New South Wales Supreme Court CITATION : Murphy & Allen v SwinbankSwinbank v Cleary [1999] NSWSC 934 CURRENT JURISDICTION : Equity Division,. Commercial List FILE NUMBER(S) : 50138/98, 50007/98 HEARING DATE(S) : 11,12,13,16,17,18,19,24,25,26,30.8.99 & 1.9.99 JUDGMENT DATE : 24 September 1999 PARTIES : 50138/98 Christopher Mark Swinbank & ors v Donald James Cleary & ors 50007/98 John William Murphy & ors) v Christopher Mark Swinbank & ors JUDGMENT OF : Einstein J COUNSEL : B.C. McDougall QC, R.W. White SC, R.J. Powell & J.A. Halley (Plaintiffs) M.A. Pembroke SC, D.L. Williams (Defendants) SOLICITORS : Baker McKenzie (Plaintiffs) Ebsworth & Ebsworth (Defendants) CATCHWORDS : Insurance - Issues arising from collapse of the Estate Mortgage Trusts - Solicitors acting in preparation of loan and security documents - Solicitors Certificates given to Trustee client omit material information - Knowledge or suspicion of wrongdoing - Side arrangement documented by Equity sharing Agreement not disclosed in Solicitors Certificates - Solicitors Certificate altered to omit material information - Professional Indemnity Insurance - Scope of indemnity - Whether insurers entitled to disclaim liability under policies - Exclusion in respect of liability brought about by dishonest act or omission - Meaning of 'dishonest' under the policies - Whether conduct of solicitors - in breach of fiduciary obligations also amounted in the circumstances proved to dishonest conduct - Exclusion for 'known claims circumstances' - Prior notification - Construction - Whether there were individual contracts of insurance or one composite contract of insurance - Whether the proper construction of the 'known claims/claims circumstances' exclusion requires that the claims circumstances must be known to each and every one of the separately or severally insured - Meaning of 'claim' - Circumstances in which separate and distinct causes of action leading to separate and distinct heads of loss or damage give rise to two claims. ACTS CITED : Evidence Act 1995 (NSW) Queensland Law Society Act Cases cited in reasons for Judgment Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606 Boles & Ors v Esanda Finance Corporation Ltd (1989) 18 NSWLR 666 Briginshaw v Briginshaw & Anor (1938) 60 CLR 336 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (Unreported, Supreme Court of Queensland, Court of Appeal, 9 July 1999) Federation Insurance Ltd v Wasson & Ors (1987) 163 CLR 303 General Accident Fire and Life Assurance Corporation Ltd & Anor v Midland Bank Ltd & Ors [1940] 2 KB 388 Gilmore & Ors v AMP General Insurance Co Ltd (1996) 67 SASR 387 Haydon & Ors v Lo & Lo (a firm) & Anor [1997] 1WLR 198 Higgins v Orion Insurance Co Ltd (1985) 17 DLR (4th) 90 Homes v GRE Insurance Limited (1988) TAS R. 147 Maulder v National Insurance Company of New Zealand Ltd [1993] 2 NZLR 351 Pech v Tilgals (1994) 94 ATC 4206 Pedler v Richardson (Unreported, Supreme Court of NSW, 16 October 1997, Young J) Peters v The Queen (1998) 192 CLR 493 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Rankin v North Waterloo Farmers Mutual Insurance Co (1979) 25 OR (2d) 102 Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378 P. Samuel & Co Ltd v Dumas [1924] AC 431 Schipp v Cameron (Unreported, Supreme Court of New South Wales, 9 July 1998, Einstein J) CASES CITED : Switzerland Insurance Australia Ltd & Ors v McCann & Ors (Unreported, Supreme Court of NSW, Court of Appeal, 27 August 1999) Thorman & Ors v New Hampshire Insurance Co (UK) Ltd & Anor [1988] 1 Lloyd's Rep 7 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 VL Credits Pty Ltd v Switzerland General Insurance Co Ltd [1990] VR 938 West Wake Price & Co v Ching [1957] 1WLR 45 Cases cited in extracts of submissions set out in Judgment Abbey National plc v Solicitors Indemnity Fund Limited (1997) PNLR 306 Chittick v Maxwell (1993) 118 ALR 728 Comino & Cooney v Manettas (1993) 7 ANZInsCas 61-162 Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 AllER 700 Crowe v Wheeler & Reynolds [1988] 1 Qd R 40 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1992) 7 ANZInsCas 61-151 HG & R Nominees Pty Ltd v Fava [1997] 2 VR 368 HIH Casualty & General Insurance Australia Ltd v Della Vedova [1999] FCA 456 (15 April 1999) Lombard Australia Ltd v NRMA Insurance Ltd (1968) 72 SR (NSW) 45 Lynch & Co v United States Fidelity & Guarantee Co [1971] 1 OR 28 McCann & Ors v Switzerland Insurance Australia Ltd & Ors (Unreported, Supreme Court of NSW, 26 June 1998, Hunter J) McMillan v Joseph (1987) 4 ANZInsCas 60-822 Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529 R v Ghosh [1982] QB 1053 Underwriters at Lloyds & Ors v Ellis & Ors (Unreported, Supreme Court of NSW - CA, 25 February 1998) DECISION : Short Minutes to be brought in. THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST EINSTEIN J Friday 24 September - 1999 50007/1998 - MURPHY & ALLEN v SWINBANK & ORS 50138/1998 - SWINBANK & ORS v CLEARY & ORS JUDGMENT 1 These two related sets of proceedings have their genesis in the collapse of the Estate Mortgage Trusts in April 1990. The primary issue is as to whether a firm of solicitors who carried on practice in Brisbane under the name "Cleary & Hoare" and their assignees who are the plaintiffs in the proceedings, have rights of indemnity against a number of insurers under contracts of professional indemnity insurance (and excess insurance) entered into by Cleary & Hoare for the years commencing 1 July 1989, 1 July 1990 and 1 July 1991 ['Year 1', 'Year 2' and 'Year 3']. A number of other issues are also raised in the proceedings. 2 An explanation of how each of the two sets of proceedings now before the Court come to be pursued requires a degree of background. The parties to proceedings 50007/98 - "The main proceedings" 3 The plaintiffs in proceedings 50007/98 ("the main proceedings") ("the Trustees") were appointed Trustees of the Meridian Investment Trusts (formerly known as "the Estate Mortgage Trusts") ("the Trusts") by order of the NSW Supreme Court on 7 November 1990. 4 Donald James Cleary, John Joseph Hoare and (from 1 January 1986) Graham Dennis Isles ('Cleary & Hoare') carried on practice as solicitors in Brisbane under the firm name of Cleary & Hoare. By June 1990 a number of others, including Mr Scanlan, had joined the firm as non-equity partners, Messrs Cleary, Hoare and Isles at this time being the only equity partners. 5 Cleary & Hoare entered into the subject contracts of professional indemnity insurance (and excess insurance) for the three years referred to above. 6 I note immediately that following late amendments to the pleadings, an issue arose as to who were the parties to the subject contracts of insurance, namely whether each partner in the firm Cleary & Hoare was severally insured under a separate contract or alternatively whether each partner in the firm was severally insured under a single contract made by the partnership. 7 The defendants in the main proceedings ("the Insurers") are the insurers under the policies. The Cleary & Hoare proceedings 8 By a writ issued on October 22, 1991 the Trustees commenced proceedings No 1802 of 1991 in the Supreme Court of Queensland for breach of retainer, negligence and breach of fiduciary duty in connection with the professional work of Cleary and Hoare for the former trustee of the Trusts ("BPTC") on the PMA1 and PMA2 facilities ("The Cleary & Hoare proceedings"). 9 The Cleary & Hoare proceedings were cross-vested to the Supreme Court of Victoria becoming proceedings 5870 of 1994 and were heard together with other proceedings brought by the Trustees against BPTC and others. The hearing of those proceedings commenced in the Victorian Supreme Court on 3 February 1997 and on 29 October 1997 consent judgments were given for the Trustees against Messrs Cleary, Hoare and Isles: (a) in the sum of $61,212,845 in respect of the PMA1 claim ("the PMA1 judgment debt"); and (b) in the sum of $22,355,706 in respect of the PMA 2 claim ("the PMA2 judgment debt"). The PMA1 transaction 10 In November 1985, BPTC as trustee of the Trusts agreed to lend PMA Development Company No 1 Pty Ltd ("PMA1") up to $20,650,000 ("the PMA1 facility") for the acquisition of land at Southport in Queensland and the development on the site of a 9 storey office and shopping complex to be known as the McDonnell & East Centre ("the Southport project"). 11 Cleary & Hoare were retained by Estate Mortgage Managers Ltd ("EMM") to act as solicitors for BPTC in relation to the preparation of loan and security documents in respect of the PMA1 facility. EMM was manager of the Trusts. Mr Richard Lew was a director of EMM. Mr Reuben Lew was his father. 12 The PMA1 facility included an arrangement ultimately reflected in an Equity Sharing Agreement dated 13 November 1995 whereby a company, Weltsbarrd Pty Ltd ("Weltsbarrd") would become the holder of 50% of the issued capital of PMA1 and be entitled to 50% of the profits from the Southport project. Weltsbarrd was a company in which Mr Reuben Lew and Ms Sandra Lew held the shares. 13 The PMA1 facility was increased in May 1986 to $24,600,000 and again in October 1986 to $30,000,000. Cleary & Hoare again acted on behalf of BPTC in relation to these transactions. At the time of the second increase in the PMA1 facility a further Equity Sharing Agreement was prepared by Cleary & Hoare, pursuant to which Weltsbarrd continued to be entitled to 50% of the profits of PMA1 and became entitled to 50% of the profits from the sale of stage 2 of the Southport project. 14 Mr Cleary was primarily responsible for preparing loan and security documents relating to the PMA1 transaction and the Equity Sharing Agreement until about 14 November 1985 when Mr Scanlan took over the day to day conduct of the transaction. 15 Cleary & Hoare's Solicitor's Certificate of 14 November 1985 was given to satisfy a condition precedent notified to PMA 1 in EMM's letter of approval of the application for loan advance. A letter which had been copied to Cleary & Hoare. The letter had stated: '8. Solicitors Approval It is a condition precedent to the advancing of any monies by the Trustee that the Trustee's solicitors investigate at your expense and in their absolute discretion approve not only the title of the property over which the Mortgage is to be given, but also all matters which in their opinion are incidental to the giving to the Trustee of an adequate and proper security , including any special insurance and your compliance with the terms of your application for this loan advance ...' [Emphasis added] 16 Notwithstanding the terms of this condition, Cleary & Hoare's 14 November 1985 Certificate omitted any mention of the Equity Sharing Agreement which they had prepared. The Certificate relevantly stated: ' Re Advance to PMA Development Company No 1 Pty Limited from Burns Philp Trustee Company Limited - $20,650,000. We refer to the letter of instructions from Estate Mortgage Managers Limited dated 31 October 1985 and certify that we have prepared and had executed the following documents: 1. Deed of Loan 2. Bill of Mortgage 3. Guarantee and Indemnity 3. Three Mortgage Debentures 4. Mortgagees' Consent to Lease' 17 The Insurer's case is that BPTC was at all material times unaware of the involvement of Mr Reuben Lew and Mrs Sandra Lew in an Equity Sharing Agreement which would give to a company of which they were the sole shareholders, the right to 50% of the profits to be made by PMA 1 from the Southport project. The Insurers' case is that Cleary & Hoare deliberately kept secret from BPTC or failed to disclose, their knowledge or suspicion of the Lews' financial involvement in the PMA 1 and PMA 2 transactions. The Insurer's case is that the terms and detail of the Equity Sharing Agreement were concealed from the Trustees and that Cleary & Hoare's communications to Mr Reuben Lew at EMM, written at the very same time as (or within a day or so of) the issuing of the Solicitor's Certificate, made detailed reference to the Equity Sharing Agreement and to the securities collateral to that Agreement which included a second mortgage over the Southport properties. The Insurer's case is that the conduct of Cleary & Hoare was such as to attract the 'dishonesty' exclusion. 18 The Insurer's case is that on the occasion of the increased PMA 1 advance in late November 1985, Cleary & Hoare first prepared a Solicitor's Certificate addressed to BPTC which certified, inter alia, that: 'We certify that we have prepared the following additional documents in connection with the borrower's purchase of two further properties at Southport. 1. Bill of Mortgage (Deed of Loan) 2. Bill of Encumbrance (Equity Sharing Agreement ) 3. Collateral documentation, including Minutes of Meeting and Certificate pursuant to the Companies Code.' [Emphasis added] 19 The case is that following a telephone call from Mr Lew advising that there was to be 'no reference to [the Equity Sharing Agreement] in BP correspondence' and that all letters about that Agreement were to be kept separate, Cleary & Hoare revised the wording of their Solicitor's Certificate to remove the reference to the Equity Sharing Agreement and to read: 'We certify that we have prepared the following additional documents in connection with the borrower's purchase of the final properties comprising the total development site at Southport: 1. Bill of Mortgage (Deed of Loan) 2. Collateral documentation, including Minutes of Meeting and Certificate pursuant to the Companies Code.' 20 The Insurer's case is that each of the later Solicitor's Certificates of May 1986 (upon the further increase of the loan advance to PMA 1), of July 1986 (upon settlement of the PMA 2 transaction) and of October 1986 (upon settlement of Stage 2 of the PMA 1 transaction), omitted any reference to the Equity Sharing Agreements and to the securities collateral to those Agreements. The PMA2 transaction 21 In 1986 Cleary & Hoare were retained by EMM to act for BPTC in relation to a loan facility for PMA Development Company No 2 Pty Ltd ("PMA2") for up to $14,000,000 ("the PMA2 facility") to purchase property at Fairfield in Brisbane and for the development on that site of a shopping centre known as the Fairfield Chase Shopping Centre ("the Fairfield project"). 22 Cleary & Hoare were retained in relation to the preparation of loan and security documents in respect of the PMA2 facility. Cleary & Hoare also prepared an Equity Sharing Agreement dated 24 July 1986 by which Yossarian Nominees Pty Ltd ("Yossarian") became a shareholder in PMA2 and entitled to 50% of the net profits of the Fairfield project. Weltsbarrd held the controlling interest in Yossarian at the relevant time. 23 Mr Peter Scanlan, then an employed solicitor, was the solicitor primarily responsible for preparing the PMA2 documentation. 24 As before, no reference was made in the Solicitor's Certificate of 22 October 1986 to the Equity Sharing Agreement. Assignment 25 The Trustees claim an entitlement to bring the proceedings because by deed made on 12 May 1999, Messrs Cleary, Hoare and Isles assigned to the trustees their right title and interest in the obligations of each of the insurers under each of the 1989/1990, 1990/91 and 1991/92 policies. As already indicated, the Trustees put their claims as to the parties to the subject contracts of insurance in a number of alternative ways, those being: Claim under the 1991/1992 policies 26 On or about 5 May 1992, Cleary & Hoare notified each of the insurers under the 1991/92 policies of a claim being the issue of the writ in the Cleary and Hoare proceedings. 27 The Trustees claim in the main proceedings an entitlement, as assignees of the Cleary and Hoare policies, to be indemnified in the amount of $45,000,000 in respect of the PMA1 judgment debt and the amount of $22,355,706 plus accrued interest in respect of the PMA2 judgment debt. 28 The Trustees claim that each of the 1991/92 insurers is liable to indemnify Messrs Cleary, Hoare and Isles to the full extent of the 1991/92 policies in respect of each of the PMA1 judgment debt and the PMA2 judgment debt. Alternative Claim under the 1990/91 and 1989/1990 policies 29 If Messrs Cleary, Hoare and Isles are not entitled to indemnity under the 1991/92 policies then the Trustees assert that they are entitled to be indemnified under the 1990/91 policies or alternatively under the 1989/90 policies up to their respective limits. 30 If the Trustees recover under the 1990/91 policies then their claimed entitlement is to $10,500,000 in relation to PMA1 and $10,500,000 in relation to PMA2. 31 If the Trustees recover under the 1989/90 policies then their claimed entitlement is to $4,000,000 in relation to PMA1 and $4,000,000 in relation to PMA2. The defence in the main proceedings 32 The insurers point out that the Trustees have put alternate claims for indemnity in respect of the three separate underwriting years. They point out and it is common ground that only one underwriting year can possibly respond. The grounds relied upon by the insurers for denying indemnity are as follows: 1991/92 policy year (a) Dishonesty by the insured; (b) Exclusion for " known claim circumstances "; and (c) Prior notification under the 1990/91 policy. 1990/91 policy year (a) Dishonesty by the insured; and (b) Exclusion for " known claim circumstances ". 1989/90 policy year (a) Dishonesty by the insured; and (b) Section 54 of the Insurance Contracts Act said not to apply. 33 The insurers also raise an issue which will only require to be determined if the trustees are otherwise entitled to indemnity, as to whether, if there is any entitlement to indemnity, the trustees are entitled to characterise their claims as "two claims", thereby doubling the amount of cover. The policy provision dealing with the "Dishonesty" exclusion 34 The policies for the subject three years all contain a general exclusion in identical form. This is in the following terms: "(5) (e) This insurance shall not indemnify the Assured in respect of any liability: (v) brought about by the dishonest or fraudulent act or omission of the Assured including any partner or former partner of the Assured or any person employed in connection with the Practice (including any articled clerk and any solicitor or conveyancer who is a Consultant or Associate with the Firm)." The policy provision dealing with prior notification 35 The relevant "insuring clauses" for the subject three years include the following provision: "(2) 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 the 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." The policy provisions dealing with known claims or claims circumstances 36 Each of the schedules, forming part of the certificate of insurance, in respect of the cover for the 1990/91 policy year and the 1991/92 policy year were endorsed with a special condition which provided: "Excluding any known claims or claims circumstances" 37 The insurers submit that this special condition is the corollary of General Condition 4(b) and of the Insuring Clause (Clause 2) already set out. General condition 4(b) is in the following terms: "(4(b)) The Assured shall give notice in writing to the Insurers as soon as is practicable of any claim the subject of the Insuring Clauses hereof made during the Period of Insurance against the Assured or of the receipt of notice from any person of any intention to make a claim against the Assured. The Assured shall also give notice in writing as soon as practicable to the Insurers of any circumstances of which the Assured is or shall become aware during the Period of Insurance which may give rise to a claim. If notice is given to the Insurers under this paragraph any claim subsequently made (whether before or after the expiration of the Period of Insurance) pursuant to such an intention to claim or arising from circumstances so notified shall be deemed to have been made at the date when such notice was given." The insurers claim that s 54 of the Insurance Contracts Act does not apply 38 If the claim is held to fall within the 1990/91 policy year, but fails because of the special condition excluding "known claims or claims circumstances", and upon the basis that the dishonesty exclusion was held not to apply, the Trustees rely upon s 54 of the Insurance Contracts Act, so as to bring the claim within the 1989/90 policy year. The insurers submit that s 54 does not apply to the facts of this case. 39 The broad submission is that the purpose of s 54 is to overcome the effect of an omission by the insured in relation to action which is required under an existing contract of insurance which would otherwise respond, but for the omission. The insurers assert that there must be an omission by the insured in the invocation of an existing right under the contract of insurance. They point out that the Trustees seek to invoke s 54 to give to the Trustees a claim under the 1989/90 policy. 40 The insurers then submit that the insured had no existing right under the 1989/90 policy which was effected by reason of some act or omission on its part. On the insurers' submissions, there was therefore no "claim" actual or deemed, in the 1989/90 policy year which the insurer was entitled to refuse to pay by reason of some act or omission of the insured. The submission is that in relation to the 1989/90 policy year, there has been no omission by the insured in the invocation of an existing right under the policy. This is said to be because the circumstances did not give rise to a right under the 1989/90 policies in the first place. On the insurers' submissions the only way a right under the 1989/90 policies could arise is by the attempt to invoke s 54. The submission is that s 54 cannot be used to "create" a claim or "expand the scope of cover". The submission is that the purpose of s 54 is to overcome an act or omission in the exercise of a right to indemnity in the year in question. One or two claims 41 If the Trustees are otherwise entitled to indemnity, the amount of indemnity will plainly be doubled if, as the Trustees contend, there are two claims and not merely one claim. The insurers submit that Cleary & Hoare, when notifying circumstances and lodging a claim, did not regard the facts as giving rise to separate claims. The submission is that the temporal differences between the PMA1 and PMA2 transactions are not distinct. The submission is that the transactions were identical in form and that the Equity Sharing Agreements were identical in form. The insurers accept that the Equity Sharing Agreement for PMA2 was entered into after the first, and before the second, Equity Sharing Agreement for PMA1. The insurers point out that the funds advanced for PMA1 were used for PMA2. The submission is that the conduct of Mr Cleary and Mr Scanlan was the same continuing conduct. In essence the insurers submit that it was highly artificial and unnecessary for the Trustees to seek two judgments against Cleary & Hoare. The submission is that it is obvious that this was done in an attempt to maximise the possible insurance cover. 42 Clause 2 in the certificate of insurance for the 1989 and 1990 primary policy has already been set out. 43 The issue then is whether there was one claim or two claims against Cleary & Hoare giving rise to the PMA1 and PMA2 judgment debts. If there were two claims, the issue becomes whether they should nonetheless be regarded as one claim on the basis that they arose from the same act or omission. As to whether there were one or two claims against Cleary & Hoare, the insurers submit that the deliberate formulation by the Trustees, of two separate causes of action in the further amended statement of claim in the Estate Mortgage litigation is not determinative. Nor, on the insurers' submission, is the artificial structuring of the settlement so as to produce two separate judgments determinative. 44 If it is held that there were two claims, the insurers submit that those claims arose from the same act or omission. The submission is that the underlying act or omission which gave rise to the liability was the concealment by Messrs Cleary and Hoare of what the insurers assert was "their knowledge of the personal involvement of the Lews and Weltsbarrd Holdings Pty Ltd and Yossarian Nominees Pty Ltd". On the insurers' case the disclosure of that knowledge by Cleary & Hoare to BPTC, at any time prior to the PMA1 and PMA2 transactions being entered into, would have resulted in BPTC not approving the recommendations of the EMM. The insurers submit that BPTC would not then have incurred loss. The insurers submit that no claim or claims would have been made against Cleary & Hoare by BPTC or its successors in title. On the insurers' submissions the claims, properly characterised, arose out of the same act or omission or even one act or omission, albeit it a continuing one, on the part of Cleary & Hoare, involving the concealment from, and failure to disclose to BPTC. Proceedings No 50138 of 1998 - The "good faith" proceedings 45 The second set of proceedings ("the good faith proceedings") only become relevant should the Court find, contrary to the position of all insurers, that Messrs Cleary and Hoare were entitled to indemnity under their 1991/92 policies of professional indemnity insurance. 46 The proceedings arise out of the fact that the Trustees originally took an assignment of the rights, if any, which Cleary & Hoare had under their policies of insurance for the 1989/90 and 1990/91 policy years. Following a later assignment, the main proceedings were amended to permit the making of an additional claim in respect of the 1991/92 policy year. 47 The background to the good faith proceedings is that Cleary & Hoare, as has already been mentioned, were defendants in the Estate Mortgage proceedings brought by the Trustees, initially in Queensland and subsequently transferred to Victoria. Those proceedings were settled as between Messrs Cleary and Hoare and the trustees on 29 October 1997. The relevant effect of the settlement was that in exchange for an assignment of their rights under the 1989/90 and 1990/91 policies of professional indemnity insurance, Messrs Cleary and Hoare were released from any further liability. 48 The Trustees in the main proceedings subsequently took the view that there was a possibility that the claims which the solicitors made against their insurers may fall within a subsequent year's policy, namely the policy for the 1991/92 policy year. That position, it should be said, is disputed by the 1991/92 insurers. 49 Subsequently Cleary & Hoare and the Trustees, over the objection of the 1991/92 insurers, rescinded the First Settlement Agreement and entered into a Second Settlement Agreement, the effect of which was to assign the rights under the third policy year (1991/92) to the Trustees. This enabled the Trustees to amend the main proceedings so as to sue the 1991/92 insurers. The potential liability of the insurers as a whole to the Trustees thereby rose from $21,000,000 to $90,000,000. The claims by the 1991 insurers 50 The 1991/92 insurers claim in the "good faith" proceedings that the rescission of the First Settlement Agreement, the entry into the Second Settlement Agreement and the Second Assignment was contrary to the term of utmost good faith which was implied into the policies for the 1991/92 policy year by reason of s 13 of the Insurance Contracts Act 1984. 51 The insurers point out that under the First Settlement Agreement, Cleary & Hoare had been released of any further liability. The insurers' case is that the agreement of Cleary and Hoare to participate in a rescission and a further assignment, operated to the disadvantage of the 1991/92 insurers in that it exposed the 1991/92 insurers to a substantial additional claim by the Trustees which would not have otherwise been available to them. The insurers' case is that Cleary & Hoare's actions in agreeing to this course were encouraged, induced and assisted by the Trustees. On the insurers' case both sets of defendants, namely Messrs Cleary Hoare and Isles and the Trustees are liable in damage to the insurers, Cleary & Hoare in respect of their alleged breach of contract and the Trustees because they were involved in the tort of inducing the breach of contract. 52 On the insurers' case the damages are comprised of the liability faced by the 1991/92 insurers in the main proceedings brought by the Trustees as the result of the addition of claims in respect of the third policy year. The defences to the good faith proceedings 53 The Trustees and Cleary & Hoare defend the good faith proceedings on the basis of an alleged breach by the 1991/92 insurers of their own duty of utmost good faith said to have been owed to Cleary & Hoare. The essence of the complaint is that the 1991/92 insurers misrepresented that the claim fell within the 1990/91 policy year when in fact it is said to have fallen within the 1991/92 policy year. The defendants in the good faith proceedings also allege estoppel arising from the same matters. 54 In response, the insurers take the position that in so far as Cleary & Hoare were concerned, the respective arguments as to the policy years were advanced in correspondence between them and Cleary & Hoare. On the insurers' case, that matter was not further agitated by Cleary & Hoare after early 1992 when the insurers assert that they made their position clear. 55 On the insurers' case there was thus no common mistake or misrepresentation which would justify the defence and cross claims of Messrs Cleary and Hoare and the Trustees, whether put in contract or in estoppel. Nor, on the insurers' case, were Cleary & Hoare entitled to rescind based upon common mistake. 56 In relation to the Trustees' claims, the 1991/1992 insurers dispute any alleged misrepresentation. Their case is that the 1991/92 insurers' position was always communicated fairly to the Trustees. Their case is that to the extent that the Trustees proceeded with any misconception, that misconception did not arise from conduct on behalf of the 1991/92 insurers. Matters not in dispute 57 Most of the factual matters relating to the good faith proceedings are not in dispute. The Trustees commenced proceedings No 5870 of 1994 in the Supreme Court of Victoria (originally proceedings No 1802 of 1991 in the Supreme Court of Queensland) against Cleary & Hoare ("the Estate Mortgage proceedings") claiming losses to the trusts arising out of alleged breaches of duty on the part of Cleary & Hoare in respect of the PMA1 transaction and the PMA2 transaction. 58 The Estate Mortgage proceedings were settled as between Cleary & Hoare and the Trustees on 29 October 1997. As part of the settlement Cleary & Hoare and the Trustees entered into: (i) a Settlement Agreement dated 29 October 1997 ("the first Settlement Agreement"); (ii) a Deed of Assignment by way of security dated 29 October 1997 ("the First Deed of Assignment"); (iii) a Power of Attorney dated 29 October 1997; (iv) Short Minutes of Order in Proceedings No 5870 of 1994; and (v) a Consent Order in proceedings No 5870 of 1994 (these documents are collectively referred to as "the First Settlement"). 59 Pursuant to the First Settlement, Cleary & Hoare consented to the PMA1 and PMA2 judgments against them in the Estate Mortgage proceedings (Clause 1 of the First Settlement Agreement). 60 Pursuant to the First Settlement Cleary & Hoare agreed that the Trustees may commence and prosecute proceedings against Cleary & Hoare's insurers under the 1989/90 and 1990/91 primary and excess policies of insurance in respect of the PMA1 and PMA2 judgment debts which were unsatisfied ("the Cleary & Hoare insurance proceedings"). 61 Pursuant to the Deed of Assignment by way of security Cleary & Hoare assigned to the Trustees their right, title and interest, whether at law or in equity, from time to time in and to the obligations of the insurers under the 1989/90 and 1990/91 policies of professional indemnity insurance (Clauses 4.1 and 1.1 of the First Deed of Assignment). 62 Pursuant to the First Settlement Agreement, the Trustees agreed to accept the proceeds of any judgment or compromise in the Cleary & Hoare insurance proceedings in full and final satisfaction of the PMA1 and PMA2 judgment debts respectively (Clause 11(b) of the First Settlement Agreement). 63 Pursuant to the First Settlement Agreement, the Trustees agreed that if they did not by judgment or compromise recover any indemnity in the Cleary & Hoare insurance proceedings in relation to the PMA1 and PMA2 judgment debts, then they would release Cleary & Hoare from any further claim against them for the balance of any judgment debts and would execute and deliver to them a Deed of Release accordingly (Clause 11(c) of the First Settlement Agreement). 64 Pursuant to the terms of the First Settlement the Trustees commenced the main proceedings. 65 On or about 12 May 1999, the First Settlement was purportedly rescinded by Cleary & Hoare and the Trustees. On that date they entered into: (i) a Settlement Agreement dated 12 May 1999 ("the second Settlement Agreement"); (ii) a Deed of Assignment by way of security dated 12 May 1999 ("the Second Deed of Assignment"); (iii) an agreement between Cleary, Hoare, Isles, Scanlan, Murphy and Allen (these documents are collectively referred to as "the Second Settlement"). 66 The rescission of the First Settlement and the entry into the Second Settlement was over the express objections of the insurers contained in letters from their solicitors to Cleary & Hoare and the Trustees dated 23 November 1998, 17 December 1998, 2 March 1999, 30 April 1999 and 7 May 1999. Principal Witnesses 67 Mr Scanlan was not a reliable witness. I formed the view that over the years since the happening of the events in question, Mr Scanlan has come to believe a version of those events which is inconsistent with the strong probabilities given the contemporaneous records and given the bulk of the evidence. He has clearly persuaded himself that at the material time he saw nothing suspicious in being asked to arrange for a Solicitor's Certificate to be altered and in being instructed to keep separate, certain matters which were not to be disclosed to BPTC. His evidence and the lack of reliability as to sections of it, is referred to below. 68 Mr Cleary was not a reliable witness. When confronted with contemporaneous documents with which he was not familiar, he became uneasy. His oral evidence was often markedly inconsistent with clear contemporaneous documentary records. I formed the view that in a number of areas his evidence could not be accepted. These matters are dealt with below. 69 Other witnesses are referred to below. 70 It is appropriate to turn immediately to the facts. 71 It is convenient to commence by setting out a short overview chronology of the PMA 1 and PMA 2 transactions: ' PMA1 Transaction 1. 13.11.85 Deed of Loan: BPTC & PMA1 (20.65 million) 2. 13.11.85 Equity Sharing Agreement: PMA1 and Welstbarrd 3. 14.11.85 Settlement of PMA1 - Initial advance - $2,650,000 4. 14.11.85 "Certificate" by Cleary & Hoare 5. 28.11.85 Further advance - PMA1 - $3,765,972.83 6. 28.11.85 "Certificate" by Cleary & Hoare 7. 30.5.86 Deed of Variation of Loan in PMA1: increased to $24.6 million 8. 30.5.86 "Certificate" by Cleary & Hoare 30.5.86 Further advance of $951,460.44 PMA2 Transaction 9. 26.6.86 Deed of Loan: BPTC & PMA1 ($14 million) 10. 28.7.86 Equity Sharing Agreement: PMA2 and Yossarian 11. 28.7.86 Settlement of PMA2 12. 28.7.86 "Certificate" by Cleary & Hoare PMA1 - Stage 2 Transaction 13. 20.10.86 Deed of Variation of Loan in PMA1: increased to $30 million 14. 20.10.86 Equity Sharing Agreement: PMA1 and Welstbarrd 15. 20.10.86 Settlement of PMA1 - Stage 2 16. 22.10.86 "Certificate" by Cleary & Hoare'. The Facts 72 The system followed within Cleary and Hoare's offices was that where Mr Scanlan wrote a letter in draft and submitted it to Mr Cleary or co-operated with Mr Cleary in the drafting of a letter, Mr Scanlan's initials 'PJS' would appear on the letter together with Mr Cleary's initials 'DJC'. [T 52] Such situations would thus include 'DJC:PJS [followed by the typist's reference and certain numerals]'. 22 October 1985 - 'Letter of Approval' 73 By letter dated 22 October 1985, EMM wrote to PMA1 (Attention Mr J Remo) formally advising that EMM had approved PMA1's application for a mortgage loan advance as a suitable investment by "the Trustee" of the Estate Mortgage Trusts. The letter of approval advised that the loan was to be primarily secured by a first registered mortgage over the Southport property, the title details of which were given, and was to be subject to a number of detailed terms and conditions which were then set out. The loan advance was to a limit of $20,650,000 and was for a term of one year. 74 The loan approval included as conditions amongst others, the following: "6. Guarantors The joint and several continuing guarantees as to the performance of the Mortgage are required to be given by: D. J. Remo J. N. Potter ... 8. Solicitors Approval It is a condition precedent to the advancing of any monies by the Trustee that the Trustee's solicitors investigate at your expense and in their absolute discretion approve not only the title of the property over which the Mortgage is to be given, but also all matters which in their opinion are incidental to the giving to the Trustee of an adequate and proper security , including any special insurance and your compliance with the terms of your application for this loan advance ... 14. Further Encumbrances The security property shall not be further encumbered without the written consent of the Trustee. 15. Variation of Shareholders/Directors No change in the shareholders or directors of the mortgagor company shall be permitted without the prior written consent of the Trustee ... 18. Valuation Qualification Requisitions Prior to settlement the Borrower shall deliver to the Trustee's solicitors Cleary & Hoare, documentation, in such form as may be approved by Cleary & Hoare, evidencing the following ... (e) Equity participation arrangements." [Emphasis added] [On Mr Cleary's evidence a copy of this letter was received by him on or about 24 October 1985, being the same day on which a meeting took place which is referred to below. Mr Cleary regarded the letter as recording the instructions given to his firm, later and in more formal terms appearing in EMM's letters to Cleary and Hoare, of 31 October 1985] 23 October 1985 - Project Summary 75 By letter dated 23 October 1985, EMM wrote to BPTC in relation to the Southport project setting out a project summary and professional reports said to support EMM's decision to recommend available security to BPTC for the investment of Estate Mortgage 'Trust' Funds to finance the development of a new shopping centre at Southport. 76 The letter detailed the subject site and the project. 77 Under the heading "Financial Structure" a number of details were given including the following:- "PMA Development Company No 1 Pty Ltd (name to be changed) incorporated 1985 to undertake this Southport Shopping Centre Venture. No previous trading. Directors: David James Remo John Norman Potter Shareholders: Remo and Potter - 50% . . . Mortgagee: Burns Philp Trustee Company Limited as Trustee for Estate Mortgage Trusts. Mortgagor: PMA Development Company No 1 Pty Ltd Guarantors: Remo and Potter Loan: ... $20,650,000." 78 This letter further detailed the subject security and included a profile of the developers. It advised that the directors David James Remo and John Potter were known to most major retailers and that a close relationship had been developed with most food retailers in the country. It gave the personal details of Mr David James Remo and Mr John Norman Potter including their detailed assets and liabilities. 79 On a subsequent occasion, as Mr Cleary conceded in evidence, he altered the description of the directors of PMA1 in the above letter by removing the name John Norman Potter and replacing it by a reference to David John Bentley. A subsequent version of the 23 October 1985 letter from EMM to BPTC was then issued naming the directors as David James Remo and David John Bentley, identifying the shareholders as "Remo and Bentley - 50%" and giving the personal details, assets and liabilities of Mr Bentley. 24 October 1985 - 'The Gold Coast Meeting giving instructions' 80 On 24 October 1985 a meeting took place at PMA's office at the Gold Coast attended by Messrs James Remo, Dennis Bentley, John Hilmer solicitor, Reuben Lew, Richard Lew and Mr Cleary. There are two diary notes by Mr Cleary relating to this meeting. The first is a three page handwritten diary note and the second is a two page typed note. These notes are appended to this judgment as appendices 1 and 2. The handwritten note includes the words "Joint Venture [Agreement] - Shareholding or side [Agreement][ ] Costs spelt out." [An arrow appears before the words 'Costs spelt out'] The typewritten note uses the words 'side agreement covering equity sharing'. 81 Mr Cleary accepted under cross-examination that he received instructions at this meeting, the Equity Sharing Agreement being indicated as a priority to be resolved first [Transcript 138]. His evidence was that he understood that another party would be contributing funds and that that party would, in addition to interest, receive the benefit of any increase in value of the property over a certain figure. [T 138] 82 On Mr Cleary's evidence: (a) Mr Remo, Mr Bentley and Mr Hilmer represented one group - being the PMA companies. [T 172] (b) Mr Reuben Lew and Mr Richard Lew represented EMM. (c) EMM represented the 'entity' which would in due course share in the profits with the borrower, the name of that entity not then being known: 'Q. Who did you think was the person who controlled [the question looses its impact in the transcript but was plainly read as - "the entity"] A. I don't know. There was no discussion about who the entity would be.' [T 172] 25 October 1985 83 By letter dated 25 October 1985 bearing Mr Cleary's reference, Cleary & Hoare wrote to "Mr Reuben Lew, Director, Estate Mortgage Managers Limited, Level 45, Naurau House, 80 Collins Street Melbourne." 84 This letter was in the following terms: "Re Proposed Advance Burns Philp Trustee Company Ltd to PMA Development Company (No 1) Pty Ltd We refer to our conference at Southport on the 24th instant and enclose draft agreement as to the equity profit sharing for your perusal. You will remember that the solicitor for the borrower requested that this document be resolved before the loan documents proceeded. We make the following observations with regard to our document. 1. We have presumed that the company has not previously traded and has no assets and liabilities and that the shares will be transferred 50%/50% prior to the situation changing. 2. We have not provided that Burns Philp Trustee Company Ltd or its agent be on the Board of the company because we assumed it would not want the responsibility or possible liability associated therewith. 3. We considered providing that you would simply have an option to buy shares but in view of the fact that you are going the [sic, plainly a typographic error - the correct word was "to"] share in the net profit of the operation of the premises from day one we recommend that you actually take up shares. 4. Please advise us the entity who will take up the shares. 5. The Deed of Loan and Bill of Mortgage will secure in full all the rights of the mortgagee in the event of default. Please let us have your urgent instructions whether this document complies with your objectives and also your instructions to submit it to the solicitors for PMA Development Company (No 1) Pty Ltd." [Emphasis added] 85 A question arises as to precisely what draft agreement was enclosed with Cleary & Hoare's letter of 25 October 1985 already referred to. Mr Cleary's evidence was that a form of draft agreement possibly the second or third version postdating that enclosed with the 25 October 1985 letter is that which is appended to this judgment and marked Appendix 3. It will be noted from that version of the agreement that the address of XYZ Company Pty Ltd was given as 51 Pitt Street Sydney with its principal office in Queensland at Level 15, MLC Court 15 Adelaide Street Brisbane. 51 Pitt Street Sydney was the address of BPTC in Sydney. The Adelaide Street, Brisbane address was the address of EMM at the time. 28 October 1985 86 By letter dated 28 October 1985 from Cleary & Hoare addressed to Mr Reuben Lew as Director, EMM, and bearing Mr Cleary's reference, Cleary & Hoare advised: "Re Burns Philp Trustee Company Ltd Advance to PMA Development Corporation Pty Ltd Equity Sharing Agreement We refer to our telephone conversation with you today and enclose copy Equity Sharing Agreement submitted to the solicitors for the borrower." 87 In the fullness of time an Equity Sharing Agreement was executed on 13 November 1985 and this is referred to below. The precise version of the Equity Sharing Agreement enclosed under cover of 28 October 1985 letter from Cleary & Hoare is uncertain. 30 October 1985 88 By letter dated 30 October 1985 Estate Mortgage Financial Services Ltd ['EMFS'] wrote to Cleary & Hoare in the following terms: "Re PMA Development Company (No 1) Pty Ltd We thank you for your letter of 25 October and confirm our verbal instructions to forward a copy of the draft agreement re the above as presented to us, to the solicitors for PMA for their comment. We will inform you as to the details of the company to act in the capacity of XYZ Company Pty Ltd as soon as it is available. In passing, we should point out that it is appropriate to correspond in these matters with this company, Estate Mortgage Financial Services Ltd and that Mr Reuben I Lew is engaged by this company as a financial consultant and is neither Director of this company or of Estate Mortgage Managers Ltd ...". [emphasis added] The letter was signed by Mr Richard Lew as director of EMFS. 31 October 1985 89 On 31 October 1985 EMM wrote to Cleary & Hoare an important letter giving that firm instructions in relation to the subject transaction. The letter is appended to this judgment as Appendix 4. It advised inter alia: "This company is the Manager of Estate Mortgage "Trusts" constituted by Deeds of Trust between this Company as Manager and Burns Philp Trustee Company Ltd as Trustee. The Trustee has approved the above proposal which calls for a fresh mortgage of freehold land, the particulars of which are set out in the attached schedule. We are authorised by the Trustee/Mortgagee to instruct you to act on its behalf in respect of this transaction. In so acting, you are to take all steps necessary to fully protect the position of the Trustee and Manager keeping both parties fully informed on all matters relating to this transaction . Prior to settlement, all your searches and enquiries must be resolved satisfactorily and the Trustee/Mortgagee must be in receipt of a certified copy of the mortgage as executed by the Mortgagor, together with your Certificate as to Title. The Mortgagee will not require to execute this mortgage which may be accepted by you on its behalf ...". [emphasis added] 90 The schedule attached to this letter identified the mortgagee as BPTC and the mortgagor as PMA1. It identified the security as being 'Registered First Mortgage of the land described in the attached Sworn Valuation Report by A C Arnold & Associates dated 3 October 1985 in respect of the property subject of the report' 91 The schedule included a number of special conditions and of particular importance, the following special conditions: "6. The Security property shall not be further encumbered without the written consent of the Trustee. 7. No change in the Shareholders or Directors of the Mortgagor Company shall be permitted without the prior written consent of the Trustee ." [emphasis added] 92 On Mr Cleary's evidence, most of the work of the transaction had already been carried out by the time this letter was received. He accepted that it was likely he would have read the letter and understood the instructions. [T 126/127] 93 Mr Cleary accepted that the 31 October letter contained the final instructions to his firm prior to the ultimate settlement, these being to use his words 'the official instructions'. [T 129] 94 Mr Cleary accepted that the information given to him on 24 October in the earlier letter of 22 October, was superseded by the later instructions given to him in the letter of 31 October. The letter of 31 October showed the guarantors as Mr Remo and Mr Bentley. The letter of 22 October had shown the guarantors as Mr Remo and Mr Potter. [T 128] 95 Mr Cleary under cross-examination, at transcript 151 and following, accepted that the letter of 31 October 1985, being the official instructions letter, related only to one part of the overall transaction, namely the loan transaction and did not relate to the Equity Sharing Agreement or give any instructions in relation to the terms of the Equity Sharing Agreement. He accepted that neither the letter nor the schedule which came with the letter contained any reference or instructions relating to an Equity Sharing Agreement. 