UNDERWRITERS at LLOYDS v ELLIS SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MEAGHER, HANDLEY and POWELL JJA 4 July 1997, 25 February 1998 [1998] NSWCA 242 Damages — Costs of proceedings — Whether recoverable as damages. Insurance — Professional indemnity insurance — Lawcover — Exclusion where relevant liability "brought about by the dishonest or fraudulent act of the Assured including any Partner or former Partner of the Assured" — Whether exclusion also extends to costs incurred by Assured in defending claim. Meagher JA I agree with Powell JA. Handley JA In these matters I have had the benefit of reading the reasons for judgment of Powell JA in draft form. I agree with those reasons and the orders his Honour has proposed but wish to add brief additional reasons of my own. Mr Plowes signed a certificate which stated that he was acting as solicitor for Mr Nikolai Mecak, Mr Craig Mecak and Kimberley McDonald in relation to the mortgage transaction between Nikolai and Farrow Mortgage Services Pty Ltd. The certificate also stated that he had explained to his clients the nature and contents of the documents and their respective obligations and liabilities under them. He then forwarded the certificate to Farrow who acted upon it by making an advance to Nikolai. The trial Judge, following the dicta of this Court in Comino v Manettas (5 March 1993, u/r) held that the certificate was dishonest but not fraudulent. The facts referred to demonstrate that Mr Plowes made material representations of existing fact to Farrow which were false, which he knew to be false, and on which he intended Farrow to rely. Farrow relied on those representations, acted to its detriment, and suffered damage when it was forced to litigate the validity of its mortgage with Nikolai without the benefit of a valid certificate from his solicitor. All the ingredients of the long established tort of deceit were therefore present and Mr Plowes' conduct must be characterised not only as dishonest, but also as fraudulent. I agree with Powell JA that the judgments for $1 entered against Messrs Plowes and Ellis (the firm) on the cross-claims brought by Farrow, Craig Mecak and McDonald must be set aside because damage is the gist of the torts of deceit and negligent misrepresentation and awards of nominal damages are not available in law. I also agree with Powell JA that the cross-claimants failed to prove actual damage and they are not entitled at this late stage to orders for inquiries as to their damages. Since the existence of the false certificate did not come to the knowledge of Craig Mecak or McDonald until after the litigation commenced, they could not establish reliance on it in the transaction. They sought to take advantage of the certificate in the proceedings but did so knowing that it was false and therefore they cannot establish relevant reliance on the certificate. Reliance is not, in all cases, a necessary ingredient of an action in negligence against a solicitor for 2 UNREPORTED JUDGMENTS causing purely financial loss. See Hawkins v Clayton & Ors (1988) 164 CLR 539 and Hill v Van Erp (1997) 188 CLR 159. However the present case is not in any sense analogous to those and in my judgment Craig Mecak and McDonald did not have causes of action against the firm in negligence. The firm was insured by the appellants in respect of claims first made against them during the period from 1 July 1990 to 30 June 1991 in respect of civil liability incurred in connection with their former practice in partnership. This was "run off' insurance as the partnership had been dissolved as from 31 May 1990, but the partners remained exposed to claims arising from past neglects and defaults which had occurred during the partnership. The relevant insuring clause (cl2) provided indemnity for the firm: "... up to an amount not exceeding the sum insured and Related Costs against all Joss to the Assured (including claimant's costs)... in respect of any description of civil liability whatsoever incurred in connection with the Practice...". (emphasis supplied) This must be read with General Exclusion 5(e)(v) from: "Any liability... brought about by the dishonest or fraudulent act of omission of the Assured including any Partner or former partner...". (emphasis supplied) The trial Judge held that while this exclusion denied cover for the actual claims ("any liability"), it was narrower than the primary cover because it did not deny indemnity for losses incurred otherwise than as a result of a liability. The time spent by Mr Ellis, acting for himself in this litigation, and his disbursements, represented a loss but not a liability. Accordingly Mr Ellis, as the innocent partner, could recover his own costs of the proceedings from the underwriters as a loss within cl2 which was not a liability excluded by cl5(e)(v). I agree with Powell JA that the terms of the policy do not support this distinction between loss and liability. C12 provides cover against "loss... arising from any claim... in respect of any description of civil liability", but cl5(e)(v) excludes from the cover, "any liability... brought about by the dishonest or fraudulent act or omission" of the firm or any partner. The cover in respect of "any... civil liability" is therefore consistent with the exclusion "in respect of any liability" of the relevant kind. Where the exclusion applies, there is therefore no room for any residual cover in respect of legal costs incurred by an innocent partner in defending claims arising from the fraud or dishonesty of another partner. This is yet another in what appears to be a steady flow of cases reaching this Court where a solicitor has given a false certificate of independent advice or witnessed a legal document without seeing the party who executed or should have executed it. See, for example, Demetrios v Gikas Dry Cleaning Industries Pty Ltd & Ors (1991) 22 NSWLR 561, Fraser v The Council of the Law Society of NSW (CA u/t, 7 August 1992), Esanda Finance Corporation Ltd v Tong & Ors (1997) 41 NSWLR 482 and others. There must have been many more which have never reached this Court, or any court, some of which have been the subject of decisions of the Legal Profession Disciplinary Tribunal. These cases reflect a serious decline in the professional responsibility and basic honesty of a minority of solicitors which, unless arrested, will diminish the standing of all solicitors. A solicitor's certificate is in danger of becoming a sick joke. Once it was not so. Powell JA The questions which arise for determination upon the present appeal and cross-appeal are: URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 3 1. whether, in the Judgment which he delivered on 31 March 1995, when sitting in the Equity Division, Hulme J erred when he held that, upon the proper construction of the Certificate of Insurance issued to the First ("Mr Ellis") Respondent in respect of the policy of indemnity for professional negligence issued by the Appellants, the Appellants, although not liable to indemnify Mr Ellis in respect of losses sustained by the Second ("Farrow"), Fourth ("Craig Mecak") and Fifth ("Ms McDonald') Respondents by reason of the dishonest acts of the Sixth Respondent ("Mr Plowes"), were nonetheless liable to indemnify Mr Ellis in respect of the costs incurred by him in the defending the claims which had been brought against him and Mr Plowes by (inter alia) Farrow, Craig Mecak and Ms McDonald; and 2. whether it was open to Hulme J to hold that each of Farrow, Craig Mecak and Ms McDonald were entitled to recover against Messrs Ellis and Plowes an amount representing the sum by which the costs of defending the proceedings or of the various cross-claims had been increased as the result of Mr Plowes' action and, as a means of giving effect to that conclusion, to award to each of Farrow, Craig Mecak and Ms McDonald a nominal sum ($1.00) for damages and to order Messrs Ellis and Plowes to pay a percentage of the costs of each of Farrow, Craig Mecak and Ms McDonald of the proceedings, such costs to be taxed on a common fund basis. However, while the issues for determination on this appeal and cross-appeal may be stated in a reasonably succinct fashion, it is far less easy to record, in a reasonably clear and succinct fashion, the tangled web of facts which has given rise to those questions. Nonetheless, I proceed, as best I might, to attempt so to do. The proceedings arose ultimately out of the activities of one Garry Mecak, the son of Nikolai Mecak, who was the plaintiff below, and the father of Craig Mecak. At all relevant times, Garry Mecak lived in a de facto relationship with Ms McDonald. The absence from the materials which were placed before the Court on the hearing of the appeal and cross-appeal of most of what appear to have been the relevant documents and of much of the evidence given at various stages on the hearing before Hulme J at first instance, means that one is left, for the most part, to rely upon the statement of facts contained in the various Judgments which Hulme J was to deliver at various times during, and on the conclusion of, the hearing at first instance. It is said that Garry Mecak had been something of an entrepreneur and that, for some time, at least, prior to 1987, he had been successful in his entrepreneurial activities. It is also said that, prior to 1987, Garry Mecak had obtained financial assistance from a variety of financial institutions of which, for all present purposes, one need note only an organisation known as "NZI Corporation" ("NZI"). Although the detail is less than clear, it would