Carpathian Resources Ltd v Hendriks
[2012] FCA 496
•15 May 2012
FEDERAL COURT OF AUSTRALIA
Carpathian Resources Ltd v Hendriks [2012] FCA 496
Citation: Carpathian Resources Ltd v Hendriks [2012] FCA 496 Parties: CARPATHIAN RESOURCES LTD (ACN 080 273 703) and HIGHMOOR BUSINESS CORPORATION v MICHAEL PETRUS HENDRIKS, CHARLES POSTERNACK and JAMES PAUL WIBERG File number: WAD 405 of 2010 Judge: MCKERRACHER J Date of judgment: 15 May 2012 Catchwords: COSTS - Federal Court Act 1976 (Cth) s 43 – consideration of circumstances when court will exercise its discretion to award costs against a non-party – whether costs should be awarded against unsuccessful respondents’ solicitors – whether it was a ‘serious dereliction of duty’ for solicitors to accept retainer from directors when at the time of accepting retainer and commencing proceedings there was a dispute as to whether directors were validly appointed to and removed from company board – solicitors given notice that there would be a costs claim against them at the time of commencing unauthorized proceeding
Held: the issue of whether or not there was authority could only be conclusively determined at trial and that costs should not be awarded against the solicitors
Legislation: Federal Court of Australia Act 1976 (Cth) s 43 Cases cited: Bagley v Pinebelt Pty Ltd [2000] NSWSC 655
Caboolture Park Shopping Centre Pty Ltd (In Liq) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224
Carpathian Resources Ltd v Hendriks (2011) 81 ACSR 542
Cook v Pasminco Ltd (No 2) (2000) 107 FCR 44
De Sousa v Minister for Immigration, Local Government & Ethnic Affairs (1993) 41 FCR 544
Deputy Commissioner of Taxation v Institute of Tax Research Pty Ltd (in liq) [2001] SASC 118
Gersten v Minister for Immigration & Multicultural Affairs [2000] FCA 922
Guss v Geelong Building Society (in liq) [2001] VSC 288
Harley v McDonald [2001] 2 WLR 1749
Knight v FP Special Assets Ltd (1992) 174 CLR 178
Lai v Tiao (No 2) [2009] WASC 22 (S2)
Lai v Tiao [No 2] [2009] WASC 22 (S)
Levick v Commissioner of Taxation (2000) 102 FCR 155
McKewins Hairdressing and Beauty Supplies Pty Ltd (in liq) v Deputy Commissioner of Taxation (2000) 171 ALR 335
Medcalf v Mardell [2003] 1 AC 120
Mifsud v Chemplex Australia Ltd [1999] VSCA 175
Montevento Holdings Pty Ltd v Scaffidi Holdings Pty Ltd (No 2) [2010] WASC 180
Myers v Elman [1940] AC 282
MZWOR v Minister for Immigration and Multicultural and Indigenous Affairs [2005] FMCA 845
Nelson v Nelson [1997] 1 All ER 970
Nominal Defendant v Kisse [2001] QDC 290
R v Dunstan (No 2) (2000) 112 A Crim R 63
Re Bendeich (No 2) (1994) 53 FCR 422
Ridehalgh v Horsefield [1994] Ch 205
Waterless Systems (Aus) Pty Ltd v Mulholland [2001] QSC 41
Wentworth v Rogers [1999] NSWCA 403
White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169
Zimmerman Holdings v Wales [2002] NSWSC 447Date of hearing: Determined on the papers Date of last submissions: 3 May 2011 Place: Perth Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 48 Counsel for the Applicants/Cross Respondents: ML Bennett with MP Bruce Solicitor for the Applicants/Cross Respondents: Lavan Legal Counsel for Respondents/Cross-Claimants: P Tottle with Y Fang Solicitor for the Respondents/Cross-Claimants: Tottle Partners
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 405 of 2010
BETWEEN: CARPATHIAN RESOURCES LTD (ACN 080 273 703)
First Applicant/Cross-RespondentHIGHMOOR BUSINESS CORPORATION
Second Applicant/Cross-RespondentAND: MICHAEL PETRUS HENDRIKS
First Respondent/Cross-ClaimantCHARLES POSTERNACK
Second Respondent/Cross-ClaimantJAMES PAUL WIBERG
Third Respondent/Cross-Claimant
JUDGE:
MCKERRACHER J
DATE OF ORDER:
15 MAY 2012
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1.The applicants/cross-respondents do pay the costs of the respondents/cross-claimants of the proceedings to be taxed if not agreed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 405 of 2010
BETWEEN: CARPATHIAN RESOURCES LTD (ACN 080 273 703)
