Waiter! There’s a Chinese restaurant in my easement!

The lawyer who acts for himself is commonly thought to have a fool for a client. But what about the lawyer who acts for the company of which he is a director and shareholder?

A Melbourne solicitor who acted in several capacities for a private company must now be pondering this question following the non-party indemnity costs order made against him personally in 1165 Stud Road Pty Ltd v Power & Ors (no 2) [2015] VSC 735. (The case was decided just before Christmas but somehow was published on Jade only this week).

The solicitor was (indirectly) one of the main shareholders in 1165 Stud Road Pty Ltd (“Stud Rd”). He was also its company secretary and one of its two directors. He dealt on its behalf in several controversial transactions and also acted as its solicitor in both litigation and conveyancing contexts.

In 2007, Stud Rd bought a block of land in Rowville. The block’s only road access was via an easement. But two years earlier a neighbour had built a Chinese restaurant on that easement.

In 2012, Stud Rd sold its landlocked block for $2.3 million. Its s 32 statement neglected to mention the slight issue of the obstructed easement. That sale then fell over before settlement and Stud Rd sued the purchaser and also the owner of the offending restaurant (“Palms”).

Early in the litigation, Palms demanded security for costs from Stud Rd. Stud Rd’s solicitor/company director/company secretary/etc. wrote back refusing and saying that Stud Rd had ample equity in the Rowville land and could afford to meet any likely costs order against it. That much was true.

But things changed when Stud Rd subsequently sold the land afresh. The new sale wasn’t disclosed to the other litigants nor was the new contract of sale discovered pursuant to Stud Rd’s continuing discovery obligations. Stud Rd also omitted to mention to the other parties its distribution of the net sale proceeds to various of its own related interests.

As the trial loomed closer, Stud Rd went into voluntary liquidation. The proceeding was discontinued before trial as a consequence.Palms had nevertheless spent over $300,000 preparing for the trial. There being no prospect of recovering those costs from the liquidated company, Palms applied instead for non-party costs orders against Stud Rd’s solicitors and its two directors personally.

Palms succeeded – but only against the director who had also acted as the company’s solicitor. His multi-faceted role as the company’s director, shareholder AND external solicitor was said by Vickery J to constitute “exceptional circumstances”.
Here is a taste:

138. It is clear that [the solicitor], in conducting the Proceeding as a solicitor on behalf of the Plaintiff, in respect of which he was not only a director but also, through a corporate vehicle, a shareholder, was in breach of paragraphs 9.2 and 13.4 of the Professional Conduct and Practice Rules 2005 and placed himself at serious risk of being in breach of paragraph 13.1 of the rules. As a solicitor in active practice, [the solicitor] ought to have been aware of the effect of these Rules.
139. This placed [the solicitor] in a conflict of interest and rendered his conduct of the litigation on behalf of the Plaintiff improper.
140. This was so despite the fact that, during the life of the Proceeding, neither Palms nor its solicitors … ever once raised the issue of conflict of interest or demand that [the solicitor], or any of the firms at which he worked, cease to act in the Proceeding due to his conflict.
141. Reference is made to paragraphs 9.2, 13.1 and 13.4 of the Professional Conduct and Practice Rules 2005 published by the Law Institute of Victoria, which was tendered in evidence:
9.2 A practitioner must not accept instructions to act or continue to act for a person in any matter when the practitioner is, or becomes, aware that the person’s interest in the matter is, or would be, in conflict with the practitioner’s own interest or the interest of an associate.
….
13.1 A practitioner must not act as the mere mouthpiece of the client or of the instructing practitioner and must exercise the forensic judgments called for during the case independently, after appropriate consideration of the client’s and any instructing practitioner’s wishes where practicable.
13.4 A practitioner must not unless exceptional circumstances warrant otherwise in the practitioner’s considered opinion:
13.4.1 appear for a client at any hearing, or
13.4.2 continue to act for a client,
in a case in which it is known, or becomes apparent, that the practitioner will be required to give evidence material to the determination of contested issues before the court.

