UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 2039 of 1995

UTSA PTY LTD (IN LIQUIDATON) AND ORS	Plaintiffs
v
ULTRA TUNE AUSTRALIA PTY LTD AND ORS	Defendants

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JUDGE:	HABERSBERGER J
WHERE HELD:	MELBOURNE
DATE OF HEARING:	18-20, 25 AND 26 NOVEMBER 2002
DATE OF JUDGMENT:	6 APRIL 2004
CASE MAY BE CITED AS:	UTSA PTY LTD (IN LIQ) v ULTRA TUNE AUSTRALIA PTY LTD
MEDIUM NEUTRAL CITATION:	[2004] VSC 105

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Practice and Procedure – Costs – Application against unsuccessful plaintiffs' solicitors for an order that it pay defendants' costs of the proceeding – Whether application hypothetical – Jurisdiction to make non-party costs orders against solicitors – Appropriate procedure – Relevant principles for determination – Whether breach of duty to the Court by the solicitors – Interrelationship with role of counsel – Supreme Court Act 1986 s.24 – Supreme Court Rules Ch 1 r.63.23.

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APPEARANCES:	Counsel	Solicitors
For the Applicants (First, Second, Third and Sixth Defendants)	Mr G.T. Bigmore QC with Mr M.J. Galvin	Mr Albert Chong
For the Respondent (Minter Ellison)	Mr P.J. Riordan	Blake Dawson Waldron

TABLE [L1]OF CONTENTS

The Applications................................................................................................................................ 1

Background to the Proceeding......................................................................................................... 1

The Order for Costs........................................................................................................................... 6

The Applications Against Minter Ellison..................................................................................... 8

Are the Applications Hypothetical?............................................................................................... 8

The Power to Make Non-Party Costs Orders............................................................................. 12

Breach of Duty to the Court........................................................................................................... 14

The Need for Caution...................................................................................................................... 17

Burden of Proof................................................................................................................................ 20

The Test is from the Lawyers' Perspective.................................................................................. 21

Reliance on Counsel........................................................................................................................ 21

Causation........................................................................................................................................... 24

The Appropriate Procedure............................................................................................................ 24

The Hearing of the Applications.................................................................................................. 28

The Applicants' Grounds............................................................................................................... 29

Alleged Deception of Ernst & Young........................................................................................... 29

Allegations of corruption against Newton and Sean Buckley................................................ 44

The Allegation against Mr Buckley.............................................................................................. 44

The Allegation against Mr Newton.............................................................................................. 48

Korman Evidence............................................................................................................................. 52

These Three Grounds as a Group................................................................................................. 62

Sung Li's Ground............................................................................................................................. 63

Orders................................................................................................................................................. 65

HIS HONOUR:

The Applications

The Court has for determination separate applications by the first, second, third and sixth defendants ("the applicants") for an order that a non-party, Minter Ellison, the former solicitors for the four plaintiffs, pay the applicants’ costs of this proceeding.

Background to the Proceeding

The circumstances leading to these applications are as follows. On 13 May 1998, Chernov J, as his Honour then was, handed down his reasons for judgment[1] ("the liability judgment") in this proceeding, following a 102 day trial over a period of some seven months. On the following day, his Honour ordered that judgment be entered for the first, second, third, sixth, eighth, ninth, tenth and nineteenth defendants against the plaintiffs and that the plaintiffs' proceeding be dismissed. During the course of the proceeding, the plaintiffs had progressively discontinued their action against the other eleven defendants.
[1]Unreported, 13 May 1998

At the start of his judgment Chernov J gave an overview of the case. My brief summary of the background to the proceeding is taken from his Honour’s overview.[2]
[2]Pages 1 to 7 of the liability judgment.

The first plaintiff, UTSA Pty Ltd (In Liquidation) ("UTSA"), conducted a business known as the Ultra Tune business which was, essentially, a franchise operation involving a system for tuning engines of motor vehicles. On 30 June 1994, it sold that business to the first defendant, Ultra Tune Australia Pty Ltd ("UTA"). At the time of the sale, the chairman of directors of UTSA was the second defendant, Mr Peter Buckley. His son, Mr Sean Buckley, the third defendant, was a senior employee of the company. Another director of UTSA was the nineteenth defendant, Mr Geoffrey Norris.

At the time of the sale, 20% of the shares in UTA were beneficially owned by a company associated with Mr Israel Herzog. The eighth defendant, Layerose Pty Ltd ("Layerose"), was the beneficial owner of 75% of the UTA shares. The shareholders and directors of Layerose were the ninth defendant, Ms Anne-Marie Moore and her sister, the tenth defendant, Ms Tania Moore. The directors of UTA were the former fifth defendant, Mr John Sambell, the former fourteenth defendant, Mr Steven Korman, who held 2.5% of the shares, and the former sixteenth defendant, Mr Dean Treadwell, who also held 2.5% of the shares. By the time of the judgment, 95% of the UTA shares were held by the sixth defendant, Sung Li Holdings Ltd ("Sung Li").

In his overview Chernov J summarised the plaintiffs' main contentions as follows:

(a)At the time of the sale, the Buckleys controlled Layerose (through their nominee, or agent, Ms Anne-Marie Moore) and, thereby, UTA. Hence, they were the effective purchasers of the UTSA business. Mr Norris and Ms Moore knowingly assisted them to achieve and disguise that situation.
(b)In the circumstances, the Buckleys and Mr Norris breached their fiduciary duty to UTSA in connection with the sale.
(c)UTA facilitated the perpetration of those breaches, or, at the very least, it received the UTSA business in full knowledge of the breaches. Hence, it held the business upon a constructive trust for UTSA under the rule in Barnes v Addy[3]. This claim was based on the contention that the Buckleys were the directing mind and will of UTA. (Alternatively, the plaintiffs said, the directing mind and will of UTA was constituted by Messrs Sambell, Korman and Treadwell and the latter two were aware of the alleged breaches.)
(d)After the sale, the Buckleys derived certain benefits through their association with UTA, which they gained by reason of, or by use of, their fiduciary position with UTSA or the opportunity or knowledge resulting from it. Consequently, they were bound to account for those benefits to UTSA and their failure to do so, constituted a breach of their fiduciary duty to it.
(e)In November 1994, the Buckleys caused UTA to enter into a sale and lease-back arrangement with respect to its intellectual property, with two offshore companies which they controlled. This was done in order to entrench the Buckleys' hold over the Ultra Tune business and to disguise further their ownership of it. At the same time, they procured the transfer of 95% of the shares in UTA to Sung Li which, according to the plaintiffs, was also controlled by the Buckleys. Their ability to procure those transactions, the plaintiffs said, showed that they controlled Layerose, UTA and Sung Li.

[3](1874) 9 Ch App 244

The plaintiffs' principal claim for relief was against UTA on the basis that it was a constructive trustee of the Ultra Tune business. The orders sought included orders for restitution, compensation, an account of profits and damages. Similar orders were sought against the other defendants (except Sung Li) on the basis that they knowingly participated in the Buckleys' breach of their fiduciary duty to UTSA. The plaintiffs also contended that the conduct of the Buckleys and Mr Norris constituted breaches of s.232 of the Corporations Law. They also claimed the return of the business and ancillary orders on the basis that the sale was a voidable transaction for the purposes of Division 2 of Part 5.7B of the Corporations Law.

His Honour then summarised the contentions of defendants, without differentiating between the various ways in which they put their respective cases. They said that the severe financial and other problems that beset UTSA for some years, but which became critical by about May 1994, resulted in the directors resolving to sell its business. This decision was made after they obtained outside advice from accounting and legal experts in relation to the matter. One of those advisers was the third plaintiff, Mr David Scott. The directors considered that the company might become insolvent in the 1995 financial year and that, therefore, its business should be sold before 30 June 1994, if that were possible. Legal advice precluded them from pursuing their preferred option, namely, selling the business to a related Peter Buckley company. Advertisements for expressions of interest also did not produce a purchaser. Through the efforts of UTSA's consultant, Mr Peter Stedwell and, to a lesser extent, Mr Peter Buckley, the Herzog interests and Layerose were brought together to form a purchasing syndicate. The sale was made to it at a figure above the valuation attributed to the business by Ernst & Young.

The defendants denied that the Buckleys controlled Layerose and that Ms Anne-Marie Moore was merely their nominee. There was a similar denial by Mr Norris that he knowingly participated in any wrongdoing by the Buckleys. The defendants further claimed that Mr Sean Buckley played no part, and was not expected to play any part, for UTSA in relation to the sale. In fact, with the consent of the directors, he advised Layerose in relation to it. Having regard to his close personal relationship with Ms Anne-Marie Moore who owned Layerose, Mr Peter Buckley and the directors understood that ultimately, Mr Sean Buckley might indirectly benefit from the participation by Layerose in the purchase of the business. Any such gain would arise from his personal relationship with Ms Moore and from his efforts in working in the new venture. The decision by Mr Peter Buckley and Mr Norris to vote in favour of the sale, however, was not motivated by a wish to confer any such benefit on him. They saw the sale as being in the best interests of the company and its shareholders. It was timely. The price was above valuation and Mr Herzog was an acceptable leader of the purchasing syndicate in the sense that he had a sound reputation in the industry. The alternative was likely liquidation in the near future. The sale, on the other hand, was at least likely to produce a small surplus which could be returned to shareholders or used to purchase and operate a small franchise business.

After the acquisition, UTA made substantial changes to the operation of the Ultra Tune business and, principally for taxation reasons, entered into the sale and lease-back arrangement referred to earlier. The defendants denied that the Buckleys controlled UTA or the two offshore companies. As to the transfer of the UTA shares to Sung Li, that was also carried out primarily for taxation reasons, after Ms Moore had taken advice about the matter from solicitors.

The first defendant said that, in the circumstances, UTA was never a constructive trustee of the Ultra Tune business. It claimed not only that the Buckleys did not breach their fiduciary duty to UTSA, but they were not the directing mind and will of UTA. Neither were Messrs Korman or Treadwell, or if they were, they were not aware of any breach of fiduciary duty by the Buckleys. It said that at all relevant times, Mr Sambell was the directing mind and will of UTA and it was common ground he had no knowledge of any breach by the Buckleys of their fiduciary duty to UTSA.

In relation to the allegation that the Buckleys should account for the gains they made through UTA by reason of, or by use of, their fiduciary position with UTSA or the opportunity or knowledge resulting from it, the defendants said that they made no such gains. Moreover, even if they did gain such benefits, they were obtained by them because of circumstances that had arisen after the sale and were unrelated in any relevant sense to their former fiduciary position with UTSA. This was particularly so in the case of Mr Sean Buckley. The scope of his fiduciary duty was such that it did not require him to account for any such gains to UTSA.

The relevant defendants also denied that there were any breaches of s.232 of the Corporations Law or that the sale was a voidable transaction for the purposes of the Corporations Law.