First Applicant/Cross-RespondentHIGHMOOR BUSINESS CORPORATION
Second Applicant/Cross-RespondentAND: MICHAEL PETRUS HENDRIKS
First Respondent/Cross-ClaimantCHARLES POSTERNACK
Second Respondent/Cross-ClaimantJAMES PAUL WIBERG
Third Respondent/Cross-Claimant
JUDGE:
MCKERRACHER J
DATE:
15 MAY 2012
PLACE:
PERTH
REASONS FOR JUDGMENT
INTRODUCTION
Following an urgent hearing in this proceeding (Carpathian Resources Ltd v Hendriks (2011) 81 ACSR 542) declarations were made to the following effect:
1.Maximiliaan Henri Danishevski, Mitchell Aaron Hammer, David Eric Hammer, Hon. Timothy Charles Thornton Lewin, Kirill Dragun, Luigi Gagliardo, Paul DeCailly and Guido Vivi are not and have not been directors of Carpathian Resources Ltd.
2.Michael Petrus Hendriks has not been a director of Carpathian Resources Ltd since the conclusion of the general meeting of Carpathian Resources Ltd held on 16 December 2010.
3.Each of James Paul Wiberg and Charles Posternack was and is a director of Carpathian Resources Ltd.
4.No resolutions were validly passed at the Annual General Meeting of Carpathian Resources Ltd on 17 December 2010.
The application was dismissed and the Australian Securities and Investments Commission (ASIC) was directed to rectify the Register containing the names of directors of the first applicant/cross-respondent (Carpathian) to give effect to the declarations concerning the directorships.
Additionally, a costs order was foreshadowed (but not made) to the effect that the applicants/cross-respondents (the applicants) were to pay the costs of the respondents/cross-claimants (the respondents) of the proceeding to be taxed if not agreed. Subsequent to the main orders being made, the parties exchanged written submissions concerning special costs orders which might be made against the solicitors for the unsuccessful applicants (the Solicitors). The respondents who succeeded in the proceeding, in addition to seeking costs against the applicants, seek costs against the Solicitors. Similar relief is also sought by Carpathian, now represented by different solicitors and constituted by a different board of directors. It would appear that the parties submitted to the Court that the foreshadowed costs order would work an injustice because the successful respondent directors replaced the unsuccessful applicant directors and would, therefore, at least in part, be indirectly paying their own costs despite their success.
In consequence of entirely unrelated events occurring since the exchange of submissions between the parties, the primary judge has recently recused himself from resolving/determining the costs question and so advised the parties last month. I have agreed to resolve the costs question in his place.
NATURE OF THE CLAIM
Shortly put, the claim against the Solicitors is that:
·those purporting to control Carpathian were never lawfully authorised to do so;
·notice to that effect in advance of the proceeding and after they were instituted was given to the Solicitors together with notice that costs would be claimed against them personally;
·the Solicitors nevertheless proceeded without an authorised retainer; and in addition
·the Solicitors have failed to put on any evidence as to the steps they took to satisfy themselves that they could properly be retained in those circumstances.
While there is no doubt that costs can be awarded against solicitors in such circumstances, in my view, this is not such a case. Shortly put, it is clear from the reasons for judgment that the only means by which the issue of appointment of the directors could be conclusively determined in the absence of some consent was by resolution of those issues at trial. This required a determination as to whose evidence and argument was to be preferred. In particular, the context and effect of exchanges occurring at an Annual General Meeting of Carpathian (the AGM) held shortly before proceedings were issued was to be unravelled and determined at trial.
