Court of Appeal (WA)|2001-11-28|Before: Mr P, Adam P, Murray J, Anderson J, Steytler J

Afkos Industries Pty Ltd v Pullinger Stewart (A Firm) [2001] WASCA 372 (28 November 2001)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : AFKOS INDUSTRIES PTY LTD -v- PULLINGER STEWART (A FIRM) [2001] WASCA 372

Practice and procedure - Action by a plaintiff against former solicitors for breach of fiduciary duty and negligence in conduct of arbitration - Application by defendant for interlocutory injunction restraining plaintiff from retaining present solicitors - Application concerned with costs order made in arbitration - Whether grounds exist to grant injunction - Consideration of conflict of interest between lawyer and client and independence of lawyer - Relevance of wishes of client - Nature of costs awarded under Commercial Arbitration Act 1985 (WA), s 34(1) discussed

Respondent (Defendant) : Mr J Gilmore QC & Mr M D Howard

Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170

Bruness Pty Ltd v Automasters Australia Pty Ltd [2000] WASCA 104

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

Henville v Walker [2001] HCA 52

1 MURRAY J: The appellant retained the respondent, a firm of solicitors, to act for it in a commercial dispute arising out of a manufacturing agreement and a confidentiality agreement. It could not be settled and in July 1998 was referred to arbitration, in which proceedings the respondent acted, retaining counsel to appear at the arbitration. The arbitrator delivered an interim award in respect of the issues resolved by the arbitration on 17 November 1999. The appellant was generally successful in the arbitration but failed on one substantive issue arising out of what was referred to as "the umbrella agreement". The appellant's opponent in the arbitration, which had been generally unsuccessful, brought an application for leave to appeal against the interim award. In the meantime, the two companies agreed that the costs of the arbitration should be resolved by each party making submissions to the arbitrator who might make an award as to costs which might involve the necessity ultimately to proceed to taxation.

2 The respondent received the submissions of the other side in relation to costs on about 10 December 1999 and thereafter things moved quickly. Four days later, on 14 December 1999, the appellant advised the respondent that its retainer was terminated. On that or the following day the firm of Arthur Metaxas & Co, now known as Metaxas & Vernon, was instructed and the file was delivered to them. The appellant's submissions in respect of costs appear to have been made in the new year and on 7 January 2000 the arbitrator delivered an interim award dealing with the question of costs, awarding the appellant 70 per cent of its costs to be taxed, if not settled by the arbitrator. The appellant was deprived of 30 per cent of its costs by reason of the discrete issue in the arbitration which it had pursued unsuccessfully.

3 Bills of costs were exchanged between the solicitors and on behalf of the appellant, Arthur Metaxas & Co negotiated a compromise of the question of costs which was agreed on 30 May 2000 with the result that on 6 June 2000 the arbitrator issued a further interim award fixing the costs to be paid. Both partners in the firm of Metaxas & Vernon, Mr Metaxas and Ms Vernon, were involved in the negotiations with respect to costs.

4 By a writ issued out of this Court on 27 June 2000 the plaintiff, then represented by its solicitors, Metaxas & Vernon, sued the respondent, its former solicitors, claiming that in breach of its fiduciary duty the respondent failed to advise the appellant that the appellant was not required to sign a costs agreement governing the bulk of the relationship of solicitor and client which had applied until the termination of the retainer in December 1999. Further, it was claimed that the respondent was negligent in the performance of its professional duties in failing to warn the appellant that as a matter of law it was not possible to rely upon the umbrella agreement in the way the appellant had sought to do in the course of the arbitration and in failing to warn the appellant that if that issue was pursued unsuccessfully, it might in fact lead to a truncation of the appellant's capacity to obtain costs, even though it might be generally successful, precisely the situation which did in fact occur.

5 The relief sought is an order setting aside the costs agreement and directing the taxation of the respondent's costs as between solicitor and client according to the relevant Costs Determination and the Scale promulgated thereunder. In addition, an award of damages is sought. The capacity to maintain the causes of action in the circumstances of the case as presently known is not material to the matter before this Court.

