Solicitors' partners should note that the firm is liable for the full amount of moneys received by a partner for investment and subsequently misapplied, even where the innocent partner had no knowledge of the transactions, and collateral personal security given by the defaulting partner does not remove the transaction from the ordinary scope of the firm's business.
Later decisions that cite Mann v Hulme
MANN v. HULME [1961] HCA 45; (1961) 106 CLR 136
Legal Practitioners
High Court of Australia
Dixon C.J.(1), Fullagar, Taylor(1), Menzies(1) and Windeyer(1) JJ.
THE HONOURABLE MR. JUSTICE FULLAGAR died at Melbourne before judgment in
this appeal was delivered.)
CATCHWORDS
Legal Practitioners - Solicitors - Partnership - Moneys received by partner for investment - Personal promissory note given by partner as added security - Misapplication of moneys by partner - Liability of firm - Measure of liability - Partnership Act, 1892 (N.S.W.), s. 11*.
HEARING
Sydney, 1961, April 11, 12; August 2. 2:8:1961DECISION
August 2.2. The partnership practice was carried on under the name of E.R. Mann and Company and the firm had been known to the respondent and her husband for a number of years prior to 1953. This circumstance accounted for the fact that when, in December of that year, Mr. Hulme was gravely ill it was a member of that firm, Richardson, who made his will. For this purpose he visited the respondents' home at their request, obtained his instructions there and forthwith prepared the will in his own handwriting and had it executed. In the course of obtaining instructions Richardson made enquiries of Mr. Hulme concerning his assets and he ascertained that the latter held a number of War Savings Certificates which had matured. Richardson pointed out that the capital sums involved were not earning interest and said that since his firm had many avenues for investing money with various clients at substantial rates of interest the respondent and her husband might, perhaps, think about whether they would like to take advantage of the opportunity which this situation presented. Subsequently, in January 1954, Mrs. Hulme went to the firm's office for the purpose of having her will prepared. There she saw Richardson and it was he who prepared it and arranged for its execution in the firm's office. Later, in May 1954, when Mr. Hulme had partially recovered, he and his wife went to the firm's office where again they saw Richardson. They reminded him of the conversation during which he had discussed the possibility of making investments on their behalf and, according to Mrs. Hulme, Richardson told them that the firm had clients engaged in the building trade who wanted to borrow money on second mortgage from time to time and he offered to invest their money in this way. He said that the building trade was booming at that time and their investments would be quite safe. According to Mrs. Hulme he said that it was his practice to investigate these clients before he made any loans to them and he assured them that their capital would be quite secure. As an added inducement he said that he would be prepared to give his own promissory notes "as an added security" for these investments and there would be no fear or worry as to the safety of their money. The respondents said that they would leave the matter in his hands as they trusted the firm and they thought "that would be quite all right". (at p139)
3. A few days after this conversation Richardson telephoned Mrs. Hulme and
said that he had a builder client who needed 400 pounds
and another one who
needed 600 pounds. He said he would like two separate cheques because two
builders were involved. In response
to this request two cheques for the sums
mentioned were forwarded to Richardson. On subsequent occasions other requests
were made
by him for moneys for similar transactions and in all, the sum of
2,565 pounds, which came from the joint funds of the Hulmes, was
deposited
with him for investments of this character. It is unnecessary to recount the
substance of the conversations which are said
to have taken place from time to
time concerning the individual transactions but it is not without importance
to pay some attention
to the times when the various amounts were placed in
Richardson's hands. The first two amounts of 400 pounds and 600 pounds were
sent to Richardson on 5th May 1954. Thereafter the following amounts were
advanced on the dates specified:
14th May 1954 . . . . . . . . . . . . . . . . 400 poundsAll of these amounts were paid to Richardson by cheque and during the period covered by the transactions various payments of interest were made to the respondent and her husband. These amounts were as follows:
10th November 1954. . . . . . . . . . . . . . 600 pounds
14th March 1955 . . . . . . . . . . . . . . . 200 pounds
23rd May 1955 . . . . . . . . . . . . . . . . 150 pounds
3rd November 1955 . . . . . . . . . . . . . . 215 pounds
