Supreme Court of WA|2014-08-25|Before: Martin CJ

COMMONWEALTH BANK OF AUSTRALIA -v- JACKSON McDONALD (A FIRM) [2014] WASC 301 (25 August 2014)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : COMMONWEALTH BANK OF AUSTRALIA -v- JACKSON McDONALD (A FIRM) [2014] WASC 301

WESTGEM INVESTMENTS PTY LTD (Receivers & Managers Appointed) (Administrators Appointed) IN ITS OWN RIGHT, TRUSTEE FOR H & JM POURZAND TRUSTEES FOR THE HELEN TRUST & PAKWEST PTY LTD TRUSTEE FOR (A) NEWPORT SECURITIES PTY LTD TRUSTEE FOR PARKWEST TRUST & (B) OAKCURE PTY LTD

HOSSEAN POURZAND IN ITS OWN RIGHT, TRUSTEE FOR HELEN TRUST, SHERIN TRUST, POURZAND FAMILY TRUST

JENNY MARIA POURZAND IN ITS OWN RIGHT, TRUSTEE FOR HELEN TRUST, SHERIN TRUST, POURZAND FAMIL TRUST

PAKWEST PTY LTD (Receivers & Managers Appointed) IN ITS OWN RIGHT, TRUSTEE FOR NEWPORT SECURITIES, OAKCURE PTY LTD, WESTVIEW ASSET & VARIOUS OTHER TRUSTS

NEWPORT SECURITIES PTY LTD (Receivers & Managers Appointed) IN ITS OWN RIGHT, TRUSTEE FOR PAKWEST TRUST, NEWPORT FAMILY TRUST

OAKCURE PTY LTD IN ITS OWN RIGHT, TRUSTEE FOR THE PARRY TRUST

SEAPORT PTY LTD (Receivers & Managers Appointed) IN ITS OWN RIGHT, TRUSTEE FOR THE SEAPORT TRUST

MAYPORT NOMINEES PTY LTD (Receivers & Managers Appointed) IN ITS OWN RIGHT, TRUSTEE FOR THE MAYPORT UNIT TRUST

QUEEN STREET PROPERTIES PTY LTD IN ITS OWN RIGHT, TRUSTEE FOR THE QUEEN STREET PROPERTIES TRUST

GRAND EDITION PTY LTD (Receivers & Managers Appointed) IN ITS OWN RIGHT, TRUSTEE FOR THE FARAH INVESTMENT TRUST No 4

LMS HOLDINGS PTY LTD AS TRUSTEE FOR THE SARACENI FAMILY TRUST

TOKYO CITY PTY LTD AS TRUSTEE FOR THE TOKYO CITY TRUST

MAREE SARACENI PTY LTD AS TRUSTEE FOR THE TOKYO TRUST, THE LUKE SARACENI FAMILY TRUST

SINGLE HOLDINGS WA PTY LTD AS TRUSTEE FOR THE TUART INVESTMENTS UNIT TRUST

SARACEN PROJECT MANAGEMENT PTY LTD AS TRUSTEE FOR THE SARACEN PROTECT MANAGEMENT TRUST

CARDUP INDUSTRIAL LAND HOLDINGS IN ITS OWN RIGHT, TRUSTEE FOR CARDUP INDUSTRIAL LAND TRUST AND THE CARDUP INDUSTRIAL LAND TRUST #2

EMERALD SECURITIES PTY LTD IN ITS OWN RIGHT, TRUSTEE FOR THE EMERALD INVESTMENT TRUST

GOLDEN WEST PROPERTIES PTY LTD AS TRUSTEE FOR THE POURZAND FAMILY TRUST, THE OZRA TRUST, THE GOLD HOUSE TRUST & JENNY'S TRUST

BRYAN KEVIN HUGHES AS LIQUIDATOR OF WESTGEM INVESTMENTS PTY LTD (in liq) (Receivers & Managers Appointed)

