De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor

The statutory provisions

1. Sections 345, 347, 348 and 349 LPA provide: "345 Law practice not to act unless there are reasonable prospects of success (1) A law practice must not provide legal services on a claim or defence of a claim for damages unless a legal practitioner associate responsible for the provision of the services concerned reasonably believes on the basis of provable facts and a reasonably arguable view of the law that the claim or the defence (as appropriate) has reasonable prospects of success. (2) A fact is provable only if the associate reasonably believes that the material then available to him or her provides a proper basis for alleging that fact. (3) This Division applies despite any obligation that a law practice or a legal practitioner associate of the practice may have to act in accordance with the instructions or wishes of the client. (4) A claim has reasonable prospects of success if there are reasonable prospects of damages being recovered on the claim. A defence has reasonable prospects of success if there are reasonable prospects of the defence defeating the claim or leading to a reduction in the damages recovered on the claim. (5) Provision of legal services in contravention of this section constitutes for the purposes of this Division the provision of legal services without reasonable prospects of success. … 347 Restrictions on commencing proceedings without reasonable prospects of success (1) The provision of legal services by a law practice without reasonable prospects of success does not constitute an offence but is capable of being unsatisfactory professional conduct or professional misconduct by a legal practitioner associate of the practice who is responsible for the provision of the service or by a principal of the practice. (2) A law practice cannot file court documentation on a claim or defence of a claim for damages unless a principal of the practice, or a legal practitioner associate responsible for the provision of the legal service concerned, certifies that there are reasonable grounds for believing on the basis of provable facts and a reasonably arguable view of the law that the claim or the defence (as appropriate) has reasonable prospects of success. (3) Court documentation on a claim or defence of a claim for damages, which has been lodged for filing, is not to be filed in a court or court registry unless accompanied by the certification required by this section. Rules of court may make provision for or with respect to the form of that certification. (4) In this section: court documentation means: (a) an originating process (including for example, a statement of claim, summons or cross-claim), defence or further pleading, or (b) an amended originating process, defence or further pleading, or (c) a document amending an originating process, defence or further pleading, or (d) any other document of a kind prescribed by the regulations. cross-claim includes counter-claim and cross-action. 348 Costs order against law practice acting without reasonable prospects of success (1) If it appears to a court in which proceedings are taken on a claim for damages that a law practice has provided legal services to a party without reasonable prospects of success, the court may of its own motion or on the application of any party to the proceedings make either or both of the following orders in respect of the practice or of a legal practitioner associate of the practice responsible for providing the services: (a) an order directing the practice or associate to repay to the party to whom the services were provided the whole or any part of the costs that the party has been ordered to pay to any other party, (b) an order directing the practice or associate to indemnify any party other than the party to whom the services were provided against the whole or any part of the costs payable by the party indemnified. (2) The Supreme Court may on the application of any party to proceedings on a claim for damages make any order that the court in which proceedings on the claim are taken could make under this section. (3) An application for an order under this section cannot be made after a final determination has been made under this Part by a costs assessor of the costs payable as a result of an order made by the court in which the proceedings on the claim concerned were taken. (4) A law practice or legal practitioner associate of the practice is not entitled to demand, recover or accept from a client any part of the amount for which the practice or associate is directed to indemnify a party pursuant to an order under this section. 349 Onus of showing facts provided reasonable prospects of success (1) If the court (the trial court) hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success. (2) If the Supreme Court (when the Supreme Court is not the trial court) is satisfied, either as a result of a finding of the trial court or otherwise on the basis of the judgment of the trial court, that the facts established by the evidence before the trial court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success. (3) A presumption arising under this section is rebuttable and a person seeking to rebut it bears the onus of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success. (4) A law practice or legal practitioner associate of the practice may, for the purpose of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success, produce information or a document despite any duty of confidentiality in respect of a communication between the law practice or a legal practitioner associate of the practice and a client, but only if: (a) the client is the client to whom the legal services were provided or consents to its disclosure, or (b) the court is satisfied that it is necessary for the law practice or associate to do so in order to rebut a presumption arising under this section."
2. It is convenient if I deal with the application against De Costi (proposed orders 3, 5 and 8) separately, and before, the application against Ms Thomson (proposed order 1).

