes of the law of tort. Even if however one were to do so I doubt whether the conduct of Powles here would satisfy most, or indeed any, of the variously expressed tests of causation except perhaps a "but for" test. The application of the variously expressed tests has almost certainly been affected by the opportunity to apportion liability available to judges and juries in most common law jurisdictions after the passage of the Law Reform (Contributory Negligence) Act 1945 (UK) and its analogues in other jurisdictions soon afterwards.
The law of tort that has developed, and which in many cases allows a remedy to a person damnified as a result of a wrong which is a concurrent wrong only, or a material or significant contributing cause only, should not be allowed to dominate and determine the proper construction of the language of an insurance exclusion which does not even use the word "cause". Mason and Wilson JJ in Shipping Corporation of India Ltd v Gamlen Chemical Co (Australasia) Pty Ltd[140] said that as a matter of strict construction (of one of the Hague Rules relating to shipping) if a loss occurs as a result of two concurrent, and therefore joint causes, it cannot be said that the loss resulted from one of them.
[140](1980) 147 CLR 142 at 164.
The approach which I prefer, although it does not adopt a test of "proximate efficiency", a test which has in fact been applied in insurance law in Australia[141], England[142], New Zealand[143], Canada[144] and the United States[145], is not inconsistent with that test. "Proximity" as a test has also received legislative recognition in s 61(1) of the Marine Insurance Act 1909 (Cth)[146]. And it has been held, by contrast, that if a policy states that the insured is covered against losses "arising out of" the insured perils, there is no requirement that the loss be proximately caused by the peril[147]. All that is necessary is that there be some "non-coincidental nexus" between the peril and the loss[148].
[141]See, for example, National & General Insurance Co Ltd v Chick [1984] 2 NSWLR 86 at 97; City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739 at 742 per Clarke J.
[142]See Lord Denning in Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] QB 57 who applied "effective or dominant cause" as "settled" law in England.
[143]See, for example, Techni-Chemicals Products Co Ltd v South British Insurance Co Ltd [1977] 1 NZLR 311 at 319.
[144]See, for example, Co-operative Fire & Casualty Co v Saindon [1976] 1 SCR 735.
[145]See, for example, Sabella v Wisler 377 P 2d 889 (Calif 1963) as applied in Garvey v State Farm Fire and Casualty Co 770 P 2d 704 (Calif 1989); distinguishing State Farm Mutual Automobile Insurance Co v Partridge 514 P 2d 123 (Calif 1973).
[146]"Subject to the provisions of this Act, and unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against."
See also Government Insurance Office of NSW v R J Green & Lloyd Pty Ltd (1966) 114 CLR 437 at 447 per Windeyer J; Australian Casualty Co Ltd v Federico (1986) 160 CLR 513; Transport Accident Commission v Jewell [1995] 1 VR 300 at 306 per Tadgell J.
[147]Government Insurance Office of NSW v R J Green & Lloyd Pty Ltd (1966) 114 CLR 437; State Government Insurance Commission v Stevens Bros Pty Ltd (1984) 154 CLR 552; Dickinson v Motor Vehicle Insurance Trust (1987) 163 CLR 500; Transport Accident Commission v Jewell [1995] 1 VR 300 at 306 per Tadgell J.
[148]Lamont v Motor Accidents Board [1983] 1 VR 88 at 96 per Tadgell J; Transport Accident Commission v Hoffman [1989] VR 197 at 201 per Young CJ and McGarvie J. If the word "directly" appears before "arising from" the effect of the expression is changed. It then requires a "direct and sufficient non-coincidental nexus": see Transport Accident Commission v Treloar [1992] 1 VR 447 at 452 per McGarvie and Gobbo JJ; Transport Accident Commission v Jewell [1995] 1 VR 300 at 307-308 per Tadgell J.
Other forms of words that impose a lesser requirement of causal connection than proximate cause are "directly or indirectly caused by"[149], "traceable to"[150] and "occasioned by or happening through"[151].
[149]Mitor Investments Pty Ltd v General Accident Fire and Life Assurance Corporation Ltd [1984] WAR 365.
[150]Phoenix Assurance Co of Australia Ltd v Liddy (1984) 3 ANZ Insurance Cases ¶60-596.
[151]Switzerland General Insurance Co Ltd v Lebah Products Pty Ltd (1983) 2 ANZ Insurance Cases ¶60-498.
However, each case must be determined on its own facts according to the actual wording of the policy. As Gibbs CJ said in Australian Casualty Co Ltd v Federico[152]:
"The ordinary rules of interpretation apply to a policy of insurance. As in the case of any other commercial contract, a court may depart from the strictly literal meaning of a particular expression to place upon it an alternative construction which is more reasonable and more in accord with the probable intention of the parties if the words will bear that construction … Further 'the trend is, if anything, to adopt a liberal interpretation in favour of the insured, so far as the ordinary and natural meaning of the words used by the insurers permit this to be done'".
But, Gibbs CJ did go on to give even the words "caused by" a fairly strict construction[153]:
"However, the words 'caused by an accident' naturally refer to the proximate or direct cause of the injury, and not to a cause of the cause, or to the mere occasion of the injury."
[152](1986) 160 CLR 513 at 520.
[153](1986) 160 CLR 513 at 521.