Legal practitioners - Application for order restraining solicitors from acting - Alleged conflict of duty and interest - Alleged conflict between solicitors' pecuniary interests and clients' interests - Turns on own facts

First Applicant : Mr S K Dharmananda SC & Mr S C M Wong

Second Applicant : Mr S K Dharmananda SC & Mr S C M Wong

Third Applicant : Mr S K Dharmananda SC & Mr S C M Wong

First-named Third Respondent : Mr M B J Lee SC & Mr W Edwards

Second-named Third Respondent : Mr M B J Lee SC & Mr W Edwards

Seventh Respondent : Mr M B J Lee SC & Mr W Edwards

Eleventh Respondent : Mr M B J Lee SC & Mr W Edwards

Twelfth Respondent : Mr M B J Lee SC & Mr W Edwards

Thirteenth Respondent : Mr M B J Lee SC & Mr W Edwards

Fourteenth Respondent : Mr M B J Lee SC & Mr W Edwards

Fifteenth Respondent : Mr M B J Lee SC & Mr W Edwards

Sixteenth Respondent : Mr M B J Lee SC & Mr W Edwards

Seventeenth Respondent : Mr M B J Lee SC & Mr W Edwards

Eighteenth Respondent : Mr M B J Lee SC & Mr W Edwards

Nineteenth Respondent : Mr M B J Lee SC & Mr W Edwards

Twentieth Respondent : Mr M B J Lee SC & Mr W Edwards

(This judgment was delivered extemporaneously on 28 July 2014 and has been edited from the transcript.)

1 This is an application by the Commonwealth Bank of Australia Ltd and others (the financiers), seeking orders which would restrain Jackson McDonald, a law firm, from acting in three proceedings to which the financiers are parties.

2 Those proceedings cover various disputes arising from a major property development at Raine Square in the City of Perth, and that property development was undertaken by Westgem Investments Pty Ltd (Westgem) and financed by the financiers. Westgem is now in liquidation. What the parties are content to describe as the main proceedings, and I will also adopt that description, were commenced in 2012, and they were commenced by Jackson McDonald on behalf of Westgem.

3 The claim is for an amount remaining to be quantified, but it is reasonable to assume at this stage that the claim is for hundreds of millions of dollars. The pleadings in that case are not yet finalised, and it is clear from my case management of those proceedings that the current statement of claim, which is itself contentious, has taken years to formulate and is based on a very extensive review of relevant facts and circumstances occurring in relation to a complex commercial development over a number of years.

4 There is a clear inference, and I find, that the case is a complex commercial case, the hearing of which will be likely to take many months, and the fees for the solicitors acting for the various parties in that case are likely to be measured in terms of many millions of dollars. The fees of Westgem are, as I understand it, being met by a litigation funder - Bentham IMF Ltd. One of the many aspects of the claim involves an assertion that the financiers knew of Westgem's financial circumstances in the final quarter of 2010, and relevantly an allegation that the financiers knew that Westgem would default on financial obligations that it had at that time, because the banks had determined not to continue to provide support under the financing arrangements in place. That factual allegation, that is to say the allegation that the banks had decided not to continue to provide support would be relevant to the solvency of Westgem at the relevant time because it would affect the capacity of Westgem to pay its debts as and when they fell due. There are other proceedings before the court in which the solvency of Westgem at various times is also relevant.

5 The significance of that aspect of the main proceedings is that between October 2009 and November 2010, Jackson McDonald received payments from Westgem totalling approximately $400,000. The liquidator of Westgem has foreshadowed the possibility of a claim to the effect that those payments were preferential and has taken steps in this court to extend the time within which such a claim might be made in order that the claim can be further investigated.

6 The liquidator has also suggested that commencement of those proceedings might properly be deferred until after the main proceedings are resolved because the resolution of those proceedings could have a bearing upon the factual issues relevant to any preference claim. That is because the determination of the question of whether the banks had decided to no longer provide financial support to Westgem could have an impact on its solvency in the manner I have described, but also, if Westgem wins that litigation and receives substantial damages, there may be an argument to the effect that Westgem was not insolvent at all.

