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IPG Finance Australia Pty Ltd v Crouch and Lyndon (a firm)

 

[2012] QSC 312

 

 

SUPREME COURT OF QUEENSLAND

 

PARTIES:

FILE NO/S:

Trial

PROCEEDING:

Claim

DELIVERED ON:

15 October 2012

DELIVERED AT:

Brisbane 

HEARING DATE:

16 – 20 April 2012, 23 April 2012, 12 – 15 June 2012, 28 June 2012

JUDGE:

Boddice J

ORDER:

1. The parties are to prepare minutes of orders in accordance with the reasons.

CATCHWORDS:

PARTNERSHIP – RIGHTS AND DUTIES – PARTNERS AND THIRD PARTIES – GENERALLY – where the plaintiffs obtained services from the first defendant, through the second defendant, in respect of a number of commercial loans – where the first defendant is a firm of solicitors – where the second defendant pleaded guilty to two counts of fraud, as a trustee, and one count of forgery in relation to conduct whilst a partner of the first defendant – where the fraudulent conduct included the creation of sham loan transactions – where the plaintiffs claim to have suffered loss and damage as a consequence of the second defendant’s conduct – where the plaintiffs claim the second defendant’s conduct constitutes wrongful acts undertaken whilst the second defendant was acting in the ordinary course of the business of the first defendant – where the first defendant claims the second defendant’s conduct was without authority, was unlawful, and amounted to a criminal frolic – where the first defendant contends each transaction was undertaken by the second defendant without the knowledge or authority of the other partners of the first defendant – whether the first defendant is liable, pursuant to ss 13 and 14 of the Partnership Act 1891 (Qld), for the wrongful acts of the second defendant

PARTNERSHIP – ACTIONS BY AND AGAINST PARTNERS – ACTIONS AND PROCEEDINGS AGAINST FIRM AND INDIVIDUAL PARTNERS – where the plaintiffs obtained services from the first defendant, through the second defendant, in respect of a number of commercial loans – where the first defendant is a firm of solicitors – where the second defendant pleaded guilty to two counts of fraud, as a trustee, and one count of forgery in relation to conduct whilst a partner of the first defendant – where the fraudulent conduct included the creation of sham loan transactions – where the plaintiffs claim to have suffered loss and damage as a consequence of the second defendant’s conduct – where the plaintiffs claim the second defendant’s conduct constitutes wrongful acts undertaken whilst the second defendant was acting in the ordinary course of the business of the first defendant – where the first defendant claims the second defendant’s conduct was without authority, was unlawful, and amounted to a criminal frolic – where the first defendant contends each transaction was undertaken by the second defendant without the knowledge or authority of the other partners of the first defendant – whether the first defendant is liable, pursuant to ss 13 and 14 of the Partnership Act 1891 (Qld), for the wrongful acts of the second defendant

TORTS – NEGLIGENCE – GENERAL MATTERS – where the plaintiffs allege the first defendant owed them a duty to exercise reasonable care, skill and diligence whilst undertaking legal services on their behalf – where the plaintiffs allege they were vulnerable to suffering financial loss if the first defendant failed to exercise reasonable care and skill in undertaking work on behalf of the plaintiffs – where the plaintiffs allege the first defendant breached that duty – whether the first defendant is liable in negligence

Trade Practices Act 1974 (Cth), s 6(3)(a), s 52

Partnership Act 1891 (Qld), s 13, s 14

Uniform Civil Procedure Rules 1999 (Qld)

Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441

Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366

JJ Coughlan Ltd v Ruparelia [2003] EWCA Civ 1057

National Commercial Banking Corp of Aust Ltd v Batty (1986) 160 CLR 251

Oscar Chess Ltd v Williams [1957] 1 WLR 370

Re Bradford Roofing Industries Pty Ltd (in liq) (1967) 70 SR (NSW) 13

Walker v European Electronics Pty Ltd (in liq) (1990) 23 NSWLR 1

COUNSEL:

LF Kelly SC, with DJ Pyle, for the plaintiffs

RS Ashton, with J Meredith, for the first defendant

SOLICITORS:

Clayton Utz for the plaintiffs

Mullins Lawyers for the first defendant

[1] Boddice J: The plaintiffs are involved in the business of commercial lending.  The first defendant is a firm of solicitors.  Between 2006 and 2008, the plaintiffs obtained services from the first defendant, through the second defendant, in respect of a number of commercial loans.  The partners of the first defendant, at the time, were the second defendant and Philip Bruce Scott. 

[2] The plaintiffs claim to have suffered loss and damage as a consequence of the second defendant’s conduct in providing these services.  They alleged this conduct was deceitful, in breach of warranty, misleading and deceptive, and/or in breach of the first defendant’s duty of care.  They claim this wrongful conduct was undertaken in the ordinary course of the first defendant’s business, and that the first defendant is liable for the plaintiffs’ loss and damage.

[3] The first defendant denies it is liable for the second defendant’s conduct.  It alleges the conduct was not authorised by the partnership, and involved illegal conduct engaged in by the second defendant as a criminal frolic of his own, not as part of the ordinary course of business of the partnership.

Background

[4] The second defendant joined the first defendant as an employed commercial solicitor in early 1997. At that time, Mr Scott had also recently been employed by the first defendant, as a litigation solicitor. The first defendant’s partners were Timothy Crouch, Christopher Lyndon and Drew Squires. 

[5] In 1998, the second defendant and Mr Scott became partners of the first defendant.  Messrs Crouch, Lyndon and Squires also remained partners. In 2002, Messrs Lyndon and Squires retired as partners.  Mr Crouch retired as a partner on 30 June 2005.  From thereon, the first defendant operated with only the second defendant and Mr Scott as partners.

[6] Hani Salameh and James Winder are the individuals responsible for decision-making on behalf of the plaintiffs.  They were introduced to the second defendant in late 2002 when the first defendant undertook legal work for another of their corporate entities.  Thereafter, the first defendant acted as the Queensland solicitors for various companies associated with Mr Salameh and Mr Winder, including the plaintiffs. The second defendant was the only partner of the first defendant who undertook legal work on their behalf, although in mid 2006 they had contact with Mr Scott as a consequence of some litigation over a property development in Fortitude Valley.