Powles' conduct before the "investment" was undoubtedly one of repeated dishonesty and fraud. It is this conduct that the Court of Appeal has catalogued. The deposit of the funds in an account that was not a trust account so designated is of no relevance: Powles would still have been able to operate upon an Allens account however designated. The only dishonesty (in the sense in which that term need be considered and to which I have already referred) or fraud in relation to the "investment" were the deriving of a secret commission and possibly the giving of references in respect of Madden and Linpar. But the desire for the secret commission did not bring about the liability, or the loss, or, to put it as I think it should be put, the liability for the loss of the sum of $US8.55 million. The liability would have been incurred regardless of that dishonesty. Neither of these was an act or omission that brought about the loss. There were no doubt numerous omissions by Powles which contributed to, and were therefore perhaps "causal" in the tortious sense, of the liability for the loss, such as the omission to make proper inquiries and to communicate the results of them to the Trust. But what brought about the loss was the fraud of those who used the Swiss banking system to spirit away the money irretrievably. That the "investment" would have been made whether there was to be a secret commission or not, was in my view likely. Powles believed in the market. And although stupidity is not incompatible with criminality, he expected that an instrument would be obtained and would generate future profits, as would other such "investments" for the Trust. The dishonest conduct of Powles before the "investment" may well have been related to the loss of the Trust's money. It may even have tainted the relationship between it and the liability, but neither the fact of a relationship nor a tainting by the insured's conduct of it is sufficient to make the exclusion applicable. It requires that there be no less than an act or omission bringing about the liability, and not just a tainting or a related dishonest act or omission or series of them. And although subsequent conduct may often throw light on the nature of earlier conduct, the subsequent dishonesty of Powles in no way brought about the liability, or put any different complexion on the making of the investment by Powles.
Arguably, if a "but for" test were applicable, it might be possible to say, although in my opinion the evidence does not go quite far enough to do so, that, but for the desire for a secret commission, and further secret commissions, the "investment" would not have been made nor the money lost. But that is not an appropriate test to apply to the language of the exclusion.
I am fortified in this conclusion by the different language used in other parts of cl 5(f)[154]. Exclusions (i) and (ii) use the wider term "arising from". Exclusion (vi) uses a very expansive expression, "directly or indirectly caused by or contributed to by, or arising from". Had that language been used in the relevant exclusion a different view of Powles' conduct and the insurers' rights in respect of it here might well have been open. But the expression "brought about by" in the dishonesty exclusion cl 5(f)(v), is much more direct causal language, indeed it is language of a most explicit kind.
[154]"GENERAL EXCLUSIONS
…
[f] This Insurance shall not indemnify the Assured in respect of any liability:-
[i]for damages arising from death, bodily injury, physical loss or physical damage to property of any kind whatsoever [other than property in the care, custody and control of the Assured in connection with the Practice for which the Assured is responsible, not being property occupied or used by the Assured for the purposes of the Practice];
[ii]arising from a contract other than a contract to provide services within the definition of 'the Practice';
[iii]to repay any monies charged as fees and disbursements or for costs incurred in relation to any dispute as to fees and disbursements;
[iv] for the payment of any trading debt incurred by the Assured;
[v]brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured. Save that this exclusion shall not apply to liability arising out of any claim brought about by the dishonest or fraudulent act or omission of any person employed in connection with the Practice ...
[vi]directly or indirectly caused by or contributed to by, or arising from ionising radiations or contamination by radioactivity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel, the radioactive toxic explosive or other hazardous properties of any explosive nuclear assembly or nuclear component thereof; directly occasioned by pressure waves caused by aircraft or other aerial devices travelling at sonic or supersonic speeds, or from war, invasion, acts of foreign enemies, hostilities [whether war be declared or not], civil war, rebellion, revolution, insurrection, military or usurped power;
[vii]incurred in connection with a practice conducted wholly outside the states of New South Wales, Tasmania, Western Australia or the Australian Capital Territory;
[viii]incurred by the Assured in his capacity as an insurance agent."
There is one further aspect that has to be considered. Is the word "fraudulent" as used in the exclusion to be given the same alternative meaning as it has in the tort of deceit, that is, a meaning which embraces a misrepresentation made recklessly whose maker did not care whether it was true or false? I doubt it because of the contextual use of the word "dishonest" in the clause. But in any event I do not think that the reference given to the Trust in relation to Madden and Linpar was given without a belief in its truthfulness by Powles. It was his honest, if completely misconceived opinion that Madden could consummate the relevant purchase and future purchases of profitable instruments. As Derry v Peek[155] stresses, even gross negligence will not suffice to ground an action in deceit[156].
[155](1889) 14 App Cas 337.
[156]See, for example, (1889) 14 App Cas 337 at 369 per Lord Herschell.
For these reasons, in summary then, I would uphold the appeal: Powles did not intend to bring about the events giving rise to Allens' liability to the Trust; he did not intend to cheat or deceive it of the $US8.55 million; Powles' knowledge that he was taking an unauthorised risk in relation to a transaction which itself was authorised is not sufficient to attract the operation of the exclusion; omissions by Powles that may have contributed to, or caused, in the conventional, contemporary, tortious sense the loss and liability for it were not dishonest or fraudulent ones; and none of Powles' otherwise dishonest conduct referred to in the dishonesty catalogue brought about the relevant liability.
I would allow the appeal with costs. There are other issues outstanding. The appeal should be remitted to the Court of Appeal for these to be determined.