Federal Court Rejects Claim Over Solicitor’s Conflict of Interest

OUTCOME: Dismissed

FEDERAL COURT OF AUSTRALIA

[APPELLANT] v [RESPONDENT] [COMPANY] [1999] FCA 28 EQUITY - relief – costs – account of profits – fees and disbursements paid to solicitor in breach of fiduciary duty – settlement on basis of independent counsels' advice and solicitor's recommendation – no avoidable loss – equitable compensation. [NAME] v [NAME] Co [1903] 2 KB 533 cited Nella v Kingia (1989) ATPR 40-952 cited [NAME] v [NAME] (No 2) (1988) 93 FLR 442 cited [NAME] v [COMPANY] (1984) 2 FCR 334 cited [COMPANY] v [NAME] (1984) 6 FCR 496 cited [NAME] v Lord Ashburton [1914] AC 932 cited [COMPANY] v Dwyer (1995) 182 CLR 544 cited In re Coomber; Coomber v Coomber [1911] 1 Ch 723 referred to Chan v Zacharia (1984) 154 CLR 178 referred to Boardman v Phipps [1967] 2 AC 46 cited

[APPELLANT], [COMPANY] (ACN [PHONE]) and [NAME] [APPELLANT] v [RESPONDENT] [COMPANY], [RESPONDENT]), [RESPONDENT], [NAME] [APPELLANT], [NAME] [APPELLANT], [NAME] [APPELLANT], [RESPONDENT], [NAME] [APPELLANT]-[RESPONDENT] and [NAME] [APPELLANT] VG 372 of 1994 FRENCH J 22 JANUARY 1999

PERTH (HEARD IN [APPELLANT])

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VG 372 OF 1994

BETWEEN: [APPELLANT]

[COMPANY] (ACN [PHONE]) and

[APPELLANT]

Applicants

[RESPONDENT])

[RESPONDENT]

[NAME] [APPELLANT]-[RESPONDENT] and

[RESPONDENT]

Respondents

[APPELLANT] OF ORDER: 22 JANUARY 1999

[APPELLANT])

THE COURT ORDERS THAT: 1. The [NAME] named respondent is to indemnify the applicants as to one third of the first named respondent's costs of this action. 2. The claim as against the [NAME] named respondents is dismissed. 3. There is no order for costs as between the applicants and the [NAME] named respondents.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VG 372 OF 1994

[APPELLANT]

[COMPANY] (ACN [PHONE]) and

[APPELLANT]

Applicants

[RESPONDENT])

[RESPONDENT]

[NAME] [APPELLANT]-[RESPONDENT] and

[RESPONDENT]

Respondents

JUDGE: FRENCH J

DATE: 22 JANUARY 1999

PLACE: PERTH (HEARD IN [APPELLANT])

REASONS FOR JUDGMENT ON [NAME] RESPONDENT AND COSTS

Introduction 1 These proceedings arise out of the settlement in 1992 of an action brought against the [RESPONDENT] [COMPANY] by [NAME] [APPELLANT], members of his family and an associated company, [COMPANY]. The trial of the action had proceeded for some days when it was settled. In the present proceedings, two members of the [APPELLANT] family, [APPELLANT], and [NAME] [APPELLANT], together with the company, [APPELLANT], sued [COMPANY] and their solicitors, [NAME], on the basis that their consent to the settlement of their earlier action was wrongly procured. It was alleged in these proceedings that the solicitor, who was seriously indebted to [COMPANY], had a conflict of interest and failed in his duty to [NAME]. And they say [COMPANY] took advantage of that situation to induce the solicitor to coerce them into settlement. 2 On 25 September 1998, after a trial of issues of liability and entitlement to relief other than damages, the action against [COMPANY] was dismissed with costs. A finding of breach of duty was made against the solicitor and submissions were invited as to relief against him and orders as to costs. 3 Submissions were filed on 30 October 1998 by the applicants with supplementary submissions by them on 19 November and submissions by the solicitors on 25 November. A motion by the applicants to set aside the costs order made in favour of [COMPANY] was filed on 14 December and a supporting affidavit on 15 December. No submissions have been received from [COMPANY].

