Thieving Lawyers: Trust and Fidelity in the High Court: Legal Services Board v Gillespie-Jones

By Associate Professor Elise Bant

Gillespie-Jones Case Page

The elusive nature of the Quistclose trust has spawned much comment, analysis and speculation, by judges and scholars in equal measure, since its genesis in Barclays Bank Ltd v Quistclose Investments Ltd [1968] UKHL 4; [1970] AC 567. A Quistclose trust is a trust which may arise when a loan is made for a specific purpose (and is often asserted by a lender when the purpose of the loan fails) but its precise nature is highly debatable. In that context, those of us who had hoped for a definitive clarification, or even some in-depth discussion, of the doctrine in the much-awaited High Court decision of Legal Services Board v Gillespie-Jones [2013] HCA 35 may be forgiven for feeling slightly disappointed. However, the Court’s circumvention of that debate (explicable in the light of its reasoning, discussed below) is offset by some very interesting observations about the interaction of judge-made law and statute, and in particular about the need for ‘coherence’ across the two sources of law, that merit attention in their own right.

How did the case arise? Lawyers stealing from other lawyers
A client facing criminal proceedings paid monies to his solicitor on to cover legal costs associated with his defence. A barrister was retained and performed a variety of services for the solicitor on the client’s behalf, but was not yet paid for those services. Pursuant to s 3.3.2 of the Legal Profession Act 2004 (Vic) (LPA) the monies constituted ‘trust money’ and were to be held for the benefit of the client. Under s 3.3.14, those monies could only be dealt with by the solicitor pursuant to and in accordance with the client’s direction. However, the solicitor stole most of the trust money, leaving the respondent barrister seriously out of pocket. The barrister made a claim for compensation for ‘pecuniary loss’ caused by the solicitor’s default under the Legal Practitioners Fidelity Fund, a fund maintained by the Legal Services Board (the appellant) under the LPA. A key question was whether the barrister had to show a proprietary interest to successful establish his claim, and if he did, whether he could make out a proprietary interest in the funds held by the solicitor. The appellant at first instance rejected his claim. The respondent successfully appealed to the County Court of Victoria, and won again on appeal to the Court of Appeal of the Supreme Court of Victoria. This run of success ended, however, before the High Court, which unanimously allowed the appellant Board’s appeal.

Did the barrister have to show that he had a proprietary interest in the stolen money?
The result in the case turned upon a wide-ranging analysis of the relevant statutory provisions and their application to unchallenged findings of fact by the primary judge. In a joint judgment, Chief Justice French and Justices Hayne, Crennan and Kiefel held that the purpose of pt 3.3 of the LPA is to regulate dealings with trust money (as defined under the statute), and to deter persons from dealings with that money contrary to, or without instructions and contrary to the interests of the persons on whose behalf the money was held: [51]. The related purpose of pt 3.6 of the LPA is to compensate persons who suffer pecuniary loss as a result of some default. The plurality held that in order to qualify as a relevant ‘person’ under s 3.6.7, the barrister need not show that he held some pre-existing proprietary interest in the trust money, such as that which might arise under a Quistclose trust. For this reason, their Honours considered any Quistclose analysis ‘not to the point’: [52]. Nor did the LPA require that the respondent hold a beneficial interest under the statutory trust as defined under s 3.3.2 of the statute. Adopting a generous approach to the remedial provision, their Honours considered that it only required that the respondent have suffered pecuniary loss which was caused by some default. That question in turn came down to whether there had been a ‘failure to pay or deliver’ trust money to the respondent so as to give rise to a relevant ‘default’ under s 3.6.2 of the Act. Given the solicitor was only entitled to make disbursements of trust money at the direction of his client, a default required that there had been some instruction given to him by the client that he had failed to follow. Ultimately, therefore, the case rested on the factual question of whether the client had ever instructed the solicitor to pay the barrister’s fees on receipt of his memoranda of fees. The plurality considered that the primary judge had made no finding of such an instruction, and her express findings on the nature of the arrangement between client and solicitor were inconsistent with such an instruction having been given. It followed that an essential factual element of the claim had not been established.