[7] Between 2002 and 2008, the first defendant provided legal services to various entities associated with Mr Salameh and Mr Winder.  Those entities included the plaintiffs.  Among the legal services provided to the plaintiffs was the preparation of agreement and security documentation for commercial loans advanced by the plaintiffs to borrowers identified by the second defendant. These transactions involved the plaintiffs paying the loan funds into the first defendant’s trust account. The borrowers also paid interest, and repaid the principal sum, into the first defendant’s trust account.

[8] In mid-2008, the second defendant’s practicing certificate was suspended by the Queensland Law Society (QLS), following an investigation into the first defendant’s trust account. This investigation identified a number of irregularities, including alleged fraudulent conduct by the second defendant. The second defendant’s practicing certificate was cancelled in late August 2008.

[9] On 10 February 2011, the second defendant pleaded guilty to two counts of fraud, as a trustee, and one count of forgery.  He was convicted and sentenced to 10 years’ imprisonment.  These offences arose out of fraudulent conduct whilst a partner of the first defendant.  That fraudulent conduct included the creation of sham loan transactions.  These transactions included monies advanced by the plaintiffs.

Pleadings

[10] The plaintiffs allege the first defendant, by the second defendant, represented to the plaintiffs that as part of its business the first defendant arranged finance between borrowers and lenders sourced by the first defendant, and had done so “for years”. 

[11] These loans were represented to be arranged on the basis that the first defendant would consider the viability of the proposed transaction and, if viable, would recommend the borrower to clients of the first defendant. All loans were to be secured on terms to be agreed with the assistance of the first defendant. The first defendant would prepare all necessary loan and security documentation, and would only disperse the loaned funds, paid to the first defendant’s trust account, after execution of that documentation.  The first defendant’s trust account would also be the vehicle for payment of interest, and repayment of the principal sum (“the representation”).

[12] The plaintiffs allege that in reliance upon the representation, they entered into loan transactions with borrowers identified by the first defendant, through the second defendant.  It is alleged each loan was a sham.

[13] The plaintiffs allege the conduct of the first defendant, through the second defendant, in making the representation and undertaking the sham loan transactions, was deceitful, in breach of contractual warranties, involved the use of telephonic services within the meaning of s 6(3)(a) of the Trade Practices Act 1974 (Cth), and misleading and deceptive within the meaning of s 52 of that Act.  The plaintiffs claim that as a consequence, the plaintiffs suffered loss and damage.

[14] The plaintiffs claim the second defendant’s conduct constitutes wrongful acts undertaken whilst the second defendant was acting in the ordinary course of the business of the first defendant, and the first defendant is liable, pursuant to ss 13 and 14 of the Partnership Act (Qld) 1891.

[15] The plaintiffs further allege they were vulnerable to suffering financial loss if the first defendant failed to exercise reasonable care and skill in undertaking work on behalf of the plaintiffs, and that the first defendant owed the plaintiffs a duty to exercise reasonable care, skill and diligence whilst undertaking legal services on their behalf.  The plaintiffs allege Mr Scott breached that duty, whilst acting in the ordinary course of the business of the first defendant.

[16] The first defendant admits it acted for the plaintiffs, and associated entities, in transactions involving commercial lending, but denies the representation was made or that it was made with the first defendant’s knowledge, consent, or authority, and denies the plaintiffs relied upon it.  The first defendant also denies the second defendant’s conduct of arranging commercial loans between lenders and borrowers was in the ordinary course of the first defendant’s business. 

[17] The first defendant contends the second defendant’s conduct in acting for the plaintiffs in the relevant transactions was without authority, was unlawful, and amounted to a criminal frolic by the second defendant. The first defendant contends each transaction was undertaken by the second defendant without the knowledge or authority of the other partners of the first defendant.

Evidence

[18] According to Mr Salameh, on 2 June 2006, the second defendant, by telephone, raised the prospect of Mr Salameh undertaking commercial lending.  The second defendant said the first defendant had represented fringe money lenders “for years”, and there was a new finance deal offering of $200,000, at five percent, for two months.  The first defendant would prepare mortgage and security documentation.   The security would probably be worth around $900,000 with no encumbrances. 

[19] Mr Salameh agreed to loan the money.  The entity advancing the funds was Alfred Street Developments Pty Ltd. The borrower was anonymous.  No security documentation was ultimately prepared by the first defendant.  The loan was repaid in accordance with its terms.

[20] On 11 December 2006 the second defendant telephoned Mr Salameh about another proposed finance facility for $500,000.  The second defendant sent details of the proposed transaction to Mr Salameh, who agreed to the transaction.  It was funded by the third plaintiff (“Thomas loan”). 

[21] Around this time, Mr Salameh and Mr Winder decided to set up a process for a lending business. Mr Salameh prepared a process chart which he discussed with the second defendant.  Mr Salameh refined the process chart over the following weeks, discussing it with the second defendant.  On 22 January 2007, the second defendant advised he had looked at the process chart and there was “nothing to change at the moment”, although it should be treated as “a work in progress”.[1] 

[22] On 26 February 2007, Mr Salameh and Mr Winder incorporated the first plaintiff.  It was to be used for the lending business.  The second defendant was advised of its existence by email dated 19 March 2007.  At that time, Mr Salameh discussed with the second defendant an application fee being charged to borrowers.  It was agreed that fifty per cent of the application fee would be paid to the first plaintiff, and fifty per cent paid to the first defendant in recognition that it was identifying potential borrowers.  The second defendant later requested the first defendant’s share be paid to Citcom Pty Ltd. The second defendant advised Mr Salameh that that arrangement was “okay” with Mr Scott.  Citcom was a company associated with the second defendant.

[23] The first plaintiff later entered into five loan transactions. The first, on or about 11 April 2007, was for $50,000 (“the Hjertquist loan”).   The second, on 1 May 2007, was for $1,190,400 (“the Aspen loan”).  The third, on 7 or 8 May 2007 was for $40,000 (“the O’Reilly loan”). The fourth, on 4 June 2007, was for $400,500 (“the Quaresmini loan”). The third plaintiff also entered into a loan transaction on 21 August 2007 for $261,250 (“the Ogle loan”).