96 At transcript 153, Mr Cleary accepted under cross-examination that he knew that it was normal to require the individuals who stood behind the borrower company to provide guarantees and that he knew that the loan transaction contained a prohibition against any change in the shareholders in the borrower company. His further evidence was as follows: 'Q. The other part of the transaction not recorded in what you call the official instructions dated 31 October 1985 involved the equity sharing agreement, didn't it A. Yes . Q. It was the second part of the overall transaction which was occurring? A. Well, it turned out to be the first part that was done and most of this transaction was done before I received the letter dated 31 October and the transaction documents were prepared based on the letter dated the 22nd. Q. The equity sharing agreement involved, did it not, a further encumbrance or a mortgage over the land? A. Yes. Q. It involved a complete change in the shareholders in the borrower company? A. Yes. Q. It involved not obtaining guarantees from one of the new shareholders of the borrower company? A. Yes, who was a lender. Q. Just say that again? A. Who was a lender to the transaction. Q. Who was a lender? A. Weltsbarrd. Q. Weltsbarrd was a lender? A. Weltsbarrd was contributing money by way of a syndicate to the transaction. Q. That is the honest evidence which you give? A. Yes. Q. You referred to the instructions in relation to the equity sharing agreement yesterday as variations to your official instructions? A. Yes. Q. Those variations involved on their face, did they not, a variation from the requirements of the special conditions in the official instructions? A. Yes, an extension and variation of them, yes. Q. Those variations, for that reason, were inconsistent with some of the instructions in the letter dated 31 October? A. Yes. Q. And the variations were not for the benefit of the trustee, were they? A. I thought they were. Q. Why might that have been? A. Because moneys were being lent by this entity and at the high risk end of the transaction. Q. Those variations to your official instructions also operated to the benefit of the party which was described in the equity sharing agreement as the second shareholder, didn't they? A. Who was the second shareholder? Q. Weltsbarrd? A. If the property increased in value . . .' [T 154] 5 November 1985 97 By memorandum dated 5 November 1995, from Mr Cleary to Mr Les Priddle, then a consultant of Cleary & Hoare, Mr Cleary stated: 'Attached hereto are copies of the following . . . (d) Equity Sharing Agreement I would be pleased if you would go through the Memorandum and Articles of Association of the Company with a view to advising what amendments should be made, if any, to ensure that our financier client's interes t in the Equity Sharing Agreement cannot be diluted. We are covered to and extend [sic] under the Deed of Loan but I want to take it a step further and ensure that our rights are not lost in the event of fraud, etc. Perhaps we need some clauses along the lines that no further shares can be issued, redeemed, etc without the consent of all existing shareholders. I stress that this will be one of the most important drafting exercises you undertake in 1995 because I expect that more than $20 million will be distributed under the Equity Sharing Agreement within three years . Again I want to ensure that all the necessary cheques and balances are there in the Articles so that the directors cannot even fraudulently delete our client's interest as a 50% shareholder in the beneficial interest of the property. There are no trusts.' [Emphasis added] 98 Under cross examination in relation to this document at transcript 176, Mr Cleary was asked and answered as follows: 'Q. And when you referred in the next paragraph to no further shares being issued you were referring to a desire on your part to ensure that the 50% interest of the entity to be nominated by Reuben Lew or Richard Lew would not be diluted? A. Yes. Q. And in the next paragraph you emphasised to Mr Priddle that you expected the very large sums of money to be distributed under the equity sharing agreement? A. Yes. Well it speaks for itself. Q. And what you meant by that was pursuant to the profit share obligations your client, that's the party with the 50% interest, which is not the PMA party, could be expected to receive substantial sums of money in the order of that which you have mentioned in the penultimate paragraph? A. Yes. Q. Pursuant to the profit share obligations under the agreement? A. Yes. . . . Q. And you said in your statement in paragraph 66 that you did not turn your mind particularly to the fact that Weltsbarrd and Yossarian could have obtained a substantial economic benefit from the PMA transaction, do you see that? A. Yes . Q. And this memorandum from you to Les Priddle clearly indicated on 5 November you were turning your mind very specifically to the very substantial economic benefit which might result from the PMA 1 transaction? A. Yes , that's what that memo says. Q. And your statement in paragraph 66 is not a fair reflection of your state of mind in November 1985 is it? A. I am not qualified to be a valuer and I don't know what the valuations were likely to be in the future. . . . Q. Are you suggesting that the figure of $20million bore no resemblance to reality? A. This was a number pulled out of the sky . . . Q. . . . You knew that there were substantial sums of money involved . A. Yes . . .' [T 176-177] 99 By letter dated 5 November 1985 bearing Mr Cleary's reference, Cleary & Hoare wrote to Mr Reuben A Lew, Financial Consultant, Estate Mortgage Financial Services Limited in the following terms: 'Re Burns Philp Trustee Company Limited Advance to PMA Development Corporation No 1 Pty Limited We refer to our telephone conversation with you on the 4th instant and enclose final draft copy Equity Sharing Agreement which has been approved by the Borrower. Please confirm that the document is acceptable to you and in order that we may prepare it in final form, we request your further instructions with respect to the following: 1. The name of your associated company to be involved to be "the second shareholder" to the agreement . . .' [Emphasis added] 100 Under cross examination in relation to this letter, Mr Cleary gave the following evidence: 'Q. In any event whatever words you used in your statement the company about which you were seeking instructions was one which you knew was associated with Reuben Lew wasn't it? A. No. Q. Was it associated with Estate Mortgage? A. Yes. Q. And Reuben Lew was the principal spokesman for Estate Mortgage? A. On mortgage matters yes. Q. On all matters wasn't he? A. No. Q. Who was? A. His wife? A. Your question was, was Reuben the principal spokesman for all matters for Estate Mortgage. They had a chairman, various officers, he was the person that I dealt with in respect to mortgage matters but there were many other people that had all sorts of other roles in the company. Q. But you knew he was the founder of the Estate Group? A. I didn't know the history of Estate Mortgage. Q. When you sought his instructions in the expectation that he would become a client of yours you went to him did you not? A. Yes . Q. And you knew that the Equity Sharing Agreement was part of the overall loan transaction for the PMA 1 document didn't you? A. Yes. Q. And you have told his Honour and you have said in your statement in paragraph 30 that Reuben Lew was the principal decision maker at least so far as instructions for loans were concerned? A. Yes. Q. And that's the context in which we are looking at this matter now, isn't it? A. Yes.' [T 180-181] 101 Mr Cleary was cross examined in relation to paragraph 66 of his statement. it is convenient to set out paragraphs 65 and 66. They were as follows: '65. I did not know, at the time of the PMA transactions, that Mr Reuben Lew was in effective practical control of Weltsbarrd and Yossarian or that he was involved with those companies. 66. I did know although I did not turn my mind to it particularly that Weltsbarrd and Yossarian could obtain a substantial economic benefit from the PMA transactions. I did not know that they would obtain a substantial economic benefit. As second mortgagees they could have obtained a substantial economic benefit or they could have lost money.' 102 At transcript page 178, Mr Cleary accepted that the first sentence of paragraph 66 'could have been expressed better than it has been'. The cross examination included the following: 'Q. Are you denying Mr Cleary, that you were aware of and conscious of the very substantial potential economic benefit which the equity sharing agreement would provide for the entity to be nominated by Mr Reuben Lew or Richard Lew? A. I was aware of the potential for significant sums to be paid under the equity share agreement if the value of the property increased. I am not a commercial person. I wasn't prepared to give commercial advice. Q. So you did turn your mind to that potential? A. I can't recall. Clearly there are large sums of money and if the property increased in value there would be significant sums of money. Q. It is not true to say you did not turn your mind particularly to that fact? A. As to how much? Q. To the fact that Weltsbarrd could obtain a substantial economic benefit? A. I was aware that Weltsbarrd, the entity that generally turned out to be Weltsbarrd, could derive significant benefits under the documents, the quantum of which I didn't exercise my mind about. Q. It is not true to say you did not turn your mind particularly to the fact Weltsbarrd could obtain a substantial economic benefit? A. Could obtain - that would be in effect, they could have obtained. Q. What you are saying, I think, is that paragraph [66] in the first sentence in so far as it refers to Weltsbarrd is not correct? A. It could have been expressed better than it has been . Q. And it is equally not correct in relation to Yossarian isn't it? A. It could have been expressed better than it has been .' [T 178] November 1985 - Memorandum 103 The Cleary & Hoare file includes a memorandum which, in its present form, is unclear as to the date. The date 8 November 1985 can be made out but there is a pin hole through the original just before the '8', so that the date could have been 8 November 1985 or 18 November 1995 or 28 November 1985. Subject to that question of date, the note reads: 'Mr Lew telephoned - requested us to write separately to him regarding Welstbaard [sic] matters on the one hand and Burns Philp matters on the other.' [emphasis added] 11 November 1985 104 By facsimile dated 11 November 1985 and on EMM header, Mr Reuben Lew at Estate Mortgage Melbourne and addressed to Mr Don Cleary of Cleary & Hoare, the following message was given: 'Profit Share Company - Welstbarrd Holdings Pty Limited Level 15, 500 Collins Street, Melbourne Vic 3000' 105 In relation to this document, the cross examination of Mr Cleary includes the following: 'Q. Weltsbarrd was your client? A. Yes. Q. It had always been clear to you from 24 October that the profit share company was one for which you were acting? A. Receiving instructions, yes, from Estate Mortgage. Q. The company name was nominated from Estate Mortgage Managers wasn't it? A. Yes. Q. You had always known Reuben Lew would nominate the name of that company for you? A. That Estate Mortgage would, yes. Q. Can you name anyone in the world other than Mr Lew who on the information available to you at that time, to your knowledge, stood behind Weltsbarrd? A. No .' [T 182] 106 By letter dated 11 November 1995, Cleary & Hoare (signed by Mr Cleary), wrote to Messrs Rylands & Hilmer, the borrowers' solicitors, in relation to the PMA Development Company No. 1 Pty Limited advance from BPTC of $20,650,000. 107 Cleary & Hoare confirmed that they acted on behalf of BPTC in connection with the advance and enclosed a number of documents. The list of documents enclosed with this letter can be conveniently divided into two particular categories. The first are those documents relating to the Deed of Loan and security documents pertinent to it. The second category relate to the Equity Sharing Agreement and collateral documents pertinent to it. The first category included for example, the original and eight copies of the Deed of Loan and the original and two copies of the Bill of Mortgage. The second category included for example, the original and two copies of the Equity Sharing Agreement and a number of collateral documents to that Agreement including the Bill of Encumbrance. 108 One of the enclosures to Cleary & Hoare's 11 November 1985 letter was its Memorandum of Professional Costs and Outlays which included a fee of $45,000 stated as covering the preparation of a number of documents and ancillary work. It included:- "TO OUR FEE - EQUITY SHARING AGREEMENT comprising all instructions, preparation and perusal of documents, correspondence, accounts, stamping and all other matters usual and necessary to complete the transaction on behalf of the Mortgagee. TO OUR FEE - Guarantee & Indemnity Comprising all instructions, investigation of title searches, attendances, preparation and perusal of documents, correspondence, accounts, stamping and registration and all other matters usual and necessary in connection with Collateral Guarantee & Indemnity TO OUR FEE Bill of Encumbrance (pursuant to Equity Sharing Agreement) Comprising all instructions, investigation of title searches, attendances, preparation and perusal of documents, correspondence, accounts, stamping and registration and all other matters usual and necessary in connection with Collateral Bill of Encumbrance TO OUR FEE Bill of Encumbrance (pursuant to Equity Sharing Agreement) (because advance for land in two stages) Comprising all instructions, investigation of title searches, attendances, preparation and perusal of documents, correspondence, accounts, stamping and registration and all other matters usual and necessary in connection with Collateral Bill of Encumbrance TO OUR FEE Mortgage Debenture - P.M.A. DEVELOPMENT CORPORATION PTY. LTD. (pursuant to Equity Sharing Agreement) Comprising all instructions, investigation of title searches, attendances, preparation and perusal of documents, correspondence attending to stamping and registration and all other matters usual and necessary in connection with Collateral Mortgage Debenture TO OUR FEE Mortgage Debenture - P.M.A. PROPERTY CORPORATION PTY. LTD. (pursuant to Equity Sharing Agreement) Comprising all instructions, investigation of company searches, attendances, preparation and perusal of documents, correspondence attending to stamping and registration and all other matters usual and necessary in connection with Collateral Mortgage Debenture TO OUR FEE Mortgage Debenture - P.M.A. DEVELOPMENT COMPANY NO. 1 PTY. LTD. (pursuant to Equity Sharing Agreement) Comprising all instructions, investigation of company searches ...". 12 November 1985 109 By letter dated 12 November 1985 signed by Mr Cleary, Cleary & Hoare wrote to Mr Reuben Lew, Financial Consultant EMM, inter alia, in the following terms: 'We refer to your letter to Mr James Remo dated the 20th October 1985 and your letter of instructions to us dated the 8th November 1985 and advise we have prepared the necessary security documents and submitted them to Messrs Rylands & Hilmer as solicitors for the borrower for signature. We enclose copy of our letter to Messrs Rylands & Hilmer dated the 11th November 1985 for your information. We confirm your instructions that Weltsbarrd Holdings Pty Limited is not a 'related company' to Burns Philp Trustee Company Limited . In these circumstances, if the loan from Burns Philp was paid out, the collateral securities would all have to be released and the obligations under the Equity Sharing Agreement would be unsecured. We therefore prepared fresh collateral securities in support of the obligations of the borrower under the Equity Sharing Agreement. We advise the securities are as follows: Deed of Loan Collateral securities thereto: (a) Bill of Mortgage; (b) Guarantee and Indemnity (c) Three Mortgage Debentures Equity Sharing Agreement Collateral securities thereto: (a) Bill of Encumbrance (b) Guarantee and Indemnity (c) Three Mortgage Debentures We enclose for your information copies of the following: i Deed of Loan ii. Bill of Mortgage iii. Guarantee and Indemnity iv. Sample Mortgage Debenture v. Equity Sharing Agreement vi. Bill of Encumbrance vii. Guarantee and Indemnity viii. Sample Mortgage Debenture ix. Mortgagee's consent to lease. . . .' 13 November 1985 110 An undated file note was admitted into evidence. This file note is appended to this Judgment as Appendix 3. The note is in Mr Cleary's handwriting. At transcript 188.5, he accepted that it was safe to assume that the handwritten words on the document came into existence prior to the completion of the documents on or about 13 November 1985. 111 Mr Cleary was asked and answered as follows: 'Q. And you have recorded in the middle of the page the words: One share to our entity? A. Yes. Q. And : One share to be held by PMA Property Corporation? A. Yes. Q. And when you have used the preposition "our", you are referring to the interests of Mr Lew and Estate Mortgage managers are you not ? A. Yes, the other entity to PMA Properties . . . [T 188] 112 Mr Cleary's evidence was that the file note seemed to be some sort of running reminder sheet in relation to matters which had to be attended to in the fulfilment of his responsibilities in acting for Weltsbarrd in connection with the Equity Share Agreement. [T 187] 113 By letter dated 13 November 1985, EMM wrote to BPTC to the attention Mr B. Lacey, inter alia, in the following terms: 'Re PMA Development Company No 1 Pty Limited $20,650,000 Mortgage Facility We have received the enclosed Deed of Loan from your solicitors Cleary & Hoare, Brisbane, with their request that after perusing the document we should secure execution by you returning the document in tonight's air bag to Cleary . . . We understand that Solicitor's Certification and disbursement authorities will be delivered by air bag to our office Thursday am in order that we may make provision for the initial settlement that day. We have confirmed that there will be no further advances made prior to our being in possession of and having approved the building contract. We should be obliged if you would execute the enclosed Deed of Loan as soon as possible in order that we may dispatch the document to Brisbane tonight.' 114 By Transfer dated 13 November 1985, Judith Eve Remo transferred her share in PMA No 1 to Weltsbarrd Holdings Pty Limited for the sum of $1. On the same day, Mr James Remo transferred his share numbered 1 in PMA No 1 to PMA Property Corporation Pty Limited in consideration of the sum of $1. 115 The formal Deed of Loan between BPTC as lender and PMA1 as borrower, was dated 13 November 1985. Clause 3.0 was entitled 'Conditions Precedent' and included the following: 'The obligation of the Lender to make the Advance or any part of the Advance relating to each security under the Facility is subject to the conditions precedent that the Lender shall have received prior to or at the time of the Advance hereunder the following, each in form and substance satisfactory to the Lender in respect of each of the securities: 3.09 The following documents duly signed: .... 3.09.07 Equity Sharing Agreement between the borrower and Weltsbarrd Holdings Pty Limited. 3.09.08 The securities described in the first Schedule of the Equity Sharing Agreement in support of the borrower's obligations under the Equity Sharing Agreement.' 116 The Equity Sharing Agreement dated 13 November 1985 was entered into between PMA1 as 'the Company' of the first part, PMA Property Corporation as 'the first shareholder' of the second part and Weltsbarrd Holdings as 'the second shareholder' of the third part. The document is appended to the Judgment as Appendix 5. The Common Seal of Weltsbarrd Holdings was affixed to the document by way of execution and counter signed by Reuben Lew and Sandra Lew. 117 The address of Weltsbarrd is given as 'Level 16, 500 Collins Street, Melbourne. This was a different address to that shown on the letterhead of EMM and EMES which was 80 Collins Street, Melbourne. 118 The document significantly recited that with respect to PMA1, the registered shareholders were PMA Property Corporation as to one fully paid up share and Weltsbarrd Holdings as to the second fully paid up share. 119 The document includes in Recital 'H' the following: 'For the consideration herein referred to and in consideration of the second shareholder continuing at its discretion and during its pleasure to hold a share or shares in the company and hereafter continuing to hold a share or shares in the Company at its discretion and during its pleasure and in consideration of the second shareholder having requested Burns Philp to make certain advances to the Company and to continue to make advances to the Compan y and for other valuable consideration the Guarantors have agreed to execute this agreement and the securities set forth in the First Schedule.' [Emphasis added] 120 The definition in clause 1.10 of 'Net Profit' was : 'Means the amount before income tax by which the gross income during an accounting period exceeds the operating expenses for that period together with in the event of a sale of the land and improvements the amount by which the sale price of the land and improvements minus the costs of sale (commission, advertising, legal expenses, etc.) exceeds the sum of $22 million.' 121 Clause 7.0 was in the following terms: ' Account for profit . The company shall account to each of the first shareholder and the second shareholder their respective share of the net profit as soon as possible after the end of each accounting period and in any event not later than one month after the end of each accounting period and in the event of a sale of the land and improvements as soon as possible thereafter but in any event not later than one month after the date of completion of such sale. In the event of a loss being incurred for an accounting period such loss shall be carried forward. 122 Clause 7.01 was in the following terms: ' Loss . It is expressly agreed that the second shareholder shall not be liable to contribute to any loss of the company.' 123 The first schedule included, together with the description of other securities, the following: ' Bill of Encumbrance of even date between the Company and the second shareholder intended to be registered as a second Bill of Encumbrance over the land described as . . . [and the title details were then set out].' 124 The first schedule also referred to a Guarantee and Indemnity of even date between the second shareholder and James Remo, Judith Eve Remo, David John Bentley, Lorraine Mavis Bentley, PMA Development Corporation and PMA Property Corporation jointly and severally. 125 The guarantors referred to in the second schedule, were Mr James Remo, Ms Judith Eve Remo, Mr David John Bentley, Ms Lorraine Mavis Bentley, PMA Development Corporation and PMA Property Corporation. 126 Mr Cleary accepted under cross examination that subject to the input from Mr Lew and Mr Hilmer, he was the author of the document, that is to say, "the creator of its provisions and its layout" [Transcript 140]. 14 November 1985 127 A Cleary & Hoare memorandum of 14 November 1985 apparently by way of a check list for settlement, includes a number of items including the following: '2. P7 Equity Sharing!!' [An arrow was drawn pointing from the "P7" towards the words 'Equity Sharing']. The First Solicitor's Certificate 128 By letter dated 14 November 1985, Cleary and Hoare [signed by Mr Cleary] to the Manager, Burns Philp Trustee Company Limited, Cleary and Hoare purported to certify as to which documents had been prepared and executed. The letter was in the following terms: ' Re Advance to PMA Development Company No 1 Pty Limited from Burns Philp Trustee Company Limited - $20,650,000. We refer to the letter of instructions from Estate Mortgage Managers Limited dated 31 October 1985 and certify that we have prepared and had executed the following documents: 1. Deed of Loan 2. Bill of Mortgage 3. Guarantee and Indemnity 3. Three Mortgage Debentures 4. Mortgagees' Consent to Lease We certify we have investigated the titles to land and the Companies which are parties to the transaction and in our opinion, upon registration of the transfer and the collateral security documents, you will have a legally enforceable security. We certify that : A. There are no adverse notifications, easements, encumbrances or interests which would affect your title as Mortgagee. B. All proper investigations have revealed no other matters which would adversely affect the proposed security. The borrower has requested an initial advance today in the sum of $2,650,000 . . .' 129 Mr Cleary under cross examination in relation to the Certificate, was asked and answered as follows: 'Q. And you stated that "We", that is the firm of Cleary & Hoare "have prepared and have executed certain documents"? A. Yes. . . . Q. The documents are numbered 1, 2, 3, but there is a second 3 and 4? A. Yes. Q. That is not a complete statement of all the documents which the firm of Cleary & Hoare have or had prepared ? A. No . Q. Nor is it a complete statement of all of the documents which the firm of Cleary & Hoare have had prepared and have had executed ? A. No . Q. It is only half true to say that you have prepared the five categories of documents set out in the letter? A. Well, it does not refer to the other document. Q. And therefore, it is only half true ? A. If you put it that way . It does not refer to the other document. Q. You agree, do you that it is half true because of the failure to refer to the other documents? A. Well, yes . Well, it does not refer the other document. Q. And therefore, it does not give a complete statement of all of the documents which you had prepared and had executed? A. That is right. . . . Q. Can we assume that you wrote the letter intentionally ? A. Yes . Q. You chose the words in the letter deliberately ? A. Yes . Q. That the letter was not accidental or inadvertent? A. I assume so. Q. The letter does not give the reader of it the whole truth in relation to all of the documents, which had been prepared and executed does it? A. It does no talk about the other documents. Q. You knew the whole truth about all the documents didn't you ? A. We had prepared other documents, yes . Q. You intended the trustee to rely on the letter, didn't you ? A. Yes . Q. The letter gave a false impression to the reader of it about the documents which you had prepared and had executed didn't it? A. It did not mention all the documents. Q. It gave a false impression didn't it? A. Well it mentioned all the documents that Burns Philp was a party to. Q. It gave a false impression of the documents which to use your words "we had prepared and had executed"? A. Yes. . . . Q. You chose to refer to the documents which you have itemised? A. Yes. Q. And you chose not to refer to the other documents, didn't you? A. Well, that is on the face of the letter, that is correct . . .' [T 193-195] 130 At transcript 195 the following questions were asked and answered: 'His Honour: Q. Why did you address this Certificate to the Trustee Company? A. Because, your Honour, that is the requirement under the Trustee Deed and what I thought was the requirement at the time. Q. And why did you think it was a requirement that your firm give a Certificate to the Trustee? A. I do not know that I can answer that. Reconstructing from the file, I noticed that at some stage I gave a certificate to the manager and, at that stage, I must have assumed we had to certify to the manager and there is this certificate to the trustee. Now whether someone brought that to my attention I am not sure but on reconstructing from the file, there is a requirement under the Trust Deed to certify to the trustee. Q. When you signed this certificate you were aware, were you not, that it was a certificate to the trustee and not to the Estate Mortgage managers? A. Yes. Pembroke Q. And you have already said to his Honour that you recognised that there were express duties imposed upon you as part of your instructions to provide certain certifications and disclosures to the Trustee? A. Yes. Q. And they are the duties set out in the letters of 22 and 31 October? A. Yes. Q. And you were purporting to fulfil those duties when you wrote the letter of 14 November 1985 weren't you? A. That was part of the process . . . Q. You did not perform your duty to certify to the Trustee in relation to all of the other matters, which you [recognised] you were obliged to certify other than by this letter of 14 November, did you? A. I can only assume that I believed I was certifying what I had to by virtue of this letter. . . . Q. That document certifies to the trustee not the manager? A. To the trustee, sorry. Q. A second mortgage to Weltsbarrd is a matter relevant to title, isn't it ? A. Yes . Q. This document does not certify in any way directly or indirectly to the second mortgage given to Weltsbarrd, does it ? A. No . Q. So it does not even comply with the narrow obligation which you sought to take comfort in in relation to certification as to title, does it. Would you like the question repeated? A. No, it does not. Q. . . . The omission to refer in this letter to the second mortgage in relation to Weltsbarrd was deliberate wasn't it? A. No. Q. It was not an inadvertent omission, was it? A. I really do not know what went through my mind at the time . . .' [T 196-197] 131 Also by letter dated 14 November 1985 from Cleary & Hoare (signed by Mr Cleary), that firm wrote to 'Mr Reuben A Lew, Financial Consultant, Estate Mortgage Managers Limited' in the following terms: 'Re Advance to PMA Development Company No 1 Pty Limited from Burns Philp Trustee Company Limited $20,650,000 We refer to our letter dated the 12th instant and confirm that we today forwarded a certificate to Burns Philp Trustee Company Limited. We request that you confirm the interest provisions in Clauses 1.07, 1.26 and 6.0 of the Deed of Loan. Also please confirm satisfactory insurance has been arranged. With reference to our letter to Messrs Rylands & Hillmer dated the 11th November we comment further as follows: 1. All security documents have been signed except the guarantee of the Equity Sharing Agreement which will be signed prior to settlement. 2. . . . The sum of $22 million has been inserted in clause 1.10 of the Equity Sharing Agreement. We request that you advise today in writing whether this is acceptable to you.' 15 November 1985 132 By letter dated 15 November 1985 bearing Mr Cleary's reference, Cleary and Hoare wrote to "The Director, Weltsbarrd Holdings Pty Ltd, 19 Short Street, Southport, Queensland" advising: "Re: Advance to PMA Development Company No 1 Pty Ltd from Burns Philp Trustee Company Ltd $20,650,000. We enclose herewith our cheque in the sum of $1.00 pursuant to the terms of the Equity Sharing Agreement." [I interpolate that some nine months later by letter bearing Mr Scanlan's reference and dated 20 August 1986, Cleary and Hoare wrote to "Mr Partridge, PMA Development Company No 2 Pty Ltd, 19 Short Street, Southport, Queensland", returning the Company Registers inter alia for PMA Development Company No 2 Pty Ltd into which a number of formal documents had been placed including those constituting the share transfers from J E Remo to Yossarian Nominees Pty Ltd and from D J Remo to P M A Property Corporation Pty Ltd. The letter also enclosed documents for insertion into the Company Registers of PMA Property Corporation Pty Ltd, PMA Development Corporation Pty Ltd and PMA Development Corporation NO 1 Pty Ltd. The Short Street address is also noted in the Equity Sharing Agreements as the registered office of the PMA Companies. I infer that the cheque for $1.00 enclosed with the letter of 15 November 1985 comprised payment for one share in PMA1 owed to Mrs Remo - although the reason why the letter was addressed to Weltsbarrd remains unclear. Possibly a shelf company and change of names situation explains this circumstance.] 133 By letter dated 15 November 1985 bearing Mr Cleary's reference, Cleary & Hoare wrote to Mr Reuben A. Lew, Financial Consultant, EMM in the following terms: 'Re Advance to PMA Development Company No 1 Pty Limited from Burns Philp Trustee Company Limited $20,650,000. We refer to previous correspondence and advise the initial settlement for part of the land was effected in Southport on the 14th inst. We enclose copy letter from Messrs Rylands and Hilmer to us dated the 14th November setting out settlement figures. We also enclose copy further letter from Messrs Rylands and Hilmer dated the 14th November 1985 enclosing copy of Return of Directors, Managers and Secretaries. We enclose copy Acknowledgment of Payment of $1 pursuant to the Equity Sharing Agreement which we would be pleased if you would sign on behalf of Welstbarrd Holdings Pty Limited and return to us. We confirm your advice that the sum of $22 million is to be inserted in clause 1.10 of the Equity Sharing Agreement. We inspected the Company Register and Welstbarrd Holdings Pty Limited is already registered as the holder of half of the shares in PMA1 . . .' [Emphasis added] 134 Exhibit DX8 is a photocopy of the senders copy of this letter. The photocopy includes Mr Cleary's handwriting in two sections related to the word 'Weltsbarrd' in the last of the paragraphs the subject of the above extract. The words 'that interest was held beneficially for EM' are connected by an arrow pointing to the word 'Weltsbarrd'. The original of the senders copy of the letter was tendered as exhibit PX14 and did not include the handwritten note. 135 Cross examination in relation to this document at transcript 191 and following includes the following: 'Q. . . . what you have recorded on the second page is that you have written the words "that interest was held beneficial for EM" with an arrow pointing to Weltsbarrd Holdings. Is that right? A. It appears to be, yes. Q. And that is the understanding which you had in November 1985, isn't it? A. No, it is not . Q. And it is the understanding which you had when you wrote the note, isn't it? A. I do not know when that note was written. It may have been written when I - one of the statements along the way was being prepared, but that is not the understanding that I had at the time. Q. It is the understanding that you had when you wrote the note is it not? A. I do not know what that is. It is sort of like a "no search of company, certified not related". It is sort of like commentary. I do not know. I do not know. Q. Do you agree that the words written in your hand namely, that interest was held beneficially for EM with an arrow pointing to Weltsbarrd, indicate a state of mind which you had to Weltsbarrd at the time you wrote the note? A. I do not know I just - it is not the understanding I had at the time. That note may have been written in the course of preparation of a statement. I do not know. I cannot . . . Q. But whether it was written at the time of preparation of the statement or at some other time it represents your understanding at the time you wrote the note, doesn't it? A. Well, it is not my understanding . Q. Are you having difficulty with this note because it is not one of the documents you looked at in preparation for giving evidence? A. No. Q. Did you see that a copy of the letter with your handwriting on it in the course of preparing to give your evidence? A. No. Q. And it does not sit consistently with the evidence you have given in this case, does it ? A. No . Q. Can you give any explanation as to why you have written that note on the copy of the letter ? A. No, I do not know when the note was written . I presume it was written after 1990 and just whether it was a question or something to be considered, I just do not know but it is not consistent with the understanding at the time. Q. Is that all you wish to say about the note? A. Yes. [T 191-192] 136 By letter dated 15 November 1985, Cleary & Hoare wrote to the Commissioner of Stamp Duties advising, inter alia: 'Re Weltsbarrd Holdings Pty Limited - Equity Sharing Agreement - PMA Development Company No 1 Pty Limited We advise that we act on behalf of Weltsbarrd Holdings Pty Limited . We produce: 1. Original and copy Collateral Equity Share Agreement [There were then set out the various collateral guarantees, mortgage debentures and the Bill of Encumbrance]. We would be pleased if you would issue your assessment as in accordance with the attached Form C.' [Emphasis added] 27 November 1985 137 By letter dated 27 November 1985, Cleary & Hoare wrote to Reuben Lew, Estate Mortgage Managers, referring to the settlement of the further advance to be effected on the following day and enclosing Solicitor's Certificate for on forwarding to the Manager of [BPTC]. The letter was sent following a telephone attendance by Mr Scanlan on Mr Lew. The file note of this attendance records Mr Lew's instruction that the Solicitor's Certificate be sent to EMM for on forwarding to BPTC. The Original Second Solicitor's Certificate 138 The letter dated 27 November 1985, Cleary & Hoare (signed by Mr Cleary), was addressed to the Manager, Burns Philp Trustee Company Limited and was in the following terms: 'Re Advance to PMA Development Company No 1 Pty Limited from Burns Philp Trustee Company Limited - $20,650,000 We refer to our Solicitors' Certificate of the 14th inst. We certify that we have prepared the following additional documents in connection with the borrower's purchase of two further properties at Southport. 1. Bill of Mortgage (Deed of Loan) 2. Bill of Encumbrance (Equity Sharing Agreement ) 3. Collateral documentation, including Minutes of Meeting and Certificate pursuant to the Companies Code. We certify that we have fully investigated the title to the additional properties and, upon registration of the transfer of documentation, you will have legally enforceable securities. We further certify that : (a) There are no adverse encumbrances or interests which would affect your title as mortgagee. (b) All proper investigations have revealed no other matters which would adversely affect the proposed security. The borrower has requested further advance in the sum of $3,765,972.83. Please make arrangements for the funds to be forwarded to the Cleary & Hoare Trust Account No 1145736 at the National Australia Bank 126 Elizabeth Street, Brisbane. We undertake after settlement to attend to stamping and registration of the security documents.' [Emphasis added to make the point that the line emphasized was omitted in the replacement Certificate referred to below]. 139 A copy of the 27 November letter bears Mr Scanlan's handwritten note 'Further Certificate done on 28 11 85' initialled by Mr Scanlan. 28 November 1985 140 A telephone message was left by Mr Lew for Mr Scanlan at 8.32am on 28 November 1985, asking him to call at 8.40am. 141 A diary note was then taken by Mr Scanlan upon his telephone call to Mr Lew in response to the telephone message, which telephone call took place prior to 9.20am on 28 November 1985. The diary note records the client as 'EMM', the subject as 'PMA' and reads: 'TA:- Mr Lew :- In all correspondence - all letters about the Equity Sharing Agreement [ ] separate. No reference to ESA in BP correspondence.' [In the section in which the square brackets appear in the above extract, the handwritten note includes an arrow pointing from the word 'agreement' to the word 'separate'.] 142 At 9.20am on 28 November 1985, Cleary & Hoare [Mr Scanlan] sent a facsimile addressed to Mr Reuben Lew of Estate Mortgage. The facsimile cover sheet included as the message 'please deliver letter and further letter to Mr Reuben Lew urgently'. 143 Under cover of this facsimile, Mr Scanlan enclosed two letters on Cleary & Hoare letterhead. The first was addressed 'Mr Reuben A Lew, Financial Consultant, Estate Mortgage Managers Limited' and read: 'Re Burns Philp Trustee Company Limited advance to PMA Development Company No 1 Pty Limited We refer to our telephone conversation of today's date. As requested we enclose additional solicitors' certificate.' This letter was signed by Mr Cleary. The Substitute Second Solicitor's Certificate 144 The second enclosure sent with the facsimile cover sheet was a letter signed by Mr Cleary, addressed to 'The Manager, Burns Philp Trustee Company Limited'. It read: 'Re Advance to PMA Development Company No 1 Pty Limited from Burns Philp Trustee Company Limited - $20,650,000 We refer to our Solicitor's Certificate of the 14th inst. We certify that we have prepared the following additional documents in connection with the borrower's purchase of the final properties comprising the total development site at Southport: 1. Bill of Mortgage (Deed of Loan) 2. Collateral documentation, including Minutes of Meeting and Certificate pursuant to the Companies Code. We certify that we have fully investigated the title to the additional properties and, upon registration of the transfer of documentation, you will have legally enforceable securities. We further certify that: (a) There are no adverse encumbrances or interests which would affect your title as mortgagee. (b) All proper investigations have revealed no other matters which would adversely affect the proposed security. The borrower has requested further advance today in the sum of $3,769,495.09. Please make arrangements for the funds to be forwarded to Cleary & Hoare Trust Account No 1145736 at the National Australia Bank, 126 Elizabeth Street, Brisbane. We undertake after settlement to attend to stamping and registration of the security documents. We advise that settlement of this transaction is due to be effected at the Gold Coast at lunchtime today.' 29 November 1985 145 By letter dated 29 November 1985 signed by Mr Cleary, Cleary & Hoare wrote to Mr Reuben A Lew, Financial Consultant, EMM in the following terms: 'Re Burns Philp Trustee Company Limited advance to PMA Development Company No 1 Pty Limited Re Equity Sharing Agreement We advise the Commissioner for Stamp Duties has assessed stamp duty on the Equity Sharing Agreement in the sum of $18.10. We are delighted with the assessment as we feared the Commissioner may attempt to assess on a different basis a large amount of duty.' [Emphasis added] 146 Mr Cleary was asked why Estate Mortgage Managers, to whom this letter was written, would be 'pleased to know' of the smaller amount of assessed stamp duty. He was asked: 'Q. You wrote the letter on 29 November to Reuben Lew, Financial Consultant, Estate Mortgage Managers? A. Yes. Q. Informing him that you were delighted with the assessment by the Commissioner? A. Yes. Q. And you wrote that letter because you thought that he would be pleased to know? A. Estate Mortgage would be pleased to know, yes. His Honour Q. Why would they be pleased to know? A. There was a concern that the Commissioner might want to assess duty on an estimate of any increase in value. Q. Would that be a concern of Estate Mortgage Managers or Mr Lew? A. That would be a concern of whoever was paying the stamp duty. Q. Why would that be a concern of Estate Mortgage or Mr Lew? A. Because they were representing the entity that would have to pay the stamp duty. Q. That would be a concern of the personal entity that they represent not their own concern? A. Yes. [T 187] 23 December 1985 147 By letter dated 23 December 1985 bearing reference 'DJC:PJS', Cleary & Hoare wrote to the Town Clerk of the Gold Coast City Council in the following terms: 'Re Weltsbarrd Holdings Pty Limited - Advance to PMA Development Company No 1 Pty Limited We refer to the above matter and advise that we are instructed by Weltsbarrd Holdings Pty Limited . We enclose Notice of Mortgage and request that you amend your records accordingly to note our clients' interest in the property. ' [Emphasis added] Mr Scanlan accepted under cross examination that it was possible that by this time he knew that "the Lews owned or controlled Welstbarrd" [Transcript page 95]. 148 By letter dated 23 December 1985 signed by Mr Scanlan, Cleary & Hoare wrote to Mr Reuben A Lew, Financial Consultant, EMM in the following terms: 'Re Burns Philp Trustee Company Limited advance to PMA Development Company No 1 Pty Limited PMA Development Company No 1 Pty Limited - Weltsbarrd Holdings Pty Limited We refer to previous correspondence. We enclose : 1. Duplicate registered Bill of Mortgage No E764015 (Burns Philp Trustee Company Limited) 2. Duplicate registered Bill of Encumbrance No E764016 (Weltsbarrd Holdings Pty Limited) . . . [A number of Certificates of Title were then referred to.] . . . ' 30 December 1985 149 By letter dated 30 December 1985, EMM [Mr Richard Lew], wrote to Mr Cleary of Cleary & Hoare in the following terms: 'Re Burns Philp Trustee Company Limited - PMA Development Company No 1 Pty Limited We remind you of our previous advice that correspondence regarding the association between the above company and Weltsbarrd Holdings Pty Limited is to be kept under separate cover of that involving associations between Burns Philp Trustee Company Limited and PMA Development Company No 1 Pty Limited . The enclosed duplicate acknowledging receipt of the documents, you will note, does not separate the two matters. Please attend to all future correspondence re the above correctly.' [Emphasis added] [The reference to 'the enclosed duplicate' is plainly a reference to the 23 December 1985 letter extracted above] 23 January 1986 150 By letter dated 23 January 1986, Cleary & Hoare wrote to the Town Clerk, Gold Coast City Council, referring to the matter Weltsbarrd Holdings Pty Limited advance to PMA1 and advising 'We refer to the above matter and advise we are instructed by Weltsbarrd Holdings Pty Limited to act on its behalf. We enclose Notice of Mortgage and request that you amend your records accordingly to note our clients' interest in the property.' [Emphasis added] The letter was signed by Mr Scanlan. Mr Scanlan under cross examination in relation to this letter was asked: "Q. You had no doubt in your mind in November 1985 that Mr Cleary knew who it was who was his client at Welstbarrd? A. That's a fair assumption ...". [Transcript page 67] 29 January 1986 151 By letter dated 29 January 1986 and signed by Mr Scanlan, Cleary & Hoare wrote to 'The Directors, Weltsbarrd Holdings Pty Limited, C/- Estate Mortgage in the following terms: 'Re Weltsbarrd Holdings Pty Limited - Southport Development: We refer to previous correspondence and enclose for your records duplicate Registered Bill of Encumbrance No 8759118. Would you please acknowledge receipt of the enclosed by signing the attached duplicate copy of this letter.' The letter to Weltsbarrd was addressed to EMM's office address. 25 February 1986 152 On 25 February 1986, Mr R.A. Lew wrote to Cleary & Hoare. The sender was recorded on the top right hand corner of the same as: 'Weltsbarrd Holdings P/L, C/- R.A. and S. Lew, Unit 5, 4 Maple Grove, Toorak, Victoria, 3142. The letter was signed by Reuben Lew over the name 'R.A. Lew'. 153 The letter advised: 'We have today telegraphically transferred the sum of $500,000 to your trust account, NAB 114-5736. These funds form the proceeds of an advance of $500,000 being made by this company to PMA Development Company No 1 Pty Limited for the purpose of there funding PMA No 2 in its purchase of the Fairfield site. By way of security this advance is being made as a contribution to the Burns Philp Trustee Company Limited Southport First Mortgage and such should be acknowledged by PMA. PMA should also acknowledge that interest in respect of this $500,000 shall be at the bank bill rate plus 2% with a 1% establishment fee payable to the bank. Should you have any queries please do not hesitate to call our Mr Lew in Sydney.' A handwritten note on the copy of this letter which was admitted into evidence and which is in Mr Cleary's handwriting, reads: 'Peter please discuss'. 