Kerin v Deputy Commissioner of Taxation No. DCCIV-99-651

KERIN V DEPUTY COMMISSIONER OF TAXATION
[2002] SADC 8
Judge D. F. Bright
Civil

In this matter the learned Master ordered that the appellant, a solicitor, pay, on an indemnity basis, the costs of the plaintiff. The solicitor appeals against that order.
The general background, and a most helpful chronology, are set out in the Master’s decision, and I gratefully adopt them. I shall confine myself here to a brief summary. A body known as ITR concocted, or came into possession of, a complex argument, the effect of which was that, for reasons of constitutional law, the Australian Tax Office (ATO) was not a legally constituted entity and was not entitled to recover tax from tax payers. It appears to have marketed this argument to various tax payers throughout Australia. Obviously the Commissioner has been concerned to defeat this argument wherever it has sprung up. Each time a court has heard it, it has been dismissed in forceful terms.
Of relevance, the appellant evidently accepted instructions from ITR to represent the defendants in actions brought against them by the ATO. He also agreed to represent another defendant, Money Tree Pty. Ltd. in proceedings against it. The latter case was forcefully dismissed by the learned Chief Justice, who was then asked to order that the solicitor pay costs on an indemnity basis. In the end, that order was not made. Then the solicitor sought to appeal the judgment dismissing the constitutional defence. The purported appeal was late and leave was sought from Justice Debelle to extend time. The ATO applied to strike it out. Concluding that any appeal had no prospect of success, Debelle J. refused leave and struck it out. He was then persuaded to order the solicitor to pay the costs of the proceedings before him on an indemnity basis, as was the Master in the present case.
It is not disputed that the Master’s order was a final (rather than an interlocutory) order and that the appeal pursuant to section 43 of the District Court Act is an appeal “stricto sensu” rather than a rehearing. It is not to the point whether I would have done the same, error must be shown in what the Master did before I can substitute any decision of my own. (House v R.(1936) 55CLR 499 @ 504-5).
The authorities on the question of ordering a solicitor to pay costs are conveniently collected in Levick v Deputy Commissioner of Taxation (2000) 44 ATR 315. A Mr. Quinn attempted to run precisely the same argument as in this case before the Federal Court, with no success. His solicitor was ordered to pay costs on an indemnity basis by Hill J. He appealed to the Full Court. The headnote records:
“2. Caution must be exercised when making orders against solicitors in proceedings. Solicitors should not be put in the position where they abandoned clients, issues or arguments for fear of personal costs orders being made against them. However, it is equally important to uphold the court’s right to order a solicitor to pay costs wasted by untenable conduct. To justify a costs order, the solicitor’s conduct must be unreasonable. This involves more than merely acting for a client who has little prospect of success. The conduct must be “something akin to abuse of process” by utilising the proceedings for an ulterior motive without consideration of the prospects of success.
........
3.The arguments presented had clearly not been advanced by the client, and their “legal” nature indicated that they had originated with the appellant solicitor. Therefore the present case must be distinguished from ........, where lawyers were instructed to argue a case that was bound to fail. It is unreasonable and a dereliction of duty for a lawyer to argue a case without first being satisfied that the points raised are at least arguable. While it is not necessary that the arguments would succeed, there must be a rational basis upon which they might succeed.”
Hill J. had concluded that the argument was raised for an ulterior motive – to delay as long as possible the making of a sequestration order against Mr. Quinn.   He also concluded that the argument was “nonsense”.   It was not raised with any belief that it might succeed, or that it was properly arguable.   The Full Court considered a number of cases.   I shall not cite them all, but will excerpt some quotations, with reference to the paragraph number of the Full Court’s decision, where full references are given.
Paragraph 16 “There is, however, an important difference between the question whether the court has jurisdiction to order a stranger to the litigation to pay costs and the exercise of that jurisdiction ..........   The discretion which the court has is one to be exercised judicially, it is not an unfettered discretion ..........
The jurisdiction is, I think, one that must be exercised sparingly, having regard to all the circumstances of the particular case.   It is clear enough that a litigant is entitled to representation to vindicate a particular legal right, or to maintain a legal defence.   Should it turn out that the litigation is decided adversely to the litigant it does not follow that costs should, in consequence, be ordered against the legal adviser, be he or she a solicitor or a barrister.   Were that the case those seeking to advance legitimate claims, or to pursue legitimate defences, might well be deprived of legal representation and access to justice in consequence, would be impeded.”
