Hana New Zealand Ltd v Stephens HC Auckland CIV 2005-404-4812

[2006] NZHC 1680

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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2005-404-4812

BETWEEN  HANA NEW ZEALAND LIMITED Plaintiff

ANDRICHARD JOHN STEPHENS Defendant

Hearing:         22 November 2006

Appearances: J Holland for Plaintiff

D Gardiner and BJ Hart for Defendant

Judgment:      28 November 2006

JUDGMENT OF ASHER J

This judgment was delivered by me on 28 November 2006 at 4:30 pm pursuant to Rule 540(4) of the High Court Rules

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Registrar/Deputy Registrar

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Date

Solicitors:

Draffin Snow Law, PO Box 47-290 Ponsonby, Auckland

Nigel G Cooke, PO Box 47-016 Ponsonby, Auckland
Copy to:

M Keall, PO Box 6905, Auckland

BJ Hart and DRF Gardiner, PO Box 47-016 Ponsonby, Auckland

HANA NZ LTD V STEPHENS HC AK CIV-2005-404-4812 [28 November 2006]

Introduction

[1]      Hana  New  Zealand  Limited  (“Hana”)  is  suing  Richard  John  Stephens (“Mr Stephens”).  Counsel for Hana previously acted for Mr Stephens.  Mr Stephens objects to his former counsel now acting against him, and seeks an order from this Court declaring that he should no longer act as counsel for the Plaintiff in this proceeding.

[2]      The essence of the claim of Hana against Mr Stephens is that in acting on behalf of Hana and accepting orders from Hana’s customers for consignments of cut flowers, and supplying those flowers, he acted in excess of his authority and in breach of his obligation to take reasonable steps to secure payment.  It is alleged that the consequence of these failures was the supply of flowers to a purchaser in Italy, who did not pay for them, causing loss to Hana.  This basic claim is put in various ways, including breach of fiduciary duty, and negligence.  The full loss suffered by Hana on the transaction is claimed by Mr Stephens.

The alleged conflict

[3]      Mr Stephens has a background in selling cut flowers.   He has worked for Turners and Growers Limited, and in 1997 was working for Flying Fresh International  Limited.    He  was  in  a  relationship  with  the  principal  of  Hana, Ms Apsuko Kato.  Mr Stephens and Ms Kato were living together in Mr Stephens’ house.

[4]      Mr Stephens left the employ of Flying Fresh International Limited.  Ms Kato set up the Plaintiff company, Hana.  Although she did not have any background in the selling of fresh flowers, that was the business of the new company.

[5]      Mr Stephens, who did not obtain new employment, and who was living with Ms Kato, was clearly involved to some extent in the new business.   Certainly the Directors of his former employer thought so, and in 1998 proceedings were issued against Mr Stephens alleging breach of a restraint of trade covenant.

[6]      The  present  counsel  for  the  Plaintiff  (“counsel  for  the  Plaintiff”)  was instructed by Mr Stephens, as was the present solicitor for the Plaintiff.  Mr Stephens dealt  primarily  with  the  Plaintiff’s  counsel,  the  instructing  solicitor  having  a relatively minor role.   Mr Stephens says that he visited Mr Keall on a number of occasions, and that Mr Keall acted for him for the entire duration of the proceedings from 1998 until they were discontinued on 16 November 2000.  During that time he says that he discussed with Mr Keall the following:

a)        the nature of the claim arising in relation to the restraint of trade;

b)       the operations of a flower export company;

c)        his relationship with Ms Kato;

d)       the respective roles that he and Ms Kato then had in the company;

e)        the operation of the company while it was subject to the restraint of trade;

f)        his concerns and/or fears over the claim; and g)          the options for resolving the claim.

He  says  that  he  relied  heavily  on  counsel  for  the  Plaintiff’s  good  advice  and guidance, and that counsel did a good job for him which led to a discontinuance.

[7]      Counsel for the Plaintiff and Ms Kato accepts this broad outline.  However, he says that he has no specific recollection of Mr Stephens on a personal level and little recollection of the events.   In relation to a number of the matters of detail referred to by Mr Stephens, he says that he cannot recall those matters.  He says that he has not looked at any of the files, and has stated through his counsel in this proceeding, that he will not look at them.   He claims that prior to the settlement conference he would not have recognised Mr Stephens on the street.  Hana paid the bills in the restraint of trade case and was the primary client.  Ms Kato has filed an affidavit supporting counsel for the Plaintiff.

