Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 3)

[2023] NSWSC 679

Supreme Court

New South Wales

Medium Neutral Citation:

Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 3) [2023] NSWSC 679

Hearing dates:

20-22 March 2023

Decision date:

22 June 2023

Jurisdiction:

Equity

Before:

Robb J

Decision:

See [219]–[224], and [237]–[242]

Catchwords:

JUDGMENTS AND ORDERS — effect of — where earlier judgment entitles plaintiff to elect to set aside or affirm agreement for buyback of legal practice — where referee engaged to prepare accounting report for various scenarios — where referee not instructed to assess value of certain aspects of plaintiff’s claim — where court makes findings of amount of compensation to which plaintiff is entitled under each scenario

COSTS — Party/Party — costs orders made between parties in respect of interlocutory proceedings

Legislation Cited:

Legal Profession Act 2004 (NSW)

Legal Profession Uniform Law (NSW), ss 4, 6(a), 7(1)(g), 17(1), 17(2), 270, 548, 626(1)

Legal Profession Uniform Law Application Act 2014 (NSW)

Uniform Civil Procedure Rules 2005 (NSW), Division 3 Part 20, r 20.14

Cases Cited:

Aon Risk Services Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27

Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan [2018] NSWSC 1455

Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 2) [2019] NSWSC 509

Lahoud v Lahoud [2006] NSWSC 126

Nelson v Nelson (1995) 184 CLR 538; [1995] HCA 25

REW08 Projects Pty Ltd v Lifestyle Investments Pty Ltd (2017) 95 NSWLR 458; [2017] NSWCA 265

The Owners-Strata Plan No 30791 v Southern Cross Constructions (ACT) Pty Ltd (in liq) [2017] NSWSC 1660

Trampoline Enterprises Pty Ltd v Fresh Retailing Pty Ltd [2019] VSCA 74

Category:

Consequential orders

Parties:

Amil Dlakic by his tutor Liliane Dlakic (Plaintiff)
Michael John Vaughan (Defendant)

Representation:

Counsel:
R Perla (Plaintiff)
M Evans (Defendant)

Solicitors:
Mills Oakley (Plaintiff)
Michael Vaughan & Co (Defendant)

File Number(s):

2016/00368205

Publication restriction:

Nil

JUDGMENT

1. These reasons determine the remaining substantive issues in these long-running proceedings for the purpose of enabling the plaintiff to elect between the two remaining remedies that are available to him. They will also consider the costs issues that have not already been dealt with in these proceedings.

2. The plaintiff is Amil Dlakic, who sues by his tutor Liliane Dlakic. The tutor is Mr Dlakic’s wife. The defendant is Michael John Vaughan.

Introduction

3. The Court has published two judgments in these proceedings. The first was published on 27 September 2018, following a hearing that took place on a number of days between 12 March 2018 and 12 June 2018: see Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan [2018] NSWSC 1455 (J1). The second judgment was published on 7 May 2019, following a further hearing that took place on 28 March 2019 and 4 April 2019: see Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 2) [2019] NSWSC 509 (J2).

Outline of the dispute

4. The dispute between the parties was complex. For the purpose of making these reasons intelligible, I will now set out a brief explanation of the nature of the dispute.

5. Mr Dlakic and Mr Vaughan are solicitors of this Court. The dispute concerned the practice of the firm Johnston Vaughan. The principal of Johnston Vaughan was initially Mr Vaughan so far as the dispute is concerned. Mr Vaughan employed Mr Dlakic as an employed solicitor. By a deed dated 19 July 2010, Mr Vaughan sold the practice of Johnston Vaughan to Mr Dlakic for a price of $550,000. Mr Dlakic’s practising certificate was suspended on 30 October 2014. Shortly thereafter, by a deed made on 25 November 2014, Mr Dlakic transferred the practice of Johnston Vaughan back to Mr Vaughan for payment of $1. This deed has been called the “buyback agreement” and is the principal subject of these reasons.

6. I dealt in J1 with a number of separate claims. Now relevant is a claim made by Mr Dlakic that the Court should declare that the buyback agreement was void or ought to be set aside, and should also make appropriate orders to compensate Mr Dlakic. I found at J1 [287] that, in principle, Mr Dlakic was entitled to an order setting aside the buyback agreement if the grant of that relief was available having regard to the relevant discretionary considerations. Alternatively, Mr Dlakic had a right to elect to affirm the buyback agreement and sue to enforce its terms.

7. As I noted at J1 [244], Mr Dlakic had not then elected whether he would ask the Court to grant him the relief that may be available according to whether he did, or did not, ask the Court to make an order setting aside the buyback agreement. That is an issue that remains relevant for the purposes of this judgment.

8. The Court was told at the recent hearing that Johnston Vaughan ceased to operate on 30 June 2019. A consequence was that, for all purposes, any consideration of Mr Dlakic being able to conduct the practice of Johnston Vaughan or to sell it became academic.

Issues that are no longer relevant

9. I should record briefly the result of a number of claims that are not relevant to the issues that remain alive in these proceedings. The first related to the premises from which the practice of Johnston Vaughan was conducted at relevant times. Mr Vaughan, as the principal of Johnston Vaughan, entered into a lease of the premises with their owner, Davlite Pty Ltd (Davlite). For the reasons set out at J1 [326] to [465], I found that Mr Dlakic was entitled to be registered as the holder of one of the two issued shares in Davlite, and that he was the beneficial owner of that share. Mr Vaughan was the holder of the other share.

10. The Court was not told whether there remain any issues that require the consideration of the Court about the consequences of Mr Dlakic being entitled to be reinstated as the holder of one of the shares in Davlite.

11. The Court also dealt in J1 with two claims by Mr Dlakic that he was entitled to an order that Mr Vaughan pay him damages on the basis that Mr Vaughan had acted as Mr Dlakic’s solicitor and given negligent advice in relation to a loan of $300,000 that Mr Dlakic borrowed in order to fund the purchase of Johnston Vaughan, and another loan of $160,000 that Mr Dlakic borrowed in order to pay for the expenses of Johnston Vaughan. I explained at J1 [178] to [240] and J1 [298] to [325] why I had found that both of Mr Dlakic’s negligence claims failed. Those claims have no continuing relevance to the proceedings.

The referee’s reports

12. In circumstances that will be explained more fully below, the Court made orders that led to Ms Jennifer Exner, a partner of Deloitte Risk Advisory Pty Ltd, being appointed as a referee pursuant to Division 3 of Part 20 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), to determine a number of questions that required resolution before the Court could make final orders in accordance with the reasons in J1 and J2. Ms Exner was provided with joint instructions by the parties on 27 September 2019. Ms Exner delivered her referee’s report on 28 May 2021 (R1). In response to certain submissions from the parties, Ms Exner delivered a supplementary report on 6 December 2021 (R2).

The final hearing

13. A final hearing in these proceedings took place on 20 to 22 March 2023. The primary issue for consideration was the adoption of Ms Exner’s reports. As will be explained, a number of challenges to Ms Exner’s conclusions emerged, and the Court was asked to determine a number of issues that Ms Exner had not decided.

14. At the hearing, both parties sought to tender a considerable amount of additional evidence. It was not immediately clear which parts of the evidence were properly admissible on an application the purpose of which was to adopt a referee’s reports. The evidence related to communications between the parties concerning the conduct of the reference, communications with Ms Exner, and evidence concerning the substance of the dispute between the parties that may have related to issues that remain undecided, but which also on its face appeared to challenge the substantive conclusions reached by Ms Exner. When it became clear that the process of dealing with the admissibility of all of the evidence would be protracted and jeopardise the completion of the hearing in the allotted time, I ruled for practical reasons that I would provisionally receive all of the evidence, save for limited exceptions, on the basis that I would decide what evidence was admissible after the Court was given detailed written submissions by the parties as to why the evidence to be relied upon was admissible, having regard to the hearing being for the purpose of the adoption of a referee’s reports and the principles that limit the evidence that is relevant on such a hearing.

15. It also became necessary for the Court to give the parties an opportunity to supplement their oral submissions by submissions in writing. For that purpose, Mr Dlakic delivered what were described as “skeleton” submissions on 5 April 2023. Mr Vaughan then responded by delivering detailed submissions filed on 28 April 2023 (the Defendant’s Submissions). As Mr Vaughan had the carriage of a number of issues that were first explained in his submissions, Mr Dlakic was permitted to deliver detailed submissions in reply, which were filed on 18 May 2023. Finally, by leave, Mr Vaughan delivered submissions on 30 May 2023, which were permitted on the basis that they were to be strictly in reply.

Pleading issues that remain relevant

16. As I will explain below, these proceedings have been unusual in two significant respects. First, Mr Vaughan, by his amended defence, responded to Mr Dlakic’s amended statement of claim almost exclusively by simply denying the allegations made by Mr Dlakic. Mr Vaughan made few positive allegations of fact. Secondly, in response to a notice to produce served upon him, Mr Vaughan produced virtually none of the books and records of Johnston Vaughan that a properly conducted solicitor’s practice would be expected to retain and be able to produce. Both of these matters had a significant effect on the conduct of the proceedings.

17. As to the first of these matters, the consequence has been that there was no issue contested at the initial hearing in relation to a number of significant matters upon which Mr Vaughan has sought to rely in response to the findings in Ms Exner’s reports, and for the purpose of the formulation of the final orders to be made by the Court. Not only was there no evidence on these matters at the initial hearing, but the questions that would be expected to have been put to Mr Dlakic in cross-examination were not put. Mr Dlakic’s position is that Mr Vaughan has now lost the right to raise these matters.

18. First, in par 33 of his amended statement of claim, Mr Dlakic pleaded that from 25 November 2014, the date of the buyback agreement, to 18 April 2015, Mr Dlakic continued to pay the operating expenses of Johnston Vaughan from his own resources. Mr Dlakic did that because, as alleged in par 7, Mr Vaughan warranted and represented to him that Mr Vaughan would continue to pay the net income earned by Johnston Vaughan to Mr Dlakic. Mr Vaughan’s response to par 13 in his amended defence was simply: “Denied”. Mr Vaughan did not admit that Mr Dlakic had continued to pay the operating expenses of the practice, and allege that Mr Dlakic had been paid part of the profits earned by the practice. The result was that the Court found, at J1 [265], that Mr Dlakic did continue to pay operating expenses of Johnston Vaughan after the date of the buyback agreement, but there was no contest and no finding that Mr Vaughan had paid any of the profits of the practice to Mr Dlakic.

19. Secondly, Mr Vaughan did not in his amended defence make any allegation that, as a consequence of the suspension of Mr Dlakic’s practising certificate, it would have been illegal for Mr Vaughan to have paid any part of the net profit of Johnston Vaughan after the date of the buyback agreement to Mr Dlakic, with the result that Mr Dlakic is not entitled to any remedy that would involve him receiving compensation calculated by reference to the revenue received by Johnston Vaughan after the date of the buyback agreement.

Material aspects of J1

20. It will be necessary to refer to particular parts of J1 that are important for the purpose of resolving the outstanding issues.

Relevant provisions of the buyback agreement

21. I set out the terms of the buyback agreement at J1 [66]. Clause 4 is the material term, which I will repeat here for convenience:

4.   The Vendor will be entitled to receive all money prior to the date of this Deed for all work done in the client’s file as they are received by the practice. The purchaser will pay those monies received to the Vendor as they are received by the Purchaser, less any money owing in respect of the aforesaid client files including disbursements.

22. This is the term of the buyback agreement that will govern Mr Dlakic's rights if he elects to affirm the buyback agreement, and to enforce it. I made the following finding at J1 [139]:

[139] The evidence justifies a conclusion that it is likely that Johnston Vaughan received substantial fees from clients for work done before the date of the buyback agreement, which on the clear terms of that agreement were required to be paid by Mr Vaughan to Mr Dlakic. Very little of those receipts were in fact paid to Mr Dlakic. It is hard to conceive that Johnston Vaughan does not have records that would prove the receipt of these funds.

23. The determination of the remedy to which Mr Dlakic is entitled if Mr Dlakic elected to enforce the buyback agreement would require the identification of all money received by Mr Vaughan after the practice of Johnston Vaughan was sold back to him for work done for clients before the date of the sale, less any money owing in respect of the disbursements on the files.