154 Under cross examination Mr Scanlan agreed that he must have been shown a copy of the letter by Mr Cleary. [Transcript page 69] 155 Under cross examination in relation to the same letter, Mr Cleary accepted that his handwriting was at the foot of the page and that he had asked Mr Scanlan to discuss the letter with him and that the letter came to him from Weltsbarrd, care of Mr and Mrs Lew. He was asked: 'Q. The letter came to you from Weltsbarrd care of Mr and Mrs Lew didn't it? A. That is what the letter says. Q. At their residential address at Toorak? A. I didn't know that was their residential address. Q. Yes you did? A. No I didn't. It didn't mean anything to me at the time. Q. You mean you did not put two and two together when you received this letter? A. No . This was after the event. Everyone seemed to be happy. I had made full disclosure to the Trustee. There was no reason to be suspiciously looking at anything. This was way past the event. It meant nothing to me. Q. Not only is the address of Weltsbarrd care of Mr and Mrs Lew but Mr Reuben Lew has signed the letter on behalf of Weltsbarrd, hasn't he? A. It appears to be Reuben Lew, yes. Q. It was obvious to you that there was no mysterious third party involved, wasn't it? A. It rang no alarm bells to me.' [T 205-206] 24 March 1986 156 By letter dated 24 March 1986 bearing reference 'PJS', Cleary & Hoare wrote to the Directors, Weltsbarrd Holdings Pty Limited, C/- EMM in the following terms: 'Re Weltsbarrd Holdings Pty Limited - Southport Development We enclose original and duplicate stamped Equity Sharing Agreement in duplicate for execution under the Common Seal of Weltsbarrd Holdings Pty Limited. Please return both documents to us for our further attention.' 8 April 1986 - Instructions on PMA 2 Transaction 157 By letter dated 8 April 1986 EMM wrote to Cleary and Hoare, inter alia advising "Re: PMA Development Company No. 2 Pty . Ltd. Re: Proposed Shopping Centre, Fairfield Road, Brougham Street & Mildmay Street, Fairfield Brisbane This Company is the Manager of Estate Mortgage "Trusts" constituted by Deeds of Trust between this Company as Manager and Burns Philp Trustee Company Limited as Trustee. The Trustee has approved the above proposal which calls for a first mortgage of freehold land, the particulars of which are set out in the attached schedule. We are authorized by the Trustee/Mortgagee to instruct you to act on its behalf in respect of this transaction. In so acting, you are to take all steps necessary to fully protect the position of the Trustee and Manager keeping both parties fully informed on all matters relating to this transaction . Prior to settlement, all your searches and enquiries must be resolved satisfactorily and the Trustee/Mortgagee must be in receipt of a certified copy of the mortgage as executed by the Mortgagor, together with your Certificate as to Title. The Mortgagee will not require to execute this mortgage which may be accepted by you on its behalf." [Emphasis added] 30 April 1986 158 By letter dated 30 April 1986, signed by Weltsbarrd Holdings Pty Limited, addressed to Cleary & Hoare, Weltsbarrd Holdings advised: 'Re Weltsbarrd Holdings Pty Limited - Southport Development Please find enclosed the original and duplicate stamped Equity Sharing Agreement which has been executed by Weltsbarrd Holdings Pty Limited.' 159 Under cover of that letter, the Equity Sharing Agreement was sent to Cleary & Hoare in its form as signed, executed and attested by Reuben and Sandra Lew. 160 By letter dated 30 April 1986 signed by Mr Cleary, Cleary & Hoare wrote to Mr Richard J Lew of EMM, inter alia, as follows: 'Re PMA Development Company No 2 Pty Limited - Proposed shopping centre Fairfield Road, Brougham Street and Mildmay Street, Fairfield, Brisbane. We refer to your letter dated 8 April 1986 and enclose "draft" Deed of Loan for your perusal . . . Please let us have your further instructions with regard to the following . . . 4. Is there to be any Equity Sharing Agreement?' 27 May 1986 161 By letter dated 27 May 1986, MacGullivray & Co wrote to Cleary & Hoare noting that they acted for Australian Bank Limited which proposed to make certain financial accommodation available to Weltsbarrd and that it was taking transfers of securities executed by PMA 1 in favour of Weltsbarrd. An enquiry was made as to whether there was a written priority agreement by BPTC and Weltsbarrd and as to whether BTPC would produce the relevant CT to enable the transfer of the bills of encumbrance to be registered. 28 May 1986 162 By letter dated 28 May 1986, EMM [Mr Richard J Lew] wrote to Cleary & Hoare, inter alia, as follows: 'Re PMA Development Company No 1 Pty Limited Please accept these instructions on behalf of Burns Philp Trustee Company Limited to prepare and have executed all the necessary documents protecting the Mortgagee's position and increasing the facility to the above Developer on the above project to $24,600,000. Please advise when these documents are available for execution by PMA Development Company No 1 Pty Limited. As this is an urgent matter please do not hesitate to contact the writer should any queries arise.' 163 By responsive letter of the same date, Cleary & Hoare wrote to EMM asking whether the extension of the facility in respect of PMA 1 to $24.6million would in any way affect the rights of Weltsbarrd. The letter sought written confirmation from Weltsbarrd that BPTC 'shall have full and unqualified priority in respect of the further advance'. 30 May 1986 164 On 30 May 1986, Cleary & Hoare wrote to the Manager, BPTC, inter alia as follows: 'Re Burns Philp Trustee Company Limited Extension of Facility to $24,600,000 in respect of advance to PMA Development Company No 1 Pty Limited. We refer to our instructions received by facsimile from Mr Richard J Lew of EMM at 10.51am on the 28th inst. As requested by Mr Lew today we enclose Solicitors' Certificate.' The Third Solicitor's Certificate 165 This letter was signed by Mr Cleary and enclosed a Solicitors' Certificate dated 30 May 1986 addressed to The Manager, BPTC reading, inter alia: 'Re Burns Philp Trustee Company extension of facility to $24,600,000 in respect of advance to PMA Development Company No 1 Pty Limited .' [The letter made no reference to the Equity Sharing Agreement nor to security collateral to that Agreement. The letter then went on to set out the detail of the borrower as PMA No. 1, the guarantors as Mr and Mrs Remo, Mr Bentley and Mrs Bentley, PMA Development Corporation and PMA Property Corporation and the mortgagee as BPTC. It detailed the investigations made and the existing security and certified that upon stamping of the Deed of Variation of Loan and Guarantor's acknowledgment it would be enforceable in favour of BPTC.] 166 Mr Scanlan accepted under cross-examination, that it was more than likely that he knew by this time of the involvement of the Lews in Weltsbarrd. [T 93] 26 June 1986 167 By letter dated 26 June 1986, signed by Mr Scanlan, Cleary & Hoare wrote to Mr Richard Lew, Director, EMM, inter alia as follows: 'Re PMA Development Company No. 2 Pty Limited . . . We refer to previous correspondence and await . . . 1. Written confirmation from you that . . . 2. Whether an equity sharing Agreement is to be entered into with PMA Development Company No 2 Pty Limited. We note that shares at present in the company are with the original persons who incorporated the shelf company. Mr Remar has advised that one share is to go to PMA Property Corporation Pty Limited and the remaining share to your appointed equity sharing Company .' [Emphasis added] 168 Mr Scanlan's evidence was that he could not recall whether at settlement of the PMA 2 transaction, he knew that Yossarian was owned by the Lew family. [T 97] 169 On 26 June 1986, the Deed of Loan with respect to the PMA 2 transaction, was entered into. The parties were BPTC and PMA 2. The facility limit was defined as the amount of $14 million or such greater or lesser amount which might be mutually agreed from time to time between the lender and the borrower. 170 Relevantly, there was no provision similar to clause 3.09.07 or 3.09.08 of the 13 November 1985 Deed of Loan. 24 July 1986 171 By letter dated 24 July 1986 signed by Mr Scanlan, Cleary & Hoare wrote again to Mr Richard Lew, EMM, advising, inter alia: 'We advise that we have yet to receive your instructions in respect of the preparation of any Equity Sharing Agreement like that which is in place in respect of the Southport Development . Please advise whether documentation of this kind is required in this development.' [Emphasis added] 25 July 1986 172 Cleary & Hoare prepared an epitome of loan and conditional Solicitor's Certificate on 25 July 1986. This stated that the shareholdings in PMA 2 were exactly the same as at the date of incorporation and sought instructions as to whether an Equity Sharing Agreement was required such that an alteration in the shareholdings could be affected. The Certificate was said to be conditional upon confirmation that settlement was to proceed notwithstanding an Equity Sharing Agreement was not in place. 173 By letter dated 25 July 1986 bearing reference 'DJC:PJS', Cleary & Hoare wrote to the Directors, PMA Development Company No 2 Pty Limited, C/- Mr J Remar, inter alia, as follows: 'Re Equity Sharing Agreement We refer to our telephone conversations of the afternoon of the 25th instant and confirm that we received instructions at 4.30pm on that day to prepare an Equity Sharing Agreement in respect of the Fairfield Development . Enclosed please find the following documents for your urgent execution and return: 1. Original and two copies Equity Sharing Agreement [There were also then set out details of the enclosed Bills of Mortgage, Guarantees and Indemnity and Mortgage Debentures and Minutes of Meetings and Share Transfers and certain other documents.]' [Emphasis added] 174 The letter advised that if there were any enquiries, Mr Scanlan should be notified. 28 July 1986 175 A transfer of shares was signed on 28 July 1986 for the transfer by Mrs J.E. Remar (formerly known as Remo) in consideration of the sum of $1 paid to her by Yossarian Nominees Pty Ltd of one ordinary share in PMA Development Company No 2 Pty Limited. 176 Under cover of facsimile dated 28 July 1986, Mr Scanlan sent to Mr Richard Lew of EMM in Melbourne, the PMA 2 Equity Sharing Agreement. The cover sheet of the facsimile describes the enclosure as follows: 'Equity Sharing Agreement for your urgent perusal and comments. Please ring Don Cleary upon receipt.' 177 The Equity Sharing Agreement dated 28 July 1986 with respect to PMA 2 is appended to this Judgment. 178 Yossarian Nominees Pty Limited is a party referred to as the second shareholder. The type written name is spelt Yossarian Pty Limited. This is crossed out and in handwriting Yossarian Nominees Pty Ltd is inserted. The address is care of 84 William St, Melbourne. That was the address of EMM. Recital F stated that Yossarian Nominees Pty Limited owned 50% of the shares of PMA 2. Recital H is in identical terms to the same recital in the November 1985 Equity Sharing Agreement. 1 August 1986 179 By letter dated 1 August 1986 signed by Mr Scanlan, Cleary & Hoare wrote to EMM enclosing a copy of the Equity Sharing Agreement. 180 Under cover of letter dated 1 August 1986 signed by Mr Scanlan, Cleary & Hoare wrote to EMM in the following terms: 'Re Burns Philp Trustee Company Limited advance to PMA Development Company No 2 Pty Limited Southport Development We refer to our conditional Solicitors' certificate of the 25th July 1986 and enclose further Solicitors' Certificate of the 28th instant.' The Fourth Solicitor's Certificate 181 By letter dated 1 August 1986 signed by Mr Scanlan, Cleary & Hoare wrote to the Manager, BPTC inter alia in the following terms: 'Re Burns Philp Trustee Company Limited Advance to PMA Development Company (No 2) Pty Limited We refer to our telephone conversation with Mr Richard Lew on the 31st ultimo and enclose our original Certificate inadvertently not forwarded to you on the day of settlement. . . .' 182 The Certificate was sent by courier under cover of this letter. At the same time a copy of the Certificate was sent by Cleary & Hoare to BPTC, attention Ms Varga. 183 The Solicitor's Certificate is appended as Appendix 4. The Certificate is divided into various parts. The only reference to the Equity Sharing Agreement is the words 'costs and outlays to prepare Equity sharing Agreement $4,401.00' under Part 1, 'Details of Loan'. No mention is made of the Equity Sharing Agreement or associated security documents under Part B, 'Details of Security', Part C, 'Details of Any Special Matters - Searches', or Part D, 'Special Conditions for the Development'. The Certificate is signed by Mr Isles although faxed by Mr Scanlan. On page 6, the certification states that 'a thorough and complete investigation of the borrower and guarantors (if applicable) has not revealed any matters which might adversely affect you'. 6 August 1986 184 By letter dated 6 August 1986 bearing Mr Scanlan's reference, Cleary & Hoare wrote to Coopers & Lybrand advising, inter alia: 'Re Equity Sharing Agreement between Yossarian Nominees Pty Limited and PMA Development Company No 2 Pty Limited We advise that we act on behalf of both Yossarian Nominees Pty Limited and PMA Development Company No 2 Pty Limited in respect of the purchase of property at Fairfield Road, Fairfield. Both Yossarian Nominees and PMA Development Company No 2 Pty Limited have entered into an Equity Sharing Agreement in respect of the development of a Shopping town upon the aforementioned property . . . We further enclose the following . . . Photocopy of Equity Sharing Agreement.' [Emphasis added] 20 August 1986 185 By letter dated 20 August 1986 [sent by Mr Scanlan], Cleary & Hoare wrote to Mr Partridge of PMA Development Company No 2 Pty Limited, returning the Company Registers for each of PMA Development Company No 5 Pty Limited and PMA Development Company No 2 Pty Limited and enclosing in relation to PMA No 2, inter alia, copy Share Transfer JE Remo to Yossarian Nominees Pty Limited. 27 August 1986 186 By letter dated 27 August 1986, Cleary & Hoare [signed by Mr Scanlan], wrote to the Directors, Yossarian Nominees Pty Limited, C/- Mr Richard Lew, Estate Mortgage Managers Limited. This letter was, inter alia, in the following terms: 'Re Equity Sharing Agreement - Yossarian Nominees Pty Limited - PMA Development Company (No 2) Pty Limited - Fairfield Gardens We refer to settlement of this transaction effected on 28 July 1986 and enclose for execution by Yossarian Nominees Pty Limited original and two copies Equity Sharing Agreement . . .' 7 October 1986 187 By letter dated 7 October 1986, Mr Scanlan wrote to Mr Richard J Lew, C/- Yossarian Nominees Pty Limited, C/- Estate Mortgage Managers Limited, inter alia, as follows: 'Re Equity Sharing Agreement - Fairfield Gardens We refer to the above matter and enclose the following documents for your safe keeping . . . Duplicate stamped Mortgage Debenture . . . Duplicate Bill of Mortgage . . . We shall forward you original stamped Equity Sharing Agreement upon finalisation of the building contract.' 16 October 1986 188 By letter dated 16 October 1986, Cleary & Hoare wrote to Coopers & Lybrand in Queensland advising, inter alia: 'Re Transfer of shares in PMA Development Company No 2 Pty Limited We advise that we act on behalf of Yossarian Nominees Pty Limited in respect of the Equity Sharing Agreement between PMA Development Company No 2 Pty Limited and Yossarian Nominees Pty Limited . . .' 189 The second stage of the PMA 1 transaction was effected on 20 October 1986 when a Deed of Variation of Loan and Guarantor's Acknowledgment was entered into between PMA 1 as borrower and BPTC as lender and the guarantors. This Deed of Variation increased the facility limit to $30 million. 20 October 1986 190 On 20 October 1986, a further Equity Sharing Agreement was entered into between PMA 1, PMA Property Corporation and Weltsbarrd. This Agreement is appended to this Judgment as Appendix 5. 22 October 1986 - The Fifth Solicitor's Certificate 191 On 22 October 1986, Cleary & Hoare under cover of letter signed by Mr Scanlan, furnished a further Solicitor's Certificate in relation to PMA 1 Stage 2. A copy of this Certificate signed by Mr Cleary, is appended as Appendix 6. No reference is made to the Equity Sharing Agreement. 7 November 1986 192 By letter dated 7 November 1986, Cleary & Hoare wrote to 'The Directors, Weltsbarrd Holdings Pty Limited, C/- Mr Richard J Lew, EMM.' 193 This letter advised, inter alia: 'Re Equity Sharing Agreement - McDonnell and East Centre State 2 We refer to the above matter and enclose original stamped and two duplicate stamped Equity Sharing Agreements for execution by Weltsbarrd Holdings Pty Limited where indicated . . .' 8 December 1986 194 A file note admitted into evidence dated 8 December 1986 is appended hereto and marked '7'. Undated Memorandum 195 A memorandum to file which is undated by Mr Scanlan is in the following terms: 'Memo to : File 1. Richard Lew has yet to advise of the figure to be inserted in the Equity Sharing Agreement . . . 3. The Equity Sharing Agreement was forwarded to Richard Lew for execution by Weltsbarrd Holdings Pty Limited . . .' 9 December 1986 196 By letter dated 9 December 1986, Cleary & Hoare wrote to the Directors, Yossarian Nominees Pty Limited, C/- Mr Richard J Lew, EMM, in relation to the PMA Development Company No 2 Equity Sharing Agreement, advising that all requisitions had been answered in respect of the transfer of shares in PMA 2 to PMA Property Corporation and Yossarian Nominees Pty Limited. 10 December 1986 197 On 10 December 1986, Cleary & Hoare wrote to the Directors, Weltsbarrd Holdings Pty Limited, C/- Mr Richard J Lew, EMM, enclosing for safe keeping registered Bill of Mortgage in favour of Weltsbarrd Holdings Pty Limited. 6 January 1987 198 On 6 January 1987, Cleary & Hoare wrote to the Directors, Yossarian Nominees Pty Limited, C/- Mr Richard J Lew, EMM, advising that they awaited return of executed Transfer of Shares as executed by the Directors of Yossarian Nominees Pty Limited. 16 December 1987 199 By letter dated 16 December 1987, Cleary & Hoare wrote to Messrs PG Jefferson & Co, Chartered Accountants of Queensland, inter alia, as follows: 'Re Equity Sharing Agreements - The McDonnell and East Centre . . . As you will see from the contents of the Equity Sharing Agreement, Weltsbarrd Holdings Pty Limited is one of the shareholders. It is a company which is owned by Mr and Mrs Reuben Lew and Sandra Lew . . .' Evidence given by Mr Peter Scanlan 200 Mr Scanlan had been a partner of Cleary & Hoare since 1987. He had completed his two year Articles in 1983 and 1984 and joined Cleary & Hoare in 1985. 201 Mr Scanlan was unable to recall the precise number of transactions in relation to which Cleary & Hoare had received instructions from EMM. Between 1985 and 1990 to his recollection, there were approximately 20 to 30 such transactions and he was involved as a solicitor or partner in all of those transactions. He had many dealings with Mr Reuben Lew and with Mr Richard Lew in the course of those transactions. On his evidence, had more dealings with Mr Richard Lew than with Mr Reuben Lew. [T8-9] 202 Mr Scanlan accepted that he understood the nature of the obligations owed by a solicitor to his client, especially a client who was a lender and a trustee. He accepted that he understood the nature of fiduciary obligations owed by a solicitor to his client and knew that those obligations involved duties of good faith and honesty and of full disclosure and a duty not to prefer the interest of one client over the interest of another client. He was aware of all those matters in June 1990 [T 9] 203 In about June 1990, Mr Scanlan learned of the difficulties involving EMM and became aware that Messrs Richard and Reuben Lew were being investigated for possible criminal offences. These events were discussed by Mr Scanlan with his partners at the time. The discussions were principally with Mr Cleary as he was then the managing partner. [T 11] 204 It is highly likely that Mr Scanlan read an article which appeared in the Australian Financial Review on 8 June 1990 which made plain that the managers of Estate Mortgage Trusts were being investigated for possible criminal offences. It is likely that he noticed from that article the reference to Weltsbarrd and Yossarian Nominees which he likely immediately recalled were companies which had been involved in the transactions undertaken on behalf of BPTC involving PMA companies in 1985 and 1986. 205 The PMA transactions were at the time, the largest transactions which Mr Scanlan had been involved in and to his recollection particularly memorable transactions. [T 11] 206 On 19 June 1990, Mr Scanlan was examined at an NCSC hearing and prior to this examination had spoken with Mr Geoffrey Chettle of counsel who was investigating the affairs of Estate Mortgage Managers Ltd and who explained that the focus of NCSC attention at the time was the Nordemesne transactions and the PMA transactions. [T 12] 207 Prior to attending to be examined, Mr Scanlan, following service upon him of a subpoena, informed Mr Lacey that the consequence of service of the subpoena was that he would be required to have access to and possibly to produce the Nordemesne documents and the PMA documents and this was because he understood that the Nordemesne and PMA transactions were to be the subject of enquiry in the examination which he had been summonsed to attend. It was only the Nordemesne and PMA transactions which he understood had been singled out to him for examination. 208 During the course of the NCSC examination, Mr Scanlan was represented by Mr Nolan, solicitor of Gilshenan & Luton and by Mr Morris of counsel. Prior to the examination, Mr Scanlan went to the trouble of ensuring that Burns Philp was prepared to waive privilege in relation to the production of the PMA documents and this was because Mr Scanlan knew that they would be necessary or required for production in connection with the examination. [T 19] 209 Mr Scanlan accepted under cross-examination, that one of the circumstances which was brought to his attention during the NCSC examination was that the PMA 1 and 2 transactions by which Mr Lew had an interest through Weltsbarrd and Yossarian in the trust funds advanced by Burns Philp, represented an exception to the norm in relation to transactions which took place. [T19] This was something which was brought home to him during the examination by reason of the questions put to him, as was the fact that he did not know of any other transaction involving Mr Lew or any of the Lew companies and funds advanced by the trust or the trustee. [T 19] 210 Another circumstance which Mr Scanlan accepted had been brought to his attention during the NCSC examination on several occasions was that he, as the solicitor for Burns Philp Trustee Company, had a fiduciary relationship to it involving duties of good faith and honesty and full disclosure. He also accepted that it was pointed out to him during the examination that even if there were a reference in some documents to Weltsbarrd or Yossarian, this would not tell the trustee that the Lews were involved in the transaction. [T 20] 211 Mr Scanlan recalled that an issue which had been explained to him during the examination was as to whether, pursuant to his fiduciary duty, it was incumbent upon him to alert the trustee to what was happening. He recalled an issue made plain to him during the examination as to whether it was part of his duty to alert the trustee that Mr Reuben Lew or the Lew family had an interest in the transaction. [T 20] 212 It was also brought to his attention during the examination that the examiner did not understand how Mr Scanlan could assume, as he informed the examiner he did, that the trustee knew about the Lew family being involved in those loans. [T 20] That matter was put to Mr Scanlan forcefully. [T 20] 213 In the course of the examination it was brought to Mr Scanlan's attention, as he accepted, that by the time he came to deal with the PMA 2 transaction he was aware that the Lew family had an interest in both PMA 1 and PMA 2. This is what he stated during the examination. 214 One of the accusations levelled at him by Mr Chettle during the NCSC examination was that he did not raise with the trustee, the interests which the Lew family had had in PMA 1 and PMA 2. 215 Mr Scanlan's evidence was that he said during the NCSC examination, that he presumed that the trustee knew of the involvement of Weltsbarrd and Yossarian in the transactions and that it had taken him by complete surprise when Mr Chettle mentioned at that time, an issue as to whether the trustee had known of this involvement. 216 The point made to Mr Scanlan at the NCSC examination was that despite his assertion that he presumed that the trustee had been aware, he was not able to assist the examiner at that time as to how the trustee had known. Mr Scanlan accepted that during the NCSC examination he kept saying to Mr Chettle that Cleary & Hoare had received instructions from the manager and that he, Mr Scanlan, had presumed that the trustee knew what the manager was doing. [T 21] 217 Mr Scanlan recalled that at one stage during the examination on 19 June, Mr Morris had objected on his behalf to certain questions put to him. Mr Scanlan accepted that in making those objections, Mr Morris was seeking to protect Mr Scanlan from the adverse consequences to the line of questions. Mr Scanlan presumed that the transcript of his evidence could have been used against him in civil proceedings. [T 23] 218 Mr Scanlan knew at the time that it was important to avoid evidence which might have implications for any civil liability. [T 23] 219 It was made clear to Mr Scanlan during the examination that his personal involvement in the PMA transactions was the subject of enquiry, as was the Lew's involvement in those transactions. The examiner made clear that the Commission was investigating whether Mr Scanlan may have been involved in wrongful conduct in the PMA transactions. [T 23] 220 Mr Scanlan understood that the wrongful conduct being investigated related to the way in which it came about that the Lews had a 50 per cent financial interest in the PMA transactions and why he had taken no steps to inform Burns Philp at the time. [T24.5] 221 Mr Scanlan recalled that the essence of the conduct which was being investigated in relation to this part of the examination was that matter and that Mr Morris on his behalf, had objected on a number of occasions to questions relating to or referring to Mr Scanlan's fiduciary duty and duty of care. He accepted that the factual context in which those questions arose related to the failure on his part, whether it was justified or not, to notify Burns Philp of the involvement of the Lews in the transactions. [T 24] He accepted that those duties, if breached, might give rise to a civil liability, a matter which he knew at that time as it was obvious, this being the very reason why Mr Morris was keen to object to questions about those duties. [T 24] 222 Mr Scanlan accepted that what Mr Chettle put to him during the examination as the essential question was why he, Mr Scanlan, did not tell Burns Philp about the involvement of the Lew family in the PMA transactions. Mr Scanlan accepted that his answer during the examination on that issue was that he had presumed that the trustee knew all about the involvement of the Lew family in the PMA transactions. He accepted that if that answer was not good enough or were not correct, it was quite obvious that he may have breached his duty as a solicitor to the trustee. [T 24] 223 When Mr Scanlan left the witness box on 19 June, it was obvious to him that there was an unresolved issue as to whether he could satisfy the examiner that he had not breached his duty in not informing Burns Philp of the above matter. 224 At the end of the examination, Mr Chettle had stated that he was not suggesting that Mr Scanlan had sat down and conspired with the Lews and that there was no reason to suspect the commission of a criminal offence. [T 25] 225 Mr Chettle had stated: 'We have no reason to suspect that your client has committed criminal offences.' [T 25.55] 226 Mr Scanlan accepted that he knew, following the NCSC examination, that 'there was an unresolved question in the examiner's mind about whether there was a breach of duty, let alone a criminal offence'. [T 27.45] 227 Mr Scanlan accepted that he had been given an indication of the possibility of a claim for breach of duty in relation to the PMA transactions during the NCSC examination. [T 28.10] He accepted at transcript 28 that Mr Chettle put to him the possibility of a claim in relation to the PMA transactions, relating to the possibility that there had been a breach of his fiduciary duty in failing to notify the trustee of the involvement of the Lews. [T 28] 228 Whilst Mr Scanlan's primary preoccupation during the NCSC examination had been the possibility of a criminal offence, he accepted that the examination 'made clear that the possibility of a breach of duty was also in question'. [T 28] 229 On the afternoon following the examination, Mr Scanlan was served with a further notice to produce books by the NCSC which notice specifically directed attention to the files he held in relation to the advance by Burns Philp to PMA 1 and PMA 2 and any further advances relating to them. He informed his partners about the production of the files and in particular informed Mr Cleary of this matter. He also discussed with Mr Nolan the interrelationship between the files which were requested and the evidence which he had given that day. 230 Mr Scanlan accepted that he was keeping Mr Cleary closely informed about the sequence of events in relation to his examination because of all the other partners, he was the one most closely concerned with the subject matter of the investigation into the PMA transactions. [T 30] 231 Mr Scanlan recalled that a few days after his examination, Messrs Reuben and Richard Lew were arrested. He recalled that this caused concern amongst himself and his partners. [T 31] 232 On 22 June 1990, Cleary & Hoare had written to Minet International Professional Indemnity Limited enclosing a proposal form for 'top up' cover for the period 1 July 1990 to 30 June 1991. Cleary & Hoare requested a quotation in the amount of $5 million $7.5 million and $10 million. [DX Vol 6 p 15] 233 Mr Scanlan accepted that it was likely that he told Mr Cleary following his NCSC examination that there was a question as to whether he, Mr Scanlan, had breached his duty to the trustee, although he felt he could justify his actions. [T 33] 234 It was possible although he could not recall for certain, that he made plain to Mr Cleary that allegations of a breach of fiduciary duty would involve, if justified, a civil liability. [T 33] 235 Mr Scanlan was asked and answered as follows: 'Q. . . . the discussion which you said was likely between the partnership as to the need to increase the professional indemnity cover in the light of the unfolding events in relation to the Estate Mortgage Trust took place, did it not, because of the possibility of a civil claim arising from those events which may be greater than the then current level of cover . . . A. I would say its more than likely that was a matter that was in the mind of certain partners and may have been addressed at a partners' meeting. I simply can't recall . . .' [T 34] 236 Following the examination on 19 June and the provision of documents by Mr Scanlan pursuant to a notice to produce, Mr Nolan retained on Mr Scanlan's behalf, Mr Callinan QC. Mr Nolan later reported to Mr Scanlan that Mr Chettle, in speaking to Mr Nolan, had said that he had looked at the documents produced and regarded the matter as very serious for Mr Scanlan. [T 36] 237 On about 10 July, Mr Chettle had spoken to Mr Callinan and said to Mr Callinan that both Mr Scanlan and Mr Cleary were under suspicion, the clear implication being that they were under suspicion for criminal offences. [T 30] 238 Mr Scanlan accepted that what was apparent to him as early as 9 or 10 July was that the NCSC having looked at the further documents produced, was not satisfied that there was a sufficient reason why he had not informed the trustee about the involvement of the Lew family in the PMA transactions. [ T 37] Hence the possibility of a claim which had arisen in the course of the 19 June NCSC examination had by that stage, on Mr Scanlan's evidence, become more likely. 239 Mr Scanlan was asked and answered as follows: 'Q. But you accept, do you not, that the possibility of civil liability against the firm arose from the very same facts and circumstances which formed the basis of the allegations which you thought unjustified of criminal misconduct . . . A. Yes.' [T 37] 240 Mr Scanlan recalled that Mr Cleary had been the person within the firm who was personally responsible for arranging the firm's insurance cover and Mr Scanlan understood that Mr Cleary was the only partner who took that under his personal wing. [T 38] 241 Mr Scanlan's examination by the NCSC had resumed on 27 July, on which occasion Mr Fryberg QC appeared on his behalf. Mr Scanlan recalled that at the commencement of the examination, Mr Fryberg expressed a number of concerns to the delegate of the NCSC who was presiding, including his concerns about possible professional liability of the firm Cleary & Hoare. The point which Mr Fryberg had explained of the concerns which he was expressing, was that the questions should, as far as possible, not go beyond the narrow confines of the subject matter of the investigations set out in the notice which Mr Scanlan had received. 242 The transcript of the NCSC examination in this regard includes, inter alia, the following: 'Mr Fryberg . . . The only other preliminary matter that I wish to raise is in relation to a number of press reports that have occurred since the hearing on the last occasion, in which a particular Melbourne lawyer has been quoted as foreshadowing action, civil action, against the trustee Burns Philp. Burns Philp, it would appear, are quite likely to make claims in turn against auditors and perhaps other professional people who may have been engaged by it. That naturally is a matter of some concern to my clients . . . One particular question or category of questions that is of concern in this regard, having regard to the transcript of the proceedings on the last occasion, are questions directed towards showing the duty owed by the solicitors to their client and the existence or otherwise of any breach of that contractual duty . These are matters which, as we would see it, are unlikely on any view to fall within the matters of which notice was given this morning and which in fairness - perhaps not deliberately but which did seem to arise from time to time on a previous occasion and which I think perhaps were not intended to be pressed on the previous occasion. . . .' [DX volume 5 page 310 and 311] [Emphasis added] 243 Mr Scanlan accepted that he understood that Mr Fryberg was there endeavouring to protect the firm Cleary & Hoare against any adverse inference which may arise from answers given in the examination which may result in the possibility of a claim of civil liability against the firm. [T 39] 244 The 27th July resumption of Mr Scanlan's NCSC examination was a Friday. On the following Monday, Mr Cleary sought quotations to increase the firm's cover to $20 million, $30 million and $40 million respectively. [T 39] 245 Mr Cleary was examined also on 27 July in the afternoon following Mr Scanlan's further examination that day. 246 Mr Scanlan was asked: 'Q. Did the two of you discuss, as far as was permissible, the substance of the allegations against either of you individually or against the firm? A. I believe we sat down and discussed them, but our major relief was that we were told that this would be the end of the matter and that we would have to be witnesses for the Crown, and we were pleased about that.' [T 39] 247 On 6 August 1990, Gilshenan & Luton wrote to Mr Chettle seeking particulars of the charges which had by then been laid against Messrs Cleary & Scanlan. The particulars sought appear at DX volume 5 page 113 and following. 248 The response to this request for further and better particulars was supplied by the Victorian Corporate Affairs Commission to Messrs Gilshenan & Luton under cover of letter of 14 August 1990. [DX volume 5 page 121] This response set out many pages of particulars and included particulars of the essence of the prosecution allegations against Mr Scanlan and against Mr Cleary in separate paragraphs. The paragraphs are extremely similar in their wording to one another although not identical. It is sufficient for present purposes to set out that which related to Mr Scanlan at DX volume 5 page 128. It read: 'The essence of the prosecution allegation against Mr Scanlan is that he aided and abetted, counselled and procured, the execution of an Equity Sharing Agreement and the transfer of one PMA share between Weltsbarrd Holdings Pty Limited and PMA Development Company No 1 Pty Limited, such agreement constituting a secret commission to Reuben Lew or Weltsbarrd Holdings Pty Limited. Positive steps were taken by Mr Scanlan to keep Burns Philp Trustee Company ignorant of such agreement. The documents were drawn in Queensland and sent to Victoria for execution. Weltsbarrd Holdings Pty Limited was a Victorian company and controlled by Mr Reuben Lew. At the same time Mr Lew was associated with Estate Mortgage Managers Limited which company managed the various Estate Mortgage Trusts on behalf of Burns Philp Trustee Company Limited. . . .' 249 Mr Scanlan accepted under cross examination that the underlying facts which were described in the particulars, dealing with the essence of the allegations, were the same underlying facts which, whether he had thought were justified or not, had been the subject of his evidence on 19 June. [T 45] 250 On 6 August 1990 an informal meeting of partners [those attending being Mr Cleary, Mr Hoare, Ms King, Mr Scanlan, Mr Hart, Mr Hewlett and Ms Harrington] of Cleary & Hoare was held. Mr Hoare prepared the minutes. [DX 5 p 111(a)]. 251 The minutes cover a range of topics concerned with 'damage control' in relation to the charges and the effect of adverse publicity on the firm. The minutes include, inter alia: 'Co-ordination: JH will head up the co-ordinating effort and strategy and will act as a link between the rest of the partners and Don and Peter. The aim is to take as much individual pressure off Peter and Don as possible. John will attend as many meetings as possible with Peter and Don's solicitors and barristers. Press Publicity Defamation: This is to be co-ordinated by Peter Hall providing all material to Kelli Stallard with a copy to John Hoare and Peter Scanlan. Kelli has instructions to institute proceedings in respect of the Sunday Mail article and any other articles she considers to be defamatory. . . . Legal Costs: It was resolved that the firm meet Peter's and Don's legal costs in relation to the matter on the basis that the allegations be treated properly as allegations against the firm and therefore a firm expense. Peter and Don are agreeable that in the event of any monies being recovered through defamation or other proceedings, then those monies will belong to the firm. . . . Law Claims: JH is to write a letter to Law Claims simply advising details of the charges.' [Emphasis added] 252 On 7 August 1990, Cleary & Hoare wrote to the Manager, Law Claims, Queensland Law Society Incorporated in the following terms: 'Re Donald James Cleary, Peter James Scanlan - Charges laid 1st August 1990 Please find enclosed detail of the charges laid against two partners of our firm on the 1st August 1990. The matters received widespread press publicity. To date, no details of any factual situations supporting those charges have been supplied. No allegations of negligence have been raised against the firm in relation to this matter. We are simply advising you as a matter of courtesy and will keep you informed should there be any further developments whereby negligence is alleged or implied.' [DX volume 6 page 48] 253 Mr Scanlan accepted that the description of the events forming the basis of the charges which were enclosed with this letter to Law Claims was 'a description of the same underlying facts which were the subject of [his] examination on 19 June'. [T 45.55] Those were matters which he had said gave rise to a question of a possible breach of duty by him in that examination and a possible civil liability against the firm. He accepted that those facts, namely the facts set out in the details of the charges against him, are substantially the same facts as later became the subject of the civil proceedings which were commenced against the firm - it was the same underlying complaint. The complaint was that Cleary and Hoare had not informed the trustee about the investment of the Lews in the PMA transactions. It was clear, he accepted, that the facts which were the subject of his examination on 19 June, gave rise to the charges which were served on 1 August and that the surrounding circumstances in due course gave rise to the subsequent civil proceedings against the firm. In essence, he accepted that 'the essential underlying facts were the same whether they were the subject of [his] 19 June examination or the charges served on 1 August or the first writ which was served'. [T 46] 254 Mr Scanlan accepted that between 14 and 28 November 1985, he was involved in the PMA 1 transaction. He accepted that during that period he acted, subject to Mr Cleary's supervision, as the solicitor for BPTC. [T 46] 255 Mr Scanlan accepted that it was necessary for him in that role to address certain correspondence directly to the trustee company and that in directing correspondence directly to the trustee company he was obliged to fulfil his fiduciary duty to that company including his duties of honesty and full disclosure. He recalled that the instructions which had been given to his firm also required him, in relation to the PMA 1 transaction, to keep the trustee fully informed on all matters incidental to the transaction being an express instruction, additional to any fiduciary duty which he had. [T 47] 256 Mr Scanlan accepted that the transaction, namely the PMA 1 transaction, involved two elements, namely a Loan Agreement and an Equity Sharing Agreement. Taken as a whole, those two elements and the documents in relation to those elements, constituted the PMA 1 transaction documents. He drafted certain collateral securities in support of the Equity Sharing Agreement and made at least one alteration to the recitals on the Equity Sharing Agreement. [T 47-48] 257 Mr Scanlan accepted that he would have reviewed the Equity Sharing Agreement and that he noticed that the parties to it were PMA companies on the one hand and Weltsbarrd on the other hand. He accepted that he did not act for the PMA companies but he had acted for the Weltsbarrd company. He accepted that he knew that the persons who stood behind the PMA companies were different from the persons who stood behind Weltsbarrd although his evidence was that he had not known who was behind Weltsbarrd. [T48] 258 Mr Scanlan had known that Mr Remo and Mr Bentley were the individuals who stood behind the PMA group of companies. 259 Mr Scanlan was taken to recital 'H' of the Equity Sharing Agreement. His recollection was vague as to precisely what he had and had not seen. It was necessary for him to draft documents which were related to the Equity Sharing Agreement and he accepted that he had to have some minimum understanding of the operation of that agreement in order to draft those documents. To the extent that his evidence was that he just drafted precedents and did not have a basic understanding of the way in which the Equity Sharing Agreement operated, that evidence is rejected. It should be recalled that he was asked and answered as follows at page 51: 'Q. You could not fulfil, safely, your obligations in relation to the further documentation which you were required to draft for the further advance which occurred on 28 November, without having an understanding of the necessary operative terms of the Equity Sharing Agreement could you? A. It would be difficult.' [T 51] 260 At transcript 51, Mr Scanlan accepted that in the PMA 1 transaction taken as a whole, he had acted for the trustee company and for Weltsbarrd. Between 14 and 28 November he had known that the persons who stood behind the PMA companies, Mr Remo and Mr Bentley, were different from the person or persons who stood behind Weltsbarrd. He knew that his instructions from Weltsbarrd came from Estate Mortgage Managers. He was aware of no one who stood behind Weltsbarrd other than those who gave him instructions in relation to it. There was no one he could point to in the period when he was acting in the PMA 1 transaction, from whom he got instructions in relation to Weltsbarrd, other than Messrs Reuben or Richard Lew. [T 51] 261 As to the letter of 27 November 1985, from Cleary & Hoare to BPTC in its original form, Mr Scanlan accepted [at transcript 52] that the letter had his initials located after the initials DJC within the reference and that it was more than likely that he had something to do with the drafting of the letter. He must have had some involvement in the drafting of the letter as his initials were on the letter. His evidence was that the Court could reliably proceed on the basis that the letter was either written by him or part of it was written by him. He accepted that when he wrote the letter or wrote part of it, he did so 'knowing that the letter was intended to be relied on by the trustee'. [T 52.55] 262 At transcript 53, he accepted that the way in which the practice operated was that he would have seen the letter before it was signed. He was asked and answered as follows: 'Q. And the letter was written in so far as it was written by you deliberately, intentionally, not inadvertently? A. The letter would have been written to, to, it would have been deliberately written to achieve the end result of a settlement. Q. And the end result which the letter was written to achieve was that it be relied upon by the trustee before advancing moneys to the borrower? A. Yes. Q. And the letter which you either wrote or cooperated in writing, referred to certain facts and documents, a series of them, which you thought at that time it was appropriate to inform the trustee about? A. Yes. Q. And you thought it appropriate to refer to those facts and documents in the sense that you thought all of that information was relevant information which you were required to provide to the trustee in the fulfilment of your duty? A. Yes. Q. The letter was intended to be furnished to the trustee in the fulfilment of that very duty wasn't it? A. Yes. Q. In fulfilment of your fiduciary duty to act with honesty and full disclosure towards the trustee? A. Yes. Q. And in fulfilment of your expressed contractual requirement to keep the trustee fully informed on all the matters incidental to the transaction? A. That's correct.' [T 53] 263 Mr Scanlan was closely cross-examined in relation to the message of a telephone call from Mr Lew seeking to speak to him at 8.32 am on 28 November and to the following events including his telephone discussion with Mr Lew and the redrafted letter sent out by facsimile at 9.20am on the same morning. 