The second and third plaintiffs, Mr Michael McCann and Mr David Scott, were the liquidators of UTSA. On 5 October 1994, they had been appointed its administrators, and when the company went into voluntary liquidation on 29 December 1994, they became its liquidators. Some shareholders and franchisees and a former director of UTSA alleged during the latter part of 1994 that there was, or there might have been, impropriety in the sale of the UTSA business in the sense that the purchaser was controlled by the Buckleys and that the business that was sold was worth more than UTA paid for it.

This proceeding was issued on 28 April 1995 by the first three plaintiffs. By June 1996, the principal causes of action had been acquired by Titan Corporation Limited ("Titan") and it was formally joined in this proceeding as the fourth plaintiff shortly thereafter in accordance with orders made by this Court. For practical purposes, it became the entrepreneurial driving force behind the plaintiffs' claims in the litigation. Titan had purchased all of the causes of action bar the statutory causes of action from the liquidators. The proposed assignment was held by Hansen J to come within a statutory exception to the rule against maintenance and champerty and approval was given under s.511 of the Corporations Law to the liquidators entering into the transaction.[4]
[4][1997] 1 VR 667. Upheld on appeal - (1996) 21 ACSR 457.

In his 229 page judgment, Chernov J gave his reasons for concluding that neither of the Buckleys nor Mr Norris had breached their fiduciary duty to UTSA or the provisions of s.232 of the Corporations Law. He also held that the sale was not a voidable transaction within the meaning of the legislation. It followed, therefore, that the plaintiffs failed against all of the (remaining) defendants.

The Order for Costs

On 20 May 1998, Chernov J gave judgment on the question of costs[5] ("the costs judgment"), after hearing argument on 14 and 18 May 1998. The first plaintiff, UTSA, was not represented at the argument on costs, although Minter Ellison were still the solicitors on the record. The second and third plaintiffs, the liquidators of UTSA, were represented at this hearing by new barristers and a new firm of solicitors. The fourth plaintiff, Titan, was separately represented, also by a new barrister and a new firm of solicitors.
[5]Unreported, 20 May 1998

The costs order made by Chernov J on 21 May 1998 was as follows:

"1.The First and Fourthnamed Plaintiffs pay the costs of the First, Second, Third, Sixth, Eighth to Tenth and Nineteenthnamed Defendants of and incidental to this proceeding, including reserved costs.
2.The Second and Third Plaintiffs pay the said costs of the above Defendants incurred by them up to the time when Titan Corporation Ltd was joined as Fourthnamed Plaintiff as well as their costs incurred thereafter, insofar as they necessarily relate to the statutory causes of action. Such costs are to be paid on a party/party basis.
3.The First and Fourthnamed Plaintiffs pay the said costs of the First and Sixthnamed Defendants on a solicitor/client basis.
4.The Second and Thirdnamed Plaintiffs pay the Firstnamed Defendant's costs of and incidental to its Counterclaim, including reserved costs, on a party/party basis.
5.The First and Fourthnamed Plaintiffs pay the said costs of the Second, Third, Eighth to Tenth and Nineteenthnamed Defendants on a party/party basis other than their costs of and incidental to the issue of the market value of the UTSA business as at 30 June 1994, including the correctness or otherwise of the Ernst & Young valuation, which costs are to be paid on a solicitor/client basis.
6.The operation of Orders in paragraphs 1, 3 and 5 above are stayed until 4.15 p.m. on 29 May 1998 or further order.
7.Liberty to apply is reserved to the Defendants to bring such proceedings as they may be advised in respect of the recovery of any costs from persons not parties to this proceeding."

Each of the four applicants has recovered some costs from the liquidators and those claims have been settled. There is, therefore, no issue arising out of the costs orders made against the second and third plaintiffs.

On the application of the first, second and sixth defendants, security for costs had been ordered to be provided by the plaintiffs on two occasions. After incomplete taxations of their bills of costs, orders were obtained for the amounts secured to be paid to the first, second and sixth defendants. No other amounts have been recovered from the first and fourth plaintiffs. UTSA had been in liquidation since before the proceeding commenced and Titan went into liquidation on 7 September 1998, shortly after the judgment was handed down.

Pursuant to the leave reserved to the defendants, on 16 June 1998 the first defendant, UTA, issued a summons against Mr Max Latimer and Mr Godfrey Cullen, two of the directors of Titan, seeking an order that they pay and be jointly and severally liable for the costs of this proceeding ordered against the first and fourth plaintiffs. The validity of that application was unsuccessfully challenged by the respondents before Chernov J.[6] Mr Cullen subsequently died and his estate was bankrupt. The claim against Mr Latimer by UTA and, after amendment, by all bar one of the successful defendants continued and was only settled in the week before the hearing before me commenced. It was agreed that certain payments would be made by Mr Latimer.
[6][1999] 1 VR 204

A non-party application for costs was also made by some of the remaining defendants against a party who had partly underwritten the security for costs provided by the plaintiffs. I was informed that this had also been settled and that payments had been made.

The Applications Against Minter Ellison

The first defendant's application for an order that Minter Ellison be liable for the costs of the proceeding was commenced by a summons dated 2 March 1999. Points of Claim were filed by the first defendant on 20 March 1999.

The second and third defendants' applications for costs against Minter Ellison were commenced by a summons dated 24 August 2000. Although that summons was said to be "filed on behalf of the First, Second, Third, Sixth, Eighth, Ninth and Tenthnamed Defendants" it sought orders for costs only in favour of the second and third defendants. Points of Claim were filed by the second and third defendants on 15 September 2000.

The sixth defendant's application for costs against Minter Ellison was apparently commenced by a summons, but no copy of that document could be found. Nevertheless, the parties had proceeded on the basis that such a summons had been issued and Points of Claim were filed by Sung Li on 15 January 1999.

Are the Applications Hypothetical?

At the outset of the hearing I raised the question of whether I needed to be satisfied that the applicants were still owed costs in respect of the proceeding, that is that there was, or was likely to be, a deficiency between the quantum of each applicant's costs if and when completely taxed in accordance with Chernov J's order and the amount already recovered by that applicant. Mr Bigmore QC, who appeared with Mr Galvin of counsel for the applicants, explained that the taxation of the applicants' costs had not been completed because of the insolvency of the first and fourth plaintiffs. Not surprisingly, the applicants did not want to incur the costs of completing the taxation if there was no one liable, and able, to pay the remaining costs of the proceeding. I note that Minter Ellison raised no queries about the existence of an entitlement by each of the applicants to payment of further costs.

However, the Court does not deal with hypothetical issues. In Swift Australian Co (Pty) Limited v South British Insurance Co Ltd[7], the Full Court of this Court, consisting of Winneke CJ, Little and Starke JJ said:

"It is established by a long line of authority that the courts will not advise parties to actions upon their rights under a hypothetical state of facts, or give to them advisory opinions, or give hypothetical decisions the effectiveness of which depends on varied states of facts which remain to be determined in the future."[8]

In refusing to deal with the question of whether the defendant was obliged to indemnify the plaintiff under a policy of insurance in advance of any finding of legal liability by the plaintiff to its injured employee, their Honours stated that:
"[W]e think the principle on which we have acted is of overriding importance in the public interest, and must be maintained."[9]

[7][1970] VR 368

[8][1970] VR 368 at 369

[9][1970] VR 368 at 370

Similar views have been expressed by members of the High Court of Australia. In Ainsworth v Criminal Justice Commission[10], Mason CJ, Toohey and Gaudron JJ said:

"The person seeking relief must have 'a real interest' and relief will not be granted if the question 'is purely hypothetical', if relief is 'claimed in relation to circumstances that [have] not occurred and might never happen' or if 'the Court's declaration will produce no foreseeable consequences for the parties'."[11] [References in footnotes omitted]

[10](1992) 175 CLR 564

[11](1992) 175 CLR 564 at 582

It seems to me, therefore, that I should not decide the non-party's liability to pay costs to a particular defendant unless I consider that there is actually some amount which is likely to be found to be owing to that defendant if the task of taxing the costs ordered to be paid by the plaintiffs to that defendant were completed. Otherwise, I would be considering a hypothetical question.

Unfortunately, the evidence on this issue of what costs might still be owed to each applicant was far from satisfactory. No doubt due to the passage of time between the making of the orders by Chernov J and the hearing of these applications, records had been lost and memories had faded. Other factors had contributed to the problem. The applicants initially relied on a table exhibited to the affidavit of their solicitor, Albert Wee Tai Chong, sworn on 11 November 2002. The table had to be updated to take into account the settlement with Mr Latimer. It set out an estimate of each applicant's entitlement to costs, the allocation between applicants of the amounts received by them in respect of costs and by deduction the amount of costs said to be remaining owing to each applicant. During the hearing, the applicants filed an affidavit of their costs consultant, Catherine Mary Dealehr, sworn on 22 November 2002, which provided further information.

The following would seem to have been established in respect of each applicant. The detailed bill of costs prepared on behalf of UTA as against UTSA and Titan for all of its costs claimed an amount of just over $2.3 million. This bill was partly taxed and allowed by a number of orders in the total sum of $452,895.67. This enabled UTA to recover the amount of $355,000 which Titan had been ordered to pay by way of security for costs. As there was no possibility of further recovery from those plaintiffs, the taxation did not proceed further. The detailed bill of costs prepared on behalf of UTA as against the liquidators claimed nearly $2.1 million. This bill was also partly taxed and allowed in the sum of $561,414.06. No doubt there was some overlap between the two partly completed taxations. UTA has recovered from the liquidators in full settlement of their liability the total sum of $399,684.36. In addition, UTA has also received, or was entitled to receive, a further $144,000 from other non-parties.

Thus, in respect of a claim for a maximum amount of $2.3 million in costs, UTA gave credit for the sum of $898,684.36. It was Ms Dealehr's opinion that the amount of UTA's unpaid costs after a full taxation was likely to be between $800,000 and $1 million. I therefore conclude that UTA has an unsatisfied entitlement to a large amount of costs from UTSA and Titan, even if Ms Dealehr's opinion were to be regarded as optimistic.

A copy of the detailed bill of costs prepared on behalf of the second defendant, the Estate of Peter Buckley, deceased ("the Estate") as against UTSA and Titan was said to be no longer available, although it had apparently been partly taxed and allowed in a sufficient sum to enable the Estate to recover the amount of $154,000 from the security provided by Titan. Ms Dealehr said that the amount claimed in the bill would not have been less than the amount claimed by the Estate against the liquidators, which was the sum of $273,756.57. The total sum of $52,000 was paid by the liquidators to the Estate in full settlement. The Estate also received, or was entitled to receive, another $18,000 from other non-parties. The Estate, therefore, gave credit for the sum of $224,000.

