NOSS v HILTON SUPREME COURT OF NEW SOUTH WALES — COURT OF APPEAL PRIESTLEY JA, COLE JA and STEIN JA 11, 29 September 1997 [1997] NSWCA 230 SOLICITOR'S use of company funds without its authority — question of proximity giving rise to a duty of care — question of whether loss occurred. HELD — loss was suffered as a consequence of negligent acts. Priestley JA. Having had the benefit of reading Cole JA's reasons in draft I wish to make only two observations. I agree with Cole JA as to the existence and breach of a relevant duty of care. On the questions of the existence and extent of any damage suffered by the respondents the case presents some difficulties which, if treated in an abstract and very theoretical way, would lend some force to the appellants" submissions. However the various matters enumerated by Cole JA on this aspect of the case leave me comfortably satisfied that the parties at the trial before Giles J all recognised that the respondents had in fact lost their loan moneys to the amount of the cheque, and that this recognition accounts for the loss/damage question having been treated in the way it was. I agree with Cole JA that the appeal should be dismissed with costs. Cole JA. The appellants are solicitors who have appealed against a decision of Giles J delivered on 16 May 1995 in which his Honour held them liable in negligence to the respondents. On appeal there was no challenge to the findings of fact made by the trial judge, nor was the Court asked to make additional findings of fact. The appellants asserted that the trial judge had fallen into error in two respects, first, in holding that there was a relationship of proximity evoking a duty of care between the appellants and the respondents, and secondly, in holding that the respondents had suffered loss. It was contended that absent a supportable finding of loss the tort of negligence was not established. For these two reasons it was submitted there ought to have been a dismissal of the respondents" claim against the appellants in negligence. THE FACTUAL CIRCUMSTANCES As the facts were unchallenged, they may be stated in the terms found by Giles J: The plaintiffs Mr Howard Hilton and Miss Katherine Briscoe were husband and wife. They owned a house at Woollahra in Sydney. At all material times Mr Hilton, a former solicitor, was serving a gaol sentence, in the course of which he became acquainted with Mr Phillip Carver. This led to a proposal that Mr Hilton, Miss Briscoe, Mr Carver and Mr Carver's wife, Mrs Beverley Carver should together invest in real estate, in the case of Mr Hilton and Miss Briscoe by raising money for that purpose on mortgage of the then unencumbered house at Woollahra. It was suggested that Mr Hilton and Miss Briscoe saw the investment as a source of income while Mr Hilton was in gaol and after his release, but their acceptance of the proposal may have owed more to Mr Carver's skills as a confidence man. 2 UNREPORTED JUDGMENTS Mr Carver suggested a number of hotels for consideration, and in April 1988 he, Mrs Carver and Miss Briscoe inspected the Cabarita Hotel near Tweed Heads. In a manner not gone into, it was decided to purchase the hotel. A shelf company named Calarde Pty Ltd was acquired to be the purchaser. On 22 April 1988 Miss Briscoe and Mrs Carver became its directors, on 9 May 1988 Miss Briscoe and Mrs Carver became its sahreholdesrs, and on 12 May 1988 the name of the company was changed to Hanover Developments Pty Ltd (Hanover). Mr Carver oversaw all these arrangements and conducted all negotiations for the purchase of the hotel. Mr Carver also retained the first named first defendant, Mr Noss of Messrs Williams Palmer Noss, to act on behalf of the purchaser of the hotel. Mr Noss was told that the purchaser would be Calarde Pty Ltd, to be renamed Hanover, and that its directors and shareholders were Miss Briscoe and Mrs Carver. He opened a file naming Hanover as his client. Contracts for the purchase of the hotel were exchanged on 12 May 1988. At Mr Carver's request, Miss Briscoe provided to him a total of $250,00 as the Hilton/Briscoe share of the deposit (not all of which may have been used for that purpose). By a letter dated 31 May 1988 addressed to Calarde Pty Ltd at Mr Carver's home someone in Mr Noss" firm stated that stamp duty of $261,865.50 was payable on the contract. It was agreed between Mr Hilton, Miss Briscoe and Mr Carver that Mr Hilton and Miss Briscoe would provide the stamp duty on the contract and Mr and Mrs Carver would pay other costs of the purchase. On or about 19 June 1988 Mr Carver asked Miss Briscoe for a cheque for $261,865.50 for