De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 6)

[2016] NSWDC 378

District Court

New South Wales

Medium Neutral Citation:	De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 6) [2016] NSWDC 378
Hearing dates:	14, 15, 16, 17, 18 and 24 (received references) March 2016
Date of orders:	16 December 2016
Decision date:	16 December 2016
Jurisdiction:	Civil
Before:	P Taylor SC DCJ
Decision:	(1)   Order Robert Newell and Leonardo Muriniti to indemnify the applicants against 50% of their costs payable in the proceedings up to the conclusion of the trial on 11 October 2012. (2)   Reserve the questions of costs of the application and interest for further submissions on a date to be fixed.
Catchwords:	COSTS – costs orders against practitioners – presumption that legal services provided without reasonable prospects of success – evidence to displace presumption – who can be beneficiary of costs order – whether costs payable – proportion of costs of proceedings – serious misconduct, serious neglect or serious incompetence – multiple statements of claim – inconsistency between pleadings and particulars – inconsistency between pleadings and evidence – extent of increased costs – voluminous irrelevant evidence – false evidence – inappropriate instructions to experts – unlawful recording of telephone conference – multiple witnesses in joint conferences – failure to produce documents – inappropriate allegations of impropriety – whether appropriate to apportion total costs – assessment of reasonable length of trial – discretion
Legislation Cited:	Civil Procedure Act 2005, s 56, s 98, s 99 Evidence Act 1995, s 38 Legal Professional Act 2004, s 345, s 348, s 349
Cases Cited:	Bendigo and Adelaide Bank Limited v Stamatis [2015] NSWSC 721 Certain Lloyd’s Underwriters Subscribing to Contract No IH00AAQS v Cross (2012) 248 CLR 378; [2012] HCA 56 Clyne v New South Wales Bar Association (1960) 104 CLR 186 Day v Perisher Blue Pty Ltd [2005] NSWCA 110 De Costi Seafoods (Franchises) Pty Limited & Anor v Wachtenheim and Anor (No 2) [2012] NSWDC 286 De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 3) [2013] NSWDC 54 De Costi Seafoods Franchises Pty Ltd and Anor v Wachtenheim and Anor (No 4) [2014] NSWDC 70 De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 5) [2015] NSWDC 8 Fowler v Toro Constructions Pty Ltd [2008] NSWCA 178 Harris v Villacare Pty Limited [2012] NSWSC 452 Hudspeth v Scholastic Cleaning and Consultancy Services Pty Ltd (No 8) [2014] VSC 567 Karwala v Skrzypczak Re Estate of Ratajczak [2007] NSWFC 931 Kelly v Jowett (2009) 76 NSWLR 405 Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300 Mark Gerard Ireland as Executor of the Estate of the late Charles Stuart Gordon v Sandra Jane Retallack & Ors (No 2) [2011] NSWSC 1096 Project Blue Sky Inc v Australia Broadcasting Authority (1998) 194 CLR 355 Re Eric Donald Glass v Defence Force Retirement and Death Benefits Authority [1992] FCA 558 Re Felicity; FM v Secretary, Department of Family and Community Services (No 4) [2015] NSWCA 19 Ridehalgh v Horsefield [1994] Ch 205 Roads Corporation v Love [2010] VSC 253 Steindl Nominees v Laghaifar [2003] 2 Qld R 683 Treadwell v Hickey [2010] NSWSC 1119 Whyked Pty Limited v Yahoo!7 Pty Limited [2008] NSWSC 477
Texts Cited:	New South Wales Barristers’ Rules Revised Professional Conduct and Practice Rules 1995
Category:	Costs
Parties:	De Costi Seafoods (Franchises) Pty Limited (ACN 103 324 812) (first plaintiff/first cross-defendant/applicant on amended notice of motion filed 16 March 2016) De Costi Seafoods (Holdings) Pty Limited (ACN 064 186 410) (second plaintiff/ fifth cross-defendant/applicant on amended notice of motion filed 16 March 2016) Serge Wachtenheim (first defendant/first cross-claimant) Deist Safety Equipment Australia Pty Ltd (ACN 081 763 877) (second defendant/second cross-claimant) Frank Theodore (second cross-defendant/applicant on amended notice of motion filed 16 March 2016) George Costi (fourth cross-defendant/applicant on amended notice of motion filed 16 March 2016) Androulla Costi (seventh cross-defendant/applicant on amended notice of motion filed 16 March 2016) Robert Newell (first respondent to amended notice of motion filed 16 March 2016) Leonardo Muriniti (second respondent to amended notice of motion filed 16 March 2016)
Representation:	Counsel: Mr S J Stanton with Mr M B Holmes (plaintiffs/first, second, fourth, fifth and seventh cross-defendants/applicants on amended notice of motion filed 16 March 2016) Mr G M Watson SC (first respondent to amended notice of motion filed 16 March 2016) Mr D A Lloyd (second respondent to amended notice of motion filed 16 March 2016)   Solicitors: McLachlan Thorpe (plaintiffs/first, second, fourth, fifth and seventh cross-defendants/applicants on amended notice of motion filed 16 March 2016) Barry Nilsson Lawyers (first respondent to amended notice of motion filed 16 March 2016) Yeldham Price O’Brien Lusk (second respondent to amended notice of motion filed 16 March 2016)
File Number(s):	2006/296319
Publication restriction:	None

Judgment

A. Introduction   

1. Robert Newell, a barrister, and Leonardo Muriniti, a solicitor, conducted litigation for Serge Wachtenheim and his company against George and Andrea Costi and some related parties which I have called "the De Costi parties".  The actions failed after a long and expensive hearing.

2. The De Costi parties say that Mr Newell and Mr Muriniti are liable to pay their costs because the litigation had no reasonable prospects of success and also because Mr Newell and Mr Muriniti engaged in serious misconduct, serious incompetence and serious neglect.

3. By a previous decision (see De Costi Seafoods Franchises Pty Ltd and Anor v Wachtenheim and Anor (No 4) [2014] NSWDC 70) I found that the proceedings against Mrs Costi are presumed to have been conducted without reasonable prospects, but that the actions against the other De Costi parties were not so conducted and an application for those costs on that basis was dismissed (see De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 5) [2015] NSWDC 8).

4. Mr Newell and Mr Muriniti say that Mrs Costi did not personally pay any costs and that the claim against her was only a minor part of the proceedings.  They also dispute some of the alleged serious misconduct, incompetence and neglect, and dispute, in any event, that additional costs were caused.

B. Issues

5. Thus, the issues can be listed as follows:

1. Is there evidence sufficient to displace the presumption that the legal services provided in the proceedings against Mrs Costi were provided without reasonable prospects of success.

2. Does the circumstance that Mrs Costi did not personally pay any costs preclude an order for recovery of the costs of the action against her.

3. Was the action against Mrs Costi a minor part of the proceedings and what proportion of the costs of the proceedings is attributable to that action.

4. What conduct of Mr Newell and Mr Muriniti amounted to serious misconduct, serious neglect or serious incompetence.

5. Did that serious misconduct, serious neglect or serious incompetence increase the costs of the De Costi parties and, if so, by what amount or proportion.

6. What, if any, part of the costs of the De Costi parties should be paid by Mr Newell and Mr Muriniti.

6. The first three issues arise out of the provisions of s 348 of the Legal Professional Act 2004 (“LPA”), whereas issues 4 and 5 arise out of s 99 of the Civil Procedure Act 2005 (“CPA”). The last issue relates to both provisions.

C. The Legal Profession Act 2004 issues

7. In 2014 the Court determined that the “evidence before the court" did not form a basis for a reasonable belief that the cross-claim by Mr Wachtenheim and his company against Mrs Costi had reasonable prospects of success and that a presumption accordingly arose under s 349(1) of the LPA that the legal services provided on the claim were provided without reasonable prospects of success (De Costi (No 4) at [178]).

8. From this finding and from s 349(3) of the LPA it follows that Mr Newell and Mr Muriniti bore the onus of establishing that there were provable facts that provided a basis for a reasonable belief that the claim against Mrs Costi had reasonable prospects of success. Section 349(4) provides circumstances where confidential documents and information can be utilised to establish these provable facts.  However, a fact is provable only if the legal practitioner, in this case, Mr Newell or Mr Muriniti, reasonably believes that the material available provides a proper basis for alleging that fact (s 345(2) LPA).  This requires proof by Mr Newell in order to resist the claim against him, proof that Mr Newell believed that the material available provided a proper basis for the allegations and that his belief was reasonable.  The position of Mr Muriniti is the same.

