Xriso Developments Pty Ltd v Sapphire Square Pty Ltd
[2021] VSC 46
•10 February 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S ECI 2020 04494
BETWEEN:
| XRISO DEVELOPMENTS PTY LTD (ACN 607 977 613) | Plaintiff |
| - and - | |
| SAPPHIRE SQUARE PTY LTD (ACN 627 989 388) | Defendant |
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JUDGE: | Daly AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 9 February 2021 |
DATE OF JUDGMENT: | 10 February 2021 |
CASE MAY BE CITED AS: | Xriso Developments Pty Ltd v Sapphire Square Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2021] VSC 46 |
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LEGAL PRACTITIONERS – Application to restrain solicitors from acting against former client – Where solicitors’ partner likely to be a material witness – Whether solicitors should be restrained in the interests of the administration of justice and the integrity of the judicial process – Where solicitor giving evidence which directly conflicts with the evidence of a former client – Whether perception of conflict of interest resolved by having another solicitor in the firm have care and conduct of the proceeding – Mitchell v Burrell [2008] NSW 772 referred to – Application granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R Heath QC with Mr B Petrie of counsel | Rigby Cooke Lawyers |
| For the Defendant | Mr R Peters | HWL Ebsworth |
HER HONOUR:
On 9 February 2021 I indicated that I would make orders restraining the plaintiff (‘Xriso’) from continuing to retain Rigby Cooke Lawyers (‘Rigby Cooke’), the solicitors on the record for Xriso in this proceeding. My reasons follow.
The parties to this proceeding are special purpose vehicles incorporated for the purpose of conducting commercial and industrial property developments in the western suburbs of Melbourne. Until 7 October 2020, the defendant (‘Sapphire’) was the incorporated vehicle for a joint venture[1] between Mr Charlie Balais (‘Mr Balais’) on the one hand, and a company controlled by Mr Peng Shen (Mr Shen) and Mr James Zhao (‘Shen/Zhao interests’) on the other hand.
[1]While I refer in these reasons to the parties being involved in a “joint venture”, I do so as a convenient shorthand description of the character of the relationship between the parties. These references should not be taken as a finding that, as a matter of fact and law, there was a joint venture between the parties.
For reasons which are not necessary to dwell upon for present purposes, the parties agreed to go their separate ways in late 2020, culminating in the execution of a suite of documents under the auspices of an Umbrella Deed executed on 7 October 2020. In the negotiations leading up to the execution of the Umbrella Deed, Mr Balais’ interests were represented by Rigby Cooke, and the Shen/Zhao interests were represented by HWL Ebsworth, the solicitors on the record for Sapphire in this proceeding. As a result of the Umbrella Deed, Sapphire is now controlled by the Shen/Zhao interests.
Approximately twelve months prior to the execution of the Umbrella Deed, Xriso entered into a contract of sale for a large parcel of developable land in Werribee (‘Werribee property’). Mr Balais did not have access to ready funds to pay the deposit of over $2 million. The question of how the deposit came to be, in effect, funded by Sapphire in that finance was obtained from Banner Capital Pty Ltd (‘lender’), which was secured by properties owned by Sapphire, is hotly in dispute. There is no dispute that, in effect, Sapphire advanced funds to pay, among other things, the deposit of the Werribee property. The question of whether the funds were loaned by Sapphire to Xriso, or represented a contribution by Sapphire to the purchase price of the Werribee property, thus giving rise to the presumption of a resulting trust in favour of Sapphire, is the central issue in this proceeding.
On 21 October 2020, about two weeks after the parties executed the Umbrella Deed, and after Xriso completed the purchase of the Werribee property for the total cost of $51,215,000, Sapphire lodged a caveat over the Werribee property claiming an “implied, resulting or constructive trust” (‘caveat’). After correspondence between the solicitors for the parties failed to resolve the dispute, on 7 December 2020 Xriso issued this proceeding, seeking the removal of the caveat.
