Legal practitioners - Application by defendant to restrain solicitors from acting for plaintiff on ground that they have a potential conflict of interest - Solicitors for plaintiff taking over conduct of an action in relation to which defendant sued - Claim in defence that plaintiff's solicitors were at fault - Principles to be applied - Whether judicial process undermined if solicitors for plaintiff continue to act

Injunction granted to restrain plaintiff's solicitors from acting

Carindale Country Club Estate v Astill [1993] FCA 218; (1993) 42 FCR 307

Chapman v Rogers; ex parte Chapman [1984] 1 Qd R 542

Commissioner for Corporate Affairs v Harvey [1980] VicRp 64; [1980] VR 669

Esanda Finance Corporation v Alvaro, unreported; SCt of WA; Library No 980310; 3 June 1998

Keppie v Law Society (ACT) (1983) 65 FLR 147

Oceanic v HIH [1999] NSWSC 292; (1999) 10 ANZ Ins Cas 61-438

Unioil v Deloitte Touche Tohmatsu (1997) 17 WAR 98

1 MILLER J: This is an application by the defendant to restrain the plaintiff from retaining or engaging the firm of Metaxas & Vernon and/or Mr Arthur Metaxas and Ms Karen Vernon from advising the plaintiff in respect of these proceedings and further to restrain those persons from acting as instructing solicitor or counsel for the plaintiff in the proceedings.

2 In October 1997 the plaintiff retained the defendant to advise it in relation to a dispute with Universal Drill Systems (Australia) Pty Ltd ("Universal") in relation to the plaintiff's rights and obligations under a manufacturing agreement and a confidentiality agreement between the plaintiff and Universal. The dispute between the plaintiff and Universal was referred to arbitration in or about July 1998 and the defendant acted on behalf of the plaintiff in the arbitration proceedings, retaining counsel to appear on behalf of the plaintiff at the hearing.

3 The arbitration proceedings were heard between March and May 1999 and on 17 November 1999 the arbitrator delivered a first, interim award in respect of the substantive issues in the arbitration. On 8 December 1999 Universal made application for leave to appeal the interim award and on the same day the plaintiff and Universal agreed on a course of action for the resolution of the costs of the arbitration. In this respect it was agreed that each party would make submissions to the arbitrator and that there would be an interim ruling on costs. If it became necessary a bill of costs would be drafted and delivered and the parties would negotiate in respect of those costs, proceeding only to taxation if necessary.

4 Pursuant to these arrangements the defendant received from Universal its submissions in relation to costs on or about 10 December 1999. Four days later, on 14 December 1999, the plaintiff advised the defendant that its retainer was at an end and that new solicitors would be instructed to thereafter act for the plaintiff in the arbitration proceedings and the application for leave to appeal therefrom. That firm of solicitors was Arthur Metaxas & Co, of which Mr Arthur Metaxas was the principal and Ms Karen Vernon an employee. Subsequently, Mr Metaxas and Ms Vernon entered into partnership in the name Metaxas and Vernon. A notice of change of solicitor was filed in the arbitration proceedings on 16 December, the files of the plaintiff having the previous day been delivered by the defendant to Messrs Arthur Metaxas & Co.

5 In an affidavit sworn 30 January 2001 and filed in these proceedings Neil Kevin Stewart, a member of the firm Pullinger Readhead Stewart, the successors of the defendant, has deposed to the fact that files and documents discovered by the plaintiff in these proceedings reveal that on 24 December 1999 the arbitrator invited submissions from the parties to the arbitration in relation to proposed amendments to his interim award, foreshadowing that a further award in relation to interests, costs and those amendments would be made in the following year. On 7 January 2000 the solicitors for Universal sought from the plaintiff's solicitors submissions in respect of costs of the arbitration and on 17 January the plaintiff's solicitors advised the defendant that the arbitrator had delivered a second interim award in relation to costs. Schedules were sought from the defendant to enable the plaintiff's solicitors to prepare a bill of costs for taxation. This information was duly provided. After negotiations in relation to the issue of costs, and the delivery of a draft bill of costs by the plaintiff's solicitors to the arbitrator and the solicitors for Universal, the issue was compromised on 30 May 2000. The negotiation of a compromise on costs was carried out by each of Mr Metaxas and Ms Vernon. The upshot was that on 6 June 2000 the arbitrator issued a third interim award in respect of the issue of costs.