Issue 1: Is there evidence to displace the presumption

9. Neither Mr Newell nor Mr Muriniti gave evidence on the application.  No reason was advanced to explain or excuse this lack of evidence and I must infer, in accordance with Jones v Dunkel, that their evidence could not have assisted their case.  That does not necessarily mean that they had no belief that the material available provided a proper basis.  Perhaps they could not recall or there may be other reasons, but there is no evidence of their belief.  In these circumstances, the failure to give evidence means that the presumption against them having the belief has not been displaced, and the onus that is upon them to rebut the presumption has not been discharged.

10. Mr Muriniti's submissions, without stating so directly, appeared to challenge the decision in De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 3) [2013] NSWDC 54, about the unconscionability claim against Mrs Costi, and the decision in De Costi (No 4), concerning the reasonable prospects of that claim.  Reference was made to evidence tendered and admitted or rejected at the hearing, in relation to Mrs Costi's supervision of the franchising operation.  It was not suggested directly that this material indicated that the decisions in De Costi (No 3) and De Costi (No 4) were wrong.

11. Mr Muriniti also relied upon other documents to found a submission that the Dee Why store was a franchise store rather than a company store and thus more closely linked to Mrs Costi because of her connection with franchising operations.  These documents were apparently produced during the course of the proceedings but not tendered.  No evidence was given as to Mr Muriniti having any regard to them, let alone that they were the basis of his reasonable belief of unconscionability.  The fact that the documents were not tendered at the trial tends to support the contrary.

12. Reference was also made to the evidence of Mrs Costi at the hearing about her knowledge which, it was submitted, amounted to provable facts forming a basis for a view that a claim against Mrs Costi was reasonably arguable.

13. The submission does not identify what claim was reasonably arguable and, if it was a claim for damages for unconscionable conduct, how those documents or evidence might establish any form of unconscionable conduct.  The submission is also silent on what was Mr Muriniti's belief.  Further, even if Mrs Costi's oral evidence could be relevant to Mr Muriniti's belief, it could not be relevant to Mr Muriniti's belief during the long period of pre-trial preparation and during the trial until Mrs Costi gave evidence. Further, Mrs Costi's evidence is part of the "facts established by the evidence before the court", as that term is defined in De Costi (No 4) at [114], [119].  In De Costi (No 4), "the facts established by the evidence before the court" were determined to provide no basis for a reasonable belief of reasonable prospects, and that matter is not directly challenged.

14. In my view, none of these matters raised establish a foundation for an arguable case of unconscionable conduct against Mrs Costi or a proper basis for alleging such a cause of action, let alone a reasonable belief in Mr Muriniti of this.  The presumption found to arise under s 349(1) of the LPA is not displaced.

15. The submissions of Mr Newell either adopted Mr Muriniti's submissions, (see Newell submissions at [7.8]) or in substance repeated a submission made by Mr Muriniti (see Newell submissions at [7.4]-[7.7]).  No other evidence was provided.  These findings against Mr Muriniti apply equally mutatis mutandis to Mr Newell.

Issue 2: The costs of Mrs Costi

16. Accordingly, s 345(1) of the LPA was contravened.  This means that by s 345(5) of the LPA the provision of legal services was made without reasonable prospects of success.  This enlivens the discretion in the Court under s 348(1)(b) of the LPA to order Mr Newell and Mr Muriniti to indemnify "any party other than the party to whom the services were provided against the whole or any part of the costs payable by the party indemnified".

17. On a strict literal reading of this provision, it empowers the Court to order Mr Newell and Mr Muriniti to pay the whole of the costs payable by any of the cross-defendants to the proceedings, for they are "any party other than" Mr Wachtenheim or his company, the parties to whom the services were provided by Mr Newell and Mr Muriniti. And the power extends to ordering "the whole...of the costs", which in the context of the repeated reference in s 348(1) to the proceedings, must refer to the costs of the proceedings.

18. However, it might be doubted whether such a wide construction is appropriate for "the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning and the logic with which it is constructed" (Project Blue Sky Inc v Australia Broadcasting Authority (1998) 194 CLR 355, 381 at [69], Certain Lloyd’s Underwriters Subscribing to Contract No IH00AAQS v Cross [2012] HCA 56, 248; (2012) 248 CLR 378 at [24]). The general purpose of the provision is to enable orders against legal practitioners for the costs of claims when they act on claims without a reasonable belief of reasonable prospects of success. The general purpose of the provision and matters of fairness do not suggest that the practitioner could be ordered to pay the costs of the entire proceedings including of claims where there was a reasonable belief of reasonable prospects. The power to make an order in respect of costs arises from the provision of legal services "without reasonable prospects of success".  It would seem to be an overreach to utilise that power in s 348 of the LPA in respect of costs incurred in claims that have not been found to have been provided without reasonable prospects of success such as the costs of the claims against the De Costi parties other than Mrs Costi.

19. In any event, the De Costi parties did not submit such a construction or seek such an order; that is, the claim in respect of costs was in respect of Mrs Costi's costs (applicants’ submissions 23/11/15 at [5]), which in the context of those submissions, I take to mean that the De Costi parties’ costs of the claim against Mrs Costi. And the effect of the orders in De Costi (No 5) is to dismiss the application under s 348 of the LPA for orders in respect of the costs of the De Costi parties other than the costs of the claim against Mrs Costi.

20. Accordingly, the question under s 348 of the LPA is whether the costs of the claim against Mrs Costi should be the subject of an order under s 348(1)(b) of the LPA, and, if so, what should be that order.  The circumstance that the order should only extend to the costs of the baseless claim against Mrs Costi does not mean that it need only be in favour of Mrs Costi.

21. Section 348(1)(b), for the reasons given above, permits an order in favour of any De Costi party in respect of the claim against Mrs Costi.  The De Costi parties were parties to the proceedings (see s 348(1) LPA) and as no services were provided to them by Mr Newell and Mr Muriniti, they fall within the ambit of "any party" in s 348(1)(b) of the LPA.

22. Mr Muriniti submits that there is no evidence that Mrs Costi paid any costs, or that any costs are payable by her.  It is submitted that this is significant because the order extends only to “the costs payable by the party indemnified". But this assumes that Mrs Costi is "the party indemnified" whereas s 348(1)(b) of the LPA refers to "any party". 

23. The De Costi parties' submissions do not focus on this point.  Rather, their responding submission argues that "payable" in s 348 means "capable of being paid" (see Re Eric Donald Glass v Defence Force Retirement and Death Benefits Authority [1992] FCA 558 at [10]) which, it is submitted, extends to Mrs Costi's costs, even if, as has occurred, all costs have been paid by De Costi Seafoods (Holdings) Pty Limited, one of the De Costi parties and a company of which Mrs Costi was a director. The De Costi parties further submit, relying upon s 98 of the CPA, that the Court can and should direct that any costs ordered be paid directly to De Costi Seafoods (Holdings) Pty Limited.

24. Section 98 of the CPA invests the Court with "full power to determine by whom, to whom and to what extent costs are to be paid", although that power is subject to "any other Act", which I take to mean subject to any contrary specific provision in any other Act.

25. I think there is force in this argument of the De Costi parties, both that the costs are "payable" by Mrs Costi because they are "capable of being paid" by her, even if not actually paid by her, and that s 98 of the CPA grants a broad discretion as to who should be the beneficiary of the costs order. I do not read s 348(1)(b) of the LPA as a contrary provision limiting the parties in whose favour an indemnity costs order can be made so long as the party is not "the party to whom the services were provided".

26. However, I prefer to resolve this question on the terms of s 348(1)(b) itself, which appear to me to permit an order in favour of the De Costi parties in respect of the costs of the claim against Mrs Costi.  There is no apparent reason, and none is suggested, as to why "any party" should be read down to include only Mrs Costi.  The considerations enumerated in Project Blue Sky at 381 [69], 384 [78] and Certain Lloyd's Underwriters at [23]-[25], such as context, general purpose and policy of the provision, and its consistency and fairness do not seem to favour a construction that precludes such an indemnity order. Similarly, if a co-party spouse of a party subject to a baseless claim pays the costs, neither the general policy nor the text of the provision favours a construction precluding an order indemnifying the co-party in respect of the costs of the baseless claim.

27. In my view, the power in s 348(1)(b) of the LPA should be limited to costs connected with the baseless claim against Mrs Costi, but is not restricted to an order only in her favour.  An order in favour of any party (other than the party to whom the services were provided) can be made.  Thus, the fact that Mrs Costi did not personally pay the costs is immaterial.