[24] Each loan was entered into in circumstances where the second defendant contacted Mr Salameh enquiring as to whether the first plaintiff was interested in lending money to a borrower. Mr Salameh understood the borrower had been a client of the first defendant “in other matters”.[2] He saw no conflict of interest as the first defendant was only acting for the plaintiffs in the transaction. He did not see the first defendant as acting for the borrowers.

[25] In respect of each transaction, the first defendant, through the second defendant, prepared a facility agreement and mortgage documentation for the plaintiffs.  These documents were executed by the borrowers, and the plaintiffs. The relevant funds were paid by the plaintiffs to the first defendant’s trust account. Although the first defendant undertook searches, the process chart prepared by Mr Salameh was not strictly followed in any transaction.  Mr Salameh and/or Mr Winder also undertook their own searches.

[26] These loan transactions were not the only loans provided by the plaintiffs to borrowers at the instigation of the second defendant.  The first plaintiff also advanced monies to Regional Planners Development Pty Ltd, a company associated with the second defendant, on 17 January 2008 and 15 June 2008.

[27] By September 2007, repayments were not occurring in accordance with the agreed terms and conditions.  Mr Salameh and/or Mr Winder corresponded with the second defendant, seeking payment of the amounts outstanding in respect of these loans.  The second defendant assured them the outstanding amounts would be paid.  The loans continued to be in default.  In late July 2008, the second defendant advised Mr Salameh payments were being delayed as the first defendant required the consent of the QLS to release monies in respect of the repayment of the loans and interest.  Mr Salameh did not ask why this was the case, and did not contact the QLS.

[28] On 15 August 2008, Mr Salameh spoke to the second defendant about the outstanding monies.  The second defendant advised the QLS was slowing down his ability to transfer money from the trust account, and that he was looking at leaving the first defendant and establishing his own legal practice.  The second defendant reassured Mr Salameh the outstanding sums would be repaid as soon as possible.

[29] On 18 August 2008, Mr Winder telephoned Mr Scott. He raised the delays and excuses provided by the second defendant. He advised Mr Scott the second defendant was leaving the first defendant and attempting to set up his own trust account.  Mr Winder recorded Mr Scott’s response as “business as usual”. [3]  Mr Scott advised Mr Winder to speak to the office manager, Jenny Lewis, and the second defendant.

[30] Following that conversation, Mr Winder telephoned the second defendant.  The second defendant advised funds would be deposited that day in repayment of the outstanding interest payments in respect of the Ogle loan.  Mr Winder then spoke to Jenny Lewis. She advised that Mr Scott was signing cheques, and that the second defendant had provided no direction to her to draw the relevant cheque.

[31] The funds continued to remain outstanding.  In early September 2008, Mr Salameh and Mr Winder again spoke to Mr Scott.  There was a dispute as to the number of conversations with Mr Scott. Mr Salameh said there was one conversation on 2 September 2008.  Mr Scott said there were two, on 1 and 2 September 2008.  Whatever be the number, it was accepted Mr Scott advised that the second defendant had left the first defendant the previous week.  Mr Scott stated he did not know anything about the outstanding loans, and could not find any files for the plaintiffs.  Mr Scott asked the plaintiffs to provide as much information as possible.  This information was subsequently provided to Mr Scott.  Shortly thereafter, the plaintiffs engaged new solicitors, who provided detailed information to the QLS.

[32] The plaintiffs were not the only clients of the first defendant to whom the second defendant had recommended commercial lending transactions.  Between 8 February 2002 and 7 November 2005 a client of the first defendant, Eastloch Pty Ltd, entered into 10 separate lending transactions.  In each, the first defendant prepared the relevant documentation.

[33] Domingos Machado, a former director of Eastloch Pty Ltd, and a trustee of the Absolute Unit Trust, said Eastloch and the entity that replaced it, Absolute Unit Trust, obtained legal services from the first defendant, through the second defendant.  On occasions, the second defendant arranged loans.

[34] The second defendant contacted Mr Machado on several occasions seeking short-term funds for a particular borrower.  The first defendant conducted searches in respect of these loans, drafted the legal and security documentation, and arranged for the borrowers to attend and execute that documentation.  Either Mr Machado or the second defendant signed the documentation on behalf of Eastloch.

[35] Once the documentation had been completed, Eastloch transferred the funds to the first defendant’s trust account.  Interest, and any repayment of capital, was paid through the first defendant’s trust account.  Commissions were also paid to certain agents in respect of the loan facilities.

[36] Mr Machado was never told by the second defendant, or any employee of the first defendant, that undertaking these loans was not part of the first defendant’s business, or that his dealings with the second defendant needed to be kept secret.  Mr Machado introduced other lenders to the second defendant.

[37] Mark Bone worked as a finance broker between 2002 and 2007. He was a director of FBI Group Pty Ltd (FBI), which provided finance broking services.  His duties involved acting as an intermediary between lenders and clients.  The first defendant undertook legal work for FBI. On occasions, the first defendant acted as an intermediary for FBI in respect of some short term loans.  Mr Bone referred those clients directly to the second defendant, as short term loans were not normally undertaken by the majority of lenders. 

[38] Mr Bone would send a request to the second defendant advising what funds were required by the borrowers.  The second defendant would advise whether he could source those funds.  All communications were to the first defendant’s general facsimile number. Mr Bone was never told by the second defendant to keep these dealings secret.

[39] Anthony Bates, a former director of FBI, also contacted the second defendant to identify available lenders for short-term funding arrangements. FBI did not stipulate the nature of those lenders. It was a matter for the second defendant.  FBI communicated with the second defendant by the first defendant’s facsimile number.  The second defendant never told Mr Bates to keep his dealings secret.  Mr Bates understood the second defendant acted for the lender, not the borrower.

[40] The plaintiffs also led evidence from several short term borrowers.  In November 2006, Richard Lord a director of Lordcorp Pty Ltd, telephoned the second defendant, at the first defendant’s premises, as he needed short term finance. It was suggested he do so by a third party.  The second defendant arranged for the necessary finance.   Mr Lord was never told by the second defendant that he was not acting as part of the first defendant’s business, or that he was to keep his dealings with the second defendant secret.  Mr Lord understood the first defendant was acting for the lender.