seem that, in relation to Garry Mecak's dealings with NZI, Nikolai Mecak had entered into a guarantee, which guarantee was secured upon Nikolai Mecak's home at 116 Water Street, Cabramatta, that home being erected on the land the subject of Certificate of Title Registered Volume 6841 Folio 66 ("the Water Street property'). It would seem that, by no later than October 1987, Garry Mecak's business enterprises had fallen upon hard times and that he had defaulted under whatever were the financial arrangements which he had with NZI. This being so, it would appear that, on 2 October 1987, NZI caused to be issued a Summons claiming against Garry Mecak, Nikolai Mecak and others - I assume, who had also guaranteed the liabilities of Garry Mecak - payment of the sum of some 4 UNREPORTED JUDGMENTS $770,000.00 plus interest, that Summons being served upon Nikolai Mecak on 12 October 1987. Thereafter, judgment in favour of NZI against Garry Mecak and Nikolai Mecak was entered on 9 February 1988, following which, as it would appear, NZI, on 8 March 1988, caused a Bankruptcy Notice to be served upon Nikolai Mecak. Meantime, so Hulme J recorded in Judgments which he delivered on 3 September 1993, and on 24 February 1994, Garry Mecak had entered into discussions with officers of NZI with a view to relieving Nikolai Mecak - or, at the least, the Water Street property - from action by NZI, as the result of which discussions an arrangement was arrived at whereby NZI agreed that, if it were paid the value of the Water Street property, it would release that property from the security which it held - it may be that the arrangement went further and was intended to release Mr Nikolai Mecak from any further liability to NZI, but this is far from clear. It would appear that, that arrangement having been made, Garry Mecak then approached Farrow with a view to having it advance to Nikolai Mecak on the security of the Water Street property, an amount - seemingly later fixed in the sum of $51,000.00 - sufficient, when supplemented by $10,000.00, or thereabouts, provided by Garry Mecak, to enable Nikolai Mecak to "pay out" NZI. As the materials which have been placed before the Court do not include any of the documents which led to the arrangement being made with Farrow, or the mortgage which appears later to have been granted to Farrow, what Hulme J has recorded in his various Judgments would appear to indicate that, as the amount which it was proposed that Farrow should advance was about 85% of what was said to be the value of the Water Street property, Farrow was not willing to make that advance solely on the strength of the security of a mortgage over that property and that it required that, in addition to that security, the repayment of the advance should be supported by the personal covenant of persons other than Nikolai Mecak. That this was so would appear to be indicated by the fact that, in the mortgage which was later granted to Farrow, Craig Mecak and Ms McDonald would appear to be described as the borrowers or the covenantors. In the Judgment which he was to deliver on 24 February 1994, Hulme J held that, in agreeing to become a party to the arrangement which had been agreed upon, and to execute the mortgage, Craig Mecak had been subjected to undue influence on the part of his father. In the same Judgment, Hulme J held that, although, in agreeing to become party to the arrangement which had been agreed upon, and in agreeing to execute the mortgage, Ms McDonald had not been subjected to undue influence on the part of Garry Mecak, nonetheless she had been led by him to believe that she would not ever have to repay the moneys the subject of the transaction. Although, again, the position is not entirely clear, there seems to be little doubt that, agreement in principle to the advance by Farrow having been obtained, Garry Mecak retained the services of Mr Plowes - a solicitor then carrying on practice in partnership with Mr Ellis under the style of "Plowes & Ellis" - to act for his father in relation to the proposed mortgage. At the same time, so it would appear, Farrow retained Messrs Abbott Tout Creer & Wilkinson ("Abbott Tout') to act on its behalf in relation to the proposed transaction, the member of the staff of that firm who had the conduct of the transaction being a Mr R J G Miles. URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 5 On 11 December 1987, Mr Miles wrote to Messrs Plowes & Ellis, advising that firm of his involvement in the matter, forwarding requisitions and seeking additional information. Thereafter, on 15 January 1988, Mr Miles wrote again to Messrs Plowes & Ellis enclosing a number of documents for completion by Nikolai Mecak and others. Among those documents was one described as a "'Solicitor's Certificate" which was in the following form: " SOLICITOR'S CERTIFICATE MORTGAGE LOAN BY FARROW MORTGAGE SERVICES PTY LTD TO N MECAK PROPERTY 116 WATER STREET, CABRAMATTA I, of Messrs Plowes & Ellis, Solicitor, hereby certify that I am acting as the Solicitor for the Mortgagor and Covenantors in relation to the above mortgage loan transaction and that before the Mortgagor and the Covenantors executed the Mortgage I explained the nature and contents of the documents and the filed Memorandum of covenants referred to in the Mortgage and their respective obligations and liabilities to them and they appeared to have understood same. I understand that the Mortgagee will rely upon this Certificate in making the said Mortgage advance. DATED 19 Solicitor" That Certificate, dated 2 March 1988, and with Mr Plowes' name inserted in the first line, and with what was apparently his signature at the end, was forwarded to Abbott Tout under cover of a letter dated 9 March 1988 - the probability is that, at the same time, there were forwarded to Abbot Tout the other documents, including the mortgage, which had earlier been forwarded to Messrs Plowes & Ellis for execution by Nikolai Mecak, Craig Mecak and Ms McDonald. Despite the form of the Certificate, when the proceedings first came before Hulme J on 23 August 1993, there was filed in Court on behalf of Mr Plowes a Notice of Admission of Facts (AB 109-110) which, omitting formal parts was as follows: "1. The second defendant did not advise either the plaintiff, Nikolai Mecak or the third cross defendants Craig Avan Mecak and Kimberley Francis (sic) McDonald in relation to the Mortgage dated 11 March 1988 registered No X441938. 2. The second defendant signed the document entitled 'Solicitor's Certificate' a copy of which is annexed to the Affidavit of Robert John George Miles sworn 22 April 1993 at p61. 3. At all times prior to signing the said Solicitor's Certificate the second defendant relied upon representations made to him by Garry Mecak that the plaintiff and the third cross defendants fully understood the nature and effect of the said mortgage. 4. The second defendant admits liability in relation to the claims made against him to date in these proceedings by the plaintiff, Nikolai Mecak, the first defendant, Farrow Mortgage Services Pty Ltd (in Liquidation), the third cross defendants Craig A van Mecak and Kimberley Francis (sic) McDonald, and the seventh cross defendant, Peter Ellis." What I have just recorded would seem to suggest that the mortgage transaction was completed on 11 March 1988, at which time some $60,000.00 or thereabouts - $51,000.00 of which was advanced by Farrow and the balance of which was 6 UNREPORTED JUDGMENTS provided by Garry Mecak - was paid to NZI which discharged its mortgage over the Water Street property, the mortgage to Farrow thereafter being registered and given dealing No X441938. It would seem that, at least in the early stages, the monthly instalments payable under the mortgage were duly paid - one assumes, by Garry Mecak - until March 1989 when the instalment for that month was either not paid or not paid on the due date. However, it would seem that from October 1989 no further instalments were paid under the mortgage. Although the date on which it occurred does not appear, the proceeding number borne by these proceedings would suggest that these proceedings were commenced at some time - possibly in late April or early May - during the first six months of 1990. At that time, so it would seem, there was filed on behalf of Nikolai Mecak a Statement of Claim to which Farrow was then the only party-Defendant. In that Statement of Claim so it would seem, Nikolai Mecak asserted, first, that what purported to be his signature on the mortgage was a forgery; second, that, if that signature were not a forgery, he had been induced to sign the mortgage as the result of the fraud of Garry Mecak who, so it was alleged, was Farrow's agent for the purpose; and, third, that if the signature on the mortgage were his, the circumstances in which he came to sign the mortgage were such that he was entitled to relief pursuant to the provisions of the Contracts Review Act 1980 ("the Review Act"). Although the materials which have been placed before the Court do not contain any Defence on the part of Farrow, one can but assume that, at some time - but when is anything but clear - there was filed a Defence which put in issue all relevant allegations in the Statement of Claim. Although the relevant material is less than clear, it would seem that the partnership which had been formerly carried on between Mr Plowes and Mr Ellis was dissolved as from 31 May 1990, and that, thereafter, Mr Ellis continued to practise - but as a sole practitioner - at the former partnership premises but whether under the style of "Plowes & Ellis" or under the style of "PJ Ellis & Co" is not clear. Notwithstanding the dissolution of the former partnership of Plowes & Ellis, on 21 June 1990, Minet International Professional Indemnity Ltd, on behalf of the Appellants, signed and issued the Certificate of Insurance, the true construction of which provides the principal question for determination upon this appeal and cross-appeal. In the schedule to that Certificate the "Name of Firm/Sole Practitioner" was said to be "Plowes & Ellis" and the period of insurance was said to be "From: Ist July 1990 to 30th June 1991 both days inclusive". So far as is relevant, that Certificate of Insurance provided as follows: "This is to certify that in accordance with the authorisation granted to the undersigned under the Master Policy referred to in the Schedule by the Insurers subscribing such Master Policy (thereinafter called 'The Insurers') insurance is granted by the Insurers in accordance with the terms and conditions following and in consideration of the payment of the premium stated in the Master Policy. 