Issue 3: Are the costs of defending a claim against Mrs Costi minor

28. Mr Muriniti submitted that no order should be made in respect of the costs of the claim against Mrs Costi because there was common representation, the costs of the unconscionability claim would be negligible and the complexities of assessment would mean that the costs of the costs assessment would probably exceed the quantum. 

29. The argument about common representation is answered by the earlier finding about the proper construction of s 348(1)(b) of the LPA.  I do not think the existence of common representation is a weighty consideration in considering whether an order should be made.

30. The claim against Mrs Costi was not trivial.  The damages claim was apparently the same damages as those claimed against the other De Costi parties.  All issues relevant to damages, which were substantial, were thus also part of the case against her; so also was the credit of substantial witnesses such as Mr Wachtenheim, Ross McGown, Richard Mare and Frank Theodore, even if the acceptance or rejection of their evidence would not have resulted in a successful claim against Mrs Costi. Mrs Costi was required to swear four substantial affidavits to answer the matters raised against her.  She was cross-examined in detail and much of the proceedings related as much to the claim against her as anyone else. She is referred to on 13 pages of the sixth further amended statement of cross-claim.  No attempt was made on this application by Mr Newell or Mr Muriniti to identify substantial items of evidence, or time periods of the trial which were irrelevant to the claim against Mrs Costi.

28. In my view, the costs of the claim against Mrs Costi should be treated as an equal portion of the whole of the costs of the proceedings. As the De Costi parties comprised De Costi Seafoods (Franchises) Pty Limited, Mr Theodore, George Costi, De Costi Seafoods (Holdings) Pty Limited and Mrs Costi, the costs of the claim against Mrs Costi should be determined to be one-fifth or 20% of the costs of the cross-claim against the De Costi parties.

29. Nor is there any basis to find that although the entitlement under s 348 of the LPA is established, a costs order should not be made in this particular case. The submission about the costs of assessment is weakened by the significance of the claim against Mrs Costi, and, in any event, is not a reason why an order should not be made.

30. Accordingly, in my view, subject to my decision below in respect of s 99 of the CPA, an order should be made under s 348 of the LPA directing Mr Muriniti and Mr Newell to indemnify the De Costi parties for the costs of the claim against Mrs Costi, being 20% of the cost of the proceedings.

D. Section 99 of the Civil Procedure Act 2005

34. The powers invested in the Court under s 99 of the CPA must be considered in the context of s 56 of the CPA. Section 56 requires the Court to give effect to the overriding purpose - the facilitation of the just, quick and cheap resolution of the real issues in civil proceedings - when exercising the power in, or interpreting, s 99. Further, the parties (s 56(3)) and their legal representation (s 56(4)) are under a duty to assist in furthering the overriding purpose, and, (in s 56(5)) a failure to do so may be taken into account by the Court in exercising a discretion (including a s 99 discretion) in respect of costs (see also Re Felicity; FM v Secretary, Department of Family and Community Services (No 4) [2015] NSWCA 19 at [23].

35. Section 99 provides:

“99 Liability of legal practitioner for unnecessary costs

(cf Act No 52 1970, section 76C; SCR Part 52A, rules 43 and 43A)

(1) This section applies if it appears to the court that costs have been incurred:

(a) by the serious neglect, serious incompetence or serious misconduct of a legal practitioner, or

(b) improperly, or without reasonable cause, in circumstances for which a legal practitioner is responsible.

(2) After giving the legal practitioner a reasonable opportunity to be heard, the court may do any one or more of the following:

(a) it may, by order, disallow the whole or any part of the costs in the proceedings:

(i) in the case of a barrister, as between the barrister and the instructing solicitor, or as between the barrister and the client, as the case requires, or

(ii) in the case of a solicitor, as between the solicitor and the client,

(b) it may, by order, direct the legal practitioner:

(i) in the case of a barrister, to pay to the instructing solicitor or client, or both, the whole or any part of any costs that the instructing solicitor or client, or both, have been ordered to pay to any other person, whether or not the solicitor or client has paid those costs, or

(ii) in the case of a solicitor, to pay to the client the whole or any part of any costs that the client has been ordered to pay to any other person, whether or not the client has paid those costs,

(c) it may, by order, direct the legal practitioner to indemnify any party (other than the client) against costs payable by that party.

(3) Before making such an order, the court may refer the matter to a costs assessor (within the meaning of Part 7 of the Legal Profession Uniform Law Application Act 2014) for inquiry and report.

(4) The court may direct that notice of any proceedings or order under this section with respect to a legal practitioner be given:

(a) in the case of a barrister, to the instructing solicitor or client, or both, as the court may direct, or

(b) in the case of a solicitor, to the client.

(5) The court may give ancillary directions to give full effect to an order under this section, including directions to a legal practitioner to provide a bill of costs in assessable form:

(a) to the court, or

(b) to a party to the proceedings, or

(c) in the case of a barrister, to the instructing solicitor or client, or both, or

(d) in the case of a solicitor, to the client.

(6) A party’s legal practitioner is not entitled to demand, recover or accept:

(a) in the case of a barrister, from the instructing solicitor or client, or

(b) in the case of a solicitor, from the client,

any part of the amount for which the legal practitioner is directed by the court to indemnify any party pursuant to an order referred to in subsection (2) (c).

(7) In this section, client includes former client.”

36. Section 99(2)(c) indicates the order that might be applicable in the present case if a default identified in subs (1) has occurred. The form of the order contemplated by paragraph (c) is that Mr Newell and Mr Muriniti indemnify the De Costi parties against the costs payable by them.

37. Although the De Costi parties seek a global order in respect of all of the costs of the proceedings, specific items or classes of conduct are identified.  It is necessary to look at each of those items or classes of conduct separately to see whether they involve serious neglect, serious incompetence or serious misconduct.  These concepts of serious neglect, serious incompetence and serious misconduct are not discrete and independent concepts (see Re Felicity at [24] referring to Ridehalgh v Horsefield [1994] Ch 205 at 232-233).

38. Section 99(1)(b) of the CPA refers to costs incurred "improperly or without reasonable cause".  This paragraph appears to apply not to the costs of the applicants, but to the costs of the defaulting practitioner (or his or her client):  the costs of the De Costi parties have not been incurred "improperly or without reasonable cause" merely because they were incurred (properly) in response to conduct of the opposing party’s legal practitioner that has been improper or without reasonable cause. 

39. Thus, a reference to costs being incurred "improperly or without reasonable cause" does not readily apply in the context of a possible order for indemnity against "costs payable" by "any party (other than the client)". The costs incurred by that party are not the subject of possible indemnity because they were incurred without reasonable cause or improperly, but because they were a consequence of some wrongful conduct by the opposing legal practitioner. This suggests that the words of s 99(1)(b) of the CPA are more naturally relevant to the circumstances of ss 99(2)(a) or (b) - which deal with the costs of the defaulting practitioner's client - rather than s 99(2)(c). As a consequence, the real question in this case is whether the costs of the De Costi parties were incurred by reason of the s 99(1)(a) matters: serious neglect, serious incompetence or serious misconduct of Mr Muriniti and Mr Newell.

Issue 4: The alleged serious misconduct, serious neglect or serious incompetence 

40. The De Costi parties have identified a number of matters which they submit involve serious misconduct, serious neglect or serious incompetence.  Each of the identified matters must be considered to determine whether they warrant being so described. 

(i) The multiple versions of the claim

41. The applicants rely upon the circumstance that there are 16 versions of the cross-claim, including nine unfiled versions and seven filed versions. 

42. A statement of claim, although commonly approved by the party, is a product of the legal practitioner's work, distilling in an abridged form those alleged facts which are necessary components of the party’s case.  Amendments are common for various reasons: further details might be provided by the client, new documentary evidence might be discovered, and the opposing party’s evidence or pleadings might prompt a rethink about the way the case is framed.

43. Whether any particular amended pleading is necessary is not easily determined at the time it is proposed, even less so after many years.

44. An example of an amendment in the present case is that the amended cross-claim altered the meaning of an alleged representation from a net return of $1,000 a week, or $4,300 a month, to a return of $12,000 per month.  The term used to encapsulate this representation of return, the "predicted profit", thus substantially changed in meaning. Mr Muriniti's submissions conceded "notable changes" in this pleading, but did not address this particular change.  It is, of course, possible that Mr Wachtenheim gave instructions for the change, notwithstanding that he accepted the original version of the representation when in the witness box, but there is no assertion of that in the submissions of Mr Newell or Mr Muriniti.  However, the cross-claim was verified and some affidavit evidence supporting the amended version exists.  In these circumstances, I do not conclude that the change was made without instructions.