[41] Kenneth Johnson approached Mark Bone in April 2005 seeking assistance with a loan. Mr Bone referred him to the first defendant, who arranged the necessary documentation.  “Someone associated with” the first defendant was lending him the money.[4]  Mr Johnson met the second defendant face to face on two occasions.  The loan funds were deposited in Mr Johnson’s account by the first defendant.  Interest payments were paid to the first defendant’s trust account.  Mr Johnson did not have a solicitor acting for him in the transaction.  He was not told the transaction was not part of the first defendant’s business, and was not told to keep the dealings secret from anyone else at the first defendant.

[42] Niclas Hjertquist used the first defendant for conveyancing services in 2001.  In 2006, he approached the first defendant to act on his behalf in another conveyance.  He dealt with Maree Robertson, an employed solicitor.  Just prior to settlement a problem arose with one of his financiers.  Ms Robertson advised the first defendant may be able to assist, but she needed to check.  Ms Robertson then advised the first defendant could cover the shortfall “for a small fee” of $5,000.[5]  Mr Hjertquist “felt it was unusual” but did not think there was anything wrong with the process.[6]  He understood the first defendant was acting as his solicitor in the conveyance.  He subsequently repaid the loan.  Although he did not recall, he accepted it was possible Ms Robertson had initially sought an extension of the date of settlement. 

[43] Maree Piwinski (formerly Robertson) agreed she had carriage of the purchase by Mr Hjertquist.  On 10 April 2007, shortly before settlement was to take place, Mr Hjertquist advised there would be a shortfall of around $50,000.  Ms Piwinski immediately requested an extension from the vendor’s solicitors.  The extension was refused by the vendor.  Ms Piwinski informed the second defendant.  He advised that funds may be able to be obtained “from one of my clients”.[7]  The second defendant telephoned Mr Salameh, and later advised her of the loan arrangements.  Ms Piwinski denied saying the firm “may be able to assist”.  She also denied telling Mr Hjertquist that for a small fee the firm could assist him with the shortfall.  She accepted the loan funds were paid into the first defendant’s trust account.

[44] Although Ms Piwinski was surprised that lending was undertaken in this way, as she had never before had an experience of organising a lender for a client, she did not check with Mr Scott, or anyone else, whether such a loan was a proper course of conduct.  She did not think it was unethical.  The second defendant did not ask her to keep the loan secret.  She had not previously observed the second defendant undertake such a transaction, and did not observe anyone doing so later. 

[45] Ms Piwinski accepted she may have worked on the file involving the loan by Absolute Unit Trust to Mr Lord.  She accepted Mr Lord was a borrower introduced by the second defendant to his lender client.  Ms Piwinski did not know a large part of the second defendant’s business was arranging loans.  The second defendant kept his files to himself and had what Ms Piwinski described as a “very unusual” work practice where he would give pieces of a file to her without giving her the whole file.[8]  She would undertake only specific tasks in respect of those files. 

[46] Mr Scott was not involved in arranging any of these commercial lending transactions. However, he was involved in reviewing a loan agreement, and in settling pleadings in respect of recovery of a commercial loan advanced by Eastloch to Juhasz.  The draft pleading had been prepared by Cian Horner, an articled clerk.  Mr Scott was his master.  Mr Horner recalled he had been requested to draft documents in respect of the Juhasz file.  He gave those documents to Mr Scott for review.  Mr Scott reviewed the documents “carefully”.[9] Mr Scott’s process was to ask questions and look at the file independently.  Mr Scott never read the file “cover to cover” in Mr Horner’s presence. [10]

[47] According to Mr Scott, when the firm operated with only the second defendant and Mr Scott as partners, the second defendant managed the commercial work and Mr Scott managed litigation. As soon as any commercial work involved litigation, responsibility for the litigation would be transferred to Mr Scott, although the second defendant may continue to have contact with the client.

[48] Mr Scott accepted the second defendant had undertaken legal work in commercial lending transactions on behalf of clients of the first defendant.  He had no knowledge of the second defendant undertaking such work before the report of the QLS.  Mr Scott accepted that following the provision of that report he was contacted by Mr Salameh and Mr Winder, who raised concerns with him as to the recovery of monies advanced by the plaintiffs. 

[49] This was the first time Mr Scott became aware of the second defendant’s activities in respect of the commercial lending files.  The second defendant did not divulge his activities to Mr Scott.  The second defendant did not discuss his files at partnership meetings.  To Mr Scott’s knowledge, no-one else in the firm was aware of the second defendant’s activities.  Mr Scott would not have approved of those activities.

[50] Mr Scott accepted he had been requested to review a loan agreement involving Eastloch. He did not recall the circumstances. Mr Scott also accepted that on one occasion he had settled a proposed pleading in respect of one lending transaction involving Eastloch.  Mr Scott did not recall reviewing the entire file, and considered it unlikely he did so, as it would not have been necessary in order to settle the pleading.  He would have discussed the contents of the file with Mr Horner, so as to satisfy himself that the pleading was true and correct.

[51] Jennifer Lewis worked for the first defendant for many years. Over time, she assumed responsibility for recording payments into and out of the trust account.  She was unaware of the second defendant’s activities in respect of the commercial lending business.  The second defendant did not discuss with Ms Lewis his clients, or the nature of his work. He would request confirmation as to trust account transactions, and she would comply with those requests.

[52] According to two former partners of the first defendant, Christopher Lyndon and Timothy Crouch, the first defendant had never engaged in the business of acting for lender clients to loan money to borrower clients. Each had no knowledge of the second defendant’s conduct, and did not authorise it.

[53] According to David Franklin, the manager of professional standards for the QLS, there was nothing improper or unusual about a solicitor’s firm acting for a private lender in respect of a loan agreement, receiving interest payments on the client’s behalf in the firm trust account. However, it would be uncommon for a solicitor’s firm which says it has no business in money lending to see regular interest payments coming in and out of the firm trust account.

Expert evidence

[54] Richard Dawson, a solicitor, opined that the second defendant’s conduct in the commercial lending transactions the subject of the claim amounted to the second defendant brokering finance between lender clients and borrower clients.  There were a number of features of the second defendant’s conduct which were not consistent with the obligations of a solicitor.  Some of this conduct was potentially contrary to the rules promulgated by the QLS in respect of a solicitor’s involvement in financial transactions. 