6 By writ dated 27 June 2000, the plaintiff, by its solicitors Metaxas & Vernon, sued the defendant for damages for negligence. That negligence was alleged to have been the failure by the defendant to ensure that the plaintiff recovered in the arbitration costs to which it was otherwise entitled. Paragraph 23 of the statement of claim recites that the plaintiff's claim in the arbitration proceedings under what is termed the "Umbrella Agreement" was dismissed by the arbitrator and in consequence the arbitrator awarded the plaintiff 70 per cent and not 100 per cent of its costs. Paragraph 24 of the statement of claim contends that in breach of the implied term of the retainer between the plaintiff and the defendant that the defendant would advise the plaintiff with reasonable skill, care and diligence and/or in breach of the duty to advise with reasonable skill, care and diligence the defendant failed to warn the plaintiff that the Umbrella Agreement claim was untenable in law; the unsuccessful prosecution of the Umbrella Agreement claim might result in the plaintiff being ordered to pay Universal's costs of that part of the claim even if the balance succeeded; and the unsuccessful prosecution of the Umbrella Agreement claim might result in the plaintiff being deprived of part of its otherwise recoverable costs. It also contends that the defendant failed to advise the plaintiff of the contents of the advice of counsel on the subject and failed to advise the plaintiff that it would be imprudent to pursue the Umbrella Agreement claim.

7 By its defence filed on 13 December 2000 the defendant denies the allegations contained within par 24 of the statement of claim and says that the Umbrella Agreement claim was not untenable in law; the defendant by its solicitor had informed the plaintiff of the consequences of the unsuccessful prosecution of that claim and advised with qualification that it was an arguable claim; that the advice of counsel on the subject was not that the claim was weak as pleaded; and that a representative of the defendant had supplied the plaintiff with the opinion of counsel on the subject.

8 Paragraph 25 of the defence adds in relation to par 23 and par 24 of the statement of claim a number of contentions. They are that the arbitrator in the reasons for judgment constituting his interim award confused the Umbrella Agreement claim with the confidentiality claim; the plaintiff had instructed the defendant to pursue the confidentiality claim in the course of the arbitration; that portion of costs attributable to the confidentiality claim was substantially greater than the portion of costs attributable to the maintenance of the Umbrella Agreement claim and the plaintiff, by itself or by its solicitors Arthur Metaxas & Co, had failed or neglected to draw to the attention of the arbitrator the flaw in the interim award in which the confusion is apparent. In par 21 of the same defence the defendant contends that the compromise of the plaintiff's claim for costs against Universal was reached without giving the defendant the opportunity to participate in the issue and the plaintiff's solicitors neglected to seek orders from the arbitrator to increase the applicable limits for the purpose of taxation of costs, with the result that the plaintiff did not claim costs to which it might thereupon become entitled. It is alleged that by neglecting to seek an appropriate costs order from the arbitrator which might have had the effect of increasing the applicable limits pursuant to the Supreme Court (Contentious Business) Determination 1996, the plaintiff failed to mitigate its loss, if any. No reply has been filed by the plaintiff.

9 Commencing with a letter dated 28 December 2000 the defendant requested the plaintiff's solicitors to withdraw from acting for the plaintiff, pointing out that the defence filed by the defendant raised directly the prospect that the plaintiff's losses were attributable in whole or in part to action or inaction on their part. In response, the plaintiff's solicitors refused to cease acting for the plaintiff, pointing out that the plaintiff itself required Messrs Metaxas & Vernon to continue in that role. By affidavit sworn 14 February 2001 Paul Afkos, a director of the plaintiff, has deposed to the fact that having taken independent advice on the plaintiff's position, it wishes to continue to be represented by the plaintiff's present solicitors, Metaxas & Vernon. Paragraph 19 thereof concludes with the words "to the extent that issues may arise in these proceedings which may provide a basis for the suggestion that the conduct of Metaxas & Vernon has to an extent been causative of the plaintiff's loss ... the plaintiff will be in a position to subsequently take action in respect of those matters."

