Qin v Mossensons
[2012] NSWSC 1581
•05 December 2012
Supreme Court
New South Wales
Medium Neutral Citation: Qin v Mossensons [2012] NSWSC 1581 Hearing dates: 05/12/2012 Decision date: 05 December 2012 Jurisdiction: Equity Division Before: McDougall J Decision: Application (to restrain solicitors from continuing to act) dismissed with costs.
Catchwords: [PRACTICE] - application to restrain solicitor from acting in proceedings - whether solicitor/client relationship - obligations of confidence - whether solicitor in possession of information confidential to the application - whether a real and sensible possibility that any such confidential information is or may be relevant to the matter. Cases Cited: Farrow Mortgage Services Pty Ltd (in Liq) v Mendall Properties Pty Ltd [1995] 1 VR 1
Mallesons Stephen Jaques v KPMG Peat Marwick [(1990)
Mitchell v Burell [2008] NSWSC 772
Kallinicos v Hunt (2005) 64 NSWLR 561
Kooky Garments Ltd v Charlton [1994] 1 NZLR 587Category: Procedural and other rulings Parties: Zeng Zhao Qin (First Plaintiff)
Shandong Tianye Mining Co Ltd (Second Plaintiff)
Shandong Tianye Group Pty Ltd (ACN 136 926 835) (Third Plaintiff)
Mossensons Pty Ltd (ACN 123 903 113) (First Defendant)
Ian Mosseson (Second Defendant)
Shandong Tianye Australia Limited (ACN 004 450 033) (Third Defendant)
Gabriel Ehrenfeld (Fourth Defendant)
Tilapia Pty Ltd ACN 134 737 723 (Fifth Defendant)
Fundamental Capital Pty Ltd (ACN 130 103 623) (Sixth Defendant)Representation: Counsel:
G Coveney (Plaintiffs)
S Fleming (First and Second Defendants)
L Tyndall (Third Defendant)
Fourth Defendant (In person)
Solicitors:
HWL Ebsworth Lawyers (Plaintiffs)
Jones Day (First and Second Defendants)
Gadens Lawyers (Third, Fourth, Fifth and Sixth Defendants)
File Number(s): 2012/203913
Judgment (EX TEMPORE - REVISED 5 dECEMBER 2012)
HIS HONOUR: I am concerned with an application brought by a defendant to restrain the plaintiffs' solicitors from continuing to act for the plaintiffs in these proceedings.
The plaintiffs are Mr Zeng Zhao Qin and two companies, incorporated in the People's Republic of China, associated with him. They sue the defendants for relief in respect of alleged breaches of various agreements made between October 2007 and September 2010.
The background to the transactions and events that are likely to be in issue in this case is that the plaintiffs and an Australian citizen, the fourth defendant Mr Ehrenfeld, wished to acquire a company that had certain characteristics, re-capitalise that company and cause it to acquire or establish a business. The desired characteristics of the company to be acquired were that it should be listed on the ASX, suspended from trading and requiring re-capitalisation.
The project, or business, which was to be acquired ended up identified as a gypsum mine in China.
To that end, the plaintiffs and Mr Ehrenfeld entered into an "acquisition agreement" in relation to a company of the kind identified. In turn, they
identified the third defendant (Shandong Australia) as an appropriate company to be acquired for their purposes.
Cutting through the various agreements and to the matters which give rise to the present application, it is apparent that the plaintiffs contributed or subscribed various funds to be held on trust pending the re-listing of Shandong Australia. The intent was that, when Shandong Australia was re-listed, the funds would be applied towards the acquisition of further shares in its capital and would enable the company to proceed with the acquisition of the gypsum mine.
It is the plaintiffs' case that at least some of the moneys subscribed by them were held in trust by the first defendant, an incorporated legal practice in the State of Western Australia.
As part of all this process, it was necessary for Shandong Australia to go through a form of due diligence process so that it could issue a prospectus for the capital raising. The solicitors who presently act for the plaintiff, HWL Ebsworth Lawyers (and I shall call them simply "HWLE"), were engaged in that process. I use this somewhat oblique phraseology because there is some conflict in the evidence as to the precise nature of that engagement.