Paragraph 33 “It is, of course, axiomatic, but nonetheless something which in the present case should be mentioned, that the mere fact that the litigation fails is no reason for invoking the jurisdiction:   nor is an error of judgment:   nor even is the mere fact that an error is of an order which constitutes or is equivalent to negligence.   There must be something that amounts, in the words of Lord Maugham to “a serious dereliction of duty”, something which justifies, according to other speeches in that case, the use of the words “gross”.   It is not, however, normally necessary to establish mala fides or other obliquity on the part of the solicitors;   though it may be that if mala fides is established that might turn the scale in a particular case:
No definition or list of the classes of improper acts which attract the jurisdiction can, of course, be made;   but they certainly include anything which can be termed an abuse of the process of the court and oppressive conduct generally.   It is also from the authorities clear, and no submission to the contrary has been here made, that unreasonably to initiate or continue an action when it has no or substantially no chance of success may constitute conduct attracting an exercise of the above jurisdiction.”
Paragraph 35 “This public policy aspect does, however, have further implications.   The power of the court to order a solicitor to pay the costs personally where litigation has been initiated or continued unreasonably when it had no or substantially no chance of success is, in an appropriate case a very salutary power.   I do not, however, regard it as at all salutary that a practice should develop whereby solicitors for defendants endeavour to browbeat solicitors for legally-aided plaintiffs into dropping their clients’ cases – or into procuring revocation of the relevant legal aid certificates – by threats that the defendants will seek to hold the plaintiffs’ solicitors personally liable for the costs of the litigation.”
Paragraph 36 “Whilst there can be no objection to an application ........at the conclusion of a hearing, given appropriate facts, it is quite another matter where such an application is threatened during or prior to the hearing.   Objectivity is a vital requirement of professional advisers.   Hence, for example, the rejection of contingency fees and the impropriety of a solicitor acting for co defendants.   Threats to apply on the basis that the proceedings must fail not only make the solicitor something in the nature of a co-defendant, but they may well, and rightly, make him all the more determined not to abandoned his client, thereby losing a measure of objectivity.”
Paragraph 40 “The cases show that this jurisdiction must be exercised with caution.   There is good reason for caution.   Too ready an exposure of the lawyer for a party to personal liability for the costs of his client or of the other party is likely to inhibit the way the lawyer acts in conducting the litigation.   It frequently happens that a lawyer will have to make judgments as to which of a number of courses is the optimum one to follow, bearing in mind his duty to advance his client’s interests by all proper means and his duty to the court to conduct the litigation in proper fashion.   The introduction of a third consideration into every day litigation that requires a solicitor to keep in mind the need to minimise the chances of a costs order being made against him personally, would raise a conflict between the lawyer’s duty to his client and to the court, on the one hand, and his own interests, on the other.   As is understandable, such a conflict would likely be resolved by the solicitor concentrating on identifying and adopting the course most likely to minimise his own personal exposure at the expense of following courses best fitted to advantage his client and to bring the action to an expeditious end.   Moreover, practitioners should not be encouraged to see the threat to seek a costs order against their opposing solicitor as a tactic available to be employed in the course of litigation to put pressure on their opponent ........”
At paragraph 44, the Full Court said: “Having said that, it is equally important to uphold the right of a court to order a solicitor to pay costs wasted by the solicitor’s unreasonable conduct of a case.   What constitutes unreasonable conduct must depend upon the circumstances of the case;   no comprehensive definition is possible.   In the context of instituting or maintaining a proceeding or defence, we agree with Goldberg J. that unreasonable conduct must be more than acting on behalf of a client who has little or no prospect of success.   There must be something akin to abuse of process;   that is, using the proceeding for an ulterior purpose or without any, or any proper, consideration of the prospects of success.
