Atanaskovic Hartnell v Birketu Pty Ltd

[2021] NSWCA 201

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Atanaskovic Hartnell v Birketu Pty Ltd [2021] NSWCA 201

Hearing dates:

29 March 2021

Date of orders:

3 September 2021

Decision date:

03 September 2021

Before:

Basten JA at [1];
Gleeson JA at [2];
McCallum JA at [149]

Decision:

(1)   Appeal dismissed.

(2)   Appellants to pay the respondents’ costs.

Catchwords:

LEGAL PRACTITIONERS – solicitors – Court’s supervisory jurisdiction – recovery of fees – retainer to investigate dispute between client and third party arising from frauds committed by solicitors’ employee –actual conflict between solicitors’ personal interests and fiduciary duty to client – whether solicitors obtained fully informed consent to act – whether nature of conflict precluded reliance on consent

LEGAL PRACTITIONERS – solicitors – Court’s supervisory jurisdiction – undertaking not to charge fees for work done – whether undertaking given in a professional capacity – whether reliance, loss or consideration required to enforce undertaking – whether Court should prevent solicitors reneging on undertaking

Legislation Cited:

Civil Procedure Act 2005 (NSW), s 99

Interpretation Act 1987 (NSW), s 34

Legal Profession Uniform Law (NSW), ss 264, 423(2)(c), 427, 428

Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW), Pt 1 r 3.1, Pt 2 rr 2, 12

Uniform Civil Procedure Rules 2005 (NSW), r 20.14

Cases Cited:

Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43

Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; [2011] FCAFC 24

Boensch v Pascoe [2019] HCA 49; (2019) 94 ALJR 112

Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36

Coll v Floreat Merchant Banking Ltd [2014] EWHC 1741

Commonwealth Bank of Australia v Smith (1991) 42 FCR 390

Council of the New South Wales Bar Association v Siggins [2021] NSWCA 40

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22

Geoffrey Silver & Drake (A firm) v Baines [1971] 1 QB 396

Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266

Hastingwood Property Ltd v Saunders Bearman Anselm (A firm) [1991] Ch 114

In re A Solicitor [1966] 1 WLR 1604

John Fox v Bannister, King & Rigbeys [1988] QB 925

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64

Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26

Law Society of New South Wales v Harvey [1976] 2 NSWLR 154

Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23

Marcolongo v Mattiussi [2000] NSWSC 834

National Mutual Holdings Pty Ltd v The Sentry Corporation (1989) 22 FCR 209

New South Wales Crime Commission v Fleming (1991) 24 NSWLR 116

Phelan v Middle States Oil Corporation (1955) 220 F (2d) 593

Prothonotary of the Supreme Court of New South Wales v Thomson [2018] NSWCA 230

Rahme v Benjamin & Khoury Pty Ltd (2019) 100 NSWLR 550; [2019] NSWCA 211

Re A Solicitor; Ex parte Hales [1907] 2 KB 539

Spector v Ageda [1973] Ch D 30

United Bank of Kuwait Ltd v Hammoud [1988] 1 WLR 1051

United Mining and Finance Corporation Ltd v Becher [1910] 2 KB 296

Wade v Licardy (1993) 33 NSWLR 1

Warman International Ltd v Dwyer (1995) 182 CLR 544; [1995] HCA 18

Texts Cited:

GE Dal Pont, Lawyers’ Professional Responsibility (7th ed, 2021, Thomson Reuters (Professional) Australia Limited)

GE Dal Pont, Riley Solicitors Manual (2005, LexisNexis Butterworths)

Category:

Principal judgment

Parties:

John Ljubomir Atanaskovic, Anthony Geoffrey Hartnell, Jeremy Martin Kriewaldt, Michael John Sophocles, Jon-Thomas Skene, Lawson Andrew Jepps t/as Atanaskovic Hartnell (Appellants)
Birketu Pty Ltd (First respondent)
WIN Corporation Pty Ltd (Second respondent)

Representation:

Counsel:
J Moore SC / J Hutton (Appellants)
B Walker SC / A Vincent (Respondents)

Solicitors:
Atanaskovic Hartnell (Appellants)
HWL Ebsworth (Respondents)

File Number(s):

2020/210601

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division – Commercial List

Citation:

[2020] NSWSC 573

Date of Decision:

3 July 2020

Before:

Hammerschlag J

File Number(s):

2018/164411

HEADNOTE

[This headnote is not to be read as part of the judgment]

Between May 2016 and September 2017, Brody Clarke (Clarke), a solicitor then in the employ of Atanaskovic Hartnell (AH), perpetrated several frauds on two clients of the firm, Birketu Pty Ltd (Birketu) and WIN Corporation Pty Ltd (WIN). One of the frauds involved Clarke deceiving Deutsche Bank to transfer amounts totalling over $7,000,000 from Birketu’s account (held as collateral for a share swap agreement) to a bank account that purportedly was a trust account of AH but was in fact Clarke’s personal bank account.

Birketu and WIN, represented by AH, commenced proceedings against Clarke (the fraud case). In October 2017, Birketu retained AH in relation to its dispute with Deutsche Bank. AH’s retainer letter described the conflict in acting for Birketu as a potential one, or one that may arise in the future. On 9 January 2018, after most of the work had been done, Mr John Atanaskovic, a partner of AH, gave an oral undertaking to Birketu that AH would not charge for any work done in investigating the Deutsche Bank frauds. After Birketu appointed new solicitors in the fraud case, AH issued an invoice to Birketu for $172,686.27 relating to that work (the investigation invoice). Birketu subsequently joined the partners of AH and Deutsche Bank as defendants in the fraud case.

In separate proceedings, the partners of AH sued WIN and Birketu for the recovery of solicitors’ fees and disbursements the subject of seven invoices (the fees case), one of which included the investigation invoice.

The two proceedings were heard together. The fraud case settled after judgment had been reserved. AH obtained judgment in the fees case except in relation to the investigation invoice (less disbursements and another small amount). After a further hearing, the primary judge (Hammerschlag J) concluded that the supervisory jurisdiction of the Court should be exercised to preclude recovery by AH of the fees owed under the investigation invoice to the extent of $149,736.19 as (a) AH did not obtain the fully informed consent of Birketu to act, (b) Birketu should not have to pay for work done in AH’s own interests and for its own benefit, and (c) AH ought to be held to their undertaking which was given by Mr Atanaskovic in a professional capacity.

The main issues on appeal were:

1. whether AH obtained the fully informed consent of Birketu to act and advise in relation to the dispute with Deutsche Bank (ground 1);

2. alternatively, whether the conflict of interest and duty was so profound that AH could not act for or advise Birketu, even with fully informed consent (ground 2);

3. whether the work performed by AH was “infected by the conflict of interest” and whether Birketu obtained no benefit from the work performed by AH, only detriment (ground 3); and

4. whether AH could not, or ought not, be permitted to resile from the undertaking (ground 4).

Held, dismissing the appeal (per Gleeson JA, Basten and McCallum JJA agreeing):

As to ground 1

1. An actual conflict existed between AH’s personal interests and fiduciary duty to Birketu, given the opposition of interests between AH and Birketu on the question of whether AH was vicariously liable to Birketu for Clarke’s conduct: [55]-[56].

2. Fully informed consent is a defence: [46]-[47]. It is necessary for the fiduciary to prove that the client has been fully informed of his or her rights and of all the material facts and circumstances of the case: [49].

Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23; Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; [2011] FCAFC 24; Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266; Rahme v Benjamin & Khoury Pty Ltd (2019) 100 NSWLR 550; [2019] NSWCA 211 referred to.

1. AH failed to make full disclosure to Birketu of all material facts and circumstances concerning the conflict of interest, including:

•   the benefit that the retainer would provide to AH by way of access to information which AH might use against Birketu in subsequent litigation: [64]; and

• AH’s personal interest in the investigation of Clarke’s ostensible authority, given that the same facts would also be relevant to the question of AH’s vicarious liability for Clarke’s conduct: [68]-[69].

As to ground 2

1. In some cases, the circumstances of a solicitor’s conflict of interest and duty may be so profound that the objective of the conflict rule can only be achieved if the solicitor does not act for the client and it may not be “even possible” for the solicitor to obtain the client’s fully informed consent, in the sense of not “practically possible”, given the high standard of disclosure required: [87]-[88].

Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 referred to.

1. Although there was some commonality of interest between AH and Birketu (as against Deutsche Bank) on the question of Clarke’s ostensible authority to act for Birketu, that is no answer to the actual conflict of interest that existed: [90].

2. The primary judge erred in finding that r 12.1 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW) is not subject to the defence of fully informed consent. However, this error was immaterial given the conclusion on ground 1 that AH did not obtain the fully informed consent of Birketu to act, and on ground 2 that it was not proper or even possible for AH to act for Birketu, given the profound conflict that existed: [100], [108].

As to ground 3

1. The findings of the referee (Mr Gyles), which were adopted by the primary judge, concerning the work done by AH in its own interests and contrary to the interests of Birketu, undermined AH’s submission that it was fair and reasonable that Birketu should pay for such work: [113]. Nor was it in Birketu’s interest that costs be incurred in retaining AH, which was in a position of actual conflict, when at least some of those costs would be duplicated when new solicitors were retained, once the conflict was properly recognised by AH: [115].

As to ground 4

1. The undertaking given by Mr Atanaskovic was something to be honoured in his professional capacity. The words used by Mr Atanaskovic were clear and unambiguous; they amounted to an undertaking not to charge for the work that AH subsequently sought to recover from Birketu: [125].

United Bank of Kuwait Ltd v Hammoud [1988] 1 WLR 1051; United Mining and Finance Corporation Ltd v Becher [1910] 2 KB 296; Wade v Licardy (1993) 33 NSWLR 1; In re A Solicitor [1966] 1 WLR 1604 referred to.

1. The supervisory jurisdiction is both disciplinary and compensatory. The enforcement of an undertaking for the purpose of ensuring honourable conduct on the part of the Court’s own officers, is distinct from the legal rights and remedies of the parties, and does not depend upon there being consideration for the undertaking: [131].

John Fox v Banister, King & Rigbeys [1988] QB 925 referred to; Coll v Floreat Merchant Banking Ltd [2014] EWHC 1741 (QB); Re A Solicitor; Ex parte Hales [1907] 2 KB 539 distinguished.

1. Resiling from the undertaking was dishonourable conduct by AH which warranted the exercise of the Court’s supervisory jurisdiction to preclude AH from recovering its fees on the investigation invoice: [139].

Judgment

1. BASTEN JA: I agree with Gleeson JA.

2. GLEESON JA: Between May 2016 and September 2017, Brody Clarke (Clarke), a solicitor then in the employ of Atanaskovic Hartnell (AH), a well-known firm of solicitors in Sydney, perpetrated several frauds on two clients of the firm, Birketu Pty Ltd (Birketu) and WIN Corporation Pty Ltd (WIN). Those companies were associated with Mr Bruce Gordon, a prominent Australian businessman, and were long established clients of AH. On 28 September 2017, Birketu and WIN, represented by AH, commenced proceedings against Clarke and obtained urgent freezing orders against his assets. In 2018, Birketu and WIN, with new representation, joined the partners of AH and Deutsche Bank AG as defendants (the fraud case). In separate proceedings, the partners of AH sued Birketu and WIN for the recovery of solicitors’ fees and disbursements the subject of seven invoices (the fees case).