6 However, what is relevant is the fact that in its defence filed on 13 December 2000, there is a plea in par 21, responding to the assertion in par 23 of the statement of claim which recites the dismissal of the claim under the umbrella agreement by the arbitrator, the award to the appellant of 70 per cent of its costs, and the compromise entered into by the appellant with the other party to the arbitration whereby the appellant's recoverable costs were fixed at $98,500 inclusive of disbursements, "being 70% of the amount to which the plaintiff would otherwise have been entitled".

7 That is not admitted by the respondent but it is pleaded that the compromise was effected, using the services and upon the advice of the firm of solicitors which later became Metaxas & Vernon without the respondent being afforded any opportunity to participate in the process of taxation or the negotiation of the compromise. The paragraph of the defence goes on to plead:

"(d) the [appellant], by its then solicitors Arthur Metaxas & Co or otherwise, neglected to seek orders from the arbitrator in the arbitration proceedings to increase the applicable limits for relevant items of the Supreme Court (Contentious Business) Determination 1996 which the [appellant] might have claimed against the [opposing party] in the arbitration when it was reasonably open to the [appellant] and to the [appellant's] then solicitors to seek such an order or orders; and

(e) by neglecting to seek appropriate costs orders from the arbitrator which might have had the effect of increasing the applicable limits pursuant to the Supreme Court (Contentious Business) Determination 1996, the [appellant] failed to mitigate its loss (if any, which is not admitted)."

8 Again the factual or legal merits of that plea are not in issue in these proceedings. The effect of the plea is clear enough. It is not an allegation that the firm which was the predecessor of Metaxas & Vernon behaved negligently in the performance of their professional duties for the appellant, although clearly in a different context of litigation such a pleading might be considered. The pleading is simply an allegation, whether essential or not within the defence matters not, which makes it clear that the respondent will allege that the appellant has failed to mitigate its damages by seeking orders which would have the effect of increasing amounts which might be claimed as costs incurred by the appellant which the other party in the arbitration might have been called upon to pay as a result of the process of taxation or as a result of the compromise negotiated by the firm which became Metaxas & Vernon.

9 That over-lengthy account is, however, merely background to the matter presently at issue. On 30 January this year the respondent applied to the Court for an interlocutory injunction restraining the appellant from retaining the firm Metaxas & Vernon, Mr Metaxas and Ms Vernon to act for the appellant in the action, which then and now remains on foot, as solicitors or counsel.

10 The summons by which that application was made was returned before Miller J and on 19 March 2001, for reasons which his Honour then delivered, he granted the injunction sought. The matter now comes before this Court by way of an appeal which seeks to have the injunction discharged and the application dismissed on various grounds alleging errors of fact and law. So far as it is necessary to deal with them explicitly, I would express my conclusions as follows.

11 The first ground of the appeal challenges the correctness of the finding by Miller J that on 8 December 1999 the appellant and the other party to the arbitration had agreed on a course of action for the resolution of the questions in respect of an award of costs of the arbitration. In my view the evidence supported the finding but it was never more than part of the narrative of background fact. The second ground is of a similar character, being concerned with the finding that the appellant's file was delivered to Arthur Metaxas & Co on about 15 December, and I propose to say no more about it. Similarly, his Honour's conclusion that submissions were sought from Arthur Metaxas & Co in respect of costs on 7 January 2000, again simply part of the narrative, seems to me to have been supported by the evidence.

12 Then it is asserted that Miller J misunderstood the nature of the appellant's claim against its former solicitors in negligence. The observation challenged is a statement of that claim in summary form and in my view adequately expresses the nature of the claim. The essential points were that costs and the quantum of costs were live issues when Arthur Metaxas & Co were retained by the appellant, that it was that firm which negotiated the compromise and, as the appellant concedes, nothing was done to seek to negotiate that compromise within the framework of any lifting of the limits imposed by relevant scale items.

13 The last ground of appeal is that if Miller J is not found to be in error in granting injunctive relief, then at least his Honour erred in ordering the present appellant to pay the respondent's costs of the application with a certificate for second counsel. The appellant argues that costs should have been reserved because it yet may be the case that the issue raised by the defendant's pleading to which I have referred above might, in the end, not be tried or if an issue in the trial, the assertion that there was a failure to mitigate the appellant's damages might not, for one reason or another, be made out.