In the present case, Hill J. inferred that the subject arguments “clearly originated with the lawyers”;   that is, Mr. Levick and Mr. Fitzgibbon.   No challenge can be made to that inference.   So this is not a case, like Orchard, where a difficult case was taken to a lawyer by a client who wished it to be pursued in the court.   Neither is it a case, like that contemplated in Ridehalgh v Horsefield, where the lawyer had “to present, on instructions, a case which he regards as bound to fail”.   This is a case where the lawyers themselves thought up the “legal” points and advanced them on behalf of the client.   It is unreasonable, in the sense of a dereliction of duty (to both the client and the court), for any lawyer to take that course without first being satisfied that the points are, at least, seriously arguable.   We agree it was not necessary in the present case that the lawyers be satisfied that the points would succeed;   but it was necessary they be satisfied there was a rational basis on which they might succeed.”
In the case before me, I do not think that either side dissented from these general statements of principle. I pause to note that the principles were correctly and carefully referred to by the Master.
I turn to some of the facts in this case. The action was commenced on 11 May 1999. The defence was filed on 12 July 1999. On 15 July 1999 the ATO wrote to the solicitor alerting him to authorities contrary to the purported defence, in particular to the High Court decision in Joose v Australian Securities and Investment Commission (1998) 159 ALR 260, a decision very much in point. It appears that the solicitor discussed the case with an interstate practitioner who appears to have argued the point in apparently identical cases. It appears to be his name referred to in the course of the judgement in Levick. It is said that he considered the High Court to be in error. The solicitor also discussed the matter with at least two reputable South Australian practitioners of long standing. It does not appear that any of these consultations were in any depth. Rather, they were designed to ascertain whether the defence was at least not obviously unarguable. The ultimate merits were not explored. It may be that the solicitor did not alert those practitioners to decisions in point. I think it fair to say that neither practitioner sufficiently researched or analysed the case to be able to give any advice on the likely outcome. Nor were they asked to. Their advice was limited to not concluding that the case was so hopeless that it would be an abuse of process to plead it. More research might well have shown that to be an unduly hopeful view.
The power to award costs against a practitioner was conferred on the District Court by an amendment to section 42 of the District Court Act which came into effect on 3 October 1999. It was not a retrospective power and the respondent acknowledges it has no claim for costs before that time against the solicitor.
Days later, on 7 October 1999, a further High Court decision, Helljay Investments Pty. Ltd. v Deputy Commissioner of Taxation (1999) HCA, 56, was handed down. It put beyond doubt the futility of the defence. It came to the solicitor’s attention promptly. He subsequently admitted to the Chief Justice, in the course of the first Money Tree case that he had read that decision within a week or two and realised that it put paid to the argument.
The respondent asserts that, thereafter, to leave the defence on file and to continue to be the solicitor on file constituted so gross an abuse of the process of the court as to entitle the Master to make the order which he made. It is further argued that the solicitor so comprehensively failed to advise his clients, the defendants, of the hopelessness of the defence that the courts should protect them by ordering the solicitor to be liable for costs. It is further contended that the failure to withdraw the defence was such a dereliction of duty to the court and to the respondent as a party who thereby incurred unnecessary costs that the order was appropriate. The Master ordered him to pay costs from 21 October 1999 onwards, being a couple of weeks after Helljay had made it plain that the defence could not succeed.
On 15 September 2000, the respondent wrote to the solicitor, suggesting that this case, which was due for a conciliation conference, should be adjourned pending the decision in Money Tree, as that would, no doubt, determine this case. On 21 September 2000, the solicitor replied, agreeing to that. As it turned out, there were eventually a number of decisions in Money Tree and there may be ambiguity in determining when it was resolved.
However, I do not think that the agreement should be construed as meaning that neither side could resile from it on reasonable notice. Had Money Tree not proceeded, I do not think that the fact that it had not been decided could have been pleaded in bar are of further action in this case. The first Money Tree decision is dated 1 March 2000 and the last 30 August 2000. On 4 August 2000 the ATO instructed solicitors and on 15 August 2000 advised the solicitor of its intention to proceed and to seek an order for costs against him. On 8 August 2000, four days after the ATO instructed solicitors, and prior to the letter of 15 August 2000, the solicitor indicated to the ATO (via its employee Mr. Burton, who was an appropriate person to speak to) that he would not be pursuing the defence in this case.
One of the defendants in this case was separately sued in the Magistrate’s Court for another tax debt. The same defence had been raised and was dismissed. That case came before this court (Hume J.) on appeal on 4 October 2000. The solicitor informed the court that he would not be pursing the defence. While that was not an indication specifically related to this case, it was entirely consistent with the earlier intimation.