1. INTERPRETATION (a) 'The Assured' means the Firm and each Partner in the Firm or the Sole Practitioner as the case may be shown in the Schedule and includes each person employed in connection with the practice (including each articled clerk and each solicitor who is a Consultant or Associate with the Firm) and the estate and/or the legal representatives of each of the foregoing and also includes each service or URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 7 administration company or trust insofar as its activities are carried out in connection with the Practice, to the intent that each of the foregoing shall be severally insured hereunder. (b) 'The Practice' means the business of practising as a solicitor undertaken by the Assured or the Assured's predecessors in business alone or with others; (c) 'The Period of Insurance ' means the period specified in the Schedule. (d) 'The Firm ' means the firm as from time to time constituted carrying on the Practice. (e) 'Partner' means any Solicitor held out by the Firm as a Partner in the Firm. (f) 'Related Costs' means all costs and expenses incurred with the Insurers' consent (such consent not to be unreasonably withheld) in the defence or settlement of any claim against the Assured, provided that if a payment in excess of the Sum Insured is made to dispose of any such claim the 'Related Costs' shall mean only such proportion of such costs and expenses so incurred as the Sum Insured bears to the amount of the payment so made. (g) 'Sum Insured' means the sum insured shown in the Schedule. ' 2. INSURING CLAUSES On the terms and conditions herein contained the 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 other than loss arising out of any circumstances or occurrence which has been notified under any other insurance attaching prior to the inception of this Certificate of Insurance. Provided that: - (a) For the purposes hereof all claims arising from the same act or omission, whether made against one or more Assured, shall be regarded as one claim; (b) The liability of the Insurers under this Certificate of Insurance and all other Certificates of Insurance issued under the Master Policy in respect of all claims arising from the same act or omission shall not exceed the Sum Insured and Related Costs. 4. GENERAL CONDITIONS (a) (i) The Assured shall not admit liability for, or settle, any claim falling within the Insuring Clauses hereof or incur any costs or expenses in connection therewith without the consent of the Insurers (such consent not to be unreasonably withheld), and subject to (ii) below the Insurers shall be entitled at their own expense at any time to take over the conduct in the name of the Assured of the defence or settlement of any such claim. 5. GENERAL EXCLUSIONS (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 8 UNREPORTED JUDGMENTS 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);" Although the material which is before the Court does not demonstrate that this was so, the fact that the Appellants' denial of liability under the Certificate of Insurance is based upon the provisions of cl5(e)(v) of the Certificate of Insurance would tend to indicate that the claims against Messrs Plowes & Ellis later incorporated in the Further Amended Statement of Claim and the various Cross-Claims to which I will later refer - which were made by Nikolai Mecak, Farrow, Craig Mecak and Ms McDonald - were first made in the period | July 1990 to 30 June 1991. Since the material which is in the appeal papers appears to be incomplete, it is difficult, indeed, to plot, with any real sense of accuracy, the progress of the proceedings and, in particular, the progress of the pleadings. However, it would seem that commencing in or about July 1992 there were filed the various Cross-Claims to which I will shortly refer and the Further Amended Statement of Claim to which I shall also refer. Although it appears not to have been the first step in this process, it would seem that, in August, or a little later, 1992, there was filed on behalf of Nikolai Mecak the Further Amended Statement of Claim to which I have referred. In that Further Amended Statement of Claim Nikolai Mecak sought to recover against Mr Plowes damages for his (Mr Plowes') negligence in failing adequately to protect his (Nikolai Mecak's) interests in relation to the mortgage transaction. In the First Cross-Claim, Farrow, alleging default under the mortgage, sought judgment for possession of the Water Street property and consequential orders. Nikolai Mecak's Defence to that Cross-Claim reflected the various allegations made by him in his Statement of Claim. In the Second Cross-Claim, Farrow sought to recover against Messrs Plowes & Ellis, damages for what was alleged to have been Mr Plowes' negligent certification and, as well, for what was alleged to have been Mr Plowes' misleading and deceptive conduct (Fair Trading Act s42, s72). Although, as I have earlier indicated, Mr Plowes admitted liability to Farrow, Mr Ellis denied liability on the ground that Mr Plowes' act was personal. In the Third Cross-Claim, Farrow sought to recover against Craig Mecak and Ms McDonald the principal and interest payable under the mortgage. While admitting his signature to the mortgage Craig Mecak asserted that it was unenforceable against him, inter alia, upon the grounds that it was procured by undue influence on the part of Garry Mecak. For her part, Ms McDonald, while admitting having been a party to the mortgage, denied liability upon the ground (inter alia) of undue influence on the part of Garry Mecak. In the Fourth Cross-Claim, Craig Mecak sought against Farrow, either a Declaration, or an Order pursuant to the provisions of the Review Act, that the mortgage was unenforceable against him. Farrow put in issue all material allegations under that Cross-Claim. In the Fifth Cross-Claim, Ms McDonald sought against Farrow either a Declaration, or an Order pursuant to the provisions of the Review Act, that the mortgage was unenforceable against her. Farrow put in issue all material allegations in that Cross-Claim. URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 9 In the Sixth Cross-Claim, Ms McDonald sought to recover against Messrs Plowes & Ellis damages for their alleged negligence in failing adequately to protect her interests in relation to the mortgage transaction. Although, as I have earlier recorded, Mr Plowes was later to admit liability to Ms McDonald, the Defence which was filed on behalf of Messrs Plowes & Ellis, at a time when they were jointly represented by the solicitors for the Appellants, put in issue all material allegations in the Cross-Claim. Although it is not entirely clear that this was so, the probability is that that the Eighth and Ninth Cross-Claims were not filed until after there had occurred the matters to which I next refer. On 14 May 1993, Messrs Minter Ellison Morris Fletcher ("Minter Ellison'), which firm was then acting in the proceedings for Messrs Plowes & Ellis, wrote to Mr Ellis a letter (AB 111-112) which, omitting formal parts, was as follows: "Claim by Mecak In our letter of 20 April 1993, we advised that we have provided Law Cover with an updated report dealing with the issues raised by the Court of Appeal's decision in GIO v Manettas & Ors. We have now received instructions in relation to the matters raised in the report. Our instructions are that having regard to the Court of Appeals' Judgment, you are entitled to indemnity for the claims made by Nikolai Mecak, Kimberley McDonald and Craig Mecak. This is irrespective of whether the solicitor's certificate was dishonest because, on the basis that judgment is correct, the giving of the certificate was not the effective cause of your potential liability. However, as for Farrow's claim, the effective cause of any liability may be the giving of the certificate. The Court's finding as to whether the certificate was or was not dishonest is, therefore, relevant to the question of indemnity. Accordingly, it will not be possible to make a final decision as to indemnity until the proceedings have been determined. So, Law Cover reserves in position in relation to your entitlement to indemnity for Farrow's claim. You should feel free to take independent advice on the question, if you wish. Also, if you wish to discuss any aspect of the issue with us, please do not hesitate to give us a call." Thereafter, on 2 June 1993, Minter Ellison wrote to Mr Ellis a letter which, omitting formal parts, was as follows: "Claim by Mecak As we have advised in the enclosed letter, we are no longer able to act on your behalf in these proceedings. Accordingly, we give notice pursuant to Pt66 r7(2) of the Supreme Court Rules that we intend to file and serve a notice of ceasing to act unless a notice of change of solicitor is served upon us by 5.00 pm on Friday 11 June 1993." The probability is that it was following the receipt of this letter that there was filed on behalf of Mr Ellis the Eighth and Ninth Cross-Claims. In the Amended Eighth Cross-Claim which was later filed on his behalf, by leave granted by Hulme J on 28 July 1993, Mr Ellis claimed against the Appellants, inter alia, an order that they indemnify him against any judgment or order for damages or interest on damages or costs that might be awarded against him in the proceedings, together with an order that they indemnify him against the solicitor and own client costs which he might incur in his defence of the various Cross-Claims in the proceedings. In their Defence to the Amended Eighth Cross-Claim, the Appellants (inter alia) denied liability upon the ground that Mr 10 UNREPORTED JUDGMENTS Plowes' giving of the Certificate was a dishonest or fraudulent act on his part at a time when he was a partner in the firm of Plowes & Ellis. In the Ninth Cross-Claim which was filed on his behalf on 16 June 1993, Mr Ellis sought to recover from Mr Plowes damages for what was alleged to be his (Mr Plowes') breach of contract and breach of duty to Mr Ellis in failing to act in the partnership business in good faith and without negligence. As I have earlier recorded, Mr Plowes was later to admit liability to Mr Ellis in this respect. The proceedings appear to have come before Hulme J in the first instance on 30, 31 August, 1, 2, 3 September 1993, on the latter of which days his Honour delivered the first of the three Judgments which he was to deliver in the proceedings. For reasons which are not entirely clear to me - but which appear in part to have been the expiry of the time which had been set aside for the hearing of the proceedings - his Honour, in that Judgment, dealt only with the issues between Nikolai Mecak and Farrow. In that Judgment, his Honour, for the reasons which he then gave, rejected Nikolai Mecak's claim that the signature on the mortgage was a forgery and the further claim by Nikolai Mecak that he had been induced to execute the mortgage by fraud practised upon him by Garry Mecak. In the result, his Honour concluded that Nikolai Mecak's claim against Farrow should be dismissed and that Farrow's claim against Nikolai Mecak should succeed. Although it is not clear that this was so, it would seem that, after he had delivered the Judgment to which I have just referred, Hulme J reserved his Judgment on the various Cross-Claims which had been raised between the parties, that Judgment being delivered on 24 February 1994. In that Judgment, Hulme J dealt with the questions whether each of the various Cross-Claims had, or had not, been made out and, if made out, what, in broad general terms, ought be the nature of the relief accorded to the successful Cross-Claimant. However, his Honour did not make any formal orders to give effect to his conclusions but adjourned the hearing for the purpose of giving directions as to the further conduct of the proceedings. I set out below a summary of Hulme J's conclusions. Insofar as Nikolai Mecak had sought to recover damages against Mr Plowes, his Honour concluded that, no matter what advice Nikolai Mecak had been given by Mr Plowes, he would nonetheless have entered into the transaction. Accordingly, his Honour concluded that Nikolai Mecak's claim against Mr Plowes should fail but, as Mr Plowes had earlier admitted liability, reserved to Nikolai Mecak liberty to argue that he ought have a Judgment for nominal damages. As I have earlier recorded, at the conclusion of his first Judgment, Hulme J had expressed his view that Farrow's Cross-Claim against Nikolai Mecak should succeed. However, as his Honour's attention appears, meantime, to have been drawn to the fact that Farrow had not, in its Cross-Claim against Nikolai Mecak, sought to recover the debt secured by the mortgage, his Honour indicated that the Judgment in favour of Farrow should be limited to a Judgment for possession of the at Water Street property. So far as Farrow's Cross-Claim against Messrs Plowes & Ellis was concerned, Hulme J concluded, first, that Mr Plowes' conduct was conduct for which Mr Ellis, as a partner, was, in law, liable and, second, that he was disposed to the view that the appropriate measure of damages was that sum by which Farrow's costs of the proceedings had been increased as a result of Mr Plowes' misconduct. URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 11 So far as Farrow's Cross-Claim against Craig Mecak and Ms McDonald was concerned, Hulme J concluded: 1. that Craig Mecak had been induced to enter into the mortgage transaction as the result of the exercise of undue influence on the part of Garry Mecak, of which undue influence Farrow ought to be regarded as having had notice, and that, accordingly, Farrow's Cross-Claim against him (Craig Mecak) should fail; 2. that, although Ms McDonald had not been induced to enter into the mortgage transaction as the result of undue influence on the part of Garry Mecak, nonetheless, the circumstances were such that, on her Cross-Claim against Farrow, she was entitled to relief pursuant to the provisions of the Review Act, that relief being such as to limit her liability to Farrow to one-half of the balance (if any) owing after the sale of the Water Street property. So far as Craig Mecak's Cross-Claim against Farrow was concerned, Hulme J indicated that, for the reasons which he gave when dealing with Farrow's Cross-claim against Craig Mecak and Ms McDonald, Craig Mecak was entitled to orders against Farrow relieving him from any liability under the mortgage transaction. So far as Ms McDonald's Cross-Claim against Farrow was concerned, his Honour indicated that, for the reasons which he gave when dealing with Farrow's Cross-Claim against Craig Mecak and Ms McDonald, Ms McDonald was entitled to orders varying the terms of the mortgage transaction so as to make it clear that her liability was limited to indemnifying Farrow against 50% of any loss arising in the event that the proceeds of sale of the Water Street property were not sufficient to discharge the indebtedness, and further limited so that she was in no way liable to bear the costs of the proceedings between Farrow and Craig Mecak. So far as the several Cross-Claims brought by Ms McDonald and Craig Mecak against Messrs Plowes & Ellis were concerned, Hulme J concluded that the probability was that, no matter what advice they were given, Ms McDonald and Craig Mecak would have entered into the mortgage transaction and that, accordingly, they had not been shown to suffer any loss arising in the transaction itself. However, his Honour concluded that the probability was that the costs of the proceedings had been increased as the result of Mr Plowes' defaults and that each of Ms McDonald and Craig Mecak would have suffered some loss in that regard. So far as Mr Ellis' Cross-Claim against the Appellants was concerned, Hulme J concluded that Mr Plowes' conduct, although not fraudulent, was nonetheless to be regarded as "dishonest" (he referred to the decision of this Court in Comino & Ors v Manettas!) and that, accordingly, the exception provided for in cl5(e)(v) of the Certificate of Insurance operated to deny Mr Ellis indemnity in respect of any liability to which he or Mr Plowes was subject. So far as Mr Ellis' Cross-Claim against Mr Plowes was concerned, Hulme J recorded his view that Mr Ellis was entitled to succeed on that Cross-Claim for damages thereafter to be assessed. As I have earlier (see p16 (above)) recorded, Hulme J did not, following the delivery of his Judgment of 24 February 1994, make any formal orders to give effect to his conclusions, but, rather, adjourned the hearing for the purpose of giving directions as to the further conduct of the proceedings. 1. 5 March 1993 (unreported) 12 UNREPORTED JUDGMENTS Although, given the state in which the appeal papers have been left, it is not clear that this was in fact so, it would appear that, in the course of giving directions as to the further conduct of the proceedings, Hulme J directed that each of the various parties to the proceedings prepare and serve upon the relevant other party or parties, a written statement of the claims made by the particular party against the other relevant party or parties and the contentions sought to be advanced in respect of any such claim or claims. That this was in fact so is to be indicated by the fact that some 70 pages of the appeal papers are given over to various documents - many of the dates attributed to which appear to be erroneous - variously described as "Particulars of Damages Claimed and Contentions", "Reply... to Contentions" and the like, all of which documents - despite the dates attributed to them in the index to the appeal papers - appear to have been prepared, served and filed in the period between 24 February 1994 and 18 July 1994 when the proceedings next came before Hulme J. Although it is not necessary for the purposes of this Judgment to record in any detail the content of the various claims and the contentions and counter contentions set out in those various documents, it is appropriate to record that, in the written Statements of Claims and Contentions and Replies prepared by Mr J C