What was not clearly established was the total amount which had been claimed by the Estate. There was the evidence of Ms Dealehr that it would not have been less than the $273,756.57 figure. Other evidence suggested it might have been as high as $370,000. No doubt the claimed amount would have been reduced on the taxation to some unknown extent. On balance, I am satisfied that, if required, a taxation of the whole bill of the Estate would result in a figure in excess of the credit already given of $224,000.

A bill of costs in taxable form was also prepared by Ms Dealehr on behalf of the third defendant, Mr Sean Buckley, as against the liquidators. It was partly taxed and allowed at the sum of $46,922.91, which was paid by the liquidators. Based on a further claim for Mr Buckley's personal attendance at the trial to represent himself, at the rate of about $450 per day for 102 days, and after allowing for the proportion attributable to the defence of the statutory causes of action which was determined to be 12% in the case of Mr Buckley, for which the liquidators were responsible, Ms Dealehr stated that:

"I am confident in saying that the costs recoverable by Buckley against UTSA and Titan would not be less than $40,000.00."

Again, even allowing for reduction on the taxation, I am satisfied that Mr Buckley has an outstanding entitlement to costs from UTSA and Titan.

A copy of the detailed bill of costs of the sixth defendant, Sung Li Holdings Ltd ("Sung Li") as against UTSA and Titan was also said to be no longer available, although I assume that it had been partly taxed and allowed in a sufficient sum to enable Sung Li to recover the amount of $96,000 security provided by Titan. An interim order had been made by Master Bruce on 5 August 1999 taxing and allowing Sung Li's costs up to 28 June 1996 as against the liquidators in the sum of $21,797.78. That amount was paid by the liquidators together with a further amount of $65,000. Thus, it would appear that Sung Li has received a total amount of $182,797.78 in respect of its costs. In a letter from Ms Dealehr to the applicant's solicitor dated 28 July 2000 it was stated that Sung Li would have recovered in total on taxation, on a conservative estimate, the sum of approximately $200,000. If this is correct, there is still a deficiency of about $17,200 over and above what Sung Li has already recovered. Although it is a near thing, I am prepared to proceed on the basis that Sung Li's claim for costs against Minter Ellison is not purely hypothetical because there would probably be a small amount of costs still owing to it by UTSA and Titan if its taxation were to be completed.

The Power to Make Non-Party Costs Orders

There was no dispute between the parties that the Court has the power, pursuant to s.24 of the Supreme Court Act 1986, to make an order for costs against a non-party, although such an order is exceptional[12]. Non-party costs orders may be made against solicitors, but the primary source of that particular power is to be found in "the ability of the court to enforce duties owed by practitioners to the court."[13] It comes within "the disciplinary jurisdiction of the court (even though the main object of the order may be compensatory) …"[14] In addition, r.63.23 of the Supreme Court Rules expressly permits such orders. At the relevant time, r.63.23(1) provided that:
[12]Knight v FP Special Assets Ltd (1992) 174 CLR 178; Burns Philp & Co Ltd v Bhagat [1993] 1 VR 203 at 220 per Brooking J with whom Fullagar and Tadgell JJ agreed; Flinn v Flinn [1999] VSCA 134
[13]White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169 at 229 per Goldberg J
[14]Etna v Arif [1999] 2 VR 353 at [69] per Batt JA. See also Abrahams v Wainwright Ryan [1999] 1 VR 102.

"(1)Where a solicitor for a party, whether personally or through a servant or agent, has caused costs to be incurred improperly or without reasonable cause or to be wasted by undue delay or negligence or by any other misconduct or default, the Court may make an order that –
…
(c)the solicitor pay all or any of the costs payable by any party other than the client."

As Batt JA said in Etna v Arif:
"Whilst an order under Rule 63.23(1) is clearly intended to compensate, the Victorian rule remains supplementary to the summary jurisdiction of the Court over solicitors (preserved in relation to legal practitioners by s.172 of the Legal Practice Act 1996) which, though it differs from the jurisdiction to strike off, has a disciplinary character."[15]

[15]Etna v Arif [1999] 2 VR 353 at [82]

In Etna v Arif[16], Batt JA, with whom Charles and Callaway JJ agreed, adopted the summary by the Court of Appeal in England in Ridehalgh v Horsefield[17] of five fundamental propositions, for which the House of Lords decision of Myers v Elman[18] was considered to be authority. They were as follows:

"(1)The court's jurisdiction to make a wasted costs order against a solicitor is quite distinct from the disciplinary jurisdiction exercised over solicitors.
(2)Whereas a disciplinary order against a solicitor requires a finding that he has been personally guilty of serious professional misconduct the making of a wasted costs order does not.
(3)The court's jurisdiction to make a wasted costs order against a solicitor is founded on breach of the duty owed by the solicitor to the court to perform his duty as an officer of the court in promoting within his own sphere the cause of justice.
(4)To show a breach of that duty it is not necessary to establish dishonesty, criminal conduct, personal obliquity or behaviour such as would warrant striking a solicitor off the roll. While mere mistake or error of judgment would not justify an order, misconduct, default or even negligence is enough if the negligence is serious or gross.
(5)The jurisdiction is compensatory and not merely punitive."[19]
[16][1999] 2 VR 353 at [82]
[17][1994] Ch 205
[18][1940] AC 282
[19][1994] Ch 205 at 227

Breach of Duty to the Court

While it is not possible, or even desirable, to attempt to define precisely what constitutes a breach of duty to the Court by a solicitor, the cases do provide some general guidance, in particular the judgment of Goldberg J in White Industries (Qld) Pty Ltd v Flower & Hart (a firm)[20] ("White Industries"). In that case his Honour identified three different situations which could constitute the serious dereliction of duty or serious misconduct by a solicitor which was required to enliven the jurisdiction to order costs against the solicitor.[21] First, his Honour stated that the authorities did not support the proposition that simply instituting or maintaining a proceeding on behalf of a client which has no or substantially no prospect of success will invoke the jurisdiction. There had to be something more namely, carrying on that conduct "unreasonably". It seemed to his Honour that this:

"involves some deliberate or conscious decision taken by reference to circumstances unrelated to the prospects of success with either a recognition that there is no chance of success but an intention to use the proceeding for an ulterior purpose or with a disregard of any proper consideration of the prospects of success."[22]

[20](1998) 156 ALR 169

[21](1998) 156 ALR 169 at 242

[22](1998) 156 ALR 169 at 236

According to Goldberg J, the second situation was that a solicitor may be liable to a costs order when his or her conduct amounts to an abuse of process of the Court. The concept of "abuse of process" in this context involves a party using court proceedings and procedures for a purpose unrelated to the objectives which the court process is designed to achieve. His Honour held that there was:

"a process of abuse of process independently of the tort of abuse of process strictly so-called which occurs when a party conceives or implements a purpose for misusing or manipulating the court process for purposes other than those for which the court process is intended."[23]

[23](1998) 156 ALR 169 at 241. In respect of the tort of abuse of process see Williams v Spautz (1992) 174 CLR 509.

Thirdly, Goldberg J expressed the view that the jurisdiction to order costs against a solicitor could also be enlivened when an allegation of fraud was made, in the words of the New South Wales Court of Appeal, without "specific instructions and an appropriate evidentiary foundation, direct or inferred, for alleging and pleading fraud."[24] The reasons for this are obvious but the observations of Lord Macmillan which were quoted with approval in Oldfield v Keogh[25] bear repeating:

"Written pleadings are frequently sent to counsel for revisal containing serious allegations of fraud, dishonesty, or misconduct. The consequence of lodging such pleadings in Court may be to cause irreparable injury to the person thus publicly accused. For an advocate to allow such charges to be launched with his name attached to them without the fullest investigation would be to abuse the absolute protection against actions for slander which the law affords to counsel. Counsel is not worthy of that protection unless he justifies it by the most scrupulous care in his written or oral attacks on character. He must insist upon being supplied with all the information which is thought by his client to justify the attack, and then he must decide for himself whether the charges made are such as can be justifiably made. In exercising his judgment in such a matter the advocate is fulfilling one of the most delicate duties to society which his profession casts upon him. It is no small responsibility which the State throws upon the lawyer in thus confiding to his discretion the reputation of the citizen. No enthusiasm for his client's case, no specious assurance from his client that the insertion of some strong allegations will coerce a favourable settlement, no desire to fortify the relevance of his client's case, entitles the advocate to trespass, in matters involving reputation, a hair's-breath beyond what the facts as laid before him and duly vouched and tested will justify. It will not do to say lightly that it is for the Court to decide the matter. It is for counsel to see that no man's good name is wantonly attacked."[26]

Having set out the same quotation, Goldberg J went on to say that:
"Although Lord Macmillan refers to counsel in this passage the principles are equally applicable, in my view, to solicitors particularly where the solicitors sign the pleading containing the allegation."[27]

[24]Minister Administering the Crown Lands (Consolidation) Act and Western Lands Act v Tweed Byron Aboriginal Land Council (1990) 71 LGRA 201 at 203-4

[25](1941) 41 SR (NSW) 206 at 211

[26]"The Ethics of Advocacy" in "Law and Other Things" (1937), pp.191-192.

[27](1998) 156 ALR 169 at 242

I also refer to the Professional Conduct and Practice Rules 2003 of Victorian Lawyers RPA Ltd. Although they were not in force at the relevant time, they are a good indication of the legal profession's approach to such issues. The rules under the heading "Advocacy and Litigation rules" apply to practitioners when they are acting as solicitor advocates or as solicitors in relation to a case in court. Rule 16.2 confirms that:

"A practitioner must now draw or settle any court document alleging criminality, fraud or other serious misconduct:
16.2.1if the factual material available to the practitioner does not provide a proper basis for the allegation;
16.2.2if the evidence by which the allegation is to be made, will be inadmissible in the case;
16.2.3unless the client wishes the allegation to be made, after having been advised of the seriousness of the allegation and of the possible consequences for the client and the case if it is not made out."

I will need to discuss these principles, in particular the last one, in greater detail when dealing with the specific complaints made by the applicants about the solicitors' conduct, but before doing that I should consider some further general principles which were said by Mr Riordan of counsel, who appeared for the respondent, Minter Ellison, to be relevant to my determination of the applications for costs against the non-party solicitors.

The Need for Caution

First, Mr Riordan submitted that the jurisdiction to award costs against non-party solicitors "ought to be exercised sparingly and with great caution".[28] He relied on a passage from the judgment of Drummond J in Re Bendeich (No. 2)[29] as explaining the rationale for such caution. His Honour said:

"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 duties 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."

[28]Levick v Deputy Commissioner of Taxation (2000) 102 FCR 155 at [50] per Wilcox, Burchett and Tamberlin JJ

[29](1994) 53 FCR 422 at 426-427

Another reason for caution was expressed by the Full Court of the Federal Court of Australia in Levick v Deputy Commissioner of Taxation[30] when they said that they endorsed:

"the emphasis on caution in making orders against solicitors, particularly as it will often be difficult for a court to know all the details and circumstances of the solicitor's instructions."