10 The defendants contend that the plaintiff should be restrained from retaining or engaging its present solicitors on the grounds that those solicitors have a personal interest in the subject matter of the action and that interest is different from the interest of the plaintiff. The defendants add that it is clear that the principals of the plaintiff's solicitors will need to give evidence in the proceedings and unless it is unavoidable, a solicitor should not represent a litigant in these circumstances.

11 The primary thrust of the submissions made on behalf of the plaintiff is that the allegations contained within the defence that the plaintiff's solicitors have an interest in the proceedings is unsupported by evidence. It is also contended that false issues are raised in the defence and unless the alleged negligence of the plaintiff's solicitors was established to be the sole cause of the plaintiff's loss, the defendant would not be assisted by the defence raised, because of the established rule that all joint or concurrent tortfeasors are fully liable in damages to a plaintiff who has suffered loss as a result of their tortious conduct, notwithstanding that several independent tortfeasors are also liable. The plaintiff also contends that there is no basis for a conclusion that the principals of the plaintiff's solicitors are likely to give evidence in the matter; there is no conflict of interest between the plaintiff and its solicitors; the plaintiff has taken independent advice and having done so has decided that it wishes to continue to retain its present solicitors and the application is entirely premature because a trial would be months away.

12 In Kooky Garments Ltd v Charlton [1994] 1 NZLR 587 Thomas J (at 589 - 590) set out the essential principles which apply where there is a claim that solicitors have a conflict of interest in continuing to act for a party:

"Representatives of law firms appear for clients where there is an actual or potential conflict of interest often enough for it to be a matter of grave concern to the Court. Where the acts or omissions of the law firm, including situations where the actions of the client are based on advice given by the solicitors, are at the heart of the question in issue, the firm is, in a real sense, 'defending' its actions or advice. There is, in such circumstances, a danger that the client will not be represented with the objectivity and independence which the client is entitled to and which the Court demands. There is no sound reason to presume or accept that the solicitors must first have the opportunity to clarify whether their client is liable as a result of their actions or of acting on their advice before confronting the conflict.

What I have said, of course, does not apply where the advice given is unrelated to liability or the question in dispute. Advising a client to prosecute or defend a claim does not attract these observations. They are restricted to the situation where the acts or omissions of the solicitors are an integral part of the other party's complaint or the client has been sued in circumstances where he or she was acting on the advice of their solicitors and it is effectively that advice which is in issue. In such cases, apart altogether from the position of the client, the Court is not receiving the assistance of counsel who are observably independent. Independence is a function of counsel. The Court is entitled to assume that solicitors and counsel appearing before it possess that independence. Solicitors not only owe a duty to their clients to do the best for them but also owe an overriding duty to the Court. The same overriding duty is owed by counsel who have been granted a right of audience to appear in this Court. As part of their professional responsibility, therefore, solicitors and counsel must ensure that they do not appear in a matter in which they have an actual or potential conflict of interest or where, by reason of their relationship with their client, their professional independence can be called in question. (See also the New Zealand Law Society, Rules of Professional Conduct for Barristers and Solicitors (2nd ed, 1993), R 1.03 and commentary.)"

13 In Clay v Karlson (1997) 17 WAR 493, Templeman J (at 494 - 495) formulated the test in relation to a situation in which the solicitors for a party were likely to be called to give evidence at trial:

"The principle is stated in those terms in Seaman (par 34.0.5). The authority cited is Chapman v Rogers; Ex parte Chapman [1984] 1 Qd R 542. That was a case in which a solicitor, whose firm was acting for a person charged with a drink-driving offence, gave evidence about the observations he had made of the accused shortly after the offences had been committed.