Principal Conclusions After Trial 4 The evidence, findings of fact and the conclusions in relation to the case against [COMPANY] and [NAME], the solicitors, are set out at length in the reasons for judgment published on 25 September. What follows is by way of brief summary only. 5 In the latter part of 1992 the state of [NAME]' accounts with [COMPANY] and the history of Mr [NAME] dealing with [COMPANY] provided good cause for it to take a hard line on the continuance of financial accommodation to the [RESPONDENT] beyond 30 November 1992. It acted in relation to the solicitors as a prudent and reasonable banker would do. There was nothing to support the suggestion that [COMPANY]'s officers, before the end of 1992, had applied pressure to Mr [NAME] to affect his approach to the conduct of his litigation against [COMPANY] on behalf of [NAME]. 6 Although prior to settlement an officer of [COMPANY] told [COMPANY]'s senior counsel at the trial, of the [COUNSEL] difficulties with [COMPANY], this was done as a matter of prudence to avoid misconstruction of any settlement involving a payment to [NAME]. Reasonable steps were taken by [COMPANY] to ensure that the responsibility for dealing with the [NAME] account was quarantined from the management of the [APPELLANT] litigation. At no time did [COMPANY] apply commercial pressure on Mr [NAME] with the intention that he breach his duty to his clients. Nor did it form the view that there had been any breaches of duty or exercise of undue influence by [NAME] over the applicants. [COMPANY] was entitled to rely upon the fact that [NAME] were advised by both senior and junior counsel. There were no circumstances which should have put it upon inquiry as to the conduct of [NAME]' solicitors with respect to them. The execution of the deed of settlement did not take place in circumstances amounting to equitable fraud on the part of [COMPANY]. 7 The case against [NAME] amounted to allegations of breaches of fiduciary duty. [NAME] [APPELLANT], with whom [NAME] effectively dealt as representative of the [APPELLANT] family, was aware from at least early December 1992 that he was in serious conflict with [COMPANY]. [NAME] approach to his dealings with [COMPANY] on behalf of [NAME] was aggressive, seeking by various means, including letters to media outlets, to exert maximum pressure on [COMPANY]. Despite the cavalier and careless conduct of his own affairs, the way he recovered fees apparently without raising accounts and the use of dubious pre-trial tactics, the general course of his conduct of the action indicated a determination to extract a positive outcome for his clients which would, of course, also provide a benefit to him. He secured for [NAME] the services of senior and junior counsel in terms which amounted ultimately to a no win no fee arrangement. In the discussions about the settlement of the action in March 1993 it was their advice which was operative. It was advice which was reasonably grounded. [NAME] own advice to [NAME] that they accept counsels' recommendation was not unreasonable in the circumstances of that case. He offered to continue representing [NAME] if counsel were not prepared to continue as appeared to be the case. He did not try to persuade [NAME] before the settlement deed was signed that they were locked in to what had been agreed on 12 March. [NAME] were no worse off than they would have been if represented by a solicitor who had no connection with [COMPANY]. There was no undue influence exercised upon them. 8 In this case however, I did find, adversely to [NAME], that he was under a duty to disclose to all of his clients in the proceedings against [COMPANY], the details of his relationship with [COMPANY]. His failure to do so was in the circumstances a breach of his duty to them as a fiduciary. That failure did not affect the outcome of the litigation. The applicants were not entitled to set aside the settlement agreement.