stamp duty. On 20 June 1988 Miss Briscoe and Mr Carver went to Miss Briscoe's bank, where Miss Briscoe obtained a bank cheque for $261,868.50 and gave it to Mr Carver. The cheque was made payable to the Commissioner of Stamp Duties or bearer and was crossed 'not negotiable'. It was common ground that the funds represented by the cheque were funds of Mr Hilton and Miss Briscoe, and that in this as throughout the transaction Miss Briscoe was acting on Mr Hilton's behalf as well as for herself. Within about a week the cheque was in the possession of Mr Noss, kept with the contract in the Hanover file pending instructions from Mr Carver to stamp the contract. There was a conflict of evidence over how the cheque reached Mr Noss."! Giles J resolved that conflict. In preferring the evidence of Mr Noss to that of Miss Briscoe, his Honour accepted that: [T]he cheque was given to him (Mr Noss) by Mr Carver about ten days prior to 6 July 1988. Mr Carver gave him the cheque one evening at his (Mr Noss") home, saying that there were still difficulties with the vendor of the hotel and that the contract should not be stamped until Mr Carver had decided whether the purchase would go ahead. Mr Noss took the cheque to his office and put it with the contract.'2 Giles J's findings of fact continued as follows: Mr Noss was also acting for Mr Carver in the refinancing of borrowings secured on Mr Carver's home. The home was owned by Kymcard Pty Ltd (Kymcard), and was the subject of four mortgages including a first mortgage to the Protective Commissioner and a second mortgage to Hunter BNZ Finance Ltd (Hunter BNZ). The second mortgage was overdue for repayment, Hunter BNZ had obtained an order for possession and issued a writ of possession, and a stay of execution of the writ of possession until 1. Appeal Book, 424U-426W. 2. Appeal Book, p.427T-428B. URJ NOSS v HILTON (Cole JA) 3 7 July 1988 had been negotiated. The proposed refinancing was principally a credit line facility from Citibank, and settlement was arranged for 6 July 1988. At the last minute Citibank declined to settle pending a valuation adjustment. Mr Carver told Mr Noss that the settlement had to occur on 6 July 1988, and said "You have my money for stamp duty — use that money'. Mr Noss replied that he was holding the cheque for stamp duty on behalf of Hanover, and Mr Carver said, "That's my money and I want you to use it. I have to settle today and I am instructing you to use my money'. There was further discussion in which Mr Noss asked how he was to know it was Mr Carver's money and was told that Miss Briscoe had put in money for the deposit and had more money to contribute 'and that money is part of my contribution', and that the money had come from the refinancing of property in Tasmania of which Mr Noss was aware. Mr Noss said, 'On the face of it it's Hanover's money, I should ring Kate Briscoe about it', and Mr Carver invited him to go ahead and affirmed that the cheque was his 'loan money to the company'. Mr Noss either did not telephone Miss Briscoe or telephoned and received no answer. He suggested that Mr Carver have the cheque reissued, and was told that that could not be done in time. Eventually Mr Noss agreed to do as Mr Carver asked provided he was given Mr Carver's written authority. Mr Carver wrote out and signed a direction to Messrs Williams Palmer Noss dated 6 July 1988 in the terms— I direct you to apply funds forwarded to you on account of stamp duty representing funds under my control and not within the control of Hanover Developments Pty Ltd (NSW) towards the discharge of Kymcard's Pty Ltd loan with Hunter BNZ The paid funds do not belong to Hanover Developments Pty Ltd (NSW). Mr Noss caused the cheque to be deposited in the trust account of Messrs Williams Palmer Noss with the second defendant Australian & New Zealand Banking Group Ltd, and the cheque was credited to that account and collected by the bank notwithstanding that it was payable to the Commissioner of Stamp Duties. In the records of Messrs Williams Palmer Noss the amount of the cheque was not credited to Hanover, but to Kymcard, and on 6 and 7 July 1988 Mr Noss caused the purchase of bank cheques in favour of the Protective Commissioner and Hunter BNZ which went to discharge Kymcard's liabilities. It was accepted in these proceedings that, whatever the result of a strict tracing exercise, in this way the funds represented by the cheque were used for the benefit of Mr Carver. Mr Noss asked Mr Carver for replacement funds for stamp duty. A letter from Mr Carver to Mr Noss dated 19 July 1988 recorded the sending of a cheque for $260,861 by