ARGUMENTS IN SUPPORT OF THE CLAIM FOR COSTS AGAINST THE SOLICITORS
The respondents’ application is supported by an affidavit of the first respondent/cross-claimant (Mr Hendriks) in which he confirms that the Solicitors acted for the second applicant/cross-respondent (Highmoor) and Mr Danishevski when Carpathian commenced the proceedings to restrain Highmoor from holding a meeting of members of Carpathian which had been convened by Highmoor for 23 November 2010 and postponed by Carpathian to 16 December 2010. He deposes to the fact that at the Carpathian AGM held in Sydney on 17 December 2010, Mr David Hammer, the corporate representative for Highmoor tendered and relied on a letter from the Solicitors to Mr Danishevski and Highmoor of 17 December 2010 which stated that Mr Hendriks was not a director and, accordingly, not eligible to chair the AGM.
Following the AGM on 17 December 2010, Mr David Hammer made an announcement to the Australian Securities Exchange Limited (ASX) that the resolutions appointing him and seven other Highmoor nominees as directors of Carpathian had been passed at the AGM. Following that announcement, Mr Hendriks, in turn, made an announcement to the ASX that the third respondent/cross-claimant (Mr Wiberg) and he had been elected and that Mr David Hammer and the persons listed in his announcement were not directors of Carpathian.
Mr Hendriks deposes to his belief that in light of those matters and the nature of the relief sought against the respondents to restrain them from holding themselves out as directors of Carpathian, the Solicitors would have known on 20 December 2010 when they issued this proceeding in the name of Carpathian as applicant that there were real issues as to:
·who the actual directors of Carpathian were;
·who had authority to make the decision to bring the application on behalf of Carpathian; and
·who had authority on behalf of Carpathian to instruct solicitors in relation to the action.
I accept that this must be so. Indeed, it is rather to state the obvious as that was the very argument to be resolved by issuing the proceeding.
Mr Hendriks became aware on 20 December 2010 of the entries made to the Register maintained by ASIC in relation to Carpathian indicating that the respondents had ceased to be directors of Carpathian. Those matters had not, of course, been lodged by any of the respondents.
Mr Hendriks then instructed the respondents’ solicitors to advise ASIC that the change of officers was not authorised. No steps were taken by ASIC to rectify its Register in relation to Carpathian until after it was served with the initial orders made in the primary judgment.
Additionally, the respondents rely upon notice being given to the Solicitors on 11 January 2011 that an application would be made for the Solicitors to pay their costs of the proceeding in the event that it was found that the persons contending they had been appointed as directors of Carpathian were not directors. The Court has so declared. In the circumstances, the respondents argue that the Solicitors should be jointly and severally liable together with Highmoor for the respondents’ costs in the proceeding. Carpathian, as now constituted and as now represented, argues alternatively that if Carpathian is liable, the Solicitors should indemnify it.
In response to submissions raised for the Solicitors, the respondents stress, not only did the Solicitors know that there was a dispute as to who the directors of Carpathian were when it issued the proceeding, a fact which cannot be doubted, but also argue that in those circumstances they owed a further duty to inquire about their retainer. In the circumstances of being aware of the dispute as to who were the directors of Carpathian at the time of issuing the proceeding, the respondents contend that it was incumbent on the Solicitors to show what steps they took to establish that those directors of Carpathian ‘as then appointed and notified to ASIC and appearing on ASIC’s Register’ were, in fact, in a position to give those instructions.
The respondents stress that there is no evidence as to which of the directors instructed the Solicitors to issue the proceeding. Nor is there evidence as to the circumstances under which the Solicitors accepted the instructions or the basis for the Solicitors’ belief that the directors were authorised to give the instructions on behalf of Carpathian. Finally, the respondents submit that there is no indication as to what steps the Solicitors took to consider and establish on a proper basis that those directors were in fact in a position to instruct to commence the proceeding in the name of Carpathian.
