Council of the Law Society of New South Wales v Hedges

Introduction

1. In the period from 1 January 2010 to 28 February 2013 Brent Hedges and his brother Stephen Hedges were the directors of a company, Hedges Legal Pty Limited, which traded as a law practice under the name "Walker Hedges & Co". During that period the brothers were the solicitor directors and only principals of the Law Practice. They had offices in the Sydney City and in Forestville. Brent worked at the City Office and Stephen worked at the Forestville office.
2. By the operation of s 140(2) of the Legal Profession Act 2004 ("the Act") the brothers were each responsible for the management of the legal services provided in New South Wales by the Law Practice and by virtue of s 143(2)(a) of the Act each was responsible as though he were a partner of the Law Practice.
3. From 1 March 2013 the brothers were the only principals of an unincorporated Law Practice which continued to be known as "Walker Hedges & Co". On and after 1 March 2013 each brother, as a principal of the Law Practice was responsible to ensure that there existed a system in relation to entrusted funds; and he had access to that system for the purpose of checking compliance with statutory obligations.
4. The trust account records of the practice and its office account records were located at the Forestville office under the supervision of Stephen Hedges. The Law Practice employed a bookkeeper, who worked on a part time basis and was located at the Forestville office.
5. In about 2012 the brothers adopted a change in their billing practice. Until then they had in each matter rendered a separate bill for disbursements not yet paid. If that bill was for a single unpaid disbursement, such as a barrister's fees or an expert witness' fees, they would ask the client to pay that fee direct to the person entitled to it, or if the client paid the amount to the law practice, the payment was deposited into the general trust account of the law practice and the person entitled to the money was paid by a trust account cheque. A different bill would issue for disbursements already paid and the professional legal fees. The payment or payments for that bill would be deposited to an "office" account.
6. The change was to issue a single bill which included costs, disbursements already paid and unpaid disbursements, and to deposit the payment(s) for that bill into the office account. The brothers testified that they agreed that upon payment of a bill that included an unpaid disbursement, "immediately" payment would be made of the unpaid disbursements (subject to clearance of the cheque if the bill had been paid by cheque).
7. Brent Hedges instigated the change. Stephen agreed to it. Brent Hedges testified that the reason for the change was that one of his clients, an insurance company, complained about the practice of separating costs from disbursements and fees payable to other providers, because of difficulty for the client in calculating a GST input credit.
8. Section 243 of the Act defined "trust money" as: Money entrusted to a law practice in the course of or in connection with the provision of legal services by the practice, and includes: 1. Money received by the practice on account of legal costs in advance of providing the services, and 2. Controlled money received by the practice, and 3. Transit money received by the practice, and 4. Money received by the practice, that is the subject of a power, exercisable by the practice or an associate of the practice, to deal with the money for or on behalf of another person.
9. Where a client paid a bill that included an unpaid disbursement, to the extent of that amount it was entrusted to the law practice in the course of or in connection with the provision of legal services by the practice. It was money received by the practice to deal with it on behalf of the client to pay that unpaid disbursement. It was trust money.
10. Money received for unpaid disbursements is trust money, even if it is included in a bill or in an amount paid to the Law Practice which is otherwise for legal fees to which the Law Practice is entitled and for disbursements already paid by the Law Practice. (Council of the Law Society of New South Wales v Bouzanis) [2017] NSWCA 330 per Basten JA & McColl JA , Simpson JA dissenting).
11. At the time the brothers adopted the new procedure Brent Hedges had been practising as a solicitor for 28 Years and Stephen Hedges had been practising for 32 years. But the brothers did not treat the relevant amounts as trust money.
12. As a result of a complaint by another Law Practice, a trust account inspector, Mr R F Dunlop, carried out an investigation of the Law Practice in 2013.
13. As a result of that investigation, the Council of the Law Society of New South Wales resolved to commence these disciplinary proceedings against the brothers and an application was filed against each of them on 16 September 2016. It was agreed that the two applications would be heard together.
14. The hearing was subsequently delayed because of the issue raised by the decision of the Tribunal in Council of the Law Society of New South Wales v Bouzanis [2017] NSWCATOD 84, where the Tribunal held that amounts for unpaid disbursements included in a bill were not trust money. These proceedings were adjourned twice awaiting the result of the appeal from that decision to the Court of Appeal, which was released on 15 December 2017 (Council of the Law Society of New South Wales v Bouzanis [2017] NSWCA 330).
15. The hearing proceeded on 12 July 2018. Almost all of the allegations were admitted. There was extensive evidence in the applicant's case that provided proof of all the grounds. None of the witnesses was cross examined. There was no oral evidence.
16. The relevant provisions of the Legal Profession Act 2004 ("the Act") apply in these proceedings, notwithstanding the repeal of that Act in 2015, because of the Legal Profession Uniform Law Application Act 2014(NSW) and the transitional provisions of the Legal Profession Uniform Law (2015) (see Griffin v The Council of the Law Society of New South Wales [2016] NSWCA 364).