142. It is likely that [the solicitor] was not able to bring an independent mind to decisions made on behalf of the Plaintiff in the conduct of the Proceeding by reason of his conflict of interest and it is likely that a number of the decisions he made were infected with this conflict.
143. An order for costs against a non-party is not dependent upon, but can take into account, any improper conduct by the non-party….

The upshot was that the solicitor personally [cf the firm that employed him] was ordered to pay Palms’ cost of the proceeding on a standard basis until the date of the undisclosed sale and on an indemnity basis thereafter.
A final point is worth noting. Palms’ application was brought partly in reliance upon s 29 of the Civil Procedure Act [as discussed in Yara v Oswal blogged here] but that limb of the application was held to be statute-barred as it had not been made before the proceeding was “finalised” as required by s 30. However, this missed deadline did not matter for Palms as the Court held that it had power to order the costs against the solicitor under s 24 of the Supreme Court Act and/or in its inherent jurisdiction.

The lessons from this case? Four occur to me.

  • Acting for yourself and/or interests close to you is perilous.
  • A lawyer and client with apparently aligned commercial interests might still have a conflict of interest if the lawyer’s forensic judgment is thought to be compromised as a result of that close association.
  • Lawyers should not act in matters in which they are likely to be material witnesses.
  • And finally, never be too reassured by the fact that no conflict of interest is suggested by your opponents.

More overblown than overarching: Court of Appeal smacks solis with costs orders and disallows fees

The Victorian Court of Appeal last week thumped three large law firms for work which was not “reasonable and proportionate” within the meaning of the Civil Procedure Act 2010.

What’s more, it effectively invited other Victorian courts to do likewise more often.

The case is Yara Australia Pty Ltd v Oswal [2013] VSCA 337.

Expect to hear a lot more about it. It is the first detailed appellate consideration of the Civil Procedure Act obligations on parties and their lawyers.

Many civil litigators will find it confronting reading.

The case

In Yara, three applicants sought leave to appeal against their failure to obtain security for costs. Although they were later able to point to a wider strategic purpose, the amount of security sought between the three of them ostensibly totalled about $141,000, (relatively small beer for the Court of Appeal.)

The applicants had separate but similar interests. Between them, they were represented by solicitors Clayton Utz, Herbert Smith Freehills and K & L Gates, 3 silks and 3 junior counsel.

Their application went down after a single day’s hearing. And worse was to come for the lawyers.

After refusing the application, the Court of Appeal of its own motion invited submissions on the question of whether anyone had breached their overarching obligations under the Civil Procedure Act 2010 in the conduct of the leave to appeal application.

The resulting judgment starts with two factual questions. “First, whether there was any over- representation of a party by counsel, and second, whether the material produced on the hearing of the application for leave to appeal was unnecessary or excessive.”

The Court was ultimately persuaded that the abundance of barristers did not constitute “over-representation” but it was less forgiving about the documentation filed in support of the application.

Why? Because even excluding the notices of appeal and written cases, the application book exceeded 2700 pages and 6 lever arch folders.

In their joint judgment Redlich and Priest JJA and Macaulay AJA were scathing. They variously described parts of it as “entirely otiose”, “not directly relevant”, “excessive”, “superfluous”, “entirely unnecessary” , “repetitious” and containing “a substantial amount of duplicated material”.

The Court concluded by ordering each applicant to pay the respondents’ costs of the application.

Each applicant’s solicitor was then hit with a double whammy. First, each solicitor was ordered to indemnify its client for half of the respondent’s costs “incurred as a consequence of the excessive or unnecessary content of the application books.” Secondly, each applicant’s solicitor was “disallowed recovery from the applicant of 50% of the costs relating to the application books, and costs incidental thereto.”

Some cherries from the judgment

The Court of Appeal is clearly hoping this approach will catch on.

And judges are being invited to act on their own initiative where the parties themselves are bashful.

Here are some extracts from the judgment (citations omitted) to give you its flavour.