The respondents rely upon the observations of Bryson J in Zimmerman Holdings v Wales [2002] NSWSC 447 (at [11]-[17]) where his Honour ordered solicitors to pay the costs of the defendants on the basis that they were aware from early in the piece that there was an issue as to the capacity of two directors to properly retain the solicitors and the latter were in a better position than the defendants to determine whether they were retained with authority. In his Honour’s view the solicitors’ responsibility was to determine whether those purporting to retain them were authorised to do so particularly ‘as there were means of inquiry … available to them which they did not follow up in an effectual way’ (at [17]). The respondents contend that the Court should infer, as Bryson J did in Zimmerman, that no steps were taken, or taken in any effectual way, by the Solicitors to satisfy itself that it was properly retained to pursue the proceeding.
CONSIDERATION
The circumstances in which instructions were taken
An important feature of this debate is the timing of events and relative speed with which the parties acted following the highly unsatisfactory AGM of Carpathian on 17 December 2010. The key findings and conclusions of the trial judge illustrate the chaotic circumstances which were urgently required to be resolved. Those findings and conclusions are:
The course of the AGM
157 What occurred at the offices of Carpathian on 17 December, in an attempt to conduct the AGM, was variously intemperate, confused, unruly and disorderly. By reason of reg 40, as I have construed it, the members who were present were required to choose one of their member to be chairperson. The attempts to achieve that were ambulatory. Mr Hammer voted for himself. Mr Robertson said words to the effect that he "nominated" Mr Hammer. No show of hands as to this nomination was called for by anyone. Mr Robertson did not raise his hand. Indeed, Mr Hammer called for a show of hands from those who were against his appointment. Ms Davies raised her hand and said she voted against Mr Hammer's appointment and said she supported Mr Hendriks. Mr Hammer said the motion to appoint him chairperson had been carried. There were then heated exchanges between Mr Beaumont and Mr Hammer concerning the application of the constitution. Mr Beaumont called for a poll. Mr Robertson then said that he withdrew his support for Mr Hammer. Poll forms were distributed by Mr Beaumont and his assistant. A poll was purportedly taken following which everyone except Mr Hammer left the room.
158 In my opinion the members who were present did not choose one of their number to be chairperson. Whilst Mr Robertson "nominated" Mr Hammer he then withdrew this because the meeting was in such disorder. There was no "motion" as Mr Hammer had described it. He had actually called for a show of hands from those against his appointment rather than for his appointment. A number of those there were talking over one another. The events I have described occurred over a very short period of time. In these circumstances it is artificial to say, as the applicants do, that Mr Robertson could not withdraw his nomination of Mr Hammer once it had been initially given. Mr Wrigley, a solicitor, and one of HBC's corporate representatives, according to Ms Davies, whose evidence I accept, stated at the meeting that it did not have a chairman. What occurred was, in the overall, a confused attempt by the members present to choose a chairperson. It failed. The appointment of a chairperson is an indispensable part of any meeting: Colorado Constructions Pty Ltd v Platus [1966] 2 NSWR 598 at 600.
159 It was, by the terms of the several proxies which he held, only if he was appointed chairperson that Mr Hammer would have become the duly appointed proxy of 5 members. That did not occur.
160 Mr Beaumont's interventions, whether in what he said variously to Mr Hammer, or in his calling for a poll were without authority under the constitution. I do not doubt that he thought he was acting appropriately on behalf of his client but his actions were ill advised, misinformed and significantly added to the disorder. He was a stranger to the meeting. This is not a case where a group of members deliberately orchestrated events in order to disrupt the meeting. Mr Hammer, on the other hand, was intent on purporting to act as chairperson in circumstances where it was, or should have been, clear to him that he did not have the support of the members who were present for his chairmanship at a time before he purported to conduct the business of the meeting in the absence of those others who had been present at the beginning.
161 I find that Mr Beaumont had no authority to purport to close the meeting pursuant to reg 42.
162 Rather, the meeting, in the circumstances which I have described, fell into complete disarray and should be treated as adjourned: Colorado Constructions at 601.