264 In being shown his handwritten note of the telephone conversation with Mr Lew, his evidence was that he could recall Mr Lew 'requesting that the material be separated'. [T 54] 265 He was asked and answered as follows: 'Q. Well, whether you recall it or not, it is reasonable to conclude, is it not, that one thing he did say to you was that there was to be no reference to the Equity Sharing Agreement in Burns Philp Trustee Company correspondence? A. That's what, yes, it says. "No reference to Equity Share in BP correspondence".' [T 54] 266 As far as Mr Scanlan could recall, it was more than likely that the conversation was with Mr Reuben Lew. 267 He believed that after his conversation with Mr Reuben Lew, he would have spoken with Mr Cleary and probably would have said: "Mr Lew rang up, and this is what he said" [T 55], no doubt repeating what Mr Lew had in fact said or the substance of what he had said. 268 Mr Scanlan accepted that following the conversation with Mr Lew and his further conversation with Mr Cleary, it is likely that he wrote the letter of 28 November 1985, sent under cover of the facsimile sheet at 9.20am on that day. [T 56] 269 He accepted that he recorded on a copy of the 27 November 1985 letter on his file, the words 'further certificate done on 28 November' and that this followed the conversation with Mr Lew and that Mr Lew had, in effect said to him 'change the letter'. [T 56] 270 He was asked: 'Q. Mr Lew said to you, in effect, "change the letter" didn't he? A. Yes he did. Q. And you had sent the first letter to him? A. Yes that is normally the procedure. Q. So it was obvious that the letter was not going to be sent to the trustee company until you changed it? A. That's possible, yes . [T 56] 271 Mr Scanlan believed that Mr Lew had phoned wanting the correspondence to be changed and Mr Scanlan's evidence was that he did not think that there was anything wrong with this. [T 57] 272 Mr Scanlan also accepted that the letter of 28 November was written intentionally and deliberately and that there was nothing accidental about the content of the letter and that it was a considered letter which he intended the trustee to rely upon. He was asked and answered as follows: 'Q. You deleted, in this letter, reference to the encumbrance over the land in favour of Weltsbarrd, didn't you? A. Yes, because that is what Mr Lew asked me to do . Q. And you deleted reference to the Equity Sharing Agreement, didn't you? A. Yes . Q. And by doing so, in your capacity as a solicitor acting for the trustee company, you chose not to tell the trustee of certain facts and documents which the previous day you had considered appropriate to inform it about? A. That's correct, because Mr Lew had given us instructions and I relied on the client's instructions. Q. So you knew what you were doing? A. Yes .' [T 57] 273 At transcript 58, Mr Scanlan was asked: 'Q. . . . The letter of 28 November concealed certain information which was in the letter of 27 November, didn't it? A. Yes. Q. And that was your choice, wasn't it? A. What do you mean my "choice"? Q. You chose to do that? A. Me, personally. I don't know if Mr Cleary did it or I did it . . . Q. Mr Scanlan what you did was choose to follow the instructions of Mr Lew, rather than perform your duty to the trustee in the way which you had originally proposed to do so, didn't you? . . . A. Yes, I followed Mr Lew's instructions. Q. And that was a conscious and deliberate decision which you made? A. I can't say it was me who made that decision. Q. It was a decision, whether you personally made it or not, in which you participated? A. Yes, I would have assisted in preparing the letters for the transaction that afternoon. Q. And you participated in that decision knowing precisely what you were doing, didn't you? A. I was following Mr Lew's instructions, that is what I was doing. Q. And you knew that the consequence of following those instructions was that you were failing to disclose information which you had previously thought you should reveal in the performance of your duty to the trustee? A. . . . I didn't think about it .' [T 59] 274 Mr Scanlan was closely cross-examined on the material which was missing from the 28 November 1985 letter written to BPTC as opposed to the form of letter which had originally been drafted for submission to BPTC of 27 November 1985. The letter which had finally been sent, omitted the references to Cleary & Hoare having prepared the Bill of Encumbrance (Equity Sharing Agreement). As has been already noted, in each case, the letter began : 'We certify that we have prepared the following additional documents in connection with the borrower's purchase of the final properties comprising the total development site at Southport . . .' 275 The cross-examination of Mr Scanlan at transcript 60, includes the following: 'Q. The letter said, in the second paragraph, that "we" that is Cleary & Hoare . . . "have prepared the following additional documents in connection with the borrower's purchase of the final properties", doesn't it? A. Yes. Q. Then it lists two documents or categories of documents doesn't it? A. Yes. Q. The bill of encumbrance, collateral to equity sharing agreement to which you referred in your letter of 27 November, was prepared by your firm, to use the words of the letter, "in connection with the borrower's purchase of the final properties", wasn't it? A. Yes, you could say that, yes. Q. That bill of encumbrance encumbered the final properties, the purchase of which were settled on 28 November? A. The second part yes, there was a settlement on the 14th and one on the 28th. Q. And that bill of encumbrance to which you did not refer in the letter of 28 November, encumbered the land in support of the obligations owed to Weltsbarrd under the equity sharing agreement, didn't it? A. Yes. Q. If there had not been the purchase of the final property referred to in this letter, there would have been no need for the bill of encumbrance, in support of the equity sharing agreement? A. . . . yes. Q. The bill of encumbrance in support of the equity sharing agreement was prepared in connection with the purchase of those final properties, wasn't it? A. Yes, I suppose you could say that, yes. Q. So the statement in the second paragraph of the letter of 28 November in so far as it said: "We have prepared the following additional documents in connection with the borrower's purchase of the final property" is a half truth, isn't it ? A. If you look at it that way, I suppose it is . Q. That is the only way of looking at it, isn't it? A. It doesn't list all of the relevant securities but, as I've said, we had instructions from Estate Mortgage to take it out. Q. That is the only way of looking at it, isn't it? A. Well, yes, it doesn't fully detail all of the securities . Q. There is no doubt that it is a half truth, isn't it ? A. Yes, I suppose you look at it that way . Q. It does not give the reader of the letter the whole picture ? A. Not for all the securities , but it does for Burns Philp. It lists all the securities that were taken. Q. My question was capable of a simple answer, it does not give the reader of the letter the whole picture, does it ? A. No, it doesn't . Q. You knew the whole picture, didn't you ? A. Yes . Q. You intended the trustee to rely on the letter ? A. Yes, to draw the funds down . Q. The letter gave a false picture to the trustee, didn't it ? A. It doesn't give a complete picture of the securities taken . Q. The letter gave a false picture to the trustee, didn't it ? A Yes . Q. And that false picture was deliberate, wasn't it ? A. It wasn't, I had instructions to do it . . . Q. I'm sure you now regret having written the letter in the form it was despatched, is that right? A. In light of what has happened in my life, probably, yeah.' [T 60-61] 276 Generally, Mr Scanlan maintained his assertion that at all times he believed he was acting on the instructions of Burns Philp Trustee Company Limited, given to him by the managers on behalf of Burns Philp. 277 Mr Scanlan was cross-examined on the diary note in his handwriting of 14 November 1985, written on the day when settlement of the transaction took place. His evidence was that this diary note really set out a check list for the settlement. He was cross-examined on the item which had the words 'equity sharing!!'. As already stated, the arrow pointing to that item is preceded by 'P7'. It was put to Mr Scanlan that the reference to P7 was a reference to the Deed of Loan and to page 7 of that Deed of Loan. It was suggested that when he looked at that page, he noticed that there was a reference there to an Equity Sharing Agreement and then made the note on the settlement sheet. His belief was that the P7 might have referred to the Equity Sharing Agreement and to the fact that someone had to include a dollar figure on page 7 of that agreement at settlement. He referred to the fact that he used exclamation marks also on item 1 where referring to Form 61 and referred to these marks as 'doodle marks'. They did not, he said, mean anything. [T 64-65] 278 Mr Scanlan was asked questions in relation to the letter of 23 January 1986 addressed to the Gold Coast City Council. That letter, he accepted, was signed by him. He was asked: 'Q. You were writing there on behalf of and instructed by Weltsbarrd aren't you? A. Yes. Q. You have been, had pains in your statement, to suggest that you did not have an understanding of who your client was, your client Weltsbarrd, haven't you? A. There is reference in my statement to the fact about when I became aware of who, or what was behind Weltsbarrd, yes. Q. It is clear that on 28 January 1986 you were writing letters on behalf [sic] the company weren't you? A. To perfect their security. Q. You don't suggest, you didn't know who it was on behalf of the company for whom you were acting? A. I simply cannot recall when I knew who, or what was behind Weltsbarrd. I've said that. Q. You must have known, at least when you wrote this letter, mustn't you? A. Not necessarily. Q. Do you often write letters on behalf of companies and have no idea who is instructing you? A. Mr Cleary had instructions from the client . So we would prepare the documents. My job was to register them, at the stamp office and get the Gold Coast City Council to put them on the rate records and for me to register them on the title. That was what my role was. Q. You have no doubt that Mr Cleary, who was your principal, knew who his client was? A. You will have to ask Mr Cleary . . . Q. Mr Cleary asked you to take over and do certain things on the file didn't he? A. Yes, he did. Q. Some of those things required you carrying out work and instructions for Weltsbarrd? A. Yes. Q. You knew Mr Cleary had been involved in the original taking of instructions on behalf of Weltsbarrd? A. That's right. Q. You had no doubt in your mind in November 1985 that Mr Cleary knew who it was who was his client at Weltsbarrd ? A. That's a fair assumption . I presume, you know he received instructions and I was told to go and register the securities and stamp them. I didn't sit and ask him about it all. Q. When you said that's a fair assumption, were you giving an affirmative answer to my question? . . . The question was then repeated and Mr Scanlan answered: A. I simply can't recall what I discussed with Mr Cleary at the time about it. Q. When I asked you that question, you said that's a fair assumption. Do you recall that answer ? A. Yes . Q. Was that answer an affirmative response to my question ? A. You could probably say, yes .' [T 67-68] 279 Mr Scanlan's evidence was cross-examined as to the date 15 November 1985 when the letter was written with his reference addressed to the Commissioner of Stamp Duties and was written on behalf of Weltsbarrd, and as to whether there was any doubt as to his knowledge of who the client was. The evidence was : 'Q. There was no doubt that you knew who the client was on whose behalf you were writing is there? A. I knew I was writing on behalf of Weltsbarrd. I didn't know who, or what was behind Weltsbarrd at that time . Q. You weren't in the habit of writing letters on behalf of corporate clients without knowing who stood behind those corporate clients were you? A. Not really but I mean, I can't recall. Q. That would be a most unusual circumstance for any solicitor wouldn't it? A. I thought Mr Cleary had done this sort of stuff. He asked me to stamp and register documents. I am a first year lawyer. He tells me to do it. I do it. I didn't sit and enquire about it.' [T 68] 280 Mr Scanlan accepted that by the time he became involved in the preparation of the further advance which was settled on 28 November, he was in a position to understand in a fundamental way the operation of the Deed of Loan and the Equity Share Agreement. [T 78] 281 Mr Scanlan was asked at transcript 78: 'Q. Mr Scanlan, what I wished to suggest to you is that knowing, as you must have known, the essential terms of the Deed of Loan and the Equity Sharing Agreement, its just not reasonably possible that you could have failed to understand a way in which the Equity Sharing Agreement worked, at least in broad terms? A. I suppose that's correct. Q. And therefore it's not reasonable to say that on the basis of the documents which you reviewed, you had no understanding of the involvement of Weltsbarrd? A. I knew Weltsbarrd was involved and they were taking securities in an Equity Sharing Agreement and mortgages , whatever.' [T 78] 282 Mr Scanlan gave evidence that he knew Weltsbarrd was involved and that it was taking securities in an Equity Sharing Agreement. His understanding was that there was moneys to be advanced by Weltsbarrd. [T 79] Evidence given by Mr Donald Cleary 283 Mr Cleary had been a partner in a Townsville firm of solicitors between 1969 and 1981 and had founded the firm Cleary & Hoare in Brisbane in 1981. By 1985 the firm, as has already been mentioned, had three partners. Between 1985 and 1990 the firm increased from the position where it had three partners and four employed solicitors to the position where it had in the order of eleven partners and seventeen employed solicitors. 284 Mr Cleary accepted that during the period between 1985 to 1990 there were something in the order of 40 to 50 transactions which Cleary & Hoare carried out on behalf of the Estate Mortgage Group. He had personally sought the work of the Estate Mortgage Group in 1985. Mr Priddle, who was a consultant to Cleary & Hoare had spoken to Mr Cleary on a number of occasions about acquiring the larger financing work from the Estate Mortgage Group, which work in 1985 had previously been carried out generally by Sydney and Melbourne firms. It was attractive for Mr Cleary to try to obtain that work for his firm in Brisbane and as a consequence of Mr Priddle's having informed him about this as larger financing work, Mr Cleary came to speak to Mr Reuben Lew or to write to him. The contact was made for the purpose of introducing himself and offering the services of Cleary & Hoare. Mr Lew shortly thereafter furnished instructions to Cleary & Hoare. Mr Cleary hoped and anticipated that those instructions would increase in number. 285 The very first instruction to Cleary & Hoare related to the Sandy Bay transaction and the second instruction was the PMA 1 transaction. A number of transactions followed those initial transactions. 286 Mr Cleary believed that if his firm had carried out a 'good job' on the first transaction, Cleary & Hoare would, he anticipated and hoped, receive more instructions. 287 Mr Cleary accepted under cross-examination that the first PMA 1 transaction was a particularly large transaction involving approximately $20 million. It was clear to him that the Burns Philp Trustee Company was Cleary & Hoare's client and he accepted that it was clear to him that he, as solicitor for the BPTC owed a duty to it in the performance of his role as its solicitor. 288 Mr Cleary accepted that his duty included a fiduciary duty, meaning a duty of honesty and of full disclosure and to avoid a conflict of interest and not to prefer the interests of one client over the interests of another client. 289 Mr Cleary accepted that his duty in relation to the PMA 1 transaction was encapsulated in a letter of instructions given to him by EMM. 290 Mr Cleary accepted that at the time of the PMA 1 transaction, the letter of instruction imposed certain duties on Cleary & Hoare by its express terms. 291 Mr Cleary's evidence was that he did not know at the time of the PMA 1 transaction that Reuben Lew was in effective practical control or involved with Weltsbarrd. His evidence was that he did not know at the time of the PMA 2 transaction that Reuben Lew was in effective practical control of or involved with Yossarian. 292 His further evidence was that because he was not aware of the involvement of Mr Lew at the time of the PMA 1 and PMA 2 transactions, he did not know that Mr Reuben Lew could obtain a substantial economic benefit from those transactions. 293 Mr Cleary accepted under cross-examination that it followed that if Mr Reuben Lew was in effective control of Weltsbarrd and Yossarian then he, Mr Cleary, would have recognised that Mr Reuben Lew could obtain a substantial economic benefit from those transactions. He was asked and answered as follows: 'Q. If you did know of Mr Lew's financial interest, I take it that you would accept that it would have been your duty to ensure that the trustee was fully informed and consented to Mr Lew's financial involvement? A. Yes. Q. If you did know of Mr Lew's involvement, may I take it you also accept it would have been improper for you to conceal that fact from the trustee? A. Yes. Q. It would have been, if you had that knowledge, dishonest to knowingly conceal that fact from the trustee? A. Yes.' [T 123-124] 294 Mr Cleary was taken to the letter of 22 October 1985 from EMM to PMA 1. He accepted that this was the approval letter which the manager gave to the proposed borrower and in which an offer of loan on conditions was made. He accepted that he was shown this letter on or about 24 October 1985 and that it contained certain information in relation to the proposed transaction. He accepted also that the information in this letter was later superseded by the letter of instructions dated 31 October 1985. 295 Mr Cleary accepted that the letter dated 31 October 1985 contained the final instructions to Cleary & Hoare prior to the ultimate settlement of the transaction on 14 November. As already noted, he described these as 'the official instructions'. [T 129] 296 Mr Cleary was confident that he had read the 22 October 1985 letter from EMM to PMA 1 when it was provided to him. He was reasonably satisfied that he was at the time acquainted with the fact that the letter recorded that Cleary & Hoare would approve not only the title of the property over which the mortgage was to be given but also all matters which, in the solicitors' opinion, were incidental to the giving to the trustee of an adequate and proper security. 297 Although the letter of 22 October 1985 was addressed to the borrower, paragraph 8 of the letter in setting out the terms of the solicitors' approval which was required, was accepted by Mr Cleary at the time as recording the instructions to Cleary & Hoare in relation to its obligation to approve the transaction. [T 129] 298 Mr Cleary also accepted that it was made plain in that instruction that Cleary & Hoare's obligations included ensuring compliance with the terms of the application for the loan advance - see paragraph 8. 299 Mr Cleary's evidence in relation to the paragraph numbered 18, entitled 'Valuation Qualification Requisitions' was that he may have understood, because of the size of the proposed loan, that there may be some syndication of it. His evidence was that he was not familiar with syndicated loans but he knew that the syndication of a loan involved normally the assignment of a fraction of a mortgage to someone who would participate in the loan advance. He accepted that syndication involved some participation by another party with the lender and that the participants in the syndicate would jointly be the lenders to the borrower, each for their part to have security for their syndicated share of the loan advance. Whether or not it would be by mortgage, each of the participants would, he accepted, have some form of security for the amount of the loan advance in which they participated. This was not something new to him as a concept. He had had prior experience of a syndicated loan transaction with Estate Mortgage Manage Managers before PMA 1 as there had been a syndicated loan in the initial transaction handled by Cleary & Hoare. Mr Cleary accepted that a syndicated loan was simply another way of referring to equity participation in the loan and his evidence was that the phrase 'equity participation arrangements' in paragraph 18 of the 22 October 1985 letter to PMA 1, could refer to the syndication of the loan. 300 Mr Cleary was shown a document which became part of Exhibit DX 5, being a facsimile dated 31 July 1985 from EMM to Cleary & Hoare, marked to Mr Don Cleary's attention. The document enclosed as part of this facsimile, was described as 'the form of agreement we use when assigning either part or the whole of a mortgage'. That document was a draft form of Deed of Assignment. 301 It was put to Mr Cleary that the Loan Syndication Agreement enclosed with the facsimile was a relatively common form for the assignment by the first mortgagee to another lender or lender described as the assignee. Mr Cleary could not recall the facsimile nor the document. He could not agree that that form of assignment in relation to a proposed syndicated loan was a form with which he was familiar in late October 1985. Although the document was addressed to 'Don Cleary' and although there was no other 'Don' in the firm besides himself, he insisted in giving evidence under cross-examination that he had not seen the document before or could not recall seeing it before. Being asked: 'Do you have any doubt that the document was sent to you in May 1985 by Estate Mortgage Managers? A. I don't know. There is no evidence of receipt on it, I have no independent recollection of it, there appears to be no evidence of receipt on it . . .'. He was asked: 'Q. Is your position Mr Cleary that because you have not looked at this document, unlike many others that you have looked at in preparation for this case, you are not prepared to admit you received it . . .? A. That's correct.' [T 132-133] 302 As to the letter from EMM to BPTC of 23 October 1985, Mr Cleary accepted that the handwritten alteration of the detail given as to Mr John Norman Potter to become 'David John Bartley' was in his handwriting. His recollection was that this document was received by him sometime after 24 October 1985. 303 He believed that it was likely that he read this document when he received it. 304 It came as no surprise for Mr Cleary to see that the financial information about the shareholders were set out in the 23 October 1985 letter from EMM to BPTC. He accepted that it would be important to Burns Philp as the financial information was relevant to the taking of guarantees from the shareholders. [T 135] 305 Mr Cleary was involved, as he accepted, in relation to the preparation of guarantees and he accepted that he had known that the guarantees were being required from the persons who appeared to stand behind PMA 1. He accepted that it was normally the case that shareholders of the company borrower would normally be the guarantors. 306 As to the letter of 23 October 1985 from EMM to BPTC, Mr Cleary could not recall whether he had seen this document with the typewritten correction now giving Mr David John Bentley's personal details. 307 In relation to his own handwritten notes taken on 24 October 1985, Mr Cleary was asked about the words 'background for Bentley'. All that he could recall was that this meant that some background for Bentley was necessary. In being asked whether it was obvious that he was conscious that Mr Bentley was being substituted for Mr Potter as a Director/Shareholder and Guarantor of the company, he answered that he had no recollection of that matter but that the documents to which he was shown, appeared to indicate this to have been the case. Although Mr Cleary could not recall or accept that the reason that he wrote the words 'background for Bentley' was associated with the need for the obtaining of a guarantee for Mr Bentley, he could not suggest what other purpose his note might have been written for. [T 137] 308 In relation to the 24 October 1985 meeting which he had attended, Mr Cleary recalled that Mr Hilmer had said to him that Mr Hilmer required the profit sharing or equity sharing agreement to be prepared first and to be approved before the rest of the deal proceeded. [T 137] 309 Further in relation to the same meeting, Mr Cleary gave the following evidence: 'Q. It was stressed that the Equity Sharing Agreement was matter of great significance to them [meaning Mr Reuben Lew and Mr Richard Lew and representatives of the PMA companies]? A. It was a priority in terms of time that that be resolved first. Q. The terms of the Equity Sharing Agreement explained to you involved the share to be given to another party of the profit which the borrower hoped to make from the transaction? A. As I understood it, another party would be contributing funds and that that party would, in addition to interest , receive the benefit of any increase in value of the property over a certain figure.' [T 138] 310 In relation to the letter of 25 October 1985 from Cleary & Hoare to EMM, Mr Cleary accepted that this was written on the day after the meeting and that on that day he was able to furnish to Mr Reuben Lew, a draft of the Equity Sharing Agreement. That draft recorded the instructions which he had been given at that time in relation to the operation of the Equity Sharing Agreement, being instructions as varied by Mr Hilmer. [T 139] 311 Over the next several days, Mr Cleary recalled that he was given instructions which enabled him to prepare a draft agreement which in due course became clause 7 of the Equity Sharing Agreement and included clause 7.01 of the Equity Sharing Agreement. 312 As to the letter of 11 November 1985 to the solicitors for PMA 1, Mr Cleary accepted that he had enumerated detail of the enclosed documents in the letter. He accepted that the documents enclosed under cover of the letter were in categories, the first being the Deed of Loan and security documents related to it and the second being the Equity Sharing Agreement and collateral documents securing obligations under that Equity Sharing Agreement. 313 Subject to the input which Mr Lew and Mr Hilmer had had in relation to the drafting of the Equity Sharing Agreement, Mr Cleary accepted that he was the author of that document in the form as at the date it was executed. [T 140] He was the creator of its provisions and its layout and he provided that the shareholders would be the two companies named in the recitals appearing on the second page of the document and he knew that those shareholders were not the same shareholders as the original shareholders of PMA 1. He knew at the outset that the shareholders of PMA 1 were Mr Remo and Mr Bentley and the document provided, as he said, that one of the purposes of the Equity Sharing Agreement was to move the shares held by Mr Remo and Mr Bentley to PMA Property Corporation and to Weltsbarrd. 314 Mr Cleary accepted that he was not confused about what he drafted in the Equity Sharing Agreement and that he knew that the steps were that Mr Remo's share should be transferred to one of the incoming shareholders and that Mr Bentley's share would be transferred to the other incoming shareholder and that the second shareholder, as referred to in the Equity Sharing Agreement, was represented by him. 315 Mr Cleary accepted that part and parcel of the agreement was that the obligations under clause 7 to account to Weltsbarrd for the profit, were to be secured by an encumbrance over the land. 316 Mr Cleary also accepted that the letter of 11 November 1985 to Rylands & Hilmer recorded that Mr Cleary had drafted and sent out a Bill of Encumbrance which was in effect a second mortgage, securing the obligations in favour of Weltsbarrd under clause 7 of the Equity Sharing Agreement. 317 Generally, Mr Cleary accepted that Mr Hilmer had acted for the PMA group of companies, namely PMA 1, PMA 2, PMA Property Corporation and some others. 318 Mr Cleary accepted that the effect of the Equity Sharing Agreement was to produce a second mortgage over the land. Another effect of the Equity Sharing Agreement which he accepted, was that it necessitated a change in the shareholders of PMA 1 from those shareholders who were named in the 23 October letter. 319 Mr Cleary accepted that he was aware of the special conditions attaching to the loan which required that there was not to be any further encumbrance of the land without the written consent of the trustee and that he was also aware of the special condition attaching to the loan which required that there be no change in the shareholders of the borrower company and that he was aware that the effect of the Equity Sharing Agreement was that there was a further encumbrance over the land and that there was a change in the shareholders of the borrower company. 320 Mr Cleary accepted that he did not inform the trustee himself of those particular variations from the requirements of the special condition. His evidence was that Estate Mortgage had varied his instructions and that Mr Reuben Lew was the principal spokesman for Estate Mortgage. [T 145] 321 His evidence was: 'Q. So you did not inform the trustee because Mr Lew, you say, varied your instructions? A. Because Estate Mortgage varied my instructions, instructions from Estate Mortgage are regarded as instructions from Burns Philp. Q. And do you say that anyone other than Mr Reuben Lew was the author of those varied instructions? A. I don't know. I can't recall, they could have been. It could have been Reuben Lew, it could have been other people, but I can't recall. But predominantly the instructions came from Reuben Lew .' [T 145] 322 Mr Cleary accepted that it was normal practice to ensure that the persons instructed in the borrower provide guarantees of the loan advance. His evidence was as follows: 'Q. And its that commercial consideration relating to the requirement for guarantees from interested persons that lies behind the condition prohibiting a change in shareholders without the prior consent of the trustee isn't it? A. . . . Yes. Q. Because no lender would like a situation to arise where having obtained guarantees from certain nominated shareholders, those shareholders ceased to be interested in the company? A. Yes. Q. Nor would it like a situation to arise where new shareholders come into the company without providing guarantees to support the loan? A. Yes. Q. The effect of the Equity Sharing Agreement was to introduce a new shareholder of PMA wasn't it? A. Yes. Q. In fact it introduced two new shareholders of PMA 1? A. Yes. Q. You obtained guarantees from all of the persons who stood behind the first shareholder? A. Yes. Q. Including related companies of the first shareholder? A. Yes. Q. You did not obtain guarantees from the persons who stood behind the second shareholder did you ? A. No . Q. You did not inform the trustee of that fact did you ? A. No . . . Q. And I'm sure you recognised that the absence of guarantees from a shareholder in the borrower company would be a matter of interest to the lender? A. I didn't consider that matter because that shareholder was advancing funds . . .' [T 148] 323 Mr Cleary's evidence was that he had no reason to suspect that at the time of the PMA 1 and PMA 2 transactions between November 1985 and October 1986, Mr Reuben Lew was in effective practical control or involved with Weltsbarrd or Yossarian. His evidence was that if he did know of Mr Lew's financial involvement, it would have been improper and dishonest to conceal his knowledge from the trustee. His evidence was that if he did have reason to suspect Mr Lew's financial involvement, it would have been improper and dishonest to fail to disclose his suspicions to the trustee. 324 Mr Cleary accepted that the letter dated 31 October 1985, which he referred to as 'the official instructions', related to only one part of the overall transactions. 325 Mr Cleary's evidence was: 'Your evidence . . . is that you had no knowledge or any reason to suspect Mr Reuben Lew was in effective, practical control or involved with Weltsbarrd? A. Yes. Q. If you did have that knowledge or that reason to suspect, it would have been improper, I take it, to act on those variations to your instructions without ensuring that the trustee was fully aware and consented to them? A. Yes. Q. You would have wanted to ensure that the trustee was aware of and consented to the variations to the special conditions about further encumbrances if you had that knowledge or reason to suspect? A. Yes - you are asking me a hypothetical question now. At the time I wouldn't have considered that because I had no suspicions. Q. You told his Honour what your evidence about your knowledge at the time was. A. Yes. Q. If you had that knowledge or reason to suspect you would have wanted to ensure that the trustee consented to and was aware of the change to the special condition prohibiting changes in shareholders in the borrower company? A. Yes. . . . Q. If you did have that knowledge or reason to suspect, you would have wanted to ensure that the trustee was fully apprised of the terms of the equity sharing agreement? A. Yes. Q. You would have made sure it was provided with a copy of that document? A. Yes. Q. That is because Reuben Lew, through his interest in Weltsbarrd, would effectively be the recipient of the benefit of those varied instructions, as well as the author of them? A. Yes . Q. He would have an obvious conflict of interest, wouldn't he? A. I would have thought so. Q. If you had that knowledge or reason to suspect Mr Lew's financial involvement, you could not be sure that Mr Lew having the benefit of those varied instructions, would pass on the information to the trustee? A. Yes . Q. If you did have that knowledge or suspicion, the absence of formal written instructions about the equity sharing agreement and the reference to it as a side agreement would have confirmed in your mind that you could not be sure Mr Lew would pass on the information to the trustee? A. Yes .' [T 156-157] 326 Mr Cleary's evidence was that he had believed that Weltsbarrd would be contributing funds and was to be a participant in the syndication of the loan funds. This was because an entity was to be nominated. He was then asked and answered as follows: 'Q. Syndication involves participation with the lender in the loan funds, doesn't it? A. Yes. Q. It commonly involved an assignment to the syndicate member of a fraction of the mortgage? A. It involves some documentation to identify their respective rights and interests . . .'. [T 158] 327 Mr Cleary was asked and answered as follows: 'Q. The equity sharing agreement which you prepared involves the participation of Weltsbarrd with the borrower or developer, doesn't it? A. Yes. Q. It does not involve the participation by Weltsbarrd with the lender Burns Philp Trustee Company? A. No. Q. Syndication, as you have explained, involves the participation in the lending, doesn't it? A. Yes. Q. The equity sharing agreement by its terms does not involve participation in the lending? A. No. Q. Syndication would not involve the provision for a 50% share in the profits of the borrower, would it? A. It could. That's what happened here. . . . Q. The equity sharing agreement in the terms which you drafted contains no reference to the word 'syndication' does it? A. No . Q. No reference to the concept ? A. No . Q. The equity sharing agreement by its terms which you drafted is not dealing with syndication as such is it? A. No. . . . There is no document showing any proposed advance by Weltsbarrd pursuant to the terms of the equity sharing agreement, is there? A. No. . . .' [T 161-162] 328 Mr Cleary was asked and answered as follows: 'Q. There is no document, is there, suggesting that Burns Philp had consented to the syndication of its $20million loan advanced in part to Weltsbarrd? A. At that time? Q. Yes. A. No. Q. Nor was there any at the time of settlement on 14 November? A. No. Q. Nor on 28 November 1985? A. No. . . . Q. . . . If the commercial point was that Weltsbarrd would contribute funds to the loan advance which Burns Philp had agreed in the first instance to make, there would have been no point in keeping secret from the trustee company the involvement of Weltsbarrd . . . A. That is a hypothetical question you are putting to me. Q. Yes. A. Yes, I agree with that. . . .' [T 163] 329 Mr Cleary accepted that in relation to the only record of his instructions on 24 October which was comprised of the two notes of that date, they made no reference to any participation by the company which became Weltsbarrd with the loan advance from Burns Philp. [T 166] 330 Mr Cleary's evidence was that the Solicitor's Certificate issued on 14 November 1985 was similar to that used by him in the Sandy Point Beach Resort loan transaction. He accepted, however, that there was no Equity Sharing Agreement in the Sandy Point Beach Resort loan transaction. It was also put to him and I accept, that there is no sensible comparison to be made between the Certificates. DX6 used in July 1985 in relation to the Sandy Point Beach Resort transaction and the Certificate used dated 14 November 1985 in the PMA 1 transaction. 331 Mr Cleary accepted that the PMA 1 transaction in fact continued through the whole of the period from the initial advance on 14 November 1985 through the second stage advance on 28 November 1985 and through the further advances on 30 May 1986 up to the further advances in late October 1986. [T 171] Mr Cleary was then asked and answered as follows: 'Q. And it is throughout the whole of that time that you said that you didn't know or suspect that Reuben Lew had any involvement or effective practical control of Weltsbarrd? A. Yes.' [T 171] 332 Again in relation to the PMA 2 transaction, Mr Cleary's evidence was that he did not have any knowledge throughout that same period but specifically around July, that Mr Reuben Lew had any involvement in or control of Yossarian which was the company involved in the PMA 2 transaction. [T 171] 333 In relation to the 15 November 1985 letter from Cleary & Hoare to Mr Reuben Lew of EMM, it will be recalled that this letter included the following: 'We enclose copy acknowledgment of payment of $1 pursuant to the Equity Sharing Agreement which we would be pleased if you would sign on behalf of Weltsbarrd Holdings Pty Limited and return to us.' 334 Mr Cleary was asked and answered as follows in relation to this document: 'Q. And that records your request to Reuben Lew at Estate Mortgage to sign on behalf of Weltsbarrd doesn't it? A. It requests Estate mortgage to have it signed. I have filed a subsequent affidavit or statement that explains that I used the word 'you' loosely and in that letter which was a very good example I have used words 'you' referring to a whole range of parties. His Honour: Q. Is it your evidence that you understood that it was in fact Estate Mortgage Managements which was behind Weltsbarrd Holdings or originally behind an entity as you referred to it ? A. No your Honour. I understood they were giving the instructions on behalf of whoever was behind it and I didn't know who was behind it . Just like they were giving Cleary & Hoare instructions on behalf of Burns Philp in respect of the other money advances, they were giving instructions to Cleary & Hoare on behalf of Weltsbarrd. Q. Was it your perception that it was possible that Estate Mortgage managers may have themselves been involved in some fashion with the Equity Share Agreement or Weltsbarrd? A. I didn't know who it was and I didn't address my mind to who was behind Weltsbarrd . Q. Had it crossed your mind it may be Estate Mortgage Managers involved with Weltsbarrd would you not then have had, as you see it, an obligation to be very careful to protect Burns Philp as against Estate Mortgage Managers? A. Yes. I didn't know who was behind it, they were giving me the instructions though . Q. In this letter of 15 November 1985 you do not say to Estate Mortgage Managers, we would be please if you could arrange for the equity share agreement to be signed by Weltsbarrd Holdings Pty Limited, do you? A. No. Q. And you don't say, we would be please if you could arrange for the equity share agreement to be signed by Weltsbarrd Holdings, do you? A. No. Q. You say, if you would sign on behalf of Weltsbarrd Holdings Pty Limited? A. Yes . Q. And do I understand your evidence is what you meant in that paragraph was if you, Estate Mortgage Managers would sign on behalf of Weltsbarrd Holdings, or do I misunderstand? A. Reconstructing from the letter what I intended was would Estate Mortgage arrange for the document to be signed by whoever was the appropriate person. Mr Pembroke Q. Who was that Mr Cleary, Mr Khemlani or somebody? A. I have no idea. Q. Was there some Arab Sheik that you thought was behind Weltsbarrd, would you give his Honour a straight and honest answer to that question? A. I have no idea who was behind. Q. So you were acting for some unnamed, unknown person, were you? A. Yes, receiving instructions from Estate Mortgage Group. His Honour Q. Was there any reason as far as you knew it, that you were not given the identity of those unknown persons that you say you believed Estate Mortgage represented? A. No, there was no reason I was aware of who was behind it hadn't been given. Q. Isn't it usual for a solicitor to ascertain the identities of the person or persons for whom he or she acts? A. Never in my life as a solicitor, have I ever known the firm I was in to want to know particulars for someone they were acting for lending money . . . Pembroke Q. Of course if you did know or have reason to suspect that Estate Mortgage Managers had a financial interest in the transaction through Weltsbarrd it would have been improper and dishonest to conceal knowledge from the trustee, would it not, it? A. Yes. . . . Q. If you knew or had reason to suspect that Estate Mortgage had a financial interest in the transaction through Weltsbarrd, it would have been improper and dishonest for you not to disclose to the trustee all of the information which you had about Weltsbarrd's involvement through the equity share agreement in the transaction? A. Yes. His Honour Q. Is it correct to say there was nothing particular that you had become aware of which indicated to you or suggested to you that the so-called second shareholder or entity was not related to Estate Mortgage Managers? A. No your Honour, there was no information either way . . .' [T 185] 335 At transcript 190, the following cross examination took place: 'Pembroke Q. it is simply not honest for you to assert in your evidence that you did not know at the time of the PMA 1 transaction that Reuben Lew was not in effective practical control or involved with Weltsbarrd is it? A. That's not correct. Q. It is not honest for you to assert that you did not know that Estate Mortgage Managers was involved with Weltsbarrd at the time of the PMA 1 transaction is it? A. That's not correct. Q. It is not honest for you to assert that you thought the justification for the introduction for Weltsbarrd to the equity share agreement was for the purpose of syndicating the loan? A. That is not correct. . . . Q. And . . . I am suggesting to you it is not honest for you to put forth that certificate [referring to the Sandy Point Solicitor's Certificate] was a justification for your 14 November Certificate being innocently devised? A. I don't agree with what you are putting to me . . .' [T 190] 336 As to the 27 November 1985 letter and to the 28 November 1985 letter and to the issue of whether Mr Lew had rung and whether Mr Scanlan informed Mr Cleary that Mr Lew had rung, Mr Cleary's evidence was that he had no recollection whatever of it being conveyed to him that Mr Reuben Lew was very concerned that there be no reference to the Equity Sharing Agreement in correspondence of Burns Philp. He had no recollection of any urgent conversation with Mr Scanlan on the morning of 28 November, but in the ordinary course of business, he would have read the 28 November letter which had signed. He had no recollection of the fact that the letter, which was replaced, was different from the letter which was sent on 28 November. 337 Mr Cleary was asked at transcript 201 as follows: 'Q. Do you agree that when you sent the Certificates of 14 and 28 November in the form in which you did, you were giving effect to Mr Lew's instructions to you? A. Giving effect to the instructions from Estate Mortgage yes. Q. You had received at that time no communications from the Burns Philp Trustee Company signifying any awareness on its part of the existence of an equity sharing agreement, had you? A. Yes. Q. Name one? A. The deed of loan. Q. You had received no communications from the Burns Philp Trustee Company signifying any awareness of the existence of the equity sharing agreement? A. Yes, the deed of loan was signed by Burns Philp and it referred to it. Q. Is that all that you refer to? A. That is all that I can remember. Q. You had received no communications from the Burns Philp Trustee Company signifying any awareness of knowledge of the financial involvement in the transaction of the Lews had you? A. I cannot swear whether or not I had communication from the Trustee. I do not recall any. Q. You provided no information and gave no advice to the Trustee, which conveyed whatever knowledge that you had about the equity sharing agreement or the involvement of Weltsbarrd did you? A. Not in correspondence directly to the Trustee. Q. Yes? A. No. [T 201] 338 At transcript 204, the following evidence was given by Mr Cleary in cross examination. 'Q. In several places in your statement, you say that you believed at the time of the PMA transactions that Burns Philp Trustee Company knew of Weltsbarrd or Yossarian or the equity sharing agreements? A. Yes. Q. And don't say that you believe that Burns Philp Trustee Company knew of the financial involvement of the Lews in the financial transactions? A. If that is what you say, it is. Q. I would like you to be sure you can agree with me? Q. Would you like me to repeat the question? A. Yes. Q. You do not say that Burns Philp Trustee Company knew of the financial involvement of the Lews in the PMA transactions? A. I would have to read the statement again but that is what the intent of what the statement was trying to say. Q. You cannot say that, because of your evidence which you would have this Court accept, you did not know yourself of the financial involvement of the Lews? A. That is what I meant. Q. In fact, you did know of the financial involvement of the Lews, didn't you? A. I did not. Q. And you did not tell the Trustee what you knew? A. That is not so.' [T 204] 339 In relation to the PMA 2 transaction, Mr Cleary accepted that he was the supervising partner in relation to the transaction and he supervised the drafting of the transaction documents. It was in the normal course of events that he would have supervised the preparation of the documents. He accepted that he is aware that in relation to that transaction, Yossarian was introduced through the Equity Share Agreement and that he knows that instructions came to him about it from Mr Lew at Estate Mortgage Managers. He was then asked and answered as follows: 'Q. And in all respects, the line of communication in relation to that company seemed to be the same as the line of communication in relation to Weltsbarrd? A. Yes. Q. And you were in a position to know, or assume, that those who controlled Weltsbarrd were the same persons who controlled Yossarian, weren't you? A. No. Q. You knew of no one else other than the Lews who might be interested in Yossarian, did you ? A. Well, I just didn't know who it was . Q. Can you point to anyone in the world who might have been involved in Yossarian other than the Lews ? A. It could have been anyone . I didn't know . . .' [T 206] 340 Mr Cleary was asked in relation to the 22 June 1990 date whether he could recall that on that date Reuben and Richard Lew were arrested. He did remember that they had been arrested but he could not remember the precise date. 341 Mr Cleary was reminded that on that day he submitted a proposal on behalf of the firm of Cleary & Hoare for increased insurance cover for up to $10 million. He did not accept that he did this because of the possibility that the circumstances which had by then been brought to his attention may have given rise to a claim against the firm necessitating increased cover. [T 209] 342 Mr Cleary's evidence at transcript 209 was : 'Q. The purpose of your submitting that proposal was to protect the partners of the firm against the possibility of a claim greater than the then current level of cover which you had? A. Generally speaking are you talking about? Q. Generally speaking? A. Yes. I presume so, if it's going up, yes.' [T 209] 343 At transcript 210, Mr Cleary was asked: 'Q. On the first working day after your examination on 27 July you sought increased cover up to $40 million for the firm? A. Did I? Q. Do you recall that? A. No. I would have to refresh my memory but Q. Would you like to see the document? A. I accept what you're saying. Q. And you did so on 30 July, which was the Monday after your examination, because of your increased concern that the circumstances which had been brought to your attention commencing with the examination of Mr Scanlan back in June and concluding with your own examination on 27 July might give rise to a claim in connection with the PMA transactions? A. Not so. Quite the contrary. Q. When you say quite to the contrary, what precisely do you have in mind? A. There was no concern that anything had been done other than in the ordinary course of business. Q. Had Mr Scanlan informed you of the substance of the examination of him on 19 June? A. He informed a partners' meeting that he had been told not to disclose his evidence but that he had been told that he was not under suspicion. . . . To my recollection he informed the partners that he was not under suspicion and that - well, he simply informed us that he was not under suspicion and that he could not discuss his evidence. Q. So you're state of knowledge was one which did not include any detailed understanding of the allegations put to Mr Scanlan on 19 June? A. Yes. Q. You say it was just coincidence, do you, that you sought increased cover on the day of the Lew's arrest? A. Yes. Q. And coincidence that you sought increased cover on the first working day after your examination? A. Yes.. You say "I". Those matters were handled by an office manager and a sub-committee of partners and the partners. Q. Mr Russ was the office manager wasn't he? A. Yes. Q. And you were the senior partner? A. I was the senior partner, yes. Q. And you signed the proposals? A. Yes. Q. Well there is no getting away from the fact that you were the senior member of the firm responsible for those decisions on 22 June and 30 July weren't you? A. I signed the documents. As I said, at that time those matters were handled by the office manager with a sub-committee of partners who would report to the partners meetings.' [T 210-211] Evidence given by Messrs Cleary, Hoare and Scanlan following the amendments to the pleadings and following the grant of leave to further cross-examine Evidence of Mr Cleary 344 Mr Cleary accepted that in June 1990 it was he who arranged the insurance on behalf of the firm and that he did so on behalf of each partner in the firm. He assumed that, and I find that, it was he who had been responsible or involved in the arrangement of insurance for the firm since the firm was founded in 1981. 