3. The two proceedings were heard together over 13 days. After judgment had been reserved, the fraud case settled. Judgment in the fees case was handed down on 9 August 2020. The primary judge (Hammerschlag J) found that AH largely succeeded on its claim and judgment (inclusive of interest) was subsequently entered for AH against Birketu in the amount of $858,966.92 and against WIN in the amount of $115,692.97: John Ljubomir Atanaskovic and the persons named in Schedule A t/as Atanaskovic Hartnell v Birketu Pty Ltd [2019] NSWSC 1006 (the first judgment).

4. That left for determination AH’s claim in respect of one invoice referred to as the “investigation invoice”. This invoice concerned work done by AH for Birketu pursuant to a retainer in relation to the dispute between Birketu and Deutsche Bank. The amount in issue was comparatively small: $172,686.27. The primary judge found that this invoice was in a “different position” to the other invoices (save in respect of the disbursements, in the amount of $7,686.27) because Mr John Atanaskovic, a partner of AH, gave an oral undertaking to Birketu not to charge for work performed pursuant to the investigation retainer (the undertaking).

5. The parties were given the opportunity to be heard further on whether the Court can and should exercise its inherent supervisory jurisdiction over legal practitioners, as officers of the court, to withhold directly or indirectly enforcement of the investigation retainer. That jurisdiction is preserved by s 264(1) of the Legal Profession Uniform Law (NSW): see Prothonotary of the Supreme Court of New South Wales v Thomson [2018] NSWCA 230 at [3]; Council of the New South Wales Bar Association v Siggins [2021] NSWCA 40 at [9]. Birketu did not seek to rely on s 99 of the Civil Procedure Act 2005 (NSW).

6. In his second judgment, the primary judge found that AH was not entitled to recover its fees from Birketu for work performed pursuant to the investigation retainer, except to the extent of $14,930.15 for work related to a discrete matter (being transactional work connected with the extension of a share swap agreement). AH was therefore not entitled to recover an amount of $149,736.19: John Ljubomir Atanaskovic and the persons named in Schedule A t/as Atanaskovic Hartnell v Birketu Pty Ltd – Supervisory Jurisdiction [2020] NSWSC 573 (the second judgment).

7. By their appeal, AH challenged the whole of the second judgment and the finding in the first judgment that Mr Atanaskovic gave the undertaking to Birketu. Shortly prior to the hearing, AH indicated that it did not press its challenge to that factual finding.

8. The essential issues on the appeal were whether AH obtained the fully informed consent of Birketu to act for and advise Birketu with respect to the investigation retainer and whether AH could or ought be permitted to resile from the undertaking.

9. For the reasons that follow, the appeal should be dismissed.

Factual circumstances

10. The primary judge made detailed factual findings. The following summary of the factual circumstances provides the context for the appeal.

11. The frauds perpetrated by Clarke fell into two categories. First, Clarke induced Birketu and WIN to make payments totalling more than $1,000,000 to his own bank account with Westpac Banking Corporation at Leura by telling them falsely that the account was AH’s trust account (the disbursement frauds). Second, Clarke twice deceived Deutsche Bank into transferring amounts totalling over $7,000,000 from Birketu’s account to a bank account that purportedly was a trust account of AH but was in fact Clarke’s personal bank account (the Deutsche frauds). The effect of the fraudulent transactions was to reduce the amount of collateral lodged by Birketu with Deutsche Bank under a share swap agreement between them. That gave rise to a dispute between Birketu and Deutsche Bank as to whether the purported variation to the share swap agreement – fraudulently sought to be effected by Clarke – was enforceable against Birketu with the consequence that the amount of the collateral Deutsche Bank would ultimately have to repay to Birketu when the share swap terminated had been reduced by $7,000,000.

12. In about mid-October 2017, Mr Atanaskovic recommended to WIN, Birketu and Mr Gordon that they obtain independent advice. Birketu engaged HWL Ebsworth later in October 2017. Mr Andrew Lancaster, the CEO of WIN, gave evidence that those solicitors provided “general advice against the whole position”. As indicated, after HWL Ebsworth took over the conduct of the fraud case, AH and Deutsche Bank were joined as defendants in 2018.

13. In the fraud case, Birketu claimed damages against AH in an amount equivalent to that paid into Clarke’s Westpac account and not recovered, on the basis that AH was vicariously liable for Clarke’s actions. AH disputed liability asserting that Clarke had not acted within the course and scope of his employment with AH.

14. Birketu also sought to recover from Deutsche Bank the amounts which it had debited to Birketu’s account on Clarke’s directions, claiming that Deutsche Bank had no mandate to make those entries. The sole defence raised by Deutsche Bank was that Clarke had ostensible authority from Birketu to conduct the dealings with Deutsche Bank that led it to debit Birketu’s account. Birketu responded by asserting that if Clarke had ostensible authority (which was denied), AH was vicariously liable to it for Clarke’s actions. Deutsche Bank alternatively contended that if Clarke did not have ostensible authority, it was entitled to recover from AH what it had to pay Birketu because AH was vicariously liable to it for Clarke’s actions. AH’s primary position was that Clarke did not have ostensible authority from Birketu because Clarke did not act within the course and scope of his employment with AH.

15. Thus, as the primary judge found in his second judgment at [11]:

On any scenario, a principal question in both the Westpac frauds and the Deutsche frauds was obviously and inevitably going to be whether Clarke acted in the course and scope of his employment with AH. It was going to arise directly in the Westpac frauds case because Birketu was claiming (and AH was denying) that AH was vicariously liable for Clarke’s actions. It was going to arise in the Deutsche frauds case because if Clarke did not have Birketu’s ostensible authority, Deutsche was claiming that AH was vicariously liable, and, if Clarke did have Birketu’s ostensible authority, Birketu was claiming (and AH was denying) that AH was vicariously liable to Birketu for its loss. (Footnote omitted.)

16. In the fees case, AH sued Birketu and WIN for unpaid fees and disbursements in respect of seven invoices, six of which were not directly related to the dispute concerning the frauds. The seventh invoice, dated 28 February 2018 for $172,686.27, relating to the investigation retainer, included disbursements of $7,686.27. In the first judgment, the primary judge allowed recovery of the disbursements (at [372]).

The investigation retainer

17. The investigation retainer was the subject of an engagement letter, dated 16 November 2017, by which AH accepted a retainer from Birketu (with effect from 18 October 2017) to advise and assist Birketu in connection with the possibility of a dispute with Deutsche Bank. The terms of the investigation retainer are lengthy and are set out in full in Schedule A to these reasons, excluding the standard terms of engagement (comprising three pages).

18. The primary judge found at [15] of the second judgment:

Under the retainer, AH would investigate, and charge Birketu for investigating, the circumstances in which Clarke had perpetrated frauds, where Clarke might (and was ultimately found to) have been acting in the course and scope of his employment with AH. As earlier adverted to, this question was going to be central in both the Westpac frauds and the Deutsche frauds cases. AH would also investigate Deutsche’s contention of ostensible authority. At the time, Deutsche was also contending (as it happens, correctly) that AH was in a position of conflict and was saying that AH could not act for Birketu.

19. In an email to Mr Gordon and Mr Lancaster dated 16 October 2017, Mr Atanaskovic said:

In these circumstances, since [Clarke] was formerly an employed solicitor of AH, Birketu/WIN may wish to consider possible claims against AH for loss they have suffered by reason of [Clarke’s] irregular conduct. As I believe you know, AH holds the view that such claims have poor prospects of success. Prima facie we do not consider, however, that AH should legally advise Birketu/WIN on prospects of recovery of these claims, since such advice would plainly not be independent. We therefore suggest to Birketu/WIN that they may well wish to seek advice on this matter from another law firm, to ensure that the matter is properly considered by Birketu/WIN. The reasons for our view on poor claim prospects include, for example, the matters mentioned in footnote 3 below, and these and the matters in the other footnotes and the emails below might sensibly be raised with any independent legal adviser, if and when Birketu/WIN seeks such advice. (We mention in passing that AH carries the usual compulsory and other professional indemnity insurance cover, which cover usually includes claims for loss through solicitor employee acts or omissions. But such cover is on the standard terms, which provide indemnity cover for claims only where the employer law practice is legally liable, or the employee is liable and the claim has not arisen through the employee’s dishonest or fraudulent act or omission.)

Plainly, [Clarke] acted wrongfully, and was primarily responsible for any loss to [sic] Birketu/WIN might suffer in relation to the above Birketu/WIN remittances. It may be appropriate, however, for Birketu/WIN to look further into why and how the remittances to the [Clarke] Leura Account occurred, and were permitted to occur at all.

20. Mr Lancaster replied by email on 17 October 2017 referring to “our conversation this afternoon” and indicated to Mr Atanaskovic that he would “discuss WIN/Birketu’s view on receiving independent legal advice with Bruce”, being a reference to Mr Gordon.

21. On 28 October 2017, Mr Atanaskovic sent Mr Gordon by email a draft “Birketu re Deutsche Bank claims engagement letter”, which was in substantially the same terms as the final letter dated 16 November 2017. Mr Atanaskovic’s covering email described the “engagement letter” as being “of an administrative or ‘paperwork’ nature” and as not intending to change what had already been discussed, but “merely to record some things in the usual way, and perhaps to flesh out a couple of others”. The covering email continued:

…

As you know from correspondence on this matter to date, Deutsche Bank (DB) has asserted AH has conflicts of interests/duties in acting for Birketu on this matter. On their face, DB’s relevant claims against Birketu are not valid. This is despite the reprehensible and wrongful conduct of Brody Clarke (BJC) in relation to DB. And, on direct basis, there is in AH’s view, therefore no compelling conflicts argument against AH acting for Birketu on the matter.

On the other hand, DB has made its claims, including its conflicts claims re AH; and the situation is made somewhat more complicated by the moneys which BJC apparently persuaded Birketu and WIN personnel to transfer to BJC’s personal Bank account at the Westpac Leura branch (BJC account). AH has never made any secret that it does not have a general client trust account (and regularly discloses this); and, despite enquiries to Dan Collis and others (BJC is, of course, no longer around for us to ask him, and even the “revived” email record is not adequately informative), we have not had explained to us why many of the payments were made to the BJC account (eg payments even of AH bills, non applicable unusual stamp duty, ordinary stamp duty which AH clients normally pay direct, payments of land tax and other client outgoings in which solicitors are normally not involved, etc). But those payments were made, and therefore, to a degree, they intrude somewhat, albeit perhaps only indirectly, re DB.

If only to play things safe/more conservatively, I therefore suggested to you and Judith over the last week or so that, even on this matter, Birketu and you might wisely seek independent legal advice and assistance elsewhere. Encouragingly for AH, however, you said you retained confidence in me and AH (ie once BJC had been expelled), and you had compelling practical reasons why you preferred to continue to instruct me/AH on this matter, at least some of which reasons you and Judith mentioned. I explained that this was legally possible, on an “informed consent by client basis”; and that this would be possible even if there had been a more evident/material conflicts issues present here than appears to be the case here. We therefore all agreed, after some further discussion (with contributions by Judith, and to a lesser degree Andrew L), to proceed on this footing. On this footing, we have indeed already done more work (eg helping in your letter to DB on Wednesday, and preparing and sending AH’s letter on Friday to DB’s lawyers).