[55] In Mr Dawson’s opinion, when Mr Scott was asked to review the loan agreement in Juhasz, he ought to have been placed on alert as to the need for further information. Similarly, when Mr Scott was asked to settle the pleadings in the Juhasz matter, he would have been required to look at the file closely, as the pleadings had been settled by an articled clerk. Mr Dawson accepted it may not be necessary for a partner to physically go through the file.  It may be sufficient for the partner to have the file and to ask questions of the person who had drafted the initial documentation.  However, if a non-legal person had prepared the legal document, there would be a higher level of care required in the settling of that documentation. 

[56] Mr Dawson also opined that certain cheque requisitions and cheques approved by Mr Scott ought to have placed a reasonably competent solicitor on notice as to the first defendant’s involvement in commercial lending transactions.

Findings

Generally

[57] It is not in dispute that the second defendant misappropriated the monies loaned by the plaintiffs.  It is not in dispute that the plaintiffs entered into those commercial lending transactions at the instigation of the second defendant. What is in dispute, and is central to the determination of this proceeding, is whether the first defendant, through the second defendant, had engaged in such commercial lending activities as part of the ordinary course of its business. 

[58] Mr Salameh gave evidence that the second defendant told him the first defendant acted for commercial lenders, and had done so “for a long time”.  I accept that evidence.  Mr Salameh impressed me as being both reliable and credible.  His attention to detail was evidenced in his note taking throughout the relevant time.  His careful, considered approach to giving evidence was consistent with a person who would not have entered into the transactions without first being satisfied as to the first defendant’s past involvement in commercial lending transactions.  Whilst Mr Salameh’s notes of the conversations on 2 June 2006 and 12 December 2006 do not contain reference to the statement “for a long time”, this is hardly surprising.  The detail that was relevant was the nature of the transactions to be undertaken.

[59] I also found each of the witnesses who gave evidence of past commercial lending transactions undertaken through the first defendant reliable and credible.  Their evidence supports a conclusion that the first defendant, through the second defendant, had acted for commercial lenders for a long period in circumstances where the second defendant had identified borrowers and lenders.

[60] Similarly, I found Mr Horner, Ms Piwinski and Ms Lewis honest and reliable.  Each conceded their memory of the particular events was affected by the passage of time.  Such a concession was entirely reasonable in the circumstances.  Their evidence as to their involvement in any transactions, and as to the second defendant’s involvement, was consistent with the contents of the relevant files.

[61] By contrast, Mr Scott did not impress me as a person who was careful or considered in his responses.  I found his answers on many occasions non-responsive.  I am not satisfied his evidence was reliable.  I do, however, accept it was difficult for him to give considered evidence on many issues due to his lack of knowledge and involvement in those matters.  The passage of time also had an impact on his recollection.  It is understandable that events prior to August 2008 would not have had the same importance to him as Mr Salameh, having regard to the way in which the first defendant had structured its work.

[62] I accept Mr Scott’s evidence that the second defendant did not discuss his files with Mr Scott.  That behaviour is entirely consistent with the evidence of Ms Lewis and Ms Piwinski as to the way in which the second defendant conducted his files.  I also accept Mr Scott was not aware of the second defendant’s fraudulent conduct.  The second defendant deceived many people, including Mr Scott and other employees of the first defendant. 

[63] The plaintiffs contended I should draw adverse inferences as to Mr Scott’s credit and honesty.  They asserted his response to Mr Salameh’s initial contact exhibited a lack of care for the clients of the first defendant. They also relied on his approach to disclosure, which was said to be inadequate and contrary to the obligation of a party under the Uniform Civil Procedure Rules 1999 (Qld), and the conduct of the trial.

[64] I am not prepared to draw any adverse inference in respect of Mr Scott’s honesty.  Whilst his answers on occasions were unresponsive, I do not accept he was being deliberately evasive.  His initial response to Mr Salameh, whilst somewhat cavalier, was consistent with that of a person who was trying to keep the first defendant operating whilst endeavouring to deal with the enormity of the consequences of the actions of a co-partner.

[65] As to disclosure, alleged deficiencies in the first defendant’s disclosure was the subject of an unsuccessful interlocutory application. I am satisfied Mr Scott genuinely attempted to comply with the disclosure obligations in all of the circumstances.  There was nothing in the conduct of the trial which would support a finding of dishonesty.

Wrongful act

[66] Section 13 of the Partnership Act 1891 (Qld) creates a liability on partners for the wrongful acts of a co-partner. An essential element is that the act or omission of the wrongdoer either occur in the ordinary course of the partnership business, or that it be authorised by the co-partners.

[67] The plaintiffs rely on the second defendant’s deceitful misapplication of the plaintiffs’ money, the breach of contractual warranties given by the first defendant, and the first defendant’s misleading and deceptive conduct in contravention of section 52 of the Trade Practices Act 1974 (Cth) as constituting wrongful acts within the terms of s 13.

[68] Each of these alleged wrongful acts depend, to an extent, upon whether the second defendant made the representation.  I accept that he did. Mr Salameh’s evidence on this aspect was clear and concise.  It was supported in material aspects by his notes of the conversations with the second defendant.

[69] I also accept the representation was made in order to induce the plaintiffs to advance the monies misappropriated by the second defendant.  Whilst the protocol established subsequent to those telephone conversations was not strictly followed in any transaction, each transaction was in accord with the types of transactions which the second defendant represented were undertaken by the first defendant.

[70] The representation was false. The borrowers nominated by the second defendant were fictitious.  The documentation prepared by the second defendant for execution by the plaintiffs was sham documentation.  I am satisfied the second defendant knew the representation was false.  I am also satisfied the plaintiffs undertook each of the lending transactions induced by, and acting upon, the representation. The plaintiffs suffered loss and damage as a consequence.   The tort of deceit has been established by the plaintiffs on the balance of probabilities.  It is a wrongful act within the meaning of s 13.

[71] My conclusion that the representation was made is also relevant to the plaintiffs’ claim for a breach of contractual warranties.  That claim is based on an allegation that at all material times there existed a contract between the plaintiffs and the first defendant pursuant to which the first defendant warranted the truth of the representation, and that any future loan transactions to be arranged by the first defendant on behalf of the plaintiffs would be genuine and enforceable loan transactions and not shams. 