345 Mr Cleary was shown the June 1990 proposal form and the section entitled 'A Memorandum' was pointed out to him. He accepted that he had treated both the Proposal and the Certificate of Insurance as documents both of which had come from the Insurers. He accepted that the Proposal was relevant to the Policy so that if the Proposal was accepted the Policy would issue. It was his understanding that the acceptance of the Proposal would lead to the issue of the Policy. He knew when he signed the Proposal on 22 June 1990 that it was the only Proposal for the firm and the partners and that it provided that it required to be signed by one of the partners. He had seen in the section marked 'A Memorandum' the paragraph reading: 'You must disclose to insurers all information which is of importance to them in deciding whether to issue insurance cover to you, including facts or conduct which might lead to a claim being made by you or by any person entitled to protection under the Certificate of Insurance. If you fail to do so, your rights to claim under the Certificate of Insurance may be affected.' 346 As he had understood the position when completing the Proposal, he had to look at the position of other partners and this was in fact what the office manager was employed to do. 347 He had signed the declaration at the foot of the second page of the Proposal and accepted that it had been necessary to look at the position collectively by reference to the circumstances known to all of the partners and to any one of the partners. He accepted that he could not take the position when signing the Proposal on behalf of the firm and his partners that it was unnecessary for him to ascertain whether there were any claims circumstances known to the other partners. He accepted that it was not only necessary to ascertain whether there were any claims against other partners but was also necessary to ascertain whether there were any claims circumstances known to the other partners in the sense of 'circumstances which may give rise to a claim'. 348 He accepted that his understanding was that the effect of the document was that it was necessary to ascertain from the other partners whether they were aware of circumstances which may give rise to a claim because of the conduct of persons employed in their group or under their supervision. He had followed the events as they unfolded in relation to the Estate Mortgage Trusts from April through to June 1990 in so far as the relevant publicity was concerned. He had an interest, he accepted, in understanding what was happening. 349 He accepted that it was likely that there was discussion amongst the partners in relation to the notice served on Mr Scanlan on 14 June 1990 to attend to give evidence before the NCSC. He accepted at transcript 255 that he knew that one of the subject matters which was proposed to be addressed with Mr Scanlan at his examination was the PMA 1 and PMA 2 transactions. He believed that those were the only two transactions which had involved an Equity Sharing Agreement. This, he recalled made those transactions different from all the other transactions carried out from the Estate Mortgage Group. He knew that the examination of Mr Scanlan involved the PMA 1 and PMA 2 transactions. He remembered those transactions. 350 At or about the time when the Estate Mortgage Managers were removed, he became aware of that fact. He had read reports in the Financial Review. 351 Mr Cleary accepted that by the time of the handing over of files in June 1990, following Mr Scanlan having been served with a notice to produce the firm's documents, he, Mr Cleary, was aware of the specific focus on the PMA 1 and PMA 2 transactions by the NCSC. 352 Mr Cleary would have read in the paper that Mr Reuben and Mr Richard Lew were both arrested and although he could not recall the specific dates it is clear that this took place on the 22nd of June 1990 353 I reject Mr Cleary's evidence that there was no relationship between the arrest of the Lews and the submission of the proposal on 22 June 1990. 354 Mr Cleary's examination had taken place on a Friday and on the following Monday the firm had sought quotations to increase the firm's existing professional indemnity cover. Evidence of Mr Hoare 355 Mr Hoare and Mr Cleary had had an equal equity interest and Mr Isles a lesser equity interest in the partnership. 356 Mr Hoare had been aware of the service of the summons on Mr Scanlan on 14 June 1990 and recalled that it had been appropriate for Mr Scanlan to be represented. He was asked whether it was drawn to his attention that part of the particular focus of the NCSC's examination of Mr Scanlan was to be the PMA 1 and PMA 2 transactions and his answer was 'It is possible. I can't say it wasn't'. On my findings the probabilities are that this matter was drawn to his attention prior to 30 June 1990. 357 Mr Hoare had read the warrants on or shortly after 1 August 1990. His evidence was: 'Q. And you understood it was being alleged that Cleary and Scanlan had concealed things from Burns Philp? A. With the Lews, yes. Q. And you understood that the concealment related to the Equity Sharing Agreements? A. Yes. Q. And you understood, surely, that that, if true, would have been a breach of duty by Mr Cleary and Mr Scanlan? A. Yes. Q. Acting in their capacity as partners and employees respectively of the firm in 1985 and 1986? A. Yes. [T 277] 358 In relation to the letter of 7 August 1990 from Mr Hoare to Law Claim, Cleary & Hoare had stated that no allegations of negligence had been raised against the firm. Mr Hoare was asked: 'Q. And you said, we will keep you informed should there be any further developments whereby negligence is alleged or implied? A. Correct. Q. You said that, did you not, because you recognized that on the facts revealed by the charges or the warrants if they were shown to be correct, there was the possibility of a claim against the firm? A. I suppose I must have been aware that there was some possibility down the track. Q. And that possibility arose or would have arisen from the same facts which were being referred to in the charges which had been served on your partners . . . from the allegations if they were proved to be correct? A. Yes, if the allegations had been proved correct, there was a possibility of a claim against the firm, yes.' [T 278] Evidence of Mr Scanlan 359 Mr Scanlan accepted that at the end of his examination on 27 July 1990, he understood that there was an allegation of wrongdoing and of breach of duty being made against him for not informing BPTC of certain matters in relation to the PMA 1 and PMA 2 transactions. He was asked and answered as follows: 'Q. And you knew that if the breach of duty was established there would be a civil liability, didn't you? A. Well I suppose so . . . Q. But it was the same conduct being considered, wasn't it, whether it gave rise to criminal consequences or civil consequences? A. Well, I suppose so, yes . . .' [T 286] 360 On a number of matters relating to the particular increase in the firm's cover of 27 July 1990, Mr Scanlan's evidence was that he could not recall the particular facts. Dealing with the case The Issues 361 The Insurers identified seven issues by reason of which, they say, they are not liable to meet the Trustees' claim (on some bases, wholly and on other bases, for certain years). [Transcript day 3 189 line 40 – 192 line 10] 362 Those issues are: i. The application of the dishonesty exclusion. ii. The application in Years 2 and 3 of the known claims or claims circumstances exclusion. iii. The breach of contract claim (clause 4(b)) for Years 2 and 3. iv. Prior notification – applicable to Year 3. v. One claim or two claims. vi. Section 54. vii. Election (6 and 7 are really one issue). 363 In addition, there is the Insurers' cross-claim for recovery of the $500,000 paid by Cleary & Hoare to the Trustees pursuant to the first settlement and retained by the Trustees under and on the terms of the second settlement. 364 The degree of complexity of the main insurance issues on the approach put forward by the Trustees, becomes apparent from the flow chart prepared by the Trustees which deals separately with the Dishonesty Exclusion and the known claims circumstances defence. The flow chart reads as follows: 'SECTION A - DISHONESTY EXCLUSION PMA 1 14 November 1985 1. Was Cleary dishonest (in whatever sense "dishonest" has) as at 14 November 1985 (initial PMA 1 facility of $20.65 million)? A. If yes: Trustees cannot recover in respect of the advance of $2,650,000 made on 14 November 1985 (Exhibit DX Volume 1 page 310) but may be able to claim in respect of subsequent advances. B. If no: Go to "Known Claims Circumstances" Defence Section B. If the policies for years 1, 2 or 3 respond, the Trustees succeed at least in respect of that part of the PMA 1 judgment which represents the advance of $2,650,000 and interest thereon under whichever policies respond. 28 November 1985 2. Were: (a) Cleary; and/or (b) Scanlan dishonest as at 28 November 1985? A. If yes to both, the Trustees cannot recover in relation to the further advance of $3,766,000 made on 28 November 1985 (Exhibit DX Volume 2 page 350; Exhibit PXI Volume 2 Tab 42 at page 35), or subsequent PMA 1 advances up to 30 May 1986. B. If no to both, go to "Known Claims Circumstances" Defence Section B. C. If yes as to Cleary or Scanlan but not both, can the Trustees recover in respect of the breach of duty of whichever of Scanlan or Cleary was not dishonest? (a) If no, the Trustees cannot recover in relation to the advance of $3,766,000 or subsequent PMA 1 advances up to 30 May 1986 (the causation issue having been decided adversely to the Trustees); (b) If yes, go to the "Known Claims Circumstances" Defence Section B. If under 2B or 2C(b) and the consideration of the "Known Claims Circumstances" Defence, it is found that the policies for any of years 1, 2 or 3 respond, the Trustees succeed at least in respect of the advance of $3,766,000 and interest thereon and in respect of subsequent PMA 1 advances unless and until a further dishonest act or omission intervenes. 30 May 1986 3. Were: (a) Cleary; and/or (b) Scanlan dishonest as at 30 May 1986 (increase in PMA 1 facility to $24 million)? A. If yes as to both, the Trustees cannot recover in relation to the advance of $951,460.44 made on 30 May 1986 (Exhibit PXI Volume 2 Tab 42 page 35) or subsequent PMA 1 advances up to 20 October 1986. B. If no as to both, go to "Known Claims Circumstances" Defence Section B. C. If yes as to one of Cleary or Scanlan but not both, can the Trustee recover in respect of the breach of duty of whichever of Scanlan or Cleary was not dishonest? (a) If no, the Trustees cannot recover in respect of the advance of $951,460.44 or subsequent PMA 1 advances up to 20 October 1986. (b) If yes, go to "Known Claims Circumstances" Defence Section B. D. If under 3B or 3C(b) and the consideration of the "Known Claims Circumstances" Defence, it is found that the policies for any of years 1, 2 or 3 respond, the Trustees succeed at least in respect of the advance of $951,460.44 and interest thereon and in respect of subsequent PMA 1 advances unless and until a further dishonest act or omission intervenes. 20 October 1986 4. Were: (c) Cleary; and/or (d) Scanlan dishonest as at 20 October 1986 (further increase in PMA 1 facility to $30 million)? A. If yes as to both, the Trustees cannot recover in relation to subsequent PMA 1 advances. B. If no as to both, go to "Known Claims Circumstances" Defence Section B. C. If yes as to one of Cleary or Scanlan but not both, can the Trustee recover in respect of the breach of duty of whichever of Scanlan or Cleary was not dishonest? (a) If no, the Trustees cannot recover in respect of PMA 1 advances after 20 October 1986. (b) If yes, go to "Known Claims Circumstances" Defence Section B. D. If under 4B or 4C(b) and the consideration of the "Known Claims Circumstances" Defence, it is found that the policies for any of years 1, 2 or 3 respond, the Trustees succeed in respect of subsequent PMA 1 advances. PMA 2 28 July 1986 5. Was Scanlan dishonest in relation to PMA 2 as at 28 July 1986 (PMA 2 facility of $14 million) ? A. If yes, the Trustees cannot recover in respect of PMA 2. B. If no: (a) If Cleary was dishonest in respect of PMA 1 or Scanlan was dishonest in respect of PMA 1, can the Trustees recover in respect of Scanlan's non-dishonest breach of duty in respect of PMA 2? (b) If yes to (a), or if (a) does not arise having regard to the findings on PMA 1, go to "Known Claims Circumstances" Defence Section B. SECTION B - KNOWN CLAIMS CIRCUMSTANCES EXCLUSION Year 3 Policy 1. Was there a prior notification under the Year 2 policy? If yes, go to Year 2 policy below. 2. If no to question 1: 2.1 Must the claims circumstances be "known" to: each of Cleary, Scanlan, Hoare and Isles (if Isles is covered); or any of them? 2.2 Does "known" refer to actual knowledge only or does it include imputed knowledge? 2.3 If 2.1(a), did each of Cleary, Scanlan, Hoare & Isles (if covered) have: actual knowledge of the claims circumstances; or (depending on the answer to 2.2) imputed knowledge of claims circumstances, on or prior to 30 June 1991. 2.4 If no to 2.3, Year 3 policy responds. 2.5 If yes to 2.3, go to Year 2 policy, Section 54. 2.6 If 2.1(b) did any of Cleary, Scanlan, Hoare or Isles (if covered) have actual knowledge of claims circumstances on or prior to 30 June 1991? 2.7 If no to 2.6, Year 3 policy responds. 2.8 If yes to 2.6, go to Year 2 policy, Section 54. Year 2 Policy 3. If the Year 2 policy is to be considered either because notification was given under Year 2 or pursuant to Section 54: 3.1 Must the claims circumstances be "known" to: each of Cleary, Scanlan, Hoare and Isles; or any of them? 3.2 Does "known" refer to actual knowledge only or does it include imputed knowledge? 3.3 If 3.1(a), did each of Cleary, Scanlan, Hoare & Isles (if covered) have: (a) actual knowledge of the claim circumstances; or (b) (depending on the answer to 3.2) imputed knowledge of claims circumstances on or prior to 30 June 1990? 3.4 If no to 3.3, Year 2 policy responds. 3.5 If yes to 3.3, go to Year 1 policy, Section 54. 3.6 If 3.1(b), did any of Cleary, Scanlan, Hoare or Isles (if covered) have actual knowledge of claims circumstances on or prior to 30 June 1990? 3.7 If no to 3.6, Year 2 policy responds. 3.8 If yes to 3.6, go to Year 1 policy, Section 54. Year 1 Policy 4. If the Year 1 Policy is to be considered pursuant to Section 54, there is no "Known Claims Circumstances" Defence.' 365 It is convenient to commence by recalling the critical conditions. Relevant Insurance Terms 366 The relevant insurance terms were as follows: 'A. YEARS 1, 2 & 3 (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 (b) The Assured shall give notice in writing to the Insurers as soon as is practicable of any claim the subject of the Insuring Clauses hereof made during the Period of Insurance against the Assured or of the receipt of notice from any person of any intention to make a claim against the Assured. The Assured shall also give notice in writing as soon as practicable to the Insurers of any circumstances of which the Assured is or shall become aware during the Period of Insurance which may give rise to a claim. If notice is given to the Insurers under this paragraph any claim subsequently made (whether before or after the expiration of the Period of insurance) pursuant to such an intention to claim or arising from circumstances so notified shall be deemed to have been made at the date when such notice was given. (5) General Exclusions (e) The Insurance shall not indemnify the Assured in respect of any liability: (v) brought about by the dishonest or fraudulent act or omission of the Assured including any partner or former partner of the Assured or any person employed in connection with the Practice (including any articled clerk and any solicitor or conveyancer who is a Consultant or Associate with the Firm); B. YEARS 2 & 3 SPECIAL CONDITION: Excluding any known claims or claims circumstances.' The Application of the Dishonesty Exclusion The Trustees Submissions as to legal principle 367 The Trustees submitted as follows: (i) 'Although clause 5 is an exclusion clause, it is to be construed according to its natural and ordinary meaning, read in the light of the contract as a whole, so giving due weight to the contractual context, and to the nature and object of the contract and of the clause in question. [Underwriters at Lloyds v Ellis (CA40239/95, 25 February 1998 unreported) at 29 (Powell JA, with whom Meagher and Handley JJA agreed) citing Darlington Futures Limited v Delco Australia Pty Ltd (1986) 161 CLR 500.] (ii) In the case of ambiguity, the clause is to be construed contra proferentem. In this case the "proferens" of the clause is clearly the Insurers. (iii) The exclusions in clause 5 must be construed in the contractual context in which they are found and having regard to the nature and objects of the contracts of insurance. In other words, they must be construed among other things in recognition of the circumstance that the contracts of insurance are, in their primary layers, compulsory; and are mandated for the protection of solicitors' clients. Whilst these considerations may not permit the court to avoid giving the words of clause 5 their natural and ordinary meaning, they will dictate that: i. the words should not be given an unduly or artificially expansive meaning; ii. where the words are capable of more than one construction, the construction most consistent with the nature and object of the contract should be preferred; and iii. in case of doubt or ambiguity, but consistent with the preceding basis of construction, the words should be construed contra proferentem: in this case, against the interests of the Insurers. iv. The key words in clause 5(e)(v) are those which describe the conduct giving rise to the excluded liability. They are the words "the dishonest or fraudulent act or omission of the Assured." Although the Insurers may wish to focus upon the word "dishonest", clause 5(e)(v) must be construed as a whole. The relevant conduct – "act or omission" – must be capable of being characterised as "dishonest or fraudulent" if the exclusion is to apply. Whether the conduct is to be so characterised will depend upon, firstly, the meaning to be given to the words "dishonest or fraudulent" and, secondly, upon an examination of the acts or omissions proved to see if they can fall within that description on its proper construction. Both the task of construction of the words "dishonest or fraudulent" and the task of examination and characterisation of the conduct in question must reflect the circumstance that it is "any description of civil liability whatsoever" – including breach of fiduciary duty – that can give rise to a claim for indemnity. They must also reflect the circumstance that the real victim of a finding that the exclusion applies is not the solicitor but the client for whose benefit and protection the scheme of compulsory cover has been put in place. (v) It is clear from clause 5(e)(v) that the expression "the Assured" has the extended meaning which is one of the several meanings set out in clause 1(a). The rationale for this is that even if an individual insured partner is personally innocent of the dishonest conduct, he or she is not entitled to indemnity if the conduct itself was dishonest within the meaning of clause 5(e)(v). This illustrates that which of the several meanings of the expression "the Assured" is applicable from time to time in the policy depends on the context: a point discussed below with particular reference to clause 4(b). (vi The ordinary English meaning of the word "dishonest" is a question of fact. It is a question which may be answered by resort to dictionaries. The Macquarie Dictionary gives the meaning of "dishonest" as: "1. Not honest; disposed to lie, cheat or steal:…2. Proceeding from or exhibiting lack of honesty; fraudulent." (vii) The same source gives the meaning of the word "fraudulent" as: "1. Given to or using fraud, as a person; cheating, dishonest. 2. Characterised by, involving, or proceeding from fraud, as actions, enterprise, methods, gains, etc." (viii) The meaning of the underlying word "fraud" includes: "1. Deceit, trickery, sharp practice, or breach of confidence, by which it is sought to gain some unfair or dishonest advantage;…3. Any deception, artifice, or trick." (ix) The legal meaning of "fraud" is of course well established: a false representation of fact made knowingly or without belief in its truth or reckless of its truth or falsity. [At the risk of unnecessary citation, see Derry v Peek (1889) 14 App Cas 337 and the legion of cases which follow it.] (x) The underlying theme of the dictionary definitions of "dishonest" and "fraudulent" is that of intention. This is emphasised, in the case of dishonesty, by other dictionary definitions, [See for example the Shorter Oxford Dictionary] and in the case of fraud by the legal concept already referred to. The requirement for an element of intention has been emphasised in a number of cases dealing with exclusion clauses in language identical or substantially similar to the language of clause 5(e)(v). Those cases were gathered and analysed in Schipp v Cameron (ED 6425/91, 9 July 1998 unreported). A number of the cases there cited are of particular relevance. (xi) The question was considered by the Full Court of the Supreme Court of Queensland in Crowe v Wheeler and Reynolds (1988) 1Qd R 40. In that case the relevant exclusion applied to "loss arising out of any claim…brought about by the dishonesty or fraudulent act or omission" of the insured [see Williams J at 41]. Williams J, with whom Andrews CJ agreed, referred to a decision of Fraser J in the Supreme Court of Ontario: Lynch & Co v United States Fidelity and Guarantee Co. [1971] 1OR 28. Williams J concluded [at 43] that "the term "dishonesty" should be applied in the way suggested by Fraser J. In the exclusion clause in question the term "dishonesty" refers to an act involving some intent to deceive or cheat and that involves a question of fact to be determined in the circumstances of each particular case." Fraser J had said [1971] 1OR at 38, "dishonest is normally used to describe an act where there has been some intention to deceive or cheat. To use it to describe acts which are merely reckless, disobedient or foolish is not in accordance with popular usage or the dictionary meaning. [His Honour had referred earlier to the Shorter Oxford Dictionary]. It is such a familiar word that there should be no difficulty in understanding it." (xii) In neither case – Crowe or Lynch – was reference explicitly made to the full contractual context or the objects for which the contract in question was made. However, in the Trustees' submission, a consideration of those matters supports the conclusion that the word "dishonest" should be given a construction which requires the element of intention to be present. To give it a wider construction would have the effect of enlarging the ambit of the exclusion and thereby diminishing the protection available, through the compulsory scheme of insurance, to solicitors' clients. (xiii) The decision in Crowe, being a decision of the Full Court of the Supreme Court of Queensland (it will be remembered that the contracts in question in this case are contracts of compulsory professional indemnity insurance made for practitioners in Queensland) is of particular significance, considering as it does a form of insurance which is obviously an ancestor of and very similar in wording to the certificates of insurance presently under consideration. (xiv) Support for the approach taken in Crowe is to be found in the decision of JD Phillips J in HG & R Nominees Pty Ltd v Fava [1997] 2VR 368. In that case too there was an exclusion for "liability arising… from or brought about by the dishonesty or fraudulent act or omission of any insured" [1997] 2 VR at 417. JD Phillips J, after considering a submission that "fraudulent act or omission" extended the conduct in question beyond mere "dishonesty", concluded: "…I am not yet clear how far the concept of "recklessness" can be imported into this exclusion clause. However it be put, I think that what is relevant to the operation of the exclusion clause with which I am concerned is some conscious and deliberate conduct on the part of the insured, which amounts to "dishonesty or [a] fraudulent act or omission". Perhaps that means that the exclusion will be brought into play where a solicitor signs a false statement, not only when he knows it to be false, but also where, having considered what is being said and realising that he does not know if it is true or false, he subscribes his name to it nonetheless and with reckless indifference. In other words, the exclusion will operate if the solicitor actually knows that what he is lending himself to is untrue, and it may perhaps operate also if he is conscious, when he signs, that he is lending his name to something as true when he does not know if it is true or not. That is how the words "fraudulent act or omission" could be given some effect, but I do not need to decide it" [1997 2 VR at 421-422]. (xv) An exclusion in identical terms to that presently under consideration was considered by Hunter J in McCann v Switzerland Insurance Australia Limited (Comm D 50227/95, 26 June 1998 unreported). The clause excluded "any liability…brought about by the dishonest or fraudulent act or omission of the Assured" [The clause is set out by Hunter J at 222. It should be noted that the words following those quoted are radically different to the equivalent words in the subject certificates but it does not appear from the decision of Hunter J that his views on the meaning of "dishonest or fraudulent act or omission" depended in any way on the sentence following the sentence in which those words appear.] Hunter J considered a large number of cases including Crowe, Lynch and HG & R Nominees. Hunter J considered the concept of fraud. He did so for the following reasons [at 240]: "I have laboured over this treatment of the concept of fraud partly for the reason that I think it has the capacity to colour the meaning of both dishonest as that element is invoked in the dishonesty exclusion, applying the principle of noscitur a sociis. In particular, such an approach, I think, draws attention to the need to see dishonesty in the context of injury to an entitlement or putting at risk of injury the entitlement of another, as distinct from attempting an examination of a concept of dishonesty in vacuo by definition of standards and the like. Moreover, although it is clear from the authorities that fraud and dishonesty may relate to injury to other than economic entitlements, I think it clear from the context of the dishonesty exclusion that its operation is concerned only with injury or the risk of injury to an economic entitlement. As earlier stated, I think bare breach of duty is, alone, insufficient to satisfy the test of dishonesty." (xvi) His Honour's view that the word "dishonest" drew meaning from its juxtaposition with the word "fraudulent" is supported by the decision of Steel J in Abbey National PLC v Solicitors Indemnity Fund Limited (1997) PNLR 306. (xvii) The conclusion that Hunter J reached was expressed as follows at 244-245: "What I think is clear from East End, [A reference to the decision of Rolfe J in East End Real Estate Pty Ltd v CE Heath Casualty and General Insurance Limited (1993) 7ANZ Insurance Cases 61-151.] and the other authorities to which I have referred, is that mere breach of duty, without more, is insufficient to constitute dishonesty, consistently with the view that where the purpose of a particular duty founded in regulation is to be found in ensuring primacy of honesty in the duty of relationship, little more is needed than proof of the breach to establish actual dishonesty. …For the purpose of the dishonesty exclusion, I think the concept of dishonesty involves an intentional act, or omission where there is a duty to act, which deprives another of money or valuable property or puts at risk or prejudicially affects that other in relation to some lawful economic right, interest, opportunity or advantage, knowing that the actor has no right to deprive that other of the money or property or to put it at risk or to so prejudice the interest of that other. Knowledge that there is no right so to act may be derived from the existence of a duty or from representations made to the object of the dishonesty. The duty may arise out of statute or out of the legal relationship between the parties. While recklessness itself is not tantamount to dishonesty it, clearly, may evidence the existence of dishonesty." (xviii) The Trustees submit that this conclusion is proper, having regard to the authorities reviewed by Hunter J, and that it ought to be applied in the present case. (xix) As noted both by Einstein J in Schipp and by Hunter J in McCann, there are some cases in which it is suggested that it is not a necessary ingredient of the concept of dishonesty that there be intention – specifically, intention to deceive. One such case is thought to be the decision of the Court of Appeal of New Zealand in McMillan v Joseph (1987) 4 ANZ Insurance Cases 91/60-822. A number of things may be said about that decision: i. firstly, it is clear that the court was not saying that dishonesty could be found otherwise than by making a finding of deliberate conduct [See for example the judgment of Somers J at 75, 055] ii. secondly, the specific holding was that what was not necessary was conduct activated by an intention to deceive (as opposed to conduct deliberately intended to achieve whatever was the natural or intended end of that conduct) [See the analysis of Hunter J in McCann at 231 – 233] iii. thirdly, intention to deceive is not irrelevant; rather, the question of intention to deceive is to be ascertained not by subjective considerations of the state of mind of the individual in question but rather against what is an appropriate objective standard of honesty [See the analysis of Einstein J in Schipp at paragraph 917]; iv. in any event, to the extent that the decision in McMillan establishes some variable content in the meaning of the word "dishonest" in its own right (a point which the Trustees certainly do not accept) then firstly, applying the principle of construction noscitur a sociis, the meaning to be attributed to "dishonest" in the context of clause 5(e)(v) may be informed by its juxtaposition with the words "fraudulent conduct" (in the composite phrase "dishonest or fraudulent conduct of the Assured"); and secondly, to the extent that there is any remaining ambiguity or duality of meaning, the word should be construed contra proferentem so as to diminish rather than enhance the scope of the exclusion to cover of which it forms part. (xx) For these reasons, the Trustees submit that the dishonesty exclusion (clause 5(e)(v)) should be construed so as to require the conduct which is said to amount to a "dishonest or fraudulent act or omission of the Assured": i. to involve a deliberate act, or deliberate omission to act where there is a duty to act; ii. having the effect of depriving another of money, property or a lawful economic right or interest etc; iii. or putting at risk or prejudicing another in one of those ways; iv. in circumstances where the person who acts or omits to act knows that he or she would or might, but has no right to, deprive or put at risk the money, property, etc of the other. (xxi) This formulation substantially follows the conclusion expressed by Hunter J in McCann. To the extent that it goes beyond the conclusions expressed by Einstein J in Schipp, the Trustees respectfully submit [Particularly in a context where the views expressed in Schipp were necessarily obiter dicta] that the conclusion of Hunter J in McCann should be adopted. (xxii) It necessarily follows from this statement of the approach to be taken to the construction of the dishonesty exclusion that a mere breach of duty, even of a fiduciary duty involving concepts of honesty and disclosure, cannot be characterised as dishonest or fraudulent unless it is deliberate or intentional (in the sense that there must be a deliberate decision, or intention to perpetrate the breach of duty) accompanied by knowledge that there is no right or justification so to act, and with knowledge that the money or property etc of another will be diminished or may be put at risk in circumstances where there is no right to diminish it or put it at risk. In other words, although it is not necessary to find that the conduct in question was activated by an express intention to cheat or deceive, it cannot be characterised as dishonest unless the circumstances clearly show firstly deliberation or intention and secondly knowledge of the likely consequences and that those consequences cannot be justified. (xxiii) Any lower requirement would put at risk the protection clearly intended to be afforded to clients of solicitors by the scheme for compulsory policies of insurance in which the dishonesty exclusion is to be found. Further, because such policies were obviously and necessarily intended to cover loss arising out of, among other things, breach of fiduciary duty, any wider construction of the words "dishonest or fraudulent act or omission of the Assured" would introduce a tension into the process of construction of the exclusion, and a complexity in the resolution of issues of fact relating to the exclusion, which should be avoided unless there is no alternative. Insistence on intention and knowledge enables the due function of the exclusion clause to be maintained whilst, consistent with absence of knowledge and intention, protecting the rights of clients. It brings a degree of certainty into the analysis and enables people to regulate their affairs with some degree of confidence. It achieves a fair balance between the legitimate but competing interest of the parties directly or indirectly involved, whilst at the same time recognising and complying with the common law principle that one cannot insure against the consequence of one's own intentional crime or fraud. [See Enright, Professional Indemnity Insurance Law (London, Sweet and Maxwell, 1996) paragraph 6.030, paragraphs 6.103-6.126] A lesser standard, as well as being destructive of the rights of clients which were clearly intended to be protected, will be productive of uncertainty. If the Insurers wished to have the benefit of some lower standard of conduct amount to dishonesty it was open to them to choose appropriate words to do so. Where the words used by them can be given meaning and significance, which avoids arbitrary or capricious consequences, the Insurers cannot complain that the words do not go so far, in a particular case, as they would like.' The Insurers' submissions as to legal principle 368 The Insurers sought to adopt as correct, the reasoning in Schipp v Cameron (Unreported, Supreme Court of New South Wales, 9 July 1998, Einstein J). The relevant extract from that Judgment is set out below. 369 The Insurers submitted that : 'Both Cleary and Scanlan accepted that the certificates dated 14 and 28 November were deliberately false in the sense of intentionally omitting information resulting in the certificates giving a false picture and constituting a half truth. Cleary: T193-200. Scanlan: T57-61. Their conduct was not reckless, foolish or inadvertent. Each intended to do what was done. Their conduct was deliberately intended to achieve what was the natural or intended end of that conduct. It is not necessary to show (as the plaintiffs' submissions accept: para 34) that the conduct in question was actuated by an express intention to cheat or deceive.' 370 The Insurers sought to support the approach adopted in Schipp v Cameron in relation to dishonest intention by reference to two recent decisions, one of the Privy Council and one of the High Court of Australia. 371 The head note in Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378 is, inter alia, as follows: 'The plaintiff airline appointed as its agent in a particular area for the sale of passenger and cargo transportation a company of which the defendant was the managing director and principal shareholder. Under the agreement the company was to hold in trust for the airline money received from such sale until it was accounted for by the company to the airline. With the defendant's knowledge and assistance the company paid the money into its current bank account instead of into a separate account, and in breach of trust the company used that money for its own business purposes. The company failed to pay to the airline sums due within the time specified by the agreement. The airline terminated the agreement and, the company having become insolvent, commenced proceedings against the defendant to recover the money owed by the company. The judge held that the defendant was liable as constructive trustee to pay that amount to the airline. On appeal the Court of Appeal of Brunei Darussalam reversed that decision, holding that the defendant could not be so liable because it had not been established that the company was guilty of fraud or dishonesty in relation to the money held in trust for the airline. On the airline's appeal to the Judicial committee: Held, allowing the appeal, that where a third party dishonestly assisted a trustee to commit a breach of trust or procured him to do so, the third party would be liable to the beneficiary for the loss occasioned by the breach of trust, even though the third party had received no trust property and irrespective of whether the trustee had been dishonest or fraudulent; that in the context of such accessory liability honesty was to be judged objectively and acting dishonestly, or with a lack of probity, which was synonymous, meant not acting as an honest person would act in the circumstances and could usually be equated with conscious impropriety as distinct from inadvertent or negligent conduct or carelessness, although a third party might be acting dishonestly if he recklessly disregarded the rights of others; that the third party's conduct had to be assessed on the basis of his actual knowledge at the time not what a reasonable person would have known or appreciated, and regard could be had to his personal attributes including experience and intelligence and the reason for him acting in that way; and that, accordingly, since the defendant had caused or permitted the company to commit a breach of trust by using in the conduct of its business money held in trust for the airline when he knew that the company was not authorized to do so by the terms of the trust, the defendant had acted dishonestly, and was, therefore, liable to the airline for the amount owed to it by the company.' 372 In delivering the judgment of their Lordships, Lord Nicholls of Birkenhead said: ' Dishonesty Before considering this issue further it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal or other contexts (see, for instance, Reg. V Ghosh [1982] Q.B. 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. the standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour. In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.' [at 389] [Emphasis added] 'The only answer to these questions lies in keeping in mind that honesty is an objective standard. The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. Knox J. captured the flavour of this, in a case with a commercial setting, when he referred to a person who is 'guilty of commercially unacceptable conduct in the particular context involved:' see Cowan de Groot Properties Ltd. v. Eagle Trust Plc. [1992] 4 All E.R. 700, 761. Acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained . He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.' [at 390-391] [Emphasis added] 373 The Insurers further relied upon Peters v The Queen (1998) 192 CLR 493. The submission was as follows: Similarly, if Cleary or Scanlan knowingly concealed information from BPTC in breach of duty, they will not escape a finding of dishonesty simply because they did not believe they were acting dishonestly because they were acting on Lew's instructions. See for example Scanlan: T93 and 57-61. In Peters v The Queen (1998) 192 CLR 493 McHugh J (Gummow J agreeing) held that whether the accused believed the means were dishonest, either in an objective or a wholly subjective sense, is irrelevant. His Honour said at para 80: "In the paradigm case of conspiracy to defraud - an agreement to induce persons to buy property by making fraudulent misrepresentations - the charges made out upon proof that the accused agreed to induce persons to part with their property by the making of statements which the accused knew were untrue. Whether or not the accused believed that what they were doing was honest is irrelevant to the charge. Obtaining property by statements which are known to be untrue is the employment of dishonest means." McHugh J also said at para 79: "Proof of a conscious design on the part of the conspirators to use dishonest means is essential to proving the charge. But this does not mean the defendants must know that they were acting dishonestly - whether dishonesty is judged by their standards or their knowledge of the standards of ordinary people." Decision as to Principle 374 Paragraphs 910-933 below are extracted from the reasons given in Schipp v Cameron. 'Exclusion Clause 910 The Seventh Defendant is not liable to indemnify the Third Defendant in respect of any liability he may incur if one of the categories in Clause 5 of the policy entitled 'General Exclusions' applies. The policy does not indemnify the Third Defendant "in respect of any liability ... brought about by the dishonest or fraudulent act or omission of the Assured ...": Clause 5(e)(v). The Seventh Defendant submitted that there was dishonesty on the part of Mr Harrison such that the exclusion clause applied. . . . 912 The Policy does not define the word "dishonest". The meaning of the word is primarily a question of the proper construction of the policy, but in the absence of any indication within the document as to the meaning of the words, the words should be given their ordinary meaning. In Underwriters at Lloyds v Ellis (unreported, Court of Appeal, 25 February 1998, per Meagher, Handley and Powell JJA) Powell JA stated that the following approach should be taken in interpreting an exclusion clause of the type sought to be relied on by the Seventh Defendant: ".. 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 proferentum in case of ambiguity (see, for example, Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500)." [at 29] 913 "Dishonesty" is defined in the Shorter Oxford Dictionary as constituting conduct that is: "Discreditable as being at variance with straightforward or honorable dealing; underhand, now, fraudulent, thievish, knavish." 914 That definition has been accepted by many of the authorities in which the question as to whether or not an exclusion clause which allows an Insurer to refuse to indemnify the Assured on the grounds that their conduct was dishonest or fraudulent has been raised: McMillan v Joseph (1987) 4 ANZ Insurance Cases 60-822; Crowe v Wheeler & Reynolds [1988] 1 Qd R 40; Comino v Manettas (1993) 7 ANZ Insurance Cases 61-162; East End Real Estate Pty Ltd t/a City Living v CE Heath Casualty & General Insurance Ltd (1993) 7 ANZ Insurance Cases 61-151; Chittick v Maxwell (1993) 118 ALR 728; H G & R Nominees Pty Ltd v Fava [1997] 2 VR 368; Underwriters at Lloyds v Ellis (unreported, Court of Appeal, 24 February 1998, per Meagher, Handley and Powell JJA). Those authorities offer some guidance as to the application of clause 5(e)(v) in these proceedings. 915 The ambit of the conduct which will be "dishonest" is not entirely clear from the authorities. In particular, there is some question as to whether or not an intention to deceive is required. The Full Court in Queensland has held that dishonesty requires "an act involving some intent to deceive or cheat": Crowe v Wheeler & Reynolds [1988] 1 Q R 40 at 43. Most recently, J D Phillips J in H G & R Nominees v Fava [at 421] in relation to an exclusion clause in a solicitor's professional indemnity policy in similar terms to clause 5(e)(v) held that "what is relevant to the operation of the exclusion clause is ... some conscious and deliberate conduct on the part of the insured." The Plaintiff submitted that those authorities which asserted that dishonesty required an intention to deceive or cheat, or the existence of knowledge that conduct was "not straight forward but underhand", should be followed. 916 There is, however, also authority for the proposition that the nature of conduct that may be characterised as "dishonest" is not limited to conduct which is actuated by an intent to deceive: McMillan v Joseph (1987) 4 ANZ Insurance Cases 61-162 at 75,056. In that case in the New Zealand Court of Appeal, Casey J gave some consideration to the meaning of the word "dishonest" in a policy similar to the one before the Court. His Honour stated: "I accept the appellant's submissions that "dishonest" is used in the sense of deliberate conduct carrying out its ordinary meanings (amongst others) of 'not straightforward' and 'underhand'. Like fraud, the term is of wide application in the almost infinite variety of human activity and while the general concepts it embodies are well understood, attempts to analyse or define them narrowly is fruitless . In any given case a decision on whether conduct is dishonest is best left to the common sense and experience of the judge or jury after consideration of all the relevant circumstances. The test is an objective one and in the context of this policy the insured's conduct is to be judged by that standard of honesty generally accepted as appropriate for members of the legal profession in their dealings with their clients. Because of the trust reposed in them it may well be higher than the standards expected in some other areas of business and commercial life. " 917 The Seventh Defendant submitted that this case was authority for the proposition that "there can be dishonesty without an intent to deceive" [Seventh Defendant's Submissions paragraph 2.4.5] and that it is this line of authority which should be followed by the Court in these proceedings. I would not accept the Seventh Defendant's submission without qualification. It seems to me that, Casey J did not hold that intention to deceive was irrelevant to a finding that conduct was dishonest, merely that the relevant intention was not to be determined by the actual state of mind of the individual whose conduct was in question. Rather, deliberate conduct or intention was to be inferred by the Court assessing the conduct against an objective standard of honesty accepted as appropriate in the circumstances . It is on the basis of this objective test that Casey J included as a relevant consideration standards and codes of conduct of the profession of the particular individual whose conduct is impugned. 