Barnden v Tadrosse (No.2)
[2013] FCCA 744
•24 July 2013
FEDERAL CIRCUIT COURT OF AUSTRALIA
| BARNDEN v TADROSSE (NO.2) | [2013] FCCA 744 |
| Catchwords: BANKRUPTCY – Costs application – trustee seeks costs against bankrupt and his solicitors – whether indemnity costs should be awarded – indemnity costs ordered against bankrupt and his lawyers. |
| Legislation: Bankruptcy Act (1966), s.58. Federal Circuit Court of Australia Act (1999), s.79. Federal Circuit Court Rules (2001), r.21.07. Federal Circuit Court (Bankruptcy) Rules (2006), r.7.06. Legal Profession Act (1987), s.198M. |
| Cases cited: RDCW Diamond (Pty) Limited v Da Gloria [2007] NSWSC 1325 |
| Applicant: | ANDREW JAMES BARNDEN |
| Respondent: | GEORGE TADROSSE |
| File Number: | SYG 562 of 2013 |
| Judgment of: | Judge Altobelli |
| Hearing date: | 1 July 2013 |
| Date of Last Submission: | 1 July 2013 |
| Delivered at: | Sydney |
| Delivered on: | 24 July 2013 |
REPRESENTATION
| Counsel for the Applicant: | Mr Lloyd |
| Solicitors for the Applicant: | Downeys Lawyers |
| Counsel for Mitry Lawyers: | Mr Eardley |
| Solicitors: | Mitry Lawyers |
No appearance by or on behalf of the bankrupt
ORDERS
George Tadrosse and Mitry Lawyers are to jointly and severally pay the costs of Andrew James Barnden incurred in relation to the bankrupt’s application filed 20 March 2013 and dismissed on 22 March 2013 on an indemnity basis.
George Tadrosse and Mitry Lawyers are to jointly and severally pay the costs of Andrew James Barnden incurred in relation to his Application in a Case filed 23 May 2013 on a party/party basis as agreed or failing agreement as assessed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 562 of 2013
| ANDREW JAMES BARNDEN |
Applicant
And
| GEORGE TADROSSE |
Respondent
REASONS FOR COSTS JUDGMENT
Introduction
By way of an Amended Application in a Case filed by leave of the court on 1 July 2013, Andrew Barnden, the trustee in bankruptcy for George Tadrosse, seeks an order for costs against:
a)The bankrupt;
b)The bankrupt and Mitry Lawyers jointly and severally;
c)On an indemnity basis;
d)Or alternatively on an ordinary basis.
The bankrupt did not appear in the present application. By way of Grounds of Opposition to Application in a Case filed 20 June 2013 Mitry Lawyers opposes the orders sought against it by the trustee in bankruptcy.
Jurisdiction
Section 79 of the Federal Circuit Court of Australia Act (1999) states:
(1) This section does not apply to family law or child support proceedings or proceedings in relation to a matter arising under the Fair Work Act 2009 .
(2) The Federal Circuit Court of Australia or a Judge has jurisdiction to award costs in all proceedings before the Federal Circuit Court of Australia (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs must not be awarded.
(3) Except as provided by the Rules of Court or any other Act, the award of costs is in the discretion of the Federal Circuit Court of Australia or Judge.
Rule 21.07 of the Federal Circuit Court Rules (2001) states:
(1) The Court or a Registrar may make an order for costs against a lawyer if the lawyer, or an employee or agent of the lawyer, has caused costs:
(a) to be incurred by a party or another person; or
(b) to be thrown away;
because of undue delay, negligence, improper conduct or other misconduct or default.
(2) A lawyer may be in default if a hearing may not proceed conveniently because the lawyer has unreasonably failed:
(a) to attend, or send another person to attend, the hearing; or
(b) to file, lodge or deliver a document as required; or
(c) to prepare any proper evidence or information; or
(d) to do any other act necessary for the hearing to proceed.
(3) An order for costs against a lawyer may be made on the motion of the Court or Registrar, or on application by a party to the proceeding or by another person who has incurred the costs or costs thrown away.
(4) The order may provide:
(a) that the costs, or part of the costs, as between the lawyer and party be disallowed; or
(b) that the lawyer pay the costs, or part of the costs incurred by the other person; or
(c) that the lawyer pay to the party or other person the costs, or part of the costs, that the party has been ordered to pay to the other person.