163 I regard the purported poll taken as tainted by fundamental procedural irregularity. It was called by Mr Beaumont who had no authority to do so. Only Mr Hammer or Ms Davies could have called for a poll under reg 44.1 of the constitution. Neither did so. Under reg 44.2 only the chairperson had authority to direct when and where a poll shall be taken. It was called for at a time when Mr Hammer was claiming to be chairperson. That was in dispute. Neither Mr Hammer nor the members he purported to represent by proxy participated in the poll. Resolutions purportedly carried as a result of the purported poll are of no effect. More importantly, I have found that the indispensable requirement that the AGM have a chairperson had not been met. I do not regard that merely as a procedural irregularity. I do not regard the relief, in these circumstances, under s 1322 of the Corporations Act as apt.
164 It follows for all these reasons that the AGM effected no business on the 17 December. None of the resolutions in the Notice of AGM nor those purportedly put by Mr Hammer were validly carried. It will be necessary for Carpathian to convene a further AGM.
Broadly speaking, the response of the Solicitors is that its conduct does not warrant the exercise of any discretion to order costs against them. It issued proceedings on instructions received from the directors of Carpathian, as then appointed and notified to ASIC and appearing on ASIC’s Register. Secondly, it contends that the conduct in itself was not causative of the costs sought as the litigation was inevitable. Thirdly, it is argued that if the conduct did warrant an exercise of the Court’s discretion and was causative, the Court should not exercise its discretion because the Solicitors were not the ‘real party’ to the proceeding.
It is further argued that the Solicitors were not in ‘serious dereliction’ of the duties they owed to the Court.
The power to order costs against solicitors
It is clear that the Federal Court Rules 2011 (as with the previous Rules) do confer power to award costs against a non-party including a lawyer: De Sousa v Minister for Immigration, Local Government & Ethnic Affairs (1993) 41 FCR 544 and Caboolture Park Shopping Centre Pty Ltd (In Liq) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224. In White Industries the Full Court noted (at 229) that there was no reason to doubt that s 43 of the Federal Court of Australia Act 1976 (Cth) conferred upon the Court jurisdiction to award costs, not only against persons who are parties but also against persons who are not. The Court observed that the section is no narrower than the provisions of O 91 r 1 of the Rules of the Supreme Court of Queensland considered by the High Court in Knight v FP Special Assets Ltd (1992) 174 CLR 178. Although this Court is invested with a broad costs jurisdiction compared with some State courts, similar principles have been universally applied (for example, see Wentworth v Rogers [1999] NSWCA 403).
In Myers v Elman [1940] AC 282, a variety of expressions was used to cover the circumstances in which the court’s exercise of its discretion to award costs against a solicitor may be warranted. Viscount Maugham considered that it was only in cases of ‘serious dereliction of duty’ (at 292) where the discretion might be exercised. Lord Wright referred to conduct ‘which involves a failure on the part of a solicitor to fulfil his duty to the Court and to realise his duty to aid in promoting in his own sphere the cause of justice’ (at 319). The expression used by Viscount Maugham has been adopted on a number of occasions in Australian cases such as De Sousa.
In White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169 (at 239), Goldberg J held that the nature of the jurisdiction is enlivened when the unsuccessful party’s solicitors have unreasonably initiated or continued an action when it has no or substantially no prospects of success. However, Goldberg J emphasised that an analysis of the cases makes it clear that:
such unreasonableness must relate to reasons unconnected with success in the litigation or to an otherwise ulterior purpose or to a serious dereliction of duty or serious misconduct in promoting the cause of and the proper administration of justice’.
It is a relevant serious dereliction of duty or misconduct not to give reasonable or proper attention to the relevant law and facts in circumstances where, if such attention had been given, it would have been apparent that there were no worthwhile prospects of success.