[30](2000) 102 FCR 155 at [43]

In recent cases in the United Kingdom, the need for caution has been emphasised because of the problem caused to respondents when legal professional privilege is claimed. In Medcalf v Mardell[31], Lord Bingham said:

"The court should not make an order against a practitioner precluded by legal professional privilege from advancing his full answer to the complaint made against him without satisfying itself that it is in all the circumstances fair to do so. This reflects the old rule, applicable in civil and criminal proceedings alike, that a party should not be condemned without an adequate opportunity to be heard. Even if the court were able properly to be sure that the practitioner could have no answer to the substantive complaint, it could not fairly make an order unless satisfied that nothing could be said to influence the exercise of its discretion. Only exceptionally could these exacting conditions be satisfied. Where a wasted costs order is sought against a practitioner precluded by legal professional privilege from giving his full answer to the application, the court should not make an order unless, proceeding with extreme care, it is (a) satisfied that there is nothing the practitioner could say, if unconstrained, to resist the order and (b) that it is in all the circumstances fair to make the order."[32]

[31][2003] 1 AC 120

[32][2003] 1 AC 120 at [23]

Lord Hobhouse said:

"… all that the lawyer has to do is to raise a doubt in the mind of the court whether there might not be privileged material which could affect its decision whether or not to make a wasted costs order and, if so, in what terms and the court must give the lawyer the benefit of that doubt in reaching its decision, including the exercise of its statutory discretion. I see nothing unfair about this approach."[33]

[33][2003] 1 AC 120 at [61]

A third rationale for the need for caution before making an order for costs against non-party solicitors is to be found in the judicial warnings against encouraging too ready resort to the jurisdiction. In Harley v McDonald[34] the Privy Council stated in its opinion:

"As a general rule allegations of breach of duty relating to the conduct of the case by a barrister or solicitor with a view to the making of a costs order should be confined strictly to questions which are apt for summary disposal by the court. Failures to appear, conduct which leads to an otherwise avoidable step in the proceedings or the prolongation of a hearing by gross repetition or extreme slowness in the presentation of evidence or argument are typical examples. The factual basis for the exercise of the jurisdiction in such circumstances is likely to be found in facts which are within judicial knowledge because the relevant events took place in court or are facts that can easily be verified. Wasting the time of the court or an abuse of its processes which results in excessive or unnecessary costs to litigants can thus be dealt with summarily on agreed facts or after a brief enquiry if the facts are not all agreed."

[34] [2001] 2 AC 678 at [50]

In Medcalf v Mardell, Lord Bingham approved of the statement of the Privy Council and went on to say:

"Save in the clearest case, applications against the lawyers acting for an opposing party are unlikely to be apt for summary determination, since any hearing to investigate the conduct of a complex action is itself likely to be expensive and time-consuming. The desirability of compensating litigating parties who have been put to unnecessary expense by the unjustified conduct of their opponents' lawyers is, without doubt, an important public interest, but it is, as the Court of Appeal pointed out in Ridehalgh v Horsefield, at p.226, only one of the public interests which have to be considered."[35]

[35][2003] 1 AC 120 at [24]

In Ridehalgh v Horsefield[36], the Court had referred to the same considerations saying:
[36][1994] Ch 205 at 238

"Hearings should be measured in hours and not in days or weeks. Judges must not reject the weapon which Parliament has intended to be used for the protection of those injured by unjustifiable conduct of the other side's lawyers, but they must be astute to control what threatens to become a new and costly form of satellite litigation."

This statement was quoted with approval by Beach J in Abrahams & Anor v Wainwright Ryan[37]. His Honour went on to say:
"Rule 63.23(1) deals with costs which have been incurred improperly or without reasonable cause or to be wasted by undue delay or negligence or by any other misconduct or default. Clearly a solicitor's negligence in the preparation and/or presentation of a case may cause a client loss in that having failed to establish his claim the client is required to bear his own costs of the proceeding and to pay those of the other side. But when the rule talks about costs to be wasted by negligence, in my opinion it is talking about costs thrown away by reason of the negligence of the solicitor in performing an interlocutory step in the proceeding or function related to the proceeding, for example, filing a defective affidavit of documents thereby being required to prepare and file a further affidavit which complies with the rules; subpoenaing witnesses to attend Court on the wrong day; or failing to appear at Court on the day fixed for the trial of the proceeding."[38]

In the same case in the Court of Appeal[39], Brooking JA referred to Beach J's comments[40], and Phillips JA stated:
"As I see it, r.63.23 provides for summary relief where, by reason of some specific act, neglect or default on the part of a practitioner, a procedural step along the way has been so taken or not taken as to occasion costs improperly or unnecessarily or to cause costs to be wasted; where the case is plain enough, a summary remedy is available under r.63.23 - subject always, of course, to para (3). That was the view of the rule taken by Beach J. and, with respect, I agree."[41]

[37]Unreported, 18 February 1997 (BC 9700322) at p.2

[38]At p.13

[39][1999] 1 VR 102

[40][1999] 1 VR 102 at [46]

[41][1999] 1 VR 102 at [49]

Mr Riordan submitted these principles were relevant to the question of the exercise of my discretion in deciding whether or not to order costs against the non-party solicitors. He criticised the applicants for not making their applications against Minter Ellison, if they thought they had reason to complain, to Chernov J shortly after judgment had been handed down. Mr Riordan pointed out that there was nothing in the applicants' present grounds that was not known to them at the earlier time. His Honour would have been able to deal with the applications expeditiously. Yet some four and half years later, a five day hearing was required to grapple with stale and unfamiliar, and thus more complicated, issues. Mr Riordan submitted that this was not what was contemplated by the statements from the cases set out above about the summary procedure.

Burden of Proof

Secondly, Mr Riordan submitted that although the standard of proof was on the balance of probabilities, the fact that the jurisdiction was predicated on the establishment of serious dereliction of duty, gross negligence or serious misconduct, required evidence, which satisfied the approach of Dixon J, as his Honour then was, in Briginshaw v Briginshaw[42]. He submitted that like Goldberg J in White Industries I should only make a finding against Minter Ellison that it had breached its duty to the Court if I were satisfied on the balance of probabilities whilst being "conscious of, and recognising, the significance and gravity of those findings."[43] I did not understand that the applicants disputed that this would be the correct approach.
[42](1938) 60 CLR 336
[43](1998) 156 ALR 169 at 199

The Test is from the Lawyers' Perspective

Thirdly, Mr Riordan submitted that in determining whether there was an appropriate evidentiary foundation, allowance should be made for matters of judgment and care needed to be taken "to guard against the effect of hindsight".[44] The fact that the claim is ultimately unsuccessful is not to the point. Even if the statement of claim is struck out, it does not mean it was necessarily inappropriate for counsel to have raised the claim.[45]
[44]Etna v Arif [1999] 2 VR 353 at [75] per Batt JA referring with apparent approval to the trial judge's statement to this effect.
[45]Brown v Bennett (No. 2) [2002] 1 WLR 713 at [160] per Neuberger J

Reliance on Counsel

Fourthly, Mr Riordan submitted that it was relevant when assessing the case made against the solicitors to consider the role played by counsel. He submitted that the ordinary rule was that "save in exceptional circumstances a solicitor cannot be criticised where he acts on the advice of properly instructed counsel."[46] The restriction on this principle was that the solicitor must not "rely blindly and with no mind of his own on counsel's views."[47] If the solicitor reasonably thinks counsel's advice is "obviously or glaringly wrong"[48], it is his or her duty to reject it.
[46]Davy-Chiesman v Davy-Chiesman [1984] Fam 48 at 63 per May LJ
[47]Davy-Chiesman v Davy-Chiesman [1984] Fam 48 at 64 per May LJ
[48]Locke v Camberwell Health Authority [1991] 2 Med LR 249

Mr Riordan further submitted that it was also relevant that, when briefed, counsel were responsible for the settling of the pleadings. On the other hand, Mr Bigmore submitted that the solicitors were not entitled to hide behind counsel. I consider that solicitors are obliged "to exercise their own independent judgment to consider whether the claim could properly be pursued."[49] I respectfully agree with Goldberg J's summary of the relevant principles in White Industries, where his Honour held that whilst "the retainer of counsel and reliance on counsel's advice, of itself [did] not absolve Flower & Hart from responsibility in relation to the institution and conduct of the proceeding", nevertheless "the retention of , and reliance upon, counsel is a significant matter to be taken into account in determining whether Flower & Hart has breached its duty to the court."[50]
[49]Tolstoy-Miloslavsky v Aldington [1996] 1 WLR 736 at 747 per Rose LJ
[50](1998) 156 ALR 169 at 242

Finally, Mr Riordan submitted that there was no doubt that the law placed the primary responsibility for the conduct of the trial on counsel. In Giannarelli v Wraith[51], Mason CJ referred to the following observations of Pollock CB in Swinfen v Lord Chelmsford[52]:

"The conduct and control of the cause are necessarily left to counsel. … A counsel is not subject to an action for calling or not calling a particular witness, or for putting or omitting to put a particular question, or for honestly taking a view of the case which may turn out to be quite erroneous. If he were so liable, counsel would perform their duties under the peril of an action by every disappointed and angry client."

The Chief Justice went on to say, albeit in a slightly different context, that:
"… a barrister's duty to the court epitomizes the fact that the course of litigation depends on the exercise by counsel of an independent discretion or judgment in the conduct and management of a case in which he has an eye, not only to his client's success, but also to the speedy and efficient administration of justice. In selecting and limiting the number of witnesses to be called, in deciding what questions will be asked in cross-examination, what topics will be covered in address and what points of law will be raised, counsel exercises an independent judgment so that the time of the court is not taken up unnecessarily, notwithstanding that the client may wish to chase every rabbit down its burrow. The administration of justice in our adversarial system depends in very large measure on the faithful exercise by barristers of this independent judgment in the conduct and management of the case. In such an adversarial system the mode of presentation of each party's case rests with counsel."[53]

[51](1988) 165 CLR 543 at 556

[52](1860) 5 H & N 890 at 921

[53](1988) 165 CLR 543 at 556

Rule 16 of the Rules of Conduct of the Victorian Bar is as follows:

"A barrister must not act as the mere mouthpiece of the client or of the instructing solicitor and must exercise the forensic judgments called for during the case independently, after appropriate consideration of the client's and the instructing solicitor's desires where practicable."