Deficient production of books and records by Mr Vaughan

24. As I have said above, Mr Vaughan did not respond to a notice to produce served upon him to produce to the Court before the original hearing the books and records of the practice of Johnston Vaughan that the Court would ordinarily assume must have been prepared in the ordinary course of the business of the practice. The absence of the expected books and records has confounded the ability of Mr Dlakic and the Court to deal with the proceedings in a complete and efficient way at the original hearing. Given the importance of the issue, it will be appropriate to repeat relevant aspects of J1. I began my consideration of the issue at J1 [98] as follows:

[98] It will be convenient to end this consideration of the background facts by dealing with the absence of detailed evidence of the work done by Johnston Vaughan for clients, the amounts of fees billed, and the amounts of fees paid by clients at relevant times. Evidence of those matters may have been significant or helpful in relation to many issues in these proceedings, as it would have assisted the Court to have an objectively based understanding of the real nature of the firm’s practice. That evidence would have been necessary to enable the Court to determine whether, and if so to what extent, Mr Vaughan did not pay Mr Dlakic fees received by Johnston Vaughan in respect of work done for clients before the date of the buyback agreement. It would have been material to an assessment of whether the consideration of $1.00 payable under the buyback agreement was inadequate. It would have been material to an understanding of the likely outcome of an accounting that will be necessary if the Court makes an order setting aside [the] buyback agreement.

25. The apparent inadequacy of production by Mr Vaughan was dealt with as a separate issue at the beginning of the hearing, as explained at J1 [104]-[105] as follows:

[104] The first morning of the hearing was devoted to dealing with the consequences of Mr Vaughan’s response to the notice to produce. An affidavit by Mr Vaughan sworn on 8 March 2018 and an affidavit of Mr Dlakic’s solicitor, Mr Hugo Nicholas Antony Paul sworn 12 March 2018, were read in respect of the issue. I permitted counsel for Mr Dlakic to cross-examine Mr Vaughan on the adequacy of his response to the notice to produce.

[105] I do not propose in these reasons for judgment to deal with this issue in any comprehensive way. The reason is that the result of the exercise was inconclusive. The available evidence does not permit the Court reliably to form a judgment about the extent to which documents falling within the categories sought in the notice to produce exist, what has been produced, or the comprehensiveness of what has been produced. All that the Court knows is that, as a matter of fact, the legal representatives for Mr Dlakic have sought to be in a position where they could tender on his behalf reasonably comprehensive business records of relevant transactions, but they have not been able to do so.

26. I expressed the following conclusions at J1 [111]-[112]:

[111] The Court has no choice but to determine the issues that are before it on the basis of the evidence that has been tendered, but it should do that having regard to the appearance that Mr Dlakic’s case has been impaired by the failure of Mr Vaughan to comply with the notice to produce in a complete and timely way. As it is clear that there has not been production of all of the documents that would have been prepared and retained in the ordinary course by a well-run firm of solicitors, the Court should be solicitous to an appropriate extent when considering the fact that in some respects Mr Dlakic has not been able to tender the best evidence that should have been available.

[112] The deficiency in production will also have the effect that some issues that may otherwise have been capable of being determined finally on the evidence at the hearing will now need to be dealt with as part of an accounting process, if Mr Dlakic succeeds in one or other of his claims arising out of the buyback agreement.

27. The inadequacy of production by Mr Vaughan is therefore the reason why Mr Dlakic’s claim could not finally be dealt with after the initial hearing, and explains much of the convoluted path that the proceedings have taken since J1 was published.

Findings on credibility

28. The findings that I made in J1 concerning the credit that should be accorded to the evidence given by Mr Dlakic and Mr Vaughan remain relevant to the determination of the remaining issues. In outline, I formed the following conclusions concerning the credibility of Mr Dlakic's evidence:

[125] Notwithstanding these concerns, I formed the opinion from listening to Mr Dlakic in cross-examination that he was attempting to give genuine and truthful evidence to the best of his ability.

[126] I accept that in most instances the evidence given by Mr Dlakic reflected his genuine present recollection of the relevant events. However, Mr Dlakic’s evidence must be treated with due scepticism given the consequences of his psychological disabilities and the consequential effect on the process whereby his affidavits were prepared and his recollection of events established. I have attempted to exercise particular care to measure the plausibility of Mr Dlakic’s evidence against the background of the objective circumstances, and have looked carefully for corroboration in the evidence given by the other witnesses called in Mr Dlakic’s case.

[127] There are a number of additional concerns that have caused me to exercise caution in weighing the significance of the evidence given by Mr Dlakic.

…

[131] Consequently, I have concluded that there is a real risk that Mr Dlakic has, over time, come to a reconstructed memory of Mr Vaughan's conduct which paints Mr Vaughan as the sole villain in Mr Dlakic's affairs.

29. In the case of Mr Vaughan, I stated the following conclusions in J1:

[133] I regret to have to say that I found Mr Vaughan to be an unsatisfactory witness.

[134] The abiding sense that I gained listening to Mr Vaughan’s cross-examination was that he was bemused as to how he could explain his conduct, both in respect of his unconscionable treatment of Mr Dlakic, and the fundamental inconsistencies between his own affidavit evidence and the objective facts.

[135] Mr Vaughan’s evidence was unsatisfactory in a structural sense, in the manner of its being given in cross-examination, and its fundamental inconsistency with the objective evidence.

…

[137] Consequently, I am not prepared to give significant weight to most of the evidence given by Mr Vaughan in his affidavits.

…

[147] Consequently, I have not accepted Mr Vaughan’s evidence except to the extent that it is corroborated by evidence that I am prepared to accept, or its acceptance is warranted on the basis that it is the most consistent conclusion to draw by reference to the objective evidence.

The buyback agreement claims

30. I explained the claims made by Mr Dlakic concerning the buyback agreement at J1 [242]-[244] in the following terms:

[242] The first of the claims is that the buyback agreement is either void or should be set aside. The second assumes the continued effectiveness of the buyback agreement, and claims damages for failure by Mr Vaughan to pay to Mr Dlakic fees received in respect of work done before the date of the buyback agreement, in breach of a term of that agreement.

[243] As I understand Mr Dlakic's case, the second of these claims will not logically arise if he succeeds on the first. If the buyback agreement is void or is set aside, then Mr Dlakic will continue to be legally entitled to all fees earned by Johnston Vaughan before the date of the buyback agreement, and Mr Vaughan will be liable to account to Mr Dlakic for all such fees that were received afterwards.

[244] Mr Dlakic has not yet elected which of these two alternative remedies he wishes to obtain. If he is entitled to an order setting aside the buyback agreement, and he elects for that remedy, then the benefit of that remedy to him in money terms will depend upon what is determined from a reconstruction of the accounts of Johnston Vaughan. That is an exercise that has not yet been done. It is not yet clear that it can be done, but the question of whether or not it can be done cannot be answered at present because of the late and incomplete production of documents by Mr Vaughan in response to Mr Dlakic’s notice to produce. If the buyback agreement is set aside, then Mr Dlakic will be entitled to all of the fees received, but he will also be responsible for all of the expenses and other outgoings of the practice. Those expenses may include an allowance for remuneration for Mr Vaughan for the work that he did in carrying on the practice of Johnston Vaughan. The evidence before the Court at present does not demonstrate whether Johnston Vaughan made a profit, and if so what that profit was. It is conceivable that the more advantageous remedy to Mr Dlakic would be to leave the buyback agreement in effect, and obtain the benefit of an order that Mr Vaughan pay to him all fees received by the practice after the buyback agreement in respect of work done before. The position is unclear.

31. I made the observations in J1 [243]-[244] concerning Mr Dlakic’s entitlement to the net profit of Johnston Vaughan if the buyback agreement was set aside, as Mr Vaughan had not pleaded a defence based upon the claim that a consequence of the suspension of Mr Dlakic’s practising certificate was that the payment of any part of the net profit to Mr Dlakic would have been illegal.

32. As I will explain below, the subsequent history of these proceedings has been bedevilled by the issue of whether Mr Dlakic made the election concerning the remedy that he wished to have after the date of publication of J1, if so what the consequences of the election were, and whether any election made by Mr Dlakic was binding upon him.

33. I described the representation upon which Mr Dlakic relied at J1 [246]. That representation was that, notwithstanding the buyback agreement, Mr Vaughan would continue to pay the net income of Johnston Vaughan to Mr Dlakic. I found that that representation was a misrepresentation and that it gave rise to an entitlement in Mr Dlakic to rescind the buyback agreement. I also found that Mr Vaughan’s conduct was unconscionable in entering into the buyback agreement because he took advantage of significant vulnerabilities from which Mr Dlakic suffered. I reached the following conclusions at J1 [287]-[288]:

[287] I consider that the evidence overwhelmingly justifies a finding that Mr Vaughan took advantage of a special disadvantage from which he knew Mr Dlakic suffered, so that Mr Dlakic will be entitled to an order setting aside the buyback agreement, if the grant of that relief is available having regard to relevant discretionary considerations.

[288] In my view the granting of that relief would separately be justified on the basis of Mr Vaughan’s misleading and deceptive conduct in representing to Mr Dlakic that he would continue to receive the income of Johnston Vaughan after the date of the buyback agreement. I am satisfied that when Mr Vaughan gave that assurance to Mr Dlakic, he did not have any genuine intention to implement it. However, in the circumstances of this case, the preferable course is to treat Mr Vaughan’s conduct in making the misrepresentation to Mr Dlakic as being an aspect of his taking advantage of the special disadvantage from which Mr Dlakic suffered.

34. In the conclusion to my judgment I made the following observations concerning the consequences of the inadequacy of the books and records of Johnston Vaughan that Mr Vaughan had produced to the Court in relation to the determination of the relief to which Mr Dlakic was entitled:

[474] I have discussed on a number of occasions the apparent significance of the inadequate response by Mr Vaughan to the notice to produce that was served upon him by Mr Dlakic. I have taken the view that the absence of adequate documentation concerning the affairs of Johnston Vaughan has had serious consequences to the conduct of these proceedings. Primarily, it has impaired Mr Dlakic’s ability to make considered choices about the relief that he should pursue. It has also impaired the capacity of the Court to make case management orders for the just, quick and cheap completion of these proceedings. As to this last matter, the Court would hesitate simply to make an order that an accounting take place, without the Court having an adequate understanding of the practical consequences and being able to facilitate an appropriate and cost-effective determination of the remaining issues.

[475] I should make it clear that I do not contemplate that the parties will be permitted to lead further evidence where that evidence could have and should have been led at the hearing, to enable them to remedy any deficiencies in the cases that they have presented. On the other hand, I am satisfied that it will not be appropriate for the Court simply to make case management orders and then leave the parties to pursue the attempt on Mr Dlakic’s part, that has failed thus far, to gather the documents that ought to exist concerning the financial affairs of Johnston Vaughan at relevant times. That is an exercise that should take place first, and should be facilitated by the full force of the Court to ensure that all available documents are produced in a timely and complete fashion. Only then will the Court and the parties have some chance to determine how these proceedings should be brought to a proper conclusion.

35. This aspect of J1 will be relevant when I come to consider Mr Vaughan’s proposal to rely upon two additional affidavits insofar as those affidavits contain evidence that could have been led at the original hearing.

Procedural history after publication of J1

36. It will be necessary to set out some of the procedural history of these proceedings for the purpose of explaining the Court’s reasons concerning the final orders that should be made, and to also deal with the outstanding issues concerning the costs of the proceedings.

37. As I have noted above, the Court published J1 on 27 September 2018. On that occasion, the Court directed the parties to consider the terms of the orders that would be appropriate to give effect to the reasons and to make case management orders to resolve the outstanding issues.

38. The parties appeared before the Court on 13 December 2018, when no procedural orders were made. Later that same day the Court made orders in chambers that required Mr Vaughan to provide access to Mr Dlakic’s nominated accountant to the books, records and premises of Johnston Vaughan.