[8]      It is common  ground that in the course of  all the  work  counsel  for  the Plaintiff   submitted   bills   to   Mr Stephens   totalling   $4,131.20   –   a   total   of approximately 20 hours work.  The Plaintiff’s solicitor submitted a much smaller bill of $393.75.

[9]      In his affidavit in reply Mr Stephens takes strong exception to counsel for the Plaintiff’s claims of modest involvement and poor memory of it.   He says that contrary to his denials, he met counsel without Ms Kato on a number of occasions. He says that he was the primary client, as he was the person subject to the restraint of trade, and was earning no income.  While the bills were paid for by Hana, he was the one who had to put the time in with the lawyers involved.   He has a concern that counsel for the Plaintiff’s memory of events will come back when there is more focus on the proceedings as trial approaches.

[10]     As to an allegation that his former counsel would not have recognised him on the street, Mr Stephens says that he would have had no difficulty recognising his former counsel at all, and that the earlier case was of great importance.  He says that right from the early days his involvement in Hana was extensive, and that he was important to the operation of the business.   He was dependent on the business, because he was not working and relied on Ms Kato to meet his mortgage payments.

Was there a conflict of interest?

[11]     The approach of the Court to an application such as this is now clearly settled.   The High Court has an inherent jurisdiction to control its own processes, except as limited by statute.  One aspect of that inherent jurisdiction is that the Court has power to determine which persons should be permitted to appear before it as advocates.  Another aspect of the inherent jurisdiction, is that the Court may control a particular proceeding, to ensure that justice is administered properly, to preserve confidence in the judicial system.   The Court has an obligation to ensure a fair hearing, and as part of that concern it has the ability to determine who should appear before it as an advocate.  These principles were set out in Black v Taylor [1993] 3

NZLR 403.  This is the approach that has been taken in a number of recent cases:

The Official Assignee v Brodie (2000) 15 PRNZ 89, para [38], Beggs v Attorney-

General [2006] 2 NZLR 129, paras [18] – [20]. The respondent has not questioned it in this application.

[12]     This discretion can be seen as part of the Court’s obligation to ensure that proceedings are conducted properly and the administration of justice is not brought into  disrepute.    This  was  memorably  expressed  by  Lord Hewitt  in  R  v  Sussex Justices, ex parte McCarthy [1924] 1 KB 256 at 259, that justice should not only be done, but should manifestly and undoubtedly be seen to be done.

[13]     Justice is not done if counsel, because of a previous connection with the opposite party, is in a conflict of interest position.  It is not seen to be done if the reasonable bystander would think it quite possible that such a conflict existed.

[14]    The New Zealand legal profession has grappled with the issue of what constitutes a conflict of interest.   Its rules of professional conduct while drafted pursuant to the New Zealand Law Society’s obligations under the Law Practitioners Act 1982, have no force of law, and are not an exhaustive code or treaties.  Rather, as is stated in their introduction, they are a definition of the bounds within which a practitioner can practice the profession.  As was commented in Black v Taylor, the rules can be seen as an appropriate guide in the exercise of the Court’s inherent jurisdiction (p 419).  Rule 1.06 states:

A practitioner must not act for a client against a former client of the practitioner when through prior knowledge of the former client or of his or her affairs which may be relevant to the matter, to so act would be or would have the  potential to  be  to the  detriment  of the former  client  or  could reasonably be expected to be objectionable to the former client.

[15]     In  this  case Mr Gardiner,  who  presented  the  argument  for  the  applicant, submits that there is both actual knowledge and general knowledge of circumstances possessed by counsel for the Plaintiff, that may be of relevance and of use to the plaintiff at trial, and thus to the detriment of Mr Stephens.

[16]     In relation to specific knowledge of relevant material, Mr Gardiner refers to the fact that in the course of discovery in these proceedings, a quantity of documents had  been  discovered  by  the  Plaintiff  which  relate  back  to  the  time  when  the

Plaintiff’s counsel was acting for Mr Stephens in 1998.   The papers in question include an exchange between Hana and a Dutch company, Globestar Trading BV.  I was shown a copy of one letter, dated 21 May 1998, where representatives of Hana, (which Mr Stephens, although he is not a signatory, asserts would have included him), wrote to the Dutch company commenting on features of doing business in Italy, and the possibility of the Italian company being a bad credit risk.   Without suggesting that it is proven that Mr Stephens had any role in this correspondence, he submits that this demonstrates how counsel for the Plaintiff will have learned from the Defendant, Mr Stephens, when he acted for him earlier, facts and attitudes of actual relevance to the issue of whether Mr Stephens was acting without authority or negligent in his dealings with the Italian company.  This knowledge could be used to the Plaintiff’s advantage.

