Watson & Ors v Ebsworth & Ebsworth (A Firm) & Anor

[2011] HCATrans 246

[2011] HCATrans 246

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M7 of 2011

B e t w e e n -

ROBERT NOEL WATSON

First Applicant

FREDERICK CHARLES GIBSON

Second Applicant

GIBSON MOTORSPORT MERCHANDISE PTY LTD (ACN 095 810 110)

Third Applicant

FC GIBSON PTY LTD (ACN 082 475 705)

Fourth Applicant

and

EBSWORTH & EBSWORTH (A FIRM)

First Respondent

PHILLIP EDWARD BATTYE

Second Respondent

Application for special leave to appeal

GUMMOW J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 2 SEPTEMBER 2011, AT 10.36 AM

Copyright in the High Court of Australia

____________________

MR A.J. MYERS, QC:   May it please the Court, I appear with MR P.J. RIORDAN, SC and MR P. ZAPPIA, for the third applicant.  (instructed by Stynes Dixon Lawyers)

GUMMOW J:   What is the position of the first and second applicant?

MR MYERS:   They have not applied.

GUMMOW J:   They did, but they disappeared?

MR MYERS:   I do not know about disappeared, but as far as the Court is concerned they are not relevant persons, to use the words of the Full Court in this case, or Court of Appeal.

MR P.J. JOPLING, QC:   May it please the Court, I appear with MR A. HANAK, for the respondents.  (instructed by Minter Ellison)

GUMMOW J:   Yes, Mr Myers.

MR MYERS:   Thank you, your Honour.  This case raises for consideration the proper test for determining whether a solicitor can act for two parties whose interests are adverse.  That is an important question for the administration of justice in Australia and it is an important question for the legal profession.  The court below concluded on this subject, as appears at paragraph 152 on page 170 of the application book, if I could ask the Court to find it and go to that.

GUMMOW J:   Perhaps one has to start at paragraph 150?

MR MYERS:   You do, your Honour.  With respect, I agree completely because paragraph 150 elucidates, one might think, what the court considered was the meaning of this word “relevantly” employed in paragraph 152.  The court made a distinction between the solicitors acting for GMM in relation to merchandising matters and other matters, that is to say matters concerning the obtaining of sponsorship and the ownership of the race team, as it was called. 

HAYNE J:   And this in a context provided by the matters at 144 is it, where the submissions were based solely upon a duty of loyalty?  No contention about confidential information, confidential knowledge.

MR MYERS:   Correct, your Honour, it is duty of loyalty only that we are concerned with.  That was the way in which the matter was put below, as one gathers from the appeal decision, and we do not attempt to put it differently here.  The circumstances of the case below at one level were complex, but at a more general level were really quite simple.  A group of three men, Messrs Gibson, Watson and Forbes, got together to create a race car team to participate in the V8 racing competition. 

As part of that there was established a company, which was going to hold the licence from the organisation that ran this racing car competition and would have an agreement of sponsorship with a motor car manufacturer.  In this case it was Ford.  There was a separate corporation, the third applicant, that was established to exploit, as it said, the intellectual property and the merchandising rights that would be associated with such a team.  It was important to have a prominent race car driver, as Mr Lowndes was called. 

Right up until 10 October when a meeting was held which really put an end to the prospects of the third applicant getting the merchandising rights, the solicitors were acting for the third applicant, whose human voices were Mr Gibson and Mr Watson, and for Mr Forbes and his interest, and Mr Lowndes, the driver.  There was a series of meetings from 25, 26 September through to 10 October, which are referred to in the reasons and are dealt with at paragraphs 104 to 109 of the primary judge’s reasons for decision.  These meetings, about which the solicitors – let me put it this way - the solicitors did not reveal to GMM or its human face, Mr Watson and Mr Gibson, the existence of these meetings.

These meetings concerned the sponsorship by Ford and also where Mr Lowndes would place his loyalties, there having been a falling out between Mr Watson and Mr Gibson, on one hand, and Mr Forbes.  Nothing was said by the solicitor or the solicitors who were still continuing to act for the third applicant about these meetings, their existence or once the meetings had been held, what was discussed at those meetings.  In particular, the meeting of 1 October relating to the Ford sponsorship was crucial. 