45. On the other hand, the utility or appropriateness of a particular amendment, if challenged, should be explicable.  The underlying claim was not especially unusual or complicated.  It principally involved allegations of misleading representations resulting in the purchase of an unprofitable business, even if other cause of actions, such as supply of defective product, and unconscionable conduct were added.  In my view, without explanation, three versions of a pleaded claim, the original and two amendments, might be excused.  Perhaps the presence of another two amendments should be disregarded before the negligence or incompetence can be regarded as serious. But, in my view, the service of 16 versions of the pleading, whether filed or not, is grossly excessive if unexplained.  It raises the possibility that the costs thrown away or occasioned by the amendments reflected in the fifth further amended statement of cross-claim and subsequent versions should be borne by the legal practitioners.

46. The explanation for the multiple versions of the pleaded claim is found in Mr Muriniti's submissions.  He submits "not every amendment of a pleading is caused by the neglect, incompetence or misconduct of a practitioner". Of course that is so. But this says nothing about 16 iterations of a cross-claim. Nor does the verification of an amended cross-claim mean that it falls outside the application of s 99 of the CPA, as Mr Muriniti asserts.

47. Mr Muriniti, in submissions, gave reasons justifying the various versions of the pleading.  He ignored the assertion of service of eight draft versions of the fifth further amended statement of cross-claim.  The circumstance that only one paragraph was amended in the version ultimately filed underlines that the costs incurred by serving eight draft versions involve serious incompetence, at least if no explanation is provided.

48. Mr Muriniti submitted that there was no evidence that "the pleadings were amended for an improper purpose or without reasonable cause". That is not the statutory test. For the reasons I have given, I am satisfied that, in the absence of explanation, the repeated serving of amended pleadings ultimately resulting in the filing of the fifth further amended statement of cross-claim suggests serious incompetence and, therefore, enlivens the application of s 99 of the CPA.

49. On the other hand, I accept Mr Muriniti's submissions (at [45]) that any incompatibility between the breach of contract and misleading representation cases was remedied by amendment during the course of the trial. That incompatibility does not indicate serious neglect and does not, in my view, enliven any entitlement under s 99 of the CPA.

(ii) The form of the pleaded representations and particulars

50. The De Costi parties refer to the form of the alleged representations containing words unfamiliar to or misunderstood by Mr Wachtenheim.  That is not evidence that those representations were not uttered by others, but for the purpose of this application, it might be a circumstance relevant in assessing the extent to which the pleadings were a necessary consequence of the client's instructions.

51. Principally, the submission of the De Costi parties is that a claim with prolix and turgid prose, inconsistent with Mr Wachtenheim's understanding, framed in ambiguous terms, not consistent with the particulars, involves a serious level of incompetence.  The purpose of pleadings - to simplify and reveal the claimant's case and not to cloud it in obscurity - supports this submission. 

52. This submission is not addressed by either Mr Muriniti or Mr Newell.

53. In my view, a pleading which is inconsistent with its particulars and is riddled with ambiguity and prolixity and where no exculpatory explanation is provided is likely to involve serious incompetence.  Such a pleading is unlikely to be the result of a client's instructions, especially when there is evidence of a lack of understanding by the client of the meaning of the allegations. And costs are wasted when time is spent by practitioners in trying to fathom needlessly complicated pleadings and inconsistencies, even if the costs directly occasioned by the form of a defective pleading are difficult to determine.

(iii) Cross-claim inconsistent with evidence

54. The existence of evidence inconsistent with a pleaded claim could be material to an application under s 99 of the CPA if the inconsistent evidence comprised the totality of the relevant evidence. That is not the case with some of the causes of the action found against the De Costi parties other than Mrs Costi (see De Costi (No 4)).

55. On the other hand, causes of action with no real evidence to support them may support serious neglect or serious incompetence allegations under s 99 of the CPA. The Fifth Theodore Representation referred to in De Costi (No 3) at [155] is an example.  The cross-claim alleged a misrepresentation that a product would readily sell at a mark-up producing a 40% gross profit margin, but there was no evidence from Mr Wachtenheim of this representation (see De Costi (No 3) at [158]). Further, Mr Wachtenheim gave evidence that he was initially selling all his fish at the recommended prices with no wastage (see De Costi (No 3) at [25] and [205]), thereby denying any inability to sell at the recommended prices and giving evidence indicating the truth of the representation. Any evidence about the high cost of the fish (see De Costi (No 3) at [206]-[209]) could not impact on the 40% gross profit margin if all fish were sold at the recommended prices.  Thus, there was no evidence to establish that this representation was made to Mr Wachtenheim (De Costi (No 3) at [158]) or that it was misleading.

56. One defective cause of action might not establish that a claim is made without reasonable prospects of success if the claim is supported by another cause of action with reasonable prospects (see De Costi (No 4) at [133]-[135]). However, it may nevertheless be serious neglect or serious incompetence to maintain any cause of action that has no evidence to support it and, thus, no prospects of success. This might enliven cost consequences under the CPA s 99, particularly where there is no submission identifying possible evidence to support the cause of action, or evidence identifying how Mr Newell and Mr Muriniti believed the cause of action might be proved.

(iv) Poorly prepared, irrelevant, false and improper evidence

57. Mr Muriniti submits that no complaint of this type can be made in respect of evidence which is not objected to or is admitted over objection. I do not accept this submission. Evidence may technically be relevant, even if it has little or no real probative value. Nor is a decision of whether evidence is admitted determinative of whether the material was truly relevant or that its tender did not involve serious incompetence enlivening s 99 of the CPA (see Harris v Villacare Pty Limited [2012] NSWSC 452 at [31], [47] and [48] and Bendigo and Adelaide Bank Limited v Stamatis [2015] NSWSC 721 at [108]-[113].

58. There is an obligation on a legal practitioner to ensure that the costs and extent of preparation are appropriate to the amount and issues in dispute: Mark Gerard Ireland as Executor of the Estate of the late Charles Stuart Gordon v Sandra Jane Retallack & Ors (No 2) [2011] NSWSC 1096. That obligation must extend to excluding voluminous evidence that while possibly technically relevant, has no real probative value to the issues in dispute.

59. One example of excessive material is the numerous affidavits of Mr Wachtenheim read in the proceedings.  No attempt was made to remove the obsolete, inconsistent or false material and prepare just one affidavit in chief, leaving the cross-examiner to refer to other sworn material if relevant. Rather, all of the numerous affidavits of Mr Wachtenheim were read, effectively representing the various accounts of Mr Wachtenheim at the different times he swore the different affidavits. To fail to reduce these documents to one affidavit or at least many less than the numerous affidavits read, seems to me to involve serious neglect. It has also multiplied the number of reply affidavits required from the De Costi parties.

60. The De Costi parties refer to the substantial quantity of evidence, including lengthy affidavits sworn by witnesses who were litigants in separate Supreme Court proceedings against the De Costi parties.  There was no suggestion of any attempt to confine that substantial material to evidence relevant to this particular cross-claim. Rather, the evidence referred to another 4 of the 13 possible De Costi franchise stores, and concerned the performance of those other 4 stores. It plainly could not assist in determining the performance of the subject store (see De Costi (No 3) at [204]).  This evidence involved nine witnesses, 17 affidavits of about 400 pages and many folders of exhibits, with the attendant significant amount of time and cost in preparation, reading affidavits and cross-examination (De Costi (No 3) at [275]). No submission was advanced on this application as to how that material was probative to the issues in the trial. There was no evidence as to how it was believed to be of assistance.  I regard its form, its volume and its use at trial as indicating serious neglect and incompetence in preparing a matter for hearing.

61. One example may be the evidence of defective product being returned at other stores.  It would not be evidence of defective product being supplied to Mr Wachtenheim or returned by him.  Mr Wachtenheim did assert that defective product was returned from his store, but that was contrary to his repeated evidence of having sold all of his product without wastage.  The alleged return of defective product was disproved rather than substantiated by the documentary record of returns (see De Costi (No 3) at [63], [368]-[371]). In my view, the cause of action for supply of defective product had no relevant evidence to support it and no reasonable prospects of success. It is an example of neglect by the legal practitioners in advancing an entirely unmeritorious claim and in putting forward voluminous, but, ultimately, irrelevant evidence from litigants in other proceedings in an attempt to buttress it.