The Evidence

1. The evidence comprises:- 1. Application of 16 September 2016. 2. Affidavit of Ronald Frederick Dunlop and report exhibit "RD1". 3. Reply of Brent Hedges. 4. Affidavit of Anne-Marie Foord of 13 September 2016 and exhibit "AMF1". 5. Affidavit of Brent Hedges of 17 March 2017. 6. Affidavit of Brent Hedges of 19 May 2017. 7. Affidavit of Brent Hedges of 14 June 2018. 8. Affidavit of Brent Hedges of 9 July 2018. 9. Affidavit of Paul Stockley of 6 June 2017. 10. Affidavit of Paul Stockley of 10 May 2018. 11. Affidavit of Peter John Deakin of 9 July 2017.

Relevant Provisions of the Act

1. Unsatisfactory Professional Conduct / Professional Misconduct . Section 254 of the Act provides: - "254 Certain trust money to be deposited in general trust account (1) Subject to section 258A, as soon as practicable after receiving trust money, a Law Practice must deposit the money in a general trust account of the practice unless: (a) the practice has a written direction by an appropriate person to deal with it otherwise than by depositing it in the account, or (b) the money is controlled money, or (c) the money is transit money, or (d) the money is the subject of a power given to the practice or an associate of the practice to deal with the money for or on behalf of another person. Maximum penalty: 100 penalty units. (2) Subject to section 258A, a Law Practice that has received money that is the subject of a written direction mentioned in subsection (1)(a) must deal with the money in accordance with the direction: (a) within the period (if any) specified in the direction, or (b) subject to paragraph (a), as soon as practicable after it is received. Maximum penalty: 100 penalty units. (3) the Law Practice must keep a written direction mentioned in subjection (1)(a) for the period prescribed by the regulations. Maximum penalty: 50 penalty units. (4) (Repealed) (5) A person is an appropriate person for the purposes of this section if the person is legally entitled to give the law practice directions in respect of dealings with the trust money."
2. Section 255 of the Act provides:- "255 Holding, disbursing and accounting for trust money (1) A law practice must: (a) hold trust money deposited in a general trust account of the practice exclusively for the person on whose behalf it is received, and (b) disb urse the trust money only in accordance with a direction given by the person. Maximum penalty: 50 penalty units. (2) Subsection (1) applies subject to an order of a court of competent jurisdiction or as authorised by law. (3) The law practice must account for the trust money as required by the regulations. Maximum penalty: 50 penalty units."
3. Section 496 provides:- "496 Unsatisfactory profession conduct For the purpose of this Act: "unsatisfactory professional conduct" includes conduct of an Australian legal practitioner occurring in connection with the practice of law that falls short of the standard of competence and diligence that a member of the public is entitled to expect of a reasonably competent Australian legal practitioner."