39. A further hearing took place on 28 March 2019. The hearing lasted about two hours. At the end of the hearing, the Court gave the parties leave to make further submissions on any issue arising out of the hearing by 2 April 2019, and stood the proceedings over to 4 April 2019 for further consideration of the orders that should be made in the proceedings.

40. On 4 April 2019, after another hearing of slightly less than two hours, the Court reserved judgment on the issue of the orders to be made to give effect to J1.

Material aspects of J2

41. The Court delivered J2 on 7 May 2019. I explained the position reached in J1 in J2 [8] in the following terms:

[8] In the principal judgment, I concluded that the Court should only express its conclusion in terms that Mr Dlakic is entitled in principle to the relief set out in orders 1 and 2 above, because it appeared to me that there were unresolved questions concerning the utility and consequences of those orders being made. There appeared to me to be a possibility that the preferable remedy would be to award Mr Dlakic equitable compensation that was equal in value to the effect of the buyback agreement being set aside, and his being registered as the owner of one share in Davlite.

Rejection of further affidavit evidence by Mr Vaughan

42. It is important to record a ruling that I made concerning whether Mr Vaughan should be permitted to rely upon a new affidavit that he swore on 3 April 2019, after J1 had been published. I said, at J2 [11]-[12]:

[11] At the hearing on 4 April 2019, Mr Vaughan sought leave to file in court and read an affidavit sworn by him on 3 April 2019. The affidavit addressed substantive issues such as Mr Vaughan’s non-involvement with Johnston Vaughan Solicitors Pty Ltd, the value of the practice, the purpose for Mr Vaughan entering into the buyback agreement, Mr Dlakic’s involvement in the winding up of Johnston Vaughan Solicitors Pty Ltd, payments made concerning the affairs of Johnston Vaughan in 2015, Mr Vaughan’s drawings of salary, and arrangements concerning the accounting practices of Johnston Vaughan.

[12] Mr Dlakic objected to Mr Vaughan being allowed to rely upon this affidavit for the purpose of the determination of the orders to be made in these proceedings. It was necessary for me to reserve judgment on this issue. I reject Mr Vaughan’s application to rely upon the evidence in his affidavit. While it may sometimes be appropriate for some evidence to be given by parties at the stage when the terms of orders are being considered, the material in Mr Vaughan’s affidavit is substantive and contentious, and could have been given at the hearing in 2018. It went far further than could be justified at a hearing to determine the terms of the orders that should be made following the publication of the Court’s judgment.

43. The attempt by Mr Vaughan to rely upon new evidence has been repeated both during the course of the reference undertaken by Ms Exner, and at the final hearing to which these reasons relate. As will be seen, a significant issue that must be decided in these reasons is whether a further attempt by Mr Vaughan to rely upon additional affidavit evidence should be permitted.

Consequences of rescission of the buyback agreement

44. In J2, I made a number of observations concerning the issues that would need to be addressed if Mr Dlakic elected to rescind the buyback agreement, at J2 [15]-[18], as follows:

[15] As to the setting aside of the buyback agreement, as recorded in the principal judgment, shortly before the buyback agreement was made, the Law Society of New South Wales (Law Society) appointed a receiver for the law firm, Johnston Vaughan, which was then solely owned, or so it seemed, by Mr Dlakic. That step was taken by the Law Society in conjunction with other steps that led to the suspension of Mr Dlakic's practising certificate. As I understand it, Mr Dlakic remains unable to practice as a solicitor in this State. It is unlikely that Mr Dlakic will ever again become entitled to practice, and, as I understand it, Mr Dlakic is in the course of legal proceedings against an insurer that are based upon a claim by him that he is totally and permanently incapacitated from his former employment as a solicitor.

[16] Consequently, if the buyback agreement is to be set aside, the Court will need to consider the possibility that the reinstatement of Johnston Vaughan to Mr Dlakic will be futile, and whatever value remains in the firm will be lost, by reason of the fact that Mr Dlakic is legally prohibited from carrying on the firm’s business.

[17] If the buyback agreement is set aside, then Mr Dlakic will become entitled to the net profit from the operation of the firm during the period after the date of the buyback agreement, during which it has been managed by Mr Vaughan. Mr Vaughan will be entitled to receive an appropriate amount of remuneration for his efforts. As recorded in the principal judgment, the financial records of Johnston Vaughan leave much to be desired, and provide an unsatisfactory foundation for the determination of the net profit for the relevant period.

[18] At the hearing, Mr Dlakic complained, with considerable justification, that the consequence of his unsuccessful efforts to obtain full and accurate financial records for the operation of the firm for the relevant period from Mr Vaughan had the result that Mr Dlakic was unable to prove at the hearing the amount to which he would become entitled if the buyback agreement was set aside. As a result, it was not feasible for the Court to determine that issue on the basis of the evidence led at the hearing. The consequence is that the Court will now have to make appropriate orders for the conduct of an account to determine what, if any, net profit must be paid by Mr Vaughan to Mr Dlakic. That is one of the difficult issues that the Court must now determine.

45. Then, at J2 [23]-[41], I considered the issues involved in making an order setting aside the surrender of the lease of the premises from which Johnston Vaughan's practice was conducted, and, at J2 [42]-[49], the evidence presented by Mr Dlakic concerning a possible sale by him of the practice of Johnston Vaughan, if he rescinded the buyback agreement. Significantly for present purposes, I considered the procedural steps that would have to be undertaken to try to establish the necessary financial circumstances of Johnston Vaughan at relevant times in order to ascertain the information that would be necessary to enable Mr Dlakic to make a considered election as to the relief that he should choose:

[71] The next unfinished aspect of this matter is to deal with the orders necessary to implement the accounting that must be undertaken to determine the amount, if any, to which Mr Dlakic is entitled, as a result of the setting aside of the buyback agreement, in the context of the unusual agreement that the Court found in the principal judgment to have been made between Mr Dlakic and Mr Vaughan, to the effect that Mr Dlakic would continue to enjoy the profits of the practice, and be responsible for its debts, notwithstanding the buyback agreement.

[72] Orders should be made now to enable the accounting to take place, notwithstanding that I have continued to reserve my decision as to whether an order setting aside the buyback agreement should be made by the Court until after the issue of whether the surrender of lease should also be set aside has been determined. The reason is that the Court did not have before it the evidence necessary for it to decide what amount Mr Dlakic is entitled to from the conduct of the practice of Johnston Vaughan after the date of the buyback agreement, and that amount will have to be determined anyway, even if the buyback agreement is not set aside, as that amount would form part of any equitable compensation to which Mr Dlakic would be entitled.

[73] The parties are agreed that the accounting should be undertaken by way of a reference under Division 3 of Part 20 of the Uniform Civil Procedure Rules 2005 (NSW).

[74] It will be appropriate for the Court to adapt the draft orders for reference submitted by Mr Dlakic.

…

[79] On the other hand, Mr Vaughan is entitled to the net profit being assessed on the basis that he was entitled to receive proper and reasonable remuneration, given that he was notionally an employee of the practice who performed all of the duties of its sole principal.

[80] Apart from the allowance for Mr Vaughan referred to in the preceding paragraph, I am not willing to stipulate the matters that the referee should be required to take into account in determining the net profits of the practice. It is already apparent that the referee’s task will be impeded by the lack of comprehensive and reliable financial records for the practice. The parties will have to make submissions to the referee as to the most cost efficient manner for the reference to be conducted in the first instance. Both the parties and the referee will be given liberty to apply to the Court for directions to resolve any difficulties.

Orders made following J1 and J2

46. The Court made orders to give partial effect to J1 and J2 on 14 May 2019. The orders that remain relevant at this stage of the proceedings are:

The Court

…

7   Orders that the Defendant be restrained, until further order of the Court, from destroying or removing from the premises of Johnston Vaughan or elsewhere, by himself or others engaged by him, any documents (physical and/or electronic) and things of or relating to the legal practice Johnston Vaughan.

8   Reserves the issue of whether the Defendant should be ordered to account to the Plaintiff for the net income of Johnston Vaughan for the period from 24 November 2014, or whether, alternatively, the Defendant should be ordered to pay equitable compensation to the Plaintiff, until the Court has determined whether to make an order setting aside the buyback agreement.

9   Orders that the proceedings be referred to a referee, who is to be a qualified forensic accountant, as agreed between the parties within 10 days of the publication of this judgment or, failing such agreement, to be appointed as soon as reasonably practicable by the president of the Institute of Chartered Accountants in Australia, for determination of the amount for which the Defendant will be liable to account to the Plaintiff for the net income of Johnston Vaughan for the period from 24 November 2014 to the date of the report, if the Court makes an order that the Defendant account to the Plaintiff in that manner. This amount is to be a sum which fairly and equitably in all the circumstances is the best estimate of the likely net profit of the business of Johnston Vaughan over the relevant period, taking into account the accounts rendered, income received, genuine expenses, including expenses which were paid by the Plaintiff, and making an allowance to the Defendant for his work in that business as is reasonably appropriate for a solicitor performing the function of the sole principal of the practice.

10   Orders that the referee be provided by each party with one (1) accounting report relating to the sum that that party contends ought to be paid on account; and the underlying source material which the Defendant has made available to the Plaintiff in the course of these proceedings.

11   Grants liberty to the parties and the referee to apply to the Court for advice and directions in relation to the conduct of the reference.

12   Grants liberty to the parties to apply in relation to the adoption of the referee’s report.

13   Orders the Defendant to pay the reasonable costs of the reference in the first instance, without prejudice to the right of the Defendant to require the costs of the reference to be assessed.

…

17   Orders the Defendant to pay the Plaintiff’s costs of these proceedings, other than the claims made by the Plaintiff for damages for professional negligence in respect of the loans made by Mr Fetin and Dr Vince pleaded in pars 34-45 and 46-53 respectively of the amended statement of claim (the professional negligence claims).

18   Orders the Plaintiff to pay the Defendant’s costs of the professional negligence claims.

…

22   Grants liberty to the parties to apply on 3 days’ notice by arrangement with the Associate to Robb J.

Procedural history after J2

47. The Court made further procedural orders on 20 June and 5 August 2019 that do not require explanation. It will be convenient to note that the Court was informed by agreement of the parties at the recent hearing that the practice of Johnston Vaughan ceased to operate between these two dates, on 30 June 2019.

48. On 8 August 2019, the Court made further orders, including an order appointing Ms Exner as the referee and an order varying order 9 made on 14 May 2019 concerning the terms of the reference. Mr Dlakic makes a specific claim for an order for the costs of the hearing on this date against Mr Vaughan. The orders made on that date which remain relevant are:

The Court

1.   By consent makes orders in terms of the Order signed by Robb J and dated today's date.

2.   Notes that the consent of the defendant is without prejudice to its claim that the plaintiff has already made an election concerning the form of relief to which he is entitled.

3.   Notes that the defendant has informed the Court that he chooses as the referee the person named in order 2(b) of the Order, if she is prepared to accept the appointment.

4.   Grants leave to the parties to apply to the Court by arrangement with the associate to Robb J for any further orders considered necessary to facilitate the conduct of the reference.

5.   Stands the proceedings over to 9:30am on 24 October 2019 for directions in respect of the receipt of the expert’s report and any other necessary case management orders.

…

Order

…

2   Within seven days, the Defendant choose one of the following chartered accountants:

…

(b)   Jennifer Exner of Deloittes; or

…

to be appointed as Referee for the purpose of Order 9 of the Orders of 14 May 2019 (as amended by these orders)

3   Order 9 of the Orders made on 14 May 2019 be varied to read as follows:

Orders that the proceedings be referred to the referee selected by the Defendant from the list proposed by the Plaintiff and contained in the court's orders of today's date, for determination of both:

(a)   the amount for which the Defendant will be liable to account to the Plaintiff for the net income of Johnston Vaughan for the period from 24 November 2014 to the date of the report, if the Court makes an order that the Defendant account to the Plaintiff in that manner. This amount is to be a sum which fairly and equitably in all the circumstances is the best estimate of the likely net profit of the business of Johnston Vaughan over the relevant period, taking into account the accounts rendered, income received, genuine expenses, including expenses which were paid by the Plaintiff, and making an allowance to the Defendant for his work in that business as is reasonably appropriate for a solicitor performing the function of the sole principal of the practice; and

(b)   the fair market value of the legal practice Johnston Vaughan as at both 25 November 2014 and 27 September 2018, as well as (separately) the quantum of all monies paid by the plaintiff to the expenses of Johnston Vaughan subsequent to 25 November 2014, for the purposes of calculating the quantum of any equitable compensation payable to the Plaintiff by the Defendant by reason of the latter’s unconscionable conduct, if the Court makes an order for equitable compensation.