Kelly SC who then appeared - as he has done on the hearing of this appeal - for Mr Ellis, it was contended (inter alia): 1. that none of Farrow, Ms McDonald or Craig Mecak was entitled to recover - whether by way of an order for costs or an award of damages - any sum representing the amount by which their costs, or the costs of any of them, had been increased as a result of Mr Plowes' misconduct; and 2. that, whatever be the entitlement of Mr Ellis to indemnity in respect of the claims made against him and Mr Plowes by reason of the giving by Mr Plowes of the Certificate, cl2 of the Certificate of Insurance entitled Mr Ellis to claim against the Appellants the costs - including disbursements - incurred by him in defending himself against all of the claims which had been made against him in the proceedings. The further hearing before Hulme J took place on 18, 19, 20 July 1994, at which time Mr CR DeRobillard appeared for Nikolai Mecak, Mr RRI Harper appeared for Farrow, Mr BJ Sharpe appeared - but only briefly - for Mr Plowes, Mr JC Kelly SC appeared for Mr Ellis and Ms J Oakley appeared for the Appellants. Although, so far as I can judge it, the greater part of the hearing before Hulme J on this occasion was directed toward submissions in support of, or by way of defence to, the various claims that had been advanced on behalf of the various parties, there would appear to have been tendered some evidence directed toward establishing the quantum of the amount due in respect of the mortgage - that evidence being given by a Mr R J Edge, a chartered accountant who seems to have been employed in the firm of which the liquidator of Farrow was a member, and who seems to have had the day to day management, on behalf of the liquidator, of the liquidation, and, as such, to have had the primary responsibility for the recovery of loans made by Farrow - and of material directed towards quantifying costs incurred by the various parties in relation to the proceedings. At the conclusion of submissions, Hulme J reserved his decision. Although, in the Judgment which he was to deliver on 31 March 1995, Hulme J dealt in some detail with the orders which he was to make in the proceedings and in respect of the various cross-claims, and the reasons for his making those orders, the comparatively limited nature of the issues which have been raised on the appeal and the cross-appeal, and the absence of the hearing of the appeal of URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 13 any representative of Nikolai Mecak, Mr Plowes, Ms McDonald and Craig Mecak mean that it is unnecessary to record, in their ultimate detail, all of the orders made by Hulme J or the reasons for his making those orders. For present purposes, it is sufficient to record the following: 1. The claims for damages against Messrs Plowes & Ellis (a) Hulme J held (AB 326) that, in the light of the reasons contained in the Judgment which he had delivered on 24 February 1994, it was not open to Mr Ellis to submit that none of Farrow, Ms McDonald and Craig Mecak was entitled to recover damages by reason of Mr Plowes' misconduct or to dispute that the measure of damages recoverable by each was the amount by which the costs of the proceedings had been increased as the result of Mr Plowes' misconduct; (b) in the course of elaborating upon his reasons for so holding, Hulme J said (inter alia) (AB 328): "T add, in response to another of Mr Kelly's submissions that Mr Craig Mecak and Ms McDonald claimed as damages against Messrs Plowes & Ellis their costs of (at least) the proceedings. My finding that their damage was limited to only (an increased) part of these is not outside the ambit of the issues in the pleadings. Furthermore, I am satisfied that, in the case of each party, the increase was not merely in consequence of that party's claim against Mr Plowes. That distinction is important because of the long standing principle which precludes recovery as damages in civil proceedings of costs of pursuing that claim. See Berry v British Transport Commission (1962) 1 QB 306, Ritchie v British Insulated Callenders Cables (Aust) Pty Ltd (1960) 77 WN (NSW) 229, Hanrahan v Ainsworth (1985) 1 NSWLR 370, Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358. The rule does not preclude recovery as damages of costs of proceedings against third parties." (c) when he came to the question of quantifying the amounts of damages recoverable by each of Farrow, Ms McDonald and Craig Mecak, Hulme J, after referring to the difficulties in estimating the amount by which the costs of each of the proceedings had been increased, said (AB 330-331): "T propose, as far as I can, to avoid the difficulties referred to above. If by making an order for costs I can reduce to a nominal figure a party's damages on account of an increase in the costs of the proceedings beyond those which would otherwise have been incurred, I will do so. ... It might fairly be said that approximately 15% of the 4 days hearing covered by that transcript was occasioned by Mr Plowes' defaults. My impression of the addresses is that 15% is also a reasonable estimate of the proportion of the time they occupied which was a consequence of Mr Plowes' actions, although I would include in this 15% the time spent on the cross-claims against Messrs Plowes & Ellis. So far as preparation costs are concerned, I have nothing more substantial to go on that the matters to which I have just referred and an impression of the likely significance in the preparation of the case Mr Plowes' actions would have had. As the 15% which appears to me to include the costs of cross-claims themselves, there would be an element of doubling up if I was to award the costs of a cross-claim and, by way of damages or additional order for costs, 15% of a party's costs. Accordingly, insofar as I feel able to deal with a party's damages 14 UNREPORTED JUDGMENTS flowing from Mr Plowes' defaults by way of costs order, I propose generally to use the figure of 10%. Again, necessarily, this figure is one based largely on impression. However, I am satisfied that the result of its application will be as fair and accurate as my best estimate, expressed in dollars, of a party' (sic) damages. To the extent to which an order for costs is being used as a substitute for damages, there is a deal to be said for directing that those costs be taxed on a common fund basis upon the ground that this most nearly approximates the requirement that damages provide reasonable compensation. The argument against the choice of this standard is the practical one that I may then be complicating a case which is already horrendously expensive by introducing a second standard for taxation, ie additional to the normal party and party one, however I take the view I should adhere to principle. Furthermore, in those cases where I am disposed to order 15% of a party's costs to be paid, inter alia, on account of damages, I regard myself as justified in ordering the whole sum to be taxed on a common fund basis. 2. Mr Ellis' claim against the Appellants for indemnity in respect of his own costs. When he came to consider this claim, Hulme J wrote (inter alia) (AB 353-357): "T indicated in my earlier Reasons that this claim failed because of an exclusion clause in the relevant policy. In respect of this Cross-Claim also, Mr Kelly SC sought to canvass a number of matters covered in my earlier Reasons. I do not propose to deal with such submissions. However there was one claim advanced in the latest hearing which was not considered by me previously and which is fairly raised in the Eighth Cross Claim. It was submitted that the policy covered, not only Mr Ellis' liability, but also his costs of defending the proceeding and that the exclusion clause did not extend to deprive Mr Ellis of cover in respect of these costs. There were issues concerning the extent of these and whether they included the cost of Mr Ellis ' Cross-Claim against Mr Plowes. Mr Kelly's argument was that, even accepting the conclusion at which I had previously arrived that cl5(e)(v) denied Mr Ellis' indemnity in respect of his liability on the Cross-Claims, because cl2 extended to loss including related costs, the indemnity provided by that cl2 was wider than that excluded by cl5(e)(v). I agree with this submission. 