This was certainly the view of the then Chairman of the Victorian Bar's Ethics Committee, Mr Young QC, as the former Chief Justice of the Supreme Court of Victoria then was, when he lectured new members of the Bar in August 1971. Mr Young said:
"I have said that counsel always acts on the instructions of a solicitor. … But it is also the position that counsel does not necessarily do or say all that the solicitor asks him to do or say. It is a vital part of our system that counsel takes charge of the case and retains the sole responsibility for the manner in which the case is conducted."[54]

[54]Conduct and Etiquette of the Victorian Bar, Melbourne 1972 at pp.7- 8

I should add that in addition to submitting that a solicitor was not excused from liability simply because counsel were involved, Mr Bigmore also appeared to suggest at one stage during the argument that the applicants had been forced to seek the costs order against Minter Ellison because they could not claim directly against counsel due to their immunity from civil liability for work done in court. Mr Riordan submitted that this was not correct and referred me to the Privy Council's ruling in Harley v McDonald, on appeal from the New Zealand Court of Appeal, that:

"there would seem to be no reason in principle why the court should not exercise the same jurisdiction over [barristers] as it does over solicitors."[55]

There can be no doubt, in my opinion, that a wasted costs order can be sought against barristers as well as solicitors and I simply refer to r.63(23)(7) of the Supreme Court Rules which, at the relevant time and still, provides that:
"This Rule shall, with any necessary modification, apply to a barrister as it applies to a solicitor."
[55][2001] 2 AC 678 at 702

Causation

As the last of his general principles, Mr Riordan submitted that it was incumbent on the applicants to establish, on the balance of probabilities, that costs had been wasted as a result of the impugned conduct of the respondent. It was not sufficient, he submitted, for the applicants to merely establish that they should be awarded costs on a "loss of a chance" basis.[56] That is, the applicants had to satisfy the Court, by the calling of evidence from counsel or some other relevant means, that the respondent's conduct had caused certain costs to be wasted in that the applicants would not have incurred the costs which they claimed from the respondent if the solicitors "had not acted or advised as they did".[57]. That question is not to be left to the Taxing Master, although the quantification of the costs found to have been incurred unnecessarily would be.
[56]Brown v Bennett (No. 2) [2002] 1 WLR 713 at ]53] per Neuberger J
[57]Brown v Bennett (No. 2) [2002] 1 WLR 713 at ]54] per Neuberger J

The Appropriate Procedure

These applications were complicated by the fact that the trial Judge, Chernov J, did not hear them before his appointment to the Court of Appeal. This enforced departure from the normal procedure that the trial Judge hears any application for non-party costs[58], raised for determination the use that could be made of his Honour's findings in the liability judgment and the costs judgment. If these findings could not be taken into account in some way, how is the Court to make findings of fact for the purpose of the applications for costs unless there is an extremely costly re-hearing which pays no regard to the earlier evidence and findings?[59] Directions had been given by other Judges who had been involved with these applications after Chernov J's elevation which to some extent had avoided the problem, because the applicants had been required to set out what evidence they relied on. Mr Sean Buckley's affidavit sworn 30 May 2002 did that by exhibiting transcript, affidavits, and exhibits from the trial as well as the judgments. However, objection was taken by the respondent to the applicants relying on certain parts of this material.
[58]Bahai v Rashidian [1985] 1 WLR 1337 per Sir John Donaldson MR at 1342, Parker LJ at 1345 and Balcombe LJ at 1346
[59]Flinn v Flinn [1999] VSCA 134 at [11]

In Flinn v Flinn[60] the Court of Appeal considered this difficulty:
[60][1999] VSCA 134

"The general rule is, not only that the non-party is not bound by findings made in the litigation, but that they may not even be used as evidence of the facts found. To this general rule there are exceptions which enable findings made in litigation to be used against someone who was not a party to that litigation for the purposes of a summary procedure. Specifically, it has been laid down in England by the Court of Appeal that on an application against a non-party seeking an order for the costs of the litigation the applicant may in an appropriate case be permitted to rely on evidence given and facts found in the litigation: Symphony Group Plc v Hodgson [1994] QB 179. In that case Balcombe LJ said at 193:
'The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action. Thus, subject to any relevant statutory exceptions, judicial findings are inadmissible as evidence of the facts upon which they were based in proceedings between one of the parties to the original proceedings and a stranger: see Hollington v F. Hewthorn & Co Ltd [1943] KB 587; Cross on Evidence, 7th ed (1990), pp.100-101. Yet in the summary procedure for the determination of the liability of a solicitor to pay the costs of an action to which he was not a party, the judge's findings of fact may be admissible: see Brendon v Spiro [1938] 1 KB 176, 192, cited with approval by this court in Bahai v Rashidian [1985] 1 WLR 1337 1343D, 1345H. This departure from basic principles can only be justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice by allowing this exception to the general rule.'

This judgment was concurred in by Staughton LJ and Waite LJ, Staughton LJ observing at 196:
'[T]here are cases, as Balcombe LJ has shown where a person may be ordered to pay costs on the basis of evidence given and facts found at a trial to which he was not a party. Before such an order is made, it must be just and fair that the stranger should be bound by that evidence and those findings. In my judgment that is not the case here.'

The statement of principle by Balcombe LJ was also endorsed by Batt J in C.E. Heath Underwriting & Insurance (Aust) Pty Ltd v Daraway Constructions Pty Ltd (unreported, 1 September 1995). The decisions cited by Balcombe LJ on applications to have costs visited on a solicitor are Brendon v Spiro and Bahai v Rashidian. In the former, Scott LJ said ([1938] 1 KB 176 at 192):

'[T]he case must go back to [the trial judge] to be dealt with in such a manner, and according to such procedure as he thinks proper, providing, of course, that the two solicitors know what the case against them is, and have a sufficient opportunity of meeting it. Whether the learned judge should order affidavits, whether he should direct oral evidence, how far he can properly refresh his mind from his notes of the hearing of the case, and dispense with additional or new evidence to prove facts which were already established in the course of the proceedings, will all be matters for him to consider.'

In the second of those cases, Bahai v Rashidian, Parker LJ, having cited this passage from Brendon v Spiro continued ([1985] 1 WLR 1337 at 1344):
'There is, here, recognition of the fact that, although it may be possible to dispense with new evidence in respect of matters established at the trial, it may also be necessary to have such matters dealt with afresh. If the issue of Mr Harris's liability is tried by the trial judge, he will certainly have to consider whether, in view of the gravity of the charges and Mr Harris's inability to cross-examine, some of the evidence will, in justice to Mr Harris, have to be given afresh. This, and no doubt many other matters, will have to be considered. Provided that (a) the procedure adopted by the judge gives to Mr Harris a full and fair opportunity to meet the charges and (b) to someone with knowledge of the strictures previously made by the judge a hearing by that judge would not appear to be marred by bias, the trial judge must be the right person to hear the application.'

In the same case Balcombe LJ, at 1345, observed:
'The exercise of this summary compensatory jurisdiction is now regulated by the provision of RSC, O. 62, r. 8. Rule 8(2) requires the solicitor to be given a reasonable opportunity to appear before the court and show cause why the order should not be made, but otherwise the procedure to be followed is left to the judge who hears the application: see Brendon v Spiro [1938] 1 KB 176. In particular he will have to consider whether he should direct oral evidence and how far he can properly refresh his mind from his notes of the hearing of the case, and dispense with additional or new evidence to prove facts which were already established in the course of the proceedings: per Scott LJ in Brendon v Spiro [1938] 1 KB 176, 192'."[61]

[61][1999] VSCA 134 at [4]-[7]

Mr Bigmore submitted that the findings of Chernov J were admissible as evidence of the facts upon which they were based because of the exception, to the normal rule, that such findings may be admissible if the connection of the non-party with the original proceeding was so close that he will not suffer any injustice. He submitted that Minter Ellison's connection was sufficiently close in that it acted throughout the trial for the plaintiffs and it remained on the record as the solicitors for the first plaintiff, UTSA, even at the costs hearing although it chose not to take part in that hearing. Further, it was intimately involved in the incidents upon which the applicants relied as justification for the making of the non-party costs orders.

Whilst Mr Riordan did not object to my referring to the two judgments of Chernov J by way of background, he did object to reliance on particular findings of his Honour in those judgments being treated as admissible evidence of the fact itself. Mr Riordan also objected to an affidavit of Peter Ross Hayes sworn on 18 May 1998, which was filed on behalf of the fourth plaintiff, Titan, at the costs hearing, being relied on by the applicants in these applications. Mr Hayes QC had been senior counsel for the plaintiffs during the hearing. The basis of Mr Riordan's objection was that as the close connection between Minter Ellison and the proceeding itself did not exist at the time of both hearings, but in particular the costs hearing, it would be unfair to treat such matters as admissible. Mr Riordan emphasised that Minter Ellison did not participate, and as they had no instructions could not have participated, in the costs hearing. He submitted that if his Honour's findings were treated as conclusive, then this would be unfair because facts would have been found without them being heard in opposition to such a finding.

As both parties indicated that they would not be changing the presentation of their case regardless of my decision on this point I delayed ruling on the objection. I consider that the matters objected to by Mr Riordan should be treated as admissible. However, in my opinion, the Judge's findings are not conclusive evidence of anything other than how he reached his particular decision on each of the orders for costs. Further, it has to be borne in mind that such findings were made without the benefit of submissions from Minter Ellison. In the end, it seemed to me that Mr Bigmore accepted that his Honour's findings and Mr Hayes' affidavit were simply some amongst a number of pieces of evidence in respect of the applications which I have to determine. In my opinion, this is the appropriate way in which to treat the matters to which the respondent objected. Further, as Mr Riordan emphasised, what I have to decide is whether on the evidence before me the applicants are entitled to an order for costs against the non-party Minter Ellison. That is not the same question which his Honour had to deal with when he made certain orders for costs on a solicitor and client basis and other orders on a party and party basis and gave his reasons for those orders.

The Hearing of the Applications

As I have stated, the applicants relied on Mr Sean Buckley's affidavit with its 90 exhibits as well as the affidavits of Mr Chong and Ms Dealehr. Mr Buckley was cross-examined before me. The respondent relied on the evidence of two witnesses. The first witness was Ian Leslie Walker, a partner with the firm of Minter Ellison, and the solicitor responsible for handling the matter on behalf of the plaintiff. Mr Walker's witness statement was tendered and he was cross-examined. The second witness was Vanessa Lee Fox, a senior associate employed by Minter Ellison and who was currently on maternity leave. A witness statement had been prepared by Ms Fox and originally it was intended that she would give evidence by verifying her witness statement in the normal way and be cross-examined. However, for reasons which I need not go into, Ms Fox was not well enough to give evidence either at the relevant time or, it appeared, for some time thereafter. By agreement between the parties, the dilemma was overcome by Ms Fox converting her witness statement into an affidavit, after certain agreed deletions had been made to it, and the applicants then did not oppose reliance on that affidavit despite their inability to cross-examine Ms Fox. In her affidavit Ms Fox stated that she had assisted Mr Walker in the preparation of the matter for trial and that she had instructed at the trial on most days in 1997 and on some days in 1998.