Grounds 1 & 2 of the Complaint- Breaches of Section 254 and Section 255 of the Act

A. Matter no. 209471 Sovereign Grange Pty Ltd v Bridgestone Australia Ltd & Gwynfor Pty Ltd

1. The following facts are proved on the evidence and are admitted by the practitioner:
2. The Law Practice acted for the plaintiff Sovereign Grange Pty Ltd in litigation conducted in Western Australian. IRDI Legal was a law firm in Western Australia which acted as the agent for the Law Practice in the litigation.
3. On 24 October 2012 the Law Practice rendered a bill to the client for $7,260.10, which included a sum of $4,390.10 for a disbursement dated 17 July 2012 payable to IRDI Legal. The client's cheque for the amount of the bill was received and banked on 1 November 2012 into an office account of the Law Practice with the ANZ Bank. The following day the Law Practice drew a cheque in favour of IRDI Legal for $4,030.10 and paid that to IRDI Legal.
4. In relation to the remaining $360.00 of trust money that had been deposited to the ANZ office account, the brothers failed to: (a) refund that amount to the client; or (b) transfer that amount to the trust account and credit the sum to the client's ledger.
5. On 11 February 2013, $270.00 of the $360.00 was used by the Law Practice to pay a filing fee in a matter in which the same client was involved in the District Court of New South Wales. In the circumstances of the preceding two paragraphs, the respondent breached ss 254 & s 255 of the Act. The response of the practitioner is that he was wholly based at ForestvilleSydney and his brother had the day to day conduct of the matter at Sudney..
6. On 14 June 2013 the remaining $90.00 of the excess of $360.00 was drawn by cheque from the ANZ office account, nearly eight months after the client's payment was deposited into the office account, and paid to the trust account in the name of the client and credited to the client's trust ledger.

B. Matter No. 211229: M & K Kaartage Pty Ltd v Westline Transport Pty Ltd

1. The Law Practice acted for M & K Kaartage Pty Limited in litigation. The Law Practice billed the client on 11 January 2012 in the sum of $5,773.34, which included $3,163.60 for disbursements for unpaid agent's fees payable to Pynt.
2. The client paid the bill by cheque on 7 February 2012. It was banked by the Law Practice into its office account with CBA Bank. When the cheque was cleared the respondent failed to:- 1. Pay the sum of $3,163.60 to Pynt; or 2. Transfer the sum of $3,163.60 to the trust account and credit the sum to the client's ledger.
3. About 73 days later on 20 April 2012 the Law Practice paid the sum of $3,160.60 to Pynt.
4. The practitioner's response was to say that he did not have the carriage of the matter and does not know why the payment was not made immediately, but he gave no instruction or direction "in that regard" and was unaware of the fact at the time.
5. The practitioner breached ss 254 & 255 of the Act.

C. Matter 209010 Global Transport - Munnerley's Bulk Haulage Pty Ltd v Hankook Tyre Australia Pty Ltd

1. The Law Practice acted for the plaintiff in this litigation. The Law Practice billed the client for $4,001.80 on 22 December 2011. The bill included an unpaid disbursement of counsel's fees of $495.00 payable to Ms S King. The client paid the bill in full on 23 February 2012. The Law Practice deposited the cheque in its CBA office account.
2. When the cheque was cleared, the respondent failed to either:- 1. Pay the sum of $495.00 to Ms King; or 2. Transfer the $495.00 to the trust account and credit the sum to the client's trust ledger.
3. The Law Practice did not pay the $495.00 to Ms King until 4 May 2012.
4. The practitioner states that he did not have the conduct of the matter. He said he did not give any direction or instruction regarding the payment and was not aware of the delay in payment at the time. He said it was "certainly not intentional" on his part. He said that if there was a breach of ss 254 & 255, it was one of which he was unaware and he did not know the reason.
5. In the circumstances the practitioner breached ss 254 & 255 of the Act.