Orders sought in respect of De Costi

1. Proposed order 8 is the order of significance against De Costi. Proposed orders 3 and 5 are part of the reasoning as to why proposed order 8 is said to be appropriate. Proposed order 3 states in a slightly different form a finding I previously made. Proposed order 5 is a form of a finding that must be made in order to justify proposed order 8.
2. The real issue is whether Mr Newell and Mr Muriniti could be liable under s 348 (in respect of the action against all but the seventh cross-defendant) in circumstances where, as I found on 13 June 2014, no presumption arises under s 349.
3. Liability under s 348 depends on providing legal services without reasonable prospects of success. The provision of legal services without reasonable prospects of success is a defined term, stated in s 345(5) to be the "[p]rovision of legal services in contravention of this section". Legal services are provided in contravention of s 345 when legal services are provided without a reasonable belief, "on the basis of provable facts and a reasonably arguable view of the law that the claim…has reasonable prospects of success".
4. Although s 345 refers to "a reasonably arguable view of the law", there was no real dispute about the relevant law in the cross-claim brought by Mr Wachtenheim and Deist. De Costi do not submit that, or identify how, the claim involved an unarguable view of the law. I do not find that it did.
5. Section 345 of the LPA requires that a reasonable belief that a claim has reasonable prospects of success must be based on provable facts. But a provable fact is a fact supported by a reasonable belief that available material provides a proper basis for alleging the fact (see s 345(2) and De Costi (No 4) at [119]). In other words, if the fact, on available material, is reasonably believed to be proper to allege, then it is provable (for the purposes of ss 345 and 348 of the LPA).
6. In this regard the title of a fact being "provable" is apt to mislead. The definition of provable facts indicates that a "properly alleged fact" might be a more accurate nomenclature.
7. It follows that if the factual elements of a cause of action can properly be alleged (on the basis of available material), or even reasonably believed to be able properly to be alleged, then those factual elements are provable facts. Once factual elements of a cause of action are provable facts, then they provide the basis for a reasonable belief in reasonable prospects.
8. Facts established by the evidence at trial, in the sense found in De Costi (No 4) at [114]-[116], are a subset of provable facts because they are established or "proven" (see De Costi (No 4) at [119]). They are also provable facts because they are properly able to be alleged.
9. For these reasons, it seems to me that if the s 349 presumption does not arise because the practitioner had, in the facts established at trial, a basis for a reasonable belief in reasonable prospects, then a basis in provable facts for a reasonable belief in reasonable prospects must also be present. Is a basis (in provable facts) for a reasonable belief in reasonable prospects the same as a reasonable belief in reasonable prospects based on provable facts (the form of s 345), or at least sufficient to satisfy s 345?
10. The following aspects of Division 10 indicate that it is sufficient, in order for a practitioner to comply with s 345, if "a basis" exists for a reasonable belief in reasonable prospects, and thus supports a conclusion that De Costi cannot establish a breach of s 348 if they cannot establish the matters necessary for the presumption in s 349.
11. First, s 347(2) requires that filed documents be certified by the legal practitioner. The practitioner is required to certify that there "are reasonable grounds for believing" on the basis of provable facts that there are reasonable prospects of success. This terminology, not requiring a reasonable belief but reasonable grounds for believing, indicates that it is sufficient if there is "a basis" for a belief, rather than that a reasonable belief need be held. It would be odd if a practitioner could properly certify a pleading under s 347 and yet nevertheless contravene s 345.
12. Secondly, s 349(3) provides that a presumption arising under s 349(1) is rebutted by establishing, on provable facts, "a basis" for a reasonable belief. It is reasonable to conclude that that which is sufficient to rebut the presumption in s 349(1) is also sufficient to prove the contrary of s 348(1), otherwise there would be no utility in the rebuttal.
13. Thirdly, s 349(4), like s 349(3) speaks of "provable facts" providing "a basis" for a reasonable belief, suggesting that "a basis" (in this case established by that subset of provable facts that constitute facts established by the evidence before the court) is sufficient to disprove a contravention of s 345.
14. Fourthly, privileged material referred to in s 349(4) can only be utilised if "it is necessary" to rebut the presumption. It seems incongruous to allow Mr Muriniti and Mr Newell to utilise privileged material under s 349(4) if a presumption under s 349(1) has arisen, but bar them from utilising that material in this application because they have successfully resisted the application of s 349(1) so that no presumption has arisen. Such a finding would offend the principles in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 at 381 [69], 384 [78]. See also Deputy Commissioner of Taxation v Zammitt [2014] NSWCA 104 at [67] and Certain Lloyd's Underwriters v Cross [2012] HCA 56; (2012) 248 CLR 378 at [23]-[25]. This aspect of s 349(4) also supports the second point mentioned above.
15. It might seem odd that the effect of De Costi being unable to establish the rebuttable presumption in s 349 has the consequence that the action under s 348 cannot be maintained. But as I indicated at [127] in De Costi (No 4), the reference by McColl JA in Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300 at [181] to a "prima facie case" supports this conclusion. In the circumstances of this case, where a trial has occurred, and the s 349 presumption is not established, "there was no prima facie case" (Lemoto at [181]) and "the proceedings [under s 348] must fail" (De Costi (No 4) at [127]).
16. For these reasons, in this case the inability to establish the presumption in s 349 requires the conclusion that s 348 cannot be satisfied. Therefore, in accordance with the proper construction of s 345(1) and 345(5), it was not the case that legal services were provided without reasonable prospects of success on the claim for damages against De Costi, save, potentially, in the case of the seventh cross-defendant.
17. Accordingly, the application in the De Costi notice of motion for orders under s 348 should be dismissed, except insofar as the application relates to the seventh cross-defendant.