…

22. On 16 November 2017, Mr Atanaskovic sent an email at 4:09 pm to Mr Lancaster, copied to Mr Daniel Collis, the chief financial officer of WIN, attaching the final form of the engagement letter. Mr Lancaster responded by email at 4:51 pm noting “this is not your typical AH engagement letter” and asked Mr Atanaskovic whether he should assume “it is still in draft form and awaiting any feedback from Birketu”. Mr Atanaskovic replied to Mr Lancaster by email at 5:48 pm advising “[n]o, not really”, and stated that “these letters are not usually negotiated”. Mr Atanaskovic’s email continued:

They are only required because of silly interventions by legal bureaucrats with not much useful to do pressing some years ago for a requirement for these letters. So a requirement for these letters was introduced, and neither clients nor lawyers seem to have benefitted. Both seem to complain they are constantly sent, but for no apparent useful purpose, and just make more work for both sides. The system seemed to work well enough without them for many years before, and I do not hear anyone thinking that the letters are useful at all.

23. The investigation retainer was finalised with some amendments and signed by AH dated 16 November 2017. According to AH’s standard terms, which were attached to the retainer letter, by continuing to instruct AH after receipt of that letter, the client is taken to have agreed to those terms.

24. Before the investigation retainer was formalised, but after it had taken effect informally, there was detailed consideration amongst the partners of AH as to whether AH could accept the retainer. On 25 October 2017, Mr Jon Skene, a partner of AH, sent an email to Mr Atanaskovic copied to three other partners in the firm, analysing the position, drawing attention to the complications involved, and raising his concerns that AH potentially had a conflict of interest as the question of AH’s vicarious liability for the conduct of Clarke would likely be litigated in a “3-way dispute” between Birketu, AH and Deutsche Bank. Mr Skene expressed the preliminary view that AH may be in breach of r 12 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW) (Solicitors’ Conduct Rules), as none of the exemptions under the rule applied, and in such event, the conflict of interest could not be resolved by the informed consent of the client.

25. It is necessary to reproduce in full the whole of the Skene email as significant parts of its contents are relied upon by Birketu in support of its contention that Birketu did not give its fully informed consent to AH acting:

From: Jon Skene

To: John Atanaskovic

Cc: Lawson Jepps, Michael Sophocles, Jeremy Kriewaldt

Date: Wed, 25 Oct 2017 06:06:34 +1100

John, thanks for those case references. I've read Soyfer (co-incidentally enough, the Soyfers lived a stone's throw from me on Chaleyer St, Rose Bay, at the time of that decision, though I never knew them personally), Frenmast, and Prince Alfred College.

I have to say that when the BJC fraud first came to light, I had initially assumed that Brody's actions were plainly not in the course of, and were unconnected with, his employment. Having now read Prince Alfred College, and in particular the reference therein to Lloyd v Grace, Smith & Co (para. 49), where a firm of solicitors was vicariously liable for the fraud of its managing clerk, I see that the position might not be so simple and clear cut as I initially thought. Indeed, I think it will ultimately be necessary to carefully consider separately each of Brody's fraudulent acts as against all the surrounding facts and circumstances.

My initial thoughts on the ss127-129 [of the Corporations Act 2001 (Cth)] issue is that it will be a stretch for DB to successfully run this defence, given that Brody was not a director of Birketu or otherwise having any formal authority to act on Birketu's behalf, but I've little doubt that they will run it and will push it as far as they reasonably (or even unreasonably) can.

One thing that is clear to me is that for both the vicarious liability issue and the ss 127-129 issue, the precise facts and surrounding circumstances will be critical to determining the proper legal position. To that end, do we have some sort of 'running sheet' that lists all relevant facts relating to, and evidence of, the actions of Brody, DB, and the client, (including AH internal instructions to Brody, or AH representations to BD [sic] or the client as to Brody's authority), in some sort of chronological order? Whilst no-doubt a major task to assemble, I would have thought this would be necessary to properly assess likely liability (or instruct Counsel on the issue)?

With respect to the money released/given away by DB at least, the issue of vicarious liability seems to me to be a secondary issue to that of whether the loss must in the first instance fall upon DB or upon Birketu. Only the party which is found to have suffered the loss can be in a position to seek compensation from the tortfeasor (BJC), or vicariously from AH. However, as a matter of procedural litigation, I imagine that both issues are likely to end up being litigated together in a 3 way dispute. By which I mean, were Birketu to bring an action against DB, wouldn't DB (1) defend against Birketu's claim, and (2) in the alternative (that DB's defence against Birketu is unsuccessful so that DB is the party which has suffered the loss in paying out its own money to BJC) DB cross claims against BJC/AH?

If that is the case then I'm afraid I see a potential conflict of interest in that AH pressing Birketu's claims against DB may, if successful, lead to AH facing DB's cross-claim for vicarious liability. Of course, AH might argue that is in AH's interest, on the basis that its alleged vicarious liability to DB might be easier to defend than its vicarious liability to Birketu might be were Birketu to fail in its claim against DB and subsequently bring a claim against AH. However, given the uncertainties and vagaries of the law on vicarious liability (at least as described in the Prince Alfred College decision) and its dependence upon all the facts and circumstances (which will apply differently depending upon whether Birketu or DB was ultimately seeking to claim against AH), there are some obvious complications in relying upon such a position.

Even if DB did not seek to bring a claim or cross-claim against AH for vicarious liability, to the extent Birketu's claim against DB fails then there is the risk that Birketu may bring a claim against AH. The mere existence of this risk creates a potential conflict in AH advising Birketu in proceedings against DB. For example, a settlement offer from DB might be for 75% of the losses suffered. An independent adviser might objectively recommend that such offer ought to be accepted by Birketu, whereas it might be in AH's interest to advise Birketu to refuse such offer, if there is a risk that AH might be required to make up the 25% shortfall following a claim by Birketu against it in vicarious liability.

Ultimately, reluctant as I am to play devil's advocate, I think we do need to consider whether there is a risk of AH being in breach of Rule 12 of the Solicitors Conduct Rules [sic] in continuing to act for Birketu. From what I've seen thus far in relation to Rule 12, a conflict between the duty to serve the best interests of the client and the interests of the solicitor cannot be resolved by obtaining the informed consent of the client (save in the very narrow exceptions contained in rule 12 which are not applicable here), but this is only a preliminary view as I've not yet had researched [sic] the position properly.

I would similarly emphasise that the above are not 'settled views' on my part and I appreciate that they do not appear to be consistent with the views you have previously put (or propose to put) to DB. Given the potential disciplinary consequences, however, I do wish to raise them immediately to make sure that everyone thinks through the issues carefully, and to that end, I would appreciate hearing the opinions of yourself and others. I'm also very happy to continue to look into these issues further over the coming days.

Best regards

Jon Skene

The oral undertaking

26. On 9 January 2018, Mr Atanaskovic attended a lunch with Mr Gordon and Mr Lancaster during which he gave a verbal undertaking that AH would not charge for any work done by the firm in relation to the investigation of the frauds (the undertaking). At trial, Mr Atanaskovic denied giving the undertaking. The primary judge rejected that evidence and found in his first judgment (at [352]) that the undertaking was given in the terms recorded in an email from Mr Lancaster to Mr Gordon, copied to Mrs Judith Gordon, on 10 January 2018 at 10:58 am:

…

JLA [John Atanaskovic] later expressed to us that AH would not be charging Birketu for any of the work done by AH in defending Birketu against the Brody/Deutsche fraud situation and made it clear that this was because that matter was created by a member of his staff.

…

The investigation invoice

27. Despite the undertaking, AH issued a Statement of Account/Tax Invoice for $172,686.27 to Birketu dated 28 February 2018 (the investigation invoice) under cover of a letter addressed to Mr Gordon c/- Birketu which referred to Mr Gordon’s “now apparent desire to change solicitors in the matter”, being a reference to Birketu’s formal change of solicitors in the fraud case.

28. The investigation invoice contained 21 line-items, which the primary judge reproduced in the second judgment (at [52]). A more detailed time record report was also in evidence identifying the dates and description of work done. That report confirmed that most of the work was done in the period of 3 October 2017 to 30 November 2017 (items 1-94, out of a total of 122 items).

The reference

29. On 9 August 2019, the primary judge referred two questions to a referee, Mr R Gyles AO QC, for inquiry and report under Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 20.14, namely, which of the items in the invoice were referrable to (1) work done for the benefit of AH, or (2) attendances where AH’s interests were adverse, or potentially adverse, to the interests of Birketu.

30. The primary judge adopted Mr Gyles’ report dated 4 February 2020 in the second judgment (at [48]), noting:

[57]   He correctly observed that by acting for Birketu in dealings with Deutsche, AH had an opportunity of managing issues between them and in particular it lessened the chance that Deutsche and Birketu would down tools and take aim at AH. Closely investigating the facts and the internal workings of Birketu would be a great advantage if AH was subsequently sued in relation to issues such as causation and negligence.

[58]   I interpolate that this type of mischief is one which the fiduciary rules and the Solicitors’ Rules aim to avoid.

[59]   Mr Gyles reported that the authority, particularly the ostensible authority of Clarke to bind Birketu, and the vicarious liability of AH for the actions of Clarke, depended upon overlapping of a complicated underlying set of facts and that it would be difficult to investigate the facts for one purpose without having the other in mind. Mr Gyles did observe that he did not detect any failure by AH to properly put what could be put in defence of Birketu for any actions actually contrary to the interests of Birketu.

[60]   Mr Gyles reported that work done for the benefit of Birketu obviously included work related to the allegation of conflict of interest on the part of AH. It also encompassed work that would reduce any amount that it might ultimately bear if vicariously liable – either on account of liability or damages. That would include all work in relation to pursuit of assets, including the freezing order proceedings, and in relation to possible negligence by Deutsche.

[61]   Mr Gyles reported that attendances where Birketu’s interests were adverse or potentially adverse to the interests of AH would include work on vicarious liability and might include the authority of the fraudster (subject to the ruling by the Court).

[62]   Mr Gyles reported (using his notional numbering) that:

Items Referable to work done for the benefit of AH were

Conflict of interest – items 3, 4, 5, 6, 7, 9.

Freezing and tracing assets – items 2, 7, 9, 11, 19.

Negligence of Deutsche – items 11, 14, 16, 17, 18, 20.

Items Referable to attendances where AH’s interests were adverse or potentially adverse to the interests of Birketu were

Vicarious liability – items 2, 6, 18, 20.

Authority – 1, 2, 6, 7, 9, 10, 11, 12, 14, 16, 17, 18, 20.

[63]   Item 21 of the invoice is a catch-all. Mr Gyles reported that he did not regard this item as justifying charges in relation to an identified heading or as being an appropriate balancing item to make up a shortfall or fill any substantive gap. Because I have determined that AH will only receive the NEC Swap fees, Item 21 can be disregarded. (Emphasis in original.)

The primary judge’s reasons – second judgment

31. The primary judge stated his findings at [5]-[27] which provided the background to the second judgment. None of these findings are challenged. With respect to the work the subject of the investigation invoice, the primary judge found:

[19]   The attendances included services where AH was in a position of actual conflict with its client and where subsequently it was engaged in heavily contested litigation with it over the issues that gave rise to that very conflict (citing [72] of the first judgment) (Emphasis added.)