'Loss' and 'liability' are words with different meanings and the difference should be given effect to. Thus the exclusion clause does not operate to prevent recovery of all loss which Mr Ellis may have suffered. Mr Ellis' claim was for legal fees. It fell into two parts. The first was in a sum of $21,850.00 representing the time Mr Ellis had spent in the conduct of the case between the time the solicitors for the underwriters had informed him that they were no longer prepared to act and he should engage his own solicitors and 3 September 1993 when the first hearing before me concluded. That time had been costed at the rate of $250.00 per hour which Mr Ellis said was his usually hourly rate. The second was in an amount of $27,593.40 for disbursements incurred, of which the largest component was counsel's fees. Mr Ellis' evidence in respect of these matters was not challenged and I accept it. Counsel for the underwriters also accepted that the cost of Mr Ellis' defence was, in principle, incurred with the underwriter's consent. URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 15 It was submitted on behalf of the underwriters that the liability excluded by cl5(e)(v) extended to any liability for (Mr Ellis') legal fees. Those legal fees were it was said 'brought about by' Mr Plowes' actions. The expression 'brought about by' introduces the concept of causation and there can be no doubt that but for Mr Plowes' actions, Mr Ellis would not have incurred any liability for the legal fees now under consideration. However, interposed between Mr Plowes' actions and the incurring of those fees was firstly, the institution of proceedings by Ms McDonald, Farrow and Messrs Mecak and the decision of Mr Plowes himself to incur the fees. In these circumstances it does not seem to me that there is sufficient proximity between Mr Plowes' actions and the liability for the fees to properly describe the liability as having been "brought about by' those actions. Furthermore, the adoption of Miss Oakley's submissions in this regard would lead to the strange result that the underwriters would not be liable in respect of fees incurred but not paid but would be liable in respect of fees paid by Mr Ellis because, by that time, he had suffered a loss and there was no existing liability. Accordingly I do not regard the exclusion clause as protecting the underwriters from liability for the loss suffered by Mr Ellis by way of his legal fees of the proceedings. The formal Orders to give effect to the conclusions expressed by Hulme J in his Judgment of 31 March 1995 insofar as those conclusions related to the Cross-Claims which had been brought by Farrow, Ms McDonald and Craig Mecak appear to have been made on 11 April 1995 (AB 363) those Orders apparently having been for the entry of judgment in favour of each of those Cross-Claimants against Messrs Plowes & Ellis in the sum of $1.00 and an order that Messrs Plowes & Ellis pay 15% of the costs of each of those Cross-Claimants of and incidental to the proceedings, such costs to be taxed on a common fund basis. It is not clear when it was that Hulme J made the formal Orders intended to give effect to the conclusions which he reached in his Judgment of 31 March 1995 insofar as those conclusions related to Mr Ellis' Cross-Claim against the Appellants. What appears to be a draft of a Minute of those Orders (AB 364-365) - in which draft Mr Ellis is mis-described as "the Eight Cross-Claimant" - contains (inter alia) the following: "The Court declares that: 1. The Eighth Cross-Claimant is entitled to be indemnified by the Ninth Cross-Defendants for his costs of defending the Second, Sixth and Seventh Cross-Claims against him pursuant to cl2 of the contract of insurance between them entered into from 1 July 1990. 2. The Eighth Cross-Claimant is not entitled to be indemnified for any other liability that he may have to any other party in these proceedings. The Court orders that: 1. The Ninth Cross-Defendants pay the Eighth Cross-Claimants costs of defending the Second, Sixth and Seventh Cross-Claims against him as agreed or taxed. 2. The Ninth Cross-Defendant (sic) pay the Eighth Cross-Claimant's costs of the Eighth Cross Claim. The Court directs that: 16 UNREPORTED JUDGMENTS 1. In default of agreement as to the amount of costs to be paid by the Ninth Cross-Claimant (sic) pursuant to O1 that those costs be taxed on the basis that: (a) Mr Ellis is not entitled to recover his charge out rate (including profit) unless it is demonstrated that, by and to the extent that he spent time on his defence to the Second, Sixth and Seventh Cross-Claims he would have lost monies (sic) he would have made from other clients. Thereafter, the Appellants appealed in respect of the Declarations and Orders made by Hulme J against them in respect of the Cross-Claim which had been brought by Mr Ellis. In their Amended Notice of Appeal - in which both Mr Ellis and the Cross-Claim brought by him against the Appellants were both mis-described - the principal grounds of appeal were: 1. that Hulme J had erred in holding that the provisions of cl5(e)(v) did not operate to prevent recovery of legal fees and expenses incurred by Mr Ellis in defending himself in respect of the Cross-Claims brought by Farrow, Ms McDonald and Craig Mecak against him either alone or in conjunction with Mr Plowes; and 2. that Hulme J erred in holding that the legal fees and costs which had been incurred by Mr Ellis in so defending himself had not been "brought about by" Mr Plowes' conduct. For his part, Mr Ellis cross-appealed in respect of both the Judgments entered, and the Orders made, by Hulme J in favour of Farrow, Ms McDonald and Craig Mecak against him and, as well, in respect of the Declaration and Orders made by Hulme J in his favour against the Appellants. In the Notice of Cross-Appeal which was filed on behalf of Mr Ellis, the principal grounds of appeal taken in respect of the Judgments and Orders made in favour of Farrow, Ms McDonald and Craig Mecak were: 1. that any increase in the costs of those parties did not flow from any breach of duty on the part of Mr Plowes for which breach of duty Mr Ellis might be held responsible; and 2. as the amount of damages found in favour of those parties was merely nominal, they were not entitled to a judgment against Mr Ellis or any consequential order for costs. Insofar as concerned the Declarations and Orders made in favour of Mr Ellis against the underwriters were concerned, the principal grounds of appeal were: 3. that Hulme J erred in holding that the provisions of cl5(e)(v) operated so as to deny Mr Ellis an entitlement to indemnity in respect of the claims made by Farrow, Ms McDonald and Craig Mecak; and 4. that, in any event, Hulme J erred in failing to hold that any increase in the costs incurred by Farrow, Ms McDonald or Craig Mecak was not "brought about by" the conduct of Mr Plowes. When the Appeal and Cross-Appeal came on for hearing the only parties who took any active part in the hearing were the Appellants, for whom Mr D L Davies SC and Ms J Oakley appeared, Mr Ellis, for whom Mr J C Kelly SC and Mr CD Freeman appeared, and Farrow, for whom Mr M W Hadley appeared. Although, for reasons which to them appeared sound, Mr Kelly, by arrangement with Mr Davies, addressed first, it is, I think, clear enough, that the first question which falls for determination is whether, on the true construction of cl2 and cl5 of the policy, the Appellants were liable to indemnify Mr Ellis against any "loss" sustained by him, whether that "loss" represented a sum or sums URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 17 payable by him, by way of damages or otherwise, to Farrow, Ms McDonald and Craig Mecak and/or the fees and costs incurred by him in seeking to defend himself in respect of the claims made against Mr Plowes and himself either jointly or alone by Farrow, Ms McDonald and Craig Mecak. It is clear enough that the answer to this question depends upon the interaction of cl2 - the insuring clause - and cl5 - the exclusions clause - of the Policy, for, whatever may once have been the approach required to be taken to an exclusion clause, it is now accepted that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity (see, for example, Darlington Futures Ltd v Delco Australia Pty Ltd?). Reduced to its most simple form, cl2 of the Policy provides that "(subject to) the terms and conditions... contained (in the Policy) the insurers shall indemnify the assured... against all loss to the assured... arising from any claim or claims... made against the assured... in respect of any description of civil liability whatsoever incurred in connection with the practice...", while, reduced to its most simple terms, cl5(e)(v) of the Policy provides that the obligation cast on the insurers by cl2 of the Policy shall not extend to any case in which the civil liability giving rise to the claim against the assured was "brought about by the dishonest or fraudulent act or omission of... any... former partner of the assured." If - as I believe to be the case - this is the correct approach to be taken to the interaction of cl2 and cl5(e)(v) of the Policy, then it would follow that, if the claims made by Farrow, Ms McDonald and Craig Mecak related to a liability in Mr Ellis brought about by the dishonest or fraudulent act or omission of Mr Plowes, then the Appellants were not liable to indemnify Mr Ellis against any loss sustained by him arising from any of such claims, whether or not that loss represented the amount of any damages or costs payable by Mr Ellis to any of Farrow, Ms McDonald or Craig Mecak or represented the fees and costs incurred by him in seeking to defend himself against any of such claims. In seeking to distinguish between "loss" and "liability" in the way in which he did in the extract from his Judgment which I have set out above (see p25 (above)) Hulme J, in my view, fell into error. This being so, it follows that the Appellants are liable to indemnify Mr Ellis only if: 1. Hulme J was correct in holding that Mr Ellis was liable to each of Farrow, Ms McDonald and Craig Mecak for damages by reason of the conduct of Mr Plowes for which, in the circumstances, Mr Ellis was to be held responsible; and 2. Mr Plowes' conduct was not to be regarded as dishonest or fraudulent. Since, during the course of argument on the hearing of the appeal, it appeared to have been accepted that the decision of this Court in Comino v Manettas3 dictated that Mr Plowes' conduct in relation to the Certificate was, although not fraudulent, nonetheless to be regarded as having been "dishonest", it follows that the real question for determination in respect of this aspect of the appeal is 2. (1986) 161 CLR 500, 510; 68 ALR 385, 391-392 3. supra 18 UNREPORTED JUDGMENTS whether the liability to which Hulme J held Mr Ellis subject to compensate Farrow, Ms