(5) Before making an order for costs, the Court or Registrar:
(a) must give the lawyer, and any other person who may be affected by the decision, a reasonable opportunity to be heard; and
(b) may order that notice of the order, or of any proceeding against the lawyer be given to a party for whom the lawyer may be acting or any other person.
Summary of arguments
The trustee contends that Mitry Lawyers engaged in conduct contrary to r.21.07 in that they caused costs to be incurred by the trustee in defending proceedings which were doomed to fail, futile, had no prospects of success and was an application without merit. The trustee contends that he incurred costs because of the negligence, improper conduct or other misconduct or default of Mitry Lawyers.
Mitry Lawyers contends that it did not engage in conduct that falls within r.21.07 and that, in any event, no conduct on its part caused the trustee to incur costs.
Background
On 8 May 2012 a sequestration order was made against George Tadrosse and Andrew Barnden was appointed his trustee in bankruptcy.
On 20 March 2013 (over 10 months later) the bankrupt filed an application in which he sought, inter alia, to have the bankruptcy annulled and, on an interim basis, to restrain the trustee from selling what was, until the sequestration order was made, the bankrupt’s home at Kellyville.
On 22 March 2013 the application came before me and the bankrupt moved on an amended application filed in court that date seeking:
a)Interim orders restraining the trustee from selling the Kellyville property; and
b)Final orders seeking to extend the time for filing an application to review the decision of the court to make the sequestration order, setting aside the said decision, or alternatively the annulment of the bankruptcy.
On 22 March 2013 I dismissed the bankrupt’s application, provided ex tempore reasons, and these reasons were subsequently published as [2013] FCCA 207. In summary I dismissed the application because the bankrupt had no standing to bring the application, he had not in any event complied with r.7.06 of the Federal Circuit Court (Bankruptcy) Rules (2006), he was clearly insolvent, there would be significant prejudice to creditors, and there was otherwise insufficient evidence to support his contentions. No appeal has been filed in relation to my decision.
Evidence
The trustee’s application for costs was supported by an affidavit of Andrew James Barnden filed 23 May 2013 and David Downey filed by leave in court on 1 July 2013. The opposition by Mitry Lawyers was supported by affidavits of the principal of the firm, Rick Mitry filed 20 June 2013, and of Edward Yin filed 20 June 2013. Mr Yin was the solicitor having the carriage of the bankrupt’s application, under the supervision of Mr Mitry.
Mr Yin was cross-examined. He agreed in cross-examination that:
a)He was familiar with the Bankruptcy Act and in particular s.58;
b)He took instructions from the bankrupt and prepared his two affidavits sworn on 20 March 2013;
c)He saw him read the affidavits before he signed them, and was satisfied that he understood the contents;
d)The affidavits were sworn before him;
e)He wrote a file note recording that the bankrupt could not read English;
f)He believed the bankrupt could not speak or read English fluently;
g)In observations to counsel he recorded that the bankrupt was not fluent in English;
h)He believed the bankrupt understood specific little words;
i)Before swearing the affidavits, he had the bankrupt’s wife interpret for him as he read it out paragraph by paragraph;
j)He agreed that there was no attestation as to translation;
k)He was familiar with r.7.06 of the court’s Bankruptcy Rules and knew the bankrupt had not complied with the same;
l)There was a delay of five (5) weeks between the date of first instructions on 13 February 2013 and the date of filing of the application on 20 March 2013;
m)The bankrupt had no legal or equitable interest in the home he occupied;
n)There was no evidence of the bankrupt’s solvency;
o)There was no evidence to justify the granting of leave to review the Registrar’s decision out of time;
Mr Yin would not accept, however, that the bankrupt did not have standing to bring the application, and believed his standing was as occupant of the property.
Trustee’s submissions
The trustee submitted that having regard to the reasons for dismissing the bankrupt’s application, and the evidence of Mr Yin, r.21.07 had been established. At the very least there was “improper conduct or other misconduct”. I did not understand counsel for the trustee to be submitting that there was no other ground under r.21.07 that was established by the evidence, but rather that the specified ground certainly was established.
Counsel referred the court to the decision of Federal Magistrate McInnis in Mahoney v CP White (No. 2) [2005] FMCA 1578 (28 October 2005) at paragraphs 16-17 where his Honour said:
16. Hence in my view the failure to make a proper assessment according to law of the prospects of success of this application and bringing the application on before the court as a matter of urgency together with the complete failure to provide any or any adequate affidavit material is sufficient to constitute what I would regard as "improper conduct or other misconduct" for the purpose of rule 21.07. Having made that finding it follows in my view that in this instance the court should make the orders requested by the respondents that the applicant’s lawyer pay the costs in the amount claimed. I further find and accept that in the exercise of my discretion prejudice may arise to creditors if the court were to merely make an order that those costs be paid out of the bankrupt estate.