7 The application today is brought on the basis that Jackson McDonald have a conflict between their personal interests in resisting a possible claim by the liquidator in relation to those allegedly preferential payments, and the interests of Westgem in advancing the case to the effect that the banks had decided not to support Westgem which would, in turn, enhance the prospect of a finding of insolvency which is a prerequisite to any recovery of a preferential payment. Of course insolvency is not the only thing that would have to be established before the preferential payments could be recovered.

8 When this issue was raised on behalf of the financiers, Jackson McDonald advised Westgem and all the other clients for whom it is acting in the three proceedings the subject of this application of the potential for conflict and suggested that they obtain independent legal advice. All clients took that advice, obtained independent legal advice and after receiving that independent advice have indicated unequivocally that they consent to Jackson McDonald continuing to act.

9 It is also relevant that Jackson McDonald have executed a deed poll by which the firm undertakes not to contest the proposition that the payments made to the firm in the latter part of 2010 were insolvent transactions in the event that proceedings seeking repayment of those amounts are commenced by the liquidator.

10 In relation to the potential for conflict which has been identified and which underpins this application, it seems to me that the following factors are relevant.

11 First, the liquidator has not foreshadowed that a claim will be lodged against Jackson McDonald. He has merely indicated that he is investigating a claim and has taken steps to extend the time within which it will be brought. So it cannot be said that there is any certainty that a claim will be brought and the highest it could be put is that there is potential for a possible claim.

12 Second, the amount of any such claim is presently uncertain. It may lie in a range between $250,000 and $400,000, although counsel for the financiers says it might go a little higher but is unable to quantify the amount of the increase. I will decide these proceedings on the basis that the amount of the claim would likely lie somewhere in the range of between $250,000 to $400,000.

13 The third relevant factor is that there would be a number of issues in any such preference claim other than solvency, including the knowledge of Jackson McDonald at the time the payments were received. That may well be a contentious issue given that the basis upon which the claim is advanced on behalf of Westgem in the main proceedings; that is, that there was an uncommunicated decision by the banks to decide to decline to provide further financial support. There are also other issues that might arise in the event that a preference claim proceeding is commenced against Jackson McDonald.

14 The fourth relevant factor is the deed poll to which I have already referred, by which Jackson McDonald effectively undertake not to contest the solvency of Westgem at the time the payments were made to it, if a claim is in fact brought by the liquidator. I digress to observe that this is not a complete answer to the potential for conflict because, of course, Jackson McDonald has an interest in avoiding the prospect of any claim being brought. But it does have an impact upon the nature of Jackson McDonald's interests and I think it is fair to classify that interest in the insolvency of Westgem as being indirect rather than direct.

15 The fifth relevant factor is that it is at least arguable that if Westgem's claim against the financiers succeeds, then Westgem was not insolvent. To that extent, Jackson McDonald's interests in relation to the possible preference claim and Westgem's interests in the proceedings against the financiers align so that it is in Jackson McDonald's interests to pursue those claims with full vigour.

16 The sixth relevant factor is that Jackson McDonald's fees in relation to acting for Westgem and other parties in relation to the claims against the financiers are likely to be measured in terms of many millions of dollars and will be vastly in excess of any loss which they might suffer in relation to the recovery of the payments which might be alleged to be preferential.

17 The seventh relevant factor is that the banks do not assert any prejudice arising from Jackson McDonald's alleged conflict of interest other than in two possible areas. The first is the possible risk of delay if Jackson McDonald are required to cease to act for Westgem at some later point in these proceedings due to conflict. However, there would of course be delay if Jackson McDonald are required to cease acting now. So the relevant prejudice is the difference between the delay that would be experienced now if Jackson McDonald ceased acting now as compared to the delay that might be experienced at some time in the future. The magnitude of the difference between those two periods of delay, if any, is impossible to quantify. It is possible that the delay may be more prejudicial at some point in the future but that cannot be determined with any certainty.