Up to the time of instructing solicitors, the ATO had incurred costs of perhaps around $150. Thereafter, and despite the advice within a few days that the defence would not be pursued, the juggernaut rolled on. In particular, the pursuit of an order that the solicitor pay costs was vigorously pursued, arguably with some inadequate responses from the solicitor.
The Master had held a directions hearing on 8 August 2000 and noted that it was plain that the solicitor was not pursuing the defence. Subsequently the solicitor applied to get off the file and was, on 16 November 2000, permitted to do so. On 4 December 2000, consent judgment was entered in favour of the ATO against the defendant tax payers.
Subsequently the Master dealt with the application to join the solicitor and to order him to pay costs. He gave his decision ordering that on 28 September 2001.
I have not set out all of the matters referred to by the Master in his judgment, or by the respondent in submissions where they set out chronologies. I do want to emphasise that, in this case, the following events occurred at the following times:-
1.Action commenced 11 May 1999.
2.Hopeless defence filed 12 July 1999.
3.Agreement to await Money Tree 21 September 1999.
4.Defence known to be hopeless by 21 October 1999.
5.ATO resumes prosecution of the action and briefs solicitors 4 August 2000.
6.ATO informed the defence would not be proceeded with 8 August 2000.
7.Consent judgment in favour of ATO for whole claim 4 December 2000.
Apart from the delay while awaiting the outcome of Money Tree, which had been suggested by ATO, there is no unusual factor about the case in relation to the time it took, or the steps that had to be taken. In my view, the only complaint is about the spurious defence. Because of the agreement to await Money Tree, there was no need to do much to meet it. All factual matters were simple and able to be proved on certificates from the Commissioner. The admittedly complex defence at law was to be decided elsewhere.
There is no evidence in this case (unlike Levick) that the defence was purely a delaying tactic – that there was an ulterior purpose in filing it. In my view, the cases in which a practitioner should be penalised merely for raising a spurious point in a pleading, for no ulterior motive, will be very rare. Those cases would commonly be met by ordering payment of the costs of striking out the spurious claim or defence, rather than by the costs of the whole action. In this case it is obvious that the argument was not one dreamed up by the defendants. It was one proffered by ITR and pursued by the solicitor. But, however, hopeless it may have been, it is not apparent that there was an ulterior motive, in particular that it was simply a delaying tactic.
Where such a spurious pleading is pursued at length, the case will be stronger. In Money Tree, the argument went to trial before the Chief Justice. It was persisted in. The Chief Justice was critical of the conduct of the practitioner and indicated that it might be sufficient to entitle a court to consider whether to award costs. He was careful to avoid saying what the outcome of such consideration might have been. Because legal privilege was not waived, he was not able to hear from the practitioner what his instructions had been, he was unable to know the extent to which the practitioner was on frolic of his own. In the absence of this information, he did not order costs.
However, when the practitioner persisted and attempted to appeal the decision, in the full knowledge that the point was hopeless, the matter came before Debelle J. Unsurprisingly, he thought enough was enough and ordered the practitioner to pay, on an indemnity basis, the costs of the appeal (and of the appeal only). With respect I agree that pushing the matter so far in the knowledge that the point was no good, called for an order – but note that it was limited to the costs incurred by pushing it too far.

It does not seem to me that the solicitor in this case pushed the defence in the same way. All he did was to raise the point and then agree to let it await the outcome of Money Tree. However unwise he was to file the defence, his error does not seem to me to be so gross as to call for the rarely made order for costs, still less on an indemnity basis.
Another matter greatly concerns me. While the matter is not free from doubt, the jurisdiction to award costs in these circumstances may, at least sometimes, include both compensatory and punitive elements. For that reason, I enquired from counsel for the ATO roughly how much might be involved in meeting such an order. I was informed that it would be around $40,000. To order that would be heavy punishment indeed.
Having regard to the way in which the action proceed to judgment, that seemed a lot. It emerged that at least a large part of those costs and disbursements related to the prosecution of the claim that the practitioner should pay them, rather than to the main action. It is claimed that the costs action involved establishing two costly matters. First that the defence was spurious and that that was known to the solicitor. In my view there as no need to prepare that argument before the substantive case was to be argued – and it was not going to be, because the outcome was to depend on Money Tree, where the question would be decided. In any event, just as the solicitor has been criticised for failing to take the trouble to understand three short cases, so can the ATO be criticised for requiring very expensive research to do the same.