62. The De Costi parties refer to the service of 5 affidavits that were not utilised and the issue of subpoenas to 13 persons who were not called.  I accept that this could cause wasted costs to the De Costi parties, and without explanation may be some evidence of neglect.  However, the costs to the applicants involved in reviewing the persons the subject of the subpoenas and the unutilised affidavits should be modest relative to the total cost of the proceedings. Without more I am not inclined to find that the failure to rely on five prepared affidavits is serious neglect or incompetence.

63. The De Costi parties also referred to the cross-claimants’ expert evidence prepared on inappropriate instructions.  For example, the damages expert, Mr Gary Dent, was instructed by Mr Muriniti as follows:

"...what we need from you Gary is, what was the dodgy stuff that David Shnider was doing with the figures and how did that translate into the dodgy information we see generally in the Broker's file and on that credit memorandum which we recently got from the NAB.

I need your assistance to try and identify what the dodginess, the techniques, the sleighs [sic] of hands and so on which were employed in the manipulation of figures which assisted or could have assisted in securing loans for Serge Wachtenheim which blind Freddy would have told him, he had no chance of servicing, yet his own brother in law didn't."

(See applicants’ submissions dated 23/11/15 at [110]).

64. These instructions convey an instruction inconsistent with the duties under the Expert Code of Conduct. The expert is not instructed to examine the material and identify if there is any inappropriate conduct, but rather is directed that there is inappropriate conduct, and the expert is instructed to identify it. The instructions suggest a conclusion from which the expert is not at liberty to depart, pressing the witness to give favourable evidence (see Hudspeth v Scholastic Cleaning and Consultancy Services Pty Ltd (No 8) [2014] VSC 567 at [167]).

65. The De Costi parties also refer to the evidence of Mr Wachtenheim and his accountant, Michael Birrell, concerning $150,000 or more which was removed from the business by Mr Wachtenheim.  In an affidavit dated 23 August 2011, Mr Wachtenheim says at [3]: "All of the takings from the operations of the De Costi fish shop at Dee Why were banked by me personally into the bank account" at the National Australia Bank, Dee Why branch, and that all of the expenses were paid from this account.  This was false. Mr Wachtenheim removed $150,000 to $200,000 for his personal use.  When it became apparent that Mr Wachtenheim had, contrary to his sworn affidavit, removed cash from the business takings prior to those takings being banked, Mr Muriniti gave the following instructions in emails to Mr Birrell in about November 2011, about the apparent shortfalls in money banked (see applicants’ submissions dated 23/11/15 at [147]):

"When we pressed Serge about the difference, what emerged is a story that he was taking money out of the till for living expenses”.

“After discussing the matter at length with Wachtenheim what we have been able to determine is that the $150,000 can be account [sic] by virtue of the fact that Wachtenheim was taking money out of the cash register to pay his wages and living expenses and failed to appreciate that since he was taking money out of the cash register, he needed to tell you that he had been taking money out of the cash register".

"We have discussed the matter with Wachtenheim and he agrees that this is the only characterisation that can be given to the money that he took from the cash register over and above his wages to pay living expenses which his wages were not adequate to meet".

"It is important the accounts be amended to account for the missing money as soon as possible in order to ensure that Serge's credibility is not damaged or permanently impaired ...we should be most grateful if you could give this matter your urgent attention",

"...we are extremely concerned about this development not least for the reason that Wachtenheim has been ordered to a mediation on 9 December 2011 and we believe that the De Costi are going to play the card of the unreported sales at the mediation to embarrass and intimidate our client and to damage his credibility permanently".

"If the figures can now be recalculated and a fresh assessment of the business undertaken in light of the additional money which was taken out of the business and not accounted for previously...and you are also able to re-swear an Affidavit to correct the omission, we may just be able to save Serge's credibility".

66. Subsequently, in an affidavit prepared by Mr Muriniti dated 15 December 2011, Mr Wachtenheim stated that he was alerted to this issue in October 2011 after a bookkeeper had undertaken a reconciliation and was unable to explain the missing amount, and that he sought the advice of Mr Birrell to discover what had happened.  This is contrary to the account revealed in the earlier emails: that Mr Birrell was informed of the missing monies and the reason for it by Mr Wachtenheim and Mr Muriniti rather than having discovered the problem.

67. In circumstances where Mr Muriniti has given no evidence on this application, it is difficult to avoid a conclusion of dishonourable conduct, of serious misconduct, by Mr Muriniti.  The August affidavit of Mr Wachtenheim may have been believed by Mr Muriniti to be correct when it was prepared, but it was known to be false when it was later read in evidence at the trial.  That error might perhaps be excused by the reading of a later affidavit dated 15 December 2011 which revealed the falsity of the earlier affidavit, but that later December affidavit was also false. In it Mr Wachtenheim claims ignorance about the cause of the error, whereas Mr Muriniti's emails disclose that Mr Wachtenheim had explained that his cash withdrawals for personal expenses were the cause of the error.

68. The absence of any explanation from Mr Muriniti leaves as the most likely conclusion that Mr Muriniti was involved with Mr Wachtenheim in the preparation of false affidavits, attributing the error to something inexplicable which required Mr Birrell's efforts to identify, whereas both Mr Wachtenheim and Mr Muriniti knew beforehand the precise nature of the explanation.  Further, Mr Muriniti’s directions to Mr Birrell in the email - "It is important the accounts be amended...to ensure that Serge's credibility is not damaged" - indicates a full understanding of what he was asking Mr Birrell to cover up and the significance of Mr Wachtenheim's claim of ignorance.

69. This matter would likely have alerted Mr Muriniti to the weakness of Mr Wachtenheim's case once his credibility was "permanently impaired". Mr Wachtenheim’s diminished credit would affect the likelihood of the misrepresentations being established, as well as the potential quantum of damages.

70. This misconduct must have had a significant impact on the length of the trial because it covered up improperly a fundamental weakness in Mr Wachtenheim's case.  While Mr Muriniti and Mr Birrell may not be obliged to assess their client's credit for the purposes of s 348 of the LPA, in accordance with Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300 (see De Costi No 4 at [144]-[145]), nevertheless the deliberate attempt to cover up this weakness in the case (Mr Wachtenheim’s credit) by false affidavits constitutes serious misconduct that impacts upon the whole of the proceedings.

71. I also cannot justify the form of the instructions given to Mr Birrell.  The intent was not merely to amend Mr Wachtenheim's claim for damages to take account of the $150,000 Mr Wachtenheim secretly received from the business, but to prepare evidence that was inconsistent with the facts as Mr Muriniti understood them: that approximately $90,000 (ultimately $120,000 in Mr Birrell's report) would be "categorised as a loan...to Serge Wachtenheim". Mr Muriniti's failure to explain the difference between his knowledge as revealed by the emails, on the one hand, and the instructions he gave to Mr Birrell and the false affidavit he prepared to be sworn by Mr Wachtenheim and to be read in court by Mr Newell, on the other, leaves me comfortably persuaded, notwithstanding the seriousness of the matter, that Mr Muriniti has engaged in serious misconduct.  It is no answer to say, as Mr Muriniti submits, that:

"[T]he submissions made against him...seek to traverse matters more obviously the subject of a disciplinary complaint than a wasted costs application [and thus] it is understandable why Mr Muriniti would not wish to go into evidence." (Submissions at [23])

72. Since the wasted costs jurisdiction in s 99 of the CPA is enlivened by "serious misconduct", it is unsurprising that disciplinary issues may overlap with applications made under s 99. Mr Muriniti's desire not to give evidence because of possible disciplinary implications does not preclude the operation of a Jones v Dunkel inference.

73. The De Costi parties also complain of the expert evidence of David Batchelor and James Turner.  Mr Batchelor and Mr Turner, former De Costi franchisees, were separately in litigation with the De Costi parties.  They prepared in those proceedings detailed schedules purporting to establish high charges for fish supplied by the De Costi parties.  Those schedules and the accompanying evidence were relied upon by Mr Wachtenheim in the trial.  The utility of that evidence depended on proof of a number of matters including the veracity of their opinion that fish allegedly delivered by the De Costi parties was equivalent to fish asserted by Mr Batchelor and Mr Turner to be comparable. However, there was no realistic prospect of that expert opinion being accorded weight since the independence of Mr Batchelor and Mr Turner was hopelessly compromised by their position as litigants against the De Costi parties.