courier, but the evidence was silent about whether a cheque was sent and, if it was, what happened to it. On Mr Carver's instructions, on 25 July 1988 Mr Noss sent to the vendor of the hotel a notice rescinding the contract for its purchase. There was litigation over the validity of the rescission, the result of which was not made known in the evidence. So far as the evidence showed, the $261,865.50 was not recovered from Mr Carver, Hanover or anyone else. Hanover was deregistered and dissolved in December 1992.'3 Additionally, Giles J found that: [T]he $261,865.50 was intended to be a loan to Hanover by Mr Hilton and Miss Briscoe, funds which could be used for Hanover's legitimate purposes notwithstanding that the particular occasion for the cheque was payment of stamp duty on the contract for the purchase of the hotel.'4 THE RESPONDENTS" CLAIM 3. Appeal Book, p428E-430M. 4. Appeal Book, p.443-O. 4 UNREPORTED JUDGMENTS The respondents" first claim against the solicitors was that they had converted the cheque for $261,865.50, that it was the property of the respondents, and that accordingly they suffered a loss in that sum. Giles J rejected that claim holding that the respondents were not the true owners of the cheque nor did they have a right to possession of the cheque. The second claim was in negligence. It was alleged that the appellant solicitors owed to the respondents a duty to take reasonable care of the cheque and in breach of that duty obtained payment of the cheque without the authority of the respondents and disbursed the proceeds otherwise than on the respondents" behalf. His Honour found: Although there was evidence (which I accept) that each of Miss Briscoe and Mrs Carver had told Mr Noss to take instructions from Mr Carver in relation to the purchase of the hotel, that did no entitle Mr Noss to permit the cheque which he thought was Hanover's cheque to be used to discharge Mr Carver's liabilities' .5 That finding was not challenged on appeal. Giles J expressed the view that, had Hanover been the plaintiff Mr Noss 'would have been in breach of his duty to Hanover in failing to verify otherwise than by Mr Carver's say-so that the funds were Mr Carver's funds.'6 Both parties on the appeal accepted that was so, but, of course, Hanover was not the plaintiff. Giles J found that there was a proximity in the relationship between the respondents and the appellants sufficient to give rise to a duty of care. The basis of his Honour's findings is found in the following passage: As well as knowing that Miss Briscoe was a shareholder in Hanover, Mr Noss knew that she and Mr Hilton had mortgaged their house to obtain money to be used by way of contribution to the purchase of the hotel. While he did not know (apart from what Mr Carver said to him on 6 July 1988) whether the cheque was the result of Hilton/Briscoe contribution or Carver contribution, he knew that the outside finance for the purchase was being or had been arranged but had not been drawn down, and so he must have appreciated that the cheque was the contribution of one or the other. His questioning of Mr Carver on 6 July 1988 so indicates: Mr Carver insisted that the cheque was part of his contribution and Mr Noss sought to be satisfied that it was — he asked how he was to know it was Mr Carver's money and where he got it from. Mr Noss felt the need to obtain Mr Carver's written authority. That the cheque was the result of Hilton/Briscoe contribution was, for all Mr Noss knew apart from what Mr Carver told him, just as likely as that the cheque was the result of Carver contribution, and the contribution was effectively to a joint venture for which Mr Noss was acting. The possibility, at the least, that a Hilton/Briscoe contribution was being wrongly diverted for the benefit of Mr Carver was given significance by Mr Carver's urgent need for money to satisfy Hunter BNZ. There was physical proximity in that Mr Noss held the cheque, there was circumstantial proximity in that although Miss Briscoe was not his client she and Mr Hilton were contributors to Hanover's purchase and may have been contributors of the cheque, and there was causal proximity in that wrongful diversion of a Hilton/Briscoe contribution would in all probability, if not necessarily, directly cause them loss. Mr Noss considered that he should ring Miss Briscoe because it was Hanover's money, but a moment's thought would have arrived at an equal need to ring Miss Briscoe in case Hanover's money was a Hilton/Briscoe contribution. In my opinion, on the facts of this case Mr Noss should not have done what Mr Carver asked without doing so; the 