17. In making urgent application’s seeking to review of a decision of a trustee under s.178 of the Act lawyers acting for parties must realise that that it is a significant application that must be properly considered and supported by appropriate affidavit evidence. In this instance there has been a failure to both properly consider the law in relation to the matter and, in my view, a complete failure to file and serve appropriate affidavit evidence in support of the application.
Counsel for the trustee was particularly critical of Mr Yin’s conduct in taking instructions from the bankrupt who could not read written English and who had difficulty with spoken English. By inference the steps taken by Mr Yin – using the bankrupt’s wife to assist with translation – was inadequate.
Submissions for Mitry Lawyers
In short counsel for the lawyers submitted that r.21.07 was not enlivened because the evidence disclosed no “undue delay, negligence, improper conduct or other misconduct or default”, there was no evidence that the alleged conduct has “caused costs” to be incurred, and in any event Mitry Lawyers was entitled to rely on the counsel who they had briefed.
Consideration
There can be no doubt that the jurisdiction to order costs against a lawyer is a jurisdiction that must be exercised “with care and discretion and only in clear cases”: Ridehalgh v Horsfield [1994] Ch 205 (at 229); Re Bendeich [1994] FCA 1504; (1994) 53 FCR 422; Deputy Commissioner of Taxation v Levick [1999] FCA 1580; (1999) 168 ALR 383 per Hill J at [11]; Levick v Deputy Commissioner of Taxation [2000] FCA 674; (2000) 102 FCR 155 at [44]; Gitsham v Suncorp Metway Insurance Ltd [2002] QCA 416 at [8] per White J (with whom Davies and Williams JJA agreed); De Sousa v Minister for Immigration [1993] FCA 146; (1993) 41 FCR 544; Money Tree Management Service Pty Ltd v Deputy Commissioner of Taxation (No 3) [2000] SASC 286.
The question before the court is whether there is evidence of conduct that falls within the purview of r.21.07. Thus principles that have been developed in other statutory contexts (such as s.198M of the Legal Profession Act 1987) are not necessarily determinative. Section 198M, for example, is focussed on whether a lawyer “has provided legal services to a party without reasonable prospects of success”. That is a concept not reproduced in r.21.07 which focuses on conduct having a certain result. That is not to say, of course, that absence of reasonable prospects of success is not an indicia of “negligence, improper conduct or other misconduct”. It does seem, however, that r.21.07 is broader in its scope than the former s.198M of the Legal Profession Act. Some of the principles developed in interpreting the former s.198M are still useful of course. Thus in Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300 at paragraph 92 the following two general principles are apposite:
a)That a legal representative is not to be held to have acted improperly, unreasonably or negligently simply because he or she acts for a party who pursues a claim or a defence which is plainly doomed to fail; and
b)The legal practitioner is not the judge of the credibility of the witness or the validity of the argument.
These are two important principles that inform the interpretation of r.21.07 but which must yield, in an appropriate case, to the wording of r.21.07. In applying these principles to r.21.07 it suggests that the conduct in question must go beyond merely acting for a client whose case was doomed to fail, and must not impose too high a standard on the solicitor on matters of credibility and validity of argument.
None of this can be construed as licence to conduct litigation capriciously, or indifferently to the public interest, or the private interest of other litigants including the trustee in this case. The trustee’s role, after all, is to protect the interests of creditors, an important public policy consideration itself.
In the same way as McColl JA at paragraph 142 in Lemoto recognised that the purpose of the provisions in the Legal Profession Act that the court was there considering was to deter the legal practitioner from representing a client whose claim had no reasonable prospects of success, it should be recognised that r.21.07 has a purpose of deterring lawyers from certain types of conduct. The language of these provisions may well be different but the purpose is arguably the same. Whilst a relevant policy consideration is the desirability of having clients legally represented even in hopeless claims (paragraph 141 of Lemoto) Rothman J succinctly identified the relevant principle as “…the purpose of legal representation is to aid the administration of justice, not to frustrate it”; RDCW Diamond (Pty) Limited v Da Gloria [2007] NSWSC 1325 (28 November 2007) at para.22.