918 Australian courts appear to have accepted that professional standards may be relevant to a court's inquiry into whether particular conduct was dishonest. In H G & R Nominees v Fava (supra), Phillips J regarded the authorities which concerned the meaning of dishonesty in the context of professional indemnity policies as falling into two categories. First, cases in which the insured professional makes a deliberately false representation. In such circumstances, the operation of the exclusion clause is relatively clear and the question as to whether or not an intention to deceive is required is not thrown up by the facts. I interpolate that in the authorities examined by Phillips J, false representations concerned situations such as those in which a solicitor had given a false certification of independent advice or purported to witness a legal document without seeing the party who executed it or should have executed it: see Comino v Manettas and the facts of H G & R Nominees itself. The second category of cases considered by His Honour were those in which the question for the Court was "at what point a failure to dishonour professional standards becomes dishonesty" [at 418]. The cases which Phillips J considered fell within the second category were McMillan v Joseph, Chittick v Maxwell and East End Real Estate. 919 The Seventh Defendants also relied on East End Real Estate Pty Ltd vt/a City Living v C E Heath Casualty & General Insurance Ltd (1993) 7 ANZ Insurance Cases 61-151. In that case, Rolfe J considered the meaning of the word "dishonest" in the context of an exclusion clause in a professional indemnity policy. His Honour said at 77-798: "'Dishonest', in my opinion, generally connotes a degree of moral turpitude or delinquency, which transcends such a breach of duty ... It does not require very much more than the breach of duty to bring about dishonesty ... In the authorities to which I have referred reference is made, in particular, to the conduct not being 'straightforward' or being 'underhand'. To that, for present purposes, I would add that the conduct may be dishonest if it is discreditable as being at variance with honorable dealing. That places it in a professional or quasi-professional context." 920 In East End Real Estate, Rolfe J relied on the rules and regulations which control the conduct of real estate agents to establish what would constitute honorable dealing. Those rules and regulations required that an offer be conveyed to the principal as soon as practical after it was received and therefore, his Honour held that the failure of an agent to convey an offer, and / or that agent being in a position of conflict regarding the fiduciary duty owed to his / her principal was sufficient to constitute dishonest conduct. 921 There was an issue between the Plaintiff and the Seventh Defendant as to the nature of the duty referred to by Rolfe J. The Plaintiff asserted that his Honour was referring to a statutory duty. The Plaintiff submitted that "His Honour considered matters of law in conjunction with a positive obligation placed on the real estate agent by paragraph 5 of Schedule 2 to the Auctioneers & Agents Regulations made under the Auctioneers & Agents Act 1941". The Plaintiff sought to distinguish East End from the present proceedings on those grounds. 922 The Seventh Defendant, however, submitted that the duty referred to by Rolfe J was not imposed by statute but was either a contractual duty, duty of care or fiduciary duty. I accept the Seventh Defendants' submission as to the nature of the duty referred to by Rolfe J. His Honour noted that it was common ground between the parties in the proceedings before him that the conduct of the real estate agent which gave rise to the proceedings, namely the failure of the agent to communicate to the vendor all offers received in respect of a certain piece of property, "may amount to either a breach of contract, negligence or a breach of a fiduciary duty." [at 77,793] 923 The Plaintiff also sought to distinguish the decision in East End and the concept of dishonesty propounded by Rolfe J on the basis that the dishonesty exclusion in the policy there under consideration included the additional words "criminal" and "malicious". In my view, little turns on the difference in considering the approach adopted by Rolfe J: cf McCann v Switzerland Insurance Australia at 244 per Hunter J 924 Notwithstanding that the facts in East End differ from the present proceedings in that Mr Harrison was not under any statutory obligation of the kind in that case, it seems to me that the approach of Rolfe J may well be applicable here. I would read his Honour's decision as meaning that not every breach of standards established for a particular profession, whether by statutory instrument or by some other means, will result in the conduct in question being regarded as dishonest. In each case, the nature and content of the standard would plainly be relevant on the issue. 925 In East End, Rolfe J observed that "there may well be instances of conduct imposed by the regulations, breach of which could not be stated to be discreditable, not straightforward or underhand": [at 77,798]. Young J in Chittick v Maxwell (1993) 118 ALR 728 at 749 also observed that a failure to adhere to professional standards, whether informally imposed by the profession itself or created by law, would not in itself be grounds for the operation of an exclusion clause which allowed an insurer to refuse indemnity on the basis that the conduct of the insured was dishonest. His Honour stated: "I must confess that, were it not for the decided cases on the word 'dishonest', I would not have thought that it was valid to say that 'dishonest' had anything to do with the way in which other solicitors of good repute may regard the conduct of the solicitor in question. There may be various practices within a solicitor's profession which solicitors regard with suspicion, but about which there is nothing morally or legally wrong. For instance, solicitors may regard it as improper to deal with a matter without opening a file for each matter and making sure all the correspondence in connection with the matter is kept on the file. However, even if a solicitor failed to comply with this rule and so brought down upon himself the odium of the profession, I could not see how that failure had anything to do with his being honest or dishonest. Perhaps an example that is likely to bring about loss is the situation where a solicitor acts for both vendor and purchaser or both mortgagor and mortgagee. That is bad practice, but I would shy away from saying it is dishonest and I would not wish it to be thought that the exclusion in the fidelity insurance policy could apply merely because a solicitor acted for both parties. [Emphasis added] 926 It seems to me that a failure to adhere to professional standards will amount to dishonesty if the relevant standard, or standards, involve an express obligation to attest to the truthfulness of a matter, to disclose a particular fact or otherwise act honestly in some regard . In my view, it will not be sufficient for conduct to be dishonest that there is a breach of a standard which merely protects against careless practices. The salient consideration is not, however, whether the standard is imposed by the legislation or by the general law. [Emphasis added] 927 A similar view of the authorities was adopted by Hunter J in the recent decision in McCann v Switzerland Insurance Australia (supra). His Honour said (at 244): "What I think is clear from East End, and the other authorities to which I have referred, is that mere breach of duty, without more, is insufficient to constitute dishonesty, consistently with the view that where the purpose of a particular duty founded in regulation is to be found in ensuring primacy of honesty in the duty relationship, little more is needed than proof of the breach to establish actual dishonesty." 928 Hunter J ultimately adopted a concept of dishonesty in materially different terms to those which I have considered above. His Honour expressed the view that the concept of dishonesty should be understood in terms of a "context of injury to an entitlement or putting at risk of injury to the entitlement of another, as distinct from attempting an examination of a concept of dishonesty in vacuo by definitions of standards and the like": at 240. As to the meaning of the word dishonest, Hunter J held (at 245) that: "For the purpose of the dishonesty exclusion, I think the concept of dishonesty involves an intentional act, or omission where there is a duty to act, which deprives another of money or valuable property or puts at risk or prejudicially affects that other in relation to some lawful economic right, interest, opportunity or advantage, knowing that the actor has no right to deprive that other of the money or property or to put it at risk or to so prejudice the interests of that other. Knowledge that there is no right so to act may be derived from the existence of a duty or from representations made to the object of the dishonesty. The duty may arise out of statute or out of the legal relationship between the parties. While recklessness itself is not tantamount to dishonesty it, clearly, may evidence the existence of dishonesty." 929 In reaching this conclusion, his Honour had regard to the concept of dishonesty which has developed in the context of the criminal offence of fraud. I note in passing that, in requiring "an intentional act or omission", I understand Hunter J to require that there be deliberate acts or omissions as opposed to reckless or thoughtless conduct. I do not understand Hunter J to include as a fundamental element of the concept of dishonesty, an intent to deceive, although clearly, like recklessness, such evidence would presumably be relevant to the existence of dishonesty as the concept was formulated by Hunter J. 930 Without expressing any view as to the concept of dishonesty ultimately formulated by Hunter J, it seems to me that that concept embraces a greater variety of conduct and situations than it is necessary to be adopted by me in the context of the proceedings now before me. In McCann v Switzerland Insurance Australia, there was an issue as to whether the misappropriation of moneys in certain trust funds held by Allen Allen & Hemsley as trustee could be said to have been brought about by the dishonest or fraudulent conduct of a partner of that firm. Hunter J held that the misappropriation was not actuated by an intention to defraud the trust and the question which his Honour was then required to determine was whether the conduct of the partner could be said to have been dishonest or fraudulent on the basis that the conduct of the partner was imprudent or reckless. 931 The Plaintiff submitted to the Court that Mr Harrison's conduct in breach of both fiduciary duties and duties of care owed to Mrs Schipp in his capacity as her or a solicitor was not actuated by fraud or dishonesty, but was rather the product of Mr Harrison's preoccupation with his own financial difficulties. This submission might have raised questions as to whether or not recklessness was sufficient to ground a finding that Mr Harrison's conduct was dishonest in the relevant sense. In the light of the findings of fact which I have made, the issue did not, however, arise. As stated above in consideration of the fiduciary duties and duties of care owed to Mrs Schipp by Mr Harrison and breached by him, I do not accept that Mr Harrison's conduct in relation to Mrs Schipp was as result of his being pre-occupied. Rather I have found that, together with Mr Cameron, Mr Harrison deliberately managed and manipulated Mrs Schipp into a position advantageous to him. 932 The fiduciary duties and duties of care which a solicitor owes to a client constitute, it seems to me, duties the failure to adhere to which may well, depending on the precise circumstances, allow the relevant conduct to be characterised as dishonest. 933 I have held that Mr Harrison acted as Mrs Schipp's solicitor, or a solicitor, in respect of a number of matters earlier spelled out. I have further held that by virtue of Mr Harrison's position as a solicitor, he owed to Mrs Schipp fiduciary obligations and duties of care which he breached, and breached flagrantly, in the furtherance of his own interests. In the light of these findings and notwithstanding the fact that Mr Harrison also breached fiduciary obligations springing from relationships independent of fiduciary duties springing from his position as a solicitor, it seems to me that Mr Harrison's relevant conduct was dishonest and that the exclusion in clause 5(e)(v) of the policy was activated.' 375 I see no reason to depart from those expressions of principle. Neither party submitted that the decision of the New South Wales Court of Appeal in Switzerland Insurance Australia Ltd & ors v McCann & ors (Unreported, Supreme Court of NSW, Court of Appeal, 27 August 1999) upholding the appeal from Hunter J's decision in McCann included any fresh statements of principle on the meaning of the dishonesty exclusion. The parties accepted that decision of the Court of Appeal turned on 'proximate cause', the Court implicitly accepting, without deciding one way or the other, that the test formulated by Hunter J could be used as a 'working' test. Hence the approach taken in Schipp to the Hunter J test is not required to be revisited by reason of the Court of Appeal decision. Findings as to dishonesty 376 As I have said, I am satisfied that Mr Cleary was an unreliable witness. In relation to the key issues, his evidence was inconsistent with the contemporaneous documents and contrary to the probabilities. 377 The central propositions in Mr. Cleary's evidence, each of which involved him asserting the improbable, were as follows: (a) He had no knowledge or suspicion of the involvement of Mr Reuben Lew or EMM in Weltsbarrd or Yossarian throughout the whole of the period of the PMA1 and PMA2 transactions from October 1985 to October 1986: statement, paras 65 and 67; (b) He believed that the second shareholder under the Equity Sharing Agreements (Weltsbarrd or Yossarian) would be contributing funds as part of the syndication of the loan: statement, para 37; (c) He believed that BPTC knew about the involvement of Weltsbarrd and Yossarian and the Equity Sharing Agreements and he assumed that EMM would show all relevant correspondence to BPTC: statement, para 38; (d) The certificate dated 14.11.85 was based on the Sandy Point certificate and was the certificate as to title referred to in the trust deed: statement, para 48. (e) The Equity Sharing Agreement was a condition precedent of the loan because of the reference in Section 18 of the letter dated 22.10.85, under the heading " Valuation Qualification Requisitions ", to " Equity participation arrangements " : statement, paras 26 and 49; (f) He had no recollection of the 27 and 28 November 1985 letters, or the circumstances relating to the change in the 27 November letter or any conversations with Reuben Lew or Mr. Scanlan in relation thereto: statement, para 52; (g) He did not turn his mind particularly to the fact that Weltsbarrd and Yossarian could obtain a substantial economic benefit from the PMA transactions: statement, para 66. 378 As to proposition (a) above, Mr Cleary's assertion of lack of knowledge or suspicion runs counter to much of the evidence adduced. It is difficult to single out any particular segment of that evidence, as my finding is based upon the whole of the evidence. The finding is also based upon the probabilities. The finding is also based upon the sequence of events in relation to Mr Cleary's instructions, already set out. 379 One matter of particular importance is Mr Cleary's handwriting appearing on Exhibit DX 8 already referred to. Mr Cleary was unable to give any explanation as to why he had written that note on the copy of the 15 November 1985 letter addressed to EMM. The words used were 'that interest was held beneficially for EM' and those words are written as relating to Weltsbarrd. 380 Also of relevance is Mr Cleary's evidence at transcript 173-174 that the letter of 25 October 1985 was being sent 'to the other parties, as it were, to the transaction being the party otherwise than those, being the PMA company group' [T 173]. This cross-examination included: 'Q. So that the purpose of the letter was to show the draft Equity Sharing Agreement to the persons who represented those interested in the Equity Sharing Agreement other than the PMA Group? A. Yes. Q. To ensure that the draft document accords with their intention and their instructions? A. Yes, it was evolving. Q. And in the paragraph numbered 3, you said to the addressee of the letter that : We considered providing that you would simply have an option to buy shares. That is a reference to the way in which the interests other than PMA interests would acquire an interest in the borrower company? A. Yes. Q. And you go on to say: but in view of the fact that you are going to share in the net profit of the operation of the premises from day 1, we recommend that you actually take up shares? A. Yes. Q. That's a reference to the intention that from day one the interests other than the PMA interests were going to share equally in the profit which hopefully would be achieved? A. From the increased value of the property yes. Q. From the proposed transaction? A. Yes. . . . [T 173-174] 381 Also of relevance are the terms of the 5 November 1985 memorandum from Mr Cleary to Mr Priddle and the cross-examination on that document, earlier referred to in this Judgment. 382 Also of relevance is Mr Cleary's evidence in relation to the 5 November 1985 letter written to Mr Lew of EMM, earlier set out. 383 Also of relevance are the terms of the 15 November 1985 letter from Cleary & Hoare to Mr Lew and use of the word 'you' emphasised in the above extract of that letter. Also of relevance was Mr Cleary's failure, it seems to me, to give any satisfactory answer to why Estate Mortgage would have been pleased to know of the assessment of stamp duty on the Equity Sharing Agreement in the sum of $18.10 - see the letter of 29 November 1985 earlier referred to and the cross-examination at transcript 187, earlier referred to. 384 Also of relevance are notes in Mr Cleary's handwriting at DX vol 2 p 588, cross-examined on at pages 187-188 which Mr Cleary believed it was safe to assume came into existence before the completion of the relevant documents on or about 13 November 1985. He had recorded in the middle of this page the words 'one share to our entity' as well as 'one share to be held by PMA Property Corporation'. His evidence was : 'Q. And when you have used the preposition "our", you are referring to the interests of Mr Lew and Estate Mortgage Managers are you not? A. Yes, the other entity to PMA Properties. His Honour Q. You did not know to whom you were referring on your evidence? A. That's right. The other entity was to PMA Properties reconstructing from that note what the reference to "our" entity would refer to . . .' [T 188] 385 I do not accept that in using the words 'one share to our entity' Mr Cleary did not know or at least strongly suspect that the entity being referred to, was one in which Mr Reuben Lew or EMM were or were to be financially involved. 386 The whole of the approach to Mr Cleary from the initial instructions received at the Gold Coast Meeting, made very plain to him the significance of the Equity Sharing Agreement as a priority to be resolved first. The words 'side agreement covering equity sharing' in the typewritten note of that meeting are further strongly suggestive of an agreement which would indeed be a 'side agreement', namely an agreement standing outside, that is to say to the side of, the central transaction in which Cleary & Hoare were acting for BPTC. 387 Mr Cleary's assertion of lack of knowledge or suspicion during 1986 confirms my view that his evidence cannot be accepted as to his lack of knowledge or suspicion during 1985. The documentary evidence in 1986 becomes quite compelling. As has already been noted, the letter of 25 February 1986 was from Weltsbarrd, care of Mr & Mrs Lew at their residential address and was signed by Mr Reuben Lew. On my findings, Mr Scanlan showed the letter to Mr Cleary. From that time on Mr Cleary had, on my findings, the clearest possible indication that the Lews were likely to be financially involved in any further similar Equity Sharing Agreements. Hence when instructions on the PMA 2 transaction required preparation of a further Equity Sharing Agreement and now involved Yossarian, Mr Cleary, if he did not already well know, could have had virtually no doubt but that the Lews were financially involved in Yossarian. The letter of 30 April 1986 had been sent from Weltsbarrd and returned the duly executed Equity Sharing Agreement which had been executed by Mr Reuben Lew and Ms Sandra Lew. 388 I was not impressed by Mr Cleary's demeanour in the witness box. To my mind, he was well aware of the significance to his personal standing and professional status of findings by this Court of his awareness of the involvement of the Lews in Weltsbarrd and Yossarian. 389 As to the matters referred to in (b) above, Mr Cleary's evidence appeared to suggest that Weltsbarrd's involvement in the Equity Sharing Agreement was commercially justifiable because Weltsbarrd would be a lender to the transaction. The Equity Sharing Agreement did not, however, involve the syndication of the loan. Mr Cleary's contemporaneous notes on 24 October 1985 make no mention of the syndication of the loan. There are no contemporaneous documents relating to the syndication of the loan. I accept the Insurer's submission that there would have been no need to keep the syndication of the loan involving Weltsbarrd's secret from BPTC. There were no instructions about the syndication of the loan which were embodied in the documentation drafted by Mr Cleary. No other person was drafting documentation relating to the syndication of the loan. Weltsbarrd's role was clearly stated in recital H to the Equity Sharing Agreement which Mr Cleary had drafted. Weltsbarrd was 'procuring' the loan from BPTC. The sharing of profit under the Equity Sharing Agreement was to operate from 'day 1' - see the terms of the letter of 25 October 1985. 390 There was no evidence to support any intended future advance by Weltsbarrd. I accept the Insurers' submission that there is no correlation between the Equity Sharing Agreement and any prospective future lending by Weltsbarrd, no correlation between the amount of the profit share and the amount of any loan and no correlation between the time of commencement of the profit share and the time of any supposed advance by Weltsbarrd. 391 As to the assertion set out in (c) above, Mr Cleary conceded that he did not assert that BPTC knew of the financial involvement of the Lews in the PMA transactions. [T 204] Had Mr Cleary believed that BPTC knew about the involvement of the Lews in Weltsbarrd and Yossarian, there would not have been any need for secrecy. There was in fact no need for the Certificate dated 14 November 1985 to exclude information which was contained in the preceding letters of 11 November 1985 to Rylands & Hillmer or of 12 November 1985 to Mr Reuben Lew. There was no need for the Certificate dated 28 November 1985 to exclude the reference to the Equity Sharing Agreement. Nor was there any need to change the Certificate dated 27 November 1985. Nor was there any need for Mr Lew to give the instructions recorded in the notes dated 8 November 1985 and 28 November 1985. 392 I accept the Insurers' submission that there is no evidence whatsoever of any contemporaneous communication from BPTC indicating any knowledge or awareness of the terms of the Equity Sharing Agreements or the involvement of the Lews or of EMM in Weltsbarrd and Yossarian. I further accept as correct the Insurers' submission that any suggestion that BPTC did know of the involvement of the Lews in Weltsbarrd and Yossarian, or the terms of the Equity Sharing Agreements, is inconsistent with the concession made on behalf of the plaintiffs in Exhibit DX 1. The essence of that concession, I accept, was that BPTC did not know the material facts, the material facts were not disclosed to BPTC by Cleary & Hoare and that, therefore, the nondisclosure and concealment by Cleary & Hoare 'brought about' the loss constituted by the PMA 1 and PMA 2 judgment debts. 393 As to the assertion in sub-paragraph (d) above, it will be recalled that Mr Cleary suggested that there was nothing improper in his Certificate dated 14 November 1985 because it was based upon the Sandy Point Certification. The Sandy Point transactions did not, however, involve an Equity Sharing Agreement. The Certificates, I accept, are not comparable - see Exhibit DX 6 and see transcript 168-170. 394 As to the assertion in (e) above, I accept the Insurers' submission that this is a far-fetched ex-post facto reconstruction. The reference in section 18 of the letter of 22 October 1985 under the heading 'Valuation qualification requisitions' to 'Equity participation arrangements' is, I accept, a reference which could equally apply to the proposed syndication of the loan. [See transcript p 131 and 164-165] The previous transaction had involved a syndicated loan. Mr Cleary's evidence was that he expected the PMA 1 transaction would also involve a syndicated loan. However, in fact, the Equity Sharing Agreement did not, as I accept, involve any question of syndication or participation with the lender - see transcript 158-168. The Equity Sharing Agreement involved a very different concept of participation with the borrower. The phrase 'equity participation arrangements' in section 18 of the letter of 22 October 1985 is, I accept, fortuitous and co-incidental. I accept the Insurers' submission that that phrase does not justify or explain Mr Cleary's secrecy as against BPTC in relation to the drafting of the Equity Sharing Agreement nor the concealment of its terms and of the financial involvement of the Lews. 395 As to the assertion in sub-paragraph (f) above, I do not accept Mr Cleary's evidence in this regard when he asserts that he has no recollection of these events. I accept the Insurers' submission that it is inherently improbable, given the seriousness of the issue and Mr Cleary's recollection of other events both before and after that he has no recollection of these events. Mr Cleary was unable or unwilling to provide even a 'snippet' of information about these events. [T 199] To my mind, the inference from the 27th and 28th November Certificates appropriate to be drawn, including the file note of the conversation with Mr Reuben Lew, is adverse to Mr Cleary. There is no reasonable explanation capable of being put for or in fact put forward by Mr Cleary. At the end of the day, I cannot accept Mr Cleary's evidence that he has no recollection of the 27th and 28th November 1985 letters or the circumstances relating to the change in the 27th November letter or of any conversations with Mr Reuben Lew or Mr Scanlan in relation thereto: statement paragraph 52. 396 As to the assertion in sub-paragraph (g) above, Mr Cleary's improbable evidence is set out in paragraph 66 of his statement. That evidence is clearly contradicted by his memorandum to Mr Priddle of 5 November 1985 to which he did not refer in his statement. Ultimately, Mr Cleary conceded that paragraph 66 could not be correct - T 175-178. I do not accept Mr Cleary's evidence that he did not turn his mind particularly to the fact that Weltsbarrd and Yossarian could obtain a substantial economic benefit from the PMA transactions: statement paragraph 66. 397 My assessment of Mr Cleary as an unreliable witness takes into account that in my view he denied the obvious and was unwilling to make frank admissions in relation to documents which were not referred to in his statement or which he had not seen in preparation for his evidence. This includes: (a) His unwillingness to accept that he received the draft Deed of Assignment in relation to the syndication of a loan [see Exhibit DX 5, T 131-133 and 158-160] (b) His unwillingness to agree that the Sandy Point Certificate provided no sensible point of comparison with the Certificate dated 14 November 1985 because there was no Equity Sharing Agreement involved in the Sandy Point transaction [see Exhibit DX 6 and T 169-170] (c) His denial of knowledge of the involvement of Mr Lew or EMM, notwithstanding his annotation on the copy of the letter of 15 November 1985 recording with an arrow pointing to Weltsbarrd, the words 'interest held beneficially for EM'. (d) His denial of knowledge of the involvement of Mr Lew in Weltsbarrd, notwithstanding his own annotation on the letter of 25 February 1986 from 'Weltsbarrd care of R & S Lew' - see transcript 205-206. (e) His supplementary statement which implausibly propounded the theory that 'you' where appearing in any letter addressed to Reuben Lew, did not in fact mean 'Reuben Lew'. (f) His evidence given late in his cross-examination (T 207-208) that the reference to 'side agreement' in his diary notes of 24 October 1985, should read 'site agreement'. 398 I accept the Insurers' submission that what appears to have occurred was a rapidly increasing alignment by Mr Cleary with the interests of Mr Reuben Lew and EMM to the exclusion of BPTC. Mr Cleary had sought out the work of the Estate Mortgage Group, Mr Priddle having informed him of the possibility of obtaining the larger financing work from the Group previously done out of Sydney and Melbourne. It was plainly attractive to Mr Cleary to seek to obtain that work and he approached Mr Reuben Lew and introduced himself and offered his firm's services, hoping for an increase in flow of work. Mr Cleary appears to have been prepared to align himself with the interests of Mr Reuben Lew and EMM which in terms of BPTC not having been given all of the necessary information, resulted in basic breaches of duty to BPTC. Mr Cleary knew on my findings from a very early point in time that there was an inconsistency between his 'official' instructions (the letter of 31 October 1985) and Mr Lew's unwritten instruction (the Equity Sharing Agreement side arrangement). Mr Cleary's conduct became deliberate and intentional by the time of the issue of the Certificate of 14 November 1985 and following Mr Lew's direction of 28 November 1985, by the time of the revised and sanitised Solicitor's Certificate of 28 November 1985. At the time of each of those Certificates, the relevant intention of Mr Cleary was, on my findings, to conceal information from BPTC because these were Mr Lew's instructions. 399 On my findings, Mr Cleary, if not aware prior to 28 November 1985 that the Equity Sharing Agreement was not to be referred to in any correspondence with the Trustee, clearly on that day became so aware. The significance of the Equity Sharing Agreement had been made plain to him at the original Gold Coast instructions meeting. He was well aware at all material times of the potential profits involved in the Equity Sharing Agreement and of the large amounts which the borrower and those interested in the borrower were likely to make in the transactions. He either knew or strongly suspected that the Lews were financially involved (in the sense of having financial interests) in Weltsbarrd and later Yossarian. On my findings, Mr Cleary: (a) at no stage believed that the involvement of Weltsbarrd or Yossarian was or was akin to that of a contributor of funds as part of a syndication of the subject BPTC loans; (b) at all material times either knew or strongly suspected that the Equity Sharing Agreements involved the participation as 'profit share companies' of Weltsbarrd and Yossarian - that is to say as companies which were to share in the very substantial economic benefits which the Equity Sharing Agreement would in all probability permit. 400 At the risk of some repetition, the evidence which suggests that Mr Cleary either had actual knowledge that the Lews were financially involved in Weltsbarrd and later Yossarian or alternatively strongly suggests such involvement may be viewed in the context of the following evidence of Mr Cleary: "Q. Was it your perception that it was possible that Estate Mortgage Managers may have themselves been involved in some fashion with the equity share Agreement or Weltsbarrd? A. I didn't know who it was and I didn't turn my mind to whom was behind Weltsbarrd." [Transcript 184] [Emphasis added] 401 This answer and particularly the section emphasised above runs counter to the following factors and evidence: (a) Mr Cleary's letter of 15 November 1985 addressed to Mr Reuben Lew, EMM enclosing the acknowledgment of payment of $1.00 pursuant to the Equity Sharing Agreement and stating that "We would be pleased if you would sign on behalf of Weltsbarrd Holdings … " (b) Mr Cleary's involvement in the setting up of the proposed structure to the extent of considering various options and recommending "that you actually take up shares" - see 25 October 1985 letter to Mr Lew earlier referred to. (c) The fact that a decision was taken to avoid obtaining guarantees from the shareholders of Weltsbarrd. (d) Mr Cleary's early November 1985 expectation "that more than $20 million will be distributed under the Equity Sharing Agreement within three years" [Memorandum of 5 November 1985 to Mr Priddle] (e) Mr Cleary's letter of 5 November to Mr Lew, but now addressed as Financial Consultant to "Estate Mortgage Financial Services Limited" and seeking "the name of your associated company to be involved to be 'the second share holder'". (f) The references to Weltsbarrd as "the profits share company" in the facsimile to Mr Cleary of 11 November 1985. (g) Mr Cleary's inability to name anyone in the world other than Mr Reuben Lew who, on the information available to him at the time, to his knowledge, stood behind Weltsbarrd. (h) Mr Cleary's receipt of instructions that Weltsbarrd was not a related company to be BPTC - see letter of 12 November 1985. (i) The references to "our entity". (j) The fact that Mr Cleary, subject only to the input from Mr Lew and Mr Hilmer was the author of the Equity Sharing Agreement. (k) The inherent unlikelihood that a solicitor could act and receive instructions from a company without either ascertaining who was behind the company or at the least forming a strong belief as to that matter. (l) The lack of secrecy in Mr Lew's having quite openly written to Cleary and Hoare with typed "sender" detail from Weltsbarrd c/- R A & S Lew - 25 February 1986 letter. (m) The fact, conceded by Mr Cleary, that if the commercial point was that Weltsbarrd would contribute funds to the loan advance from BPTC, there would have been no point in keeping the involvement of Weltsbarrd secret from BPTC. 402 The principal factor which may suggest that up to 27 November 1985 Mr Cleary was not actually aware of the involvement of the Lews in Weltsbarrd is the writing of the original Second Solicitor's Certificate in terms referring to the Equity Sharing Agreement. Granted that the Certificate was submitted to Mr Reuben Lew 'for on forwarding to [BPTC]', yet still the fact is that the Certificate ex facie certified to the preparation inter alia of 'Bill of Encumbrance (Equity Sharing Agreement)'. And yet Mr Scanlan's evidence, after some prevarication with the cross-examiner, was that he had no doubt in November 1985 "that Mr Cleary knew who it was who was his client at Weltsbarrd". [T 67-68] I cannot accept on the evidence that on and prior to 27 November 1985 Mr Cleary did not have a well founded and strong suspicion that the Lews (or at the least Mr Reuben Lew) had a financial interest in Weltsbarrd. Mr Cleary may well have known this fact - the evidence has many pointers in this regard, but cannot be said to be absolutely clear, in the sense of the onus of proof incumbent upon the trustees. [Section 140(1) of the Evidence Act 1995 (NSW) stipulates a single standard of proof for all civil cases, namely the balance of probabilities. Section 140(2) preserves the doctrine in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362; Pedler v Richardson (Unreported, Supreme Court of NSW, 16 October 1997, Young J) at 10-11.] But what is quite clear, on the evidence, is that the events of 28 November and the instructions from Mr Lew to 'change the Certificate' and to keep all letters about the Equity sharing Agreement separate and to make no reference to the Equity Sharing Agreement in correspondence addressed to BPTC (which instructions I find were conveyed by Mr Scanlan to Mr Cleary), represented a clear and strong indication, read as such by Mr Cleary, to the effect that Mr Reuben Lew was interested in Weltsbarrd and to the effect that an important matter (the Equity Sharing Agreement and the bill of encumbrance associated with it) were not to be revealed to BPTC. Hence, whatever the knowledge of Mr Cleary up to this point in time as to the precise position, the events of 28 November in fact brought home to him the existence of circumstances which spoke volumes in terms of non disclosure and conflict of duty. If Mr Cleary was not yet aware of the involvement of the Lews or at least Mr Reuben Lew in Weltsbarrd by now, then on this day his previously strongly held suspicions of such involvement received corroboration of the highest order. 403 In those circumstances, Mr Cleary's conduct falls within the description, 'discreditable as being of variance with straightforward or honourable dealing, underhand' [see the definition of 'Dishonesty' extracted above from the Shorter Oxford Dictionary]. His actions in participating in the issue of Solicitors' Certificates which failed to disclose the Equity Sharing Agreements and ancillary encumbrances and in failing to disclose his knowledge or suspicion of the Lew's or at least Mr Reuben Lew's, financial involvement in the PMA 1 and PMA 2 transactions, were conscious and deliberate. The Certificates included deliberately false representations. His conduct was clearly, as the Trustees concede, in breach of the fiduciary obligations owed by Cleary and Hoare to the BPTC. But it went further. It involved a degree of moral turpitude or delinquency which clearly went well beyond and transcended that breach of duty. This was a failure to adhere to professional standards which involved an express obligation to attest to the truthfulness of a matter and to disclose particular facts and to act honestly in certifying as to the agreements and encumbrances prepared and executed as part of the transaction. In Mr Cleary's case, his own conduct and the conduct in which he participated, went well beyond mere recklessness or thoughtlessness. Mr Cleary was clearly placed in a situation in which he either well knew or alternatively had strong grounds for suspecting and actually suspected, that the Lews were, or at the least Mr Reuben Lew was, financially interested in Weltsbarrd and Yossarian as part of a side arrangement documented by the Equity Sharing Agreement. He clearly knew also that BPTC would rely on the Solicitor's Certificates and knew that the Certificates were false in that they omitted material information. Mr Cleary's conduct was 'dishonest' within the meaning of the clause 5(e)(v) dishonesty exclusion. 404 Turning to Mr Scanlan, to my mind he also was not a reliable witness. 405 My assessment of Mr Scanlan as a witness is that he sought to underestimate considerably his involvement in the necessary legal work involved in documenting the subject transactions. I do accept, however, that he has not been shown to have consciously or deliberately intended to deceive or mislead the Trustee. The degree of recklessness, however, involved in the particular circumstances where, having first issued a Certificate he was then informed by Mr Lew of the necessity to change the Certificate and went along with that matter, albeit having discussed the same with Mr Cleary, without himself questioning the significance of the new instruction, to my mind places Mr Cleary well and truly within the ambit of the 'dishonesty exclusion'. The Certificate of 28 November was deliberately false in the sense of intentionally omitting information resulting in the Certificate giving a false picture and constituting a half truth. Both Mr Scanlan and Mr Cleary participated in the decision to send out the redrawn Certificate. A Solicitor's Certificate to a lender is a signally significant document. And when prepared on an occasion where a settlement advance is to be made in a situation where the solicitors retainer expressly provided that the solicitors were 'to take all steps necessary to fully protect the position of the Trustee and manager keeping both parties fully informed on all matters relating to [the] transaction', the significance of the Solicitor's formal certification becomes absolutely plain. 406 Mr Scanlan was unwilling to accept that he understood the basic operation of the Equity Sharing Agreement. I reject this evidence. 407 The Insurers submitted that the Court should not accept Mr Scanlan's denial of any knowledge of the involvement of Mr Reuben Lew in Weltsbarrd or Yossarian, despite the fact that he had taken instructions from Mr Lew and had written to the directors of Weltsbarrd and Yossarian care of Mr Lew. 408 Whilst the matter is one of some difficulty on the evidence, bearing in mind the gravity of the allegation that Mr Scanlan was aware of the involvement of Mr Lew in Weltsbarrd and Yossarian, to my mind the Insurers have not proved that knowledge in this case. [See the earlier reference to Pedler v Richardson.] 409 Mr Scanlan's evidence was that he was a relatively newly admitted solicitor involved under Mr Cleary's supervision in a large conveyancing transaction [the word 'conveyancing' is used to refer to what is more accurately described as a transaction in which the solicitors prepared loan and security documents and carried out ancillary conveyancing work] and simply failed to appreciate that he was doing anything wrong in following Mr Lew's instructions and in acting under Mr Cleary's supervision. To a large extent I can accept that in a pressured environment and under supervision by the partner who had taken instructions, Mr Scanlan may have simply failed to focus on the possible significance of what was occurring. I cannot however accept that Mr Scanlan had no grounds for suspicion that something untoward was occurring when he was required on the very day when the further PMA 1 advance was to take place, to alter the Solicitor's Certificate already issued and when he was advised that there was to be no reference made to the Equity Sharing Agreement in correspondence with BPTC. 410 Ultimately the dishonesty exclusion case does not in fact turn on whether or not the denials by Mr Cleary and Mr Scanlan of actual knowledge of the involvement of the Lews in Weltsbarrd and Yossarian, are accepted. Their deliberate conduct resulting in intentional concealment amounted to "dishonest conduct" by reference to the objective standard of what ordinary honest people would have done in the circumstances and by reference to the objective standard of what ordinary honest solicitors would have done in the circumstances. 411 As will have become clear from what has been written above, my finding is that Mr Cleary was either in fact aware of the involvement of the Lews, or at least of Mr Reuben Lew, in Weltsbarrd or Yossarian, or was very strongly suspicious [to an extent of being as close to certain as may be] of that involvement. 412 Mr Scanlan on the other hand engaged in conduct which was reckless in the extreme. He had grounds for suspicion that something did not ring true. He clearly came to suspect at some point in time, that there was a financial involvement of the Lews, or at least of Mr Reuben Lew, in Weltsbarrd and Yossarian. His grounds for suspicion were, at least initially, based on his instructions to change the second Solicitors Certificate and to keep all letters about the Equity Sharing Agreement separate and to make no reference to the agreement in correspondence with BPTC. But in contradistinction to the position which obtained in relation to Mr Cleary, Mr Scanlan could not be close to certain that his suspicions were correct. The suspicions were nevertheless tangible and real and based on considerations which were far from insignificant or insubstantial. True it is that his evidence rings true that he did not stop to contemplate the real significance of the instructions he had received. Yet my finding is that he was by no means asleep on the occasion in question. He simply failed to fully grasp the significance of the instruction and the change to the solicitors certificate. He did not fail to grasp the fact that these matters were not insignificant. Mr Scanlan knew that the 28 November certificate was untrue in the sense that it left out important information. The Certificate of 28 November was in fact deliberately false in the sense of intentionally omitting information resulting in the Certificate giving a false picture and constituting a half truth. He acted on Mr Lew's instructions after clearing that matter with Mr Cleary. His evidence was that he went to Mr Cleary 'with these concerns' [transcript 57]. There is no doubt that he was aware that Mr Lew saw the matter as of particular importance. He was in a hurry and did not step back to weigh up in his own mind the suspicion which he harboured as to why this was happening. He was too busy to apply his mind to a concern which on my findings he had at the time. He should have asked further questions but did not. He was swept up in the flow of things, by the magnitude of the matter, by Mr Lew's standing and Mr Cleary's imprimatur of Mr Lew's direction. 413 Mr Scanlan's conduct involved a participation in the issue of the substitute second Solicitors Certificate. He did not sign the certificate. He did not sign the letter under cover of which the certificate was sent. He did, however, continue to be involved in the conveyancing transactions relating to PMA1 and PMA2. Mr Scanlan accepted that it was likely that he knew by 30 May 1986 of the involvement of the Lews in Weltsbarrd. The high probability is that he was close to certain of that involvement on about 25 February 1986. [See the letter from the Lews of that date]. On 30 May 1986 the third Solicitors Certificate was signed by Mr Cleary and sent to BPTC. It made no reference to the Equity Sharing Agreement nor to the collateral security. In June and July 1986 Mr Scanlan continued to be actively involved in the conveyancing transactions. In late July he signed the letter reminding Mr Lew that the firm had "yet to receive your instructions in respect of the provision of any Equity Sharing Agreement like that which is in place in respect of the Southport development". In early August 1990 Mr Scanlan enclosed a copy of the Equity Sharing Agreement in his letter to EMM. He in fact signed the fourth and fifth Solicitors Certificates, neither of which disclosed or referred to the Equity Sharing Agreement. 