…

6.   Costs be reserved.

49. As is evident from order 1, the orders were made by consent. I understood at the time I was asked to make the orders that the parties had conferred and agreed that the orders were appropriate for the purpose of proceeding to the final determination of the proceedings.

50. By note 2, Mr Vaughan preserved his position in relation to his belief that Mr Dlakic had already made a binding election concerning the relief to which he was entitled.

51. Order 3 in the short minutes of order effected a variation of order 9 that the Court made on 14 May 2019. I understood that the parties had agreed that the issues that the varied order 9 required Ms Exner to determine would be sufficient to enable Mr Dlakic to elect as to the remedy he wished to have and to enable the Court to make whatever final orders were necessary to determine the proceedings.

52. I had formulated order 9 as made on 14 May 2019 in draft form in J2, on the basis that the parties were given an opportunity to respond to the draft before formal orders were made. It should be noted that by the consent orders made on 8 August 2019, the Court, on the application of the parties, made the original order 9 into order 9(a), and added a new order 9(b). The parties must have agreed that there would be utility in the referee deciding the additional issue.

53. Both the original and the varied order 9 were specifically formulated to deal with the problem that the final determination of the proceedings would require the referee to determine questions concerning the finances of the practice of Johnston Vaughan in circumstances where it was already known that the books and records of the practice as produced by Mr Vaughan were inadequate for the purpose. The Court did not order that the determination be made by a referee solely for reasons of expediency. Ms Exner was appointed as referee because of her expertise as a forensic accountant. As such, Ms Exner was likely to be in a better position than the Court to make judgments that may be necessary to make the most reliable findings that were possible in the face of the inadequacy of the financial records. In this regard, the Court consciously deferred in the fact-finding process to the expertise of the referee as being more likely reliable than if the Court had attempted to carry out the same exercise.

54. On 27 September 2019, it was necessary for the Court to make a number of specific orders concerning the conduct of the reference to ensure that the difficult exercise that had been accepted by Ms Exner would proceed as efficiently as possible. The Court’s orders were:

The Court

1.   Directs the parties by their solicitors by 4pm on Tuesday, 1 October 2019 to sign and send to Jennifer Exner of Deloitte Australia, the referee appointed pursuant to the orders of the Court made on 8 August 2019, a letter on the plaintiff’s solicitor’s letterhead in the form attached to these orders and marked attachment “A”.

2.   The direction in paragraph 1 is without prejudice to the parties’ entitlement to apply to the Court for leave to provide further materials to the referee.

3.   Directs the parties to confer for the purpose of determining what additional material should be provided to the referee in respect of the subject matter of the affidavit of the defendant sworn 26 September 2019 and to provide to the associate to Robb J by 11 October 2019 a draft of any agreed letter to the referee or alternative drafts prepared by each of the parties in respect of the receipt by the referee of that material.

4.   Directs the plaintiff by 4pm Friday, 4 October 2019 to provide to the defendant and the associate to Robb J a schedule of all information and actions which the plaintiff wishes to receive or take or have taken in relation to the compliance by the defendant with any orders in that regard previously made by the Court or necessary for the purposes of the reference, together with an explanation of the reasons for the necessity for that information to be received or those steps to be taken.

5   Directs the defendant by 4pm on 11 October 2019 to deliver to the plaintiff and the associate to Robb J a schedule that specifically engages with the plaintiff’s schedule and contains the defendants response on an item by item basis.

6.   Stands the proceedings over to 4pm on Tuesday, 15 October 2019 before Robb J to resolve the outstanding questions the subject of these directions or alternatively to make directions to enable the resolution of those questions.

55. Attachment “A” to these orders was a draft letter dated 27 September 2019 addressed to Ms Exner that made provision for signature by the solicitors for both Mr Dlakic and Mr Vaughan. The draft letter contained an overview of background facts and then stated the “Tasks required to be undertaken” in the following terms:

Pursuant to the orders of the court, you are required to undertake two tasks:

1. Task 1: The amount (if any) the defendant is liable to account to the plaintiff for the net income of Johnston Vaughan for the period from 24 November 2014 to the date of the report. This amount is to be a sum which fairly and equitably in all of the circumstances is the best estimate of the likely net profit of the business of Johnston Vaughan over the relevant period, taking into account the accounts rendered, income received, genuine expenses, including expenses which were paid by the Plaintiff, and making an allowance to the Defendant for his work in that business as is reasonably appropriate for a solicitor performing the function of the sole principal of the practice; and

2. Task 2: The fair market value of Johnston Vaughan as at both 25 November 2014 and 27 September 2018, as well as (separately) the quantum of all monies paid by the plaintiff to the expenses of Johnston Vaughan subsequent to 25 November 2014.

56. The draft letter then set out the information that was then available to the parties that was thought to be relevant to the preparation of Ms Exner’s report. It will not be helpful to set out the list in these reasons. The information provided was at least deficient in the sense that, because of the deficiencies in the information provided by Mr Vaughan to Mr Dlakic that have been explained above, the parties were unable to provide Ms Exner with comprehensive records of the practice of Johnston Vaughan for the relevant period. The draft letter ended: “If you require any further information or instructions, please do not hesitate to contact the parties, whose details are set out above.”

57. These orders were formulated by the parties in consultation with the Court. Orders 4 and 5 represented a specific attempt by the Court to require the parties to direct their attention to the additional information that they wished Ms Exner to have so that she could make the most specific and reliable findings that were possible on the basis of that information in respect of the tasks that she was appointed to undertake. It was the Court’s intention that the parties would have a last and final opportunity to put information to the referee, so that her findings would be as accurate as possible and would be final. However, the orders were not intended to contradict the observations made in J1 [474]-[475] concerning the prohibition on the reliance on evidence that ought to have been made available before the first hearing. The orders were made on the assumption that there may be collateral evidence relevant to the completion of the tasks given to Ms Exner that might alleviate the difficulties caused by the deficiencies in the books and records of Johnston Vaughan.

58. On 28 August 2020, Mr Dlakic filed a notice of motion the objective of which was to obtain an order that Mr Vaughan pay Ms Exner’s costs as required by order 13 made by the Court on 14 May 2019. On 6 November 2020, Parker J made the following orders in the Applications List:

1.    I make the orders and notations in the Short Minutes of Order initialled by me and dated today.

SHORT MINUTES OF ORDER

1    Without prejudice to the right for the Defendant to have the costs invoiced by Deloitte assessed as to their reasonableness the Defendant will make payment of the invoices for the work pursuant to the orders of Robb J made on 14 May 2019 and the letter and scope of works and attached terms and conditions dated 28 November 2019 as follows:

a.    make payment of the outstanding invoice in the sum of $34,254 on or before 27 November 2020,

b.   make payment of any further invoices issued by Deloitte within 28 days of receiving the invoice.

2    Each party is to pay their own costs of and incidental to the motion filed by the plaintiff 28 August 2020.

3    The Court notes the email received from Deloitte and placed on the court file consenting to and being bound by the above orders.

59. On 10 March 2021, Mr Dlakic filed a notice of motion in which he sought the following orders:

1. An order, pursuant to rule 20.17(1)(c), rule 20.20(1) or alternatively rule 20.21 of the Uniform Civil Procedure Rules 2005 (NSW) that the Defendant within 7 days of the date of this Order provide the information and documents requested by Deloitte in their letter dated 3 December 2020.

2.   That the Defendant pay the Plaintiff’s costs of and incidental to this motion on an indemnity basis.

60. I understood that, at the time the Court was asked to make this order, Ms Exner had decided that it was necessary to request further information from Mr Vaughan and had made that request in a letter dated 3 December 2020.

61. Mr Dlakic seeks a specific order for his costs to be payable by Mr Vaughan in respect of a short hearing on 25 March 2021, after which the Court made the following orders:

The Court by consent makes orders in terms of the short minutes of order signed by Robb J and dated today's date.

Short minutes of order

1   The Court notes the undertaking given to the Court by the defendant to use his best endeavours to provide a response to the matters raised and the information sought in the letter from Jennifer Exner, of Deloitte Risk Advisory to Mr Nicholas Gibbs of Mills Oakley, Solicitors dated 24 March 2021 by close of business on Friday 16 April 2021.

2.   Stand the plaintiff’s motion and these proceedings over to 9:15am 3 May 2021 before Robb J.

3.   The costs of and incidental to the plaintiff’s Notice of Motion be reserved.

62. Mr Vaughan gave this undertaking to the Court because he had apparently not responded in due time to a request for information made by Ms Exner on 16 April 2021.

63. Mr Dlakic also seeks an order for costs against Mr Vaughan in respect of a further brief hearing that occurred on 3 May 2021, which lasted about eight minutes, at which the following orders were made:

The Court

1   Stands the plaintiff’s notice of motion filed 10 March 2021 over to Wednesday, 9 June 2021 at 9:15am for directions.

2   Reserves costs.

64. As appears from the transcript for this hearing, counsel for Mr Dlakic informed the Court that the parties had received an email from Ms Exner advising that she was working with the information that had been provided by the parties on the assumption that there was no more material to come. On that basis, Mr Dlakic sought an order that his notice of motion be stood over until 10 March 2021. Counsel advised the Court that it was likely that the only matter that would be outstanding was the issue as to costs.

65. Mr Dlakic provided his submissions on the costs issue to the Court. At the hearing on 9 June 2021, the Court made an order that Mr Vaughan provide his submissions on the issue of costs within seven days and stood the proceedings over to 9 July 2021.

66. Ms Exner delivered her initial referee’s report on 28 May 2021. I will refer to the relevant parts of that report below.

67. At the final hearing, the parties tendered a considerable amount of correspondence between their solicitors and with Ms Exner concerning the conduct of the reference. It would ordinarily not be necessary for the Court to give close attention to correspondence of this nature on an application to the Court to adopt a referee's report. I propose to consider the correspondence only to the extent that it is strictly necessary for the Court to do so. One aspect of the correspondence that should be recorded is a letter from the solicitors for Mr Dlakic to Michael Vaughan & Co (Mr Vaughan having established a new practice in that name after the practice of Johnston Vaughan ceased, and having become his own solicitor in the proceedings) dated 24 August 2021. The letter included the following statement:

4.   It is the plaintiff's position by electing to pursue the alternate remedy and no longer seeking to have the Buyback Agreement set aside, the plaintiff is entitled to an order for compensation, that includes:

a.    The net profit received by the practice after the buyback agreement in respect of work done before the buyback agreement (the Adjusted Net Profit);

b.    The expenses paid by the plaintiff on behalf of the practice after the date of the buyback agreement (the Expenses Issue); and

c.    The value of the practice (the Valuation Issue).

(Together, the Exner Issues).

5.    Ms Exner has produced a report dated 28^th May 2021 (the Exner Report) that addresses the Exner Issues in the following ways:

a.    The Adjusted Net Profit – "Task 1 Net profit of Johnston Vaughan” (Section 4);

b.    The Expenses Issue – "Task 3 Monies paid by the Plaintiff towards the expenses of Johnston Vaughan" (Section 6); and

c.    The Valuation Issue – "Task 2 Value of Johnston Vaughan at the relevant dates" (Section 5).

68. This extract from the 24 August 2021 letter was made, as it states, after Ms Exner had delivered R1 and was made in response to that report. It appears, although the meaning of the letter may not be clear, that Mr Dlakic had decided on the basis of the conclusions reached by Ms Exner that it was in his interests to elect to affirm the buyback agreement, and to sue to enforce the agreement. Clause 4 of that agreement has been set out at [21] above. It entitled Mr Dlakic to be paid the fees received by Mr Vaughan after the date of the buyback agreement from work in progress before that date, less the costs of disbursements incurred by Mr Vaughan in respect of that work in progress. Mr Dlakic evidently understood that, if he affirmed the buyback agreement, he would become entitled to receive the amounts described in par 4 of his solicitors' letter.