32. At [75], the primary judge recorded that it was not in issue that:

(1)   at the time that AH accepted the retainer, and for so long as AH remained retained, it was in a position of actual and potential conflict of interest with its client;

(2)   work that it did under the retainer included work that was done for its own benefit where its interests were adverse or potentially adverse to those of Birketu;

(3)   the invoice charges, other than the NEC Swap charges, are within the terms of the undertaking; and

(4)   the supervisory jurisdiction is available to preclude recovery by AH.

33. At [76], the primary judge concluded that the supervisory jurisdiction of the Court should be exercised to preclude recovery by AH of the fees owed under the investigation invoice (save for an amount of $14,930.15). At [77], the primary judge stated that to permit AH to recover more would be to:

(1)   give efficacy to the retainer which, in my view, it was not open to AH, acting ethically, to accept in the face of the clear and profound conflict between its own interests and the duties which it owed to Birketu;

(2)   require Birketu to pay AH for work which AH did in its own interests and for its own benefit, or contrary to the interests of Birketu (or both);

(3)   allow AH, dishonourably, to renege on the undertaking which it gave to Birketu in a professional capacity.

34. These conclusions rested upon the following findings.

35. First, AH did not obtain the fully informed consent of Birketu (at [84]) and Birketu’s sophistication, experience and resources did not excuse AH from the heavy burden of full disclosure (at [92]). Specifically, AH did not, or did not sufficiently, disclose:

• that the retainer would be a vehicle by which AH would be given access to information which it might use against Birketu in subsequent litigation between them: at [86];

• that the investigation of Clarke’s ostensible authority from Birketu to deal with Deutsche was closely connected and overlapped inextricably with the subject of whether Clarke was acting within the course and scope of his employment with AH, both in the context of the Deutsche frauds and in the context of Birketu’s rights against AH directly in connection with the Westpac frauds: at [87];

• that if Clarke did have Birketu’s ostensible authority, the contest would then be between Birketu and AH, and in that contest whether Clarke was acting within the course and scope of his employment would be a critical issue in respect of which the interests of Birketu and AH were plainly at odds: at [88]; and

• the potential benefits to itself and corresponding potential disadvantages to Birketu to which the retainer might, and in the primary judge’s view did, give rise: at [89].

36. As a consequence of AH acting for Birketu, the primary judge found that: AH would learn facts concerning the surrounding circumstances of Clarke’s fraud, which it otherwise did not know, from Birketu’s cooperation in the investigation (at [90]); AH had an opportunity of managing issues between Birketu and Deutsche, and this lessened the chance that Deutsche and Birketu would down tools and take aim at AH; and there was a great advantage to AH in closely investigating the facts and the internal workings of Birketu if, as came to pass, AH was subsequently sued in relation to issues such as causation and negligence: at [91].

37. Second, even assuming a finding that Birketu gave fully informed consent to AH acting (which there was not), this was not a bar to the exercise of the supervisory jurisdiction as:

1. although AH may have adequately put arguments (to Deutsche Bank) on the ostensible authority aspect of the wider dispute, that had little to say about its position generally, given Mr Gyles’ other observations about AH’s position of conflict: at [94];

2. the present case was of the kind that Street CJ referred to in Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 (Harvey), where the conflict of interest is such that it is not proper, or even possible, for the solicitor to continue to act for and advise his or her client, even with consent: at [95];

3. even if there was a defence of fully informed consent to a breach of fiduciary duty, this did not make AH’s position any less untenable from the point of view of its professional ethical obligations, given that r 12.1 of the Solicitors’ Conduct Rules does not provide as an exception that a solicitor can act if there is a conflict, provided there is fully informed consent: at [98];

4. the work for which AH seeks payment, including the work relating to the question of Clarke’s ostensible authority and also “the conflict of interest work, the freezing and tracing of assets work, and the work related to the negligence of Deutsche”, was infected by the conflict of interest, given the overlapping and complicated underlying set of facts which it would be difficult to investigate for one purpose without having the other in mind: at [99]-[100]; and

5. there was no benefit, but only detriment to Birketu, from this work: at [101].

38. Third, AH ought to be held to its undertaking which was given in a professional capacity: at [104].

39. Fourth, the special circumstances necessary for the Court’s exercise of its supervisory jurisdiction are present: at [105]. In this regard, there is no challenge to the primary judge’s statements of principle at [29]-[34]. It is accepted that the Court has a well-established inherent supervisory jurisdiction, to which solicitors are amenable, which is designed to impose on them higher standards than the law applies generally (United Mining & Finance Corporation Ltd v Becher [1910] 2 KB 296 at 304; Wade v Licardy (1993) 33 NSWLR 1 at 6-9), and this jurisdiction extends to ensuring that a solicitor honours an undertaking given by him or her in that capacity.

The issues on appeal

40. The issues on appeal were as follows:

1. whether AH obtained the fully informed consent of Birketu to act and advise in relation to Birketu’s dispute with Deutsche Bank (ground 1);

2. whether the conflict of interest and duty was so acute that AH could not act for or advise Birketu in the dispute with Deutsche Bank, even with Birketu’s fully informed consent, and whether to permit AH to recover its fees in those circumstances would give efficacy to a retainer which it was not open to AH, acting ethically, to accept (ground 2);

3. whether the work performed by AH was “infected by the conflict of interest” and whether Birketu obtained no benefit from the work performed by AH, only detriment (ground 3);

4. whether AH could not, or ought not, be permitted to resile from the undertaking (as found by the primary judge), and whether recovery of the whole or part of the fees claimed by AH would allow them to renege dishonourably on the undertaking (ground 4); and

5. whether there were special circumstances such that the Court should exercise its supervisory jurisdiction and preclude AH from recovering those fees (ground 5).

41. Ground 2 is strictly in the alternative to ground 1; it stands or falls with ground 1. Although AH approached grounds 2-4 as separate matters, these grounds were related and ultimately need to be considered in the context of the challenge to the exercise of the discretion. AH accepted that ground 5 is dependent on the outcome of grounds 1-4.

Ground 1 – whether fully informed consent

42. It is necessary first to recall some basic principles.

Legal principles

43. The fiduciary duty owed by a solicitor to a client is a duty of “absolute and disinterested loyalty”: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 104 (Mason J); [1984] HCA 64, citing Judge Learned Hand in Phelan v Middle States Oil Corporation (1955) 220 F (2d) 593, 602-603. That fundamental rule embodies two themes: the “conflict rule” and the “profit rule”. This case is concerned with the conflict rule.

44. The conflict rule precludes “any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict”: Chan v Zacharia (1984) 154 CLR 178 at 198 (Deane J); [1984] HCA 36; Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [68] (Gageler J). The objective of the rule is “to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage”: Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557; [1995] HCA 18 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ).

45. In National Mutual Holdings Pty Ltd v The Sentry Corporation (1989) 22 FCR 209 at 229, Gummow J, after referring to the statement by Deane J in Chan v Zacharia at 199 concerning a conflict or significant possibility of conflict, observed that whilst his Honour was speaking of fiduciaries generally (in that case between partners, not solicitor and former client):

… even among fiduciaries solicitors stand in a special position. There is an underlying principle that a person should be entitled to seek and obtain legal advice in the conduct of his affairs without the apprehension of his being thereby prejudiced; the concern is with the general preservation of confidentiality and encouragement of full and frank disclosure between client and solicitor: Baker v Campbell (1983) 153 CLR 52 at 114-115, per Deane J.

46. Informed consent is a defence. There is no duty on a fiduciary to obtain the informed consent of the principal, “[r]ather, the existence of an informed consent [will go] to negate what otherwise was a breach of duty”: Maguire v Makaronis (1997) 188 CLR 449 at 467; [1997] HCA 23.

47. Accordingly, it is for the fiduciary to make out the defence: Maguire at 466; Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; [2011] FCAFC 24 at [108] (Besanko J, Finkelstein and Jacobson JJ agreeing); Hasler v SingtelOptus Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266 at [135] (Leeming JA, Barrett and Gleeson JJA agreeing).

48. The consent must be “fully informed” and what is required “is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given”: Maguire at 466. In Harvey, Street CJ said at 170 that there must be:

… a conscientious disclosure of all material circumstances, and everything known to him relating to the proposed transaction which might influence the conduct of the client or anybody from whom he might seek advice.

49. The question is whether the client has been “fully informed of his rights ‘and of all the material facts and circumstances of the case’”: Rahme v Benjamin & Khoury Pty Ltd (2019) 100 NSWLR 550; [2019] NSWCA 211 at [100] (Macfarlan JA, Bathurst CJ and McCallum JA agreeing), citing Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 393.

50. Consent can be established “at different times and in different ways”, and sufficiency of disclosure can depend on the sophistication and intelligence of the persons to whom disclosure must be made: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [107].

51. There is a common feature of the lawyer-client relationship which could be seen as involving a conflict of interest and duty. A lawyer has an interest in maximising fee revenue, in (i) taking on a client, (ii) setting the fees to be charged, and (iii) determining what needs to be done. There are regulatory controls which address these matters. None of these interests was invoked as a basis of conflict in this case.

Submissions

52. AH’s principal submissions were as follows:

1. the “important circumstance”, being the independent legal advice given by HWL Ebsworth to Birketu on the “whole position”, was not taken into account by the primary judge;

2. AH disclosed both the existence of a conflict and its implications to Birketu in the investigation retainer letter;

3. Birketu did not provide evidence that it was not aware that AH had a conflict of interest and duty, or that it did not understand the implications of that conflict, or that the advice actually given by HWL Ebsworth was not meaningful as to the nature and implications of that conflict or that HWL Ebsworth was not fully independent; and

4. Mr Gordon and Birketu had strong pragmatic reasons to want AH to act in the dispute against Deutsche Bank.

Matters not in issue

53. There is no challenge to the primary judge’s findings in the second judgment (at [11]) identifying the nature and circumstances of AH’s conflict of interest and duty (see [15] above). AH accepted that it was in a position of actual conflict between its personal interest and fiduciary duty at the time of entering the investigation retainer. AH also accepted that, as the party seeking to recover its fees, AH had the onus of proof of establishing fully informed consent.

Decision

54. The disclosure relied upon by AH in the retainer letter is to be read together with the covering email of 28 October 2017 attaching the first draft of the retainer letter (see [21] above). Several observations can be made concerning the disclosure by AH.

55. First, although Deutsche Bank and its lawyers had suggested that AH was in a position of conflict in acting for Birketu in its dispute with Deutsche Bank, AH told Birketu that it did not “presently” consider that such a conflict had arisen “directly” in relation to this matter. Rather, AH described the conflict as a “potential” one, or one that “may … possibly arise” in the future, if Birketu “does have a liability to Deutsche Bank”. At the same time, AH advised Birketu that it did not have a liability to Deutsche Bank in relation to the $7,000,000 of collateral transferred to Clarke’s personal account.

56. That was not a correct statement of the legal position given that AH was in a position of actual conflict. In describing the conflict as a “potential” one, or one that might arise in the future, AH conflated its assessment of the likely outcome of the dispute between Birketu and Deutsche Bank with the conflict question; the conflict question required attention to be given to the existence of actual or potential opposition of interests between AH and Birketu arising from Birketu’s dispute with Deutsche Bank. The purported disclosure by AH in the retainer letter did not address the correct question.