D. Matter 209010 Global Transport - Munnerley's Bulk Haulage Pty Ltd v Hankook Tyre Australia Pty Ltd

1. The Law Practice acted for Global Transport in another (earlier) matter. It billed the client on 18 October 2010 in an amount of $88,499.95, which included $891.00 for unpaid expert's fees payable to UNSW Global. The client paid the bill in full on 27 October 2010 and the Law Practice deposited the cheque into its CBA office account.
2. The cheque in payment of $891.00 was drawn on the CBA office account on the same day payable to UNSW Global.
3. The cheque was not subsequently presented. It was reversed by the Law Practice in June 2012.
4. Following reversal of the cheque in June 2012, the Law Practice failed to either:- 1. Pay the sum of $891.00 to UNSW Global by issuing a further cheque in its favour; or 2. Transfer the sum of $891.00 to the trust account and credit the sum to the client's ledger.
5. On 23 August 2013, about 34 months after the original payment was drawn, the Law Practice drew the sum from its ANZ office account and paid the amount into its trust account. It credited the sum to the client's trust ledger.
6. The practitioner said he did not have the carriage of the matter and If there was a breach of ss 254 and 255 it was not intentional on his part, he gave no instruction or direction that would lead to the breach and had no knowledge of it at the time. .
7. The practitioner breached ss 254 & 255 of the Act.

E. Matter 211217 NTI Limited & Ors ats Inter Capital Express Australia Pty Ltd

1. The Law Practice acted for Inter Capital Express Australia Pty Limited, a defendant in the litigation. On 27 February 2012 the Law Practice billed the client an amount of $5,071.00, which included unpaid disbursements of $1,980.00 for mediation fees payable to Mr S Walsh QC.
2. The client paid the sum of the bill ($5,071.00) on 12 March 2012. The Law Practice deposited the cheque that day into its CBA office account.
3. On clearance of the cheque, the respondent failed to either:- 1. Pay the sum of $1,980.00 to Mr Walsh; or 2. Transfer the sum of $1,980.00 to the trust account and credit the sum to the client's ledger.
4. More than 3 months after the Law Practice received the $1,980.00 and deposited it in its CBA office account, on 28 June 2013 it drew a cheque on the ANZ office account in that amount, deposited it into the trust account, and credited the sum to the client's ledger.
5. The practitioner's response to the ground was that he did not have the carriage of the matter and was unaware of the delay. He said he gave no instruction or direction in that regard other than Mr Walsh was to be paid immediately. He said that the first he knew of the delay was when it was drawn to his attention by the book keeper after the trust account inspector drew it to her attention. If it was a breach of the sections, it was not intentional or wilful on his part and he gave no direction in that regard and was unaware of it at the time.
6. The practitioner under this ground breached ss 254 & 255 of the Act.

F. Matter 209207 JUA Underwriting Agency Pty Ltd v GW & DF Parsons Pty Ltd

1. The Law Practice acted for JUA Underwriting Agency Pty Limited which was the plaintiff in the litigation.
2. The Law Practice billed the client an amount of $22,052.16 on 9 January 2012. That bill included an unpaid disbursement of $10,450.00 for counsel's fees payable to Mr Paul Stockley.
3. The client on 20 April 2012 transferred by EFT into the office account of the Law Practice a sum of $19,500.30 in part payment of the invoice.
4. The Law Practice wrote off the shortfall of $2,551.86 on 13 June 2012.
5. After the client's EFT into the office account, the respondent failed to either:- 1. Pay the sum of $10,450.00 to Mr Stockley; or, if the shortfall applied to his fees the sum of $7,898.14 to Mr Stockley; or 2. Transfer the sum of $10,450.00 or $7,898.14, as applicable, to the trust account and credit the sum to the client's ledger.
6. On 1 February 2013 by cheque No. 2271 drawn on the CBA office account the Law Practice paid Mr Stockley the sum of $2,000.00.
7. On 30 August 2013 by cheque No. 1663 drawn on the ANZ office account the Law Practice paid Mr Stockley the sum of $6,392.00.
8. Of the original amount invoiced by Mr Stockley, the sum of $1,518.00 was not paid to him.
9. The practitioner's response in his Reply that he did not have the conduct of the matter and he was unaware of the delay at the time. He said he gave no direction in regard to the delay and if there were breaches of ss254 and 255, then they did not occur as a result of any instruction or direction by him, and he was unaware of them at the time. .
10. In the circumstances set out, the respondent breached ss 254 & s 255 of the Act.