74. I regard the use of this evidence, in the form that it was advanced, as manifesting incompetence. It may be arguable whether that incompetence is "serious". However, the volume of the material and the answering evidence it necessitated was significant. Thus, the incompetence was serious in its consequences on the efficient conduct of the trial.

75. The incident involving the illegal tape recording is dealt with in a separate judgment (De Costi Seafoods (Franchises) Pty Limited & Anor v Wachtenheim and Anor (No 2) [2012] NSWDC 286). It involves serious misconduct by Mr Newell and Mr Muriniti. No exculpatory evidence from Mr Muriniti or Mr Newell was given then, or on this application. The written submissions of Mr Muriniti refer to the absence of evidence of "planning" by Mr Muriniti.  If there was a “lack of planning” (and there was no evidence from Mr Muriniti or Mr Newell to this effect), it does not excuse the legal practitioners’ conduct in conducting a conference in the presence of other witnesses, and in copying and utilising the illegal recording.

76. In oral submissions, an order in respect of the costs of this incident was not vigorously resisted by Mr Newell or Mr Muriniti.  The matters dealt with in De Costi (No 2) indicate that Mr Muriniti and Mr Newell should bear the costs of and incidental to the recording of Mr Shnider's telephone conference.

77. The De Costi parties also refer to a document referred to as the "Dent Chronology".  This document was a chronology of events forwarded as part of the instructions to Mr Dent by Mr Muriniti for the purposes of a report by Mr Dent, an expert accountant.  The existence of a diary indicated by the chronology and by other correspondence was never produced.  Its absence was not satisfactorily explained.  The chronology itself was inconsistent with the affidavit of Mr Wachtenheim being prepared by Mr Muriniti at the same time. In these circumstances, there was no satisfactory explanation for the differences between the chronology and Mr Wachtenheim's affidavit.  In my view, the explanation for those differences and the absence of this diary upon which the chronology was based, is likely to be attributable to serious incompetence and neglect as much as to misconduct.  This was a matter that consumed legal costs before and at the hearing.

(v) Failure to produce documents

78. The De Costi parties submit that documents were wrongly not discovered by Mr Wachtenheim and that this was known to Mr Muriniti and Mr Newell.  The relevant undiscovered documents included diaries of Mr Wachtenheim for the years ending 30 June 2003 and 2004, National Australia Bank and Commonwealth Bank of Australia statements, emails between Mr Shnider, Mr Muriniti and Mr Newell in October 2007, and Mr Wachtenheim's amended tax returns for the 2005, 2006 and 2007 tax years.

79. I accept that each of these documents was relevant to the proceedings.  Some were belatedly produced.  There is a question as to whether the Commonwealth Bank of Australia statements and the diaries existed, since they were never produced.  However, at least in respect of the diaries, on the balance of probabilities I am persuaded that they did exist.  Neither their existence nor knowledge of their existence was denied by Mr Muriniti or Mr Newell on this application.

80. Thus, there is a failure to produce documents.  This might be attributable, in part, to Mr Wachtenheim. Any default by Mr Wachtenheim could not explain the failure to discover the correspondence between Mr Newell, Mr Muriniti and Mr Shnider nor the diaries that enabled Mr Muriniti to create the Dent chronology. In other respects, notwithstanding the absence of exculpatory evidence from Mr Newell and Mr Muriniti, I am inclined to attribute the failure to produce documents to the default of Mr Wachtenheim.

81. This aspect of the claim was resisted by Mr Muriniti and Mr Newell on the basis that it did not cause costs to be incurred by the De Costi parties. I do not accept this. Although it is difficult to quantify the direct cost consequences of the nonproduction or belated production of documents, it nevertheless resulted in additional costs being incurred: the De Costi parties were compelled repeatedly to raise the nonproduction of documents at hearings, to explore different avenues of proof and to gather other material to resist or discredit the claim.

(vi) Inappropriate dealing with witnesses

82. The De Costi parties refer to the preparation of the affidavit evidence of Kevin Ng, done in the presence of Mr Batchelor, Mr Turner and Mr Newell.  As indicated earlier, Mr Batchelor and Mr Turner were witnesses in the proceedings and were also litigants in other proceedings. Their evidence concerned, in part, a similar subject matter to the evidence of Mr Ng.  They were Mr Ng's former employers.

83. Mr Ng gave evidence about the pressure he felt under when he was asked to affirm the content of his evidence in the presence of Mr Batchelor and Mr Turner and the haste with which he was compelled to sign his affidavit before reading it. He also asserted that he was not provided with a copy of his affidavit despite assurances to the contrary and that the content of the affidavit was incorrect.

84. No evidence was proffered by Mr Newell or Mr Muriniti to counter these claims or the evidence of Mr Ng. My earlier judgment (De Costi (No 2) at [63]-[64]) dealt with the obligations on counsel in respect of witnesses and conferences.  It is not appropriate for legal practitioners to confer jointly with potential witnesses on the same subject matter: Day v Perisher Blue Pty Ltd [2005] NSWCA 110, and an instance of that conduct was described by Vickery J in Roads Corporation v Love [2010] VSC 253 at [37] as having "seriously undermined the trial process and was improper".  The practice is prohibited by Bar Rule 70 of the New South Wales Barristers’ Rules (“the Bar Rules”) and Rule A.46 of the Revised Professional Conduct and Practice Rules 1995 (“the Solicitors Rules”).  Thus, the unanswered evidence of Mr Ng is evidence of serious misconduct.

85. A similar submission is made in respect of the evidence of Stephen Vial and no explanation is offered by Mr Newell or Mr Muriniti. Mr Vial's evidence is not as compelling as Mr Ng's because Mr Vial had the opportunity to review his affidavit.

86. The De Costi parties also referred to the similarity of the evidence of conversations between Mr Turner and Mr Batchelor as indicating improper preparation by the legal practitioners.  This might also indicate neglect of proper procedure in preparing affidavits or that Mr Batchelor and Mr Turner themselves colluded to prepare their affidavits.  The absence of evidence from Mr Newell and Mr Muriniti to explain the circumstances does not assist them, but I am not disposed to find this as an example of serious misconduct by the legal practitioner. Further, there is nothing inherent in this conduct which might be expected to increase the time taken in the proceedings or otherwise increase the costs of the De Costi parties.

87. Finally, on this aspect, the De Costi parties point to the dealings with Mr Shnider.  As indicated above, I accept the impropriety alleged in respect of the tape recording, as dealt with in my earlier judgment (De Costi (No 2) at [52]-[69], [81]-[83]).

(vii) Serious allegations of impropriety without a proper basis

88. Serious allegations of impropriety should only be made in pleadings or in opening a case if they are relevant to the proceedings and there is known evidence intended to be adduced to support it: Clyne v New South Wales Bar Association (1960) 104 CLR 186, 201. A belief that such evidence may emerge from cross-examination is not enough (see also Bar Rule 64 and Solicitors Rule A.37).

89. The outline of the evidence to be given by Mr Shnider, provided by Mr Newell and Mr Muriniti, stated that an affidavit of Mr Shnider was prepared by Andrew Thorpe, solicitor for the De Costi parties, with a purpose "to conceal the true nature of the representation made by Theodore and George Costi and that the basis of the representation was...to conceal from the ATO [sic]", and that Mr Thorpe attempted "to induce Shnider to say that [Mr Wachtenheim] was earning more than [otherwise] revealed".  The outline of evidence also alleged that there were "[t]hreats and inducements made by De Costis" to obtain a "misleading affidavit" from Mr Shnider. Although this outline is less than clear as to precisely what Mr Shnider's evidence would be, that evidence is alleged by the outline to be "misleading" because of "[t]hreats and inducements made by the De Costis" and it contained allegations of concealment from the Australian Tax Office by the De Costi parties and the false exaggeration of Mr Wachtenheim's earnings by Mr Thorpe.  This last matter is a particularly perverse allegation, given that Mr Muriniti had recorded in emails his knowledge that Mr Wachtenheim had earned and withdrawn from the business more than his affidavits had disclosed, a matter to which I have already referred.

90. In any event, these serious allegations of impropriety involving the conduct of Mr Thorpe or the alleged threats or inducements by the De Costi parties were not the subject of evidence by Mr Shnider. As they lacked a proper foundation, they should not have been made.

91. The costs that resulted from these allegations of impropriety are not clear.  For reasons already given in De Costi (No 2), significant time at trial was spent in relation to Mr Shnider's evidence. This evidence was tainted by the illegal recording, by the joint conferences with Mr Wachtenheim, and was central to the serious but unfounded allegations of impropriety contained in the outline of evidence of Mr Shnider provided by the legal practitioners.  These matters support a conclusion that Mr Newell and Mr Muriniti should bear the costs occasioned in relation to Mr Shnider's evidence.