In any event the trustee’s argument goes beyond mere considerations of pursuing hopeless claims. The other misconduct complained of derives from the solicitor’s knowledge of the bankrupt’s limited understanding of the English language. This is an important consideration that goes to the heart of whether the bankrupt was likely to have understood the potential consequences of the claim he wanted to bring. There is no evidence of any attempt by the lawyers to reality test the bankrupt’s instructions. There is no evidence that the lawyers advised the bankrupt of the possible consequences of his proposed application. There is certainly no evidence that they advised him not to proceed as he did. All of this evidence ought sensibly to have been led by the lawyers in the context of a r.21.07 claim but they did not.
The court is entitled to infer that no evidence was led because none of these things took place. Indeed in view of the formidable language difficulties that existed, and the way in which they chose to communicate with their client, one wonders whether these issues could ever have been properly communicated in the first place.
The use of the bankrupt’s wife as an interpreter does not mitigate this problem. She was hardly a disinterested bystander as her home was the subject of the litigation. She owed none of the professional obligations that a properly trained and qualified interpreter owes. It is no answer to say that it is not necessarily negligent for a lawyer to have acted as he did in this case: Proudent Capital Ltd v Nanmovski [2013] NSWSC 40 (8 February 2013) at paragraph 348-349. The question is not whether the lawyer was professionally negligent but whether, in all the circumstances of this case, the lawyer’s actions amount to “improper conduct” or “misconduct” for the purposes of r.21.07.
On the evidence before the court it is not possible to conclude that the bankrupt was fully informed about the litigation and its potential consequences. The lawyers must take some responsibility for that. When all the evidence of Mr Yin is considered he must have known that there were difficulties in the case and yet he did not even take the precaution of reasonably satisfying himself that the bankrupt properly understood what was going on. Not only was there no apparent reality testing of the client’s case, there was not even the communication medium available for that to occur. This is, in the court’s opinion, improper conduct in the context of this case, for the purposes of r.21.07.
The litigation was carried on with seeming indifference to its impact on others. The interests of the trustee and creditors were ignored. The public interest in utilisation of scant court resources was ignored. Whilst it is only speculation, one wonders whether the bankrupt’s possible indifference to a costs order against him was the limit of consideration of the consequences. One purpose of r.21.07 is to change this indifference.
The other main argument advanced on behalf of Mitry Lawyers is that there was no evidence that any conduct of the lawyers for the purposes of r.21.07 “caused” the trustee to incur costs. Counsel for Mitry Lawyers referred the court to Kelly v Jarett [2009] NSWCA 278 at [61], but the principle is self-evident from r.21.07 itself as was recognised by Federal Magistrate Barnes (as she then was) in Hankuk Grocery Pty Ltd v Minister for Immigration & Anor [2008] FMCA 496 (18 April 2008).
The issue of causation is plainly relevant to a consideration of r.21.07. Counsel submits that the bankrupt was always going to bring the application given the consequences to him of the loss of the house he was occupying. Counsel reminded me of the bankrupt’s conduct in court on 22 March 2013 when he was telling his counsel to say and do certain things. It is true that the bankrupt was animated at times during the hearing. That does not establish, however, that he would have brought the application himself. That is a hypothetical proposition. There is no evidence to this effect. Having regard to the bankrupt’s difficulties with the English language the court does not accept the likelihood of the bankrupt having initiated any application on his own.
The question of causation must be viewed realistically, not hypothetically, and by reference to the evidence before the court. But for the lawyers’ improper conduct the present litigation would not have been commenced and the trustee would not have incurred the costs he has.
Finally counsel for Mitry Lawyers contends that a discretionary factor is that the solicitors relied on counsel’s advice. This principle is based on paragraph 87 of the reasons of Basten JA in Fowler v Toro Constructions Pty Ltd [2008] NSWCA 178 where his Honour said:
Although her Honour stated, no doubt correctly, that a solicitor responsible for litigation cannot hide behind the coat tails of counsel, the fact that he obtained counsel’s advice; the fact that he and counsel were of the same opinion at all critical times and the fact that no order is sought against counsel are all factors which militate against the conclusion that the solicitor had alleged a fact without “a proper basis”.