The application was subsequently listed for hearing on 15 February 2021. On 24 December 2020, the solicitors for Sapphire wrote to Rigby Cooke inviting Rigby Cooke to cease acting for Xriso, on the grounds that Mr Bill Karvela (‘Mr Karvela’), the managing partner of Rigby Cooke, was likely to be a material witness in this proceeding. No response to that request was made until 29 January 2021, when Rigby Cooke stated that it declined to cease to act for Xriso.
The application is made by Sapphire on the basis that allowing Rigby Cooke to continue to act for Xriso would prejudice the administration of justice, and the integrity of the judicial process, on the grounds that:
(a) Mr Karvela will be a material witness in the current proceeding to remove the caveat, and any subsequent proceeding between Xriso and Sapphire with respect to the underlying dispute between them; and
(b) Rigby Cooke will be in breach of its duty of loyalty to Sapphire, its former client.
Apart from the proper characterisation of the funds used to pay the deposit upon the Werribee property (‘advance’), another dispute between the parties concerns the question of whether those funds were advanced to Xriso with the authorisation and consent of the Shen/Zhao interests.
It is not in dispute that Mr Karvela previously acted for Sapphire, and was intimately involved in the transaction by which the lender made the advance, as Mr Karvela, among other things, witnessed the signatures of Mr Balais and Mr Shen to the security documents provided to the lender.
In his affidavit filed in this proceeding on 23 December 2020, Mr Shen deposed that he signed the security documents in the presence of Mr Balais and Mr Karvela without their object or contents being explained to him. Only Mr Balais signed the drawdown notice directing that the advance be paid by the lender into Rigby Cooke’s trust account, from which payments were made for the deposit and to Mr Balais directly. This evidence is directly contradicted by the evidence in the affidavit of Mr Karvela filed and served on 8 February 2021 (that is, after Sapphire issued its summons to restrain Rigby Cooke from acting for Xriso). In substance, Mr Karvela gives evidence that verifies the solicitor’s certificates provided by him to the solicitors for the lender prior to the advance being made to the effect that he provided a full explanation of the security documents and their import to Mr Shen. On the assumption that Mr Shen continues, in the face of Mr Karvela’s affidavit, to assert that at no time was he told of the contents and purpose of the security documents, there is a direct conflict of evidence between Mr Shen and Mr Karvela which may ultimately have to be resolved at a trial. Another staff member of Rigby Cooke, Mr Karvela’s personal assistant, was also present at this meeting, and may also ultimately be a witness as to what transpired at the meeting.
Needless to say, if the conflict of evidence referred to above is ultimately resolved in favour of Sapphire at trial, there may be significant reputational and other consequences for Mr Karvela and Rigby Cooke. There is also a possibility, on the materials currently before the Court, that Sapphire may have a claim against Rigby Cooke regarding the disbursement of the advance from Rigby Cooke’s trust account on or about 17 December 2019, although counsel for Sapphire conceded that he does not presently hold those instructions.
While it was not conceded as such by senior counsel for Xriso in his submissions, having regard to the facts (or at least the evidence) and the circumstances as they currently stand, it seems to me that it would be very difficult for Rigby Cooke to resist an application restraining it from acting in any proceeding concerning the substantive issues in dispute between the parties, particularly given that the question of whether the advance was authorised by the Shen/Zhao interests is likely to be a live issue in any such proceeding. The possibility of adverse findings against Mr Karvela, and the possibility of there being findings which would have adverse reputational and possibly financial consequences for Rigby Cooke, are matters which would support a view that the proper administration of justice and the integrity of the judicial process would require that Rigby Cooke not act for Xriso in any such proceeding.
I also agree that the duty of loyalty owed by Rigby Cooke to its former client would almost certainly preclude Rigby Cooke acting against Sapphire in any dispute between the former joint venture partners in which Rigby Cooke had any role to play. After all, the association between Rigby Cooke and Sapphire is not distant, either temporally or in terms of the subject matter of the solicitor-client relationship. It might be acceptable for Rigby Cooke to act for one joint venture partner concerning the documentation of the dissolution of the commercial relationship between them, in circumstances where Mr Shen’s interests were ably represented by other solicitors. However, litigation is a different matter, given the overarching duties of legal practitioners to the Court in litigious matters, and given the direct involvement of Mr Karvela in the transaction under scrutiny, and where there will be, as it presently stands, a direct conflict of evidence between Mr Karvela and Mr Shen.