69. On 9 July 2021, the Court made the following orders:

The Court

1   makes orders in terms of the short minutes of order signed by Robb J and dated today’s date.

2   grants leave to the parties to relist the proceedings by arrangement with the Associate to Robb J.

Short minutes of order

THE COURT ORDERS THAT:

1.   The Court notes that the plaintiff elects to seek equitable compensation for damages for breach of the Buyback Agreement.

2.   The plaintiff to provide any further submissions to Ms Exner seeking her further opinion, clarification or comment in respect of any matters raised in her report dated 28 May 2021 and any further material for her consideration by 30 July 2021.

3.   The defendant to provide any response to Ms Exner in relation to any submissions or material provided to her by the plaintiff pursuant to Order 2 above by 20 August 2021.

4.   Within 14 days of any further report produced by Ms Exner, the plaintiff is to provide proposed orders to the defendant which he seeks be made by the Court including the adoption of Ms Exner’s report dated 28 May 2021 or any subsequent report, the quantification of all aspects of his claim and any further orders in terms of cost of the proceedings or reserved costs (the Proposed Orders).

5.   Within 7 days of the defendant being provided with the Proposed Orders, the defendant is to notify the plaintiff and the Court of his consent or opposition to the Proposed Orders.

6.   In the event of any opposition to the Proposed Orders, the defendant is to file and serve submissions setting out his opposition to the Proposed Orders within 7 days of receipt of the Proposed Orders (the Defendant’s Submissions).

7.   The plaintiff is to file and serve submissions in response to the Defendant’s Submissions within 7 days of receipt of the Defendant’s Submissions.

8.   The matter is to be listed for directions in respect of the Proposed Orders on 14 September 2021 at 9:15am before Robb J.

9.   Reserve the costs of the appearance today.

70. Mr Dlakic seeks an order that Mr Vaughan pay his costs of 9 July 2021.

71. The Court was apparently asked to make the note in par 1 of the short minutes of order made on 9 July 2021 because of the position taken by Mr Dlakic as disclosed in par 4 of his solicitors' 24 August 2021 letter.

72. On 15 December 2021 and 3 February 2022, the Court was asked by the parties to make orders by consent that had the effect of varying orders 4 to 7 made on 9 July 2021 to extend the dates for the parties to comply with orders 4 to 7. I infer that the extensions were sought because Ms Exner had been asked to reconsider some of the conclusions that she had reached in R1. Ms Exner delivered her supplementary report, R2, on 6 December 2021.

The final hearing

73. The final hearing in these proceedings began on 20 March 2023. In essence, most of the hearing was occupied by a dispute between the parties concerning whether Mr Dlakic had made an election in relation to the remedy that he had chosen that bound him to affirm the buyback agreement. That position appears consistent with the statement in Mr Dlakic's solicitors' 24 August 2021 letter that is set out above. Mr Vaughan appears to have thought that, if Mr Dlakic elected to affirm the buyback agreement, he would be entitled to compensation that included the value of the practice of Johnston Vaughan. Notwithstanding that Ms Exner had found that the practice had a value, Mr Vaughan went to considerable lengths in his new evidence and submissions to try to persuade the Court that it should not adopt Ms Exner's finding, and should find that the practice had no value. Apparently, Mr Vaughan directed much of his energy during the reference to trying to persuade Ms Exner to assign a nil value to the practice.

74. On the other hand, Mr Dlakic appeared to understand that, whichever election he had made, he would be entitled to relief that included the net profit of the practice of Johnston Vaughan until it ceased to operate. I should note that, at the hearing, Mr Dlakic abandoned the claim that he was entitled to both the net profit of the practice and to the value of the practice at the date of the buyback agreement.

75. The Court made some observations during the hearing to the effect that the parties may not have correctly understood the consequences of the two alternative forms of relief between which Mr Dlakic initially had the right to elect.

76. During the course of the hearing, Mr Dlakic apparently realised that the election that he originally appeared to have made might not give him the relief that he expected, and he changed his position to assert that, whatever he had said on the issue of an election, that was not binding upon him, and that he was not required to elect between the alternative remedies until the Court had finally determined the monetary value of the two alternative forms of relief.

77. After submissions were made by the parties on the issue, Mr Vaughan conceded on the last day of the hearing that Mr Dlakic retained the right of election that he claimed to have: see T 105.21. The result was that the clouds of obscurity parted and some sun shone in. Although much of the hearing had been wasted, the Court would not be required to decide the issue of whether Mr Dlakic had made an election between inconsistent remedies that was binding upon him, either as a matter of law, or because Mr Vaughan had conducted the reference in a way that had the effect that Mr Dlakic was estopped from changing his position. Although the issues to be decided were simplified in that way, instead of the Court only having to receive evidence relevant to the quantification of one form of relief, it is now required to determine the quantification of each form of relief, so that Mr Dlakic can then elect between them. As it happens, that outcome makes the issue of what evidence was admissible at the hearing more complicated, as the Court will now be required to deal with evidentiary disputes in relation to the form of relief that Mr Dlakic will later elect not to take.

78. As the greater part of the hearing was directed at a false issue that disappeared on the last day, the Court did not have time to determine all of the evidentiary disputes that arose during the course of the hearing. Further, the parties did not leave themselves sufficient time to make proper oral submissions.

79. The parties contested the reception into evidence of two affidavits sworn by Mr Vaughan on 28 February 2022 and 2 August 2022, both dates being after Ms Exner had delivered her two reports. As I understood the content of those affidavits, they were largely occupied with providing evidence going to the facts relevant to the issues determined in Ms Exner’s reports, for the purpose of persuading the Court not to adopt aspects of the report on the grounds that Ms Exner had reached false conclusions. Had there been time for the Court to examine the affidavits in detail, I would have immediately rejected all parts of the affidavits that had been sworn for that purpose. That would have been on the ground that it was too late after the conclusion of the reference, having regard in particular to orders 4 and 5 made by the Court on 27 September 2019, to permit Mr Vaughan to tender new evidence at the final hearing. Furthermore, after the end of the original hearing, it had become impossible for Mr Dlakic to fairly deal with evidence that had not been put to him in his cross-examination. I would have made a similar ruling to the ruling that I made in J2 [11]-[12].

80. However, the admissibility of Mr Vaughan's new affidavits was complicated by the fact that both Mr Dlakic and Mr Vaughan submitted that there were some issues in respect of which they were, in principle, entitled to tender further evidence in the proceedings because, for one reason or another, Ms Exner had not dealt with, or declined to deal with, the relevant issues as part of the reference. That position, as adopted by both parties, left open the possibility that some of the additional evidence relied upon by both parties might properly be admissible at the hearing. The parties had not left the Court sufficient time to deal with that possibility in a detailed way.

81. There was also a problem with the way that the parties had presented the documentary evidence to the Court in their court books. Only three Court books were required for the original hearing to determine liability. Each party provided a separate two lever arch volume court book to the Court at the final hearing. The separate court books overlapped to some extent. Some documents upon which Mr Dlakic wished to rely were in Mr Vaughan's court book but not his own. Pages 78 to 127 of the first volume of Mr Vaughan's court book were not in the folder where they ought to have been, but the Court was told that they had been inserted at the end of the second folder. When counsel for Mr Vaughan started to tender documents from Mr Vaughan's court book in a serial fashion, it became apparent that he was making submissions as to the admissibility of documents that had already found their way into evidence as part of Mr Dlakic's court book.

82. The parties ultimately agreed to cooperate to provide a single joint court book, as they should have done in the first place. The Court now has the benefit of having three sets of Court books; the two overlapping but incomplete court books which it worked on during the hearing, and a new untouched court book that is apparently complete but is ordered in a different way to the court books that the Court was required to use during the hearing.

83. The Court was not given time to rule upon the admissibility of all of the documents that are now in the joint court book. That is problematic, because, in principle, most of the documents should not be admissible, as they constitute communications between the parties and between the parties and the referee concerning the reference, or they contain evidence that should not have been provided to the referee because it was not properly dealt with at the initial hearing, or because it should have been provided to the referee, but was not. Yet it is possible that some aspects of the documentary evidence may be properly admissible because there is some issue relevant to the relief to which Mr Dlakic is entitled that the Court must determine – as separately claimed by each party – but was not determined by Ms Exner.

84. As stated, the Court was forced by circumstances to rule that it would receive Mr Vaughan's two affidavits and the documents in the joint court book provisionally, on the basis that it would rule on the admissibility of the evidence in these reasons for judgment: see T 82.50-83.50. Furthermore, I ruled that the parties would be required to deal specifically in the written submissions that had by that stage become necessary with the admissibility of each document upon which they wished to rely. The Court did not accept the burden of going through the whole of Mr Vaughan's two affidavits and the joint court book to rule individually on the admissibility of all parts of that evidence. The Court required the parties to identify and to justify the admissibility of each aspect of the new evidence upon which they wished to rely in their written submissions: see T 103.30-103.42.

Ms Exner's reports

85. It will be convenient to consider the two reports delivered by Ms Exner together, as the only effect of R2 is to correct a small number of errors in R1. I will signify the changes by stating the varied figure in bold in square brackets after the equivalent figure in R1.

86. The preparation of R2 by Ms Exner is significant to the issue of whether the Court should adopt the conclusions stated by Ms Exner, as it demonstrates that Ms Exner entertained challenges by the parties to her initial conclusions in R1 but she adhered to those conclusions, save for a small number of computational or typographic errors.

87. Ms Exner's first report contains detailed reasoning in 36 pages, as well as a number of appendices that explain aspects of her reasoning in detail, or contain particular aspects of the evidence upon which Ms Exner relied.

88. Ms Exner set out the tasks that she had been instructed to perform at R1 [1.4]. That statement is consistent with order 9 as varied on 8 August 2019, save that Ms Exner described the task in order 9(a) as Task 1, and she separated the two components of order 9(b) into Task 2 and Task 3. Task 2 was the determination of the fair market value of Johnston Vaughan, as at 25 November 2014 and 27 September 2018. Task 3 was the determination of the amount of all monies paid by Mr Dlakic towards the expenses of Johnston Vaughan after 25 November 2014.

89. At R1 [1.6], Ms Exner stated that she had listed the documents that she had relied upon in Appendix 2. I will not set out the documents that are there listed, but it appears that the information available to Ms Exner concerning the financial affairs of Johnston Vaughan was limited.

90. It will be convenient to set out in full aspects of the summary of Ms Exner's conclusions as stated in Part 2 of R1, as follows (noting that footnotes have been omitted and the tables have been edited in accordance with the note set out below the extract):

…

Net profit of Johnston Vaughan post 25 November 2014

Overview

2.3.    I have been instructed to determine the amount (if any) the Defendant is liable to account to the Plaintiff for the net profit of Johnston Vaughan for the period from 24 November 2014 to the date of my report (refer paragraph 1.4 above).

2.4 Details as to my precise instructions and my interpretation of these instructions is set out in Section 4. In short, I have assessed the Adjusted Net Profit of Johnston Vaughan for the period from 5 February 2015 to 31 October 2019 (the Relevant Period), being the period for which accounting records have been provided to me.

2.5 The task of assessing the Adjusted Net Profit of Johnston Vaughan has been complicated due to issues and limitations arising from the accounting records of the practice. I have summarised the key issues that have impacted my assessment of the Adjusted Net Profit of the practice during the Relevant Period in Section 4 (refer paragraph 4.6 below).

Alleged unrecorded cash receipts

2.6    The Plaintiff asserts that the accounting records of Johnston Vaughan understate the fee income generated by the practice as there are significant cash receipts that have not been recorded in the relevant general ledgers.

2.7    The Plaintiff has prepared two spreadsheets which purport to include details of unrecorded cash receipts from clients during the period from 25 November 2014 to 31 December 2018 (total of $514,406).