Ms Virginia Waterhouse, a partner in the firm, had responsibilities relating to the due diligence process. She has sworn that Shandong Australia "has never been a client of HWLE". She has also sworn that "HWLE was requested by Mr Zeng in about mid 2011 to manage the due diligence process for [Shandong's Australia] application for redemption to trading on the official list of the ASX".
Ms Waterhouse refers, as does Mr Ehrenfeld in his affidavit evidence, to a planning memorandum for the Shandong Australia due diligence committee. That memorandum was prepared by HWLE and adopted by the committee. It states, among other things, that HWLE has "has been engaged to act as legal advisers to the company in relation to certain aspects of the offer".
Ms Waterhouse seeks to "clarify" that statement (the verb is hers) in five ways. There is no evidence that the "clarifications" represent anything discussed or disclosed, to Shandong Australia or anyone else relevant, at or prior to the time of the initiation and consummation of the due diligence process. I do not regard those clarifications as having any relevant bearing on the dispute.
There are other references in the due diligence material to the role of HWLE. They include the following.
- "HWLE" will be undertaking a verification and review process and checking that specific disclosure requirements...have been met";
- HWLE "and the other experts and advisers...will provide formal sign-offs" (the content of which was explained); and
- "HWLE has confirmed to the due diligence committee that verification has been undertaken in accordance with the procedure". (This was a "prospective" statement in that it was what HWLE expected to do following completion, in a satisfactory manner, of the due diligence process).
It is the plaintiff's case that the conditions on which they paid money were not met and that, accordingly, they are entitled to the return of the money. They articulate that basic case in various ways against various of the defendants, including by references to breach of trust, accessory liability for breach of trust and the like. It is not necessary to go into the detail of that articulation of the plaintiff's case. It is sufficient to say, as I have indicated, that the basic dispute is one as to whether, on the proper construction of the relevant agreements and in the events that have happened, the plaintiffs are entitled to the return of their money.
Shandong Australia submits that it was a client of HWLE for the purposes of the due diligence process; alternatively, that HWLE was retained by it or on its behalf for the purposes of that process.
As I have said, Ms Waterhouse disputes that characterisation of the relationship. I think that it is safe to proceed on the basis that, as was stated in the planning memorandum that she drafted, HWLE was "engaged to act as legal advisers to the company in relation to certain aspects of the offer".
Whether or not that imposes a solicitor/client characterisation on the relationship is not necessary to be decided, because, on any view, the relationship has come to an end. The present application is not put on the basis that there are current, or conflicting, retainers.
However, equally, it is clear that as a result of the relationship (however characterised) HWLE is under obligations of confidence to Shandong Australia in relation to matters disclosed to it in the course of performance of the due diligence process and for the purposes of the relationship.
It is common ground that the relevant principles are as were summarised by Brereton J in Kallinicos v Hunt (2005) 64 NSWLR 561 at [76]. His Honour reviewed the authorities in depth, and concluded, in that paragraph, that they established some eight propositions. I set out that paragraph of his Honour reasons, without however the references to the underlying authorities that his Honour had carefully inserted, and gratefully accept, as accurate and appropriate, what his Honour there said:
76 The foregoing authorities establish the following:· During the subsistence of a retainer, where the court's intervention to restrain a solicitor from acting for another is sought by an existing client of the solicitor, the foundation of the court's jurisdiction is the fiduciary obligation of a solicitor, and the inescapable conflict of duty which is inherent in the situation of acting for clients with competing interests.
· Once the retainer is at an end, however, the court's jurisdiction is not based on any conflict of duty or interest, but on the protection of the confidences of the former client (unless there is no real risk of disclosure)
· After termination of the retainer, there is no continuing (equitable or contractual) duty of loyalty to provide a basis for the court's intervention, such duty having come to an end with the retainer.
· However, the court always has inherent jurisdiction to restrain solicitors from acting in a particular case, as an incident of its inherent jurisdiction over its officers and to control its process in aid of the administration of justice.
· The test to be applied in this inherent jurisdiction is whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that a legal practitioner should be prevented from acting, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice.