The Applicants' Grounds

There was considerable overlap in the grounds relied on by the first three applicants to justify their claims for costs against Minter Ellison. In their various Points of Claim, both UTA and Mr Sean Buckley relied on the following three grounds:

"Alleged deception of Ernst & Young."
"Allegations of corruption against Newton and Sean Buckley."
"Korman Evidence."

The Estate limited its grounds to the first and third of those headings.

The ground relied on by the fourth applicant, Sung Li, was quite distinct from the others. Sung Li put its claim primarily on the basis that, for reasons dealt with in detail below, it should not have been joined as a defendant and that, despite the plaintiffs' solicitors being advised of the relevant facts by Sung Li's solicitors, the proceeding was not discontinued against Sung Li.

I turn then to examine each of the grounds upon which one or other of the applicants relied as the basis for an order for costs against the non-party solicitors.

Alleged Deception of Ernst & Young

This allegation was inserted into the plaintiffs' statement of claim by an amendment made on 27 October 1995 pursuant to an order of Hansen J on that day. The allegation, which appeared in paragraph 31C of the amended statement of claim, was that a valuation of UTSA obtained by its directors from Ernest & Young shortly prior to the sale of the Ultra Tune business and assets to UTA was procured through the agency of Peter Stedwell and Stewart Barry Thompson who knew at the time they gave instructions to Ernest & Young that "UTSA was worth at least $2.2m." and that "they were deceiving Ernst & Young in relation to the true value of UTSA". The deception was said to have occurred because certain matters concerning UTSA's affairs, such as recent staff retrenchments which would have the effect of significantly lowering costs in the future, were not fully disclosed to Ernst & Young by Messrs Stedwell and Thompson.

In essence, the applicants' complaint is that Minter Ellison breached its duty to the Court not to allege fraud or impropriety without having an appropriate factual basis. I reject the respondent's submission that this allegation was "not in itself an allegation of fraud" but that it simply formed part of the broader allegation that "the sale of the business, which was controlled by Peter Buckley and Sean Buckley, was a 'sham' ". Even if the word "fraud" was not used in the pleading, an allegation that someone knowingly deceived another person as to the value of a company by withholding information about the company, seems to me to be an allegation of fraudulent or dishonest or improper conduct on the part of the first person.[62] As Dawson J said in his dissenting judgment in Banque Commerciale SA, en Liquidation v Akhil Holdings Limited:

"Whilst fraud must be pleaded with some particularity, it is not necessary that the word 'fraud' be actually used if the conduct relied upon and its fraudulent nature be otherwise sufficiently apparent …"[63]

[62]Chernov J expressed a similar view at p.8 of the costs judgment.

[63](1990) 169 CLR 279 at 295

Chernov J found there was no basis for the allegation that Ernst & Young was misled. In the liability judgment, his Honour stated as follows:

"It is convenient to mention here, that at the outset, the plaintiffs launched a strong attack on the Ernst & Young valuation. They claimed that false and otherwise wrong material was furnished by Thompson and Stedwell to the accountants with the result that their valuation substantially undervalued the business. The plaintiffs did not pursue this allegation in their final submissions. They also did not press, in the end, with any vigor [sic], the notion that the Ernst & Young valuation significantly understated the true value of the business. In my view, the evidence does not establish that false or otherwise wrong material was provided to Ernst & Young by Thompson or Stedwell (or anyone else)."

His Honour also made the following finding in the costs judgment:

"The whole question of the proper market value of the UTSA business at the time of sale, was a critical issue in this case. Consequently, the correctness or otherwise of the Ernst & Young valuation was a major issue. The plaintiffs did not effectively abandon it until the end or almost the end of the case. Given that and the plaintiffs’ apparent failure to obtain evidence that Ernst & Young were intentionally misled by Thompson and Stedwell, made their pursuit of such a challenge to the valuation, high handed conduct which was, at the very least, productive of undue prolongation of the case. In the circumstances, the plaintiffs’ conduct in relation to the Ernst & Young valuation was a 'luxury' and, in my view, the defendants should not be out of pocket at least in relation to that aspect of the proceeding."

The respondent objected to the admissibility of, and disputed the correctness of, the findings by Chernov J in the liability judgment that in their final submissions the plaintiffs did not pursue their allegation that "false and otherwise wrong material was furnished by Thompson and Stedwell to the accountants with the result that their valuation substantially undervalued the business"; and that the plaintiff "did not press, in the end, with any vigor [sic],the notion that the Ernst & Young valuation significantly understated the true value of the business". The respondent also objected to the admissibility of, and disputed the correctness of, the findings by Chernov J in the costs judgment that the plaintiffs' challenge to the valuation was "high handed conduct which was, at the very least, productive of undue prolongation of the case" given that the plaintiffs did not "effectively abandon" their challenge to the correctness of the Ernst & Young valuation "until the end or almost the end of the case" and that they failed "to obtain evidence that Ernst & Young were intentionally misled by Thompson and Stedwell".

The issue before me is not whether his Honour was correct in ordering costs on a solicitor and client basis against the first and fourth plaintiffs on the valuation issue, but whether the respondent should be ordered to pay the first, second and third defendant's costs of the proceeding because the allegation that Ernst & Young were misled was made without an appropriate factual basis. In order to answer this question, it seems to me that one starts with an examination of whether the solicitors were at fault in the making of the amendment to the statement of claim to include paragraph 31C. One does not consider this question with the benefit of hindsight, knowing that at the end of the lengthy hearing, the Judge has found that "the evidence does not establish that false or otherwise wrong material was provided to Ernest & Young by Thompson or Stedwell (or anyone else)." The concentration must be on what was known to the plaintiffs' legal advisers at the time the allegation was made.

As I understood the applicants' submissions, it was suggested that Minter Ellison had failed to show that the liquidator plaintiffs had given "specific fully informed and unambiguous instructions" to make the allegation that Ernst & Young were misled. On the material before me, particularly Mr McCann's initial affidavit, I am satisfied that the lawyers did have those instructions. The real issue, however, is whether the solicitors acted properly in accepting the instructions to make the allegation in question.

Mr Riordan relied on a number of matters which he submitted provided the basis for an inference being drawn in support of the allegation that the deception of Ernst & Young was intentional. These matters, which largely formed Mr Walker's initial instructions, were to be found in the affidavits of Messrs Sambell, Stedwell and McCann in a proceeding brought by Sung Li against UTA and others in the Supreme Court of New South Wales. After omitting some which were clearly not known to the plaintiffs at the time, they included allegations that:

(a)Mr Sean Buckley and his father had deliberately set about to acquire the Ultra Tune business at a reduced price;
(b)after the purchase of the business Mr Sean Buckley had made admissions to a Mr Peter Grace with respect to the "scam";
(c)Mr Stedwell had been instructed by the directors of UTSA to engage Ernst & Young to prepare the valuation so that it could be relied upon if the sale was "ever challenged or questioned";
(d)Mr Stedwell had informed Mr McCann that the valuers were not advised about the retrenchments;
(e)Mr Stedwell had been instructed by Mr Peter Buckley not to pursue certain expressions of interest in connection with the proposed sale of the Ultra Tune business and effectively only to treat with the expression of interest from Messrs Herzog and Sambell;
(f)persons, other than those associated with Mr Buckley's bid, who expressed an interest in purchasing the business were required to provide a $7,000 non-refundable deposit;
(g)Mr Thompson, the financial controller of UTSA, provided to Mr McCann copies of the correspondence between him and Ernst & Young, which showed that although he provided information to Ernst & Young to assist in the preparation in the valuation certain matters concerning UTSA's affairs were not fully disclosed to Ernst & Young;
(h)the reason why Mr Thompson, who would have been aware of the importance of the disclosure of a matter such as the retrenchments, did not correct the error was unexplained;
(j)Messrs Stedwell and Thompson continued to be involved with UTA after the acquisition by Layerose.

Mr Walker agreed in cross-examination that there was no direct evidence of the alleged intention to mislead Ernst & Young in the instructions he received. He said that it was "a matter of inference". He also said that in all the circumstances he thought it was "a reasonable assumption" that because the Ernst & Young valuation had proceeded on insufficient data, there had been an intention to deceive Ernst & Young. On the basis of this evidence, Mr Bigmore submitted that the respondent's position was logically flawed. He argued that the solicitors had no more than one (if that) of many available (innocent) inferences upon which to base the deception allegation, and that there was, therefore, no irresistible inference that fraudulent conduct had occurred.

In my opinion, this submission confuses the factual foundation required to justify the making of an allegation of fraud at the pleading stage with the evidence necessary to justify a finding of fraud at the conclusion of the hearing. I have previously referred to the statement by the New South Wales Court of Appeal that there must be "an appropriate evidentiary foundation, direct or inferred, for alleging and pleading fraud."[64] The Court of Appeal went on:

"We say inferred, because it will sometimes be impossible to prove fraud by direct evidence. The tribunal of fact may be invited to draw an irresistible inference of fraud from the facts proved. Of its nature, fraud is often perpetrated covertly. The perpetrators of fraud will often take pains to cover their tracks."[65]

This does not say that there has to be an irresistible inference of fraud before it can be pleaded.

[64]Paragraph [41] above

[65]Minister Administering the Crown Lands (Consolidation) Act and Western Lands Act v Tweed Byron Aboriginal Land Council (1990) 71 LGRA 201 at 203-4

In Three Rivers DC v Bank of England[66], Lord Hutton gave two reasons for rejecting the contention in that case that the plaintiffs had no real prospect of establishing that the defendant knew of matters which rendered its conduct dishonest or reckless:

"One is that I think that it is reasonably possible that further material may become available to the plaintiffs before trial … Secondly, I consider that the material already available to the plaintiffs provides reasonable grounds for thinking that they may be able to advance their case by the cross-examination of the [defendant's] officials."

[66][2001] 2 All ER 513 at [144]-[145]

In Brown v Bennett (No. 2)[67] Neuberger J stated the principle as follows:

"A barrister's duty is to ask himself, whether bearing in mind the evidence currently available, but taking into account the possibility (whose value may be nil or significant depending on the particular case) of evidence which might come to light during the course of the proceedings or during trial, there is a strong enough case to justify pleading and maintaining dishonesty in accordance with the Code."

In the same case, Neuberger J considered the conflict facing a lawyer between not breaching his or her duty to advance the client's case in accordance with the client's instructions and not breaching his or her duty to the Court not to make an unwarranted allegation of fraud and concluded:

Nothing further was said to the Court about Mr Korman until 14 November 1997, when the plaintiffs produced a short affidavit sworn by Mr Korman on that day. The affidavit went to a critical issue in the case as to whether the second and third defendants effectively owned and controlled UTA. Mr Korman alleged that Mr Sean Buckley had made admissions to this effect in a recent conversation with him.