[17]     To this Mr Holland, who appears for the Plaintiff on this application, submits that  this  material  is  not  confidential,  and  is  available  in  any  event  as  part  of discovered material.  There is therefore no conflict.   He also makes the point that counsel for the Plaintiff has asserted on oath that he has no specific recollection of the events of the particular details of the instructions he received from Mr Stephens, and will not re-examine his file.

[18]     In my view, it somewhat misses the point to suggest for a legal practitioner to claim that the relevant material is available on discovery, and he has forgotten it in any event.  Even if prior knowledge of disclosed documents just makes counsel’s job easier  in  pursuing  Mr Stephens,  in  that  counsel  for  the  Plaintiff  knows  which documents to focus on, rather than having to work things out afresh, that acts to the detriment  of  Mr Stephens  as  the  former  client.    And  memory  can  develop  and improve with focus and thought.  Concentration on specific reference points in the past can trigger new recollections.  Memory can come back.  It will be seldom that general disclosure, or the claimed forgetting of relevant material, will comfort a Court, faced with a conflict assertion.   Such qualifications are not to be seen in Rule 1.05.  In the end, it is not an issue of what the previous counsel actually knows, but rather what the client would reasonably expect counsel to know.

[19]     In this case it would seem that counsel for the Plaintiff would have had, in

1998, a detailed knowledge of Hana’s then operation, and Mr Stephens’ role in it.  In contesting a restraint of trade claim focused on the activities of Mr Stephens as an alleged associate of Hana, the nature of Mr Stephens’ work will undoubtedly have been of relevance.  It is clear that the Plaintiff today regards what he did in 1998 as relevant.  That is presumably why the 1998 documents have been disclosed by the Plaintiff.  The knowledge that counsel for the Plaintiff obtained back then clearly has the potential to be to the detriment of Mr Stephens in the conduct of the litigation.

[20]     Certainly, in the words of Rule 1.05, it can reasonably be expected to be objectionable to Mr Stephens that counsel for the Plaintiff should act against him in those circumstances.  Mr Stephens should not have to be comforted by counsel for the Plaintiff’s assurances that his memories have dulled.   He should not need to receive promises that the documents of the former file will not be looked at.  Such concerns should not arise in a case such as this.

[21]     It cannot be said with certainty that anything that counsel for the Plaintiff learned, and may remember, will act to the detriment of Mr Stephens.  However, it is possible that this could arise.  And it is reasonable for the client to fear that it could happen.  That is enough for there to be an unacceptable conflict of interest in counsel for the Plaintiff continuing to act.

[22]     There will, of course, be cases where the fact that counsel has acted for the other party cannot reasonably be seen as objectionable.   Acting on a minor prosecution many years earlier might come into that category.  Certainly the facts in Black v Taylor showed a more serious level of reasonable objection than in this case, because of the much greater involvement of counsel in that case with the affairs of the other party, over a period of many years.  While this case is not as extreme as Black v Taylor, the level of possible detriment is such that counsel for the Plaintiff should not act.

[23]     In this matter counsel for the Plaintiff will also have developed, through acting for Mr Stephens for some time in important litigation, a general knowledge of Mr Stephens’ position.  Mr Stephens says he became aware of his financial situation,

and indeed it was put to me from the Bar, and does not appear to be in contention, that he prepared a legal aid application for Mr Stephens.   He was aware of his relationship with Ms Kato and may have seen the two of them together on occasions. A barrister in acting for a client in such a situation will quickly develop some appreciation of the client’s personal strengths and weaknesses, and will form some assessment of how the client would perform as a witness.  That assessment is formed by the barrister when the client’s guard is down, and indeed it is in the client’s interest that counsel fully understand his confidential position, both personal and financial.   In this situation the barrister, through the open communication of the client, will obtain an expert and confidential knowledge of great value if that former client is now the opponent.

[24]     In the High Court decision in Black v Taylor, in an extract quoted by the

Court of Appeal at p 406, McGechan J put it this way:

Last, the lawyer (and particularly the family solicitor) gets to know personalities.  He gets to know something, and often a good deal, of a former client’s weakness, fears and reactions.  It is as much information passed on as is verbal or written description.  Like all information, it can be misused for another person.  There could be cases, perhaps with a former client witness’ credibility crucial, where such knowledge of personality inevitably acquired by virtue of the former solicitor/client relationship could amount to a real information consideration.  There will be cases where a former client’s very real fears that he will be cross-examined from a position of unfair superiority should be given due consideration.