Trust Money - Breaches of ss 254 and 255 of the Act - Discussion

1. Most of these alleged breaches were admitted by the brothers. All of them were proved. Implied by those admissions is the admission that the relevant amounts were trust money. In the reply of Brent Hedges to the application against him, he did not allege in respect of any of the contraventions of s 254 or s 255 that he did not know the money was trust money. In his reply to these breaches said he "was unaware at the time", gave no instructions or directions to do what was done, and the breaches were unintentional.
2. Nor did Stephen Hedges in his reply to the same grounds in the application against him say that he did not know the money was trust money. His replies were that the matters were all his brother's matters, he was "wholly based in the practice at Forestville", he was unaware of breaches, he gave no direction or instruction in that regard, it was not an intentional breach by him, he does not know the reasons for the breach, and it was "not intentional or wilful on his part".
3. Brent Hedges testified in his affidavit of 31 January 2017 that the procedure they introduced was that when a bill was paid that included an unpaid disbursement and the funds were deposited to an office account, the part time bookkeeper, Ms Cooper, would draw a cheque on that account to pay the unpaid disbursement, it would be signed by one of the brothers and sent with a covering letter to pay the unpaid disbursement.
4. Stephen Hedges also said, "When the new practice was instituted, directions were given to Ms Cooper that upon receipt of any payment of costs and disbursements, if the disbursements had not been paid prior to payment, payment of the disbursements must be made immediately upon receipt of the funds from the client." This level of urgency suggests that money from a client for payment of unpaid disbursements was recognised by the brothers as trust monies.
5. However, in the same affidavit Stephen Hedges stated, "As it had not been my practice before, I was not aware that any such disbursements comprised trust money." But given that at the time of these breaches (2010 -2013), he had been practising as a solicitor for 30 years or more and Brent Hedges had been practising as a solicitor for 26 years or more, it is not credible that they did not know that money paid to a solicitor by a client for payment of a debt to a third party is trust money.

N.B. For item B the relevant page of the statements for the overdraft is not in evidence and the nearest balance in evidence is 20 February 2012.

1. In relation to these five of the 6 subject deposits, clearly in so far as they reduced the outstanding balance of the CBA overdraft account they benefitted the practitioners for their own purposes, being part payment of their overdraft debt.
2. In Council of the Law Society of NSW v Gallego [2017] NSWCATOD 29 the Tribunal quoted the definition of unsatisfactory professional conduct in s 496 of the Act. It then said :- "The common law test of professional misconduct is explained in the often cited decision of Allinson v General Council of Medical Education and Registration (1894) 1QB 750 …. We accept the common law principle as being adopted in the Supreme Court of NSW and the Tribunal as applicable in relevant circumstances (see re Hodgekiss [1962] SR NSW) 340 at [351]; Council of the Law Society of NSW v Greenstein [2015] NSWCATOD 122)."
3. The Tribunal continued:- "We have found that the practitioner placed funds into an interest-bearing account in his name as trustee for the client without written authority to do so. We have also found that the practitioner on a number of occasions withdrew funds from the account without authority to do so. We have also found that the practitioner failed to ensure proper costs disclosure was made."
4. The Tribunal then referred to various conduct of the practitioner the subject of the complaint, including placing funds in an interest-bearing account in his name as trustee for the client without authority to do so and in breach of s 254.
5. The Tribunal then continued:- "In each instance, the practitioner's conduct disclosed repeated carelessness by reason of his failure to know and comply with the Act and regulations. This occurred in circumstances where he was entrusted with significant funds by his client …"
6. The Tribunal then later said:- "A lack of awareness by the practitioner of the requirements of the Act and regulations does not provide an excuse for his conduct. A solicitor having the responsibility and privilege to be entrusted with a client's funds has a duty to ensure that he or she is fully cognizant of the relevant provisions of the Act, regulations and now rules governing the holding and disbursal of such funds."