Dealing with this matter in the Full Court of the Supreme Court of Queensland, Campbell CJ said:

'... for the reason that it is desirable to avoid any suggestion of real or apparent conflict between the duty to the court and the obligation to the client, I consider that it is generally unwise for a solicitor who is not himself appearing as advocate or instructing solicitor in court, but who is aware that it is likely that he will be called as a material witness (other than in relation to formal or non-contentious issues) to continue either personally or through his firm to represent the client if this can be reasonably avoided. It may be unavoidable in some cases, such as those involving complex commercial issues.'

To similar effect there is a statement in the Victorian case Commissioner for Corporate Affairs v Harvey [1980] VicRp 64; [1980] VR 669. Marks J said (at 762):

'What is important, however, is that the court sets its face against giving audience to legal representatives who are unable to assure the court of a singular interest. It is the purity of interest in the adversaries before the court that gives what fundamental utility and credence there is in the system.'

The singular interest to which his Honour referred is the interest of the client. Legal practitioners who have a personal interest in the outcome of an action do not have that singular interest which as his Honour said, gives the fundamental utility and credence to the system."

14 More recently, in Newman v Phillips Fox [1999] WASC 171; 21 WAR 309 (at 315 - 316) Steytler J made these observations in relation to the question of the court's control over the conduct of solicitors as its officers:

"In Australia the courts have, on a number of occasions, shown a willingness to intervene upon this third basis. So, for example, in Yunghanns (at 9) Gillard J affirmed that the court has an inherent power to control and deal with members of the legal profession and to ensure that the administration of justice is not brought into disrepute by the conduct of those members. (See also Re J A Grieve [1861] 1 WWL 197.)

Moreover Drummond J has said, in Carindale Country Club Estate Pty Ltd v Astill [1993] FCA 218; (1993) 42 FCR 307 at 311, that there is a public element in the work that a solicitor does in that he or she is an officer of the court and, in performing his or her professional function, plays an integral part in the administration of justice. This, as Drummond J pointed out, is one of the reasons for the new emphasis on the special fiduciary position of a solicitor (as to which see, eg, Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 at 169-170 and Mallesons Stephen Jaques v KPMG Peat Marwick (1990) 4 WAR 357 at 361) where a question arises as to his or her freedom to act against the interest of a former client who has given him or her confidential information.

Also, in Oceanic Life Ltd v HIH Casualty & General Insurance Ltd [1999] NSWSC 292; (1999) 10 ANZ Ins Cas 61-438 at 74,978 [48] Austin J has said that in addition to fiduciary duties and the duty not to misuse confidential information, a solicitor who acts in litigation owes a relevant legal duty to the court as well as an ethical duty. His Honour went on to say:

'The duty to the court arises from the court's concern that it should have the assistance of independent legal representation for the litigating parties: see D A Ipp, "Lawyers' Duties to the Court" (1998) 114 LQR 63 at 93. In the realm of conflicts of interest and conflicts of duty, the solicitor's duty to the court may not be much different from his or her fiduciary duties to former and present clients. However, the duty to the court tends to be expressed in such a way as to emphasise the public interest in preserving confidence in the administration of justice, and therefore in the appearance as well as the reality of independence, and the court's practical approach to its supervisory discretions: Freuhauf Finance Corporation Pty Ltd v Feez Ruthning [1991] 1 Qd R 558; Murray v Macquarie Bank Ltd (1991) 33 FCR 46; Carindale Country Club Estate Pty Ltd v Astill; Macquaries Bank Ltd v Myer [1994] VicRp 22; [1994] 1 VR 350; Kooky Garments Ltd v Charlton [1994] 1 NZLR 587; Watson v Watson (unreported, Supreme Court, NSW, Santow J, No 4347 of 1996, 25 May 1998).' "