2.8.    In order to test the accuracy of the spreadsheets prepared by the Plaintiff, validation procedures were undertaken in respect of a sample of the alleged unrecorded receipts, which totalled approximately $301,000. I have been able to satisfactorily trace $154,426 of the receipts in this sample to the accounting records. I have been unable to identify any evidence as to how $146,657 of the receipts in this sample have been recorded in the accounting records of the business; this equates to approximately 49% of the sample transactions selected.

2.9    If this 'failure' rate is extrapolated across the total population of the alleged unrecorded receipts, a total of circa $265,000 in cash receipts has been unrecorded during the time period addressed by the Plaintiff's spreadsheets.

2.10    The Defendant contends that the cash receipts provided for a mixture of disbursements of the legal practice. I am unable to determine, based on the information available to me, the extent to which any unrecorded cash receipts have been used to pay unrecorded expenses of the business. I appreciate that this may have occurred. However, in my opinion, there should be contemporaneous records that evidence this e.g. to comply with the substantiation requirements for taxation purposes.

2.11    To assist the Court in making a finding on this issue, I have presented my calculations that assess the Adjusted Net Profit of the business on the following alternative scenarios:

a)   Assuming that all of the alleged unrecorded cash receipts were used to pay genuine expenses of the business (i.e. no adjustment is required to the net profit of the business) (Scenario 1).

b)   Assuming that an arbitrary 50% of the alleged unrecorded cash receipts were used to pay genuine expenses of the business (Scenario 2)

c)   Assuming that the alleged unrecorded cash receipts were retained by the Defendant and not used to pay any business expenses (Scenario 2).

Commercial remuneration

2.12    The issue as to the commercial remuneration that would have been appropriate for the personal exertion efforts of the Defendant during the Relevant Period is outside my area of expertise, as I am not a remuneration expert. For this reason, I have sought joint instructions on this matter.

2.13    In the absence of receiving joint instructions on this issue, I have assumed that the commercial remuneration package for the role of the Defendant in the business during the Relevant period is $200,000 [corrected in R2 at [1.17(a)] to $175,000] per annum. To the extent that the assumption is unreasonable in relation to any fiscal year/s during the Relevant Period, my conclusions will change, perhaps materially.

2.14    Details as to each party’s position on this issue and my reasons for adopting the above assumption are set out in paragraphs 4.38 to 4.52 below.

My conclusions

2.15.    The table below summarises my conclusion as to the total Adjusted Net Profit of Johnston Vaughan during the Relevant Period on each of the alternate scenarios.

Table 1 Total Adjusted Net Profit during the Relevant Period

Net profit before tax	528,737
Total adjustments	(486,647)
Adjusted net profit (excluding unrecorded cash receipts)	42,090
Adjustment: Alleged unrecorded cash receipts
Scenario 1	–
Scenario 2	132,644
Scenario 3	265,289
Adjusted Net Profit for the Relevant Period
Scenario 1	10,664
Scenario 2	143,308
Scenario 3	275,952

2.16.    The Plaintiff asserts that funds totalling $67,470 were received from clients after the date of the Buyback Agreement (i.e. 25 November 2014) and these funds related to work in progress undertaken prior to this date (Refer to paragraphs 4.80 to 4.89 below). Based on my understanding of the terms of the Buyback Agreement, any funds received by the Defendant relating to work in progress prior to the sale should have been paid to the Plaintiff.

2.17    I am unable to conclude as to the total amount paid to the Plaintiff in respect of work undertaken prior to the Buyback Agreement, or details as to the liabilities satisfied by the application of funds owed by him, because of a paucity of information available to me. I consider that the amount of $67,470 may be owing to the Plaintiff (in addition to the Adjusted Net Profit) unless the Court is satisfied that these funds have either been repatriated to the Plaintiff or used by the Defendant to pay the liabilities of Johnston Vaughan Solicitors Pty Ltd that existed at the date of the Buyback Agreement.

Value of Johnston Vaughan at the relevant dates

2.18    I have undertaken Limited Scope Valuations of the practice at the relevant dates because I have not undertaken all of the approaches, methods and procedures that would ordinarily be conducted in a valuation assignment due to limitations in the available accounting records.

2.19    I have valued the practice by reference to determining the value of the commercial goodwill only. This approach excludes the value of any tangible business assets and business liabilities that may have been in existence at the date of the valuation, such as accounts receivable, work-in-progress and payroll tax liabilities. I have adopted this approach on the assumption that the sale of the practice at any time would be structured such that any tangible business assets and business liabilities in existence [at] the date of sale would remain with the vendors. This is consistent with the manner in which the previous sale transactions of Johnston Vaughan in July 2010 and November 2014 were structured.

2.20    My approach also assumes that the office fit-out and furniture has no (or nominal) market value as at the date of sale. I consider that this assumption is reasonable, given that the balance sheets as at (or around) the valuation dates do not recognise any value for these assets.

2.21    The table below sets out my opinion as to the commercial goodwill that a hypothetical purchaser would be prepared to pay to acquire the practice trading as Johnston Vaughan, as at the relevant dates:

Table 2 Indicative value of the practice (commercial goodwill only)

24/11/14	Alt. 24/11/14	27/9/18
Low	33,000	50,000	10,000
High	67,000	70,000	15,000
Midpoint	50,000	60,000	12,500

2.22    This reflects my assessment of the price that a hypothetical purchaser would be prepared to pay to acquire a legal practice that was already operating and established, taking into account the financial and operational issues that the business was experiencing at each date of valuation.

Monies paid by the Plaintiff to the expenses of Johnston Vaughan

2.23.    In my opinion, there is sufficient evidence for me to conclude that the plaintiff paid a total of $175,323 [varied in R2 [2.8] to $199,683] toward the expenses of Johnston Vaughan, subsequent to 25 November 2014. This represents the payment of insurance premiums (a total of $24,725) and the payment of the additional expenses that the Defendant has conceded were paid by the Plaintiff (totalling a further $150,598).

183. Mr Vaughan responded to this claim at pars 7.1 to 7.5 of the Defendant’s Submissions, which do not refer to any part of Mr Vaughan’s affidavit evidence. The submissions assert that clients of Johnston Vaughan, who had paid money into trust on account of fees, agreed with Mr Vaughan for the money to be transferred to the new trust account of Michael Vaughan & Co. The submissions identified the amounts held on trust for four clients, but those amounts only added up to $49,090. The submissions are consistent with Michael Vaughan & Co having provided the relevant legal services, rather than Johnston Vaughan before 30 June 2019, when Johnston Vaughan ceased to operate.

184. Even though these submissions do not refer to any evidence given by Mr Vaughan, it is not necessary to consider them further because they are consistent with the conclusion that the Court has reached on the basis of Ms Exner’s reports.

Defendant’s Legal Fees

188. Mr Dlakic submitted to Ms Exner that two payments in the total amount of $55,000 recorded in the CBA Trust Account bank statements were made to the barrister who appeared for Mr Vaughan at the original hearing. Mr Dlakic claimed that these payments should be treated as personal expenditures of Mr Vaughan and not business expenditures, so that they should be added back to Ms Exner’s determination of the Adjusted Net Profit.

189. Ms Exner recorded, at R2 [3.45]-[3.47], that Mr Vaughan asserted that he had put the amount of $55,000 into the trust account to fund the payment to his barrister. Ms Exner stated that she was unable to validate Mr Vaughan’s assertion, but that she had reviewed the general ledger of Johnston Vaughan for the 2018 financial year and noted that the $55,000 was not recorded as an expense in the profit and loss statement. Accordingly Ms Exner concluded prima facie that no adjustment was required for the purpose of the determination of the Adjusted Net Profit.

190. Mr Dlakic claims that the $55,000 should nonetheless be added back as income of Johnston Vaughan for the purpose of determining the Adjusted Net Profit, because Mr Vaughan was the only party who could have provided Ms Exner with the information that she required for her to verify that the $55,000 was sourced from Mr Vaughan’s personal funds.

191. This is another claim that cannot logically form part of the First Scenario but only the Second Scenario.

192. Even though Mr Vaughan did not provide Ms Exner with evidence that he paid the $55,000 into the Johnston Vaughan Trust Account, the evidence establishes that it was paid out of a trust account. Unless there was evidence that the money was the property of Johnston Vaughan, and incorrectly paid into its Trust Account, the evidence that is available establishes that the money was not the money of Johnston Vaughan. That is consistent with the treatment of the amount in the profit and loss statement – that is, it was not referred to at all because it was never Johnston Vaughan’s money. The evidence is consistent with Mr Vaughan not using the funds of Johnston Vaughan to pay his own legal costs.

193. Mr Vaughan made the bare assertion, in par 82 of his 2 August 2022 affidavit that the $55,000 “[was] paid by myself from my own funds”. It is not necessary for the Court to receive this evidence, as it is consistent with the conclusion reached by the Court on the basis of Ms Exner’s reports.

Post-Buyback Expenses

194. This claim is supported by Ms Exner’s finding, at R2 [2.8] that the correct amount of the expenses of Johnston Vaughan that Mr Dlakic paid after the date of the buyback agreement was $199,683.

195. In pars 9.1 to 9.7 of the Defendant’s Submissions, Mr Vaughan mounts a detailed argument as to why Mr Dlakic is not entitled to repayment of any post-buyback expenses. The essence of Mr Vaughan’s argument is found in par 9.3 where he says: “…The defendant admits that in the period from 25 November 2014 to July 2015 the plaintiff paid some monies into the practice accounts of Johnston Vaughan, as is addressed in detail below. However, during that period the plaintiff withdrew or transferred far more out of those accounts tha[n] he put in and, at the same time, as is set out again in detail below, the plaintiff, a signatory on the xx[xxxx] account for the practice Johnston Vaughan drew cheques in excess of $95,000 on that account for which the defendant does not have the records showing the payee or the purpose of such cheques.” Mr Vaughan noted that Ms Exner had declined to determine any amounts paid out of the accounts of Johnston Vaughan to or for the benefit of Mr Dlakic because that exercise did not form part of Task 3. Mr Vaughan submitted that, even if that is so in relation to Task 3: “That is not and cannot be the tasks set for the Court…” Mr Vaughan then made detailed submissions, based upon the bank statements for an account of Johnston Vaughan for the period 16 October 2014 to 20 July 2015 (20 pages with individual transactions numbered 1 to 483). Mr Vaughan submitted that the Court should note that Mr Dlakic was the sole signatory on the relevant bank account. Mr Vaughan then made detailed submissions by reference to pars 7 to 12 of his 28 February 2022 affidavit, in which he made assertions by reference to the bank statements as to specific amounts claimed to have been withdrawn by Mr Dlakic for his own benefit, in a total amount of $184,626.97.

196. This is the claim that ought specifically have been pleaded in Mr Vaughan’s defence, as I have noted above at [18], but was not pleaded and was not addressed at the initial hearing. It is confounding why Mr Vaughan chose not to do so, given that it appears from his 28 February 2022 affidavit that he may have had records that would have enabled him to prosecute the claim that he now seeks to make. The content of the submissions now made by Mr Vaughan make inexplicable his deficient response to Mr Dlakic’s notices to produce before the initial hearing. The appearance is that Mr Vaughan simply chose not to produce books and records of Johnston Vaughan that were in his possession and which he now seeks to deploy in his defence.

197. As Mr Dlakic was not given the opportunity of answering Mr Vaughan’s new case at the initial hearing, I reject so much of Mr Vaughan’s new affidavits as give evidence to support this claim.

198. The Court will adopt Ms Exner’s finding that Mr Dlakic paid $199,683 of expenses of Johnston Vaughan after the date of the buyback agreement.

Adjusted Net Profit

199. As is set out in Table 1 in R1 [2.15] that is set out above, Ms Exner expressed her conclusion concerning the amount of the Adjusted Net Profit on the basis of three separate scenarios. Ms Exner did not make a determination as to which of the scenarios should be adopted. Ms Exner determined that the Adjusted Net Profit was $275,952, subject to possible reduction on the basis of Mr Vaughan’s assertion that part of the cash receipts of Johnston Vaughan as at the date of the buyback agreement had been applied in making cash payments of Johnston Vaughan’s operating expenses. Mr Vaughan did not provide evidence of these payments to Ms Exner. Ms Exner created the three scenarios on arbitrary assumptions as to the proportion of the $265,289 in unrecorded cash payments that she had found was received was applied to pay operating expenses in cash. Ms Exner did this, as she stated in R1 [4.69]: “To assist the Court in making a finding on this issue…” The matter has therefore been left to the Court to decide.