McDonald and Craig Mecak, was "brought about by" the conduct of Mr Plowes in signing the Certificate. As I have earlier (see p12 (above)) recorded, in the Cross-Claim which it brought against Messrs Plowes & Ellis, Farrow, relying upon what was alleged to have been a general duty of care and, as well, the provisions of the Fair Trading Act, asserted that, acting in reliance upon the Certificate signed by Mr Plowes, it entered into the mortgage transaction and that, by reason of Mr Plowes' issue of the Certificate, it had suffered loss and damage, particulars of which loss and damage were said to include (inter alia): "(Ms McDonald and Craig Mecak) have each instituted proceedings against (Farrow) seeking to have the mortgage set aside upon grounds including that they were not aware of the nature and effect of the mortgage prior to signing." As I have earlier (p13 (above)) recorded, in the Cross-Claim which she brought against Messrs Plowes & Ellis, Ms McDonald alleged that Mr Plowes, or Messrs Plowes & Ellis, having undertaken the work of solicitors on her behalf in relation to the mortgage alleged that Mr Plowes or Messrs Plowes & Ellis had failed adequately to protect her interests in relation to the mortgage in that he, or they, did not properly advise her as to the nature and effect of the mortgage and her liabilities and obligations thereunder, by reasons of which facts she claimed to be entitled to be indemnified against any Judgment against her in favour of Farrow and the costs and expenses incurred by her in relation to the Cross-Claim brought against her and Craig Mecak by Farrow. Ms McDonald's claim against Messrs Plowes & Ellis was, thus, based, not upon her being exposed to risk as the result of a dishonest certification by Mr Plowes, but upon the assumption of a duty of care to her and the failure of Mr Plowes to fulfil that duty to her. The Cross-Claim which was filed by Ms McDonald against Messrs Plowes & Ellis is to be contrasted with that (AB 65-72) filed by Craig Mecak against Messrs Plowes & Ellis. In that Cross-Claim, Craig Mecak claimed to be entitled to be indemnified in respect of any Judgment entered against him in favour of Farrow and the costs and expenses incurred by him in relation to the proceedings, the bases upon which that claim to indemnity were founded being: 1. that by issuing the Certificate to Farrow, upon which Certificate Farrow relied in relation to the mortgage transaction, Mr Plowes exposed Mr Mecak to the liabilities of a covenantor under the mortgage; and 2. alternatively, that Mr Plowes, or Messrs Plowes & Ellis, assumed a duty of care to him (Craig Mecak) in relation to the mortgage transaction, which duty of care he or they failed to discharge and by reason of which failure he became subject to the obligations of a covenantor in respect of the mortgage. This being the form taken by each of the relevant Cross-Claims, it is to be observed that, at least as a matter of pleading: 1. Farrow's claim to indemnity was based upon the issue to it by Mr Plowes of the Solicitor's Certificate, the issue of which Certificate was, in the circumstances, to have been regarded as a dishonest act on the part of Mr Plowes (see, Comino v Manettas*) and which act, being an act undertaken in furtherance of a business of the partnership of Plowes & Ellis, was an act for which Mr Ellis was in law to be regarded as having been liable together with Mr Plowes; 4. supra URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 19 2. although the issue of that Certificate by Mr Plowes appears to be the basis upon which Ms McDonald founded her claim that Mr Plowes, or Messrs Plowes & Ellis, assumed a duty of care to her, Ms McDonald's claim for indemnity was based upon the alleged failure of Mr Plowes, or of Messrs Plowes & Ellis, to discharge their duty of care rather than upon the fact that, by issuing the Certificate, Mr Plowes or Messrs Plowes & Ellis exposed her to the risks involved when she assumed the liabilities of a covenantor under the mortgage; by contrast, the primary basis upon which Craig Mecak founded his claim against Mr Plowes or against Messrs Plowes & Ellis was that, by issuing the Certificate, Mr Plowes exposed him (Craig Mecak) to the risk involved in his becoming a covenantor under the mortgage. The phrase "brought about by" is one which connotes a causal relationship between the liability in question and the act or omission sought to be relied upon. This being so, it invites an application of the principles which have been developed by the courts in relation to issues of causation. In Comino v Manettas5 Mahoney JA, as he then was - with whom, on this point, each of Sheller and Cripps JJA agreed - said that: "The phrase looks to what actually brought about the liability, in negligence, tort or otherwise, to (the relevant plaintiff)." Hulme J's conclusion that each of Farrow, Ms McDonald and Craig Mecak was entitled to recover damages against Messrs Plowes & Ellis, the measure of which damages was, prima facie, that sum by which the costs of the proceedings of each had been increased, necessarily carried with it a conclusion on the part of his Honour that the liability of Messrs Plowes & Ellis to pay such damages was actually brought about by Mr Plowes' conduct in issuing the false Certificate. I see no real problem with that approach insofar as it relates to Farrow and Craig Mecak for the cause of action which each sought to raise against Messrs Plowes & Ellis was based - in the case of Farrow - wholly, or - in the case of Craig Mecak - at least partly, upon Mr Plowes' issue of the false Certificate. However, such an approach would not seem to be appropriate in respect of the award of damages - if that award were properly made, a question to which it will be necessary later to turn - in favour of Ms McDonald for, as I have previously noted, the Cross-Claims which Ms McDonald sought to raise against Messrs Plowes & Ellis were based, not upon Mr Plowes' conduct in issuing a false Certificate, but upon Mr Plowes' conduct in assuming a duty of care towards Ms McDonald and his failure to discharge that duty. If the views which I have recorded as to the interaction of cl2 and cl5 of the Policy and as to the relationship between Mr Plowes' conduct and the liability upon which Hulme J sought to found his awards of damages in favour of Farrow, Ms McDonald and Craig Mecak be correct, then it follows, in my view, that, while his Honour was correct in holding that Mr Ellis was not entitled to indemnity in respect of the Judgments and Orders which he was later to make in favour of Farrow and Mecak, he was in error in holding that Mr Ellis was nonetheless entitled to indemnity in respect of his costs of defending the Cross-Claims which had been brought by Farrow and Craig Mecak. Further, if my views on those matters be correct, it would seem to follow that his Honour was in error in holding that Mr Ellis was not entitled to indemnity in respect of the Judgment and Orders - assuming them to have been properly made - which he proposed to make in favour of Ms McDonald but that - upon the same 5. supra 20 UNREPORTED JUDGMENTS assumptions - he was correct in holding that Mr Ellis was entitled to an indemnity in respect of the Cross-Claim which had been brought against Messrs Plowes & Ellis by Ms McDonald. These conclusions notwithstanding, it remains necessary to determine whether, in the circumstances, it was open to Hulme J to make any award of damages in favour of Farrow, Ms McDonald and Craig Mecak or any of them. By way of introduction to this question, it should be noted that the causes of action sought to be raised by Farrow, Ms McDonald and Craig Mecak against Messrs Plowes & Ellis were not causes of action founded in contract but were causes of action based - in the case of Farrow - upon the provisions of the Fair Trading Act or - in the case of Ms McDonald - upon the assumption of a duty of care and a failure to discharge that duty, or - in the case of Craig Mecak - upon the taking of an action which led to him being exposed to risk, all of which causes of action, so it seems to me, invited the application - whether directly or by analogy - of the principles to be applied to claims founded in tort. In the Statement of Issues which was handed in by Mr Kelly at the commencement of the hearing of the Appeal and Cross-Appeal, it was not disputed that, despite the long-standing principles which precludes the recovery as damages in civil proceedings of the costs of pursuing the claim the subject of those proceedings, it was open to a Court, in an appropriate case to include in an award of damages the costs of proceedings against third parties - such a submission, if made, would have been difficult to sustain in the light of the authorities which permit the recovery of such costs, not merely in actions for wrongly arrest and malicious prosecution, but also in actions for damages for malicious abuse of the court's process (see, for example, Coleman v Buckinghams Ltd®; Hanrahan v Ainsworth'). Rather, it was suggested in that Statement of Issues that a number of questions were raised for consideration, which questions included the following: 1. whether it was open to Hulme J to hold that any increase in costs which had been suffered by Farrow, Ms McDonald or Craig Mecak had been caused by the action of Mr Plowes in issuing the false Certificate, rather than by the decision of those parties to raise the several Cross-Claims which they had raised; 2. assuming that, at least in theory, it was open to Hulme J so to do, whether it had been