If proceedings are commenced or continued without proper regard to the chances of success or failing to give proper attention to the law, this may, in all the particular circumstances of any given case, trigger the exercise of a discretion to order a legal practitioner to pay the cost occasioned by that action. However, the respondents do not point to any error of this nature. There are no indications of any failures to have regard to the proper law such as in Bagley v Pinebelt Pty Ltd [2000] NSWSC 655 or in a variety of other cases: Levick v Commissioner of Taxation (2000) 102 FCR 155; R v Dunstan (No 2) (2000) 112 A Crim R 63; Deputy Commissioner of Taxation v Institute of Tax Research Pty Ltd (in liq) [2001] SASC 118; Mifsud v Chemplex Australia Ltd [1999] VSCA 175 [1999] VSCA 175; De Sousa; Cook v Pasminco Ltd (No 2) (2000) 107 FCR 44; and MZWOR v Minister for Immigration and Multicultural and Indigenous Affairs [2005] FMCA 845.
Costs orders have also been made against practitioners in circumstances where the litigation has not been conducted with due propriety. No such indication is apparent in this circumstance, in contrast, for example, to Re Bendeich (No 2) (1994) 53 FCR 422; McKewins Hairdressing and Beauty Supplies Pty Ltd (in liq) v Deputy Commissioner of Taxation (2000) 171 ALR 335; Waterless Systems (Aus) Pty Ltd v Mulholland [2001] QSC 41; Harley v McDonald [2001] 2 WLR 1749; Guss v Geelong Building Society (in liq) [2001] VSC 288; Gersten v Minister for Immigration & Multicultural Affairs [2000] FCA 922; Wentworth; Nelson v Nelson [1997] 1 All ER 970 (at 976-978 per Waller LJ); Lai v Tiao [No 2] [2009] WASC 22 (S); and Nominal Defendant v Kisse [2001] QDC 290.
As French J (as his Honour then was) held in De Sousa, the jurisdiction should only be exercised with caution and in clear cases and, in particular, his Honour (at 548) adopted the test of ‘serious dereliction of duty’.
It has been noted that the speed at which and the stress under which legal practitioners have to carry out many of their functions, particularly in relation to litigation emphasises that it is undesirable in minor lapses or errors of judgement under stress that there should be exercise of the jurisdiction (per Hamilton J in Bagley (at [26]). In that case, a three stage process was applied enquiring, first, as to whether the conduct is such as to attract the court’s jurisdiction to order costs against a legal practitioner personally (i.e. whether the conduct of the legal practitioner amounts to serious dereliction of duty beyond ‘mere negligence’ or error of judgment). Secondly, the court must enquire as to whether the conduct was causative of the costs complained of and, thirdly, the court may consider whether in all the circumstances it ought to make a personal costs order.
The Solicitors stress that they commenced the proceeding on an urgent basis from the registered directors of the company. The Solicitors also say that the registration of the directors appears to have occurred without opposition from the current directors. This is not correct. There is evidence that opposition was clearly conveyed to ASIC. The Solicitors point to the fact that the records of the directors of a company held by ASIC constitute prima facie evidence of the directorships pursuant to s 1274B(2) and s 1274C of the Corporations Act 2001 (Cth) but this is incidental. It is obvious that the Solicitors were clearly aware that there was a dispute as to legitimacy of the directorships at the date they received instructions. But that is by no means an end to the matter.
There is evidence that the purported directors who provided instructions also provided to the Solicitors resolutions of the company’s board on the company’s letterhead confirming their positions as directors. They provided written instructions on the company’s letterhead to seek declaratory relief. In those circumstances, the Solicitors say they acted in good faith in accepting the instructions on behalf of the registered directors of Carpathian.
Simply commencing proceedings without authority may fall within the category of failing to conduct litigation with due propriety but the cases considering these circumstances almost invariably require that some negligence in establishing due authorisation be established. See the discussion in De Pont, Lawyers; Professional Responsibility (LBC, Sydney, 2001) (at 375-376).
Nelson v Nelson concerned an English firm of solicitors who innocently issued proceedings on behalf of an undischarged bankrupt. In that decision, the Court of Appeal held that a degree of negligence or fault was relevant in determining liability. This approach has been followed in Australia: see, for example, Kisse where solicitors who were the subject of a costs award had issued proceedings in a deceased’s name, not in the name of the personal representative of the estate. The proceedings, accordingly, were a nullity. What was central was that the solicitor concerned knew that the deceased was dead at the time of issuing the proceedings.