Motion on the Costs Order 9 By motion filed on 14 December 1998, the applicants sought an order pursuant to O 35 r 7(1) that the orders made on 25 September be varied by deleting par 2, the costs order in favour of [COMPANY], and substituting an order that [NAME] pay [COMPANY]'s costs. 10 The procedural basis for the motion was that the costs order was made in the absence of the applicants or their legal representative and without any opportunity being given to them to make submissions in relation to who should bear [COMPANY]'s costs. I accept that it is appropriate to consider on their merits the submissions now advanced by the applicants as to the appropriate costs order. 11 It is submitted that in this case either a "[NAME]" or "[NAME]" order should be made. The preferable order, it is said, is a [NAME] order namely that [NAME] pay [COMPANY]'s costs of the proceedings – [NAME] v [NAME] Co [1903] 2 KB 533. Where conduct on the part of an unsuccessful respondent has contributed to the applicant's proceedings against another successful respondent, such an order can be made – Nella v Kingia (1989) ATPR 40-952 at 50,406, [NAME] v [NAME] (No 2) (1988) 93 FLR 442 at 449, [NAME] v [COMPANY] (1984) 2 FCR 334 at 340, [COMPANY] v [NAME] (1984) 6 FCR 496 at 510. 12 The conduct of [NAME] in failing to disclose to [NAME] the full extent of his dealings with [COMPANY] is said to have excited suspicion in the minds of the applicants that there may have been equitable fraud on the part of [COMPANY]. Even at trial, it is submitted, [NAME] in his oral evidence alleged that he had a genuine belief that he was being victimised by [COMPANY]. That evidence was rejected. In the circumstances it is said to be appropriate that [NAME] be ordered to pay [COMPANY]'s costs. 13 On behalf of the solicitors it is argued that the matter that led the applicants to institute the proceedings against [COMPANY] can be judged by the original statement of claim which alleged wrongful application of commercial pressure by [COMPANY] and a conspiracy between [COMPANY] and [NAME]. These were said to be based upon service of [COMPANY]'s notice of default in early March 1993 and an increase in its cash offer on or about 11 or 12 March. Neither allegation had any foundation and neither was referable to the letter of 22 December 1992 from [NAME] to [COMPANY] in which he falsely asserted that [COMPANY]'s attitude to withdrawing his financial facility was affected by the litigation then pending against [COMPANY]. 14 In my opinion there is some substance to the submission that [NAME] conduct contributed to the institution and continuance of these proceedings against [COMPANY]. His letter of 22 December, when discovered, must have strengthened the applicants' belief that they had a case against [COMPANY]. It was an improper use of his involvement with the [APPELLANT] litigation to try to pressure [COMPANY] in relation to his own affairs, albeit it was the reverse of that which he is accused of doing in these proceedings. In light of the finding that [NAME] [APPELLANT] was aware that [APPELLANT] was in serious conflict with [COMPANY], however, it is difficult to say that [NAME] failure to disclose the detail of his indebtedness, of itself, contributed to the institution of these proceedings as against [COMPANY]. 15 In my opinion, it is appropriate, having regard to the pretence [NAME] adopted with respect to [COMPANY]'s conduct, that he bear some proportion of the costs which the applicants must pay to [COMPANY]. To make a [NAME] order would, I think, in view of [NAME] marginal financial position, unduly prejudice [COMPANY]'s right to recover its costs. Although my assessment of [NAME] contribution to the institution of these proceedings is qualitative rather than quantitative, I must endeavour to translate my view of the quality of his conduct into an appropriate apportionment. In my opinion he should indemnify the applicants as to one third of [COMPANY]'s costs of the action. This reflects the fact that while there is a basis for concluding, as I do, that [NAME] contributed by his own conduct to the continuance, if not the institution, of these proceedings there were other factors involved. This is particularly so in the early stages of proceedings which were based in part upon information already known to [NAME] [APPELLANT]. The order I will make does not involve any variation of the costs order made on 25 September but the addition of a further order in the terms proposed.