200. I accept Mr Dlakic’s submission that, as Mr Vaughan did not plead that these cash payments had been made in his defence, and in any event, he did not lead any evidence at the initial hearing to prove the proportion of the unrecorded cash receipts that had been applied in payment of Johnston Vaughan’s operating expenses, the proper course is for the Court to accept Scenario 3 and find that the Adjusted Net Profit was relevantly $275,952 (as revised at R2 [2.3]). I therefore reject Mr Vaughan’s submission, made at Defendant’s Submissions par 11.9 without elaboration, that the Court should accept Scenario 2.

201. In the Defendant’s Submissions at pars 11.2 to 11.8, Mr Vaughan challenged the reasonableness of Ms Exner’s allowance of an annual salary of $175,000 for Mr Vaughan. I reject that challenge because, as Ms Exner explained at R1 [4.40]-[4.44], for want of better evidence, Ms Exner determined the $175,000 amount by acting upon evidence provided by Mr Vaughan that suggested that 35% of total fee revenue received was a proper basis for the determination of the remuneration to be allowed to Mr Vaughan, and then actually made the determination on the basis of 40% to allow for the lower amount of revenue that she had found Johnston Vaughan had received. Mr Vaughan cannot now complain if Ms Exner determined the amount of the remuneration by adjusting the evidence provided by Mr Vaughan in his favour.

Determination of amount of Unbilled WIP

202. The Court must determine the amount that Johnston Vaughan received after the date of the buyback agreement from Unbilled WIP as at that date, for the purpose of calculating the amount payable to Mr Dlakic under clause 4 of the buyback agreement, on the basis of the evidence before the Court at the initial hearing, except to the extent that the Court may give leave to the parties to adduce further evidence prepared after the conclusion of the hearing. As explained above, Ms Exner correctly took the view that the determination of this amount was not a task that she had been instructed to carry out.

203. The amount of Mr Dlakic’s Unbilled WIP claim is $434,930. That is the total amount in the table in Mr Dlakic's draft short minutes of order that became MFI 1 that is set out above at [112]. As I have noted above at [169], Ms Exner observed at R2 [3.12]-[3.13] that Mr Dlakic's claim was really only for $393,475, as two amounts, in the total sum of $140,000, had not been received by Johnston Vaughan. Mr Dlakic based his claim on the matters recorded in the spreadsheets that he prepared and were in evidence at the original hearing at Tab 34 to Exhibit AD-1. Mr Dlakic gave evidence on that issue in pars 224 to 227 of his 22 May 2017 affidavit. At par 224, Mr Dlakic said that he had prepared spreadsheets on 1 October 2014 and on 22 May 2017 setting out the fees in numerous matters that he was aware had not been paid to him by Mr Vaughan, although he said that there could have been other matters where fees remain outstanding to him that he could not recall and that he could not determine from the records available to him. Mr Dlakic said: “The total fees that I estimate are owing to me in respect of unpaid Work-in-Progress of Johnston Vaughan is the sum of $1,922,981.44, as set out in the above latest version of the spreadsheet.” That sum is indeed the total stated at the end of the 22 May 2017 spreadsheet. The spreadsheet takes the form of listing amounts owed by clients on an aged debtors basis. The meaning of the spreadsheet is not evident on its face, and Mr Dlakic’s affidavit does not provide an explanation. Mr Dlakic’s reliance upon the spreadsheets is perplexing. One would expect that aged debtors schedules prepared as at two dates could be used to identify the value of the WIP as at the first date (in this case 1 October 2014, which was slightly before the 25 November 2014 date of the buyback agreement) and then, by comparison with the debts that remained outstanding at the second date, the debts that had been paid in the intervening period could be identified. In this case, although Mr Dlakic’s two spreadsheets are dated 1 October 2014 and 22 May 2017, the list of debtors is almost identical in each and the information concerning the ages of the debts is identical in almost every case. The later spreadsheet appears to be almost entirely a reprint of the earlier one. It does not prove the Unbilled WIP received by Johnston Vaughan after the date of the buyback agreement. In any event, as the earlier document is an aged list of debtors, tax invoices must have been sent to the debtors so that the debts were not unbilled – that is, they did not represent WIP.

204. A consideration of the wording of clause 4 of the buyback agreement suggests that the problem lies in the description of this claim as “Unbilled WIP”. Clause 4 entitled Mr Dlakic to be paid all money received by Johnston Vaughan after the date of the buyback agreement for all work done in clients’ files prior to that date, whether billed or unbilled as at the date of the buyback agreement. Consequently, Mr Dlakic was entitled to be paid all of the fees listed in the 1 October 2014 spreadsheet if those fees were paid by the relevant clients to Johnston Vaughan after 25 November 2014. It is not clear why the manner in which the 22 May 2017 spreadsheet was prepared is of no assistance in determining the amount of fees that were received.

205. In fairness to Mr Dlakic, he said in par 226 of his affidavit that he was unaware as to what, if any, amount had been received by Mr Vaughan from the client entries in the 22 May 2017 spreadsheet in respect of items 3 to 146 and 149. Mr Dlakic then gave evidence, in par 227, concerning the debts recorded in five of the items. The amounts of the debts that Mr Dlakic specifically claimed were outstanding as at 25 November 2014, for which Johnston Vaughan had received some repayments were (as written by Mr Dlakic):

Item 147    Paul Nakhe (IJG GROUP) Pty LTD    $48,500

Item 148    Catherine Ricketts          $48,000

Item 150    Deborah Canov          $41,000

Item 151    Paul Calleja             $198,500

Item 152    Rabija (robyn) Tarakaj       $25,000

206. Then, in par 227 of his affidavit, Mr Dlakic gave evidence that tended to prove that Mr Nakhe had paid $55,000, Ms Ricketts had paid $48,500, Ms Canov had paid $15,000, Mr Calleja had paid an estimated $191,000, and Ms Tarakaj had paid $18,028. The evidence given by Mr Dlakic was not challenged, even though it was in some respect weak as proof that the payments had been made. Some of the payments were greater than the amounts set out in the table above, as Mr Dlakic gave evidence that Mr Vaughan had done additional legal work for some of the clients after the date of the buyback agreement. As I understand it, the amounts beside the individual item numbers in the table at [205] above are less than the corresponding amounts in the table set out at [112], because the latter table was wrongly prepared using the amounts in the 22 May 2017 spreadsheet that included not only work done before the date of the buyback agreement, but also work done by Mr Vaughan afterwards that Mr Dlakic was not entitled to be paid under clause 4 of the buyback agreement.

207. I made the following observations on this issue in J1:

[78] Mr Dlakic gave evidence that, following the buyback agreement, he received some very small amounts in respect of fees paid to Johnston Vaughan for work done before the date of the buyback agreement, and in par 224, Mr Dlakic refers to a spreadsheet exhibited to his affidavit that he originally prepared on 1 October 2014, and updated over the period to 22 May 2017, which takes the form of an aged debtors list in respect of amounts that Mr Dlakic claims represented fees owed by clients that should have been paid to the firm and remitted to Mr Dlakic. The total amount of the list is $1,922,981.44. Mr Dlakic qualified his evidence by explaining in relation to some entries that part of the fees payable by clients accrued before the date of the buyback agreement, and part accrued afterwards. Mr Vaughan simply denied the paragraph, without offering any positive explanation concerning what fees were owed to the firm and what amounts were received.

[79] Mr Dlakic gave evidence of being aware, by reason of having reviewed some of the Johnston Vaughan trust account ledgers in about October 2015, that some of the fees itemised in the spreadsheet (with a total of about $339,430.35) had been received by Johnston Vaughan. Strangely, Mr Vaughan did not respond to these paragraphs.

[80] There is one receipt that I am satisfied occurred, because evidence was given as to its receipt by Mr Steven D’Apice, who was a conveyancer employed by Johnston Vaughan at the time, and who also was responsible for all office records concerning receipts in reconciliation to the trust account cash books and journals, all trust account bookkeeping, and the records necessary to complete PAYG and GST declarations. Mr D’Apice gave evidence that in about September 2015, Mr Dlakic attended the office and negotiated the amount of fees to be paid by a client, Mr Paul Calleja, which enabled an amount of approximately $191,000 to be released from the firm’s trust account. Mr D’Apice gave evidence that, of this sum, about $180,000 was paid to Mr Vaughan. Mr D’Apice annexed to his affidavit what he called an expense sheet that was given to him by Mr Vaughan. The document lists eight payments totalling $178,439.11.

[81] It must be noted that two of those payments were described as "Michael Vaughan – rent" for $43,866.25, and "rent in advance" for $24,360. This payment to Mr Vaughan occurred long after the time when the lease of the Montgomery Street property to Mr Dlakic had been surrendered.

[82] In his specific response to Mr D’Apice's affidavit, Mr Vaughan did not respond to the evidence concerning the release of Mr Calleja's fees from the trust fund or that about $180,000 was paid to him. Mr Vaughan denied Mr D’Apice's evidence that Mr Vaughan instructed him to pay the bills and expenses listed in the document and said (par 21): "I say that the Plaintiff was to pay his obligations to the staff and the rent from the Calleja money. The annexure marked "A" is not a document made by me and the writing on it is the handwriting of the Plaintiff". Irrespective of who was the author of the document annexed to Mr D’Apice's affidavit, Mr Vaughan's response is a clear admission that the money was paid to Mr Vaughan for alleged expenses of Johnston Vaughan at a time long after the date of the buyback agreement.

208. In saying in J1 [80] that there was one payment that I was satisfied had been received I did not mean that I had found as a fact that that was the only receipt that had been proved. The paragraph appeared under the heading “Contentious issues of fact”, and that part of the judgment was directed to explaining questions of fact that were in issue between the parties. The Court did not finally deal with the quantification of Mr Dlakic’s claim for enforcement of the buyback agreement in J1.

209. As is stated in Defendant’s Submissions at par 3.2, Mr Vaughan seeks to respond to this claim in pars 12 to 24 of his 2 August 2022 affidavit. I have already explained above why I reject Mr Vaughan’s submission that Mr Dlakic is precluded from recovering the amount of this claim because his practising certificate had been suspended.

210. Mr Vaughan’s evidence is difficult to understand because he states that it is given in response to a claim by Mr Dlakic for $1,372,324 for Adjusted Net Profit. Some confusion appears to have been introduced because of references made in Mr Vaughan’s evidence to appendices of Ms Exner’s reports that in fact were concerned with her identification of cash receipts by Johnston Vaughan after the date of the buyback agreement.

211. In his affidavit Mr Vaughan gives detailed explanations about each of the matters involving the clients listed in the schedule in [205] above. The explanations are supported by attached extracts from general ledgers, tax ledgers, tax invoices and cheque butts. Mr Vaughan purports to have a detailed recollection of what happened in each of the matters. I will not set out the evidence in detail, but it is a fair description that it seeks to give chapter and verse responses to Mr Dlakic’s claim.

212. The fact that Mr Vaughan is now able to give this evidence, whatever the truth of it may be, given that he did not respond to the evidence tendered by Mr Dlakic at the original hearing, and that he did not produce to the Court any of the documents upon which he now seeks to rely, is extraordinary. It is at least possible that the course of the original hearing would have been completely different if Mr Vaughan had complied with his obligations as a party, let alone a solicitor of this Court, to make a proper response to his obligation to produce the books and records of Johnston Vaughan that were in his possession or control.

208. The conclusion cannot be avoided that Mr Vaughan, who should have known better, decided to flaunt his obligations and to not provide an evidentiary response to Mr Dlakic’s claims. Mr Dlakic was clearly hamstrung in the presentation of his case because of the absence of the books and records that he struggled mightily but unsuccessfully to obtain. I have set out above at [34] the observations I made at J1 [475] to the effect that I made it clear that I did not contemplate that the parties will be permitted to lead further evidence where that evidence could have and should have been led at the hearing, to enable them to remedy any deficiencies in the cases that they have presented. Mr Vaughan’s attempt to rely upon the new evidence on the issue of the WIP receipts is a flagrant violation of that ruling.