· The jurisdiction is to be regarded as exceptional and is to be exercised with caution.
· Due weight should be given to the public interest in a litigant not being deprived of the lawyer of his or her choice without due cause.
· The timing of the application may be relevant, in that the cost, inconvenience or impracticality of requiring lawyers to cease to act may provide a reason for refusing to grant relief.
However, it is to be noted that the discretion which Shandong Australia seeks the Court to exercise is one that requires the Court to take into account the specific facts of the particular case. While statements of principle (including but not limited to those in Kallinicos) are of great assistance in understanding the boundaries of and guidelines for the exercise of the discretion, they can not be taken as directing the exercise in any particular way.
At the end of the day, as Hayne J recognised in Farrow Mortgage Services Pty Ltd (in Liq) v Mendall Properties Pty Ltd [1995] 1 VR 1 at 4, solicitors may be restrained from acting in circumstances where they had earlier acted for, and acquired confidential information of, an opposing party, "if there is a real and sensible possibility of the misuse of confidential information".
As Ipp J said in Mallesons Stephen Jaques v KPMG Peat Marwick [1990] 4 WAR 357 at 362-363, the question is whether the solicitor's duty to advance the case of the client for whom he or she is acting might conflict with the solicitor's duty to keep confidential information given to him or her by the former client, or to refrain from using that information to the advantage of the present client or the detriment of the former client. (I have expanded slightly, but I think not unduly, what his Honour said.)
Having said all that, as Brereton J recognised in Kallinicos, and has been repeated since, there is a real public interest in a litigant's having the lawyer of its choice acting for it, and the litigant should not be deprived of the lawyer of its choice without due cause.
To my mind, the question is to be assessed by looking at whether there is a real and sensible possibility that HWLE, through Ms Waterhouse, has confidential information of Shandong Australia that is likely to be relevant in the resolution of the disputes that are likely to arise in these proceedings. Resolution of that question has not been rendered any easier by the fact that the defendants have not filed and served commercial list responses.
Before I turn to that question, I should note that an affidavit on which the plaintiffs rely suggests that the plaintiffs have to date incurred in excess of $180,000 in costs, and that if they were to be required to engage new lawyers, not only would those costs be wasted, but the handover process would cost in the order of $70,000. I do not regard that factor as having any particular significance. Whether or not the costs presently incurred are reasonable, having regard to what has happened to date, is a matter on which I express no opinion. It is obvious, however, that some of the work in respect of which those costs were incurred would enure for the benefit of the plaintiffs if they were required to obtain new lawyers.
In any event, the application has been brought promptly. Mr Coveney of counsel, who appeared for the plaintiffs, submitted that the present application was made on insufficient evidence. He accepted that, if in the future sufficient evidence did appear and a further application were made, costs incurred and perhaps wasted in the interim would not have any dispositive significance.
I return to the question of confidential information.
As I have said, the likely issues in the proceedings appear to relate to whether certain agreements made between 2007 and 2010 were breached; whether those agreements have otherwise come to an end either in accordance with their terms or in the events which have happened; and whether in those circumstances the plaintiffs are entitled to the return of moneys paid by them in pursuance of those agreements.
It may be accepted that the due diligence process in which HWLE, through Ms Waterhouse, was engaged was an exercise undertaken as part of the process of performance of those agreements. More broadly, it may be said that the due diligence process was an inevitable consequence of the fundamental bargain, or plan, struck between the plaintiffs and Mr Ehrenfeld once Shandong Australia was identified as an appropriate company for the execution of that plan or bargain.
I am prepared to accept, although with some reservations, that Ms Waterhouse has come into possession of confidential information, in the course of the due diligence process, which confidential information might not otherwise be apparent, or become apparent, through the ordinary processes of obtaining documents if the Court is subsequently minded to direct disclosure or permit the service of subpoenas or notices to produce.