57. Second, to the extent that AH accepted in its reply submissions that it was not correct to describe the conflict in the retainer letter as being a “potential” one or one that might arise in the future, it does not follow, as AH submitted, that those descriptions of the conflict were “natural enough given that it depended on Birketu being legally liable to Deutsche Bank”. The erroneous description by AH of the conflict as a “potential” one obscured the reality of the opposition of interests between AH and Birketu. This was not disclosed by AH.

58. Third, it is no answer to say, as AH submitted, that Mr Gordon and Birketu knew that AH had a conflict. Mr Gordon and Birketu knew what they had been told by AH, namely, that AH did not consider that it had a conflict of interest and that there was “no compelling conflicts argument” against AH acting for Birketu. They were not told that AH had an actual conflict of interest in acting for Birketu on the investigation retainer.

59. Nor was there full disclosure of all material facts and circumstances. As the Skene email correctly recorded, one difficulty confronting AH in acting for Birketu on the dispute with Deutsche Bank was that, in advising Birketu on any settlement offer by Deutsche Bank, the interests of Birketu and AH were adverse: whilst an independent solicitor may have advised Birketu to accept less than full recovery of its claim against Deutsche Bank, it was not in AH’s interests to give that advice, as it would face a potential cross-claim by Birketu for any difference (see [25] above).

60. Fourth, it cannot pass without mention that the description of the draft “engagement letter” in the covering email of 28 October 2017 as administrative or “paperwork” was inapt, given the importance of the purported disclosure by AH in the retainer letter.

61. The email also asserted, somewhat threateningly, that despite enquiries of Mr Collis and others, Birketu had not explained to AH why many of the payments were made to Clarke’s account. That statement highlighted the actual conflict which existed and was a prelude to AH’s position in the fraud case that AH was not vicariously liable for Clarke’s conduct. Plainly, the interests of AH and Birketu conflicted because of their opposition of interests on the question of whether AH was vicariously liable for Clarke’s conduct.

Insufficient disclosure

62. The primary judge’s findings on the issue of fully informed consent have been referred to at [35] above. AH addressed these findings in its reply submissions.

(1) Access to information

63. AH submitted that the access to information which the investigation retainer would provide AH was sufficiently disclosed to Birketu by the statements in the retainer letter that AH “may arguably have practical interests in seeking to avoid liabilities and duties, or seeking to avoid satisfying duties and liabilities, to Birketu or you”, and that AH would “therefore not give the advice, or act in a way” which it “would properly otherwise do”.

64. Even accepting that these vague statements should be read in context with other statements in the retainer letter referring to the potential claim by Birketu that AH was liable for Clarke’s conduct, that disclosure said nothing about the benefit that the retainer would provide to AH by way of access to information which AH might use against Birketu in subsequent litigation.

65. AH also submitted that the failure to disclose the access to Birketu’s information was only a theoretical implication of the conflict which did not render the disclosure in the retainer letter insufficient: Rahme v Benjamin & Khoury at [100]. According to the submission, the possibility of AH obtaining access to information not already in its possession from its prior representation of Birketu was remote and speculative. However, AH adduced no evidence to support this assertion.

66. Further, and contrary to AH’s submissions, it is not to the point that Birketu made no attempt in evidence to identify any specific information which AH had or could have obtained which AH could use in subsequent litigation between them which was not already known to AH. That would be to reverse the onus of proof on the defence of fully informed consent.

67. Moreover, the information to which the investigation retainer would provide access would be of a significantly different quality from any information previously obtained by AH when acting for Birketu. That is because the investigation retainer involved an examination and consideration of the facts relating to Birketu’s dealings with Clarke in relation to the variation of the share swap agreement, of which AH was not aware, and those facts inextricably overlapped with the facts relating to AH’s vicarious liability for Clarke’s conduct. Indeed, the likelihood that there was information not known to AH inhered in AH’s assertion that Clarke was not acting in the course of his employment with AH.

(2) Overlap of facts

68. AH submitted that the circumstances giving rise to the overlap of facts between the investigation retainer and the issue of AH’s vicarious liability, including the possibility of claims by Birketu against AH, was expressly disclosed in the retainer letter. The difficulty with this submission is that AH did not disclose its personal interest in the investigation of Clarke’s ostensible authority, given the opposition of interest on the issue of AH’s vicarious liability for Clarke’s conduct.

69. AH also submitted that the degree of overlap of the facts was not as great as the finding by the primary judge might suggest. This submission sought to diminish the significance of the primary judge’s finding that the investigation of Clarke’s ostensible authority “overlapped inextricably” with the question of AH’s vicarious liability for Clarke’s conduct. However, no basis was shown for finding error in that assessment by the primary judge which was based on readily supportable reasoning.

(3) The vicarious liability issue

70. AH submitted that the potential contest between Birketu and AH on the vicarious liability issue, and the circumstances in which it would arise, were expressly disclosed in two passages in the draft retainer letter, which were repeated in the final letter. However, an examination of those passages highlights the insufficiency of the purported disclosure.

71. The first passage contained the uninformative statement that “this firm may suffer from a conflict of interests and/or duties in relation to this matter (and conflicts of interests and/or duties may also arise as a result of other matters and circumstances), such as referred to above (in brackets) and below)”. The cross-reference to the passage “(in brackets)” above was to the following:

(It is possible, however, that conflicts of interest and duties may still possibly arise or exist by reason of other matters and circumstances, such as referred to (and some of which are expanded on) below, although most are not related to this matter.)

72. The second passage contained statements that “it may be argued by DB and/or by Birketu that this firm may have a liability to Birketu for any liabilities which Birketu would have incurred to DB for the moneys so advanced …” and “this firm may arguably have practical interests in seeking to avoid liabilities and duties, … and thus may therefore not give the advice, or act in a way, which this firm would properly otherwise do” were it not to have those “possible interests” (emphasis added).

73. Neither passage amounted to a full disclosure of all the relevant facts and circumstances. As his Honour found (at [88]), AH did not disclose that the critical aspect on which Birketu’s and AH’s interests were “plainly at odds” concerned Clarke’s course of conduct and scope of authority and that the opposition of interests between Birketu and AH on the issue of vicarious liability gave rise to the actual conflict of interest.

(4) Potential advantages and disadvantages of the retainer

74. AH submitted that the finding about the potential advantages and disadvantages of the retainer was conclusionary on the other findings. That submission ignored that this finding was based on the unchallenged findings of the primary judge (at [57]-[63]) adopting the report of Mr Gyles (see [30] above), concerning the items of work done for the benefit of AH and the attendances where AH’s interests were adverse or potentially adverse to the interests of Birketu.

Independent advice

75. AH submitted that the fact that it had recommended that Birketu obtain independent advice, which Birketu had done, was an important consideration both as to the nature of the required disclosure and the reality of the informed consent given. AH complained that the primary judge seemingly gave no weight to this consideration because he made no reference to it.

76. Contrary to AH’s submissions, the primary judge referred to AH’s recommendation that Birketu obtain independent advice when he set out in full the terms of the retainer letter in the second judgment (at [14]), which recorded that advice.

77. Although his Honour did not specifically refer to the evidence of Mr Lancaster that Birketu had obtained advice from independent lawyers, nothing flows from this since the acknowledgment by Mr Lancaster in cross-examination that Birketu was taking general advice against the whole position did not amount to evidence of advice on the specific question of the “possible” conflict of interest referred to in the retainer letter. Moreover, there was no evidence that Birketu obtained advice on the actual conflict of interest which existed.

Mr Gordon’s sophistication

78. The primary judge considered Mr Gordon’s position, and took into account Birketu’s sophistication, experience and resources in deciding whether AH had obtained fully informed consent from Birektu. There is no error in the finding that this did not excuse AH from the heavy burden of full disclosure.

79. Insofar as AH complained that his Honour made a similar finding that Mr Atanaskovic was sophisticated, experienced and possessed resources, which AH says was irrelevant, these observations were made in connection with the finding (at [92]) that the retainer reflects an acute awareness of the position of conflict. This complaint goes nowhere.

80. The challenge to the finding that AH did not obtain Birketu’s fully informed consent should be rejected.

Ground 2 – Conflict so profound that AH could not act

81. Ground 2 challenges two findings by the primary judge which are related. One is the finding at [77(1)] that to permit AH to recover its fees would give efficacy to a retainer which it was not open to AH, acting ethically, to accept “in the face of the clear and profound conflict of interest between its own interests and the duties which it owed Birketu”. The other finding is at [95] that the conflict of interest was so profound that it was not proper, or even possible, for AH to continue to act for and advise Birketu, even with consent.

82. These findings were based on the principles stated by Street CJ in Harvey. Reference was also made to the statement of Megarry J in Spector v Ageda [1973] Ch 30 at 47. In addition, the primary judge reasoned that fully informed consent would not be effective to make AH’s position any less untenable given its professional ethical obligations as r 12.1 of the Solicitors’ Conduct Rules does not provide an exception for a solicitor to act where he or she obtains the fully informed consent of the client.

83. Although AH accepted that there can be cases of the type referred to in Harvey (where it is not possible for a solicitor to act), AH submitted that the primary judge erred in finding that the present case was of that type.

Decision

84. Given the conclusion on ground 1, this ground does not strictly arise. Nevertheless, I will indicate my views: Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26 at [12]; Boensch v Pascoe [2019] HCA 49; (2019) 94 ALJR 112 at [8].

Harvey

85. The statement of Street CJ in Harvey at 170-171 to which the primary judge referred (at [40]) is as follows:

Where there is any conflict between the interest of the client and that of the solicitor, the duty of the solicitor is to act in perfect good faith and to make full disclosure of his interest. It must be a conscientious disclosure of all material circumstances, and everything known to him relating to the proposed transaction which might influence the conduct of the client or anybody from whom he might seek advice. To disclose less than all that is material may positively mislead. Thus, for a solicitor merely to disclose that he has an interest, without identifying the interest, may serve only to mislead the client into an enhanced confidence that the solicitor will be in a position better to protect the client’s interest. The conflict of interest may, and usually will, be such that it is not proper, or even possible, for the solicitor to continue to act for and advise his client. A solicitor, who deals with his client while remaining his solicitor, undertakes a heavy burden. Where a solicitor discovers that continuing to act for his client will, or may, bring the interests of his client and his own interests into conflict, it will be a rare case where he should not, at least, advise his client to take independent legal advice. (Emphasis added.)

86. AH submitted that the wider statements of principle in Harvey must be applied “sub modo”, referring to the remarks of Young J in Marcolongo v Mattiussi [2000] NSWSC 834 at [66]. This submission was unhelpful as AH did not specify how those principles should be qualified.

87. The wider statements in Harvey should be read as saying no more than two things. First, in some cases the circumstances of the solicitor’s conflict of interest and duty may be so profound that the objective of the conflict rule (to preclude the solicitor being swayed by considerations of self-interest) can only be achieved if the solicitor does not act for the client. In Harvey, Street CJ gives the example of a deliberate proposal of the solicitor that his client deal with him (at 171).