[72] The plaintiffs engaged the first defendant to undertake legal services on its behalf. The first defendant undertook such services, including preparing loan and other documentation.  That amounted to a contractual arrangement between the plaintiffs and the first defendant.  Having regard to the relationship between the plaintiffs and the first defendant, I am satisfied the relevant contract included the warranties pleaded by the plaintiffs.[11] 

[73] Part of that engagement included the plaintiffs, at the second defendant’s instigation, advancing monies to the first defendant’s trust account pursuant to commercial lending transactions represented by the Thomas loan, Aspen loan, O’Reilly loan, Quaresmini loan and Ogle loan. There is no dispute that each of the loans was, in fact, a sham.  Both warranties have been breached in all the circumstances.  Such a breach of warranty also constitutes a wrongful act, within the meaning of s 13.

[74] The plaintiffs’ claim that the first defendant engaged in misleading and deceptive conduct is dependent upon findings that the second defendant, in making the representation and engaging in the conduct relied upon, used telephonic services within the meaning of s 6(3)(a) of the Trade Practices Act, and was misleading and deceptive within the meaning of s 52 of that Act.

[75] I accept Mr Salameh’s evidence that the representation was made in the course of telephone calls with the second defendant.  The relevant conduct involved the use of telephonic services.  I also accept the second defendant made the representation, and undertook the sham transactions.  I am satisfied this conduct constitutes misleading and deceptive conduct in contravention of the Trade Practices Act.  

[76] The first defendant contends it is not liable for this misleading and deceptive conduct as the conduct was not engaged in “on behalf” of the first defendant. I do not accept that contention. The second defendant made the representation whilst offering to undertake legal services on behalf of the first defendant.  He did so as a partner of the first defendant.  Such conduct constitutes a wrongful act within the meaning of s 13.

Ordinary course of business

[77] A wrongful act by a co-partner, alone, is insufficient to establish liability pursuant to s 13. It is necessary to also establish the wrongful act occurred in the ordinary course of the first defendant’s business, or was authorised by its co-partners, either expressly or by implication.

[78] The business of a partnership can be defined or described by its partnership agreement.  Where, as here, the partnership does not have a formal partnership agreement, a determination of its ordinary business requires a consideration of what the business is, and what acts are apt to be done in carrying it on.[12]

[79] The ordinary course of business often involves conduct with an element of repetition, and a transaction which is indistinguishable in the common flow of the business.  However, it does not follow that a transaction which does not involve repetition will not be part of the ordinary course of business of a particular partnership.  It depends on all of the circumstances of the case.

[80] For a transaction to form part of the ordinary course of business of a partnership, the transaction must be one actually done in the course of the day-to-day business activities of that partnership.  A determination of this issue therefore requires a consideration, on the facts of the case, as to what the partnership business was, and what acts are apt to be done in carrying on that partnership business.[13] 

[81] In determining whether a particular act or omission was undertaken in the ordinary course of business, it is not decisive that the act or omission was wrongful or unauthorised in fact.  What is decisive is the capacity in which the wrongdoer partner was acting, having regard to the context of the relationship with the person who sustained loss or injury, and from the viewpoint of that person, at the time of performance of the wrongful act.[14] The court should not be too ready to find the ordinary business requirement is not satisfied.[15] 

[82] In the case of a firm of solicitors, a useful starting point is to ask whether the general description of the act falls within the scope of the ordinary business of solicitors.[16] In determining this question, it is immaterial that the solicitor is acting dishonestly in undertaking that conduct.  The issue for consideration is whether the substance of the transaction, viewed fairly and properly, is the kind of transaction which forms the ordinary business of a solicitor. 

[83] The second defendant undertook each transaction whilst a partner of the first defendant.  In each transaction the second defendant was acting on behalf of the plaintiffs as clients of the first defendant. Each transaction was undertaken through use of the first defendant’s trust account.  Each transaction was arranged using the first defendant’s premises, and facsimile and telephone facilities.  Loan and security documentation was in the usual form for documentation of that type. 

[84] Each of these activities lay at the heart of the second defendant’s conduct and were fundamental to the operation of his scheme. Each are fairly and properly to be regarded as acts done by him while acting in the ordinary course of the first defendant’s business.[17]  The legal documents were prepared as part of the pursuit of the first defendant’s business.  Legal fees were charged for its preparation, and paid to the first defendant.

[85] Whilst the second defendant’s conduct involved the identification of borrowers, from the perspective of Mr Salameh and the other lenders, the first defendant was only acting for the lender in each transaction.  They did not understand the first defendant acted for the borrower. 

[86] The fact that the transaction involved deliberate and dishonest conduct by the second defendant, for his sole benefit, does not prevent such conduct from being legally capable of being in the ordinary course of the business of the partnership.[18]  Similarly, the fact the actual borrower was not the person identified by the first defendant does not take the conduct out of the ordinary course of the first defendant’s business.  The drafting of loan and security documentation can be an act done within the ordinary course of a firm’s business even if it was drafted for a dishonest purpose.[19] 

[87] The preparation of loan and security documentation is work undertaken in the course of a solicitor’s business when acting for commercial lenders, and was work usually undertaken by the first defendant.  The second defendant had been employed by the first defendant because of his lending clients.  He came to the first defendant with those clients.[20]

[88] Mr Scott accepted it was in the ordinary course of business of the first defendant to undertake conduct which protected the interests of lender clients, and which involved the preparation of loan and security documentation, and which involved the receipt and payment of funds into and out of the trust account.

[89] Balancing all of the relevant information, and having regard to the nature of the first defendant’s legal practice, the conduct engaged in by the second defendant in respect of each of the loan transactions was conduct engaged in in the ordinary course of the first defendant’s business.  It involved undertaking duties which, to the plaintiffs, were not at all unusual for a firm of solicitors. 

[90] The first defendant contends that the conduct was not in the ordinary course of business of the first defendant as it involved mortgage brokering, which was a business excluded from the first defendant’s professional indemnity scheme, and not included within the statutory fidelity fund arrangements of the QLS.  It also specifically involved identifying borrowers from the firm’s client base and introducing them to the plaintiffs as the firm’s client, conduct initially subject to conditions, and later expressly prohibited by the Queensland Law Society Rules.  The first defendant contends such conduct is properly to be described as extraordinary. 