In a separate joint judgment, Justices Bell, Gageler and Keane agreed with the result, but adopted a different statutory analysis. Their Honours agreed with the majority that the monies were held on a statutory trust for an on behalf of the client. But their Honours considered that, in light of the statutory history of the remedial provisions, the compensatory purpose of pt 3.6 of the statute was limited to persons holding a beneficial interest in the trust money. As the beneficiary of the statutory trust in the instant case was the client, not the barrister, the latter’s claim necessarily failed.

The foregoing summary suggests that this case has little to say beyond its immediate, albeit important, statutory context. However, there are several points of broader interest and import.

To what extent should statutory provisions to be interpreted in light of common law doctrines?
The first is the emphasis by all members of the Court on the importance of having primary regard to the words of the statute in interpreting its provisions, and avoiding overlaying those words with unnecessary and irrelevant common law doctrines and concepts. The same refrain has been fairly consistently played in recent years by the Court (for example, in the context of the Trade Practices Act 1974 (Cth), now Australian Consumer Law, see Marks v GIO Australia Holdings Ltd [1998] HCA 69, [103] (Gummow J).) However, it might be commented that the distinct approaches offered in the two joint judgments rather underlines the difficulty inherent in engaging in statutory interpretation in a vacuum. That some assistance beyond the words of the statute is required to give them meaning is confirmed in the court’s reasoning. The majority founded its interpretation of pt 3.6 on its ‘remedial and beneficial’ purpose, demanding ‘as generous a construction as the actual language of the provisions permits’. The minority’s more restrictive interpretation, by contrast, arose from the close historical analysis of the evolution of the statute and the view that the current Act was not intended to deviate from that course. Neither analysis is dictated or excluded by the simple words of the statute.

Is coherence in the law of overriding importance?
The second and most striking feature of the decision of Justices Bell, Gageler and Keane is their treatment of the Quistclose trust analysis. Rather than simply dismissing the doctrine as irrelevant, in the manner of the majority, their Honours did consider whether an express trust (which might attract the Quistclose label, discussed further below) arose on the facts, and concluded that it did. However, they considered that any such trust potentially gave rise to rights or obligations inconsistent with those conferred or imposed under the scheme. To that extent, it necessarily undermined the statutory scheme and for that reason must not be recognised, enforced or inferred (at [119]–[120]). This reflects an application of the overriding principle of ‘coherence’ or (viewed from the other side) ‘stultification’ recently and repeatedly emphasised by the High Court (see, eg, Miller v Miller [2011] HCA 9; Equuscorp Pty Ltd v Haxton [2012] HCA 7). This principle dictates that a plaintiff must be permitted or denied recovery where to do otherwise would undermine or stultify some overriding principle or policy of the law. The principle aims to avoid incoherence or incongruity in the law. It is a general principle applicable throughout the law rather than a particular aspect of the law of trusts.

The High Court’s promotion of the principle of coherence raises some important and hitherto under-examined issues that go to the heart of our legal system. For reasons of space, only two are noted here. The first is that it arguably provides fresh impetus to those scholars who seek principled ‘fusion’ or convergence between the judge-made rules of common law and equity. Any principle of coherence should surely support rationalisation of doctrines differentiated by historical origin alone. The differing requirements of common law and equitable rescission, approaches to tracing at common law and in equity, and separate evolution and indicia of common law and equitable wrongs triggered by common factual patterns are only some of the areas that reflect an arguably unwarranted inconsistency in approach, and that would arguably benefit from rigorous application of the coherence principle. The second question is far more contentious and relates to the broader and ongoing interplay between judge-made law (comprising rights arising both at common law and in equity) and statutory provisions that reflect some consistent and overriding public policy. The statutory Leviathans of our time (such as the Torrens regime, Corporations Act 2001 (Cth) and Australian Consumer Law) spring to mind in this context. To what extent must or should those statutes exert ‘gravitational force’ on the development of related common law areas pursuant to the principle of coherence? The ongoing tensions, for example, between the individualistic underpinnings of the common law of contract and the protective approach reflected in the Australian Consumer Law reflect two largely conflicting visions of the abilities and obligations of contracting parties. The extent to which the High Court can and should develop one set of rules governing contractual dealings without reference to the other, in the light of its own emphasis on developing a coherent legal system, remains to be determined. To date, the High Court’s approach (perhaps best exemplified in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52) has been to ‘silo’ evolution of judge-made and statutory principle unless their interaction is squarely in issue. However, it is arguable that under a system of law in which coherence is an overriding requirement, this approach can and should no longer be accepted.