18 The second possible area of prejudice to which the financiers point is the possible prejudice in relation to case management issues and in particular, those arising from the need to manage the issues arising in what I have been describing as the main proceedings and the issues which arise in what I might, perhaps inaccurately, describe as satellite proceedings being COR 77 of 2014.

19 It is said on behalf of the financiers that they might suffer prejudice in conferral with Jackson McDonald in relation to those issues because they might not be satisfied that Jackson McDonald are adopting only the view of their clients in relation to that conferral. It seems to me that possible prejudice of that character is entirely fanciful when regard is taken of the deed poll which Jackson McDonald have executed. As a consequence of that deed poll, there will be no issue with respect to solvency in any subsequent proceedings relating to any alleged preferential payments. It is therefore entirely fanciful to suppose that Jackson McDonald would approach conferral in relation to the proper case management of these various proceedings by reference to some personal interest which it might have in the question of the solvency of Westgem.

20 The final matter that is relevant is that the clients of Jackson McDonald, cognisant of the possible conflict, have taken independent legal advice and have consented to Jackson McDonald continuing to act, no doubt also cognisant of the fact that they would suffer substantial loss in terms of costs thrown away and which would have to be duplicated if other solicitors were now to be engaged.

21 Turning then to legal principles that I must apply to the determination of this issues, it seems to me from the many authorities that have been cited by the parties that the court's jurisdiction to restrain solicitors from acting in a position of conflicting interest is not in doubt, at least in contemporary times.[1] There are a number of bases upon which the court can exercise that jurisdiction. They include restraining a breach of a duty owed to clients, and they can extend to also include to restraining a breach of duty owed to the court as officers of the court engaged in the administration of justice.[2]

22 This application is not brought on the basis of restraining Jackson McDonald from breaching a duty owed to its clients because, as I have mentioned, each client has provided fully informed consent after receiving independent legal advice. So that aspect of the jurisdiction has no relevance to these proceedings. Rather, the application is brought on the basis that the court should exercise the jurisdiction which has been described as exceptional in order to protect the proper administration of justice.

23 It is well established by authority that the test to be applied in that area of the court's jurisdiction is to enquire whether the fairminded lay observer considers that there is a real, and not fanciful, risk that Jackson McDonald would prefer its own interests in Westgem not being insolvent as compared to the contrary assertion which they have indirectly advanced through the factual proposition that the banks had decided to discontinue financial support of Westgem in the latter part of 2010.[3]

24 As I have noted, the test is commonly enunciated in term of the perception of a fair-minded lay observer. As I noted during argument, that enunciation of the test seems to me to be curious, and for my own part I do not understand why the courts of Australia continue to maintain enthusiasm for utilising the colonial descendant of the hypothetical man on the Clapham Omnibus, and pose legal tests by reference to the likely view of a hypothetical observer. Perhaps it is for the purpose of endeavouring to connote a degree of detachment or objectivity to a process which inevitably involves the application of normative standards of behaviour determined by the court itself. But I digress.

25 The position adopted by Jackson McDonald's clients is relevant to a test posed by reference to the fair-minded lay observer cognizant of all the facts because that observer would likely be influenced by the fact that those who have perhaps the most to lose by the alleged conflict to which the financiers point have determined on the basis of independent legal advice that they do not wish Jackson McDonald to cease to act.

26 The authorities also establish quite clearly that in determining whether the jurisdiction should be exercised account must be taken of a number of considerations which include the desirability of litigants not being deprived of the lawyer of their choice; the avoidance of prejudice to the administration of justice by delay and the desirability of avoiding substantial legal cost being thrown away.[4] It is also clear from the cases that the exercise of this exceptional jurisdiction is not an occasion upon which another party to proceedings should look to obtain forensic advantage from a decision made by the court on the basis of the administration of justice.[5]

27 The administration of justice is a broad concept, as the High Court has exemplified in a number of decisions, including Aon Risk Services Australia Ltd v Australian National University.[6] It includes considerations of cost and delay. In relation to considerations of this kind, I find that the inevitable consequence of an order of the kind sought would be that substantial legal costs would be thrown away and a significant period of delay would be caused. These matters are relevant to the weighing of the countervailing considerations which must be assessed when applications of this kind are made.