On 18 November 1997, Mr Korman was called by Mr Hayes to give evidence on behalf of the plaintiffs. Mr Korman stated that he had resolved the claims against him and that the plaintiffs had agreed to pay him the sum of $80,000.00 for his costs. He did not refer to any earlier Terms of Settlement, nor was evidence about the settlement sought to be led from him by senior counsel for the plaintiffs.

What then happened was recounted by his Honour in the liability judgment as follows:

"On 19 November 1997, while he [Mr Korman] was still in the witness box, the Terms of Settlement of 14 November 1997 were produced pursuant to a notice that had been issued by the first defendant. He was asked some questions about the circumstances of that 'settlement'. He was then asked whether there were any earlier Terms of Settlement between him and the plaintiffs. The transcript reads as follows.
"Is that the first occasion that terms of settlement had been finalised by you?---Yes.
There had been no settlement reached prior to then?---There was an agreement that we would both, the plaintiffs and myself, would settle the action. The argument was over the question of costs.
Just stop there. When was that agreement reached?---It wasn't a written agreement, it was an understanding that - - -
All right. I wasn't asking whether it was in writing or not?---That would have been 22, 23 October.
22 October?---Around that period of time.
See, on 22 October, Mr Hayes, at page 4976 of the transcript, informed the court that agreement in principle had been reached between you and the plaintiffs subject to a documentation, which he expected to be signed that day?---Correct.
Was there anything documented on 22 October?---No, there was not. And the following morning, I was unavailable, I was at hospital. My father was dying on the 23rd and Mr Hayes couldn't - I was not in a position to finalise the terms of the settlement.
What agreement had you reached on the 22nd that meets the description 'agreement in principle'?---That I would be paid legal costs, reasonable legal costs, and we would settle the matter accordingly.
Without any figure being fixed for the legal costs?---There was no final figure discussed on the legal costs, no."

The first defendant then served on the plaintiffs a further notice to produce the Terms of Settlement of October. In response, the plaintiffs produced a copy of the Terms of Settlement of 23 October signed by Korman and senior counsel for the plaintiffs. These Terms provided for the dismissal of the proceedings against Korman with no orders for costs with agreement that each party would bear their own costs as well as mutual releases. His denial that the agreement of October was not documented, was false."

Chernov J found that other aspects of Mr Korman's evidence were false. In respect of Mr Korman's denial that he was paid the $80,000 in exchange for the evidence he gave, his Honour said:

"Thus, in my view, any offer by the plaintiffs to pay Korman money in the context of him giving evidence for them, was not made in exchange for settlement of a claim that Korman had against them (which, in any event, was never articulated). Rather, it was an offer to pay Korman in exchange for him telling the plaintiffs what evidence he was prepared to give and then giving that evidence."

It is appropriate to set out another finding by his Honour concerning Mr Korman's evidence. His Honour said:

"I should make it clear in case there is any doubt that there is no evidence to suggest that during their discussions with Korman, any of the plaintiffs' legal advisers thought that Korman's evidence was untrue. On the contrary, they acted on the assumption that his evidence was true."

Mr Walker gave evidence that he was involved in the negotiations with Mr Korman about his requirement to be paid $80,000.00, but said that at no time did he ever consider "that what was being done was improper in the sense that it was designed to procure Korman to change his evidence."

In her affidavit Ms Fox said that she was not involved in or aware of the negotiations which led to the first Terms of Settlement until she was handed a copy of them "in late October 1997". She said that the negotiations on behalf of the plaintiffs had been conducted by Mr McCann, Mr Latimer and counsel. However, she had been present on 13 November 1997 when Mr Korman outlined to Mr Hayes his requirements for telling the plaintiffs what he alleged Mr Buckley had said to him in a recent conversation, and when Mr Hayes rang Mr Latimer who authorised him to agree to pay the amounts Mr Korman was wanting for "assisting and giving evidence" and when Mr Korman then told them what had occurred in his meeting with Mr Buckley, the substance of which was recorded in his affidavit. Counsel drew both the Terms of Settlement and Mr Korman's affidavit which was sworn the next day before her in Mr Hayes' chambers. Ms Fox said that she believed that the contents of Mr Korman's affidavit were true.

Mr Bigmore submitted that the evidence revealed that Minter Ellison was aware of both the Terms of Settlement dated 23 October 1997 and the Terms dated 14 November 1997. He drew particular attention to the fact that on the day when Mr Korman's affidavit was filed in Court, Ms Fox waited at the National Australia Bank with Mr Korman who gave her the affidavit only after satisfying himself that $80,000 had been transferred into his bank account. He submitted that the combination of the withholding of the fact and circumstances of the "payment of money in return for evidence" with the fact that the evidence was false amounted, at worst, to contempt or a severe breach of Minter Ellison's duty to the Court and, at best, to a discretionary matter strongly militating in favour of the making of a non party costs order against them. The applicants also submitted that they could rely on the findings by Chernov J and upon the fact that the "payment of money in return for evidence" only emerged during cross-examination, after the first Terms of Settlement had been produced in response to the second Notice to Produce. Further, Mr Bigmore submitted that neither Mr Walker's nor Ms Fox's evidence explained how, throughout 19 November 1997, Mr Korman was allowed to give the impression that there was only one settlement, the negotiation of which extended over the period from before 22 October 1997 to 14 November 1997, and that the $80,000 was consideration for settlement of the disputes between him and the plaintiffs rather than payment for his further evidence.

It seems to me that Mr Bigmore's submissions involved three separate criticisms. First, that Mr Korman had been paid $80,000 in return for him giving evidence and that this payment had not been disclosed to the Court. Secondly, that Mr Korman had been allowed in evidence in chief to give the impression that there was only one settlement. And thirdly, that Mr Korman's lie about the existence of the earlier Terms of Settlement had not been corrected.

Not surprisingly, Mr Bigmore strongly attacked the conduct of the plaintiffs' lawyers in respect of the payment to Mr Korman. He referred to the decision of the Court of Appeal in England in R v Kellett[74], where in discussing the offence of attempting to pervert the course of justice, their Lordships said:

"First, we do not consider it fortuitous that there is no case in the books, as far as we know, which supports the extreme view indicated by some of the textbook statements that any interference with a witness is an attempt to pervert the course of justice. That would make a man guilty of this offence if he went privately to a witness who had made a false statement and by reasoned argument supported by material facts and documents tried to dissuade him from committing perjury and to persuade him to retract lies and tell the truth. …
Secondly, … we think that however proper the end the means must not be improper. Even if the intention of the meddler with a witness is to prevent perjury and injustice, he commits the offence if he meddles by unlawful means.
Threats and bribery are the means used by offenders in the cases, and any pressure by those means – or by force, as for example by actually assaulting or detaining a witness – would, in our opinion, be an attempt to pervert the course of justice by unlawfully or wrongfully interfering with a witness. If he alters his evidence or will not give it 'through affection, fear, gain, reward, or the hope or promise thereof' (in the words of the oath which used to be administered to the foreman of a grand jury), the course of justice is perverted, whether his evidence is true or false and whether or not it is believed to be so by him who puts him in fear or hope.
Perhaps the most extreme illustration of the end not justifying the means is to be found in the sad case of the attorney in Rex v Johnson (1678) 2 Show. 1, who agreed with another to give him £350 to prove that a deed, with which Lady Ivy had obtained a verdict against Dr. Whitchcott's lady and her tenants, was forged. It was argued that any man may agree with another to give him money to do a lawful act, as to prove a deed to be forged. But the Court of King's Bench thought it a great offence, 'for witnesses ought to come unbiassed and not affected with money', and Johnson was heavily fined."[75]

[74][1976] 1 QB 372

[75][1976] 1 QB 372 at 386 and 388 per Stephenson and Orr LJJ and Jones J

Re Kellett was cited with approval by the Full Court of the Federal Court of Australia in Hatty v Pilkington (No. 2)[76] and by Dawson J in Meissner v The Queen[77]. In his judgment in the former case, Black CJ stated:

"Thus, a person may have the requisite intention to pervert the course of justice even if he also has an intention to prevent perjury and to prevent what he considers to be injustice. There are obvious reasons why this should be so because the due processes of the law may be just as much interfered with by someone who deliberately acts to interfere with its processes for what he perceives to be a good reason as they are by someone who interferes for reasons he knew to be corrupt."[78]

[76](1992) 35 FCR 433 per Black CJ, with whom Neaves J and Spender J agreed.

[77](1995) 184 CLR 132 at 158-9

[78](1992) 35 FCR 433 at 440

Mr Bigmore accordingly submitted that the plaintiffs' lawyers were in breach of their duty to the Court by in effect agreeing to pay him to give evidence and by not informing the Court at the outset of Mr Korman's evidence of this fact.

Mr Bigmore's third criticism was that the lawyers were aware that Mr Korman had given false answers but did nothing to correct the lie. That occurred when Mr Korman denied in cross-examination that he had entered into Terms of Settlement prior to the Terms dated 14 November 1997. The lie was exposed because, while Mr Korman was still being cross-examined, the plaintiffs and Minter Ellison were required to produce all Terms of Settlement, and this was done on 20 November 1997 through Mr Weinberg QC, who had replaced Mr Hayes for the remainder of Mr Korman's evidence, because of Mr Hayes' personal involvement in the negotiations. Initially a fax which referred to the earlier Terms was produced and later in the day the earlier Terms themselves were produced after Minter Ellison had obtained this document urgently from the liquidators because it did not have a copy.

The obligations on a barrister in regard to false evidence are set out in rule 29 of the Victorian Bar's Rules of Conduct, which relevantly states:

"A barrister who, as a result of information provided by the client or a witness called on behalf of the client, learns during a hearing … that the client or a witness called on behalf of the clients:
(a) has lied in a material particular to the court …;
(i)must refuse to take any further part in the case unless the client authorises the barrister to inform the court of the lie …;
(ii)must promptly inform the court of the lie … upon the client authorising the barrister to do so, but
(iii)must not otherwise inform the court of the lie …"

Rule 15 of the Professional Conduct and Practice Rules 2003 is to similar effect in respect of solicitors acting in litigation.

In respect of these criticisms Mr Riordan submitted that Minter Ellison had done nothing wrong in participating in the negotiations to pay Mr Korman to give what they believed to be truthful evidence and by not disclosing this fact to the Court. He submitted that the evidence was clear that counsel controlled the negotiations for the terms and the drawing of the affidavit evidence and that Ms Fox was entitled to rely upon the decisions and actions of counsel in the conduct of this part of the trial, including the way in which evidence in chief was led. With respect to the question of informing the Court of Mr Korman's lie, Mr Riordan submitted that it would be entirely inappropriate to interrupt cross-examination to disclose to the court that the witness is not telling the truth. The cross-examiner may not want the lie to be corrected during cross-examination. He submitted that any such disclosure should be made after the witness' evidence had finished so that there was no doubt that the witness had not been mistaken and the witness had been given every opportunity to correct the error. In any event, Mr Riordan submitted that it was fanciful to suggest that Mr Weinberg would not have fulfilled his ethical obligations under the rules. Finally, Mr Riordan submitted that the trial judge had made absolutely no criticism of the plaintiffs' legal advisers as a result of this matter and, by his comment referred to above, it could only be inferred that he considered that, in his opinion, they had acted properly.