And what of the Quistclose Trust?
The third and final general observation regarding this case brings us back to Quistclose trusts. In determining that, but for the principle of coherence, an express trust under general equitable principles would have arisen on the facts, Justices Bell, Gageler and Keane somewhat testily observed, at [112]:

The terminology of a ‘Quistclose trust’ is helpful as a reminder that legal and equitable remedies may co-exist. The terminology is not helpful if taken to suggest the possibility apart from statute of a non-express trust for non-charitable purposes.

This might be thought to suggest that unless an arrangement conforms to orthodox express trust principles, it cannot be saved through the application of some other ‘Quistclose’-based analysis.

One can wholeheartedly agree with their Honours’ subsequent observation that an arrangement whereby a solicitor holds money received from his client for or on behalf of that client ‘archetypally’ answers the description of an express trust. To give that trust the ‘Quistclose’ nomenclature adds nothing of value to the analysis. The problem is, of course, that not all examples of the Quistclose trust are so readily amenable to express trust analysis: the case bearing its name is a striking example. It is for this reason that scholars have searched for alternative legal analyses that will explain and justify the award of a non-express (‘constructive’) trust in Quistclose-style scenarios, together with all the beneficial baggage that comes with the award of such a ‘trust’ (immunity from the consequences of the trustee’s insolvency is the best known attraction, but other statutory benefits also often hinge on the characterisation as a trust, as was argued in this case — albeit unsuccessfully in the final result. For a seminal example of the significant practical attractions of a finding of a trust in a legislative context, see Daly v Sydney Stock Exchange Ltd [1986] HCA 25.)

It remains to be seen whether a consequence of the High Court’s decision is that courts are less ready to find constructive trusts (whether labelled Quistclose or otherwise) where money has been transferred for a non-charitable purpose that fails and the indicia of an express private trust are not established. What is clear is that the continuing uncertainty over the nature and legitimacy of Quistclose arrangements highlights the broader need for a comprehensive and coherent framework of the principles of constructive trusts. On this final point, and for the author’s perspective, see E Bant and M Bryan, ‘A Model of Proprietary Remedies’ in E Bant and M Bryan (eds), The Principles of Proprietary Remedies (Thomson Reuters, forthcoming September 2013) ch 12.

AGLC3 Citation: Elise Bant, ‘Thieving Lawyers: Trust and Fidelity in the High Court: Legal Services Board v Gillespie-Jones’ on Opinions on High (16 August 2013) <http://blogs.unimelb.edu.au/opinionsonhigh/2013/08/16/bant-gillespie-jones/>.

Elise Bant is an Associate Professor at Melbourne Law School.

10 thoughts on “Thieving Lawyers: Trust and Fidelity in the High Court: Legal Services Board v Gillespie-Jones

  1. I find yours a very helpful analysis, Dr Elise.

    One of the minority’s concluding observations at para 144 – as one of the concluding observations in the judgment – stood out for me: “…any payment to Mr Gillespie-Jones [the barrister] by Mr Grey [the solicitor] would not have been a payment of trust money. Had he complied with s 3.3.20(1)(b) of the Act, Mr Grey would have paid trust money into the law practice’s own account and drawn upon that account to pay Mr Gillespie-Jones. Mr Gillespie-Jones could not have insisted on payment of money from the trust account and Mr Grey could not have drawn money from the trust account to discharge his debt to Mr Gillespie-Jones other than by paying it into his own account.”