18th August 1954. . . . . . . . . . . . . . . 25 poundsThese sums totalling, in all, 220 pounds were paid by cheques signed by Richardson and drawn on the firm's trust account. (at p140)
9th November 1954 . . . . . . . . . . . . . . 65 pounds
18th November 1954. . . . . . . . . . . . . . 25 pounds
1st March 1955. . . . . . . . . . . . . . . . 105 pounds
4. The claim which the respondent and her husband made in the suit was based upon the assertion that subsequently to the receipt of the moneys in question they were misapplied by Richardson. It is, of course, said as against the appellant that the moneys were received by Richardson whilst acting within the scope or apparent scope of his authority as a partner in the firm. The fact that they were misapplied by Richardson is beyond dispute though a ground of appeal was taken that there was no evidence to this effect. But at all times the litigation seems to have been conducted on the basis that Richardson had misapplied the moneys and there is a great deal to be said for the proposition that this was admitted on the pleadings. What, in fact, happened to the moneys we do not know. We do know, however, that Richardson is serving a sentence of imprisonment for fraudulent misappropriation and that the formerly subsisting partnership was dissolved some time ago. This has been stated to each court below with the concurrence of the parties and it may well have been understood to have constituted an acknowledgment that the moneys formed part of the sum which was misappropriated. But at the conclusion of the argument on the appeal it was said that the appellant, who, naturally enough, knows nothing of Richardson's actions in the matter, does not know whether or not the moneys in question were appropriated by Richardson to his own use and it is asserted that at no time was any admission of misappropriation made. But whilst asserting this counsel for the appellant ultimately invited us to deal with the appeal on the basis that the moneys were misapplied by Richardson "in the sense that they were not applied in accordance with the instructions which he received". Particular mention of this matter is made for reasons which will appear later and in the meantime we shall deal with the case on this basis. (at p140)
5. Richardson did not defend the suit and the hearing, therefore, proceeded against the appellant only. In the result the plaintiffs failed to secure any relief against him. But an appeal to the Full Court of the Supreme Court was allowed and a declaration was made that Richardson and the appellant were jointly and severally liable to pay to Mr. and Mrs. Hulme the sum of 2,565 pounds together with interest on the several sums involved for specified periods. There was a further order that the total sum be paid within a time limited: Hulme v. Mann (1961) SR (NSW) 136; (1960) 78 WN 90 . This appeal is now brought from the order of the Full Court. (at p141)
6. It will be necessary to examine the reasons which led to these contrary decisions but first of all it is desirable to make some observations concerning the character of the suit and to identify the basis upon which the respondent is said to be entitled to the relief which the order of the Full Court affords. Presumably the foundation of the suit was the proposition that where moneys are entrusted to an agent expressly for the purpose of applying them in some specified manner the agent becomes a trustee thereof (Burdick v. Garrick (1870) LR 5 Ch 233 and North American Land and Timber Company, Limited v. Watkins (1904) 1 Ch 242 ). And where the agent is one of several partners and he receives the moneys of the principal in the course of performing an act "for carrying on in the usual way business of the kind carried on by the firm of which he is a member" (Partnership Act, 1892 (N.S.W.), s. 5) it may well be that his partner or partners become trustees also although they have no knowledge of the transaction and the moneys never actually reach their hands. Receipt by one partner in those circumstances may well be sufficient to create the relationship. But, as will be seen, the question whether this proposition is entirely valid is not of much importance in the case and, since we have no information whatever as to what happened to the Hulmes' moneys after they reached Richardson's hands, we do not think it either necessary or desirable to examine this proposition further. Such an examination would be of importance only for the purpose of determining whether the suit was open to objection on the ground that Mr. and Mrs. Hulme had no equity entitling them to proceed in the equitable jurisdiction. That objection was in fact taken in the appellant's statement of defence but it was not pursued as it was obvious to him that if it could be established that in accepting the Hulmes' moneys for investment Richardson had acted within the scope of his apparent authority as a partner and that he subsequently misapplied them, the