established that the costs incurred by one or more of Farrow, Ms McDonald or Craig Mecak had in fact been increased by reason of the conduct of Mr Plowes; 3. whether, in the circumstances, it was open to Hulme J to make an award of nominal damages in favour of each of Farrow, Ms McDonald and Craig Mecak and to make the order for costs which, in each case, he did. So far as the first of these questions is concerned, it seems to me that, at least in theory, it was open to Hulme J to find that the costs incurred by each of Farrow and Craig Mecak in relation to the proceedings had been increased as the result of the issue by Mr Plowes of the false Certificate. It is, I think, clear enough that one of the issues which was raised in the proceedings brought by Nikolai Mecak against Farrow, and one of the issues which was raised in the Cross-Claim brought by Farrow against Ms McDonald and Craig Mecak, was whether or not those persons or any of them had had the terms of the mortgage and of the deposited Memorandum explained to them as the Certificate which had been 6. (1962) 63 SR 171; 80 WN 593 7. (1985) 1 NSWLR 370 URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 21 issued by Mr Plowes purported to certify. It follows that, to the extent to which any of Farrow, Ms McDonald and Craig Mecak became concerned, in the course of the proceedings, or of the relevant Cross-Claims, to assert, or to deny, the correctness of the facts asserted in the Certificate, the probability is that that party's costs were likely to have been increased beyond the level which they would otherwise have reached. However, while, as I have earlier recorded, Farrow and Craig Mecak, in the several Cross-Claims which they raised against Messrs Plowes & Ellis sought to rely on the issue of the false Certificate as giving rise to a cause of action, and as going to the measure of damages flowing from that cause of action, Ms McDonald, as I have earlier recorded, did not. This being so, it seems to me that it was not open to Hulme J, even in theory, to hold that the costs incurred by Ms McDonald in relation to the proceedings had, by reason of the issue of the Certificate, been increased beyond the level which they would otherwise have reached. The second and third questions to which I have earlier referred may be dealt with together. If, as I have earlier recorded as being my view, the causes of action which Farrow, Ms McDonald and Craig Mecak sought to raise in the various Cross-Claims which they raised against Messrs Plowes & Ellis were such as, whether directly or analogically, required the application of the principles which required to be applied to causes of action founded in tort, then, in each case, each of Farrow, Ms McDonald and Craig Mecak bore the onus of establishing that it, she or he had, in fact, suffered damage, and of providing to the Court material which enabled the Court to establish the quantum of damages in each case. In the present case, as it seems to me, each of Farrow, Ms McDonald and Craig Mecak ought to be regarded as having failed to discharge that onus, it following, in my view, that each of the several Cross-Claims which they have sought to raise against Messrs Plowes & Ellis ought to have been dismissed with costs. It may be contended that the view which I have just expressed is an overly strict one, for the common practice in proceedings in the Equity Division of the Court is that, so long only as a prima facie case of damages has been established, the question of whether or not any damage has, in fact, been sustained and, if so, what is the appropriate award of damages to be made in respect of such damage as has been established, is, at the relevant plaintiff's risk as to costs, referred to the Master for inquiry and determination, further consideration and further costs being reserved. However, while that is the common practice in proceedings in the Equity Division of the Court, it is not a practice which is universally followed, nor was it followed in the present case. It is apparent that Hulme J, with the acquiescence of the relevant parties, himself undertook the task of determining whether or not Farrow, Ms McDonald and Craig Mecak had sustained any damage in respect of the causes of action which they respectively sought to raise against Messrs Plowes & Ellis and, if so, what was the appropriate award of damages to be made in each case. It is equally clear, as it seems to me, both that Hulme J failed to find that either of Farrow or Craig Mecak had in fact incurred costs beyond those which they would have incurred had Mr Plowes not issued his Certificate and that, in any event, the material which had been placed before him did not permit him to make any assessment of the amount of such increase - if it in fact had occurred - in costs. Further, it is clear - since he held that, even if Mr Plowes had discharged the duty of care which Ms McDonald sought to raise, Ms McDonald would still have entered into the mortgage transaction - that Hulme J found that Ms McDonald had suffered no damage in respect of the alleged breach of the duty of care which 22 UNREPORTED JUDGMENTS she sought to raise against Messrs Plowes & Ellis. This being so, it follows, in my view, that Ms McDonald's Cross-Claim against Messrs Plowes & Ellis should have been dismissed with costs. It is no answer to the views which I have just recorded to point to the fact that, in each case, Hulme J entered Judgment in favour of Farrow, Ms McDonald and Craig Mecak in the sum of $1.00 by way of nominal damages and, in lieu of determining the quantum of damages - which so he seems to have thought each must have sustained - made the special orders as to costs to which I have earlier referred. As I understand it, the concept of "nominal damages" is one which is limited to claims founded in contract in which, a breach having been established, actual damage has not been established, it following that an award of nominal damages in respect of claims founded in tort, where damage is the gist of the action, is impermissible. Further, it seems to me that, while in an appropriate case, it might be proper to award as damages a sum determined by reference to the costs in fact incurred in what might be described as third party proceedings, that is not a course which Hulme J adopted in the present case - if he had done so he would have entered Judgment for each of Farrow, Ms McDonald and Craig Mecak in the appropriate sum and, in addition, would have awarded each of them as against Messrs Plowes & Ellis the costs of their respective Cross-Claims. It follows, in my view, that each of the relevant Cross-Claims should have been dismissed with costs and that, to that extent at least, the Cross-Appeal should be upheld. For these reasons the Orders which I would propose are as follows. 1. ORDER that, to the extent set out below, each of the Appeal and the Cross-Appeal be upheld. 2. ORDER that each of the several Declarations and Orders made on the Cross-Claim brought by the Respondent/Cross-Appellant against the Appellants/First Cross-Respondents be set aside. 3. IN LIEU THEREOF (a) DECLARE that the Respondent/Cross-Appellant is entitled to be indemnified by the Appellants/First Cross-Respondents in respect of so much of the costs of the Respondent/Cross-Appellant of the Cross-Claim brought against by the Fifth Cross-Respondent as are not recovered by him from such Cross-Respondent pursuant to the order for costs set out below. (b) ORDER that the Appellants/First Cross Respondents indemnify the Respondent/Cross-Appellant to the extent set out in the preceding Declaration. (c) ORDER that the Cross-Claim brought by _ the Respondent/Cross-Appellant against the Appellants/First Cross-Respondents otherwise be dismissed. (d) ORDER that the Respondent/Cross-Appellant pay four-fifths of the costs of the Appellants/First Cross Respondents of the said Cross-Claim. 4. ORDER (a) that each of the several Judgments entered, and each of the several Orders made, in favour of the Second, Fourth and Fifth Cross-Respondents respectively on the Cross-Claims brought by it, him and her respectively against the Respondent/Cross-Appellant be set aside; URJ UNDERWRITERS at LLOYDS v ELLIS (Powell JA) 23 (b) that in lieu thereof each of the said Cross-Claims be dismissed; (c) that the Second, Fourth and Fifth Cross-Respondents pay the costs of the Respondent/Cross-Appellant of the Cross-Claim brought by it, him or her respectively against the Respondent/Cross-Appellant. 5 5. ORDER that the Respondent/Cross-Appellant pay the costs of the Appellants/First Cross Respondents of the Appeal. 6. (a) ORDER that the Second Cross-Respondent pay one-half of the costs of the Respondent/Cross-Appellant of the Cross-Appeal. (b) OTHERWISE make no Order as to the costs of any party to the 10 Cross-Appeal. Counsel for the appellant/first cross-respondents: D L Davies SC and Ms J Oakley 15 Solicitors for the appellants/first cross-respondents: Minter Ellison Counsel for the first respondent/cross appellant: J C Kelly SC and C D Freeman Solicitors for the first respondent/cross appellant: P J Ellis & Co (Neutral Bay) 20 Counsel for the second cross-respondent: N W Hadley Solicitors for the second cross-respondent: Abbott Tout No appearance for the third, fourth and fifth respondents (submitting) 2 Solicitors for the third cross-respondent: Astley Thompson & Valtas (St Mary's) Solicitors for the fourth and fifth cross-respondents: Lyons & Lyons (Bondi 30 Junction) No appearance for the sixth cross-respondent Solicitors for the sixth cross-respondent: Barkell & Peacock40