14 To my mind those arguments beg the question. The application for an injunction having been made, the question was whether there was a serious question to be tried in relation to the conduct of the members of the firm Metaxas & Vernon, as they became, in relation to the subject matter of the litigation, which should properly lead to an order having the effect of depriving the appellant of their professional services. The application was opposed and, as I understand it, hotly argued.

15 Indeed, we are told there was considerable debate about costs when Miller J delivered his decision. What may or may not ultimately happen about the allegation of failure to mitigate the appellant's loss is not to the point if the grounds for the grant of the injunction are held to have been made out. In other words, if the appeal fails, the arguments raised by the appellant in relation to costs seem to me to provide no basis upon which the Court ought to conclude that it was not open to Miller J to exercise his discretion with respect to costs by allowing them to follow the event.

16 The remaining grounds, some of which seem to me to miss the point, may be said to go to the merits of the decision made by Miller J. Before dealing with their substance, I should note that before Miller J, the appellant was represented by Metaxas & Vernon and Mr Metaxas appeared as counsel. In an affidavit sworn on behalf of the appellant by Mr Afkos, a director of the company, it was deposed:

"Having taken independent advice the [appellant's] position is that it wishes to continue to be represented by Metaxas & Vernon and 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 [appellant's] loss then the [appellant] will be in a position to subsequently take action in respect of those matters."

17 While that deposition is refreshing in its honesty, to my mind it is in rather extraordinary terms. The appellant apparently takes the view that it wishes to continue to be represented in the action against the respondent by Metaxas & Vernon but it will keep watch on developments and if it should prove to be the case, as a result of this litigation, that the conduct of its solicitors may be seen to have caused it loss, presumably by the establishment of a failure to mitigate its damages in circumstances which may give it a cause of action in negligence or for breach of fiduciary duty against those solicitors, then it is content that it will be able to make a claim against the solicitors later.

18 To my mind, the extraordinary nature of that evidence is reinforced by the fact that Mr Metaxas informed Miller J during the hearing "that it is the intention of his firm to withdraw from the proceedings at some time prior to trial." To my mind, if that was the appropriate course to take, then it should have been taken when the respondent's application raised the issue of concern. Miller J thought that the revelation:

"... does underline the fact that the [appellant's] solicitors acknowledged the existence of a potential problem in continuing to act for the plaintiff at the trial stage. I agree with senior counsel for the [respondent] 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."

19 In the end, his Honour took the view that there was a serious issue to be tried as to the role played by the firm which was the predecessor of Metaxas & Vernon in the ultimate resolution of the question of costs of the arbitration because when those solicitors were retained, the subject of costs was still very much a live issue and it was they who compromised the matter of costs. The pleading by way of defence made their conduct in that regard a matter in issue in the proceedings between the appellant and the respondent. Miller J observed that "whether or not the principals of the [appellant's] solicitors will need to give evidence at trial is also an open question." But his Honour thought it was at least potentially the case that the principals of the appellant's solicitors would be required to give evidence. His Honour continued:

"The conflict of interest which the [appellant'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 [appellant] itself, the Court has an inherent jurisdiction to supervise the conduct of solicitors and counsel before it."

20 Following the citation of authority, his Honour concluded that it was:

"... abundantly clear that the necessary objectivity and independence which is required of the [appellant's] solicitors in this case is seriously compromised by the unanswered pleas in the defence of the [respondent] which relate to the [appellant's] conduct in relation to the compromise of the issue of costs before the arbitrator. It is indeed difficult to see how the [appellant's] solicitors can be expected to give independent and objective advice to the [appellant] on the issues which are raised in the pleadings. But, perhaps more importantly, it is the professional responsibility of the [appellant'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."

It was for those reasons that his Honour granted the injunction sought.

21 What I have described as the grounds going to the merits of the appeal, tackle the task (difficult for the appellant) of establishing that that view of the matter was not reasonably open to Miller J so that the exercise of his discretion to grant the injunction should be reversed. The argument presented is effectively that there was nothing before his Honour but the bare assertion of par 21 of the defence and the fact that nothing was done to seek to lift the limits which would have been imposed on the costs on taxation. That costs were still a live issue when the retainer of the solicitors commenced, and that they later compromised the costs, were not of themselves sufficient to indicate that the conduct of Arthur Metaxas & Co would be called into question. The appellant adds that it remains an open question whether either Mr Metaxas or Ms Vernon or both would be required to give evidence and the appellant says it has no present intention to call either as a witness.