    Long emphasised for Queensland practitioners on the part of the Queensland Law Society has been the rule that a solicitor must NEVER, EVER, EVER draw money out of the solicitor’s trust account for payment into his or her general or office [his or her own] bank account on account of disbursements incurred but unpaid. This rule applies even though it is done with a view to payment – which may occur more or less immediately thereafter – to the creditor (whether barrister, expert witness, titles office or whoever). (Reimbursement of an outlay already paid with the solicitor’s own money, subject to statutory requirements about notifying the client, having written client authority, etc, were always regarded as OK.) The rule sticks in my memory still from the QUT Legal Practice Course of the early 1990s in instruction no doubt closely sponsored by the Qld Law Society, and has always appeared, in bold print so to speak, in the Society’s guidance published to the profession over many years. I don’t know whether the principle has received similar emphasis in other States and I’m not sure whether the rule does have an express basis in the current Legal Profession Act 2007 (Qld) or predecessor Trust Accounts Act 1973 (Qld). It is sound in principle is it not? – at the moment of transfer of funds out of trust to the general bank account, the solicitor will be mixing trust money and the solicitor’s own money. And, bearing in mind that here we have what the court called an archetypal trust, how can that be within the client’s intentions? Absent any special circumstances or agreement (perhaps) every client intends that money will be paid – subject to client approval of specific amounts, perhaps – directly out of trust to the barrister/expert witness/title office and cares not one whit that the barrister etc is legally the solicitor’s creditor only, because the client is more concerned about the end or larger purpose.

    The client intends that it never can be money belonging to the solicitor and (for example) clawed back on the solicitor’s insolvency and distributed to his unsecured creditors. Shall not waffle on. Thanks for your blog, Dr Elise; it’s great.

  2. I think, Elise, what I find most jarrying really is Bell, Gageler and Keane JJ’s statement that ‘…any payment to [the barrister] by [the solicitor] would not have been a payment of trust money.’ To me, this is just inexplicable. As far as I can see, the minority is describing a transaction through the solicitor’s office/general bank account using it as a mere conduit; the money transits through it (if that is significant). But the money remains impressed with the original trust until acutally paid over to the barrister. It is plainly traceable into the solicitor’s hands. Even if it is not a fast-action transit through the general account – as where let us say the financially pressured solicitor augments his own funds generally with trust funds in a fast and loose manner, having regard in a broad sense to the overall amount in disbursements he has ‘incurred’ (perhaps even where he is awaiting counsel’s fee notes) and not yet paid it remains so impressed.

  3. Thanks for your comment, Kevin. You make some very good points. Supposing the barrister had submitted his memoranda of fees to the solicitor, and the client directed him to pay the barrister from the trust funds. It surely could not have been contrary to the Act to pay him directly from the trust account? Indeed, one would have thought it would be contrary to the direction to pay the funds into the solicitor’s account first. The position of course would be different if the solicitor had paid the barrister’s fees first and the client had authorised him to repay himself from the trust funds. The passages at [123]-[125] seem to suggest this is right. The statement at [144] is rather difficult to understand in that context.

    As to the statement (at [145]) that the barrister never had any ‘entitlement to’ payment of trust money, this must, I think, be understood as a fairly technical expression of the point that the barrister was only ever a creditor of the solicitor. As a creditor, he could not demand that he be paid from a particular source. (The only person who was able to make directions in relation to the trust account was the client as beneficiary of the trust.) The barrister had no proprietary right to or claim in respect of the trust fund. His entitlement was only to be paid the appropriate money sum by the solicitor. Mind you, he might well have (subjectively) ‘expected’ he would be so paid…

  4. Have to confess to feeling a little distressed and less-than-objective on the issue! I am just conscious, I think, of how hard our Society in Qld and leading personalities in the solicitors’ branch have striven for many years to maintain the purity of the simple and, what seems to me, obviously wholesome doctrine: no payment out of trust into general in respect of disbursements incurred but remaining unpaid! For one thing, it is of considerable practical importance in maintaining an efficient and workable system of external auditing of solicitors’ trust accounts.