As noted in Flower & Hart (at 236) every person is ‘entitled to have a practitioner act for him or her even in an unmeritorious case’. Even if there is some specific error of judgement demonstrated at or around the time the warning was given, it is not errors of judgement which attract the exercise of the jurisdiction to award costs against the solicitor but, rather, errors of duty owed to the court (Harley (at 1771)). There is no articulation or particularisation in this instance of ‘gross negligence’, to use the expression in Mifsud (at [44]). At the lower level of the scale, references have been made to unreasonable conduct, for example, in Levick (at 166). But once again, ‘unreasonable’ is to be understood in the manner summarised in Flower & Hart.
Here, the adverse findings made against the Solicitors’ clients are not shown in any way to have been discernable on reasonable enquiry by the Solicitors at that stage.
Legal professional privilege
There is a further complication in these sorts of cases.
In Lai v Tiao (No 2) [2009] WASC 22 (S2), a case with some similar features to the present, Johnson J, following a lengthy judgment, considered a submission that fees paid to solicitors and counsel should be disgorged and paid to the successful party because the unsuccessful party had no authority to engage a solicitor on behalf of an incorporated association. As her Honour observed (at [47]):
There is, in fact, no dispute that [the solicitor] was put on notice. The issue before this court is what he was required to do as a result of being put on notice. Although he clearly had to make some inquiry, what he does not have to do is to make his own determination of the credibility of his client or the veracity of his client’s claim.
Her Honour continued to note (at [48]) that a solicitor is not required to judge the strength of the case and decline to act if it is unlikely to succeed.
The approach her Honour took (at [50]) was that the court should not make the order sought against the Solicitors unless, proceeding with extreme care, the court is satisfied that there is nothing the practitioner could say, if unconstrained, to resist the order and that in all the circumstances it is fair: Medcalf v Mardell [2003] 1 AC 120 (at 130, 140 and 151).
‘Unconstrained’ in this context refers to the difficulty facing a practitioner responding to a costs claim by virtue of legal professional privilege. In Medcalf (at [23]), Lord Bingham of Cornhill referred to Ridehalgh v Horsefield [1994] Ch 205 where the Court of Appeal said:
The respondent lawyers are in a different position. The privilege is not theirs to waive. In the usual case where a waiver would not benefit their client they will be slow to advise the client to waive his privilege, and they may well feel bound to advise that the client should take independent advice before doing so. The client may be unwilling to do that, and may be unwilling to waive if he does. So the respondent lawyers may find themselves at a grave disadvantage in defending their conduct of proceedings, unable to reveal what advice and warnings they gave, what instructions they received. In some cases this potential source of injustice may be mitigated by reference to the taxing master, where different rules apply, but only in a small minority of cases can this procedure be appropriate. Judges who are invited to make or contemplate making a wasted costs order must make full allowance for the inability of the respondent lawyers to tell the whole story. Where there is room for doubt, the respondent lawyers are entitled to the benefit of it. It is again only when, with all allowances made, a lawyer's conduct of proceedings is quite plainly unjustifiable that it can be appropriate to make a wasted costs order. (citation omitted)
Lord Bingham said that in a situation in which the practitioner is of necessity precluded (in the absence of a waiver by the client) from giving his or her account of the instructions received and the material before him or her at the time of settling the impugned document, the court must be very slow to conclude that a practitioner could not have had sufficient material. His Lordship said:
Speculation is one thing, the drawing of inferences sufficiently strong to support orders potentially very damaging to the practitioner concerned is another.