Counsel involved in the application were experienced counsel in the sense that they had both been admitted to the Bar in 1988. There is no evidence, however, about their experience and expertise in bankruptcy. Mr Yin gave evidence that he did raise with one of the counsel the issue of prospects of success. Apparently no advice was given in writing. In Mr Yin’s affidavit he deposes to counsel giving advice in conference on 19 Mach 2013 that there was a good case against the trustee. He gives further evidence of the advice given in conference on 20 March 2013. What is absent from the evidence about the advice given is whether, and if so how, the solicitors and counsel considered the issues of standing, non-compliance with r.7.06 and solvency. All of which were critical to the success of the bankrupt’s application.
The issue before the court is whether the lawyer engaged in conduct described in r.21.07 that caused the trustee to incur costs. The role of counsel is advanced as a discretionary factor going to the exercise of the court’s jurisdiction under r.21.07. The court cannot see why merely relying on counsel’s advice should militate against the lawyers’ liability when the statutory context is one of deterrence of certain conduct. What difference does this make from the trustee’s perspective, or the public interest in avoiding unnecessary use of court time and resources? Based on the available evidence before the court counsel may well have ignored the same issues that the lawyers ignored, but that is no reason not to make the lawyers liable. This is a case where the lawyers “cannot hide behind the coat tails of counsel”.
Conclusion on r.21.07
Having regard to the above the court concludes that Mitry Lawyers has caused the trustee to incur costs because of “improper conduct or other misconduct”. This determination is, of course, strictly limited to the r.21.07 context. It is intended to have no bearing on issues of professional conduct or negligence generally.
Indemnity costs?
The trustee submits that indemnity costs should be awarded. The principles applicable to such orders are found in Colgate-Palmolive Company v Cussons Pty Ltd [1993] FCA 536 at paragraph 24.
It seems to me that the following principles or guidelines can be distilled out of the authorities to which I have referred:-
1. The problem arises in adversary litigation, i.e. litigation as between parties at arm's length. Different considerations apply where parties may be found to be entitled to the payment of their costs out of a fund or assets being administered by or under the control of a trustee, liquidator, receiver or person in a like position, eg. a government agency or statutory authority.
2. The ordinary rule is that, where the Court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis. In this Court the provisions of Order 62, rules 12 and 19, and the Second Schedule to the Rules will apply to the taxation. In many cases the result will be that the amount recovered by the successful party under the Order will fall short of (in many cases well short of) a complete indemnity.
3. This has been the settled practice for centuries in England. It is a practice which is entrenched in Australia. Either legislation (perhaps in the form of an amendment to rules of Court) or a decision of an intermediate court of appeal or of the High Court would be required to alter it. No doubt any consideration of whether there should be any change in the practice would require the resolution of the competing considerations mentioned by Devlin LJ in Berry v. British Transport Commission and Handley JA in Cachia v. Hanes on the one hand and by Rogers J in Qantas on the other. The relevant passages from the respective judgments have been earlier referred to.
4. In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here or in England. The tests have been variously put. The Court of Appeal in Andrews v. Barnes (39 Ch D at 141) said the Court had a general and discretionary power to award costs as between solicitor and client "as and when the justice of the case might so require." Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v. Preston ((1982) 1 All ER at 58) namely, there should be some special or unusual feature in the case to justify the Court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at 8) in Tetijo, "The categories in which the discretion may be exercised are not closed". Davies J expressed (at 6) similar views in Ragata.
5. Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v. Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v. Hutchinson (1987) 10 NSWLR 525, Maitland Hospital v. Fisher (No. 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal), Crisp v. Keng (Supreme Court of New South Wales, 27 September 1993, unreported, Court of Appeal) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.
6. It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice.
Counsel for the trustee submits that the present case is an example of proceedings commenced in wilful disregard of known facts or clearly established law. Another basis might be, however, the refusal to accept the offer to compromise the case. By way of an email dated 21 March 2013 the trustee’s solicitor invited Mr Yin to withdraw the application failing which indemnity costs would be sought from 21 March 2013.
Indemnity costs should not lightly be ordered. However this is a case which, in the court’s opinion, falls within the formulation for cases where indemnity costs should be ordered or set out at paragraphs 16-21 of Colgate-Palmolive. It is a case where the bankrupt, if he had been “properly advised, should have known he had no chance of success”. It was a case that “was paper thin”. On the evidence before the court the lawyers are as culpable as the bankrupt for the costs incurred by the trustee.
I certify that the preceding thirty -six (36) paragraphs are a true copy of the reasons for judgment of Judge Altobelli
Associate:
Date: 24 July 2013
2
20
0