22 It is said that the finding of an actual or potential conflict of interest is wrong and unsupported by the evidence and there is nothing in the mere fact of the pleading by way of defence which could lead to the conclusion that the necessary objectivity and independence required of the solicitors was in any way compromised. It is asserted that an injunction of this kind should only be granted on the basis that the solicitors might have some potential liability by reason of the matters referred to and that, the appellant asserts, could not be so unless at this stage it can be seen that the pleading by way of defence ought to succeed in that there was some basis for seeking an increase in the limits under the scale and that it was legally possible to do so.

23 As I have indicated, in my opinion, while the pleading remained on foot, it was sufficient that it be evaluated in its own terms. It was in terms capable of raising an issue known to the law, namely the question whether the appellant, by the conduct of its solicitors leading to the compromise in respect of costs, could be said to have failed to mitigate its loss arising from its assertion that due to the fault of the respondent it had been deprived of 30 per cent of its costs, although generally successful in the arbitration. It was not, in my opinion, necessary that Miller J be satisfied of the further fact that, assuming it to have been possible to seek an order lifting the limits in respect of costs, such an order should have been made. That would be to place Miller J in the position of having to try out the merits of the pleading for the purpose of determining whether or not to grant an injunction precluding the solicitors from acting as such or as counsel by reason of any actual or potential conflict of interest or that their duty of independence owed to the court was in any substantial way compromised.

24 As to the question whether there might have been an application to the arbitrator to lift any or some of the limits applicable to the taxing of costs, the arbitrator's discretion as to costs stems from the Commercial Arbitration Act 1985 (WA), s 34(1) which empowers the arbitrator in relation to costs to "tax or settle the amount of costs" to be paid or to "award costs to be taxed or settled as between party and party or as between solicitor and client". By s 34(2), unless the costs are taxed or settled by the arbitrator, they are, so far as they are taxable, to be taxed generally in the Supreme Court, by virtue of the definition of "Court" in s 4(1). That, as I understand it, was the form of order as to costs adopted in this case, subject to the qualification that the appellant was only entitled to recover 70 per cent of the costs so taxed.

25 By virtue of the Rules of the Supreme Court 1971, O 81D r 16:

"(1) The provisions of Order 66 shall, with such modifications as are necessary, apply in relation to proceedings in the Court for taxation of the costs of an arbitration including the fees and expenses of an arbitrator or umpire.

(2) ..."

26 By s 167(1)(d) of the Supreme Court Act 1935 (WA), rules of court may be made, "for regulating any matters relating to the costs of proceedings fixed by determinations under s 58W of the Legal Practitioners Act 1893". It is under s 58W that the relevant Legal Practitioners (Supreme Court) (Contentious Business) Determinations are made. The current Determination and the one before it incorporate a Supreme Court Scale of Costs which contains item 25 currently, providing that for arbitration proceedings "the same costs as in an action" may be settled by taxation. Under cl 4 of the Determination, various special rules contained within O 66 of the Supreme Court Rules are expressly preserved in their operation. Included in the Rules mentioned there is O 66 r 12, which provides for special costs orders raising or removing the limit provided with respect to any particular allowances in the relevant scale.

27 The conclusion to which I have come, therefore, is that the statutory scheme has the effect that the costs of an arbitration rest in the discretion of the arbitrator. If, as in this case, that discretion is exercised by an award of costs made in a form which provides for their taxation by the court, then by virtue of O 81D r 16 and the relevant Costs Determination itself, the taxation will proceed in accordance with and subject to the provisions of O 66 and subject to the limits as to quantum incorporated in the scale provided under the Determination, the applicability of which is secured by O 66 r 11, subject to any special order made under O 66 r 12. Those limits therefore would govern the taxation in the case of this arbitration unless, upon the application of the appellant, particular limits were raised or removed: James Aris & Associates v Minister for Works (1994) 11 WAR 390, 393 - 4 per Rowland J, with whom Pidgeon and Wallwork JJ agreed.