Relief Against the Solicitors for Breach of Fiduciary Duty 16 The applicants ask that there be an account of profits and equitable compensation assessed against their former solicitors. The claim for an account of profits relates to the fees paid to [NAME] as part of the settlement, including the disbursement component of those fees and other unspecified fees which they had appropriated in the course of the action. 17 The principle is cited that a fiduciary who breaches fiduciary duties is liable to account for any profits derived from acting in such a fiduciary capacity. This is one of the three primary remedies available upon a breach of fiduciary duty by a solicitor to his client and generally in the wider range of fiduciary relationships – [NAME] v Lord Ashburton [1914] AC 932 at 956-957, [COMPANY] v [NAME] (1995) 182 CLR 544 at 556. 18 The remedy of account was described by the High Court in the Warman case as "ancient and notoriously difficult in practice" (at 556). It does not depend upon detriment to the applicant for relief or dishonesty or lack of bona fides on the part of the fiduciary ([NAME] at 557). The remedy must be fashioned to fit the nature of the case and the particular facts – [NAME] at 559. And it will not be awarded in every case of a fiduciary breach. In Warman the High Court approved the observation of [NAME] LJ in In re Coomber; Coomber v Coomber [1911] 1 Ch 723 at 728-729 where his Lordship said: "Fiduciary relations are of many different types … and the Courts have again and again, in cases where there has been a fiduciary relation, interfered and set aside acts which, between persons in a wholly independent position, would have been perfectly valid. Thereupon in some minds there arises the idea that if there is any fiduciary relation whatever any of these types of interference is warranted by it. They conclude that every kind of fiduciary relation justifies every kind of interference. Of course that is absurd. The nature of the fiduciary relation must be such that it justifies the interference. There is no class of case in which one ought more carefully to bear in mind the facts of the case …than cases which relate to fiduciary and confidential relations and the action of the Court with regard to them." 19 As [NAME] J said in Chan v Zacharia (1984) 154 CLR 178 at 205: "…one cannot but be conscious of the danger that the over-enthusiastic and unnecessary statement of broad general principles of equity in terms of inflexibility may destroy the vigour which it is intended to promote in that it will exclude the ordinary interplay of the doctrines of equity and the adjustment of general principles to particular facts and changing circumstances and convert equity into an instrument of hardship and injustice in individual cases…" 20 The rigour of the equitable remedy is mitigated by an appropriate recognition of skill and industry on the part of the fiduciary from which the applicant may have benefited. So in Boardman v Phipps [1967] 2 AC 46, the fiduciaries had used "commendable skill" for their beneficiaries while acting in breach of their fiduciary duty: "The power to make just allowances to honest fiduciaries is…firmly established. Equity's prophylactic rules for fiduciaries are mitigated to this small extent." [NAME], Commercial Equity: Fiduciary Relationships, Butterworths (1995) 6.89-6.90 21 The applicants submit that in the present case they were entitled to be informed by [NAME] as to the full details of their relationship with [COMPANY] so they could then decide whether to engage another solicitor or to obtain advice from another solicitor or, alternatively, to give their informed consent to [NAME] continuing to act on their behalf. It was submitted that the rationale for requiring a fiduciary to disgorge profits earned while acting as fiduciary in the absence of informed consent is to deter fiduciaries from the temptations so to act. It was submitted that the finding that [NAME] did not make sufficient disclosure amounts to a finding that there was no informed consent given by [NAME] to [NAME] for them to act with a divided loyalty. The consequence was that any purported consent by the applicants to the payment of fees was vitiated in the absence of that informed consent. 22 The profits said to have been derived by [NAME] from acting in their fiduciary capacity as solicitors for the applicants were, on the applicants' submissions, the following:

1. The sum of $200,000 paid to [NAME] on 7 April 1993 pursuant to the deed of settlement executed on or about 31 March 1993.