88. Second, in some cases it may not be “even possible” for the solicitor to obtain the client’s fully informed consent, in the sense of not “practically possible”, given the high standard of disclosure required of the solicitor, which Street CJ described as:

a conscientious disclosure of all material circumstances, and everything known to [the solicitor] relating to the proposed transaction which might influence the conduct of the client or anybody from whom he might seek advice.

89. In seeking to distinguish the present case from the type of cases contemplated in Harvey, AH submitted that the interests of AH and Birketu were aligned against Deutsche Bank on the question of Clarke’s ostensible authority. There are several difficulties with this submission.

90. First, the fact that there was some commonality of interest between Birketu and AH in a three-way dispute with Deutsche Bank on one issue (denying that Clarke had ostensible authority from Birketu) is no answer to AH’s actual conflict of interest which existed from the opposition of interest on the issue of AH’s vicarious liability for Clarke’s conduct.

91. Second, as the primary judge found (at [99]), the question of Clarke’s ostensible authority and AH’s vicarious liability for his actions depended on an overlapping and complicated set of facts which it would be difficult to investigate for one purpose without having the other in mind.

92. Third, it is no answer for AH to say, as it submitted, that its interests were aligned with Birketu because AH was “even more than usually motivated to win the dispute with Deutsche Bank and resolve the issue for a significant and longstanding client”. The motivation of AH was irrelevant to the question of informed consent, but anyway was part only of the situation.

Solicitors’ Conduct Rules, r 12.1

93. The Solicitors’ Conduct Rules were developed by the Law Council of Australia in accordance with s 427 of the Legal Profession Uniform Law (NSW) and are made by the Legal Services Council under Pt 9.2 of that Law. The content of the Conduct Rules may include, without limitation, provisions with respect to what Australian legal practitioners, Australian-registered foreign lawyers and law practices must do, or refrain from doing, in order to “avoid conflicts of interest”: s 423(2)(c) Legal Profession Uniform Law (NSW). The Solicitors’ Conduct Rules commenced in New South Wales on 1 July 2015: see Pt 1, r 2.

94. The objective of the Rules is to assist solicitors to act ethically and in accordance with the principles of professional conduct established by the common law and the Rules (Pt 1, r 3.1). Part 2, r 2 sets out the purpose and effect of the “Operational rules” contained in Pt 2. The stated purpose of the operational rules is the same as the objective of the Rules stated in Pt 1 (Pt 2, r 2.1). The effect of the Rules is that they apply in addition to the common law (Pt 2, r 2.2), and whilst a breach of the Rules may give rise to disciplinary action by the relevant disciplinary body, a breach cannot be enforced by a third party (Pt 2, r 2.3).

95. Part 2 of the Rules includes r 12, which relevantly provides:

Conflict concerning a solicitor’s own interests

12.1   A solicitor must not act for a client where there is a conflict between the duty to serve the best interests of a client and the interests of the solicitor or an associate of the solicitor, except as permitted by this Rule.

12.2   A solicitor must not exercise any undue influence intended to dispose the client to benefit the solicitor in excess of the solicitor’s fair remuneration for legal services provided to the client.

12.3   A solicitor must not borrow any money, nor assist an associate to borrow money, from:

12.3.1   a client of the solicitor or of the solicitor’s law practice, or

12.3.2   a former client of the solicitor or of the solicitor’s law practice who has indicated a continuing reliance upon the advice of the solicitor or of the solicitor’s law practice in relation to the investment of money,

UNLESS the client is:

(i)    an Authorised Deposit-taking Institution,

(ii)   a trustee company,

(iii) the responsible entity of a managed investment scheme registered under Chapter 5C of the Corporations Act 2001 (Cth) or a custodian for such a scheme,

(iv)   an associate of the solicitor and the solicitor is able to discharge the onus of proving that a full written disclosure was made to the client and that the client’s interests are protected in the circumstances, whether by legal representation or otherwise, or

(v)   the employer of the solicitor.

96. It is not necessary to set out the specific exceptions in r 12.4 relating to the preparation of a Will, referral fees received by solicitors from a third party or referred fees paid by a solicitor. It is common ground that none of the exceptions applied in this case.

97. The term “associate” is defined in the glossary of terms as follows;

associate in reference to a solicitor means:

(a)    a principal of the solicitor’s law practice,

(b)    a partner, employee, or agent of the solicitor or of the solicitor’s law practice,

(c)    a corporation or partnership in which the solicitor has a material beneficial interest,

(d)    in the case of the solicitor’s incorporated legal practice, a director, officer, employee or agent of the incorporated legal practice or of a subsidiary of the incorporated legal practice,

(e)    a member of the solicitor’s immediate family, or

(f)   a member of the immediate family of a partner of the solicitor’s law practice or of the immediate family of a director of the solicitor’s incorporated legal practice or a subsidiary of the incorporated legal practice.

98. AH submitted that r 12.1 should be understood as subject to the long-established position that a solicitor can obtain informed consent to act where the solicitor is in a position of conflict. In support of this construction of the rule, AH referred to Riley Solicitors Manual (2005, LexisNexis Butterworths) at [6010] where it is said that the rule “states the general fiduciary proscription in this context”. AH also referred to the Commentary on the draft Solicitors’ Conduct Rules issued by the Law Council of Australia in August 2013, which stated:

Because the relationship between the solicitor and client is of a fiduciary character, in dealing with the client the solicitor must not:

engage in situations where his or her own interests do or may conflict with the duty owed to the client except with the latter’s fully informed consent;

…

Rule 12 is directed to reflecting the application of fiduciary duties in the solicitor-client context. …

99. In oral argument, senior counsel for the respondents submitted that “r 12 is scarcely intending to set up yet another parallel system, apart from the true common law and equity, … [containing] … the supervisory jurisdiction with respect to relations between fiduciaries who are solicitors and their clients”. The submission continued that there was nothing of benefit to AH from this understanding of r 12 or its application, pointing to the position set out in Mr Skene’s email.

100. As indicated, the scope of the ethical obligation in r 12.1 is not dispositive of the appeal, given the conclusion on ground 1 that an actual conflict existed. If it were necessary to decide this point, my view is that the construction of r 12.1 adopted by the primary judge was incorrect. However, that error is immaterial; the ethical obligation in r 12.1 was an independent reason for the alternative finding that the present case was of the type referred to in Harvey where the conflict was so profound that it is not proper or even possible for a solicitor to act.

Whether fully informed consent is an exception to r 12.1

101. Rule 12 deals with three discrete aspects of the solicitor/client relationship: conflicts of interest (r 12.1), undue influence in the context of charging in excess of the solicitor’s fair remuneration (r 12.2), and dealings between the solicitor and client involving borrowing money from a client, except for permitted categories of clients (r 12.3).

102. The subject matter of r 12.1 is the proscriptive fiduciary duty imposed on a solicitor by the “conflict rule”. As indicated, the conflict rule precludes a solicitor from acting for a client where there exists a conflict of personal interest and fiduciary duty or a significant possibility of such a conflict.

103. Given the wide definition of “associate”, which includes a member of the solicitor’s immediate family, the ethical obligation imposed by r 12.1 extends to a conflict which exists between the personal interests of an “associate” of a solicitor and the solicitor’s duty to the client. It is not necessary to address whether the ethical obligation in the case of conflicts involving an associate of the solicitor is potentially wider than the proscriptive fiduciary duty imposed by the conflict rule.

104. The present question is a narrower one: does the ethical obligation in r 12.1 necessarily preclude a solicitor from acting for a client where a conflict exists and no specific exception in r 12 is available? There are several compelling reasons why r 12.1 should be read as not intending to change the general law that fully informed consent is a defence to the proscriptive fiduciary duty (see [46] above).

105. First, the rule lacks any specific indication of an intention to exclude the general law exception to the conflict rule for fully informed consent. Second, attributing such an intention to r 12.1 would be contrary to the stated objective and purpose of the Rules being to assist solicitors to act in accordance with the principles of professional conduct established by the common law. The absence of a specific exception to r 12.1 for fully informed consent is unsurprising once it is recognised that the principles of professional conduct established by the common law include the defence of fully informed consent.

106. Third, it is most unlikely that a rule made by the Legal Services Council relating to conduct of solicitors to “avoid conflicts of interest” (s 423(2)(c) Legal Profession Uniform Law (NSW)) was intended to preclude a solicitor from avoiding the conflict rule by the existing exception at general law of obtaining the fully informed consent of the client. Rather, if there is fully informed consent, there is no breach of r 12.1.

107. This conclusion is consistent with the Commentary issued by the Law Council of Australia but is not reliant upon that Commentary. The Commentary was issued two years prior to the introduction of the Solicitors’ Conduct Rules in New South Wales, and does not have the status of extrinsic material under s 34 of the Interpretation Act 1987 (NSW) to which the Court could have regard when construing the statutory rules. The Commentary does no more than state what the Law Council of Australia, as the proponent of the draft Rules, may have thought or intended the scope of the proposed rule to be.

108. Notwithstanding the error by the primary judge in the construction of r 12.1 of the Solicitors’ Conduct Rules, AH has not shown error in the alternative finding that the present case was of the type where it was not proper or even possible for AH to act for Birketu, given the profound conflict that existed. Ground 2 has not been made out.

Ground 3 – Nature of the work performed by AH

109. AH challenged the primary judge’s finding that the work performed by AH was “infected by the conflict of interest” and that Birketu obtained no benefit from the work, whilst the benefit obtained by AH was more than incidental. AH submitted that this finding involved two errors.

110. First, the primary judge should not have concluded, based on the report of Mr Gyles, that AH’s work was necessarily infected by a conflict of interest. Second, the primary judge should have found that AH’s work benefited Birketu, and AH received only an incidental benefit, such that it was not unreasonable for AH to recover fees for that work.

Decision

111. As to the first asserted error, AH submitted that both Mr Gyles and the primary judge erred in concluding that it would be difficult to investigate the facts for one issue without investigating the other, because the questions of AH’s vicarious liability and Clarke’s ostensible authority are separate legal questions.

112. That separate legal questions arose from the dispute with Deutsche Bank misses the point. The answer to each of the legal questions was fact sensitive. As Mr Gyles observed, and the primary judge agreed, the vicarious liability and ostensible authority issues shared the same underlying set of facts. The primary judge addressed the extent to which the separate legal questions impacted AH’s conflict of interest and found (at [94]), that while AH may have adequately put arguments on one aspect of the wider dispute, this had little to say about its position generally, being a reference to AH’s conflict of interest and duty on the vicarious liability issue. There is no error in that finding. Plainly, it would be difficult for AH to investigate the facts for one issue without it affecting the other.

111. As to the second asserted error, accepting that Mr Gyles found that AH had demonstrated “cogent reasoning” in their work on the issue of ostensible authority, AH’s submissions ignored the findings of Mr Gyles, which were adopted by the primary judge, concerning the work which AH did in its own interests and contrary to the interests of Birketu (at [62]). These findings undermined AH’s submission that it is fair and reasonable that Birketu should pay for such work.

112. To the extent that there was any benefit to Birketu in AH possibly persuading Deutsche Bank that Clarke did not have ostensible authority to act for Birketu, this was mitigated by two matters. As the respondents correctly submitted, Birketu inevitably had to obtain new legal representation, given AH’s conflict of interest and duty, and as the primary judge found, the benefit to AH was more than incidental. That finding was well open on the conclusions in the report of Mr Gyles (at [62]), which the primary judge adopted.