Finally, while Sapphire’s application was not put on the basis that if Rigby Cooke continued to act for Xriso there was a risk that confidential information of Mr Shen might be disclosed to the advantage of Xriso and the disadvantage of Sapphire, it is not beyond the realms of possibility that a conflict of that nature could arise. It is apparent from Mr Karvela’s affidavit that the credit of Mr Shen may well be squarely in issue (as to, for example, his facility with and comprehension of the English language), which may be able to be challenged or at least tested using information to which Rigby Cooke may be privy to by reason of having acted for Sapphire in the past.
As noted above, senior counsel for Xriso did not dispute that there may be scope for an actual or perceived conflict to arise, although that matter was not expressly conceded either. However, senior counsel relied upon two key matters to distinguish the current circumstances from those where the courts have restrained a party from retaining, or continuing to retain, the solicitors of its choice by reason of an asserted conflict or concern regarding the objectivity of the solicitor:
(a) first, the limited scope of the current proceeding, being the application to remove the caveat; and
(b) secondly, the role of Mr Demian Walton (‘Mr Walton’), another partner of Rigby Cooke, with the conduct of the application on the part of Xriso.
Turning first to the scope of the proceeding, senior counsel for Xriso submitted as follows:
(a) the current proceeding is of the nature of an interlocutory proceeding, which will be determined on the basis of the affidavits filed by the parties, rather than on the basis of testimony which has been fully tested at trial;
(b) the parties’ preparation for the hearing of the application is close to complete, and there is little left to be done by Xriso’s solicitors prior to the hearing in six days’ time; and
(c) there is no basis for contending that Sapphire has been, or will be, prejudiced by Rigby Cooke continuing to represent Xriso in this proceeding. Conversely, it will be costly and inconvenient for Xriso to have to retain new solicitors shortly prior to the scheduled hearing date.
As for Mr Walton’s involvement, senior counsel for Xriso submitted as follows:
(a) Mr Walton is an experienced solicitor, and has exclusive care and conduct of the caveat removal application on behalf of Xriso since 24 October 2020, soon after Sapphire lodged the caveat on the title of the Werribee property;
(b) he has taken instructions from both Mr Balais and Mr Karvela in the ordinary way (that is, he did not allow the witnesses to confer with each other in his presence), and Mr Karvela has not, and will not, take any part in the conduct of this proceeding;
(c) the Solicitors’ Conduct Rules permit an associate of a solicitor to act for a party where that solicitor is a material witness, provided the administration of justice will not be prejudiced by the associate acting; and
(d) the Court can be confident that Mr Walton is fully cognisant of, and will adhere to, his duties to the Court and his other ethical duties.
In the interests of expedition, I will not traverse the relevant authorities at length, save to say that, relevantly, the outcome of the application is not predicated upon my subjective view of whether the administration of justice, or the integrity of the judicial process, would or would not be jeopardised by Rigby Cooke continuing to act for Xriso in this proceeding. Rather, the test to be applied is whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that a legal practitioner should be prevented from acting for Xriso, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice.[2]
[2]Kallinicos v Hunt [2005] 64 NSWLR 561. This statement of principle has been referred to on numerous occasions since.
The current application is finely balanced. On the one hand, Mr Karvela is clearly a material witness on a matter of controversy, and was centrally involved in the transaction which is said by Sapphire to give rise to a caveatable interest in a valuable property. On the other hand, I accept that this is an interlocutory proceeding, preparation for which is close to complete, in circumstances where another partner of the firm, an experienced solicitor, has care and conduct of the file, and where the final disposition of this proceeding is unlikely to involve the giving of viva voce evidence or require the detailed evaluation of conflicting evidence. All that requires determination is the question of whether there is a serious question to be tried as to whether Sapphire has the interest in the Werribee property claimed by the caveat, and if so, where the balance of convenience lies.