    I am sure you are right, Dr Elise, with respect, that a payment from the trust bank account to the barrister with client authority is perfectably acceptable and can involve no breach of trust; certainly it happens all the time in practice.

    It is not clear from the judgment, but I wonder if the minority’s statement at para [144] was afffected by s 3.3.18 of the Victorian Act: trust money is not available for the payment of debts of the [law] practice. Can this mean that the solicitor must always somehow ‘convert’ the trust money into his or her own money before applying it to pay his or her own debt? If ‘yes’ (which I doubt) mere transfer of money into the general account won’t do the trick because s 3.3.19 says that trust money cannot be mixed with other money…

  5. Dear Kevin,

    You are right that that is an important provision. But I think the ultimate answer lies in Reg 3.3.34. As French CJ, Hayne, Crennan and Keifel JJ note at [22]-[23], trust monies can only be applied for payment of legal costs owed to the practice if procedures laid out in Reg 3.3.34 are complied with (summarised at [23]). The link on the judgment actually takes you to the wrong instrument, so I will set them out in full below. As you will see, they are quite prescriptive and even in the case of a payment out of the trust account that has been authorised by the client, requires certain notice requirements to be observed (under 3(b)):

    3) The law practice may withdraw the trust money-

    (a) if-

    (i) the money is withdrawn in accordance with a costs agreement that
    complies with the legislation under which it is made and that
    authorises the withdrawal; or

    (ii) the money is withdrawn in accordance with instructions that have been
    received by the practice and that authorise the withdrawal; or

    (iii) the money is owed to the practice by way of reimbursement of money
    already paid by the practice on behalf of the person; and

    (b) if, before effecting the withdrawal, the practice gives or sends to
    the person-

    (i) a request for payment, referring to the proposed withdrawal; or

    (ii) a written notice of withdrawal.

    (4) The law practice may withdraw the trust money-

    (a) if the practice has given the person a bill relating to the money; and

    (b) if-

    (i) the person has not objected to withdrawal of the money within 7 days
    after being given the bill; or

    (ii) the person has objected within 7 days after being given the bill but
    has not applied for a review of the legal costs under the Act within
    60 days after being given the bill; or

    (iii) the money otherwise becomes legally payable.

    (5) Instructions mentioned in subregulation (3)(a)(ii)-

    (a) if given in writing, must be kept as a permanent record; or

    (b) if not given in writing, must be confirmed in writing either before,
    or not later than 5 working days after, the law practice effects the
    withdrawal and a copy must be kept as a permanent record.

    (6) For the purposes of subregulation (3)(a)(iii), money is taken to have been
    paid by the law practice on behalf of the person when the relevant account of
    the practice has been debited.

  6. I really do appreciate your continuing interest in my thoughts, Elise: it is very kind of you.

    It occurs to me that the concept of a solicitor’s disbursement comes with some interesting historical baggage, although this point does not get a mention in the Gillespie-Jones decision that I can find. It seems that notwithstanding the name ‘disbursement’, you don’t as a solicitor have to actually pay over any money before a disbursement is a disbursement. The MR, Lord Langdale, sought the advice of the taxing masters on this point in Re Remnant [1849] 50 ER 949. The masters advised and Lord Langdale accepted at 953:

    “That such payments as the solicitor in the due discharge of the duty he has undertaken is bound to make, so long as he continues to act as solicitor, whether his client furnishes him with money for the purposes or with money on account, or not: as, for instance, fees of the officers of the court, fees of counsel, expense of witnesses etc. …
    We think also, that the question whether such payments are professional disbursements or otherwise, is not affected by the state of the cash account between the solicitor and the client; and that (for instance) counsel’s fees would not the less properly be introduced into the bill of costs as a professional disbursement, because the client may have given money expressly for paying them;…”

    Justice Keane discussed this in the Queensland Court of Appeal: Legal Services Commissioner v Dempsey [2008] QCA 122.