28 The question therefore before Miller J was whether there was a serious question to be tried which would support the grant of the injunction sought on the ground that it was asserted in the action by the respondent that the appellant failed to mitigate its loss because its solicitors could have sought but did not seek an order of the kind contemplated by O 66 r 12. Did the fact that that issue was raised in the litigation arguably give rise to the need for the court to exercise its undoubted inherent jurisdiction to control legal practitioners acting in litigious matters so as to prevent them from acting on the ground that there was actually or potentially a conflict of interest between solicitor and client, or the circumstances were such that the necessary independence and objectivity of the legal practitioner would be compromised?

29 As to that matter, Miller J found useful guidance in the formulation of the principles by Thomas J of the New Zealand High Court in Kooky Garments Ltd v Charlton [1994] 1 NZLR 587 at 589 - 90 as follows:

"Unfortunately, this is a situation which is not all that uncommon. 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 their 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."

30 Reference may also usefully be made to the judgments of Templeman J in Clay v Karlson (1997) 17 WAR 493 at 494 - 5 and Steytler J in Newman v Phillips Fox (1999) 21 WAR 309 at 314 - 6, par [18] - par [25]. The judgments of their Honours in both of those cases were delivered in the context of applications of the same kind as that before Miller J, but in different factual circumstances. Templeman J dealt with the general undesirability of a practitioner continuing to be involved in a case as counsel or solicitor if he or she was likely to be called as a witness. His Honour expressed the view that the case for intervention by the Court to restrain the practitioner from acting would be stronger, where the solicitor "has a personal interest in the outcome of the action: he is more than simply a witness" (495).

31 In my opinion, this appeal may not succeed. I note that it is essentially an appeal from a discretionary judgment by Miller J and therefore the question for this Court is not whether the members of the Court would or would not have granted the injunction had they been in the position of Miller J, but whether, on the material before him, it was open to his Honour to do so. I think it was and indeed I share his Honour's view that this was a relatively clear case, not so much because of the potential conflict of interest, although in my opinion that was present, nor so much because of the prospect that either or both of Mr Metaxas and Ms Vernon might be called as witnesses to explain their conduct and rebut the suggestion that by virtue of their inactivity the appellant failed to mitigate its loss, but more particularly because the solicitors' independence from the interests of their client was clearly compromised.

32 In my opinion there can be no doubt that in a real sense, upon this issue, the lawyers would be required to defend their professional conduct and while it might also, in the context of this litigation, be in the interest of the appellant that they should do so successfully, there is nonetheless a real danger that the court would lose the assurance of the independence and objectivity of their representation of their client. In a real sense, the fact that their conduct was so integrally identified with an issue put against the appellant by the respondent in the litigation made manifest the danger against which it was proper for the Court to guard by the injunction it granted.

33 That danger was that the credibility of our system of litigation depends heavily on the integrity of its processes. Litigants, members of the public and the court itself require the assurance that practitioners performing their important role in representing clients and as officers of the court will not do so in circumstances where their conduct of litigation may be distorted by a personal interest in the outcome, which must have the effect of detracting from their independence. Cases where there is a conflict of interest between legal practitioner and client are simply one type of case (usually providing a clear example) where having regard to that fundamental principle, the court will exercise its inherent power to restrain a practitioner from acting.

34 It follows also that the obligation of the practitioner and the interest of the court is wider than that of the client. It is for that reason that a protestation by the client that it wishes the legal practitioner to continue to act will not generally persuade a court not to restrain by injunction where otherwise it may be thought necessary to do so. I add, finally, the reminder that in any event, in this case, the appellant's observation that it wished Metaxas & Vernon to continue to represent it was in heavily qualified terms.

36 ANDERSON J: I have had the advantage of reading in draft the reasons for judgment of Murray J. I agree that the appeal should be dismissed for the reasons expressed by Murray J. There is nothing I wish to add.

37 STEYTLER J: I have had the advantage of reading the reasons for decision of Murray J. I agree, generally for the reasons given by Murray J, that the appeal should be dismissed.

Arbitration Act 1985

Practitioners Act 1893

Afkos Industries Pty Ltd v Pullinger Stewart

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (58 paragraphs)

Afkos Industries Pty Ltd v Pullinger Stewart (A Firm) [2001] WASCA 372 (28 November 2001)

Parties

Legislation Cited (3)

Cases Cited (5)