firm would ultimately be held liable to make good the loss (Partnership Act, s. 11(a)). If, therefore, the Hulmes were prevented from litigating these issues in the present proceedings there would be fresh proceedings and the appellant had no wish to take the risk of incurring another set of costs which, because of Richardson's depredations, he would be unlikely to recover even if he should ultimately be successful. Accordingly, we were asked by the appellant, consistently with his attitude below, to consider the matter in the light of s. 11 of the Partnership Act and the material issue therefore was whether Richardson was acting within the scope of his apparent authority as a partner in the firm in his dealings with the respondent and her husband. This we think is a convenient and proper course to pursue and accordingly we propose to deal with the appeal on that footing. It is of some interest to note that in Hallinan v. Kinsey (1934) 51 WN (NSW) 162 , Long Innes J. entertained a suit in a form which as between the parties to that suit raised this very issue. (at p142)
7. The learned trial judge dismissed the suit in his court as against the appellant because he was of the opinion that Richardson's acts were not within the scope of his apparent authority as a partner in the firm. With this in mind it is convenient to revert for a moment to the fact, which already appears, that Richardson told the respondent and her husband that he was prepared to give his own promissory notes as "added security" for the safety of their investments. In fact he did on the occasion of each receipt prepare and deliver to the Hulmes his personal promissory note and this circumstance was a matter to which the learned trial judge attached a great deal of importance. He did not find, and it is not now suggested, that the Hulmes made personal loans to Richardson. Indeed such a finding would have been not only diametrically opposed to the oral evidence but quite inconsistent with much of the circumstantial detail which is beyond dispute. The Hulmes had come in contact with Richardson as a member of the firm, according to the oral evidence the loans were to be made to builder clients of the firm, consistently with this evidence specified sums were asked for from time to time and were in fact provided and during the period over which the transactions extended interest payments were made by cheques drawn on the firm's trust account. But his Honour saw in this aspect of the transaction "a condition" that Richardson should make himself personally liable for repayment of his promissory notes and become a "principal debtor" to the Hulmes. Then, having accepted the proposition that it was within the ordinary scope of the business of a solicitor to accept money to be lent to specific though unnamed persons, he held that the annexing to such a transaction of a condition having the effect which he had described, would take the transaction outside the ordinary scope of such a business. To this proposition there is, we think, a clear answer. First of all, the so-called condition and the giving of the promissory notes pursuant thereto did not, on any view of the evidence, constitute Richardson a principal debtor to his own clients. The promissory notes were given as "added security" for the proposed investments and were intended to secure the Hulmes' capital only in the event of loss upon any of the contemplated investments. But they did not alter the character of Richardson's obligations to the Hulmes so long as the moneys remained uninvested. Nor did they relieve the appellant from any obligation which the receipt of the moneys imposed upon him as a partner in the firm. It will be seen, therefore, that the arrangement that promissory notes should be given was purely collateral and although it may be said that such an arrangement was most unusual the fact that it was made does not afford any ground for saying that the receipt of the money was not in the ordinary course of the partnership business. The conclusion of the learned trial judge was, it appears to us, dependent upon the validity of his view that Richardson became primarily liable to the Hulmes. As he said, "it is not within the ordinary scope of a solicitor's business to accept money to be lent on mortgage on condition that the solicitor shall make himself personally responsible for repayment of his promissory notes making him a principal debtor to his own client". Acceptance of this view would, it seems to us, lead inevitably to the conclusion that the dealings were personal to Richardson in the sense that the moneys in question were lent to him and any subsequent inquiry as to whether the transactions were within the scope of his apparent authority as a partner would be quite pointless. But his Honour did not entertain the view that the moneys were advanced merely as personal loans to Richardson; his view seems to have been merely that the giving of the promissory