2. The sum of $10,500 retained for costs out of the payment of $16,500 made to [NAME] [APPELLANT].

3. Such other amounts as [NAME] applied to the payment of their fees in relation to the original proceedings from moneys which came into their hands on behalf of [NAME] during 1992 and the early part of 1993. 23 In supplementary submissions in relation to the sum of $10,500 the applicants argued that the evidence shows that payment in the sum of $16,500 was credited by [NAME] into a trust ledger in the name of the [APPELLANT] family, being the same trust ledger into which the payment of $200,000 was also entered. The two payments having been intermingled and treated as moneys received on behalf of the [APPELLANT] family, the sum of $10,500 retained was never applied in payment of legal fees specifically relating to [NAME] [APPELLANT]. On that basis it was submitted [NAME] should account for all such moneys to the applicants. 24 On behalf of [NAME], however, it was submitted that the applicants knew that [NAME] was in serious conflict with [COMPANY] from early 1992 and did not seek to obtain different legal representation. It was said to have been doubtful that they could have obtained alternative representation given their financial position. They received the benefit of a great deal of work performed by [COUNSEL] and by counsel retained by him. 25 On behalf of [NAME] it is pointed out that as was found in the primary judgment, there was no evidence that as a result of anything [NAME] had done or failed to do the applicants were any worse off than they would have been if represented by a solicitor who had no connection with [COMPANY]. No case was sought to be made that [NAME] should have ceased to act in December 1992. On the contrary, the complaint was that he should have continued the case rather than advising its settlement in March 1993. The case for the applicants, which was rejected, was that [NAME] acted dishonestly in relation to the settlement, exercised undue influence and wrongly procured an inappropriate settlement. It is said that what the applicants now wish to do is to recover moneys representing the solicitor's costs and disbursements which they authorised [COUNSEL] to incur and from which they received significant benefits. 26 The claim for an account of profits is attacked on the basis that the fees earned by the solicitor pursuant to his retainer were not profits as that term is understood by equity, nor could the moneys paid for disbursements be so regarded. No case was able to be cited to support the proposition that professional fees earned for services rendered should be disgorged on an account of profits. It would be inequitable to grant such a remedy in the circumstances of this case and to do so would involve unjust enrichment of the applicants. The applicants continued to seek and obtain the benefit of the legal work the subject of the fees and disbursements and it seems likely that they had already had the benefit of a substantial discount in the fees they would otherwise have incurred. In the alternative, an allowance must be made for the value of the work done. It was pointed out in the submissions on behalf of the solicitors that [NAME] [APPELLANT] knew on 14 March 1993, prior to commitment to the settlement, that [NAME] would use the money he received from [COMPANY] in reduction of his mortgage to [COMPANY]. Counsel would have to be paid for the work they had done. It was not to the point, it was submitted, that he may not have known the precise division. It was also submitted that [NAME] [APPELLANT], not being an applicant in the proceedings, was not entitled to any relief. 27 In relation to the "unspecified fees yet to be determined" referred to in the applicants' submissions, it was pointed out that the sum of $10,000 recovered on behalf of [NAME] [APPELLANT] in a claim against J.E. [APPELLANT] R/E was transferred on account of costs in the Federal Court proceedings. Again, it was submitted [NAME] [APPELLANT] is not an applicant in the proceeding and could not be entitled to any relief. 28 The application itself sought no account of profits. The relief claimed was the setting aside of the deed and damages at common law. Had a claim of the kind now raised been made it would have prompted, according to the submissions on behalf of [NAME], the pleading of defences that the value of the work performed at the continued request of the applicants exceeded the payment for fees and disbursements and that it would otherwise be inequitable to grant such a remedy. A cross-claim for fees and a claim for set-off could also have been expected. 29 In my opinion, the submissions made on behalf of the solicitors on this question have merit. [NAME] was carrying out work for the applicants on a basis which was speculative in terms of the recovery of fees for himself and for counsel. It is not able to be said that the fees ultimately paid to him were excessive or did not represent a fair allowance for work done on the case. In the event that the fees were excessive it was open to the applicants to require their justification by the taxing of itemised accounts. 30 Fees paid for professional services on this basis do not, in my opinion, constitute a profit of the kind for which an account should be ordered. A fortiori there is no basis for requiring the repayment of fees paid to senior and junior counsel or otherwise by way of disbursements. 31 As for the case of [NAME] [APPELLANT], she was not an applicant in these proceedings and in addition to the matters to which I have referred, she would not, in any event, be entitled to relief.