5. Appeal Book, p.446D-H. 6. Appeal Book, p.446P-R. URJ NOSS v HILTON (Cole JA) 5 relationship was such that the solicitors owed to the plaintiffs a duty to take care that what might have been their contribution to the purchase of the hotel was not misused for the benefit of Mr Carver.'7 THE APPEAL The appellants" primary contention was that Giles J was in error in determining that there was sufficient proximity to give rise to a duty of care. It was argued that once it was appreciated that the cheque was the property of the company, not of the respondents, 'the respondents could not reasonably assume, nor have a legitimate expectation, that the solicitor owed to them a personal duty, or was assuming a personal duty, to safeguard their "contribution". The solicitor had given explicit evidence that he regarded himself as acting for the company, not the respondents. The second contention was that as the emphasis at trial had been on the conversion count, and thus on the question of ownership of the cheque, there had been no investigation of loss which might flow to the respondents if monies comprising their loan to the company, which monies were in the hands of Mr Noss, were used other than for company purposes. There had been no enquiry regarding whether the respondents could recover the amount of the loan from the company. There was no rational basis for equating the amount of the loan to the company, being the amount of the cheque, with any loss suffered by the respondents. Absent proof of loss the claim in negligence must fail. I did not understand the appellants to contend that there were no circumstances in which a solicitor may owe a duty of care to persons other than those with whom he had a solicitor/client relationship. It is now established that such a duty may be owed to a disappointed beneficiary where the negligence of the solicitor results in theintentions of the testator in favour of the intended beneficiary not being implemented.' Further, in particular circumstances, solicitors have been held liable to persons not their client arising from negligent dealing with interests in property,° inappropriately dealing with monies on deposit,!° to a wife when acting for the husband in failing to ensure that their client's passport which they held did not fall into his hands,!! and for failing to provide independent advice to a third party.!2 Absence of a solicitor/client relationship is thus not necessarily a bar to a claim in negligence. Whether such a duty exists depends upon notions of proximity. As Giles J said in his judgment: The plaintiff's loss was financial loss, and whether the solicitors owed them a duty to take care to avoid that loss depends, as in Hawkins v Clayton, on whether there was a relationship of proximity in the sense used in this area of the law absent a solicitor/client relationship. Ihave set out the passage in Giles J's judgment in which his Honour enunciates the factors which persuaded him that sufficient proximity existed. In addition to those factors, on appeal the respondents contended that the substance of the transaction with which Mr Noss was concerned was that he was acting for two parties to a joint venture in which the company was merely a vehicle, and further Appeal Book, p449U-451F. Hill (trading as R F Hill & Associates) v Van Erp (1997) 71 ALJR 487. 9. Seymour v Seymour (1996) 40 NSWLR 358. 10. Purkiss & Anor v Hannigan (Court of Appeal, unreported, 13 February 1997). 11. Al Kandari v J R Brown & Co. [1988] 1 QB 665. 12. Krambousanos & Anor v Jedda Investments Pty Ltd & Ors (1996) 64 FCR 348. ox 6 UNREPORTED JUDGMENTS that he had acted or was acting for Miss Briscoe in her proposed divorce from Mr Hilton, a matter associated with the proposed purchase by the company of a hotel because of the need to have persons available as directors or licensees unassociated with persons having a criminal background. The appellants contended that there were persuasive factual and policy reasons against holding that such proximity as was established was sufficient to ground a duty of care. One factor was the fact as found that the cheque, and thus the money the subject of the claim, was the property of the company. There should not be held to be either generally or in the present instance, a duty of care between a lender to a company and a person into whose hands the funds of the company came to be held. Another factor was that the solicitor did not consider that he was acting for Miss Briscoe, but only for the company. A third factor was that the respondents had a recourse against the company to sue to recover their loan: a