Ground 3 of the Complaint - Delayed in Paying Fees to Third Parties

1. Both brothers admit, and the evidence establishes, the following delays by them in payment of fees due to third parties: 1. The respondent delayed by over three months the payment of monies to Pynt, a third party; 2. The respondent delayed by over two months the payment of monies to Ms King, a third party; 3. The respondent delayed by over 17 months the payment of monies to Mr Walsh QC, a third party; 4. The respondent delayed by:- 1. Over 10 months the part-payment of $2,000.00 to Mr Stockley, a third party; and 2. 16 months, the final payment to Mr Stockley, a third party.
2. In Re Robb & Anor (1996) 134 FLR 294 The Full Federal Court held that where a solicitor holds a client's funds for the purpose of paying counsel and other persons, and transfers those funds to an office account, any delay in so paying the money amounts to professional misconduct, for during the period of delay the solicitor is treating what is essentially client's funds as the solicitor's own money. The Court held that wilful or persistent failure to pay counsel's fees could amount to professional misconduct and said (at 310): The point is that the delay in paying counsel to be attributed to the solicitors in the present case stems from their assumption that moneys in their office account, received on trust for the client and transferred to the office account for the very purpose of paying counsel, were not affected by their fiduciary duties to the client and were their moneys to pay counsel fees when they chose and that any delay was simply a matter between counsel and themselves. That assumption was totally unjustified. On the contrary, every day of delay in paying counsel from the time of transferring the moneys from the trust account to the office account, was a day in which the solicitors were in breach of their fiduciary duty to the client.
3. In Russo v Legal Services Commission [2016] NSWCA 306 the New South Wales Court of Appeal in a re-hearing on appeal from the Occupational Division of the Tribunal dealt with a situation where a client had paid the solicitor for counsel's fees for a brief to advise. The amount involved was in excess of $10,131.00. The solicitor received the money but did not pay the barrister. The barrister sued the client and obtained a verdict. It was 4½ years after the solicitor received the money when he finally ascertained that he had received it and paid the barrister.

The Outcome

1. There are affidavits in evidence by an accountant solicitor, Mr David Fisher, and a barrister, Mr Michael Galvin. Mr Galvin has been a friend of the practitioner since they were 10 years of age. They have socialised for more than 25 years and they have had considerable professional contact including being briefed by the practitioner. He has read the application, the reply and an affidavit of the practitioner in these proceedings. His evidence is that the practitioner in his experience is honest, ethical, a competent solicitor and of excellent character. Mr. Mr Fisher has known the practitioner for about 20 years since he began to perform accounting services for his law practice, including annual audits of the trust account. They have been friends for many years. Mr Fisher has read the application, the reply and one affidavit of the practitioner. His opinion from In his dealings with the practitioner is that he was "diligent in ensuring that the functions and operations of the Trust Account are maintained in accordance with the law and regulations…". He has found the practitioner to be "a person of the upmost honesty maintaining the highest standards of integrity.."
2. The conduct of the practitioner the subject of these proceedings is wholly inconsistent with his good reputation.
3. The Law Society in its submission referred to five fines imposed by the Disciplinary Tribunal in situations where the practitioner In Council of the Law Society v Gallego (No. 2) [2017] NSWCATOD 61 a fine of $1,000.00 was imposed where there was a finding of professional misconduct because of breaches of s 254 and other trust account sections and also breaches of several clauses of the regulations and the general rules.
4. In Council of the Law Society of NSW v Beazley [2017] NSWCATOD 35 there was a fine of $6,000.00 where there was a finding of professional misconduct and unsatisfactory professional conduct. The professional misconduct included a breach of s 254 of the Act found to be professional misconduct. There was also a finding of professional misconduct in relation to a breach of s 260, a breach of s 67 and a breach of rule 26 of the Rules.
5. In Russo v the Legal Services Commissioner [2016] NSWCA 306, the fine was $20,000.00. The breach of s 255 was found to be unsatisfactory professional conduct, the failure to pay counsel was professional misconduct, and failure to account to the client was professional misconduct.

Costs

1. Because the Tribunal has made findings that the practitioner is guilty of professional misconduct, section 566 of the Act requires that unless there are exceptional circumstances, the Tribunal make an order for the practitioner to pay the costs of the Law Society, There is a similar provision in Clause 23(1) of Schedule 5 of the Civil and Administrative Tribunal Act 2013.

Orders

1. Accordingly the orders are: 1. The Respondent is guilty of professional misconduct; 2. The Respondent must pay a fine of $5,500; 3. The Respondent must pay the costs of the Applicant of or incidental to the proceedings as agreed or as assessed.

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 September 2018