Damages/Equitable Compensation 32 The applicants also submitted that they were entitled to equitable compensation in relation to two separate breaches of fiduciary duty by [NAME] in: (a) Acting for [NAME] in relation to the original proceeding between late 1992 and the conclusion of settlement by the making of consent orders on 1 April 1993 whilst under a conflict interest, without the informed consent of [NAME]; and (b) Recommending to [NAME] on 12 March 1993 that they should accept [COMPANY]'s offer of settlement whilst under a conflict of interest which had not been disclosed to [NAME]. 33 It is submitted that the liability of [NAME] extends beyond an account of profits because on the facts found in the primary judgment they contributed to the decision by [NAME] to accept [COMPANY]'s offer of settlement. Accordingly it is said that [NAME], having been in breach of fiduciary duty in recommending acceptance of the settlement, are liable to the applicants for equitable compensation or damages for the loss of opportunity to proceed with the original action against [COMPANY]. 34 It was submitted that the Court had made findings of fact outside the scope of issues necessary for determination at trial which may have prejudiced the applicants in relation to their claim for equitable compensation. Reference was made to the order of [NAME] J on 22 February 1996 directing that: "The issues of liability and entitlement to relief other than damages be tried and determined before the issues of entitlement to and quantum of, damages, and the proceeding be set down for trial forthwith." 35 Reference was made to discussion between the Court and senior counsel for the applicants on the last day of the trial. It was submitted that the only remedy sought at the trial was rescission of the deed of settlement and the consequential setting aside of orders made by consent pursuant to that deed. On that basis, it is now submitted by the applicants, that in relation to rescission it was irrelevant whether the breach of fiduciary duty caused [NAME] to enter into the deed of settlement. It was submitted therefore that it was not necessary for the Court to make any finding on that issue at that stage of the proceeding and that the applicants have been prejudiced by not having an opportunity to make submissions. Reference was made to findings at pages 70 and 71 of the reasons for judgment where it was said: "Nevertheless, I am not satisfied that on the advice which they accepted from [COUNSEL] and from senior and junior counsel, [NAME] suffered an avoidable loss. . . .

In all the circumstances I cannot conclude that as a result of anything [NAME] has done or failed to do the applicants were any worse off than they would have been if represented by a solicitor who had no connection with the [RESPONDENT] [COMPANY]." 36 These findings it is said were made in the context of deciding whether or not the applicants were entitled to relief in the form of recision of the deed of settlement. It was submitted that the Court should not regard itself as bound by these findings on the question whether the applicants are entitled to relief in the form of equitable compensation. [ADDRESS] was invited to rule on this point. By way of response, counsel for [NAME] submitted that the findings were a necessary part of the process whereby the Court determined the nature and extent of the breach of duty alleged against the solicitors. They were appropriate to be made within the scope of a trial of issues of liability and entitlement to relief other than damages. The fact that such breach of the solicitor's duty as was found was inconsequential, was relevant to the applicants' claim to set aside the deed. 37 In my opinion the findings made were within the scope of the issues defined for separate trial by [NAME] J. In particular, they went to the question whether or not the applicants made an informed consent to the settlement proposal. 38 In the circumstances, and notwithstanding the breach of fiduciary duty by [NAME] which I have found, the operative advice which led to acceptance of the settlement proposal came from [NAME] and [NAME]. It was advice which appeared to have been reasonably grounded. The acceptance of that advice by the applicants constituted an informed consent to the settlement and was not vitiated by the recommendation on the part of [NAME]. What the applicants had in effect was access to independent advice. In my opinion, therefore, there is no entitlement to equitable compensation or damages.

Costs 39 The findings I have made are not to be taken as any endorsement of the way in which Mr [NAME] apparently conducted his practice or conducted himself in the litigation in issue or in these proceedings. I have already made observations about those matters in the written reasons for judgment published in September 1998 and it is not necessary to repeat them here. 40 His failure to make full disclosure to his clients of the relationship with [COMPANY] and his conduct in making the false assertions contained in his letter of 22 December 1992 in all probability contributed to the institution and continuance of these proceedings. It is submitted for the applicants that there were circumstances which excited suspicion that he had been manipulated by [COMPANY] in relation to the settlement of the proceeding. 41 In my opinion, while ordinarily the rule that costs follow the event should apply, this is one case in which, having regard to his conduct, I should make no order as to costs as between the solicitor and his former clients. I certify that the preceding forty one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.

Associate: Dated: 22 January 1999 Counsel for the Applicants: [redacted]

Solicitor for the Applicants: [redacted]

Counsel for the [NAME] Respondent: [redacted]

[NAME]: [RESPONDENT] of Submissions: 30 October, 19 November and 25 November 1998

Date of Judgment: 22 January 1999