[91] Whilst the identification of borrowers was central to the second defendant’s fraud, an essential feature of the fraudulent conduct was the production of title and other searches to establish the existence of appropriate security, the preparation of the loan and security documentation, and the use of the first defendant’s trust account for receipt of the loan funds and repayment of any interest and principal. Those acts were all undertaken by the second defendant in the course of his duties as a partner of the first defendant.  The second defendant also rendered a fee on behalf of the first defendant for the legal services undertaken by him.  The second defendant’s conduct was not so extraordinary as to take it out of the ordinary course of the first defendant’s business.

Authority

[92] My conclusion in relation to the ordinary course of business renders it unnecessary to determine whether the second defendant’s conduct was authorised by the partnership, either expressly or by implication.

[93] Had it been necessary to determine this issue, I would not have been satisfied the second defendant’s conduct was expressly authorised by the partnership.  The clear evidence of Mr Scott, and the former partners of the first defendant, was that no such conduct was expressly authorised by the partners.  I accept their evidence. 

[94] The plaintiffs contend the Hjertquist transaction, and the other commercial lending transactions, are consistent with Mr Scott having impliedly authorised the second defendant to undertake commercial lending transactions.

[95] The Hjertquist transaction is an instance of an employee of the first defendant being aware of the second defendant arranging a loan for a borrower client from a lender client.  There is no evidence Ms Piwinski was aware of any other transactions of this type.  Whilst she had heard of Eastloch Pty Ltd and Absolute Unit Trust, and knew that they were clients of the second defendant, she was not aware of the nature of the transactions.  Having regard to her evidence as to the second defendant’s practice of only giving her pieces of his files, it is understandable she would not have knowledge of the nature of those transactions. 

[96] The Hjertquist transaction was a highly unusual circumstance, involving Mr Hjertquist’s urgent need for funds to complete the transaction. That one instance is insufficient to support a finding that Mr Scott had impliedly authorised the second defendant to enter into the transactions the subject of the claim. 

[97] There is no evidence that Mr Scott had any material knowledge of the various transactions entered by Eastloch Pty Ltd and the other lenders.  Whilst Mr Scott reviewed a loan agreement and settled pleadings in respect of the Juhasz loan file, his involvement was limited and for a specific purpose. I accept his evidence that he did not review the entire file.  I am satisfied his involvement did not require him to read the entire file.

[98] Mr Scott sought and obtained information from Mr Horner, and reviewed relevant documentation from within that file. The information he received, and the documentation reviewed by him, was not such as to cause a reasonably competent solicitor to be placed on notice that the first defendant was engaging in transactions not authorised by the Queensland Law Society Rules.

[99] Mr Dawson’s evidence was premised on a reasonably competent solicitor reading the entire file.  I am satisfied a reasonably competent solicitor could undertake the task of reviewing the loan agreement and settling pleadings by looking at the relevant documents within the file, and by having the person who drafted the documents answer relevant questions. That is the process undertaken by Mr Scott.  That process would not have brought to Mr Scott’s attention the fact that the transaction in question was one in which the second defendant had arranged for a borrower client to obtain a loan from a lender client.

[100] Similarly, the cheque requisitions, cheques and other matters raised by Mr Dawson would not have alerted Mr Scott to issues of concern. The suggestion there were aspects that ought to have been queried occurs with the benefit of hindsight into the second defendant’s dishonesty.  Mr Scott’s limited involvement must be reviewed in the context of a partnership where there was, at the relevant time, no reason for Mr Scott to distrust his partner.

[101] The plaintiffs have not established the second defendant’s conduct was impliedly authorised by Mr Scott. 

[102] In order to establish the second defendant had apparent authority to engage in the transactions, the plaintiffs must establish three conditions.  First, each of the loan transactions involved work within the scope of the kind of business carried out by the first defendant.  Second, each transaction was undertaken in the usual way.  Third, the plaintiffs knew the second defendant was acting as a partner of the first defendant, and were not aware of any lack of authority on his part.

[103] Having regard to my earlier finding, the plaintiffs have established the first condition.  I am also satisfied the plaintiffs have established the third condition.  The second defendant was acting as a partner when dealing with Mr Salameh.  There is no basis to conclude Mr Salameh was aware of any lack of authority.

[104] As to the second condition, the first defendant contends there were unusual features such that the transactions were not undertaken in the usual way.  Those unusual features included the second defendant proposing the establishment of a company, which he would manage, the making of an initial loan to an anonymous borrower without validation or security, the making of loans to a company associated with second defendant, and the payment of application fees to the second defendant’s company.

[105] The so-called unusual features relied upon by the first defendant must all be considered in the context of the plaintiffs’ overall dealings with the first defendant.  Those dealings involved the use of the first defendant’s services, through the second defendant, for a number of years prior to entering into the first of the loan transactions.  There was nothing in those dealings which caused Mr Salameh, or should have caused a reasonable person in his position, to question whether the second defendant was acting as a partner of the first defendant, or without the authority of his co-partner.

[106] The initial offer by the second defendant to establish a company was immediately rejected by the plaintiffs. It was not pressed again.  The first loan transaction, although to an anonymous borrower and without security, occurred in circumstances of urgency against a background of trust in the second defendant’s professional capabilities.  There was no reason for the plaintiffs to question the second defendant’s statements as to the circumstances surrounding that transaction.  That transaction was completed in accordance with the agreed terms.

[107] When a second transaction was proposed, the plaintiffs initiated a discussion about the processes to be adopted in respect of further transactions.  Whilst that process was not strictly followed in any subsequent transaction, it contained requirements as to searches and the preparation of appropriate loan and security documentation.  Such documentation was prepared by the first defendant. The loans also occurred in the context of the first defendant acting as the plaintiffs’ solicitors.

[108] The loans to the second defendant’s company were undertaken in circumstances where documentation, although not initially executed by the parties, was provided at some stage.  Whilst it is not usual for a solicitor to obtain a loan from a client, the relationship of trust that existed between the second defendant and the plaintiffs did not render these transactions so unusual as to take them out of the types of transactions previously undertaken.