5       The statutory regime and the obligations that are imposed by the [Civil Procedure Act] have not previously been considered in any detail at an appellate level. As the enforcement of the overarching obligations under the Act has been so little traversed, there is presently little to guide judicial officers as to the extent of the Court’s powers and the means by which parties or their legal representatives can be penalised for any contravention. We have thus addressed some of these issues at greater length than would ordinarily be necessary when a contravention of the Act is under consideration.

….

14     Each party and their solicitor and counsel have an obligation to comply with the overarching obligation. Whether any of them have breached that overarching obligation is to be determined by an objective evaluation of their conduct having regard to the issues and the amount in dispute in the proceeding. The legal practitioners’ duty is non-delegable. The obligation will override their duty to their client where the discharge of that duty would be inconsistent with the overarching obligation. The legal practitioner will not be relieved of this overarching responsibility because of the instructions of their client.

15     Legal practitioners, whether solicitor or counsel, involved in the preparation of pleadings, affidavits or other materials that are to be used in the proceeding or who provide advice as to such matters, have individual responsibilities to comply with the overarching obligation. Both solicitor and counsel also have an overarching responsibility with respect to the extent and level of their client’s representation. Each must ensure that, having regard to the issues, the extent and level of representation proposed is reasonable and proportionate. Advice or instructions given or received by legal practitioners, and instructions given by the client, may inform but will not be determinative of the question whether, viewed objectively, there has been a breach of the obligation.

         ….

18     Section 29 of the Act provides the Court with broader and more flexible powers than under the Supreme Court (General Civil Procedure) Rules 2005 (‘the Rules’) or under its inherent jurisdiction. Rule 63.23(1) enables the Court to make orders for costs against a legal practitioner who has caused costs to be incurred improperly by a failure to act with reasonable competence and expedition. However, the primary object of r ? 63.23(1) is not punitive or disciplinary but compensatory, enabling reimbursement of a party’s costs incurred because of the default of the solicitor. The primary object of the Rule is not to punish the solicitor, but to protect the client who has suffered and to indemnify the party who has been injured. Rule 63.23(1) also protects solicitors from the negligence or incompetence of counsel.

20     The Court’s powers under s 29 of the Act include the power to sanction legal practitioners and parties for a contravention of their obligations …. Moreover, the power to sanction is not confined to cases of incompetence or improper conduct by a legal practitioner. Where there is a failure by the practitioner, whether solicitor or counsel, to use reasonable endeavours to comply with the overarching obligations, it will be no answer that the practitioner acted upon the explicit and informed instructions of the client. A sanction may be imposed where, contrary to s 13(3)(b), the legal practitioner acts on the instruction of his or her client in breach of the overarching obligations.

21     …. In our view, the enactment of s 29 together with s 28(2) imbues the Court with broad disciplinary powers that may be reflected in the costs orders that are made. The Court is given a powerful mechanism to exert greater control over the conduct of parties and their legal representatives, and thus over the process of civil litigation and the use of its own limited resources.

22     The Act does not merely reaffirm the existing inherent powers of the court but provides a powerful indication of the will of the Parliament about the values sought to be achieved by the way in which cases are managed in the courts and the balances that have to be struck….

23     It is therefore somewhat surprising that despite the length of time the Act has been in force, the scope of the sanction provisions in the Act for a failure to comply with the overarching obligations has been under-utilised.

….

25     The explanation for the under-utilisation of the provisions of the Act lies in part in a false perception that these provisions and the overarching obligations do not effect any material change to the Rules and the inherent jurisdiction of the Court…. The Act creates obligations which extend beyond those in the Rules and confers upon the courts a panoply of powers not found in the Rules.

26     The Act prescribes that parties to a civil proceeding are under a strict, positive duty to ensure that they comply with each of the overarching obligations and the court is obliged to enforce these duties. The statutory sanctions provide a valuable tool for improving case management, reducing waste and delay and enhancing the accessibility and proportionality of civil litigation. Judicial officers must actively hold the parties to account.