But the test is not simply whether HWLE, through Ms Waterhouse, has come into possession of confidential information. It is whether the information is of such a character as to give rise to the real and sensible possibility of conflict of the kind to which Ipp J referred in Mallesons Stephen Jaques and to which Hayne J referred in Farrow Mortgage Services. Such a real and sensible possibility could only arise if there were a sound basis for concluding that it was at least likely, as a reasonable and well informed member of the public would see it, that HWLE, through Ms Waterhouse, was in possession of confidential information of Shandong Australia that would be relevant to the issues likely to arise in this litigation. That in turn would give rise to a problem if, as Ipp J said, HWLE's interests in advancing the case of the present plaintiffs might conflict with its duty to keep confidential the information of Shandong Australia.
At present, I see no basis for concluding that there is any, let alone any real or sensible, possibility that that might happen.
As the issues stand at present, the question is not so much one of what happened in the due diligence process but what is the result, in terms of the performance or termination of the relevant agreements, of the events that have happened. Thus, to the extent that confidential information was exchanged in the due diligence process which might not otherwise be available to the plaintiffs, it does not seem to me, again as the matter stands at present, that this would have any real bearing on the resolution of the contractual issues which the plaintiffs advance.
Mr Tyndall of counsel, who appeared for Shandong Australia, suggested that there was a possibility that Ms Waterhouse might become involved as a witness. It is clear that this is not of itself a reason for restraining her firm from acting. As Brereton J said in a subsequent decision, Mitchell v Burell [2008] NSWSC 772 at [20], the mere circumstance that a solicitor will be a material witness, even on a controversial matter, does not of itself justify restraining that solicitor from continuing to act.
I agree further, that as his Honour said in the same paragraph, restraint would only be justified:
"...when the solicitor has a personal stake in the outcome of the proceedings or in their conduct, beyond the recovery of proper fees for acting, albeit that the relevant state may not necessarily be financial, but involves the personal or reputational interest of the solicitor, as will be the case if his or her conduct and integrity come under attack and review in the proceedings."
Mr Tyndall pointed to the fact that HWLE appeared to have drafted some of the agreements on which, or in respect of which, the plaintiffs sue. That is a frequent occurrence in litigation - that the solicitors for a party, in relation to a contractual dispute, are the authors of the contractual documents. Unless some claim is made for rectification of the documents, or it is suggested in some way the solicitor acted negligently, dishonestly or fraudulently in their drafting, the fact that a solicitor was involved in the drafting exercise does not mean that his or her reputation or interest would be likely to come under attack on the question of construction of the documents.
Another way of approaching the same problem is that adopted by Thomas J in Kooky Garments Ltd v Charlton [1994] 1 NZLR 587 at 589-590. His Honour there said that a restraint, on the basis of the solicitor's personal or reputational interest being under attack, would be justified only:
"where the acts or omissions of the solicitors are an integral part of the other party's complaint or the client has been sued in circumstances where he or she was acting on the advice of their solicitors, and it is effectively that advice which is in issue".
There is no evidence to suggest that these considerations arise in the matter with which I am concerned.
Mr Tyndall noted that in the course of the due diligence process Ms Waterhouse had had dealings with other parties who are, or some of whom are, parties to the litigation: in particular Mr Ehrenfeld and, through him, companies controlled by him. That may be so. But there is no suggestion that Ms Waterhouse, or HWLE, had any professional relationship (by way of retainer) with Mr Ehrenfeld or his companies. To the extent that Mr Ehrenfeld may have said things, they were not said in circumstances which entitle him or his companies to the protection of confidentiality. If ever those discussions become relevant - and at present I do not see how they could be - there would be no impediment to their being put into evidence in any event.
I should note that I have referred only to Ms Waterhouse. The evidence suggests that another solicitor in the firm HWLE, Ms Anita Christmas, was also involved. Her involvement adds nothing to the discussion, because in any event it is the information obtained by HWLE through its partners or employees that is relevant, not the identity of the individuals through whom that information may have been obtained.
In all the much circumstances, I conclude that the facts come nowhere near showing sufficient ground for restraining HWLE from continuing to act for the plaintiffs in these proceedings. On that basis I order that the third defendant's notice of motion filed on 11 October 2012 be dismissed with costs.
The exhibits on the application are to be handed out.
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Decision last updated: 21 March 2013
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