113. AH says that the same costs would have been incurred by Birketu if other solicitors, other than AH, had been retained from the beginning for the investigation retainer because the same correspondence with Deutsche Bank and detailed consideration of the issue of ostensible authority would have been undertaken by the other firm as by AH. Again, that misses the point. At the time AH entered the investigation retainer it was not in Birketu’s interest that costs be incurred in retaining AH, which was in a position of actual conflict, when at least some of those costs would be duplicated when new solicitors were retained, once the conflict was properly recognised by AH. So much was ultimately accepted by AH in argument.

114. AH also repeated the submission made in support of ground 2 that Birketu benefited from the work because its interests were aligned with AH on the ostensible authority issue. As indicated, commonality of interest on one issue did not mean that the parties’ interests were aligned. Given the opposition of interest on the issue of AH’s vicarious liability for Clarke’s conduct, on which the parties took opposing positions at trial, the parties’ interests were plainly not aligned. Ground 3 has not been made out.

Ground 4 - The undertaking

117. For a court to enforce a solicitor’s undertaking as such it is an essential requirement that there be a promise made in his or her capacity as a solicitor: United Bank of Kuwait Ltd v Hammoud [1988] 1 WLR 1051 at 1063 (Staughton LJ), citing United Mining and Finance Corporation Ltd v Becher [1910] 2 KB 296 at 306-307 (Hamilton J); Wade v Licardy at 7G-8B, citing In re A Solicitor [1966] 1 WLR 1604 at 1607-1608 (Pennycuick J).

118. AH sought to avoid the enforcement of Mr Atanaskovic’s statement on two bases: (1) that the statement did not amount to an undertaking; and (2) that, if it did, then the exercise of the discretion to enforce the undertaking miscarried.

Ground 4(a): whether the statement was an “undertaking”

119. It is to be recalled that the primary judge found in the first judgment that Mr Atanaskovic said at a lunch with Mr Gordon and Mr Lancaster on 9 January 2018 words to the effect:

AH will not charge Birketu for any of the work done by AH in defending Birketu against Brody and the Deutsche fraud situation because this whole matter was created as a result of one of my staff members.

120. In writing, AH advanced three reasons why the words spoken by Mr Atanaskovic did not amount to an undertaking.

121. The first reason – that the word “undertaking” was not used by Mr Atanaskovic – was not pressed in AH’s reply submissions. That retreat from AH’s submission in chief is unsurprising. It is well-established that the use of the word “undertaking” is not essential in order for a solicitor’s representation as to future conduct be enforceable: Hastingwood Property Ltd v Saunders Bearman Anselm (A firm) [1991] Ch 114 at 126, citing John Fox v Bannister, King & Rigbeys [1988] QB 925; and Re A Solicitor; Ex parte Hales.

122. The second and third reasons can be dealt with together. AH repeated the submission advanced below that the context demonstrates that no undertaking was given as the discussion of fees about work which had been performed is not something intended to be honoured in the solicitor’s professional capacity.

123. The primary judge rejected this submission, finding at [104]:

I reject the submission (although I think it was only made faintly) that Atanaskovic was not acting in a professional capacity. That is the only capacity in which he was acting. He was retained in his professional capacity, he did work covered by the retainer in his professional capacity, he claims the fees in his professional capacity and he gave the undertaking in his professional capacity. The undertaking is concerned with his professional entitlement and position.

124. In oral argument, AH submitted that the line between a statement made by a solicitor as to something that will be done or not done, and a formal undertaking, is difficult to draw. Whilst maintaining the written submission that the statement by Mr Atanaskovic ought not be construed as an undertaking by a solicitor, senior counsel for AH accepted that the statement could be regarded as an undertaking. That concession was properly made.

125. The undertaking given by Mr Atanaskovic was something to be honoured in his professional capacity. The words used by Mr Atanaskovic are clear and unambiguous; they amount to an undertaking not to charge for the work that AH subsequently sought to recover from Birketu.

Grounds 4(b) and (c): whether the undertaking should be given effect

126. AH accepted that the Court has a discretion whether to enforce an undertaking but submitted that the exercise of discretion miscarried because the primary judge appears to have concluded that it followed as a matter of course that the undertaking should be enforced.

127. I reject that submission. On a fair reading of his Honour’s reasons, including the statement of principles at [28]-[34], and the application of those principles at [75(4)], [77(3)] and [78], his Honour proceeded on the correct basis that the Court had a discretion to enforce the undertaking in the exercise of the Court’s supervisory jurisdiction.

128. Next, AH submitted that the undertaking should not be enforced because “this was at most a marginal case” and, at its highest, the evidence reveals a change of intention by Mr Atanaskovic in the following circumstances:

1. there was no reliance by Birketu on the undertaking in terms of altering conduct;

2. there was no loss caused as a result of AH resiling from the undertaking;

3. almost all of the work had been performed by AH prior to the undertaking being given;

4. the conduct of Mr Atanaskovic was not dishonest; and

5. the undertaking was given at an informal lunch and was not subsequently confirmed in writing.

Reliance, loss and absence of consideration

129. The first three matters are related and can be dealt with together. AH submitted that the supervisory jurisdiction is compensatory and therefore the absence of reliance and loss are relevant matters in the exercise of the Court’s discretion to enforce an undertaking. As to the absence of consideration for the promise, AH submitted that a solicitor’s voluntary promise concerning fees for work already performed has not previously been enforced in the supervisory jurisdiction, and to enforce such a promise would place a solicitor’s promise in a different position from promises made by a creditor for discharge of a debt without consideration.

130. These contentions are misplaced. They ignore the principles stated by the primary judge at [30]-[31] of the second judgment, as to which no complaint is made. The position is helpfully summarised by GE Dal Pont in Lawyers’ Professional Responsibility (7^th ed, 2021, Thomson Reuters (Professional) Australia Limited) at [22.30]:

The jurisdiction is discretionary, and so the court will not exercise it as a matter of course. It is unfettered by absolute rules but must be exercised according to the facts of each case. Informing the exercise of the jurisdiction is its disciplinary slant. The latter dictates, for instance, that the court’s order is premised not on the claimant holding an enforceable contractual or other civil right, but on a failure that merits reproof – that the failure to honour it is “inexcusable”. (Citations omitted.)

131. In short, the supervisory jurisdiction is both disciplinary and compensatory; enforcement of an undertaking is for the purpose of ensuring honourable conduct on the part of the Court’s own officers, and is distinct from the legal rights and remedies of the parties; enforcement does not depend upon there being consideration for the undertaking. What distinguishes the enforcement of a voluntary promise by a solicitor from a similar promise made by an ordinary creditor is the fact that the undertaking is given by a solicitor in his or her professional capacity. As officers of the Court, solicitors are expected to abide by undertakings given by them professionally and, if they do not, they may be called upon to make good their defaults. Where the solicitor, directly or indirectly, still has it in his or her power to do the act which he or she undertook to do, the Court may order the solicitor to do that act: John Fox v Bannister, King & Rigbeys at 928 (Nicholls LJ).

132. That expectation of solicitors is reinforced by r 6.1 of the Solicitors’ Conduct Rules which provides:

Undertakings

6.1   A solicitor who has given an undertaking in the course of legal practice must honour that undertaking and ensure the timely and effective performance of the undertaking, unless released by the recipient or by a court of competent jurisdiction.

133. Here, the undertaking concerned the solicitor’s professional entitlement and position. There was no error by the primary judge in enforcing the undertaking by precluding AH from recovering the fees they undertook not to charge the client.

134. It remains to address two authorities to which AH referred on the relevance of reliance and loss to the exercise of the discretion. For the reasons that follow, the first is an unreliable guide to the nature and limits of the supervisory jurisdiction in New South Wales, and the second is readily distinguishable on the facts.

135. Coll v Floreat Merchant BankingLtd [2014] EWHC 1741 (QB) involved an application by a claimant (a former employee) for leave to bring committal proceedings against solicitors of the former employer for alleged breach of inter-party undertakings given by the solicitors to keep safe a computer pending resolution of the dispute and not to part with its possession or allow any other party to access, open or interfere with the computer other than by agreement of the parties or by order of the court. Hickinbottom J held that, given there was no reasonable prospect of the claimant proving that the relevant solicitor had breached an undertaking, and that there was no other good reason to allow the application to proceed, permission should not be granted.

136. After referring to several English authorities, Hickinbottom J set out a summary of propositions at [45] which were said to be derived from “a great number of authorities”, including some referred to in the judgment, although no authorities were referenced in the summary. Strictly, the summary was obiter, given the outcome of the proceedings. AH placed emphasis on the proposition in sub-par (iii) of [45]:

(iii)   … However, given that solicitors are now the subject of a comprehensive and sophisticated regulatory regime through the SRA [Solicitors’ Regulatory Authority], the jurisdiction will only usually be exercised where someone has lost out as a result of the solicitor’s conduct and the court is the appropriate forum to require that loss to be put right on a summary basis. The jurisdiction is therefore primarily compensatory, although in a disciplinary context. (Emphasis added.)

137. Three observations can be made. First, care must be exercised in applying propositions stated in summary terms in the context of the statutory regulation of solicitors in England to the supervisory jurisdiction in Australia. AH did not refer the Court to any Australian authority which has adopted, let alone referred to, Coll. Second, as senior counsel for the respondents correctly submitted, the proposition in sub-par (iii) (“the jurisdiction will only usually be exercised”), like the other propositions in [45] of Coll, is very general and does not provide reliable guidance for the exercise of the supervisory jurisdiction in this State. Third, a major difficulty with the proposition in sub-par (iii) is that, although reference is made to the disciplinary aspect of the enforcement of an undertaking, there is no mention that the disciplinary aspect does not require reliance, loss or consideration for an undertaking.

138. The second case relied upon by AH, Re a Solicitor; Ex parte Hales, involved an undertaking given by a solicitor to a person, not being the solicitor’s client, that the solicitor would hold funds for the purpose of payment to the person upon a certain event happening. The Court concluded that the personal undertaking made by the solicitor was sufficient to exercise its supervisory jurisdiction to compel the solicitor to carry out the undertaking. Darling J found that the undertaking constituted a declaration of trust, and there was a breach of trust by the solicitor against the person who had altered his legal rights in consequence of the declaration of trust (at 545). Lawrence J was of a similar view (at 547). The finding of reliance in that case was in the context of what amounted to a declaration of trust. The case is not authority for the proposition, as suggested by AH, that reliance is usually required to be established to engage the Court’s supervisory jurisdiction.

Dishonourable conduct

139. As to the fourth matter, the dishonourable conduct of the solicitor which warranted the enforcement of the undertaking in this case was not that Mr Atanaskovic did not have an intention to honour the undertaking when it was given; it was that Mr Atanaskovic had given an undertaking in his professional capacity which was capable of performance and from which AH reneged.