further remedy against the holder of the funds was not required. Further, Miss Briscoe should be regarded as a shareholder in the company, as distinct from a lender to it, and it is established that where a wrong is suffered by the company, it is the company which should recover loss, not the shareholders. !3 Finally, it was submitted that because it was not certain that if the solicitor permitted misapplication of the funds loss would necessarily flow to the respondents as lenders, that was a factor diminishing or negating the existence of sufficient proximity to give rise to a duty of care. Ultimately the question whether there is a sufficient proximity in any given case to give rise to a duty of care involves a subjective judgment unless the circumstances fall within a category which has been authoritatively determined to create such a duty. The present case does not fall within any such category. I have come to the view that Giles J was correct to hold that the proximity was sufficient to give rise to a duty of care to not act in such a way as to cause loss to the respondents in dealing with the funds of the company. I see no advantage in repeating in different words the factors which persuaded Giles J to the view he formed, other than to add the circumstance that the reality of the position in which Mr Noss found himself was that he was dealing with two disparate groups or families and having control over the company funds he must have recognised at least the possibility that the group formed by the respondents might suffer loss if he permitted the funds to be used in a manner other than for the company's purposes, as plainly he did. Giles J in fact had this to mind for he referred to 'a joint venture for which Mr Noss was acting'. I recognise that Dawson J, with whom Toohey J agreed, stated in Hill v Van Erp'4, a disappointed beneficiary case in which it was held that a duty was owed by the solicitor to the disappointed beneficiary, that: The duty arises from the special considerations involving testamentary dispositions which I have discussed above. There is nothing in what I have said which is to convey the view that whenever a person's performance of a contractual obligation may, if performed negligently, injure a third party's economic interests, that person owes the third party a duty of care. Nor is anything I have said intended to convey the view that, other than in a case of the present kind, a solicitor owes a duty of care to persons other than his client whose interests may be affected by the solicitor's performance of his or her duties to the client. The duty of care which I would recognise in the present case 13. Foss v Harbottle [1843] 2 Hare 461. 14. (1997) 71 ALJR 487 at 503. URJ NOSS v HILTON (Cole JA) 7 arises from the particular relationship between the parties, that relationship being analogous to other relationships of proximity in which a duty of care has been held to arise. It is that which, in addition to the forseeability of harm, provides the basis in this case for recognition of tortous liability for negligence. Nonetheless I am of the respectful view that the passage in the judgment of Dawson J which I am about to quote correctly states the general law applicable in this appeal. In different terms, the principle expressed in that passage is that a duty of care is imposed on a person who places himself in a relationship which the law recognise will as one of proximity with other persons where damage to those others is reasonably foreseeable as a consequence of careless behaviour on his part, and merely because a person has placed himself in that relationship by reason of a contract with another does not necessarily preclude a finding of proximity (although in some cases it might do so). The contract may give rise to an obligation to perform a task but the performance of the task may, in all the circumstances, give rise to a duty of care to perform it so as not to cause damage, whether of a physical or economic kind, to another. Even if one party to a contract can exclude liability to the other party for negligence in the performance of the contract but cannot do so with respect to someone who is not a party to the contract, that is no reason to deny the existence of a duty of care to that third party. A party to a contract is able to negotiate with respect to the protection of his interests whereas a third party is not in a position to do so.' 15 Here the solicitor had funds of the company yet he allowed them to be used without authority from the company for the private purposes of a third party in circumstances where he acknowledged