However, some of those nuances may not be immediately apparent to even a well‑informed observer. What might be more readily perceived by a fair‑minded observer is that, in a dispute between former joint venture partners regarding the use of joint venture assets to facilitate the purchase of a substantial and valuable property for the benefit of one joint venture partner (without, on Xriso’s case, the other party having any security over that property), the former solicitors for the joint venture vehicle are not only acting for the beneficiary of the transaction in a dispute, but the solicitor ultimately involved in the transaction has gone on oath to say, in effect, the principal of the other joint venture party is not telling the truth. This is not a case where the solicitor‑client relationship between Rigby Cooke and Sapphire ended long ago, or concerned an entirely different subject matter. And, while the reputational and financial interests of Rigby Cooke may not loom large in this proceeding, they may well do so in any proceeding concerning the underlying dispute.
The stakes of the current application are relevant too. The scope of this proceeding is quite narrow. However, without prejudging the outcome of the application, its disposition is significant to both parties. The Werribee property is a valuable parcel of land. Xriso has already put on evidence regarding the adverse consequences to it of the caveat remaining on the title of the Werribee property. On the other hand, if the caveat is removed, whatever interest Sapphire has in the Werribee property will have reduced protection. Accordingly, the parties and the Court should be able to have full confidence that the legal representatives will represent their clients with due objectivity and candour, and are seen to be doing so.
Senior counsel for Xriso submitted that the Court (and Sapphire) should take some comfort that Mr Walton, not Mr Karvela, has care and conduct of the proceeding on behalf of Xriso, and the authorities tend to focus on the difficulties that arise when the solicitor who was a material witness also has care and conduct of the proceeding, not another member of the firm. From my review of the authorities, those circumstances do tend to bring the conflict into sharper relief, but I do not accept that the conflict, or at least the perception of conflict, is necessarily resolved by having another solicitor in the firm have care and conduct of the proceeding. There are numerous examples in the authorities where a relevant conflict has been found notwithstanding the solicitor concerned was no longer engaged in the conduct of the proceeding, particularly where the law firm itself has or may have a financial stake in the result.[3] Further, the potential for conflict is heightened when the solicitors formerly acted for the current client’s opponent in the litigation.[4] As observed by Brereton J in Mitchell v Burrell:[5]
Against that, most cases point to the view that, in this respect, the law treats a firm of solicitors as a single entity, so that if one partner is disqualified, the firm should not act. In principle, given the incidents of the relationship of partnership (involving utmost good faith and loyalty between the partners), and those of solicitor and client (requiring any partner in a firm to do all in his or her power and use all knowledge and information available to them, including to their partners, to assist the cause of the client), it is difficult to see how, where one partner is disqualified, it could be acceptable for another partner in the same firm to continue to act.[6]
[3]See Gangemi Pty Ltd v Luppino Pty Ltd [2012] VSC 168; Mitchell v Burrell [2008] NSWSC 772 (25); Bowen v Stott [2004] WASC 94.
[4]See Adam 12 Holdings Pty Ltd v Eat & Drink Holdings Pty Ltd [2006] VSC 152 [38]-[39].
[5][2008] NSWSC 772.
[6]Ibid [25].
Accordingly, the fact that Mr Walton has care and conduct of the file does not necessarily alleviate the perception of conflict.
I should stress, however, that in reaching the conclusion I have, I have no concern whatsoever about the integrity or professionalism of Mr Walton, who is an experienced solicitor of, to the best of my knowledge, good repute. Rather, the difficulties arise with the possible conflict between the reputational and financial interests of the firm as a whole, combined with the difficulties of a partner of the firm giving evidence against, in effect, a former (and recent) client of the firm, where the credibility of both witnesses may well be a central issue in dispute between the parties to this and any subsequent proceeding.
I accept that there will be some cost, inconvenience, and some (minor) delay arising out of the need for Xriso to change solicitors. However, the preparation for the application is, if not complete, then well advanced. There are more than sufficient documents in evidence. The evidence regarding what may be the critical factual disputes is, subject to any evidence in reply sought to be addressed by Sapphire, largely complete, and counsel has been briefed for Xriso.
Accordingly, I shall grant Sapphire’s application in paragraph 1 of its summons filed on 4 February 2021, and hear further from counsel as to the future directions for the conduct of the proceeding, and the question of costs.
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