209. Furthermore, the reception of the evidence would put the Court in the extraordinary position that it would be asked to accept the evidence of a witness that it has already ruled at J1 [147], as set out above at [29], it would not accept, except to the extent that it is corroborated. As it is now too late for Mr Vaughan to bring forward selected parts of the books and records of Johnston Vaughan, the grant of leave for Mr Vaughan to rely upon his testimonial evidence would be pointless.

210. Mr Vaughan has not formally applied for leave to rely upon his new evidence on this issue and he has provided no explanation at all as to why he did not serve it on Mr Dlakic before the original hearing. I refuse to permit Mr Vaughan to rely upon the evidence now.

211. Accordingly, the claim made by Mr Dlakic to enforce clause 4 of the buyback agreement must be decided on the basis of the evidence that was before the Court at the initial hearing. Apart from denying that evidence, Mr Vaughan did not positively challenge it and Mr Dlakic’s evidence was not contradicted in cross-examination.

212. I have set out my findings in relation to the credibility of the evidence given by Mr Dlakic at J1 [125]-[131], the relevant parts of which are reproduced above at [28]. Although I consider that Mr Dlakic was not an entirely reliable witness on some subjects that were affected by his psychological condition and his emotional state, I was satisfied that in relation to objective matters he had attempted to give genuine and truthful evidence to the best of his ability. Consequently, I am satisfied that the issue of the receipts of fees by Johnston Vaughan for legal services provided before the date of the buyback agreement should be determined on the basis that the evidence given by Mr Dlakic is the best evidence that is available, and that Mr Vaughan, who was in sole control of the books and records of the practice, was the only party in a position to contradict that evidence, but did not do so.

213. I consider in these circumstances that the evidence proves on the balance of probabilities that Johnston Vaughan received the following fees after the date of the buyback agreement for legal services provided to clients before that date:

1. Paul Nakhe – $55,000. See Mr Dlakic’s 22 May 2017 affidavit at par 227(1).

2. Catherine Ricketts – $48,500. See Mr Dlakic’s affidavit at par 227(unnumbered subparagraph). Although Mr Dlakic’s evidence was that Johnston Vaughan had been paid slightly more than that amount, only that amount was outstanding at the date of the buyback agreement.

3. Deborah Canov – $15,000. See Mr Dlakic’s affidavit at par 227(2).

4. Paul Calleja – $178,439.11. See J1 [80].

5. Rabija Tarakaj – $25,000. See Mr Dlakic’s affidavit at par 227(4) and Tab 36 of Exhibit AD-1. The exhibit is an unsigned copy of an Authority to Debit Trust Account dated 29 September 2015 that Mr Dlakic said in his evidence was signed by Ms Tarakaj in his presence and handed by him it to Mr Vaughan. The Authority referred to an estate matter and authorised that certain amounts be paid out of trust, including $31,028.00 to Johnston Vaughan. The amount that Mr Dlakic stated was owed at the date of the buyback agreement was $25,000.

6. The total amount is $321,939.11 (compared to the $393,475 which Ms Exner found was the upper limit of Mr Dlakic’s claim: see [203] above).

Conclusion

219. The result is that Mr Dlakic has established that, if he elects to affirm the buyback agreement, the First Scenario compensation to which he will be entitled is the Unbilled WIP of $321,939.11, as found by the Court, and the Post-Buyback Expenses of $199,683 found by Ms Exner. The total is $521,621.11. The first part of this amount is recoverable under clause 4 of the buyback agreement, and the second part consists of money had and received by Mr Vaughan that was paid by Mr Dlakic to satisfy the expenses of Michael Vaughan under the mistaken belief, induced by Mr Vaughan, that Mr Vaughan would pay Mr Dlakic the profits earned by the practice.

220. If Mr Dlakic elected to take the compensation under his Second Scenario, he would be entitled to the Adjusted Net Profit of $275,952 found by Ms Exner. As Ms Exner found at R1 [4.19]-[4.20], that is set out above at [102], the fact that Mr Dlakic paid $199,683 in Post-Buyback Expenses does not have the effect of adding to the Adjusted Net Profit. Ms Exner did not find that the Post-Buyback Expenses related to expenses incurred by Johnston Vaughan in earning revenue after the date of the buyback agreement, so that the Adjusted Net Profit, as determined by Ms Exner, must be taken to be revenue received after the date of the buyback agreement, less expenses paid out of that revenue, and not the Post-Buyback Expenses. Consequently, if Mr Dlakic elects to receive compensation determined on the basis that the buyback agreement should be set aside, the only amount that Mr Vaughan has received that ought to be paid to Mr Dlakic is the Adjusted Net Profit.

221. It will be necessary for Mr Dlakic to make a formal election as to the relief that he asks the Court to give him.

222. Mr Dlakic also seeks pre- and post-judgment interest.

223. It will be necessary for Mr Dlakic to prepare draft short minutes of order to give effect to these reasons, and as part of that exercise, he must calculate what he claims as pre-judgment interest, and attach a schedule establishing the basis of the calculation of that interest to his draft short minutes of order.

224. Mr Dlakic should provide the draft short minutes of order to Mr Vaughan within 14 days of the publication of these reasons, and, if Mr Vaughan objects to any part of the draft short minutes of order, he should prepare revised draft short minutes of order, and provide that document to Mr Dlakic and my Associate within a further seven days. In that event, both parties should serve and deliver to my Associate short written submissions in support of their position by the date that Mr Vaughan is required to submit his draft short minutes of order.

Costs

225. In his skeleton outline of submissions filed on 5 April 2023, Mr Dlakic sought the following further costs orders in par 39:

39. The plaintiff seeks an order that:

a.   The defendant pay the plaintiff's costs of the Notice of Motion filed 10 March 2021 (the Motion); and

b.   The defendant pay the plaintiff's costs and disbursements incurred since 14 May 2019 as agreed or assessed, including the costs of and incidental to the appearances on:

i.    8 August 2019;

ii.    25 March 2021;

iii.    3 May 2021; and

iv.    9 July 2021

(the Reserved Costs).

226. In relation to the notice of motion filed on 10 March 2021 and what he called the Reserved Costs, Mr Dlakic relied upon submissions dated 8 June 2021 that he had provided to the Court.

227. Mr Dlakic submitted that Mr Vaughan should be ordered to pay his costs of the proceedings since the previous costs orders were made on the basis that the reference process was necessary because of the non-compliance by Mr Vaughan with the notice to produce served upon him in 2018 that has been discussed in these reasons.

228. Mr Dlakic also seeks an order that Mr Vaughan pay him interest on the amounts of costs that have been paid by Mr Dlakic. In principle, Mr Dlakic should be entitled to interest on the costs paid by him on the basis considered in Lahoud v Lahoud [2006] NSWSC 126 at [82]-[83].

229. Mr Vaughan's position on the issue of costs, as set out in Part 17 of the Defendant's Submissions, is that the issue should not be determined by the Court until after Mr Dlakic has made his election concerning the remedy that he wishes to receive. Mr Vaughan informed the Court that a number of offers of compromise have been made during the proceedings, and submitted that it is premature for the Court to deal with the issue of costs on a final basis. Mr Vaughan also stated that there was an issue as to whether Mr Dlakic should pay Mr Vaughan's costs of work done on the remedy that is ultimately abandoned by Mr Dlakic, at least since 9 July 2021.

230. I accept that, if there is a chance that the parties may rely upon offers of compromise for the purpose of the determination of the costs orders that should be made in these proceedings, it is premature for final costs orders to be made now. However, I consider that it is appropriate for the Court to make a number of rulings on the costs issues, to provide a scaffolding for any future submissions by the parties on costs.

231. First, all of the costs that have been incurred since the original costs orders were made by the Court on 14 May 2019 have been incurred in the prosecution of Mr Dlakic's claim that he was entitled either to elect that the buyback agreement be set aside, or to elect to enforce it, and, in either case, to seek appropriate compensation. Consequently, in principle, as Mr Dlakic has succeeded on both of the alternative claims, he is entitled to an order that Mr Vaughan pay his costs incurred after 14 May 2019 on the ordinary basis.

232. Those costs will include the costs of the reference that Mr Vaughan was ordered to pay in the first instance by order 13 made on 14 May 2019. Mr Vaughan has not made an application that he be indemnified in respect of those costs, but in principle that application, if made, should be rejected.

233. As Mr Vaughan has now accepted that Mr Dlakic's right to elect as between the two alternative remedies remains alive, in principle Mr Dlakic should not be ordered to pay Mr Vaughan's costs incurred in respect of the alternative that Mr Dlakic abandons. Were it otherwise, the value of the right of election would be undermined for the successful claimant, because, if the claimant did not make the election prematurely, the claimant would risk being ordered to pay the costs of the wrongdoer in relation to the alternative that the successful claimant ultimately abandoned. That outcome would, in many cases, have the effect of destroying the right of election.

234. The Court should also rule on Mr Dlakic's application for the costs of the notice of motion filed on 10 March 2021 and what he called the Reserved Costs. That is because Mr Dlakic may be entitled to those costs, if his submissions succeed, even if for some presently unknown reason an order is not made that he be paid his costs of the proceedings generally from 14 May 2019.

235. As to the costs of the notice of motion, Mr Dlakic was reasonably justified in filing the notice of motion because Mr Vaughan held up the process of the reference by not providing certain material as requested by Ms Exner in a letter dated 3 December 2020 in a timely way.

236. Mr Vaughan provided his explanation for his delay in giving Ms Exner the information she requested in his affidavit sworn on 24 March 2021. Mr Vaughan sought to persuade the Court that he had initially attempted to respond in a timely way but that by mischance his communications with Ms Exner were not received, and her communications to him were not responded to either because he "saw no necessity to reply", or correspondence from Mr Dlakic's solicitors was only forwarded to his secretary and that she "was away from her computer most of that day, [and] that letter unfortunately did not come to her attention and as such was not redirected to myself". There are a number of grounds for doubting the veracity of Mr Vaughan's explanations, but I do not think that it is necessary to explore that issue. The simple fact is that Mr Vaughan was required to take responsibility for ensuring that he or his staff responded effectively in a timely way to the correspondence addressed to him by Ms Exner and Mr Dlakic's solicitors, and that, because his response was ineffective in fact, he must take responsibility for the need for Mr Dlakic to file and prosecute the notice of motion.

237. I am satisfied that Mr Vaughan should be ordered to pay Mr Dlakic's costs of the notice of motion.

238. As for the Reserved Costs, the costs incurred on 8 August 2019 were in respect of the orders made by the Court on that date that are set out above at [48]. Those orders concerned the process of the reference. Mr Dlakic is entitled to his costs of that day, but only on the basis that he may be entitled to his costs of the proceedings generally after 14 May 2019.

239. Mr Dlakic is entitled to his costs of the hearing that took place on 25 March 2021 at which the orders set out at [61] above were made, in any event, because the hearing was necessary to obtain the undertaking by Mr Vaughan to respond to the request for information made by Ms Exner.

240. The same is true for Mr Dlakic's costs of the appearance on 3 May 2021, at which the orders set out at [63] above were made, on the basis that that appearance also related to Mr Dlakic's notice of motion that led to the Court's orders made on 24 March 2021.

241. As to Mr Dlakic's costs of the hearing on 9 July 2021, at which the Court made the orders set out at [69] above, Mr Dlakic is entitled to his costs of that hearing, but only on the basis that they are part of the costs to which he may generally be entitled in respect of the proceedings after 14 May 2019. The orders made on that day were not made because of any delinquency in the conduct of Mr Vaughan. They were made as a necessary step in the progress of the reference.

242. The result is that in respect of the Reserved Costs, Mr Dlakic is only entitled to special orders that Mr Vaughan pay his costs of the hearings on 24 March 2021 and 3 May 2021, as well as any notice of motion filed by Mr Dlakic that led to those hearings. The balance of the Reserved Costs must be accommodated within any general order that may be made that Mr Vaughan pay Mr Dlakic's costs.

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Decision last updated: 22 June 2023