As a result of the meetings Ford decided to go with Mr Forbes.  Mr Lowndes, not unnaturally, followed the money.  He went with Ford and the result was, as one would expect in a commercial way, the merchandising and intellectual property rights were lost to the third applicant.

The test that is framed on page 152 is not a satisfactory test.  It is not a satisfactory test because the force and effect of the word “relevantly” is left completely unexplained.  It would appear, from the sort of distinction that is made at paragraph 150, that the court may have thought that a relevant relationship was one where the same legal issues were being considered.  But that is too narrow a view to take of the scope of the duty of loyalty as part of the fiduciary obligation.

From a practical and commercial point of view if the sponsorship and the driver go one way the merchandising is going to follow them and the failure, at least the failure, to inform the persons for whom the solicitors were still acting that they were participating in these meetings, giving advice, legal, and it might appear business advice, adverse to the interests of their clients, GMM, constitutes, we would say, a clear breach of the fiduciary obligation of a solicitor.  Now, it might be said that however that obligation is framed what happened must be a breach.  On the other hand ‑ ‑ ‑

HAYNE J:   But to avoid breach the solicitors would have had to do what?  Jettison both clients, I think, could they not?  Walk away from both?

MR MYERS:   They would have to either jettison both clients or get the clearest permission from both clients to continue to act, having fully explained what the possible consequences of acting for both would be.  A wise solicitor would not have even attempted that task in this situation.  The commercial interests of the parties are completely adverse.  We say whether this case is regarded as one dealing with the administration of justice where there is a plainly incorrect decision of the court below, or a case involving a matter of general principle, there ought still to be special leave on this ground. 

But we do say that it is a matter where the court has not given specific consideration to what is the principle that is involved.  Certainly there should not be allowed to stand a proposition that the principle is not relevantly related in a context where “relevantly” seems to be confined to a

consideration of the respective identification of legal matters divorced from a wider context. 

We contended below and we do here that what was said by the Supreme Court of Canada in R v Neill - and on page 165 of the reasons for the decision the significant passage is set out, is the test that ought be adopted in this country:

The bright line is provided by the general rule that a lawyer may not represent one client whose interests are directly adverse to the immediate interests of another current client – even if the two mandates are unrelated –

that is to say, as one understands it, they are unrelated in relation to a consideration of the legal matters that the mandates relate to –

unless both clients consent after receiving full disclosure –

That is what we say.  There was a second basis upon which the Court of Appeal decided against the third applicant and that was that, in any event, no loss was caused.  We say that that decision is also evidently incorrect.  The reasons are set out at paragraph 166, which is found at pages 175 to 176 of the application book, if I am not mistaken, yes.  It is a fairly brief description of the reasons.  The essential failure here was ‑ ‑ ‑

GUMMOW J:   The assessment of any equitable compensation would have to go back, would it not?

MR MYERS:   It would have to certainly, your Honour, and no, I do not have anything to say about that.  But the court below, having referred to Brickenden at some length from paragraphs 163 to 165, did not seem, we would say with respect, to understand that it was pertinent here.  It was the failure of the solicitor to disclose what he was up to in relation to these meetings that robbed our clients of the possibility, the real chance of obtaining the commercial advantage that they were seeking and, if I might say, in relation to which he was advising them.  If the Court pleases.

GUMMOW J:   Mr Jopling.

MR JOPLING:   If the Court pleases.  This case raises no legal principle concerning fiduciary duties that need be the subject of this Court’s attention.  The case concerns an implied retainer arising out of work undertaken by the solicitors for the company GMM and turns, as our learned friend has made bold this morning, on an analysis of the work undertaken by the solicitors for GMM.  GMM’s role was to undertake merchandising ‑ ‑ ‑

GUMMOW J:   Just before you go on, there is an extension of time required in this case.  Do you oppose that?

MR JOPLING:   No, your Honour, I do not think we would not take that issue.  There has been an explanation provided in an affidavit as to financial ‑ ‑ ‑

GUMMOW J:   There has been, yes.  Very well, Mr Myers has that extension.  Yes, go on.