  7. Having been a bit rude about the minority, I feel it is only fair to turn my sights on the majority!

    At para [42] they say, ‘If the instruction had been found to be directed to payment of the barrister’s fees, the monies would have qualified as transit money, in which case they would have been subject to these provisions. But her Honour rejected that contention.’ The reference to ‘these provisions’ is to s 3.3.20(1)(b) of the Act and reg 3.3.34 of the Regulation, which you set out in any earlier post, Dr Elise. Also, ‘these provisions’ it is said, ‘do not, in their terms, appear to be referable to the circumstances where a client gives an instruction to disburse monies’.

    Mystifying.

    The client’s money certainly went into the general trust account. And correctly so. Transit money must be paid into the trust bank account when received in the form of cash under s 3.3.17A(4) of the Act. I can’t see how there can be any room for doubt that an EFT — and here all the money was received by way of EFT — is cash.

    If I am wrong – and I might be – it means that solicitors can receive what has for generations been treated as trust money – an amount specifically earmarked for payment of a barrister, to the titles office, another solicitor etc – into the general account, so long as it is received in the form of an EFT.

    Transit money is, of course, trust money under the definition of ‘trust money’, but when received in a form other than cash much record keeping is relaxed and the mode of custodianship is different. No doubt the archetypal form of ‘transit money’ will be a cheque payable to a third party (or order – if bearer it may be cash???) such as a barrister or the titles office. It only remains transit money for so long as remains in that form. If by inadvertence the cheque is paid into the general trust account rather than mailed onwards, there will be money taken to be in the trust account [a debt of course really, owed by trust account banker to the solicitor] and that notional money must be trust money; it is not or at least it has ceased to be, transit money.

    It was not the primary judge’s finding that there was no specific direction for payment of the barrister of a specific amount which precluded the money in the trust bank account being characterised as trust money. Not at all.

    And why on earth can’t reg 3.3.34 be referable to disbursements? If it isn’t, then it means that simply because a payment out of trust is a “disbursement” (in context, any payment other than to the law practice holding the money, that is, to a third party made by the solicitor in the course of his professional practice), then there is (A) no requirement for instructions (or client authority) under reg 3.3.34(3)(a)(ii) and (B) no requirement to give notice to the client (or a request for payment whcih includes reference to the proposed withdrawal) [reg 3.3.34(3)(b)], which surely cannot be right.

  8. Slight blunder in my last post. I left out a ‘not’ in quoting from para [42] of the majority judgment: ‘If the instruction had been found to be directed to payment of the barrister’s fees, the monies would have qualified as transit money, in which case they would NOT have been subject to these provisions. But her Honour rejected that contention.’

  9. Dear Kevin,

    I think the important distinction to be drawn is between trust money that comes into the firm’s hands subject to a specific direction to pay to a third party, and trust money that comes into the firm’s hands on account of legal costs generally. In the former, the money is ‘transit money’ and must be paid over in accordance with those instructions (see 3.3.16). Transit money (in whatever form it is received) is not required to go first into the general trust account (3.3.13(1)(b)) – the one exception is with cash, which as you have noted must first be deposited into the general trust account and then must be dealt with according to the instructions. Rather, the provisions state that the transit money must be dealt with in accordance with the directions within the time stipulated, or as soon as practicable after received. Whether depositing transit money into the general account constitutes a breach would probably depend on whether it was a necessary step in following the direction.

    But in any event, I suppose we have to remember that this case was not a transit money case: the findings were not that the trust money came subject to a specific direction to pay (for example) to the particular barrister, but that it was (as a general matter) on account of legal costs. In that case, it had to go into the general trust account and only be dealt with subsequently according to the procedures we have already discussed.

    Best wishes,

    Elise

  10. Thanks, Elise.

    Mmmmm…I may have become a little infatuated with my idea that an EFT equals cash in this context; at least it is an overvalued idea. I was also a little taken by the notion that a bearer cheque is cash. I suppose realistically the legislators did mean just notes and coins.

    Whenever I try to understand the intricacies of any payment system I feel a little like the special agent in the movie “Catch Me If You Can” who asks innocently, “You mean those funny numbers at the bottom of a cheque actually mean something?”

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