Second, the ATO needed to establish that the practitioner, if not himself the sole person responsible for the action being brought and maintained, was at least sufficiently connected to it to give jurisdiction to a court to make orders against him. It appears that a good deal of effort went in to investigating what he did, whom he took advice from, what documents he had, and so on. There are suspicions that the solicitor may have been obstructive in complying with a subpoena – but they are no more than that. With respect, since the solicitor was clearly the solicitor on the record, little had to be done to establish the threshold point that he was connected with the action. I accept that proof of impropriety in what he did might have assisted the claim he was on a frolic of his own.
In any event, there does not appear to have been any conduct proved against the solicitor in the conduct of the costs action such as to give rise to a jurisdiction to order costs of the main action, either on an indemnity, or a party and party basis, or to give rise to an order on the costs application for anything other than party and party costs.
The order of the Master is for costs of “these proceedings” on an indemnity basis. It is not clear whether that order refers only to the main action. The distinction between the costs of the main action and the costs of the costs application was drawn to his attention in argument before him. His third order gives liberty to apply “in relation to the costs of and incidental to this application and argument”. Probably that reflects his appreciation of the distinction. If, however, his first order is intended to refer to the whole costs of action, including the application for costs, I would hold it to be in error. Of more importance, I think the Master has applied the outcome of the Money Tree appeal to this action without giving sufficient weight to the crucial difference between the prosecution, even to appeal, of a point known to be hopeless and the filing of a pleading relying on such a point and then agreeing to await the outcome of a test case. To my mind, the latter is not even nearly as reprehensible as the former.
I recognise that reasonable minds may well differ when categorising conduct, in particular, as to whether it is so bad as to call for the making of a rare order. In my view, the conduct in this case falls so far short of that degree of reprehensibility that the discretion of the Master must have miscarried. For these reasons I conclude that I must vary the Master’s order insofar as it relates to the solicitor. On doing so, I must exercise my own discretion.
I have noted that I do not consider that merely filing the defence and then leaving it in abeyance is enough to justify an order. Nor is it shown that, because of the practitioner’s conduct in relation to the costs application, he should be ordered to pay those of the main action. Counsel for the ATO argued that, nevertheless, the compensatory aspect of the jurisdiction to award costs should persuade me to protect the defendants against the heavy orders that the ATO has obtained against them. It was submitted that the solicitor had failed properly to advise the defendants. That may well be correct. In my view they can, if they complain about the solicitor’s conduct towards them, bring actions themselves for their own benefit. They are only up for party and party costs of the main action, which, in light of the history I have set out, would not be expected to be large. The judgment against them for unpaid tax was inevitable.
It is further argued that the ATO should be protected, in the sense of giving it as many parties as possible from whom to recover its costs. Since the costs of the main action will not include the costs of the costs application, they will not be large. There is no evidence that the defendants will not be able to meet them. Even if they were, it is largely beside the point.
It was suggested that a letter in August 1999 from ATO to the solicitor advising of ATO’s intention to seek costs against him on an indemnity basis if the defence were to be persisted with should assist its claim. I guess that, in some cases, an unawareness of the possibility of an adverse order by a practitioner might be put in the scales in favour of not making such an order. The letter eliminates this possibility. Having regard to what was going on in Money Tree, I cannot think it was much of a possibility in this case. Beyond that negative effect, I think it was of no effect. Indeed, to give it greater effect would be to run the risk, adverted to in the cases, of permitting threats to be made against a practitioner with a view to inhibiting his or her performance of his or her duty.
For these reasons, I allow the appeal. I make the following orders.
Dismissing the application that Peter David Kerin pay the costs of these proceedings.
That the defendants pay the plaintiff’s costs of and incidental to these proceedings on a party and party basis up to and until 4^th December 2000. This order does not extend to costs of and incidental to seeking orders against any person or entity other than the defendants.
I give liberty to either party in relation to the costs of and incidental to this appeal and to the original application and argument.
I direct that the Registry notify the parties, including Mr. George Siokos and Mr. Jim Siokos of these orders and I give them liberty to apply.

[2002] SADC 8

7 February 2002