MR JOPLING:   Thank you.  GMM’s role was to undertake merchandise activities relating to Mr Lowndes and his team and the Court of Appeal held that the solicitors at the relevant time advised GMM in relation to those activities and nothing more.  It was never alleged below, your Honours, that GMM was to be involved in the buy‑out of Forbes and RPM.  Indeed, the buy‑out proposals were not made by GMM, but were rather made by Messrs Watson and Gibson.  There was no finding that the solicitors provided any strategic advice to GMM about.

It is against that background that one ought examine the special leave questions that our friends raise.  Our friends invite the Court to look at the decision in R v Neil in Canada and draw on that and apply that here in Australia.  But, your Honours, we say that that decision does not stand for the proposition that the matters which give rise to a conflict may be unrelated.  On the contrary, the court in Canada makes plain that a solicitor cannot act for one client whose interests are directly adverse to the immediate interests of another current client, unless both clients consent after receiving full disclosure.  There is, we say, no new principle that emerges from that, that there ought be no contest on that point in this Court.

The applicant’s submissions about the work that Battye and Ebsworth did for GMM are, we submit, misleading in two material respects.  At the Court book, application book page 194 at paragraph 22, our opponents contend that Battye gave:

“ongoing strategic advice about GMM’s relationship with RPM and Mr Forbes”.

That, with respect, if the Court pleases, mistakes what the Court of Appeal found.  The footnote reference at page 194 is to footnote 42 and if one goes back to the Court book at page 0156 our point is made plain.  Your Honour will see there at the top of page 0156, above point 10:

The work which was done by other law firms for Messrs Watson and Gibson was limited and did not involve on‑going strategic advice about GMM’s relationship with RPM and Mr Forbes.

We repeat that both the trial judge and the Court of Appeal concluded that Battye had no instructions to act on behalf of GMM in relation to the buy‑out negotiations with Forbes and that GMM was not involved in the buy‑out proposal at all.  We refer the Court to application book 67 and page 162.  Secondly, your Honours, it is suggested ‑ ‑ ‑

GUMMOW J:   You are addressing us on point 2, I think, at page 202 of the application book?

MR JOPLING:   Yes, your Honour.

GUMMOW J:   Namely, the case turns upon the analysis of the particular engagement of the solicitors?

MR JOPLING:   Yes, your Honour.  Secondly, the factual point of distinction that we wish to make and the error that our friends enter into is that it was suggested that in September 2001 Mr Battye and Ebsworths advised GMM in relation to claims by Forbes that GMM was not entitled to the use of the name Gibson Motorsport. 

Your Honours will have seen in the short book that we have given the Court for today that we have provided you with the evidence at the trial, where Mr Gibson gave evidence that he, in fact, had received advice from another firm of solicitors, namely Neil Falconer at White Cleland, and not from Battye and Mr Gibson.

These errors, if the Court pleases, are important and highlight the fact that the applicant has misstated the work that Battye did for GMM in a most significant way and highlight, we say, why this case is really a case that is mired in its own particular facts and ought not trouble the Court.  The applicant’s submissions on breach of duty focus on Mr Battye’s conduct after 31 August.  That date is important because as the Court of Appeal concluded Mr Battye told Mr Watson on that day in a conversation that he would not act for GMM on any issues relating to Forbes and RPM and would only be acting for Lowndes on those issues going forward.

Secondly, the work that Ebsworths performed after 31 August for GMM was limited to providing advice in connection solely with the merchandising business.  Thirdly, Mr Battye’s continued involvement in the negotiations involving Forbes was only in the context of work that he was doing for Mr Lowndes.

We then turn to the breaches of duty submissions.  Our opponents refer to four breaches:  continuing to act for Lowndes, arranging and attending the Queensland meeting in September, arranging and attending the meeting with Ford in October and, finally, failing to reveal those two sets of meetings. 

In continuing to act for Lowndes it is our contention that the interests of Lowndes were not in conflict with GMM.  GMM purely sold merchandise for the team.  Lowndes had a contractual right to be paid from the sales of merchandise which was enforceable against RPM.  It was in Lowndes’ interest that the sale of merchandise continue.  Additionally a decision on the buy‑out negotiations did not spell the end for GMM.  Although GMM had no enforceable right to sell team merchandise, at the meetings in September it was agreed, in principle, that GMM would continue to sell merchandise and be given a contractual licence to secure the rights to do so. 