notes, having the effect which he ascribed to them, removed the transaction from the ordinary scope of a solicitor's business. As already pointed out however, his view as to the effect of the promissory notes was erroneous; quite clearly their purpose was to constitute Richardson a surety in respect of each investment undertaken and if investments had in fact been made they would have done no more than this. In those circumstances the fact that they were offered and given in no way changed the character of the principal transaction which, according to the evidence, was the entrusting of funds to Richardson as a partner in the firm for the purpose of making specific investments on the Hulmes' behalf. No doubt promissory notes were offered as an inducement to the Hulmes to provide funds, but this fact no more removed the transaction from the ordinary course of business than did Richardson's representations that he had builder clients who required advances and that they were prepared to pay substantial rates of interest. In our view the decision of the Full Court on this point was correct. (at p144)
8. The other ground upon which the suit failed as against the appellant rested upon the view which the learned trial judge took of the facts. This was that his Honour felt "unable to find affirmatively that the plaintiffs did arrange with Richardson that the money should be lent to clients on second mortgage". He did not go so far as to say that he believed the arrangement was not made but he was inclined to believe that it was not. But it is about as clear as it could be from the sequence of events that the moneys in question were provided for the purpose of investment and, as already mentioned, it is not suggested that we should conclude that the advances were made from time to time for Richardson's personal use. In these circumstances we find great difficulty in seeing why Mrs. Hulme's evidence on this aspect of the case should not be accepted. It spoke of an arrangement of a commonplace character and considerable support for it is provided by the events which followed and concerning which there can be no real dispute. We think there is great force in what was said in the Full Court on this aspect of the matter and we agree that the proper conclusion on the evidence is that "the moneys in question were handed to Richardson to be invested by him on behalf of the plaintiffs on second mortgages" (1961) SR (NSW), at p 140; (1960) 78 WN, at p 93 . But even if no mention was made of "second mortgages" there can be no doubt that the moneys were placed in Richardson's hands for the purpose of making specific investments from time to time upon securities prepared by him, and such a finding would be sufficient to bring the case within s. 11 (cf. Hallinan v. Kinsey (1934) 51 WN (NSW) 162 ). (at p144)
9. The only other point which we need mention is that which was raised by counsel for the appellant at the conclusion of the argument. This was based upon the concluding words of s. 11 of the Partnership Act which provides that in the circumstances specified in the section "the firm is liable to make good the loss". It was not established, it is said, that Richardson had appropriated the moneys in question to his own use but only that they had not been applied in accordance with his instructions. Then, seizing upon the word "loss" the appellant contended that if the respondent should otherwise succeed in the suit the order of the Full Court should nevertheless be varied by deleting the order for repayment and by substituting an order for an inquiry as to the loss which the appellant has sustained. But this submission proceeds upon a mistaken view of the meaning of the relevant words. The respondent has lost the moneys which have been misapplied and this is the measure of the firm's liability. She is not bound to endeavour to trace the moneys and then, in order to ascertain whether or not she has suffered a loss, to accept and give credit for any investment that may be found to have been made by the misapplication of the moneys in question. No doubt, on the analogy of the liability of trustees for breach of trust she might have followed this course had she so wished (cf. In re Salmon; Priest v. Uppleby (1889) 42 Ch D 351 ). But the claim which she and her husband made plainly indicates a rejection of any such right. (at p145)
10. For these reasons we are of the opinion that the appeal should be dismissed though the order of the Full Court should be varied to meet the situation caused by the death of her husband subsequently to the appeal to that court. (at p145)
ORDER
Decree of the Full Court of the Supreme Court of New South Wales varied by substituting for the word "plaintiffs" where it appears in the declaration contained in the decree and in the immediately ensuing order and in the order for payment of costs the words "the appellant Ivy Alice Victoria Hulme". Otherwise appeal dismissed with costs.