that Mr Carver had no authority to instruct him on behalf of the company to permit its funds to be used for private purposes, where it has been held that he must have known that the funds came from one of two groups, and where it has been held that wrongful diversion of a Hilton/Briscoe contribution would in all probability, if not necessarily, directly cause them loss. The second contention of the appellant was that loss had not been established. The respondents" loss as lenders might have been recovered from the company. Giles J found that the $261,865.50 'was intended to be a loan to Hanover by Mr Hilton and Miss Briscoe'. It was not established that the company had no assets to meet a claim for repayment. The evidence regarding the financial position of the company was scant. Giles J did not in terms address the question, nor address quantification of the loss. His. Honour did find that 'so far as the evidence showed, the $261,865.50 was not recovered from Mr Carver, Hanover, or anyone else'. The second amended statement of claim by paragraphs 9 and 17 alleged that the plaintiffs had suffered loss and damage of $261,858.50. Those paragraphs were denied by the amended statement of defence. In accordance with the practice in the Commercial Division a statement of issues was handed to the trial judge at the commencement of the trial, and was agreed.!6 Regarding the claim in negligence the issues were: 6. Further or alternatively, whether in the circumstances the first defendants, or alternatively the first named first defendant owed a duty to take reasonable care of the said cheque and/or the proceeds thereof. 15. (1997) 71 ALJR 487 at 500. 16. Appeal Book, p.26-27. 8 UNREPORTED JUDGMENTS 7. Whether the first named defendants, or alternatively, the first named first defendant obtained instructions from the plaintiffs or alternatively the second named plaintiff to deal with the cheque as was done. 8. Whether, if no instructions were so obtained the plaintiffs have suffered loss and damage. The quantum of loss was thus not in issue although the question whether loss was suffered was. I mention that neither of the written outline of submissions of the appellants or the respondents before Giles J which are with the court file, address any aspect of the question of loss. Although Giles J did not directly address the matter of loss, it is plain that he found loss established because he directed a judgment in the respondents" favour in the sum of $261,865.50 grounded in negligence. Notwithstanding the statement of issues, one suspects that the question of existence of loss was not in truth an issue at the trial in the manner in which it was conducted. That loss was suffered by the respondents, although perhaps not the precise quantum of loss, flowing from the found negligence is, to my mind, tolerably clear. In reality there was never any prospect of the amount of the loan being recovered from the company. The company was a $2 company. Mr Carver was a confidence man. There was no evidence that he ever put funds into the company although there are statements of his intention to do so. So far as the evidence extends the company was a vehicle to purchase an hotel. A deposit of $100,000 was paid on that purchase but it did not proceed. Proceedings were commenced to recover that sum but, as Giles J found, there was no evidence of the outcome of those proceedings. One might presume that if that sum was recovered the appellants would have sought to seize it. Mr Noss held a lien over his files for a considerable time for non-payment of his fees. Although he ceased to act in the action to recover the deposit, it would be likely that he would have monitored those proceedings so that if the sum were recovered he would have sought recovery of his fees. The company, so far as the evidence extends, was unable to proceed with another prospective purchase in Berry Street, North Sydney because it was unable to satisfy the financier's requirements after the purchase of the hotel fell through. And finally, the company was deregistered pursuant to s 475 of the Corporations Law in 1992 after failing to lodge any returns for three years. These circumstances, to my mind, make it clear that the respondents suffered loss in consequence of the appellants" negligent acts. For these reasons the appeal should be dismissed with costs. Stein JA. I agree with Cole JA. Orders accordingly. Counsel for the appellant: M A Pembroke SC/G A Sirtes Solicitors for the appellant: Ebsworth and Ebsworth Counsel for the respondent: D M J Bennett QC/F G Lever/J V Gooley Solicitors for the respondent: KNPW Lawyers