[25]     It is impossible to say in a case such as this, to what extent such knowledge and information could assist counsel for the Plaintiff.  He has asserted, and I accept that it is true, that he has no specific recollection of Mr Stephens on a personal level and no recollection of his affairs.   But as I have said, recollections can revive, particularly in the focus of contested Court proceedings, when counsel has to cross- examination a former client.   Moreover, such assertions of poor recollection can understandably be of little comfort to the former client.   Such a former client’s entitlement to protection against potential conflict should not turn on the asserted poor memory of the former lawyer.

[26]     It is to be noted that there is a domestic element to this proceeding.  Although the Plaintiff is Hana Ltd, Mr Stephens’ former defacto partner, Ms Kato, is a director

of Hana and will be its primary witness.  The issue of these proceedings followed the break-up of their relationship.  Rule 1.05 of the Rules of Professional Conduct for good  reason  states  in  the  Commentary  (2)  that  the  Rule  can  apply  where  a practitioner has acted for a husband and wife.   Here counsel for the Plaintiff has acted for two persons who have been in a relationship akin to that of husband and wife.  While there is no invariable rule that a practitioner cannot act for one of two previous partners who had been clients, against the other, it is an area where practitioners should be cautious and conservative.  In the circumstances of this case, those who were previously the mutual lawyers of the parties, should not now choose to act for one against the other.

[27]     Mr Holland has emphasised Mr Stephens’ delay in bringing this application. Proceedings were commenced late last year.   The allegation of conflict was first made  in  early  October 2006,  just  prior  to  a  settlement  conference  that  was  to proceed.   The settlement conference was held, without prejudice to the claim of conflict.   This application was filed immediately after the settlement conference, pursuant to a timetable order made at its conclusion.

[28]     Mr Holland’s  criticism  is  legitimate,  and  the  Court  must  guard  against cynical last minute applications, brought for the tactical reason of forcing an adjournment.  However, delay can be no more than a factor to be taken into account in the Court exercising its discretion.   Even last minute applications, if there is a clear and serious conflict, can succeed.

[29]     Mr Gardiner has explained Mr Stephens’ delay.   It was only prior to the settlement conference that the issues arising in the proceedings were properly appreciated, and it was realised that the conflict existed.  There is nothing to indicate that this application is tactical or deliberately last minute.  I have found that there is a potential conflict.  In this case the application is not so last minute that the Plaintiff should not be able to retain counsel, and proceed with the fixture which is allocated for the beginning of February 2007.

[30]     I consider that the objections that I have set out above that relate to counsel apply with equal force to the Plaintiff’s present solicitor, who was Mr Stephens’

solicitor in the earlier litigation.  While that solicitor appears to have had much less involvement   in   the   file   than   counsel,   as   instructing   solicitor   with   overall responsibility for the file, she can be fairly assumed to have been aware of all matters known to counsel at the time.  It was her duty to be familiar with the file, and I do not  consider  that  there  is  a  proper  basis  to  distinguish  between  her  state  of knowledge and that of counsel that she instructed.   There is no affidavit from the instructing solicitor setting out her actual role, or state of knowledge.  Even if it is the case (and this is by no means clear), that the solicitor was put in place simply to meet the ethical requirement of having an instructing solicitor, the result should be the same.  The instructing solicitor has an overall responsibility for the file, and can be expected to have a full knowledge of it.  Justice will not be seen to be done if an instructing solicitor, even one who has had a relatively minor role, is assumed not to have the knowledge of the counsel she has instructed.  The central issue is not so much what she actually knew, but what a client could reasonably expect her to know. In this case, Mr Stephens could reasonably expect her to know about the details of his earlier case.

Conclusion

[31]     Counsel for the Plaintiff is in a conflict of interest position in acting against his former client, Mr Stephens.  He enjoyed a substantial retainer from Mr Stephens, in relation to important proceedings where the nature of Mr Stephens’ work for the company that now sues him, was at issue.   He was in receipt of confidential information which could be used against Mr Stephens in these proceedings.   He would have got to know aspects of Mr Stephens’ affairs and character that could be of use in the pending fixture.  Mr Stephens could reasonably be concerned that this information could be used now against his interests.  The continued involvement of the solicitor for the Plaintiff, who can be assumed to have the knowledge of the counsel she briefed, is open to the same objection.

[32]     I therefore declare that the present counsel and solicitor for the Plaintiff can no longer act for the Plaintiff in this proceeding.

Costs

[33]     Costs on this application are awarded on the usual basis in favour of the successful applicant, on a 2B scale.

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Asher J