In respect of the two meetings in Queensland in September and the meeting with Ford, we say again nothing turns on those matters because by that point in time it was made plain that the work that Battye was doing was work solely for Lowndes. 

In relation to the second question for special leave we agree with your Honour the presiding Judge that the assessment would have to go back to the court below.  The applicant’s written submissions do not put into issue the applicable principles on causation and equitable compensation cases.  Those principles were outlined by the Court of Appeal, were accepted by the applicant as correct and there is no suggestion that the principles should be challenged in this Court.  If the Court pleases.

GUMMOW J:   Thank you.  Mr Myers.

MR MYERS:   Thank you, your Honours.  The first reference, which my learned friend gave to your Honours, was to the application book at page 194.  I am sorry I have got that wrong.  Paragraph 120, I am sorry, your Honours, at page 156 - my learned friend’s reference is mistaken.  The sentence to which he referred dealt with the question of work done by other law firms, not work done by the solicitors.  That is quite apparent.

Secondly, your Honours, could I ask you to go to the reasons for decision of the trial judge?  I want to refer briefly to paragraph 98 on page 55.  I will skip through these because they are important.  The first sentence:

On 19 September 2001, Mr Watson forwarded to Mr Battye a letter of the same date sent to him by Andersen Legal.  In that letter, Andersen Legal stated that they acted for RPM –

which had been formerly called Gibson Motorsport –

and Mr Forbes.  The letter purported to set out historical matters before denying Mr Watson any entitlement to commission referable to the Ford sponsorship moneys.

So Mr Watson, on behalf of GMM, is seeking advice about that.  Could I go forward to paragraph 103 on page 58:

On 26 September, Mr Battye sent an email to Mr Watson advising that he would be away for a couple of days –

He omitted to say in the email that he was going to be away for a couple of days on 27 and 28 September, meeting with Mr and Mrs Lowndes and Mr Forbes in Queensland when they discussed all matters, including as appears from paragraph (f), use of the “Team’s intellectual property”.  It was agreed that the team’s intellectual property could be used at least until after Bathurst.  That is an occasion on which there are motor races.  If one goes on, the next page at paragraph 106 - this is the Ford meeting:

On 1 October 2001, Mr Battye, as instructed by Mr Lowndes, had a meeting with Ford (Mr Polites and Ms Allen).  In the meeting, Mr Battye told Ford that he and Mr Lowndes understood that Mr Forbes would not sell the team to Mr Watson or Mr Gibson.

So he is acting adversely to the interests of his client, that is GMM, because if Ford go with Mr Forbes the prospect of getting the merchandising and intellectual property rights are diminished, to say the least, considerably.  If I could go across to paragraph 107:

The next day (2 October 2001), Mr Battye had contact with Mr Watson concerning the Dunlop sponsorship agreement.

But then line 34 –

On 4 October, one of Mr Battye’s partners did some work on a privacy issue for GMM.  Mr Battye conceded in cross‑examination that, as at this time, he still considered GMM a client.

If I could go to paragraph 109 on the next page:

On the same day (9 October), Mr Battye had meetings with Mr Forbes between 10.30 a.m. and 3.00 p.m., and Mr Lowndes between 3.00 p.m. and 6.00 p.m.  There was discussion concerning the possibility of merchandise coming under the control of RPM –

That is not GMM –

Mr Battye’s explanation for not including Mr Gibson and Mr Watson in this discussion was that even though he still considered GMM a client of his, he knew that there would be a meeting the next day.

Well, the meeting the next day is, perhaps, a little late because by that time the deed is done.  Certainly any of these cases dealing with a conflict of interest involving solicitors will involve some consideration of facts.  Very often solicitors get into difficulty because they do not draw the line early enough and they think things will work out and steps go on and on and on and there are some complexities.  In this case we say, with respect, there are not great complexities and we do accept that GMM was not, at the relevant time, involved in the buy‑out.  It was simply a merchandising company.  If the Court pleases.

GUMMOW J:   We are not satisfied that this application presents any question of principle concerning the fiduciary duties of solicitors.  Rather, any appeal would turn upon particular issues of fact as to the scope of the solicitors’ engagement in this case.  Special leave is refused with costs.

AT 11.01 AM THE MATTER WAS CONCLUDED