92. Related to this matter is that Mr Newell called Mr Shnider, and then made an application under s 38 of the Evidence Act 1995 to cross-examine him.  In that application, Mr Newell alleged that Mr Shnider had "doctored his evidence" and then colluded with the De Costi parties. Yet these allegations are also not the subject of evidence by any witness.

93. None of these matters were the subject of response by Mr Newell.  I accept that they amounted to conduct in breach of the Bar Rules, because the allegations by Mr Newell conveyed an implicit statement (which was incorrect) of there being factual support for the allegations of impropriety.

(viii) Conclusion as to conduct

94. In my view, there is a proper basis for a costs order on three bases:

1. Specifically in respect of the costs attributable to the action against Mrs Costi under s 348 of the LPA, which I have assessed as 20% of the costs of the claim. That same conduct of providing legal services for a baseless claim against Mrs Costi is serious misconduct that would justify a similar order under s 99 of the CPA.

1. Specifically in respect to the evidence of Mr Shnider. The basis for such an order rests upon the illegal recording and its use, the inappropriate joint conference, and the false and unsupported allegations of impropriety. Mr Shnider's evidence consumed nine days of the trial, about 12% of the total.

2. The other unexplained incidences of serious misconduct, serious neglect and serious incompetence identified earlier in this judgment, in particular, the inappropriate preparation of a false affidavit by Mr Wachtenheim and the improper instructions given to Mr Birrell and Mr Dent, but also the excessive amendments, the prolixity of the pleadings, the causes of action pleaded which were unsupported by evidence, the volume of irrelevant, ill-prepared or improperly prepared evidence and the nonproduction of documents.

Issue 5: Assessment of the costs occasioned by the wrongful conduct

95. Mr Muriniti submits that the jurisdiction under s 99 of the CPA must only be applied in clear cases (see Kelly v Jowett (2009) 76 NSWLR 405 at [60]). So much can be accepted. The submission that because the applicants’ submissions are lengthy means that the case is not clear is a submission of less force.

(i) Form of orders sought

96. Mr Newell submits (submissions 16/2/16 at [6.1]) that "s 99(2) only permits the Court to order the legal practitioner to pay the costs a client has been ordered to pay to other parties".

97. No authority has been cited in support of this proposition and it is contrary to the text of s 99(2)(c).

98. Section 99(2)(c) provides that:

“99 Liability of legal practitioner for unnecessary costs

…

(2) After giving the legal practitioner a reasonable opportunity to be heard, the court may do any one or more of the following:

…

(c) it may, by order, direct the legal practitioner to indemnify any party (other than the client) against costs payable by that party.”

99. Thus, there is no requirement that the order extend only to the costs that a party has been "ordered to pay". The only restrictions are that the party is not the client, and that the costs are "payable by that party". Accordingly, I do not accept this submission (see Karwala v Skrzypczak Re Estate of Ratajczak [2007] NSWFC 931 at [6], Treadwell v Hickey [2010] NSWSC 1119 at [30], Whyked Pty Limited v Yahoo!7 Pty Limited [2008] NSWSC 477 at [19]).

100. Mr Muriniti (submissions at [16]) submits that there is no express power in the Court to make the orders sought.

101. The orders sought are:

1. that the respondents "pay Andrea Costi’s costs of the proceedings...on an indemnity basis" (applicants' s 348 submissions 23/11/15 at [5]); and

2. that the respondents "indemnify the Applicants to the extent of 90% of the costs of the proceedings, at trial on indemnity basis" (applicants’ s 99 submissions 23/11/15 at [6]).

102. No issue seems to be taken with the form of order (a). However, the proper form of an order contemplated by s 348(1)(b) of the LPA is that the respondents indemnify the De Costi parties against the costs payable by them in resisting the claim against Mrs Costi or perhaps, alternatively, that the respondents indemnify Mrs Costi against the whole of her costs.

103. In respect of order (b), the limitation on the power precluding such an order is not made clear by Mr Muriniti.  Reference is made to Re Felicity although no applicable paragraph was identified. The limitations indicated at [16] and in the opening words of [18] of that decision have no application to the present orders. There is no suggestion in that decision that an order in the form contemplated by s 99(2)(c) of the CPA - that the respondents indemnify the De Costi parties against the costs of the proceedings payable by them - is unavailable. And if the respondents can be ordered to indemnify the De Costi parties against the whole of the costs of the proceedings, they also can be ordered to indemnify the De Costi parties against some of, a part of, or a proportion of those costs.

(ii) Ordering a proportion of the costs

104. Mr Newell submits (submission at [6.4]) that an order made under s 99 of the CPA for 90% of the costs "could only be appropriate where the commencement or continuation of a proceeding itself was a consequence of wrongful conduct".

105. Again no reason is given to support this submission.  It appears to ignore the possibility that a proceeding could properly be maintained and yet 90% of the time or costs could be entirely wasted as a result of wrongful conduct, including, for example, pursuing a cause of action which was entirely without merit.

106. Of course there must be an appropriate nexus between the costs incurred by the applicants as a result of the wrongful conduct and the order in respect of costs.  An order to indemnify parties with respect to all of their costs may be an inappropriate remedy when the primary complaint is in respect of particular items of misconduct. But the need for an appropriate nexus does not preclude an order in respect of particular items of misconduct, or an order in respect of part of the costs of the entire proceedings that were wasted as a result of the wrongful conduct.

107. Related to this, Mr Muriniti submits (Muriniti's submissions at [11]) that it is "wrong", "not available" and "inconsistent with the authority" for the Court to award a percentage of the costs of the proceedings, because of the need for causation.  The real issue then is whether an assessment of 90% of the costs or some other proportion is a fair and reasonable assessment of the amount of additional costs occasioned by the wrongful conduct. The Court is entitled both to award the "costs thrown away or lost because of the conduct complained of" (Kelly v Jowett at [61]) and to determine fairly the amount of those costs or the proportion those costs bear to the costs of the proceedings. Correctly, as Mr Muriniti submits, (submissions at [13]) "no order may be made unless the Court is satisfied that costs have been wasted as a result of the practitioner", but if the Court is so satisfied, the orders should fairly compensate the party for the amount of those wasted costs.  The decision in Kelly v Jowett does not preclude a global percentage approach to costs in the appropriate case.

108. I do not think the need for a connection between wasted costs and the costs ordered precludes a global order.  A broad brush approach has been mandated by the Court of Appeal in Lemoto (at [92]) and when numerous items of misconduct are found, the need for a connection between the wasted costs and the order would permit the Court to do its best to ascertain what proportion of the total costs are due to misconduct rather than seek to identify the precise costs incurred in relation to every item of misconduct, a near impossible task. To this extent, I reject the submission that in all cases a global percentage approach offends the principle in Kelly v Jowett.  Such an approach is, if anything, endorsed in Bendigo and Adelaide Bank Limited. A global percentage approach does not offend the requirement that the misconduct must result in costs to the parties seeking to be indemnified; rather, it concerns the quantification of those costs or the formulation of orders to deal fairly with them.

(iii) Costs caused by wrongful conduct

109. Mr Newell submits (submissions at [6.5]) that, "Nearly every example [of wrongful conduct] provided by the De Costi parties points to costs alleged (but not admitted) which were wasted by Mr Wachtenheim and Deist".  Strictly, whether Mr Wachtenheim wasted costs or whether the example of wrongful conduct points to such wastage is irrelevant.  The important matter is whether the costs of the De Costi parties were wasted.  Costs being wasted by Mr Wachtenheim does not establish or disprove that costs were wasted by the De Costi parties as a result of the wrongful conduct.

110. Mr Newell also submits:

"It cannot be submitted that the commencement and continuation of the cross-claim as against [the De Costi parties other than Mrs Costi] was a consequence of serious neglect, serious incompetence or serious misconduct".  (Submissions at [6.7]).

111. This is accepted insofar as "the cross-claim" is read as "a cross-claim", given that I have previously found those claims for damages to have had reasonable prospects under s 345 of the LPA. But this does not answer the question of whether the commencement and continuation of some of the causes of action within the cross-claim, including against the De Costi parties, were without reasonable prospects and were a consequence of (or involved instances of) serious neglect, serious incompetence or serious misconduct.