27     Yet as we have observed, sanctions imposed for a breach of any overarching provisions have been a rarity at first instance. When no party invites the court to determine whether there has been a breach of the Act, there may be a judicial disinclination to embark upon such an own-motion inquiry for fear that inquiry as to a potential breach may be time consuming and may require the introduction of material that was not before the court as part of the proceeding. Such fears cannot relieve judges of their responsibilities….

You can probably still hear this judgment causing a hush in mega-firms the length of Collins Street (starting with their photocopying departments).

How Edelsten’s costs application against solis backfired

Last October I posted about Dr Edelsten’s adventures in the Supreme Court of Victoria against a lady friend in (Mainly) keeping a sugar daddy’s confidences.

A quick reminder. In an entertaining but unflattering judgment Dr Edelsten won an order for $US5000 plus certain limited suppression orders against a Ms da Silva.

Among other things, Beach J found that “most of the evidence given by the defendant was demonstrably false and could not be believed. However, Dr Edelsten was no more an impressive witness than Ms da Silva.”

Now the aftermath (which escaped me among the distractions of the summer holidays).

The week before Christmas Dr Edelsten went back to court and sought his costs of the litigation against the defendant’s solicitors – on an indemnity basis.

Among other things, he relied upon the Civil Procedure Act.

He argued that swathes of the defendant’s case had no proper basis, her solicitors must have known this and therefore they should not have persisted with key aspects of the defendants’ case.

Beach J was not swayed.

“I am satisfied that at all times … the defendant’s solicitors were acting on the instructions of the defendant. Indeed, when the defence was eventually abandoned, it was abandoned in the face of the defendant’s evidence to the contrary.

… Having regard to the instructions the defendant’s solicitors then possessed, I see nothing improper, or in breach of any rule of conduct, or in breach of any overarching obligation or other provision of the Civil Procedure Act, in the drawing, settling and filing of the defendant’s defence. …

It is always possible to say that an issue, upon which it becomes clear that a party will ultimately be unsuccessful, could have been abandoned earlier if greater diligence had been exercised. However, the mere failure to abandon a point at the earliest possible time does not mandate a conclusion that an overarching obligation of the Civil Procedure Act has been breached.

…. In the end, I have come to the conclusion that while a counsel of perfection would have suggested that the concession made on the afternoon of the third day of the trial could (and possibly should) have been made 24 hours earlier, the failure to take this step at that time did not involve the contravention of any of the overarching obligations in the Civil Procedure Act.

And the ordeal was not yet over.  Beach J concluded with an order that Dr Edelsten pay the solicitors’ costs of his failed application on a solicitor /client basis (apparently because the judge considered the application had been sufficiently hopeless to warrant costs on more than the usual party/party basis).

The costs decision is here.

 

Courage at all costs? Lawyers reminded of personal exposure in Centro

Australia’s most famous English silk, Geoffrey Robertson, once rhetorically rolled his eyes at the concept of fearless lawyers in Anglo-Australian law.

He was all for the idea but his point was that a brave lawyer, here or in London, braves mainly the risk of occasional unkind words from the bench and the media.

For truly courageous lawyers, he said, look to places like Columbia.

There, some lawyers’ career alternatives boil down to either a safe and very comfortable life for themselves and their families, subsidised by the local drug lords, or a more principled career on a very modest government income which, among other things, is hopelessly inadequate to guard them and their families from the real possibility of kidnapping or assassination.

Columbia remains a long way off but Robertson QC’s disparagement of legal courage here might require some updating after Justice Michelle Gordon’s reported comments in the Centro case this week.

The case is in its seventh week in the Federal Court. There are hundreds of millions of dollars at stake. The auditors were always in the gun. Now their counsel and solicitors King & Wood Mallesons might be too.

See the Fairfax reports here and here.

A judge’s power to order costs against the lawyers is not in doubt (see for example my post here on Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys [2012] FCA 282 and the Allen Arthur Robinson post on a similar recent case here). But such costs orders typically involve after-the-event criticism of the lawyers from the bench.