Undertaking given in an informal setting

140. As to the fifth matter, to describe the setting in which the undertaking was given as a “non-working lunch” or an “informal lunch”, is another way of saying that the setting was a social occasion. But the informality of the occasion does not detract from the context in which the undertaking was given by Mr Atanaskovic to reassure his client that it would not be out of pocket as a consequence of the fraud perpetrated by a solicitor employed by AH. As Mr Lancaster recorded in his 10 January 2018 email, Mr Atanaskovic acknowledged at the lunch that “Birketu/WIN would not be out of pocket” in defending Birketu against the “Brody/Deutsche fraud situation”, which was a matter created by a member of his own staff.

141. There is no merit in AH’s contention that the subject matter of the undertaking relating to its fees meant that the undertaking was given at a time when AH was not representing the client or acting in the client’s interests. This was another way of saying that the undertaking was not given in a professional capacity. The present case is readily distinguishable from the theoretical example discussed in Geoffrey Silver & Drake (A firm) v Baines [1971] 1 QB 396 at 404, where Widgery LJ said:

If a solicitor borrows money personally and incurs a personal obligation in that regard, his promise to pay that money is not a promise in his capacity as a solicitor, even though he sits in his office when he receives the money and even though he acknowledges the debt on his professionally headed notepaper.

142. By contrast, negotiating terms of payment for the provision of legal services is conduct by a solicitor in the course of legal practice. The subject matter of the undertaking, being fees for the legal services provided by AH pursuant to the investigation retainer, was inextricably linked to the provision of the services by AH in their capacity as solicitors. Resiling from the undertaking given to Birketu was dishonourable conduct by AH which warranted the exercise of the Court’s supervisory jurisdiction.

143. Ground 4 has not been made out.

Ground 5 – the exercise of the Court’s supervisory jurisdiction

144. Given the conclusions above on grounds 1-4, ground 5 does not arise as it is dependent on success on any of grounds 1-4.

145. However, it is appropriate to address one further submission advanced by AH. Contrary to AH’s submissions in chief, exorbitant overcharging is not the only basis for the exercise of the Court’s supervisory jurisdiction and nothing in New South Wales Crime Commission v Fleming (1991) 24 NSWLR 116 at 123 (Gleeson CJ) suggests it is. AH acknowledged so much in their reply submissions.

146. This case involved considerations quite distinct from those raised by overcharging. Here, the issue was the standard of conduct of a solicitor where an actual conflict of interest existed and a solicitor attempted to resile from an undertaking given to the client in a professional capacity. Plainly, on the findings of the primary judge, the circumstances of this case warranted the exercise of the Court’s supervisory jurisdiction.

Conclusion and Orders

147. The appeal has failed. There is no reason why costs should not follow the event: UCPR, r 42.1.

148. I propose the following orders:

1. Appeal dismissed.

2. Appellants to pay the respondents’ costs.

149. McCALLUM JA: I agree with Gleeson JA.

**********

Schedule A

Dear Mr Gordon

Engagement Letter – Deutsche Bank AG and

Purported NEC Swaps Agreements Variations re Alleged “$7m Loan”

You have requested us to provide you and your company with legal advice and assistance from about 18 October 2017 in connection with the above, including the possibility of dispute with Deutsche Bank AG, Sydney Branch (DB). The purpose of this letter is to confirm our engagement and the terms and conditions on which we act on this matter.

1. Responsible Partner

John Atanaskovic will be the partner primarily responsible for this matter.

2. Fees and disbursements

We will charge professional fees for all services rendered by reference to the time spent by our lawyers in working for you on this matter. We will also charge for any out-of-pocket expenses we incur on your behalf in accordance with our standard Terms of Engagement attached.

The partners and employed solicitors who will or may primarily be involved in this matter and their current hourly rates (exclusive of GST) are:

Name	Level of Lawyer	Hourly Rate
John Atanaskovic (JLA)	Partner	$900
Michael Sophocles (MJS)	Partner	$675
Lawson Jepps (LAJ)	Senior Solicitor	$650
Paul Springthorpe (PYS)	Senior Solicitor	$625

JLA will be attending to most of the work, certainly initially. MJS and PYS are litigation specialists, and it may be that the matter does not proceed to that stage, in which case they are not likely to do much, if any, work on the matter. If additional partners or employees are required to work on this matter, they will be charged for at hourly rates that are commensurate with their experience and expertise.

We may adjust our hourly rates and overall fees in accordance with our standard Terms of Engagement attached.

[…]

5. Terms of Engagement and Possible Conflicts of lnterests and/or Duties

Attached are our standard Terms of Engagement. These form part of the terms and conditions of our engagement on this matter.

It has been suggested, in particular by DB, and officers and external lawyers of DB, that this firm suffers a conflict of interests and/or duties in acting for Birketu and/or you on this matter.

We presently do not consider that such a conflict has in fact arisen directly in relation to this matter since, based on your instructions and the information known to us to date:

(a)   we do not see why Birketu or you would have a liability to DB in the circumstances of this matter, for example in relation to the alleged $7m loan asserted by Ashley Seeto of DB, and

(b)   if Birketu does not have, and/or you do not have, such a liability to DB, we cannot see why this firm would have obligation or liability to Birketu or you in relation to the matter.

(It is possible, however, that conflicts of interests and duties may still possibly arise or exist by reason of other matters and circumstances, such as referred to (and some of which are expanded on) below, although most are not related to this matter.)

On the other hand, if (contrary to our views) Birketu and/or you does have a liability to DB in relation to this matter then, as we have explained to you, this firm may suffer from a conflict of interests and/or duties in relation to this matter (and conflicts of interests and/or duties may also arise as a result of other matters and circumstances, such as referred to above (in brackets) and below). If this is the case, subject to the waivers/consents referred to below, we should not act as lawyers for Birketu or you, and instead another lawyer or law firm should act for Birketu and you in relation to this matter.

You have indicated that you understand the above, but that you nevertheless have confidence in this firm, and there are practical reasons why Birketu and you would still desire this firm to act as lawyers for Birketu and you in relation to this matter.

In consequence of your indication, and at your request, we have informed you that, even if conflicts of interests and/or duties exist as between a lawyer and a client, the lawyer may still act for the client, if the client on a “fully informed” basis gives its consent to the conflict of interests and/or duties.

There is no precise formula that will determine “full information”, but for this purpose, we briefly confirm below aspects of our oral advice as regards some of the main ways in which such conflicts may arise in the present case, some of the consequences thereof, and the operation of the applicable rules regarding consent to such conflicts, as follows:

(a)   As you know, Brody Clarke (BJC) was formerly an employed solicitor at this firm. His employment was immediately terminated on 28 September 2017 when the background to this matter became known to JLA and MJS. But this does not remedy or remove all (or even most) of any conflicts issues as may exist or arise.

(b)   It is reasonably clear that BJC acted reprehensibly, and fraudulently, including as follows (but the following is not exhaustive):

(i)   in apparently suggesting that moneys should be paid by Birketu and/or you and/or other of your companies (such as WIN Corporation Pty Ltd) into a personal bank account of BJC at the Leura branch of Westpac (BJC Account), although on the misleading basis that BJC represented that such account was a general client trust account of this firm (notwithstanding that we do not have, and have never conducted, a general client trust account, and we regularly, such as in engagement letters like this one, disclose the former); and we understand that some moneys were then placed into the BJC Account by Birketu and WIN, and that material amounts of such moneys have subsequently, in one way or another, been dissipated or largely dissipated by BJC. This firm may arguably be liable to reimburse some or all of such moneys or other damage incurred by Birketu, you and/or your other companies in relation to such wrongs, and we have indicated to Birketu, you and WIN that you should take separate independent legal advice on this;

(ii)   one of the payments which was apparently made was a payment of about $2m by WIN, apparently loosely relating (in ways which even now we have not had explained to us by WIN, and we do not understand) to liabilities once owed by WIN to Ten Network Holdings Limited, which payment only became known to the partners of this firm on 28 September 2017;

(iii)   BJC appears to have fraudulently procured DB to enter into certain alleged agreements, and forged documents, which make it appear that Birketu has entered into agreements with DB, and assumed liabilities to DB under those agreements, on the basis of which DB alleges it advanced two tranches of money into the BJC Account, which money (save about $1.5m thereof) BJC has subsequently dissipated;

(iv)   DB claims that, in the process of the foregoing, Birketu has become liable inter alia for the moneys so advanced by DB;

(v)   in the foregoing circumstances, it may be argued by DB and/or by Birketu that this firm may have a liability to Birketu for any liabilities which Birketu would have incurred to DB for the moneys so advanced, and for other moneys and obligations also, such as interest, fees and expenses payable to third parties, and certain Birketu pre-emption obligations to DB;

(c)   in addition to contractual and other obligations and duties to carry out with competence, etc the legal work entrusted to him, a solicitor has fiduciary and other duties, including duties of loyalty and honesty, to the solicitor’s clients, including a duty to avoid conflicts between his own interests with his duties to his clients, and the interests of his clients;

(d)   a solicitor has a duty to place the interests of his clients and his duties to his clients above his own interests, and to avoid the solicitor’s client’s interests being in conflict with his own interests; and

(e)   by virtue of what is described above, this firm may arguably have practical interests in seeking to avoid liabilities and duties, or seeking to avoid satisfying duties and liabilities, to Birketu or you or your other companies, or even to DB and other third parties, and thus may therefore not give the advice, or act in a way, which this firm would properly otherwise do, were we not to have those possible interests which arguably conflict with our duties to Birketu, you or your other companies.

Birketu and you have requested that this firm nevertheless act as lawyers for Birketu and you in relation to this matter, on the footing that Birketu and you, on an informed basis, consent to such conflicts of interests and/or duties this firm may have in so acting for Birketu and you. We have agreed to do so, on the following footing:

(a)   that in the time available to date, we have explained in a general way, and some of the specific ways, the conflicts of interests and/or duties as may presently exist, or come to exist, such as those described above, that you on an informed basis so consent to any conflicts that may exist in us acting for Birketu and you, and have offered further to explain the general and specific ways to you, as and when requested;

(b)   that we have recommended (and continue to recommend), that Birketu and you also obtain independent legal advice inter alia as follows:

(i)   as to the advisability of you appointing us as your legal counsel in this matter, and on the issue of the potential conflicts of interests/duties that we do or may in future face, and that we meet your legal expenses in you so doing; and/or

(ii)   even if we do act for Birketu and you, you receive independent advice on a continuing basis on the legal work we do for you on this matter (ie in a sense “audit advice” or “looking over our shoulder advice”),

(c)   that the relevant conflicts issues be kept under review, and if necessary, Birketu and you do thereafter take additional independent legal advice on those issues, or that Birketu and you thereafter take legal advice and assistance more generally from another lawyer or law firm (including as referred to above); and

(d)   that Birketu and/or you understand that you are each at liberty at any time to seek and take legal advice and assistance from another lawyer or law firm, either in lieu of, or in addition to, this firm’s advice and assistance (but on the basis that Birketu and you are still liable for our fees and disbursements that are then or thereafter payable by Birketu or you for or in connection with legal work already done, as set out in this letter and its attachments).

We take this opportunity again to thank you for your instructions, and also your continuing confidence in this firm (despite the events and circumstances involving BJC which have so far come to light and become known to us and you), and look forward to working with you on this matter.

Yours faithfully

ATANASKOVIC HARTNELL

Amendments

16 March 2022 - Typographical errors amended: Caselaw; [71]; [72]; [92]; [131]; Schedule A

Decision last updated: 16 March 2022