…
Only rarely will the court be able to make "full allowance" for the inability of the practitioner to tell the whole story or to conclude that there is no room for doubt in a situation in which, of necessity, the court is deprived of access to the full facts on which, in the ordinary way, any sound judicial decision must be based. The second qualification is no less important. The court should not make an order against a practitioner precluded by legal professional privilege from advancing his full answer to the complaint made against him without satisfying itself that it is in all the circumstances fair to do so. This reflects the old rule, applicable in civil and criminal proceedings alike, that a party should not be condemned without an adequate opportunity to be heard. Even if the court were able properly to be sure that the practitioner could have no answer to the substantive complaint, it could not fairly make an order unless satisfied that nothing could be said to influence the exercise of its discretion. Only exceptionally could these exacting conditions be satisfied. Where a wasted costs order is sought against a practitioner precluded by legal professional privilege from giving his full answer to the application, the court should not make an order unless, proceeding with extreme care, it is (a) satisfied that there is nothing the practitioner could say, if unconstrained, to resist the order and (b) that it is in all the circumstances fair to make the order.
Admittedly there is regrettably no evidence from the Solicitors as there had been in Medcalf of the Solicitors’ unsuccessful attempts to persuade the clients to waive privilege. In my view, in most cases such as these, such evidence would be desirable even if it may be readily inferred that such waiver would not be forthcoming in many instances.
On the other hand, there is, in this case, evidence of written instructions on the company letter head, the resolution and the ASIC record. To reject the client’s account as to authority in those circumstances rather begs the very question the court was asked to resolve. A question which necessarily required the calling of a deal of evidence and determination of competing arguments. Litigation on this topic was virtually inevitable. The Solicitors may well be in the same position had the roles been reversed with the then applicants being respondents to the same issues.
There was a dispute as to authority but a dispute which required resolution at trial after possible findings of credit and findings as to the key events at a difficult AGM. To accept instructions in those circumstances does not constitute a serious dereliction of duty or a serious misconduct by a solicitor. In the absence of some clear objective information, it is difficult to imagine what else the Solicitors could properly do in the circumstances. The warning given by the respondents’ solicitors that they would claim costs against the Solicitors if the respondents succeeded did not add to the store of knowledge upon which the decision could be made as to whether the instructions received were duly authorised.
In my opinion, it would have been virtually impossible in the absence of the benefits available to the trial judge to determine the issue ultimately resolved at trial concerning whether the election of directors had validly occurred at the AGM in question. One need only examine the passage (at [157]-[164]) of the primary judgment which illustrates the difficulty in that regard.
Carpathian, through its new solicitors and guided now by the successful respondent directors, also seeks costs against the Solicitors relying on a decision of Heenan J in Montevento Holdings Pty Ltd v Scaffidi Holdings Pty Ltd (No 2) [2010] WASC 180 (at [6]). It is unnecessary to refer to that paragraph because the broad principle, with respect, is undoubtedly correct.
What the decision, however, in Montevento does reveal is the importance of examining the particular circumstances. As noted in that decision (at [5]) there were, when instructions were taken, sufficient indications available that the board of the relevant company concerned had been ‘deadlocked for a long time’ (my emphasis) and that there was, therefore, ‘no power for an individual director to give instructions or to incur liabilities on behalf of the company’.
In the present situation, by contrast, the question of who had authority could only be determined by reaching findings and untangling the effect of those findings from a ‘chaotic’ AGM, one single recent meeting from which events flowed quickly. One party’s version of the content and effect of the meeting had to be preferred to the other. Whose argument would carry the day could not be ascertained at the outset before due consideration of the evidence and arguments.
CONCLUSION
For the foregoing reasons, I am of the view that this is not a case that falls into the rare category of circumstances in which costs should be awarded against the Solicitors for the unsuccessful party.
There are also submissions from the Solicitors, (then for the applicant) suggesting that there should be apportionment of costs as some of the grounds argued for the respondents and some of the relief sought was not achieved. (Those submissions may not now be advanced given the change in control of the applicant.) In any event, there is no indication that this case falls into a class which would take it outside of the usual rule as to costs. The respondents relevantly had complete success as to the outcome and the judgment reveals no impropriety or resource wastage on their part in reaching that result.
Costs should follow the event. The applicants failed and, as originally foreshadowed by the primary judge, should pay the costs of the respondents to be taxed if not agreed. While the respondents through their shareholding in the applicant will be indirectly paying themselves some portion of those fees, they will still derive some benefit.
I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate:
Dated: 15 May 2012
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