Media reports of the Centro case suggest provisional criticism from the bench of the lawyers’ anticipated performance.

Assuming these reports are correct, what is a brace of silks and senior juniors and their über firm instructing solicitors to do?

While it would hardly look courageous, they could turn tail and run. Abandoning a line of argument in defiance of a client’s instructions is a real option in some cases. While obviously problematic (not least from the costs angle) it can be justified in the right circumstances by the lawyers’ overarching obligations under, among other things, the Federal Court Act, the Civil Dispute Resolution Act (Cth) and Victoria’s Civil Procedure Act.

Another option is persevering in the teeth of incoming judicial flak and attempting to win over an apparently very dubious judge. (although they have reportedly described their argument as “not without foundation” which sounds a mite trepidatious.)

But whichever course the auditors’ representatives now choose, they will probably require more guts than Robertson QC thought was usually required of Anglo and Australian lawyers.

This a nine-cornered stoush (yes, nine!) and costs will surely be running at several Portsea beach houses per week.

Stay tuned.

Underachieving the overarching purpose

Michael O’Brien of Aitken Partners has referred me to a scorching judgment delivered by Justice Reeves in the Federal Court in Brisbane last week – Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys [2012] FCA 282.

The patent attorneys had served a statutory demand for $10,706 on their former client. The client asserted a genuine dispute under s 459G of the Corporations Act and ultimately succeeded in having the stat demand set aside. This outcome cost the parties a combined total of approximately 550 pages of affidavit material and looks set to cost someone (unlikely to be the parties themselves) legal costs of more than twice the actual amount in dispute.

The judgment refers to the Civil Dispute Resolution Act extensively and takes both parties’ lawyers to task for their apparent ignorance of it and related principles arising from the Federal Court Act and ethics generally. (It will be recalled that the Civil Dispute Resolution Act is the federal cousin of Victoria’s Civil Procedure Act).

Some tasters from the reasons –

….

7. The hearing lasted a full day, a large part of which was taken up with objections to the voluminous affidavit material described above. In keeping with their bellicose approach thus far, when I began to hear those objections, I discovered that there had been no discussion between the two lawyers to attempt to resolve any of them and thereby avoid both their clients’ and the Court’s resources being wasted on that exercise. To compound this situation even further, during the hearing of those objections it emerged, incredible as it may sound, that neither lawyer appeared to have a copy of the Federal Court Rules 2011 or the Evidence Act 1995 (Cth) with him in court. Thus, neither of them could tell me which section or rule he was relying upon to make particular objections.

8. The final travesty came at the end of the day’s hearing when, during submissions in reply, the lawyer for Superior IP sought leave to rely upon a large amount of additional material that he had not put forward earlier. When I say “final travesty”, I should add that there was a number of other less significant defaults on both sides that I have failed to mention (above) in the interests of brevity.

9. It hardly needs to be said that what I have just described is the absolute antithesis of the overarching purpose of civil practice and procedure set out in s 37M of the FCA Act, viz the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. It is not overstating the matter to observe that this is the sort of conduct that brings the legal profession into disrepute, that significantly undermines the efficient disposal of civil litigation and that has the potential to erode public confidence in the administration of justice in this country. I therefore propose to return to this matter when I come to consider the question of costs at the conclusion of these reasons. [my emphasis added.]

…..

46. … since an obvious conflict is likely to arise between the interests of the clients and that of their respective lawyers on [the issue of costs of this proceding], I consider I should make the following directions:

1.That each of the two lawyers concerned is to provide a copy of these reasons to his respective client and advise it to seek independent legal advice on the question of the costs of these proceedings.

2. That the two lawyers concerned be joined as parties to these proceedings for the limited purpose of determining the question of the costs of these proceedings.

47. Finally, I intend to direct the Registrar to provide a copy of these reasons to the Queensland Law Society, the Bar Association of Queensland and the Legal Services Commission, so that those bodies may take such action as they consider appropriate in relation to the conduct of the two lawyers concerned.

Ouch!