15 In the present case I am satisfied that the defendant has made out its entitlement to interlocutory injunctive relief. The pleadings, supported by the affidavit of Mr Stewart, point to a serious issue to be tried as to the role played by the plaintiff's solicitors in the ultimate resolution of the question of costs in the arbitration. The pleas contained within par 21 and par 25 of the defence cannot be said to be hollow assertions in relation to which there is no evidence. The fact is that the plaintiff's solicitors took over the proceedings from the defendant at a point of time when the subject of costs was still very much a live issue. It was they who compromised the question of costs. The award was at that time only an interim award. What role they played and how they went about resolving the question of costs is very much a matter in issue in the proceedings. Whether or not the principals of the plaintiff's solicitors will need to give evidence at trial is also an open question. Further, it is no answer for the plaintiff to contend that because the plaintiff's solicitors would at most be joint tortfeasors the defendant's contentions contained within the defence have no substance. The defendant denies the allegations of breach of the retainer agreement and/or breach of duty of care, and simply puts in the alternative that if (which is denied) the defendant is liable to the plaintiff in damages, the plaintiff has failed to mitigate those damages by reason of the actions of its solicitors. That raises a direct issue as to the role played by those solicitors and potentially puts the principals of the plaintiff's solicitors in line to give evidence. The conflict of interest which the plaintiff's solicitors have seems to me to be plain. Whether it is actual or potential does not matter. In my view it exists. Whatever the view of the plaintiff itself, the court has an inherent jurisdiction to supervise the conduct of solicitors and counsel before it. In Kooky Garments Ltd v Charleton (supra), Thomas J (at 590) put it this way:

"The Court has an inherent jurisdiction to supervise the conduct of counsel in Court, and this includes the ability to intervene where it appears that the conduct of counsel outside the courtroom may have a bearing on the conduct of the case. (See eg, Re a Solicitor (1987) 131 SJ 1063n; Davies v Clough (1837) 8 Sim 262; 59 ER 105, Re a firm of Solicitors [1992] 1 All ER 353, and for a recent case in which the perception of a law firm as a single entity was convincingly endorsed, see Mallesons Stephen Jacques v KPMG Peat Marwick (1990) 4 WAR 357, per Ipp J, especially at pp 371-375. For a comprehensive article on the topic, see Miriam Dean and Christopher Finlayson, 'Conflicts of interest: When may a lawyer act against a former client?' [1990] NZLJ 43.) Davies v Clough confirmed the general principle that all Courts may exercise an authority over their own officers as to the propriety of their behaviour. It is part of a Court's duty to safeguard the sacrosanct privacy of the solicitor-client relationship and, in doing so, to maintain public confidence in the legal profession and protect the integrity of the judicial proceeding. (See Freeman v Chicago Musical Instrument Co [1982] USCA7 831; 689 F 2d 715 (1982), 721.)

I am primarily concerned in this case with the principle of protecting the integrity of the judicial process. That integrity is undermined if solicitors or counsel do not possess the objectivity and independence which their professional responsibilities and obligations to the Court require of them. (See also Rules of Professional Conduct R 8.10.)"

16 In my view it is abundantly clear that the necessary objectivity and independence which is required of the plaintiff's solicitors in this case is seriously compromised by the unanswered pleas in the defence of the defendant which relate to the plaintiff's conduct in relation to the compromise of the issue of costs before the arbitrator. It is indeed difficult to see how the plaintiff's solicitors can be expected to give independent and objective advice to the plaintiff on the issues which are raised in the pleadings. But perhaps more importantly, it is the professional responsibility of the plaintiff's solicitors to ensure that they do not act in or appear in a case in which they have an actual or potential conflict of interest, or where their professional independence may be called in question.

17 Mr Metaxas informed me during the hearing that it is the intention of his firm to withdraw from the proceedings at some time prior to trial. Although he claimed that I had compelled him to make this revelation, he was under no compulsion whatever. It does, however, underline the fact that the plaintiff's solicitors acknowledge the existence of a potential problem in continuing to act for the plaintiff at the trial stage. I agree with senior counsel for the defendant that there can be no distinction drawn between an actual or potential conflict of interest in the course of preparation for trial and at trial.

18 In my view the defendant has made out its case for relief and I am prepared to grant an injunction restraining the plaintiff from retaining or engaging the firm of Metaxas & Vernon, Mr Arthur Metaxas, and/or Ms Karen Vernon, to advise the plaintiff in their capacity as solicitors or counsel in the proceedings and/or to act as instructing solicitors or counsel for the plaintiff in the proceedings and/or to appear as solicitor of record for the plaintiff.