112. Further, the submission of Mr Newell (submissions at [6.7]) referring to the commencement and continuation of the cross-claim being "improper and without reasonable cause" is not the statutory test for two reasons. First, the chapeau to s 99(1) of the CPA refers not to the continuation of the claim but to "costs [that] have been incurred". Secondly, for reasons given, the text of s 99(1)(b) suggests its operation is confined to costs of the client, rather than to costs of another party.

(iv) The need for a clear case

113. Section 99 of the CPA is not confined to cases that are "plainly unarguable and bound to fail" (as asserted in Newell’s submissions at [6.7]), although s 99 orders may have been made in those cases. If serious incompetence causes costs to another party in the course of proceedings, then the possibility of a 99(2)(c) order is enlivened.

114. The authorities referred to - Steindl Nominees v Laghaifar [2003] 2 Qld R 683 at [23] and Whyked Pty Ltd at [184]-[185] - support the uncontroversial proposition that caution must be exercised under s 99 so as not to make orders that interfere with or weaken the substantial public interest in impoverished clients with difficult cases receiving vigorous legal assistance (see Re Felicity at [14]). As Mr Muriniti submits (submissions 16/2/16 at [5]), personal costs orders against legal practitioners should be made "only in clear cases" (see Lemoto at 321 at [92], Kelly v Jowett at [60], Fowler v Toro Constructions Pty Ltd [2008] NSWCA 178 at [20]). Insofar as s 99 is concerned, that requires clear cases of wrongful conduct causing wasted costs, not clear cases of unarguable proceedings.

115. Finally, I do not accept the suggestion that the volume or detail of the submissions is necessarily inversely proportional to the strength of the application (see Muriniti's submissions at [10]).  The strength of the application must depend on the clarity of the points raised and the persuasiveness of the reasoning in support, in respect of both the existence of the wrongful conduct and that the conduct has caused wasted costs.  The observation of Basten JA in Fowler, Corbett and Jessop trading asHaydon Fowler Corbett Jessop v Toro Constructions [2008] NSWCA 178 at [84]:

“Although her Honour noted authority to the effect that claims against solicitors should not be allowed to turn upon contestable facts and should be rejected unless a clear case has been made out, her Honour appears not to have applied that principle. A finding against the plaintiff’s solicitors required 37 pages of closely typed explanation and reasoning. The fact that the conclusion could only be reached after extensive examination of affidavit evidence and cross-examination of a solicitor, should have provided cause for doubt about the propriety of an order”,

is concerned with whether a detailed reasoned judgment involving "extensive examination of affidavit evidence in cross-examination of a solicitor" might give cause for doubt about a wasted costs order. It is not to the point here where there is no evidence from or cross-examination of the legal practitioners. Inevitably in this case, I have had to utilise the experience of conducting the lengthy trial, standing back and assessing in that context the extent of wasted costs arising from the established items of wrongful conduct.

116. Any difficulty or inability to determine the precise costs that are wasted by reason of a particular item of wrongful conduct raises the question of how the proportion of total costs attributable to the wrongful conduct of the legal practitioner might be determined. It cannot be simply on the basis of the time taken by particular witnesses. Even with essential witnesses such as Mr Wachtenheim, the time was increased because of the needlessly irrelevant content and number of affidavits sworn.

117. There was no suggestion by Mr Newell or Mr Muriniti, nor do I think there can be, that the time taken by the De Costi parties enlarged the length of the trial inappropriately or that unnecessary evidence was prepared to resist the claim.  In that event, I think it is a reasonable approach in assessing the wasted costs occasioned by the wrongful conduct to compare the time actually taken in the trial with the time a reasonable trial on the arguable causes of action ought to have taken.

118. But what of pre-trial costs? The proceedings were commenced several years before the trial. Presumably the pre-trial costs are significant. Bearing in mind that the procedure for a wasted costs application should be "as simple and summary as fairness permits" (Ridehalgh v Horsefield at 238) and that a broad brush approach was approved in Lemoto at [92], it seems to me fair and just to apportion the pre-trial costs in accordance with the proportion adopted in relation to the costs of the trial.

119. So one way of assessing the amount of costs occasioned by the defaults is to compare the actual duration of the trial with a reasonable estimate of a trial on the arguable causes of action. The De Costi parties submitted that a period of seven and a half days was a reasonable estimate for the trial duration, and gave a breakdown of this figure. However, I think this estimate understates the period needed for objections, the time for an opening, cross-examination and submissions. Whilst I accept that without serious incompetence and without misconduct, there would have been many less witnesses appropriate for the trial, I think that such a trial properly coordinated could conceivably have reasonably taken about three weeks, and I allow another four days for it being heard by an inexperienced judge. That indicates, at most, 19 days. Ultimately, the trial took 75 days. In my view, the appropriate amount attributable to wrongful conduct involving Mr Newell and Mr Muriniti is a proportion based on the extra 56 days, namely, 56/75 or 75%. This figure informs the extent of the indemnity for costs to be ordered under s 348 of the LPA and s 99 of the CPA.

120. Even supposing that none of the extra time taken in the preparation and trial of the matter, beyond what is reasonable, can be attributed to the De Costi parties, as I find, nevertheless it does not follow that all of the extra time can be attributed to Mr Newell and Mr Muriniti, still lest to their instances of serious neglect, serious incompetence or serious misconduct.  In particular, some delay must result from the conduct of Mr Wachtenheim: changing his evidence, swearing false affidavits about banking all the cash received in the business and about his ignorance regarding the missing moneys. I am not persuaded that much of the length of the trial can be attributed to the conduct of Mr Wachtenheim, but some should, even if neither Mr Muriniti nor Mr Newell have given evidence or made submissions to attribute any of the wrongful conduct to Mr Wachtenheim or to attribute any of the additional time and costs in the litigation to Mr Wachtenheim.

121. Another matter relevant to the length of the hearing is the style, technique and approach of counsel and solicitor.  So also are items of neglect and incompetence of the legal practitioners at levels that do not warrant the appellation of being “serious”. Such matters should not result in adverse costs orders because they are not perceived to involve clearly serious levels of incompetence or neglect required to enliven s 99 of the CPA.

122. In all these circumstances, I think it is appropriate to reduce the additional delays and costs attributable to the serious wrongful conduct of Mr Newell and Mr Muriniti by a further third, from 75% to 50%.

123. A question may arise in relation to the division that should be made between the costs for which Mr Newell and Mr Muriniti separately are responsible. However, both practitioners relied on the submissions of the other on this application.  Neither gave evidence, neither sought to absolve themselves because of the conduct of the other, or their ignorance of the conduct of the other.  It appeared to me, and there was no evidence to the contrary, that the conduct of the trial, and the proceedings generally, were a joint enterprise between them.  In those circumstances, I do not think that it is appropriate to distinguish between them. I hold them both liable equally.

E. Conclusion

124. I determine that the wrongful conduct of Mr Newell and Mr Muriniti in breach of s 99 of the CPA has increased the costs of the proceedings by 50%, and I think it is appropriate that they bear responsibility for those costs.

125. If orders were to be made separately under the different statutory provisions, I would order that:

1. Mr Newell and Mr Muriniti indemnify the De Costi parties in respect of 20% of the costs payable by the De Costi parties in the proceedings, on account of the costs occasioned by the claim against Mrs Costi, pursuant to s 348 of the LPA;

2. Mr Newell and Mr Muriniti indemnify the De Costi parties in respect of 50% of the costs payable by the De Costi parties in the proceedings, on account of the costs occasioned by the serious neglect, serious incompetence and serious misconduct of Mr Newell and Mr Muriniti, pursuant to s 99 of the CPA; and

3. the two orders not be cumulative.

126. However, I am persuaded that I can make one order in respect to the entitlement under the two Acts, namely, that Robert Newell and Leonardo Muriniti indemnify the applicants, the De Costi parties, against 50% of the costs payable by the De Costi parties in the proceedings, and it is appropriate that I do so.

F. Costs

127. Although the applicants might be entitled to an order for the costs of the application, and also might be entitled to an order for interest, the parties have not made submissions on those matters. The costs of the application are complicated by the several hearings that were involved.  I reserve any questions of costs of the application and interest on costs to a date to be fixed in the new term.

G. Orders

128. The orders of the Court are:

1. Order Robert Newell and Leonardo Muriniti to indemnify the applicants against 50% of their costs payable in the proceedings up to the conclusion of the trial on 11 October 2012.

2. Reserve the questions of costs of the application and interest for further submissions on a date to be fixed.

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Decision last updated: 15 February 2017