28 The previous cases also contain observations to the effect that complex commercial litigation is inevitably replete with the potential for conflict from a number of sources, particularly, for example, where solicitors had given advice in relation to transactions giving rise to the dispute, or where solicitors had given advice in relation to the outcome of the dispute, or where the solicitors' practical capacity to be paid depends upon the outcome of the dispute. The point of those observations is that if the court determines applications of this kind with an eye keenly attuned to the perception and avoidance of possible conflict, there will be delays, inefficiencies and increased costs which are not justified by any real or appreciable risk to the administration of justice.[7]

29 In this case I bring to account the various considerations to which I have referred and which count against the making of the order, including the costs which would be thrown away, the inevitability of delay, and the fact Jackson McDonald's clients would be deprived of their choice of solicitors. In my view there is very limited potential for conflict arising from the possibility that Jackson McDonald might wish to avert the potential of a preference claim ever being made, taking into account the fact that in the event that such a claim is made there will be no issue with respect to the solvency of Westgem. In my view the only conclusion that can reasonably be drawn is that any possibility of Jackson McDonald modifying its behaviour in the representation of its clients because of its own interests is entirely fanciful. In that circumstance the various considerations which count against the order sought being made compel the conclusion that this application should be dismissed.

30 In this case I do not think it matters whether these views are my own views, formed on the basis of what I have heard, or whether I somehow metamorphose myself into the position of the fairminded lay observer. I believe such a person would form the same view. For these reasons, I do not accept that this is one of those exceptional circumstances in which the court should exercise the jurisdiction invoked, and the application will be dismissed.

[1] Grimwade v Meagher [1995] VicRp 28; [1995] 1 VR 446, 455 (Mandie J); Tottle Christensen v Westgold Resources NL [2003] WASCA 244 [7]; Kallinicos v Hunt [2005] NSWSC 1181; (2005) 64 NSWLR 561 [76] (Brereton J); IsmailZai v The State of Western Australia [2007] WASCA 150; (2007) 34 WAR 379 [19] (Steytler P).

[2] Rondel v Worsley [1969] 1 AC 191, 227 (Reid LJ); Kallinicos [76] (Brereton J); Belan v Casey [2002] NSWSC 58 [15] [21] (Young CJ in Eq).

[3] Kallinicos [76] (Brereton J); IsmailZai [35] (Steytler P); Tottle Christensen v Westgold Resources NL [4].

[4] IsmailZai [35] (Steytler P); Tottle Christensen v Westgold Resources NL [4]; Grimwade v Meagher (455) (Mandie J); Kallinicos [76] (Brereton J).

[5] Premier Capital (China) Ltd v Sandhurst Trustees Ltd [2012] VSC 611 [2] (Pagone J); Westpac Banking Corporation v Newey [2013] NSWSC 533 [21] [22] (Pembroke J); Bahonko v Nurses Board of Victoria (No 3) [2007] FCA 491 [3] (Middleton J).

[6] Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175; see also Sali v SPC Ltd [1993] HCA 47; (1993) 116 ALR 625, 629 (Brennan, Deane & McHugh JJ).

[7] Westpac Banking Corporation v Newey [21] [22] (Pembroke J); AMP Capital Investors Ltd v Parsons Brinckerhoff Australia Pty Ltd [2013] NSWSC 1633 [11] (Pembroke J).

COMMONWEALTH BANK OF AUSTRALIA -v- JACKSON McDONALD (A FIRM) [2014] WASC 301 (25 August 2014)

At a glance

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Judgment (77 paragraphs)

COMMONWEALTH BANK OF AUSTRALIA -v- JACKSON McDONALD (A FIRM) [2014] WASC 301 (25 August 2014)

Cases Cited (4)