414 To my mind Mr Scanlan's conduct constituted a failure to adhere to professional standards which involved express obligations to disclose particular facts in the matter of the subject Certificates. This was not a careless practice. The continuance, following the issue of the substitute second Solicitors Certificate of the practices of: (a) omitting all reference to the Equity Sharing Agreements in correspondence with BPTC; (b) overseeing the signing of, or himself signing, further Solicitors Certificates which in each case omitted references to material Equity Sharing Agreements and to encumbrances on BPTC's property; comprised a course of conduct which was discreditable as being at variance with honourable dealing, which involved giving false certifications, which was deliberate and which followed a tangible suspicion gained on 28 November 1985 that something was amiss. The conduct amounted to 'dishonesty' within the meaning of the dishonesty exclusion. As stated in Schipp , it seems to me that a failure to adhere to professional standards will amount to dishonesty if the relevant standard or standards, involve an express obligation to attest the truthfulness of a matter, to disclose a particular fact or otherwise to act honestly in some regard. As stated in Schipp at paragraph 928, 'Hunter J adopted a concept of dishonesty in materially different terms to those which I [had] considered [in the preceding paragraphs to paragraph 928]. 415 I add that I do not see it as strictly necessary for me to express a view as to Hunter J's requirement, as I understand his Honour's judgment, that to satisfy the 'dishonesty exclusion', there be deliberate acts or omissions as opposed to reckless or thoughtless conduct. To my mind, the conduct of Mr Scanlan went beyond simple recklessness or thoughtlessness. However, if it is necessary to express a view on the issue then with the greatest respect to the approach taken by Hunter J, I would not agree. Reckless or thoughtless conduct may, depending always on the precise circumstances, enliven the 'dishonesty exclusion'. In the present circumstances, Mr Scanlan's conduct enlivened the exclusion clause. 416 In the result, I accept as correct the Insurers' submission that the Trustees' flow chart earlier set out, proceeds upon the misconceived basis that the questions of dishonesty and causation should be addressed by referral to discrete acts or omissions at the time of each of the advances. My finding is that the solicitors deliberately kept secret from BPTC, or failed to disclose, their knowledge or suspicion of the Lews' financial involvement in the PMA 1 and PMA 2 transactions. The non-disclosure was a continuing non-disclosure and occurred throughout the course of both PMA 1 and PMA 2 transactions. The non-disclosure was not confined to the occasions when the various solicitors' certificates were provided to BPTC. I accept as correct the Insurers' submission that 'dishonesty' within the meaning of the exclusion clause, may consist of 'acts or omissions'. My finding is that the dishonesty, although evidenced by the act of providing false certificates, was not confined to those acts and that there was a continuing omission to disclose. 417 If, however, the Trustees' flow chart analysis be required to be followed, then in my view and on my findings of fact, an affirmative answer requires to be given to questions 1A, 2A, 3A, 4A and 5A. The result on the 'dishonesty exclusion' case is that the Trustees cannot recover in respect: (a) of the advance of $2,650,000 made on 14 November 1985; (b) of the further advance of $3,766,000 made on 28 November 1985; (c) of the advance of $951,460.44 made on 30 May 1986 or subsequent PMA 1 advances up to 20 October 1986; (d) PMA 1 advances subsequent to 20 October 1986; (e) PMA 2 advances. 418 In the result, there never was at any stage any disclosure to BPTC by Messrs Cleary or Scanlan of the terms or significance of the Equity Sharing Agreements or the financial involvement of the Lews in the transactions. That non-disclosure and the conduct of Messrs Cleary and Scanlan referred to above, constitutes dishonesty within the meaning of the relevant exclusion clause. 419 In light of the Court's findings that the dishonesty exclusion was enlivened, it is strictly unnecessary to deal with the further defences of the Insurers. In deference to the submissions, I propose to deal with some, but not all, of those defences. Known Claims or Claims Circumstances - The Principles 420 The respective submissions going to 'known claims or claims circumstances' covered a number of issues. The issue raised during final address when amendments to the pleadings were allowed and additional cross-examination permitted, went to whether, in relation to the known claims or claims circumstances exclusion, there were one or several contracts of insurance to which individual partners were parties and to what was suggested as being required to be known to each insured to enliven the 'known claims or claims circumstances exclusion'. 421 The Trustees' central submission is that in relation to the known claims circumstances exclusion, the circumstances which must be known are those known to each assured. Hence on the Trustees' submission, whether there is one contract or several contracts, there will nevertheless be several insurances on any view of the matter so that if, on the proper construction of the policy, the circumstances must be known to the individual partners and if the Court was to find that one partner, for example Mr Hoare, did not have knowledge of those circumstances, at for example 30 June 1990, or before, then even if claims circumstances were known to other partners, there is no exclusion which affects Mr Hoare's several insurance. 422 The Trustees accept that the question is initially one of construction. 423 If the Court was to accept the Trustees' submission as to construction, then the Trustees assert that there may still be a question as to whether the knowledge of the individual partner was actual knowledge or whether it might extend to knowledge which it might be claimed should be imputed to him, being the knowledge of another partner. 424 To my mind, the convenient course is to examine these aspects after first addressing issues which do not, at least in the first instance, require a treatment of the rights and obligations of, if there be such, the individual insured under, if there be such, several contracts. The structure of what follows will be : (a) An examination of the interrelationship of General Condition 4(b) and the Special Condition. (b) An examination of the proper construction of General Condition 4(b). (c) An examination of the facts relevant to the 'known claims and claims circumstances' exclusion. (d) An examination of the 'prior notification' case. (e) An examination of the 'one contract/several contracts/circumstances known to whom', issues. The interrelationship of General Condition 4(b) and the Special Condition 425 The special condition first appears in the excess insurance Certificates for Year 2. It is repeated in each of the excess insurance certificates for Year 3. 426 The excess insurance certificates incorporate the terms of the applicable primary certificates 'otherwise than as varied herein' [see for example PX1 Tab 13 Condition 3]. It follows that the special condition relating to known claims or claims circumstances requires to be construed in a contractual context that includes, except in so far as they are varied, the terms of the relevant primary certificates. Of particular relevance as throwing light on the construction of the special condition relating to known claims or claims circumstances, are the insuring clauses (clause 2 and general condition 4(b)). Both parties accepted that it could safely be assumed that the reference to 'known claims or claims circumstances' is a shorthand way of referring to the subject matter of clause 4(b): that is to say, to a 'claim the subject of the Insuring Clauses made during the Period of Insurance against the Assured' or to 'notice from any person of any intention to make a claim against the Assured' or to 'any circumstances of which the Assured is or shall become aware during the Period of Insurance which may give rise to a claim'. The first of these would be a 'known claim'. The third would be a 'claims circumstance'. The second, depending upon its precise character, might be one or the other. 427 The insurers placed no reliance upon 'known claims'. [Transcript 316] The proper construction of General Condition 4(b) 428 In FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [Unreported, Supreme Court of Queensland, Court of Appeal, 9 July 1999] the Court dealt with the following policy condition: 'If during the subsistence hereof the Insured shall become aware of any occurrence which may subsequently give rise to a claim against him or them for breach of professional duty by reason of any negligence, whether by way of act, error or omission and shall during the subsistence hereof give written notice to the Company of such occurrence, then any such claim which may subsequently be made against the Insured arising out of such negligence shall for the purposes of this Policy be deemed to have been made during the subsistence hereof.' [Emphasis added] 429 Derrington J, with whose reasons on this issue Chesterman J and Pincus JA agreed, said: 'It is also correct that in order to come within the terms of [the] condition . . ., the insured had to be aware of more than the mere circumstances forming the occurrence; it had to be aware of the possibility of a claim against itself for malpractice associated with those circumstances. However, again it did not have to be aware of how or why this might be so, or whether the possible claim was justified or might be expected to be successful . The indemnity extended to its costs of defending even an unsuccessful claim, so the general context supports the construction excluding any need for belief as to the claim's possibility of success . This is also consistent with the ordinary meaning of the condition's reference simply to any occurrence that may give rise to a claim, without any further unwarranted implication that the claim should be justified or successful. The degree of its possibility required by the term is not even qualified by any reference to reasonableness. It is very likely that this construction was intended since the alternative would have greatly reduced the practicality and value of the cover. In some cases an insured may not know of the full circumstances on which the claim is based until the statement of claim is served. This would be contrary to the liberal construction that should be applied to such terms. Alternatively, if it knows of an occurrence and knows very well that there is no valid basis for a claim against it but that one may still be made, it is of value to it that the cover will apply to any such occasion; and the provision as drafted in this policy would provide that cover. That would be both intentional and commercially reasonable. In the present case, the representatives of the insured were not aware of any fault on its part and did not expect a claim to be made, but from the time of notice of the solicitor's investigation they were aware of some possibility of a claim for malpractice, irrespective of whether or not it might be justified. They knew that somehow the patient had contracted septicaemia in their hospital and that his solicitor was investigating its cause, which of course indicated at least the possibility that a claim for malpractice might arise out of it. This was sufficient to alert it as to the possibility of a claim within the meaning of the term. It might be contrasted with the facts in Della Vedova where the enquiry addressed to the insured was specifically directed to a possible claim against the insured's client without any suggestion of fault on the part of the insured.' 430 To my mind there is, notwithstanding slight differences in expression, no real difference between the condition dealt with in FAI and General Condition 4(b). The reasoning of Derrington J is pervasive. The Insurers rely upon the proposition that there were 'claims circumstances' which was a shorthand way of referring to 'any circumstances of which the assured is or shall become aware during the Period of Insurance which may give rise to a claim'. I accept that an analysis of the condition requires that the circumstances which are said to be known to the assured (i.e. of which the "Assured is or shall become aware') are circumstances 'which may give rise to a claim'. 431 In Pech v Tilgals (1994) 94 ATC 4206 Dunford J dealt with a claim by the plaintiff taxpayers against their accountant in negligence arising out of the alleged failure of the defendant to prepare and submit accurate income tax returns on their behalf. The defendant cross claimed seeking indemnity under a policy of insurance for any damages for which he was liable. The cross defendant insurer denied liability relying on an exclusion clause. 432 The exclusion clause provided: 'You are not covered under this Policy with respect to claims: 1. . . . 2. . . . 3.1 Made or threatened or in any way intimated before the commencement of insurance cover under this Policy 1. 3.2 Arising from any circumstance or circumstances of which You shall become aware , prior to the commencement of insurance cover under this Policy 1 and which a reasonable Accountant in Your position would at any time prior to the commencement of cover have considered may give rise to a Claim or Claims.' [Emphasis added] 433 Again the exclusion clause used words which are not in precisely the same terms as those used in the present case. Again the essential meaning is similar. There was of course an additional rider to clause 3.2, adding the objective element referable to a reasonable accountant in the insured's position. 434 Dunford J said at p 4217, inter alia: 'It is therefore necessary to consider what circumstances were known to the insured prior to the commencement of the policy and to then consider whether a reasonable accountant in the position of the insured would have considered that such circumstances may give rise to a claim. In my view the words 'at any time' (prior to the commencement of cover) do not embrace circumstances which may have existed some time previously but which have been overtaken by subsequent events, as such a construction could at times lead to absurd results; but refer rather to what the reasonable accountant should consider right down to the commencement of cover. Moreover the hypothetical accountant must not only be reasonable, but must also be placed in the position of the insured, and this includes his relationship with and knowledge of possible claimants. Finally, the issue is whether such circumstances MAY give rise to a claim as opposed to whether they would, should or were considered likely to give rise to a claim, but the word does not include a bare theoretical possibility of a claim.' 435 His Honour then set out certain findings of fact as to matters of which the insured was aware and continued at p 4219: 'Taking these matters into account, I believe that a reasonable accountant in the position of the cross-claimant would not have expected or anticipated that a claim against him would or should be made; but the circumstances, including the sudden termination of his services, were such that the possibility of a claim was not so remote or fanciful that it could be disregarded, and therefore he should have considered that a claim MAY be made. ' [Emphasis added] 436 Both parties in final submissions before me agreed with the following proposition: 'For circumstances to fall within the special condition, three things are required: (1) the Assured must know - be or become aware - of the circumstances during the period of insurance; (2) the circumstances must be such as to be capable of giving rise to a claim; and (3) the knowledge or awareness of the Assured must encompass not only the circumstances - ie the factual matters in question - but their potential to give rise to a claim.' 437 The Trustees submitted as follows: It cannot be enough that the Assured know of the circumstances, without also knowing (or being aware) that those circumstances may give rise to a claim. [See the judgment of Derrington J in the Court of Appeal of the Supreme Court of Queensland in FAI General Insurance Co Limited v Australian Hospital Care Pty Ltd (9902 of 1998, 9 July 1999 unreported) at paragraph 10; see also Permanent Trustee Australia Limited v FAI General Assurance Co Limited (1998) 153 ALR 529, 567-568 and HIH Casualty and General Insurance Australia Limited v Della Vedova (Full Federal Court, ACT AG80 of 1997, 15 April 1999 unreported). The last two cases were relied upon and applied by Derrington J in the first case.] The Trustees accept that the operation of the special condition, in relation to claims circumstances, does not require any evaluation of the strength of the claim or its justification or prospects of success. [See Judgment of Derrington J in FAI at para 10] Nonetheless, for the special condition to be activated, it must be shown that the Assured had both knowledge of the circumstances that are said to have the potential to give rise to a claim and knowledge that a claim might be made based on those circumstances. Because the special condition is predicated on knowledge, it must require an examination of the actual knowledge of the Assured. It is not to the point to say that a person in the position of the Assured "must have known". Such considerations will be relevant, if at all, in assessing the credibility of the Assured's evidence in relation to knowledge. Thus, if an Assured denies knowledge and the denial is accepted, the "must have known" test ceases to have any further application; specifically, it cannot be relied upon to fix the Assured objectively with knowledge which, it is accepted ex hypothesi, was lacking. General condition 4(b) - The Principles 438 The Trustees submitted and the Insurers accepted that the principles as to what must be known in terms of satisfying General Condition 4(b) were not relevantly different to the principles to be applied in respect of the known claims and claims circumstances special condition. Known claims and claims circumstances: The facts 439 It is unnecessary to repeat so much of the Judgment as has already set out the sequence of events which occurred during the period between June 1990 and August 1990. Mr Scanlan clearly became aware during his examination on 19 June 1990 of circumstances which were capable of giving rise to a claim of the nature of that later pursued by the Trustees in the Cleary and Hoare proceedings No. 5870 of 1994. His knowledge or awareness gained during that examination clearly encompassed not only the factual matters in question but also their potential to give rise to such claims. Mr Scanlan's awareness of these matters was heightened by the events which occurred between 19 June 1990 and the end of August 1990, and most particularly by his further examination on 27 July 1990, by his knowledge that Mr Cleary was to be so examined and by the issue of the warrants on 1 August 1990. 440 It will be recalled that Mr Scanlan's evidence was that the difficulties involving EMM by June 1990 and the investigation of Messrs Richard and Reuben Lew for criminal offences had been discussed with Mr Scanlan's partners, and principally with Mr Cleary, at the time. Also that Mr Scanlan's evidence was that when he was served the day after his first examination with a further notice to produce specifically files held in relation to BPTC's advances on PMA 1 and PMA 2, he had informed his partners about the production of the files. His evidence was also that he kept Mr Cleary closely informed about the sequence of events in relation to his examination. 441 Mr Scanlan's evidence at transcript 23-24 included the following: 'Q. You told his Honour that it was likely that you did inform Mr Cleary that there were allegations of a breach of fiduciary duty in the examination? A. It is likely, yes that I did discuss it with Mr Cleary. Q. And if that is likely, is it not also likely that you made it clear to him that that would involve, if justified a civil liability ? A. It's possible. I cannot recall. Q. Possible or likely? A. It's likely , but I just cannot recall. Q. Thank you. Did Mr Cleary tell you that he was proposing to substantially increase the firms professional indemnity cover? A. He may have. I can't recall. Q. Had the partnership discussed the need to increase the level of professional indemnity cover in the light of the unfolding events in relation to the Estate Mortgage Trusts? A. It is likely that it was discussed at the meetings, and partners' meetings and whatever , but there was always a concern from one of my partners, Mrs King, that there was just not enough insurance because the firm had expanded, grown. We had opened a Sydney office. Q. ** And the discussion which you said was likely between the partnership as to the need to increase the professional indemnity cover in the light of the unfolding events in relation to the Estate Mortgage Trust took place, did it not, because of the possibility of a civil claim arising from those events which may be greater than the then current level of cover? A. There was a general concern in the office about the way that the estate mortgage matters had transpired, what had happened . Mr Lew and Richard had been charged, and there was just a general concern about it. But in our view, in my view, I believed that we did everything right and proper and once everything had been looked at and analysed that they would find that there would be no problem. (** Question marked read back.) A. I would say it's more than likely that was a matter that was in the mind of certain partners and may have been addressed at a partner's meeting. I simply can't recall.' 442 This evidence is consistent with Mr Cleary's evidence that it was likely that there was discussion amongst the partners in relation to the notice served on Mr Scanlan on 14 June 1990 to attend to give evidence before the NCSC The evidence of a system with a subcommittee of partners reporting to partners meetings is also consistent with the ability of those seeking to do so to quickly convene formal or informal partners meetings to approve an urgent increase in cover. 443 To my mind, the circumstance that Cleary and Hoare sought quotations for top up cover of $5million, $7.5million and $10million by facsimile on 22 June 1990 (DX volume 6 p 15) serves to confirm the Court's further finding of fact that on the probabilities the firm Cleary & Hoare, by all of its partners, had become aware by 22 June 1990 of the existence of circumstances which were capable of giving rise to a claim of the nature of the claim later pursued by the Trustees in the Cleary and Hoare proceedings 5870 of 1994. Likewise the circumstance that Cleary & Hoare sought quotations for additional cover to limits of $20million, $30million and $40million on 30 July 1990 (see DX volume 6 p 43 referring to a telephone request), serves to confirm the Court's further finding of fact that by late July 1990 and following the further examinations of Messrs Cleary and Scanlan, the firm by its partners were extremely concerned as to the firm's potential liability on claims of the nature of the claim later pursued by the Trustees in the Cleary and Hoare proceedings. 444 Without being exhaustive in terms of repeating the factual findings and recitation of evidence earlier set out in this Judgment, prior to 30 June 1990, there existed 'known claim circumstances' in the sense of 'circumstances which may give rise to a claim' which included: (a) The fact that against a background in which in 1987 and 1988 PMA 1 and PMA 2 had defaulted on their loans from BPTC. Receivers had been appointed to PMA 1 and PMA 2. BPTC had not recovered its principal and interest advanced, in April 1990 the Estate Mortgage Trusts had collapsed amid extensive publicity. (b) In June 1990 the NCSC had commenced an investigation into the affairs of EMM and had served a notice on Mr Scanlan to attend and be examined. (c) On 19 June 1990 Mr Scanlan had been examined by the NCSC. Detail of the examination has already been referred to. The examination on my findings, exposed and explored in a very direct manner allegations of concealment, dishonesty and breach of duty by Mr Scanlan in connection with the PMA 1 and PMA 2 transactions. (d) On 19 June 1990 the NCSC issued a notice to produce to Mr Scanlan for documents relating to the PMA 1 and PMA 2 transactions. (e) On 22 June 1990 Messrs Reuben Lew and Richard Lew were arrested and charged. This caused concern amongst Mr Scanlan and his partners [transcript 31]. (f) There was a developing concern as events unfolded from April through May and through to June 1990 about the fact of what was happening with Estate Mortgage [transcript 34]. The concern developed in the context of the firm's level of cover with particular focus following the specific allegations of a possible breach of duty put to Mr Scanlan in his examination of 19 June [transcript 35]. 445 In relation to the suggested divide between circumstances known to Mr Scanlan prior to 30 June 1990 and circumstances known to him during July and August 1990, my finding is that by 30 June 1990, Mr Scanlan had become aware of circumstances which were clearly capable of giving rise to a claim of the nature of the claim later pursued by the Trustees in the Cleary & Hoare proceedings. The later NCSC examination of late July 1990 simply served to emphasise and confirm what must have been, on my findings, quite plain after the initial examination, namely that circumstances clearly put to Mr Scanlan in his first examination made him aware as a matter of fact of the possibility of a claim against himself and his firm of the nature of the claim later pursued by the Trustees in the Cleary & Hoare proceedings. 446 As I accept Justice Derrington's formulation of what was required, it was not necessary in order to satisfy the exclusion clause for any belief by Mr Scanlan as to the possibility of success of such a claim against his firm. That having been said, my finding of fact is that Mr Scanlan prior to 30 June 1990 had been made aware, particularly during the course of the NCSC investigation and examination of himself, that the possibility of a civil claim against his firm was neither remote nor fanciful. Year 3 - 'Prior Notification' under the Year 2 Policy question 447 The Insurers prepared in final submissions a convenient synopsis comparing relevant parameters of the subject charges to be found at DX 1 page 48 as against the paragraphs in proceedings 1802 of 1991 and the later proceedings 5870 of 1994. The schedule is appended to the Judgment as Appendix 8. It is, inter alia, relied upon by the Insurers as part of their Year 3 'prior notification' case. - See insuring clause 2 where, on the Insurers' submissions which I accept, what is required involves two steps namely: i. Circumstances or an occurrence which has been notified and ii. Whether the loss (here the judgments) arose out of the circumstances notified. 448 I accept the Insurers' submission that the second of these steps raises an objective test. 449 I accept the Insurers' submission that the insuring clause excludes cover for claims 'arising out of' circumstances previously notified. I accept as correct the Insurers' further written submissions in the following terms: 'The "circumstances" notified on 7 August 1990 included the fact of the criminal charges against Cleary and Scanlan including the terms of those charges and the underlying facts on which they were expressly based. Scanlan accepted at T45-46 that the description of the events forming the basis of the charges served on 1 August 1990, was a description of the same underlying facts which were the subject of his 19 June examination and were also substantially the same facts as later became the subject of the civil proceedings commenced against the firm. An objective assessment of the facts alleged in the charges, compared with the facts alleged in the Statement of Claim issued on 22 October 1991 (served on 5 May 1992) and which, after amendment, became the Further Amended Statement of Claim in the Victorian proceedings, demonstrates the relevant correlation and identicality of the facts in each case. . . . The essential circumstances the subject of the criminal charges were later reflected in the proceedings commenced by the Trustees, initially as proceedings No. 1802 in Queensland which later became proceedings No. 5870 of 1994 in Victoria. The essence of the criminal charges (relating to PMA1) is that Cleary and Scanlan assisted Lew/Welstbarrd to obtain a 50% share in the net profits of PMA1's Southport project in return for Lew agreeing to obtain for PMA1 a $20million loan from BPTC to develop the property. The 50% share was kept secret: see DX1 Vol 6 p.49. The Yossarian charges are similar. These allegations lie at the heart of the subsequent civil proceedings.' 450 For reasons already clear, it is ultimately not necessary to decide the issues between the Insurers and the Trustees on the artificial basis that the only circumstance of relevance is the Year 3 'Prior Notification' defence. Had this been the case, then on the Trustees' submissions, the 7 August 1990 notification, being the notification of charges relating to secret commissions, was not a notification of the circumstances that gave rise to the later claims made by the Trustees. On the Trustees' case, it is said not to have been an essential ingredient of those charges - as it was for the Trustees' claims - that Cleary & Hoare were retained on behalf of, and owed fiduciary duties to, BPTC. The Trustees' case is that their claims were not premised upon, nor did they assume as a necessary factual underpinning, any arrangement in relation to secret commissions. Their case is that the Trustee did not allege that Cleary & Hoare were parties to some illegal transaction, the aim and result of which was to persuade Estate Mortgage Managers to make a corrupt recommendation not for the benefit of the Trusts but for its own benefit. Instead, so the Trustees assert, it was alleged that Cleary & Hoare had placed themselves in a position of conflict arising out of their acting for both BPTC and Weltsbarrd and Yossarian. 451 Hence, on the Trustees' case at the widest level, the notification of 7 August 1990 was the laying of criminal charges. The Trustees' case is that their claims do not arise out of those charges. 452 In that fashion, the Trustees submit that if one looked at the detail of the charges and compared them with the details of the Trustees' claims (for example, relating to PMA 1), the lack of congruity was plain. Here, the Trustees sought to identify the detail of the respective charges and Trustees' claims in the following terms: 453 The Insurers in turn prepared a schedule to point up the allegations and matters common to the changes and the relevant pleadings. This schedule is appended to the Judgment and more accurately identifies the common elements. 454 To my mind, the Trustees' recording of the essence of the charge and the pleadings is essentially misleading in this context. The 7 August 1990 notification was, in my view, a notification of the circumstances which gave rise in due course to the civil proceedings. In the result the Court's holding in relation to the application of the known claims circumstances exclusion qua the Year 3 policy, is that there was a prior notification under the Year 2 policy. 455 As also already made clear, in my view, the heart of the civil proceedings involved allegations going to facts, the description of which were essentially the same as those which had been, at least in part, the subject of Mr Scanlan's 19 June examination. The 'one contract/several contracts/circumstances known to whom? issues 456 Extensive submissions were addressed by both parties on a range of issues related to the subject insurance contracts furnishing basic or compulsory cover of $500,000 and furnishing excess (non compulsory) cover. 457 The first matter in issue went to questions: (a) As to the identification of the parties to the several contracts of insurance. (b) As to who were the insured under the relevant contracts. 458 Other matters in issue went to questions of the proper construction of the 'known claims or claims circumstances' terms. As already indicated, the particular focus of these issues went to whether individual partners were severally insured and as to whether, upon the proper construction of the subject contracts, an insured partner would be affected by 'known claims or claims circumstances' not known to him or her but known to another partner. 459 The Trustees asserted that the relevant contracts of insurance were made: 1. For Year 1, by way of three separate contracts: between Mr Cleary and the relevant Insurers, Mr Hoare and the relevant Insurers and Mr Isles and the relevant Insurers; 2. For Year 2 and Year 3, by way of two separate contracts: between Mr Cleary and the relevant Insurers and Mr Hoare and the relevant Insurers; 3. Alternatively, for each year, by way of one contract between the firm Cleary & Hoare on the one part and the relevant Insurers on the other under which (for Year 1) Messrs Cleary, Hoare and Isles were severally insured and (for Years 2 and 3) Messrs Cleary and Hoare were severally insured, in each case with separate certificates issued to them; and 4. For Years 2 and 3, although Mr Isles was no longer a partner and there was no separate certificate of insurance issued to him, he is said to have been entitled to be indemnified under the relevant contracts of insurance as though a certificate had been issued to him. [This entitlement is said to arise under the relevant Master Policy or Master Contract pursuant to which the individual certificates of insurance were issued. It is put that Mr Isles would be entitled to enforce the right to indemnity on the principles laid down by the High Court in Trident General Insurance Co Limited v McNiece Bros Pty Limited (1988) 165 CLR 107.] 460 The Trustees' submissions were put in two tranches which overlapped - the first proffered by Mr McDougall QC and Mr Powell until Mr McDougall's departure from the case, and the second proffered by Mr White SC and Mr Powell, Mr White having taken over as leading counsel for the Trustees. 461 The respective submissions were as follows: Initial Submissions 23 August 1999 'The structure of Cleary & Hoare's (ie, Messrs Cleary's, Hoare's and Isles' . . .) insurance arrangements is in substance the same for each of Years 1, 2 and 3. That structure consists of: i. a Memorandum of Agreement establishing a professional indemnity insurance scheme for the Queensland Law Society Incorporated (the "Society") (the evidentiary references are given in the next subparagraph). It should be noted that the Memorandum of Agreement authorises firstly the issue of a master policy to the Society and secondly the issue by the "Coverholder" of "individual Professional Indemnity Certificates of Insurance … to Solicitors … who are required to be insured" by certain statutory rules; ii. the statutory rules in question are the Indemnity Rules of the Queensland Law Society Incorporated (the "Indemnity Rules"). The Indemnity Rules were made by order of 21 May 1987 published in the Queensland Government Gazette on 23 May 1997. The Rules were amended by order in counsel made on 31 May 1990 gazetted on 2 June 1990; iii. the effect of the Indemnity Rules, both as originally gazetted and as amended, is to require every "practising practitioner to whom these rules apply" to take out indemnity insurance. The rules apply to "every solicitor or conveyancer who is, or is held out to the public as a principal in private practice in Queensland" (amended in 1990 by deleting the reference to "solicitor or conveyancer" and substituting "practising practitioner"). In other words, partners in firms were required to be insured pursuant to separate certificates of insurance; iv. a Master Policy made between certain insurers and the Society on behalf of solicitors and conveyancers who are required to be insured. [See PX1 volume 1 tab 2 (Agreement and Master Policy for Year 1); tab 9 (Agreement and Master Policy for Year 2); tab 18 (Agreement and Master Policy for Year 3).] Note that the Master Policy by clause 1 contains an agreement between the insurers thereto and the Society "on behalf of all solicitors … who may from time to time be required to be insured" by the Indemnity Rules; v. certificates of insurance for the basic (compulsory) cover of $500,000 [See exhibit PX1 volume 1 tab 3 (Year 1); tab 10 (Year 2); tab 19 (Year 3).] It is clear for Year 2 and Year 3 that the certificates are issued to individual partners so that there is one certificate of insurance for the primary layer for each partner. Although the certificates for Year 1 do not name the individual partners, there are nine individual, separately numbered certificates. The proposal form [DX vol 6 p 28] shows that the person who assessed the number of partners ascertained (wrongly) that there were eleven; presumably, since two of those partners were described as "NSW only", separate certificates of insurance were not issued for those "NSW only" partners. In any event, given that there are nine concurrent separately numbered certificates, the proper inference is that, consistent with the terms of the Indemnity Rules, the Memorandum of Agreement and the Master Policy, separate certificates of insurance were issued for each partner as was done explicitly in Year 2 and Year 3; and vi. certificates of insurance for such excess (non-compulsory) insurance as might be arranged [See exhibit PX1 volume 1 tabs 4 to 8 (Year 1); tabs 11 to 16 (Year 2); tabs 20 to 26 (Year 3).] Unlike the basic cover, the certificates for excess cover were not issued in favour of individual partners. However, as is explained in paragraph 8 below, the excess insurance incorporated the terms of the primary certificates of insurance. The result, in the Trustees' submission, is that there were individual contracts of primary insurance for each partner, evidenced by the terms of the certificate issued (expressly in Years 2 and 3 and by implication in Year 1) to each partner individually. That this is so is confirmed by the wording of paragraph (b) of the proviso to clause 2 (the "Insuring Clauses") referring to "this Certificate of Insurance and all other Certificates of Insurance". It is also confirmed by the definition in clause 1(a) of "The Assured" and the provision therein for several insurance. The insurance scheme in place for each year in question included a compulsory element – the basic cover of $500,000 each claim which every sole practitioner or firm was required to have in place; and a voluntary component – whatever excess insurance (if any) practitioners or firms thought fit to arrange. For obvious reasons, it was necessary that if excess insurance were taken out, it should be on terms relevantly identical to the terms of the compulsory primary insurance. With the exception of the "known claims or claims circumstances" condition [which first appeared in the certificates for Year 2: see exhibit PX1 volume 1 tab 13] this was effectively achieved. Thus, the certificates for excess insurance in each year incorporated the relevant provisions of the primary cover. Because the terms of the certificates of insurance did not relevantly change from year to year (with the exception already noted as to naming individual partners), it is convenient to look at one only. These submissions will refer to the first of the certificates of insurance for Year 1 [PX vol 1 tab 3], but they apply equally to the certificates of insurance for the following years. The first important clause is the insuring clause: clause 2. It reads: [the clause is then set out] Clause 3 is significant. It provides as follows: "3. Special Conditions: a. Subject to General Condition (f) the Insurers will not: 1. seek to avoid, repudiate or rescind this insurance upon any ground whatsoever, including in particular non-disclosure or misrepresentation; 2. reject or reduce the quantum of any claim because of any non-disclosure or misrepresentation. b. Where the Assured's breach of or non-compliance with any condition of this insurance has resulted in substantial prejudice to the handling or settlement of any claim against the Assured in respect of which the Assured is insured hereunder the Assured shall reimburse to the Insurers the appropriate sum by which the Insurers have been prejudiced. Provided always that it shall be a condition preceded of the right of Insurers to seek such reimbursement that they shall have fully indemnified the Assured in accordance with the terms hereof. [Clauses 4(b) and 5(e)(v) are then set out.] In clause 1(a) the expression " The Assured " is defined to mean: '…the Firm and each Partner in the Firm or the Sole Practitioner as the case may be shown in the Schedule and includes any person employed in connection with the Practice (including each articled clerk, and each solicitor or conveyancer who is a Consultant or Associate with the Firm) and the estate and/or the legal representatives of any of the foregoing, and also includes each service or 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.' In each certificate the name of the Firm is given as Cleary & Hoare. Because the terms of each year's certificates of insurance for the primary, or compulsory level are incorporated into any excess insurance, the terms of those certificates of insurance, on their proper construction, will govern not only the primary cover but also any excess cover [except to the extent that the primary terms are varied in any certificate of excess insurance: see clause 3 of the Certificate of Insurance for Excess Cover for, for example, the 1989 year (there is no relevant variation for later years) at exhibit PX1 volume 1 tab 6. In other words, notwithstanding that the primary layer of cover is compulsory whereas the excess layers are not, the terms of the primary cover will, unless varied, apply in respect of the excess cover. The nature of the contracts of insurance effected on the terms of the primary certificates is self evident. They are several (as clause 1(a) makes clear) insurances against loss arising from any claim in respect of any description of civil liability whatsoever incurred in connection with the Assured's practice as a solicitor: see clause 2(a). The description of "loss to the Assured" in the insuring clause is not limited to defined categories of loss: on the contrary, it uses the widest possible words to describe both the kind and the source of insured loss. It was self evident, at the time each of the contracts of insurance was made, that insured solicitors might incur civil liability for a variety of reasons: including, but not limited to, breach of contract, breach of fiduciary duty and negligence. It must have been the intention of the parties to the contracts of insurance that, subject to the terms of the certificate, any liability arising from any of these causes and otherwise falling within the terms of the insuring clause would attract a right of indemnity in accordance with the terms of the contract. The objects of the contracts are likewise clear. They include an intention to provide indemnity to solicitors for claims made against them in connection with their practice. Importantly, and arising from the compulsory nature of the insurances at the primary level, the objects must be taken to include the wider object of providing a degree of protection, and in a more general sense comfort, to clients of solicitors. The compulsory aspect of the scheme was clearly intended to ensure that there would be a fund available so that clients of negligent (etc) solicitors who suffered loss would not remain uncompensated in the event that their solicitor might not have the resources to satisfy a judgment in respect of that loss. The public interest aspect of the scheme is clearly reflected in clause 3(a), whereby the Insurers give away their common law and statutory right to avoid, repudiate or rescind on grounds including non-disclosure and misrepresentation. That this provision, although on its face beneficial to the solicitor as well as the client, is included specifically for the benefit of the client is made clear by clause 3(b). In other words, a solicitor guilty of non-disclosure or misrepresentation remains entitled to the benefit of the insurance (so that the solicitor's client will not suffer) but is liable to indemnify the insurer for any prejudice (so that the insurer will not suffer). Importantly, the insurer must pay out before recovering from the solicitor.' Supplementary Submissions - 1 September 1999 'There is a number of indicia of separate contracts of insurance. These include: 6.1 the terms of the statutory scheme, established under the Queensland Law Society Act 1952 and the Indemnity Rules made pursuant to that Act (note that under the Act rules made pursuant to section 5, upon publication in the Gazette, "have the same force and effect as if they were embraced in and formed part of this Act".) 6.2 The terms of the Master Policies or Master Contracts pursuant to which the contracts of insurance were effected from year to year. Thus, for Year 1, clause 1 of the Master Policy provides: "The Insurers agree with the Queensland Law Society Incorporated … on behalf of all solicitors … who may from time to time be required to be insured by [the] Indemnity Rules … and former solicitors … to provide such insurance in accordance with the terms of the Certificate of Insurance attached hereto. Subject as hereinafter appears in respect of former practitioners, such Certificates of Insurance shall be issued on receipt of the premium payable …". By clause 3, a rate of premium is prescribed per sole practitioner or partner. By clause 6, former practitioners are accorded a right of indemnity without payment of premium and without issue of a Certificate of Insurance "as if a Certificate of Insurance in the terms attached hereto had been issued …". By clause 7, authority is given to Minet International Professional Indemnity Limited or The Queensland Law Society Incorporated "to issue on behalf of the Insurers to Practitioners seeking Insurance … Certificates of Insurance in the form attached hereto". 6.3. The terms of the Certificates of Insurance themselves: although for Year 1 the Certificates do not name individual partners, the fact is that some eight certificates were issued each specifying a premium which, by reference to the Indemnity Rules and the Master Policy, must have been a premium payable in respect of individual partners. For Years 2 and 3, the Certificates were issued specifically in favour of the partner named therein. The terms of the Certificate distinguish between "the Assured" on the one hand and "the Firm" on the other. Although the "Assured" includes the "Firm" it also includes each partner in the firm and a number of other persons, "to the intent that each of the foregoing shall be severally insured hereunder". The provisions of clause 2 are also relevant. Clause 2(a) refers to claims "against one or more Assured". Clause 29b) deals with aggregation of liability "under the 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". Both subclauses are consistent with the existence of individual contracts. 7. The scheme thus established is of a Master Policy, to which the Queensland Law Society Incorporated and certain insurers were, but firms of solicitors and individual solicitors were not, parties under which individual Certificates are issued to individual practitioners (in conformity with the statutory requirements) upon payment of individual premiums. Whether or not such Certificates are issued, as a matter of convenience, upon application made by or on behalf of partners through their firm, the objective circumstances, fortified by the reference to "several insurance", are consistent with the existence of individual contracts of insurance between individual practitioners on the one hand and the Insurers on the other. For Years 2 and 3, the evidence shows that the only certificates issued were certificates which named individual practitioners and the firm (if any) of which they were members. For Year 1, the schedule did not make provision for the naming of individual practitioners. 