[109] Finally, when the plaintiffs were requested to pay the application fees into another account, Mr Salameh was expressly advised by the second defendant that it “was okay” with Mr Scott.  Having regard to their relationship, there was no reason for the plaintiffs to reject the second defendant’s assurances.  I also accept Mr Salameh’s explanation for the “mistake email”.[21] His apology was consistent with a politeness to others as exhibited when giving his evidence.

[110] Having considered all of those circumstances, the matters relied upon by the first defendant as constituting unusual features are insufficient to support a finding that the transactions were not made in the usual way.

[111] The first defendant also relied upon the plaintiffs’ conduct in not complaining to Mr Scott or others, notwithstanding defaults on the loans in late 2007 and 2008.  That lack of complaint must also be viewed against the long-standing relationship between the plaintiffs and the second defendant. 

[112] The plaintiffs consistently raised with the second defendant concerns in respect of the defaults, and were given explanations in relation thereto.  There was nothing which should have caused them to reasonably doubt the repeated reassurances given by the second defendant.  Once it became apparent they had reason not to accept those assurances, the plaintiffs contacted Mr Scott directly.  Those responses are in accord with what would be expected of a reasonable person in the circumstances.

[113] The plaintiffs have established that the second defendant had apparent authority to engage in the transactions.

Misapplication of funds

[114] In each loan transaction the plaintiffs paid the funds into the first defendant’s trust account.  Those funds were received by the first defendant in the ordinary course of its business.  They were misapplied by one of the first defendant’s partners.  The plaintiffs suffered loss and damage as a consequence of the misapplication of those funds.  The first defendant is liable for that loss and damage.

Negligence

[115] The plaintiffs’ claim in negligence depends on a finding that Mr Scott, if exercising the reasonable care and skill of a competent solicitor when reviewing documentation with respect to the Juhasz loan, and in signing various cheque requisition forms and cheques in respect of the Juhasz and Epona loans, would have identified that the first defendant was engaging in conduct in breach of rule 87A of the Queensland Law Society Rules and taken steps to ensure that such conduct was not engaged in again.

[116] Having considered the evidence as to Mr Scott’s involvement in the Juhasz file, and in signing the cheque requisitions and cheques, I am not satisfied, on the balance of probabilities, that his failure to identify that the first defendant, through the second defendant, was undertaking such loan transactions constituted a breach of any duty of care owed by the first defendant. 

[117] Mr Scott’s involvement in reviewing the Juhasz loan agreement, and in settling pleadings for its recovery, was limited. It occurred in the context of a partnership of some years involving an understandable level of trust. There was nothing in the second defendant’s conduct at that time that ought to have placed a reasonably competent solicitor on notice that the second defendant ought not to be trusted, or that his work ought to be the subject of detailed review. 

[118] The duty of care owed in the circumstances was not an absolute duty.  It required the taking of reasonable care and skill in all the circumstances. Mr Scott performed his duties with that requisite care and skill. His review of the loan agreement, and the pleadings, was as you would expect of a competent solicitor exercising reasonable care and skill.

[119] I did not find Mr Dawson’s evidence to the contrary persuasive.  It cast an unreasonable expectation upon a solicitor in Mr Scott’s position.  There was nothing in the file note dated 22 July 2004, or in the documentation reviewed by Mr Scott in his discussions with Mr Horner, which would have caused a reasonably competent solicitor exercising the requisite care and skill to have been alerted to the possibility that the transaction was in contravention of rule 87A.  In the circumstances prevailing at the time of Mr Scott’s involvement, a reasonably competent solicitor exercising reasonable care and skill would not have read the entire file.

[120] The other anomalies identified by Mr Dawson are in a similar category. 

[121] The plaintiffs have failed to establish the first defendant is liable in negligence.

Quantum

[122] Mr Salameh gave evidence as to the quantification of the plaintiffs’ loss and damage.  I accept Mr Salameh’s evidence in respect of that loss and damage. 

Conclusion

[123] The Plaintiffs have established, on the balance of probabilities, that the first defendant is liable for their losses pursuant to s 13 of the Partnership Act 1891 (Qld).  The plaintiffs have also established, on the balance of probabilities, that the first defendant is liable pursuant to s 14 of the Partnership Act 1891 (Qld).

[124] The parties are to prepare minutes of orders in accordance with the reasons.  I shall hear the parties as to costs.

Footnotes

[1] T1-66/54

[2] T3-74/37

[3] See exhibit 1, document 187

[4] T5-47/7

[5] T5-38/4

[6] T5-38/30

[7] T9-36/40

[8] T9-45/39

[9] T4-93/40

[10] T4-96/55

[11] See Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 per Lord Diplock at 511; Oscar Chess Ltd v Williams [1957] 1 WLR 370 at 374

[12] Walker v European Electronics Pty Ltd (in liq) (1990) 23 NSWLR 1 per Mahoney JA at 11

[13] Re Bradford Roofing Industries Pty Ltd (in liq) (1967) 70 SR (NSW) 13

[14] National Commercial Banking Corp of Aust Ltd v Batty (1986) 160 CLR 251 at 287-8

[15] JJ Coughlan Ltd v Ruparelia [2003] EWCA Civ 1057 at [30]

[16] JJ Coughlan Ltd v Ruparelia [2003] EWCA Civ 1057 at [25]

[17] Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at [36]

[18] Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at [130]

[19] Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at [36]

[20] T9-26/50

[21] See Exhibit 36

Close

Editorial Notes

  • Published Case Name:

    IPG Finance Aust P/L & Ors v Crouch and Lyndon & Anor

  • Shortened Case Name:

    IPG Finance Australia Pty Ltd v Crouch and Lyndon (a firm)

  • MNC:

    [2012] QSC 312

  • Court:

    QSC

  • Judge(s):

    Boddice J

  • Date:

    15 Oct 2012

Litigation History

Event Citation or File Date Notes
Primary Judgment [2012] QSC 312 15 Oct 2012 -
Appeal Determined (QCA) [2013] QCA 220 09 Aug 2013 -
Application for Special Leave (HCA) File Number: B49/13 06 Sep 2013 -
Special Leave Refused [2014] HCATrans 16 14 Feb 2014 -

Appeal Status

{solid} Appeal Determined - {hollow-slash} Special Leave Refused (HCA)