Alternatively, if there were a breach of a duty in respect of any of the applicants' criticisms, Mr Riordan submitted that there was no evidence of any costs being wasted as a result of the solicitors' conduct. It was open to the applicants to have led evidence from cross-examining counsel or otherwise as to the fact that there had been significant time wasted.

Even if it is done with the best of intentions, payment of a witness to give evidence should not occur, in my opinion. The cases relied on by the applicants establish this proposition. By payment of a witness I understood Chernov J to mean, and I also mean, something more than meeting the legitimate costs and expenses of a witness. As Chernov J pointed out, it does not follow that, simply because a witness wants to be paid before he will give evidence, his evidence must be false. On the other hand, this stance should make a lawyer extremely wary of the witness' motives and veracity. Further, it follows, in my opinion, that if there has been a payment to the witnesses, this fact should be disclosed to the Court before the evidence is given.

In this context, it is important to note, as Mr Riordan pointed out, that despite devoting considerable time to the matters in the liability judgment, and despite his Honour's lengthy consideration in the costs judgment of all of the factors which were said to justify an order for costs on a solicitor and client basis in favour of the defendants, in particular the first defendant, the issue of Mr Korman's evidence was not mentioned by Chernov J in the costs judgment. In neither judgment did his Honour make any relevant finding, or even any comment, critical of the conduct of the plaintiffs' lawyers. On the contrary, his Honour specifically noted in the liability judgment that they had "acted on the assumption" that Mr Korman's evidence was true.

Although I consider that Minter Ellison should not have condoned the proposal to pay Mr Korman to give evidence, I am still of the view that the applicants have not made out their case for costs against the non-party in respect of this first part of the ground. There is no reason to conclude that Mr Korman would not have been called to give evidence in any event, even without his bought co-operation, given his tantalising indications that he was able to give evidence on a critical issue. Obviously, Mr Korman could have been subpoenaed but, as Chernov J pointed out, such a step does not guarantee that the important evidence he claimed to have would come out. If Mr Korman had been subpoenaed, it seems to me that working through this minefield might have occupied just as many days of evidence as in fact happened. Thus, I am not satisfied that there were costs incurred which could be described as wasted.

Mr Bigmore's second criticism can be disposed of quickly. Questions could certainly be raised as to how it was that this matter of the terms of settlement had not been clarified in evidence in chief, but an issue like that is clearly within the province of counsel. Minter Ellison was entitled, in my opinion, to rely on its experienced counsel handling these difficult issues in an appropriate manner. As I have not heard from senior counsel who led that evidence from Mr Korman, I do not propose to say anything more.

With respect to the alleged wrongful failure by the plaintiffs' lawyers to correct Mr Korman's false evidence about the terms of settlement, I agree with Mr Riordan's submissions that one cannot assume that the lie would have remained hidden if the true position had not emerged during the rest of Mr Korman's cross-examination. I do not agree with the applicants' approach which, it seems to me, would have required the lawyers for the plaintiffs to talk to Mr Korman whilst he was still being cross-examined to tell him that the false evidence had to be corrected, or to announce to the Court during the cross-examination that Mr Korman's denial about the earlier terms of settlement was false. In any event, it seems to me that this issue is another one peculiarly in the province of counsel and that the solicitors could not really override the way in which counsel handled it. I am, therefore, of the view that the applicants have not made out their case for costs against the non-party in respect of this third part of the ground.

I also consider that, even if I had found that the solicitors were in breach of their duty to the Court in respect of this issue of correcting Mr Korman's false evidence, which I do not, there is no evidence that any significant costs were wasted as a result of the way in which Mr Korman's evidence came out. The allegations he made about admissions by Mr Buckley as to ownership of Layerose were critical and I have no doubt that a similar time would have been spent by senior counsel for UTA, Mr Meagher QC, in cross-examining him, whether or not the full story had been disclosed at the outset, because it was important for the defendants to damage his credibility. Indeed, Mr Bigmore conceded that he could not press the argument that there had been any significant prolongation of the case on the basis of Mr Korman's false evidence. I have qualified the above statement about wasted costs because I suppose it could be said that there would have been no need for the second of the two notices to produce to be prepared and served if he had not lied about the earlier terms of settlement. However, in the context of a 102 day trial, such costs would be de minimus, in my opinion, and they should not effect the outcome of these applications.

Once again, looking at the issue of the Korman evidence as a whole, it seems to me that the applicants' submissions focused not on the question of whether costs were needlessly incurred as a result of the solicitors' breach of duty to the Court, but on the view that because the solicitors had acted improperly they should be punished by being ordered to pay the applicants' costs of the proceeding, less the credit for costs already received. As I have previously stated, this is not the correct approach to an application against solicitors for an order that they pay wasted costs.

The Three Grounds as a Group

I stated previously that it was part of the first three applicants' submissions that either singly, or failing that as a group, the grounds relied on should lead to the conclusion that I should order costs against the non-party. I have now considered each of the grounds relied on by the first, second and third defendants and concluded that none of them justify the making of an order for costs against Minter Ellison. In my opinion, there is no additional strength to be gained from considering the grounds as a group rather than singly. Mr Bigmore submitted that when one looked at these grounds together, it could be seen that a pattern emerged which in effect was that the plaintiffs attempted to intimidate the defendants by whenever possible overstating the case and making the most serious allegations of wrongful conduct. I do not accept that this argument has been made out. As Mr Riordan said, these were only a very few issues in a trial which lasted for seven months.

Even if I were of the view that these three grounds as a group justified an order for costs against the non-party, I reiterate that in my view the width of the order sought by the applicants was excessive. I do not consider that, even if they were successful, these three grounds would warrant an order that Minter Ellison pay the first, second and third defendants' costs of the proceeding. As previously stated, it seems to me that, at best, they would justify an order that the non-party solicitors pay the wasted costs of those defendants, being those incurred in dealing with the allegation that Ernst & Young were misled and, perhaps, the costs of preparing and serving the second notice to produce in respect of the Korman Terms of Settlement.

It was submitted by the applicants that these three grounds were linked in another way. During cross-examination, Mr Walker agreed that in a telephone conversation on 11 November 1997, Mr Hayes had said to him that the plaintiffs' case "was not a walk up start". Mr Walker also agreed that at that time Titan was substantially in arrears in paying Minter Ellison's fees, to the tune of about $100,000 to $150,000. However, Mr Walker rejected the suggestion that Minter Ellison's conduct in respect of the Korman evidence or any other aspect of the case was influenced by his concern over fees. He said that he was not particularly concerned about the statement by Mr Hayes because he would "wax and wane at various times with his opinions and was much more bullish than this generally." Mr Walker said that he thought that the case was "going well". It was a "very strong case" in his opinion. I accept Mr Walker's evidence in this respect.

This means that each of the applications by the first, second and third defendants for a non-party costs order against Minter Ellison fails and will be dismissed.

Sung Li's Ground

I turn then to consider the application by the sixth defendant, Sung Li, which was based on an entirely separate ground. Chernov J found in the costs judgment:

"The plaintiffs alleged in their Statement of Claim that Sung Li acted as agent for, inter alia, the Buckleys and assisted them in breaching their fiduciary duties and that it aided and abetted them in breaching s.232 of the Corporations Law. On 28 November 1995 the then solicitors for Sung Li wrote to the plaintiffs pointing out that Sung Li did not commence trading through its current owners until 17 October 1994 and in those circumstances, it could not have participated in any breach of fiduciary duty by the Buckleys or anyone else at the time of the sale. The solicitors invited the plaintiffs to discontinue the proceeding against it. The sixth defendant says that it was obvious that Sung Li could not have committed the wrongful acts in relation to the sale of the business, yet the plaintiffs chose to press on with its allegations against it (and failed). Consequently it should have indemnity costs."

It was submitted on behalf of Sung Li that it was entitled to rely upon these findings and that it therefore followed that an order for costs should be made against the non-party solicitors.

Minter Ellison objected to the admissibility of, and disputed the correctness of, his Honour's findings. In support of the objection, Mr Riordan submitted that his client had not been present at the costs argument and therefore should not be bound by what he respectfully submitted were erroneous findings by his Honour about the role allegedly played by Sung Li. In explaining why his Honour had erred, Mr Riordan submitted that the statement of claim pleaded that Sung Li, a company under the control of the Buckleys, assisted the Buckleys and others in the breaches of fiduciary duty by acting as the trustee of the "Friends Family Trust" and receiving 95% of the UTA shares and that a person who received the trust proceeds, without consideration, with the knowledge that they were acquired as a result of a breach of fiduciary duty and refused to disgorge, participated in the breach within the meaning of the second limb of Barnes v Addy[79]. It was these alleged wrongful acts by Sung Li which the plaintiffs relied on and they occurred after it came under the control of the Buckleys. Mr Riordan submitted that Sung Li was therefore a necessary party. It was not to the point that the plaintiffs' allegations were not accepted. Mr Riordan also relied on the fact that Sung Li was the party against whom an injunction was sought, and undertakings received, not to deal with the shares, at the outset of the proceeding. He also referred to the fact that Sung Li filed a summons seeking summary judgment against the plaintiffs but later withdrew the summons presumably because it was considered that the question of Sung Li's involvement was not clear cut. Finally, Mr Riordan submitted that even if it were held that Sung Li was not a necessary party, this was another case of where Minter Ellison was entitled to rely upon the fact that experienced and competent counsel had signed the pleading which joined Sung Li.
[79](1874) 9 Ch App 244

As I have previously ruled, his Honour's finding on whether or not Sung Li should have been joined as a party is admissible and a matter which I have to take into consideration. However, I am not deciding the same question as Chernov J. I have to decide whether it is appropriate to order the non-party solicitors to pay Sung Li's costs of the proceeding. For all of the reasons given by Mr Riordan in his submissions, I am not prepared to make such an order. Insofar as this involves me in reaching a different conclusion to Chernov J as to the correctness of joining Sung Li as a defendant in the proceeding, then, on the basis of the argument before me, I would respectfully disagree with his Honour's view. It is, however, sufficient for me to base my conclusion on the argument that the solicitors were entitled to rely on the view of their experienced and competent counsel that Sung Li should be joined.

Sung Li's application for non-party costs against Minter Ellison therefore fails and will be dismissed.

Orders

The orders I propose making are that each of the first, second, third and sixth defendants' application for non-party costs against Minter Ellison be dismissed. I will hear the parties on the question of costs.

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[2004] VSC 105

6 April 2004