8. The alternative proposition must be that even if there is but one policy, between the firm on the one hand and the Insurers on the other (notwithstanding the payment of individual premiums and the issue of individual certificates) then nonetheless that policy was a composite contract of insurance under which each partner was severally insured, and the expression "the Assured" is to be construed having regard to the separate certificates. This alternative analysis is consistent with the decision of the Full Court of the Supreme Court of South Australia in Gilmore & Ors v AMP General Insurance Co Limited (1996) 67 SASR 387.' Gilmore's Case 462 In Gilmore v AMP General Insurance Co Limited (1996) 67 SASR 387, the South Australian Full Court dealt with the question of whether an innocent insured was entitled to indemnity notwithstanding that the indemnity was sought for loss arising out of a claim brought about by the dishonest or fraudulent act or omission of another partner. 463 The plaintiffs were or had been partners in a firm of solicitors during a period in which S also had also been a partner. The parties agreed for the purposes of the proceedings that S whilst a partner of the firm had engaged in conduct amounting to 'dishonest acts or omissions', there being a dispute between the plaintiffs and the insurers with whom each of the plaintiffs had taken out professional indemnity insurance as to whether or not in such circumstances the plaintiffs were entitled to be indemnified by the insurers in respect of claims made by clients against the plaintiffs in respect of the default of S. The insurers operated a scheme of insurance known as the 'compulsory professional indemnity insurance scheme of the Law Society of New South Australia'. 464 The firm in question had been called 'Fisher Jeffries & Co' and subsequently 'Fisher Jeffries'. 465 Leave to state a case to the Full Court asked the following question: 'Q. Are the insurers entitled to deny indemnity to the plaintiffs in respect of any loss arising out of the Gill and Upton claims pursuant to clause 5(d)(iii) of the Certificates of Insurance by reason of the dishonest acts or omissions of S in circumstances where the plaintiffs were partners of S, were not guilty of any dishonest acts or omissions themselves, and were not aware of and did not acquiesce in and were not parties to the commission of any dishonest acts or omissions by S?' 466 Cox J with whose reasons and answer to the case Mathieson J agreed, and with whose answer to the case Duggan J agreed and with whose reasons Duggan J also agreed although adding to those reasons his own comments, set out the relevant clauses and the background statutory insurance scheme as follows: ' The statutory insurance scheme Section 52 of the Legal Practitioners Act provides that the Law Society may, with the approval of the Attorney-General, establish a scheme providing professional indemnity insurance, to an extent provided by the scheme, for the benefit of legal practitioners. By "professional indemnity insurance" is meant insurance against inter alia "civil liability arising in connection with legal practice (whether the liability arose from an act or omission on the part of the insured legal practitioner or some other person)". The scheme is to be promulgated in the form of regulations. It is to have the force of law and be binding on the legal practitioners who are covered by it. A scheme was duly devised and it is embodied in the Legal Practitioners (Professional Indemnity Insurance Scheme) Regulations 1987 (SA) as amended from time to time. Certificates of insurance in the form provided by the regulations were issued to practitioners in accordance with the professional indemnity insurance master policy. It was a "claims made" policy and it appears that the two former clients gave notice of their respective claims in 1992. By that time Miss Gilmore had retired from practice but she was still effectively insured in all relevant respects because cl 5 of the master policy provides that a former practitioner is entitled to be indemnified as if a certificate of insurance had been issued and was in force at the relevant time. Three of the partners had by then left Fisher Jeffries, one to practise on his own account and the others to join other firms. Each of the plaintiffs except Miss Gilmore held in 1992 a certificate of insurance in the prescribed form. The schedule to Mr Blue's certificate, which will serve as an example in the case of the continuing members of Fisher Jeffries, sets out particulars special to Mr Blue's policy - the period of insurance, the sum insured, the premium and so on - and one of the boxes near the top of the schedule contains the following information - "The Practitioner: Malcolm Fraser Blue Name of the Firm/Company Practitioner: Fisher Jeffries." In the case of Mr Fisher, who left Fisher Jeffries in 1988, the particulars read: "The practitioner: Peter George Robert Fisher Name of the Firm/Company Practitioner: Norman Waterhouse." Another box in Mr Blue's schedule states: "Sum insured $750 000 each claim." Certain clauses in the certificate of insurance are relevant to the present question. Clause 1 (Interpretation) includes the following: "In this Certificate of Insurance unless the context otherwise requires: (a) 'the Practitioner' means the person or company named as such in the Schedule; (b) 'the Assured' means: (i) the Practitioner, the Firm and each Partner thereof or the sole Practitioner or the Company Practitioner and each Director holding a current practising certificate of the Company Practitioner as the case may be shown in the Schedule, (ii) each person employed in connection with the Practice (including each articled clerk) and each practitioner who is a Consultant or Associate with the Practitioner, the Firm or the Company Practitioner, (iii) the estate and/or the legal representatives of each of the foregoing, and (iv) each service or administration or nominee 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; . . . (e) 'the Firm' means the firm as from time to time constituted in which the Practitioner is practising and includes a sole practice; (f) 'the Company Practitioner' means the incorporated practice as from time to time constituted in which the Practitioner is practising; (g) 'Partner' includes any Practitioner held out by the Firm as a partner in the Firm; . . .' Other relevant provisions of the certificate are: "2. Insuring Clauses On the terms and the 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 ocurring [sic] 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 circumstance 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; and (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. . . . 5. General Exclusions (a) Subject to 5(b) hereof this insurance shall be subject to a Deductible of $50,000. . . . (d) This insurance shall not indemnify the Assured in respect of any loss arising out of any claim: (i) for death, bodily injury, physical loss of or physical damage to property of any kind whatsoever (other than property in the care, custody and control of the Assured in connection with the Practice for which they are responsible, not being property occupied or used by the Assured for the purposes of the Practice); (ii) for the payment of any trading debt incurred by the Assured. (iii) brought about by the dishonest or fraudulent act or omission of the Assured , save that this Exclusion shall not apply to liability arising out of any claim brought about by the dishonest or fraudulent act or omission of any person employed in connection with the Practice (other than a Director) including any articled clerk, consultant or associate." [Emphasis added] 467 Cox J then went on to deal with the interpretation question and, having identified the question, considered the general rules applicable to an insurance policy of that kind when one of two co-insured persons deliberately caused loss as by his own fraudulent conduct and his partner, not involved in the fraud in any way, made a claim on the insurance company. 468 The interpretation question was identified as follows: ' The interpretation question What is in issue in the case stated is the correct interpretation and application of the expression "the Assured" in subpar (d)(iii) of the exclusion clause. The plaintiffs say that this refers only to the individual practitioner named in the Schedule - in the case of Mr Blue, for instance, it refers only to Mr Blue himself. The defendant says that "the Assured" in subpar (d)(iii) must be interpreted in the light of cl 1 and thus, in Mr Blue's case, signifies Mr Blue and Fisher Jeffries and each of its partners. As a matter of documentary interpretation there is obviously much to be said for the defendant's submission. The purpose of a definition clause is to streamline and save space, and one would normally expect to interpret "the Assured" in subpar (d)(iii) as though the whole of the cl 1 definition were incorporated into the subparagraph itself. The relevant part of the definition speaks of "the Practitioner, the Firm and each Partner thereof" and this would seem, at least at first sight, in the case of Mr Blue, to bring in Fisher Jeffries and all of the members of the firm as well - indeed, in accordance with the definition of "Partner", would extend to any practitioner held out as a partner. However, Mr Gray QC, for the plaintiffs, submitted that the position is not as simple as that.' 469 In considering the general rules and the case law, Cox J noted that the Law Society Master Policy acknowledges that the rights and interests of any co-insured persons may not be the same. His Honour pointed out that clause 1 provided expressly that the persons or bodies constituting 'the assured' are insured severally. His Honour then continued: 'Clause 1 provides expressly that the persons or bodies constituting "the Assured" are insured severally. The insurer thus undertakes separate and distinct obligations to the co-insured: see General Accident Fire & Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 at 405-405. In Federation Insurance Ltd v Wasson (1987) 163 CLR 303 it was held that this form of insurance could have a critical bearing upon the respective rights and obligations of the insurer and the insured - in that case, the ability of one co-insured to terminate the policy unilaterally. In Lombard Australia Ltd v NRMA Insurance Ltd (1968) 72 SR (NSW) 45 it was held by the Court of Appeal of New South Wales that, in the case of such a composite policy, a hire-purchase company was entitled to recover the cost of repairing its motor vehicle notwithstanding the circumstance that the damage was caused when the hirer, its co-insured, deliberately ran it into a tree. The main point under consideration was whether the loss or damage could be described as "accidental", with respect to the hire-purchase company, and there was little discussion in point of principle about the possible disqualification of an insured by reason of the fraudulent or other criminal act of a co-insured. However, there are other decisions to the same effect. There does not appear to have been any exclusion clause that was relevant to the issue in Lombard's case.' 470 Cox J then considered six decisions, namely V.L. Credits Pty Limited v Switzerland General Insurance Co Limited (1990) VR 938, P. Samuel & Co Limited v Dumas (1924) AC 431, Rankin v North Waterloo Farmers Mutual Insurance Co (1979) 25 OR (2d) 102, Higgins v Orion Insurance Co Ltd (1985) 17 DLR (4th) 90, Homes v GRE Insurance Limited (1988) TAS R. 147 and Maulder v National Insurance Company of New Zealand Limited (1993) 2 NZLR 351. 471 In the light of these authorities, Cox J formed the view that it was appropriate to hold: 'First, that under a composite policy, such as the Law Society's Professional Indemnity Policy, the fraudulent act of an insured person will not, without more, entitle the insurer to refuse to indemnify an innocent co-insured and, secondly, that any exclusion clause will not likely be read as providing otherwise. While in the end the terms of the policy will be decisive, the mere use of the expression "the insured" in an exclusion clause will not necessarily be enough to disqualify the innocent co-insured.' 472 The Trustees submitted as follows: 'The manner in which the Trustees seek to use Gilmore, is by reference to the definition in Gilmore of "Assured" which relevantly included the firm and each partner, where the insurances were several and individual certificates of insurance were issued to each of the assured partners. Gilmore concerned liability arising from the dishonesty of one partner. The relevant exclusion was in respect of the dishonesty of the assured. On the Trustees' submission, the policy before the Court in Gilmore follows a format and a statutory scheme similar to the Queensland scheme so that the Trustees submit that the principles of construction are particularly applicable to the policies now before the Court. The Trustees point out that the Full Court of the Supreme Court of South Australia held that, although if one just had regard to the definition of 'Assured', one could see that one could read the definition of partner of the assured into the exclusion clause, having regard to the Certificates which were issued, that construction was not the construction which ought be adopted. The Trustees now submit that in applying the contra proferentem rule, reference to the 'assured' in the exclusion clause means only the individual practitioner and the firm. The Trustees draw attention to the holding in Gilmore that the firm itself was not dishonest as distinct from the individual partner, nor was the individual assured, and hence to the decision that the exclusion clause did not apply. The burden of the Trustees' claim is that one is dealing with an exclusion clause which here is said to exclude indemnity in respect of liability brought about by a dishonest act or omission. The Trustees posit that one assumes a dishonest act giving rise to a liability and an act which gives rise to a liability which is not dishonest. The Trustees' submission is that each of those acts is an effective cause of the loss so that: (i) all that is excluded from the indemnity is liability arising from the dishonest act; (ii) one is left with an effective cause of the loss being a liability which is not the subject of an exclusion.' 473 In my view, enough of the decision in Gilmore has already been set out to make plain that at least in relation to the dishonesty exclusion before me, the relevant clause was in quite different terms to that treated with in Gilmore. The relevant insurance term in General Exclusion paragraph 5(e)(v) expressly refers to 'the Insurance . . . not indemnifying the Assured in respect of any liability brought out by the dishonest or fraudulent act or omission of the assured including any partner or former partner of the assured'. 474 Particularly important as it seems to me, was the reliance placed by Cox J upon the saving clause in sub-paragraph (iii) of paragraph (d) of the exclusion clause there under consideration. The reasoning was as follows: ' The exclusion clause in the Law Society's form of policy I return to the certificate of insurance in question and on the assumption (which the plaintiffs challenge) that the expression "the Assured", in the case of Mr Blue's certificate for instance, effectively refers to Mr Blue and also to his partners in Fisher Jeffries. The question is whether this is what the expression means in subpar (iii) of par (d) of the exclusion clause. Mr Walsh QC, for the defendant, did not dispute that the insurance here was several. Nor, as I understood his submission, was he concerned to challenge the correctness of the decisions in North America and New Zealand and Australia on which Mr Gray relied. Rather, he said, there is no room here for the modern benign interpretation of a composite policy, preserving the rights of an innocent co-assured, in view of the terms of this particular exclusion clause. In my opinion, the defendant's submission, as a general proposition based upon the pro forma policy, must be upheld. When a certificate of insurance under the Law Society scheme insures a practitioner, his firm and his partners, as shown in the schedule of the certificate of insurance, that will identify "the Assured" referred to in subpar (iii). I do not accept Mr Gray's submission that the reference to "the Assured" in the exclusion clause is unapt to bring in "the Practitioner, the Firm and each Partner thereof" because it links those constituents of the Assured conjunctively, not disjunctively (unless, I suppose, all of the partners have been involved in the relevant act of dishonesty). More to the point, I think, is the saving clause in subpar (iii): ". . . save that this Exclusion shall not apply to liability arising out of any claim brought about by the dishonest or fraudulent act or omission of any person employed in connection with the Practice (other than a director) including any articled clerk, consultant or associate." If the plaintiff's argument is sound there is no need at all for a general exception in the case of employees. The implication to be drawn from the exception is that, without these words, persons employed in connection with the practice would otherwise have been included, and that of course is what would happen if the effect of using the expression "the Assured" in subpar (iii) is to bring in all the relevant parts of the cl 1 definition." 475 Once one adverts to the saving clause, it became patently clear simply as a matter of the proper construction of the express words in sub-paragraph (iii) of paragraph (d) of the exclusion clause, that the wording of the Certificate, in particular sub-paragraph (iii), indicated an intention not to indemnify a partner against loss occasioned by the dishonest or fraudulent acts or omissions of a fellow partner, including a person who was a partner at the time the loss was incurred. Yet a further indicator to that effect was found by Cox J in the qualification in parenthesis with respect to a director. As Cox J said: 'The director of an incorporated practice - the "Company Practitioner" as the certificate describes it - will almost invariably be an employee of the practice as well. It would be anomalous to deny the innocent partners of a dishonest practitioner a right to indemnity under the policy but to allow recovery in the corresponding case of the innocent directors of a company practitioner - hence, I conclude, the director qualification to the general exception with respect to employed persons. In my opinion, the wording of the certificate, in particular subpar (iii), indicates an intention not to indemnify a partner against loss occasioned by the dishonest or fraudulent acts or omissions of a fellow partner including a person who was a partner at the time the loss was incurred. The indicators to that effect are strong enough, I consider, to oust the liberal interpretation which might otherwise be given to the policy in accordance with the modern trend of authority. If there were any real doubt or uncertainty about the proper interpretation of the exemption clause I would apply those cases I have cited to the plaintiff's benefit in accordance with the contra proferentum rule, but I think the meaning of the certificate in the relevant respects is too clear for that.' 476 To my mind, the wording of the exclusion clause under consideration in Gilmore is clearly distinguishable from the known claims circumstances clauses presently requiring to be construed. 477 The Trustees sought to gain particular assistance from an application of the contra proferentem rule. Their submissions included the following: 'The Trustees submit that the decision in Gilmore applies by parity of reasoning to the construction of the known claims or claims circumstances exclusion so as to require that the claims circumstances must be known to the separately or severally insured. The known claims or claims circumstances exclusion does not specify who must have the requisite knowledge. The widest construction of the clause would require that the knowledge be had by anyone falling within the definition of "the Assured". That would have the consequence that an insured partner who was not personally aware of the relevant circumstances would not be covered because another partner (or other person falling within the definition "the Assured") did. It would mean that Mr Isles - who had retired as of 1 July 1990 - would not be entitled to indemnity because someone else, who was insured under a relevant certificate or the composite policy (as the case may be), did. In circumstances where the exclusion was clearly inserted by the Insurers the exclusion should be construed contra proferentem so as to entitle the Insurers to decline indemnity only to an "Assured" who had knowledge of the relevant circumstances. The relevance of the decision in Gilmore is heightened for Years 2 and 3. In each of those years, each partner was the recipient of, and named in, an individual Certificate of Insurance. In the Trustees' Submission, the consequence is that the facts are relevantly indistinguishable from those considered in Gilmore, so that the reasoning of Cox J must be applied. Further, the failure to specify, in the known claims or claims circumstances clause, whose knowledge was to be regarded as relevant highlights the significance of the application by Cox J of the contra proferentem rule.' 478 Gilmore being clearly distinguishable from the present clauses under consideration, I do not accept the Trustees' submission that it is possible to extrapolate from the reasoning in Gilmore to the findings for which the Trustees' contend. Holding on the construction issues 479 In my view, the question of construction must take into account the constituent documents including the Proposal. As made plain in the judgment of Sir Wilfred Greene M.R. in General Accident Fire and Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 at 407-408, words in a printed form must be given a construction which 'fits in' with the 'essential nature' of the contract in question. 480 This is not the first case involving difficult questions of construction of a composite contract of insurance. As pointed out by Gaudron in Federation Insurance Ltd v Wasson (1967) 163 CLR 303 at 318-319: 'The consideration that the policy encompasses separate obligations with respect to the different insurance parties, or separate insurances of the separate interests of the insured parties does not mean that every right and obligation provided in the policy should be construed as a separate right or obligation inhering in each of the insured parties'. 481 In the same case at 309-311, Mason CJ and Wilson, Dawson and Toohey JJ made plain that a composite policy may call for a distributive application of its terms in certain contexts, but not in others. 482 In Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606 at 619 the majority consisting of Mason CJ and Dawson, Toohey and Gaudron JJ said: 'But we should point out that, even in the case of a composite contract, some obligations are joint so that it is impossible to treat the contract of insurance as involving separate contracts: see Deaves v CML Fire & General Insurance Co Ltd; Federation Insurance Ltd v Wasson; United Shoe Machinery Company of Canada v Brunet.' 483 As the Insurers submitted: '[d]ifferent considerations apply, depending upon the essential nature of the insurance contract in question, whether one is considering the right to cancel the policy, the obligation to pay the premium or the insurer's right to deny indemnity for fraudulent non-disclosure or dishonesty. In each case, the issue is one of construction.' 484 In my view, the correct approach to the issue of construction requires the Court in construing a commercial document to give a common sense and workable construction. The construction issue requires to take into account the wording of the Proposal. When one takes into account the wording of the Proposal it becomes quite plain that the person making the declaration and seeking the cover on behalf of all the partners is required to ascertain the extent and nature of the separate knowledge of each of the partners as to relevant circumstances which may give rise to a claim. The question asks 'Are you or any of the partners aware after enquiry . . .'. It would make no sense of the Proposal if the Policy wording, including the Special Condition and General Condition 4(b) were to be construed in a way which rendered it unnecessary for the Proposal to have sought from the proponent, information as to the state of knowledge of other partners of circumstances which may give rise to a claim. 485 Reverting for a moment to the facts, which show that the parties approached their dealings in a manner consistent with this construction, Mr Scanlan's evidence was that at the time of the renewal for insurance, a memorandum would be circulated to the partners in the firm, asking them to respond as to whether or not they knew of any claims or claims circumstances. 486 To my mind, but acknowledging that the matter is not beyond doubt, the better view is that the reference to a claim against the Assured should be given its wide meaning under Clause 1(a) of the Certificate of Insurance as referring to the firm and each partner - that is to say, as referring to a claim against the partnership or against any member. On this approach, the reference in Clause 4(b) to 'the Assured [who] is or shall become aware' of circumstances, is likewise a reference to the firm and each partner. This approach caters for the need to import the definition of "the Assured" as found in the "Interpretation" section [Clause 1(a)] of the Certificate of Insurance, into the construction of the words "of which the Assured is or shall become aware" in General Condition 4(b). It takes into account the wording in the Proposal. In short, the better view is that the word "Assured" in the general condition requires to be given the same meaning as that provided for in the definitional provision. 487 I note that in the light of the factual finding that by 22 June 1990 on the probabilities, all of the partners had become aware of the existence of circumstances which were capable of giving rise to a claim of the nature of that later pursued by the Trustees in the Cleary and Hoare proceedings 5870 of 1994, this issue does not arise. Whilst the matter is not beyond doubt, on the better view the proper construction of the known claims or claims circumstances exclusion does not require that the claims circumstances must be known to each and every one of the separately or severally insured. 488 Finally, in my view, there was only one policy between the firm on the one hand and the Insurers on the other being a composite contract of insurance under which each partner was severally insured. One Claim/Two Claims 489 This issue arises out of proviso (a) to clause 2 – the so called "Insuring Clauses". That proviso requires that "all claims arising from the same act or omission, whether made against one or more Assured, shall be regarded as one claim". The proviso focuses attention on the identification firstly of the claim or claims and secondly of the circumstances – which must be characterised as "the same act or omission" to enliven the proviso – from which those claims arise. 490 The meaning of the word "claim" is one which has caused difficulty in insurance law. Cases on the subject were cited and analysed by in Schipp at paragraph 946 and following. The conclusion at paragraph 958 was put as follows: "The meaning of the word "claim" is ultimately a question of the construction of the policy. Previous decisions as to the meaning of the word claims in the context of different policies provide only limited assistance". 491 I accept as correct the Trustees' submission that in the context of clause 2, the word "claims" in proviso (a) must have the same meaning as it has in the body of the insuring clause. In that context, it is clear that what is referred to is a "claim or claims…against the Assured": that is to say, an assertion of an entitlement to compensation or restitution made by a third party (in this case by or derivatively on behalf of a client) against the Assured. 492 The authorities suggest that the word "claim" cannot be identified with "cause of action"; and that the formulation of the claim by the party making it cannot be decisive of the rights and liabilities of the party to the insurance contract [See West Wake Price & Co v Ching [1957] 1WLR 45, 57; see also Haydon v Lo & Lo [1997] 1WLR 198, 206; see also Thorman & ors v New Hampshire Insurance Co (UK) Ltd & anor [1988] 1 Lloyd's Rep 7, 16]. 493 The question of the number of claims is dependent upon the underlying facts [Haydon at 204; Thorman at 16; Schipp at paragraph 964.] Further, or alternatively, the assessment of the number of claims may be undertaken by the extent to which damages in respect of each alleged claim can be isolated [See Thorman at 11-12; see also Schipp at paragraphs 966-967]. 494 Where there are separate and distinct causes of action giving rise to the same loss or damage – as was the case, for example in Schipp [See the factual analysis commencing at paragraph 66, noting in particular the alternative analysis at paragraphs 672 to 674] - it is easy to understand why there is only one claim. Where however there are separate and distinct causes of action leading to separate and distinct heads of loss or damage then it is not easy to understand why there is but one claim. Further, and a fortiori where there are separate and distinct of causes of action relating to separate and distinct transactions and leading to separate and distinct loss or damage, then there is, I accept, no basis in reason or principle for finding that there is but one claim. 495 The Trustees sought to illustrate the point by reference to the facts in Haydon. A fraudulent clerk, Yim, defrauded two estates: the Tang Estate and the Tso Estate. The fraud in respect of the Tang Estate was perpetrated over a period of two years by 43 separate acts of theft which fell within four separate groups. A claim was brought by the Estate against the solicitors for compensation or restitution in respect of the aggregate of Yim's thefts. It was not necessary (in terms of pleading a complete cause of action) for each and every one of the thefts to be pleaded and particularised; but if less than 43 had been pleaded and particularised, and judgment recovered, the Estate would have been estopped, on the principle discussed in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, from pursuing a claim for the balance – unless, perhaps, it could establish that it was not unreasonable for it so to act [Cf. Boles v Esanda Finance Corporation Limited (1989) 18 NSWLR 666]. 496 I accept as correct the Trustees' submission that in the present case, it would have been open to the Trustees to sue Cleary & Hoare only in respect of the PMA1 transaction. I accept that a judgment for or against the Trustees would not have prevented the Trustees thereafter from suing Cleary & Hoare in respect of the PMA2 transaction. [This is clear from the analysis of Anshun in the judgment of Samuels JA in Boles; see in particular 18 NSWLR at 670, 672 – 673]. I accept that this is because the causes of action in respect of the PMA1 and PMA2 transactions are in law separate and distinct. 497 The relevant facts are essentially undisputed. The evidence of the two retainers is found both in the statements of Messrs Scanlan and Cleary [Exhibits PX4(R) and PX6(R)], and in the correspondence contained in Exhibit DX volumes 1 and 2. I accept that that evidence shows that there were separate retainers of Cleary & Hoare for the PMA 1 and PMA 2 transactions [indeed, as the Trustees pointed out, it could be said that there were separate retainers for the various stages of the PMA 1 transaction. I note however that the Trustees do not suggest that this means that the PMA 1 judgment debt should be regarded as anything other than one claim.] 498 I accept as correct the Trustees' submission that the pleading of the case against Cleary & Hoare reflects the legal reality [See the further amended statement of claim exhibit PX1, volume 2, tab 42. There is nothing in the antecedent versions of the pleading which puts the claim on any different basis: see exhibit DX volume 3 (prior proceedings) tabs 1, 3.] 499 The judgments which were recovered are separate reflecting the separate claims. I accept that the Trustees can hardly be criticised for taking the judgments in a way which would not prevent or shut out their prospects of success [See the evidence of Mr Connor at transcript day 7, page 256, lines 40-52]. I accept as reliable Mr Connor's evidence that the reason why separate judgment debts were entered was that the view of the Trustees' legal advisers was that there were two claims and that 'we [which I take to be a reference to the Trustees acting on legal advice] wanted to ensure a [sic] settlement did not prevent . . . or shut out that issue' [transcript 256]. 500 I accept that there is no legal or factual connection between PMA 1 and PMA 2, in the sense that the latter in no way, legally or factually, depends upon, or assumes the existence of, the former. The case is plainly distinct from that presented in Schipp where the integral relationship between the various steps of the scheme, and the overarching nature of the deception practised on Mrs Schipp, was clearly explained in the judgment [See in particular paragraphs 666-671 and the alternative analysis in paragraphs 672-674.] In the present case, it is, I accept, entirely conceivable that the Trustees could have succeeded on one claim but not, for some reason or other, on the other: if there were but one claim then this could not be the case. 501 The only basis on which it can be suggested that there might be one claim is that the PMA 1 and PMA 2 transactions formed part of one overall scheme to defraud BPTC, and that Cleary & Hoare knew of and were an integral part of that scheme. Not even the Insurers put a case of such startling width: either in opening or in cross-examination of Messrs Scanlan and Cleary. The most that can be put is that Cleary & Hoare were guilty of consecutive but relevantly unrelated breaches of fiduciary duty, in consecutive but relevantly unrelated transactions, because in each case they preferred the interests of one client by not disclosing material information to the other client. I accept that the factual similarity of the breaches cannot convert two transactions into one, two causes of action into one, or two separate claims of loss into one. 502 Suppose that in PMA 1 the loans had been funded by Trusts A, B and C; and that in PMA 2 the loans had been funded by Trusts X, Y and Z (each being a separate and distinct trust but having BPTC as Trustee). The Trustees ask: 'Could it be said that, in those circumstances, there was but one claim?' The answer, I accept, must be "no". How then can the absence of that factual element convert two claims into one? The answer, I accept, is that it can not. 503 In my view, there having been separate and distinct causes of action leading to separate and distinct heads of loss or damage, the situation gave rise to two claims. The Breach of Contract Claim : Clause 4(b) - For Years 2 and 3 504 The Insurers pleaded this cause of action against the possibility that the exclusion for known claims circumstances was said by the Trustees to have had no contractual force. No submissions were advanced by the Trustees to this effect. In the result and as foreshadowed by Mr Pembroke at transcript of 13 August 1999 page 190, it is unnecessary to deal with this issue which was ultimately not litigated. Insurance Contracts Act 1984 s.54: Election 505 The Trustees' claims having failed by reason of the dishonesty exclusion, it becomes unnecessary to deal with the Trustees' claimed reliance upon Section 54 of the Insurance Contracts Act. The $500,000 cross-claim 506 By this cross-claim, the 1990/1991 primary insurers seek to recover the amount of $500,000 paid on account of indemnity rights of Cleary & Hoare in relation to the first Settlement Agreement entered into on 29 October 1997. 507 The Insurers claim that the payment was made by the 1990/1991 primary insurers on account of any indemnity rights which Cleary & Hoare may have. The submission is that it was paid in order to allow Cleary & Hoare to settle their differences with the Trustees in a manner favorable to them. The Insurers' submission is that at the time the payment was made, the 1990/91 primary insurers had not denied indemnity to Cleary and Hoare and were not aware of all the circumstances upon which they now rely to support their subsequent denial of indemnity and to establish that Cleary and Hoare acted dishonestly. 508 It is clear from the evidence of Mr O'Connor that the payment was made by Cleary and Hoare's then solicitors, Maddock Lonie & Chisholm. Although apparently the primary layer insurers were the source of those funds, and in this respect I accept the evidence of Mr Connor at transcript pages 256-257, they were paid to Cleary & Hoare or more accurately at, I infer, the direction of Cleary & Hoare to Maddock Lonie & Chisholm. I accept the Trustees' submission that it was in fact Cleary & Hoare who, through their solicitors, made the payment to the Trustees. 509 By letter dated 28 October 1997 Ebsworth & Ebsworth wrote to Baker & McKenzie advising inter alia: 'Our clients have instructed us to inform you that they do consent to the Solicitors and Scanlan entering into the Settlement Agreement and Deed of Assignment by way of Security. This consent is given on the basis that it is the understanding of our clients, the Solicitors and Scanlan that the payment of $500,000 made pursuant to clause 5 of the Settlement Deed is a commercial payment only and does not constitute and is not capable of constituting an admission that the Solicitors and Scanlan are entitled to indemnity pursuant to or that there are two claims under either the 1989/90 or 1990/91 Primary and Excess Policies of insurance.' 510 The Trustees submit that at the time the Insurers made the payment to Maddock Lonie & Chisholm they determined to make a 'commercial payment' and that in the context of the circumstances of which the Insurers were then aware, it is presently impossible for the Insurers to maintain that the Trustees have been unjustly enriched at the expense of the Insurers. 511 The matter is said to turn on whether or not at the time the payment was made the 1990/91 primary insurers who had not denied indemnity to Cleary & Hoare, were or were not aware of all the circumstances upon which they now rely to support their subsequent denial of indemnity and to establish that Cleary & Hoare acted dishonestly. 512 Ultimately it seems to me that the Trustees' submissions are correct. It is true that the 1990/91 excess insurers had denied indemnity to Cleary & Hoare at the time the payment was made and that one might focus on the bases which it may be argued, underpinned that denial. However, the Insurers made a commercial decision in a complex factual position and at a time when the precise facts were in a state of some uncertainty. It was known that the funds would be paid to the Trustees. 513 It follows it seems to me, that the Trustees cannot be said to have been unjustly enriched by receipt of the sum of $500,000 and that it cannot be said to be unconscionable for them to retain that sum. 514 The $500,000 amount was paid in order to allow Cleary & Hoare to settle their differences with the Trustees in a manner favorable to them. It does not seem to me that there is an element of injustice here involved which is sufficient to establish a restitutionary claim. The Good Faith Proceedings 515 As earlier indicated in the Judgment, the good faith proceedings were only relevant should the Court find, contrary to the position of the insurers, that Cleary & Hoare were entitled to indemnity under their 1991/92 policies. In this regard I note that the first bracket of evidence given by Mr Hoare, the evidence given by Mr Connor and the evidence given by Mr Murphy, save for two matters relating to Mr Connor, went essentially to the issues raised in the good faith proceedings. The matters relating to Mr Connor involved first, a few questions put to him on the 'one claim/two claims' issue [ - See the reference to this evidence under that heading in the Judgment] and secondly his acceptance in relation to the $500,000 cross-claim, that the moneys were paid at source by the primary insurers [see the reference to this evidence under that heading in the Judgment]. 516 As no finding has been made that Cleary & Hoare were entitled to indemnity under their 1991/92 policies, it seems to me unnecessary to proceed to determine the good faith proceedings. For the same reason, it seems to me, strictly unnecessary to set out the initial evidence of Mr Hoare, the evidence of Mr Murphy and that of Mr Connor going to these matters. I note that having raised this question with the parties, I did not understand any party to submit that save for the reference to part of Mr Connor's evidence already set out, any answers given by those witnesses may be suggested as going to issues outside the good faith proceedings. 517 I do propose, however, to grant leave to the parties, having the benefit of all of the above reasons, to address submissions as to the need or utility in the Court notwithstanding the findings, to proceed to determine the good faith proceedings. Jones v Dunkel - The position of Mr Lacey 518 The Trustees submitted that on the evidence, the Court should find that BPTC was well aware that both Weltsbarrd and Yossarian were companies associated with EMM. On the evidence, I make no such findings. To the contrary, my finding on the evidence is that BPTC was unaware that Weltsbarrd and Yossarian were companies associated with EMM. 519 Exhibit DX1 includes an exchange of correspondence between Ebsworth & Ebsworth, the solicitors for the Insurers and Baker & McKenzie, the solicitors for the Trustees. By letter dated 5 August 1999, Ebsworths wrote to Baker & McKenzie stating, inter alia: ' As to Brian Lacey We understand that Mr Pembroke SC and Mr McDougall QC have discussed the relevance of Mr Lacey's evidence. We confirm that the relevance of Mr Lacey's evidence is only to the fact that the alleged dishonest conduct of the insured "brought about" the liability constituted by the PMA 1 and PMA 2 Judgment Debts. If that is not a fact in issue in the proceedings, please let us know. If it is, and you wish to cross-examine Mr Lacey, please let us know and ensure that any documents on which you will rely in your cross-examination, are included in the bundle or otherwise advised to us. It is not satisfactory, nor in accordance with the Court's orders, for you to hold back documents on which you are relying in any way, especially any document of which we are unaware'. 520 The responsive letter of the same date from Baker & McKenzie to Ebsworths stated, inter alia: 'Brian Lacey. We note you comment as to the relevance of Mr Lacey's evidence. In response we advise that our clients contend that the losses reflected in the PMA 1 Judgment Debt were caused by the conduct of the solicitors as pleaded expressly or by incorporation in paragraph 46 of the further amended statement of claim in the Supreme Court of Victoria proceedings no 4870 of 1994. It is also contended that the losses reflected in the PMA 2 Judgment Debt were caused by the conduct of the solicitors pleaded expressly or by incorporation in paragraph 56 of the further amended statement of claim in the Supreme Court of Victoria proceedings no 5870 of 1994. Our clients accept that if in either or both cases such conduct of the solicitors is found to have been dishonest (which dishonesty is not admitted by the trustees) that the necessary causal link will have been made out . Please let us know whether in light of the above you intend to proceed with Mr Lacey's evidence.' [Emphasis added] 521 By letter dated 10 August 1999 Ebsworths wrote to Baker & McKenzie stating, inter alia: 'In relation to Mr Lacey, in light of the concession made in your letter dated 5 August 1999, we advise that we do not propose to read his statement.' 522 By letter dated 10 August 1999, Baker & McKenzie wrote to Ebsworths advising, inter alia: 'We advise that we do require Mr Lacey for cross-examination. The ambit of the cross-examination will be limited and we do not expect it to involve any documents which are not already in the plaintiffs' or defendants' bundles of documents.' 523 In opening the case, Mr McDougall at transcript page 5, stated 'I don't propose to cross-examine Mr Pembroke's witnesses. In relation to one of them, we've reached an agreement which renders it unnecessary to call him.' I understand Mr McDougall to have there been referring to Mr Lacey's statement. 524 At transcript page 18 on 11 August 1999 in opening, Mr McDougall said inter alia: 'We said in the proceedings in Victoria that, by reason of their retainer by the trustee, the solicitors came under a fiduciary obligation to disclose to the trustee information in their possession relating to the equity sharing agreement. By reason of their retainer in relation to that agreement they were under a fiduciary obligation to the other client not to do so. They placed themselves in a position of conflict of interest and duty, or more accurately, of duty and duty and as a result the trustee suffered loss which we sued to recover. Now that isn't in dispute . . .' 525 In final submissions at transcript page 208 on 30 August 1999, I enquired of Mr McDougall in relation to the recent decision of the Court of Appeal in McCann. The following appears in the transcript: 'His Honour: Now, in so far as the decision deals with proximate cause and matters not going specifically to definitions of dishonesty in the ambit of East End or Schipp v Cameron, or Justice Hunter's decision, what are the parameters, if any, in relation to this case which raise proximate cause which may be affected by the Court of Appeal Judgment, or are there none really in the way the case has been run? McDougall: There is really no question of proximate cause in the sense that there is a concession by us that if dishonesty of the relevant kind is found, then the loss that resulted, or the loss that BPT suffered, was the result of that dishonesty.' 526 Paragraphs 40.1, 40.2 and 40.3 of the Trustees' final submissions sought to raise questions of fact going to BPTC's alleged knowledge that both Weltsbarrd and Yossarian were companies associated with EMM. 527 Paragraph 41 of the Trustees' final submissions are then in the following terms: 'There has been no evidence to rebut the matters of fact referred to in paragraphs 39 and 40, although Mr Lacey at least was, apparently, available as a witness.' 528 To my mind, the concession made by the Trustees' solicitors in the correspondence, part of Exhibit DX1 to which I have referred and in the sections of the transcript to which I have referred, make plain that the Trustees have not litigated or called a case to the effect that BPTC was aware that Weltsbarrd and Yossarian were companies associated with EMM. Had that matter been appropriate to have been litigated, it would have been necessary for Mr Lacey's statement to have been read by the Insurers and for Mr Lacey to have been cross-examined on that statement. I accept that the Insurers did not read the statement by reason of the concession. Clearly implicit in the concession was that BPTC was not aware that Weltsbarrd and Yossarian were associated with EMM. The statement became part of Exhibit DX1 not for the purpose of proving the content of the statement but for the purpose of proving that the statement was available to have been read by the Insurers but for the concessions. 529 I draw no inference from the Insurers' failure to read and rely upon the statement of Mr Lacey. Short Minutes of Order 530 The proceedings will be stood over for a few days to permit the parties an opportunity to prepare short Minutes of Order, to address submissions on any matters which it may be suggested remain to be dealt with and for the purposes of argument in relation to costs. Reserved Judgment 531 I am conscious of the fact that the tender of the documents comprising DX9 followed rulings after a contest on legal professional privilege. A reserved judgment on that matter is being prepared and will be handed down shortly. ****** Appendices 1 to 8 are available from the Supreme Court Registry Last Modified: 10/13/1999 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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