The Trustee's claim

1. Ms Thomson seeks orders for the payment of costs under s 348 of the LPA and s 99 of the CPA, which are quoted above. This component of her notice of motion was not dealt with in my decision dated 13 June 2014 (see the purpose of the earlier hearing referred to in [4] above). As I said in that decision at [101], [105], [110]-[112]: "101 [These assertions by Ms Thomson] are the same assertions that found the claim against Mr Muriniti and Mr Newell. It is inappropriate that I deal with this issue now given that it arises in another context in this application, and in the present context it is hypothetical only because of my earlier findings. The extent to which this issue needs to be dealt with at all in this judgment is considered below… 105 …the application before me concerned only issues under s 349 of the LPA preliminary to the issues arising in s 348 of the LPA, and concerned s 99 of the CPA not at all. The residual issues arising under s 348 of the LPA and s 99 of the CPA are left to be considered and determined on another day, dependent, at least in part, on this decision. … 110 …I understood the parties to have agreed that any argument under s 348 of the LPA would be dealt with on a future occasion, in conjunction with consideration of s 99 of the CPA. The issue of concern at this hearing was the application of s 349 of the LPA. 111 Section 349 requires consideration of whether the facts established by the evidence before the trial court hearing proceedings on a claim for damages do not form a basis for a reasonable belief in reasonable prospects. Such a conclusion can only arise if the court has heard the proceedings. Whilst this has occurred in respect of the claim by Mr Wachtenheim and Deist against De Costi, it has not occurred with respect to the claim against Mr Shnider. Accordingly, if Ms Thomson as Mr Shnider's trustee is entitled to an order against Mr Newell or Mr Muriniti under s 348, it will not be because of the provisions of s 349(1), but because of the alternative procedures referred to by McColl JA in Lemoto at [137]. The District Court was the court 'in which proceedings are taken' (s 348) against Mr Shnider, but it is not the court 'hearing proceedings on a claim...[utilizing] the evidence before the court' (s 349). 112 As ss 99 of the CPA and 348 of the LPA are not to be determined as part of this aspect of the application, the residue of Ms Thomson's application must be left to the subsequent hearing (that is, the application apart from orders 1-3). As that application will not involve s 349 the presumption does not arise (see Lemoto at [137]) and the onus remains on Ms Thomson throughout."
2. No issue was taken with this approach. Nevertheless, Mr Newell and Mr Muriniti seek to have the application of the Trustee dismissed in advance of the matter being heard.
3. Such an order cannot follow from my earlier decision about the s 349 presumption, because the presumption was unrelated to the claim by the Trustee. Section 99 of the CPA was not considered at all.
4. In De Costi (No 4) at [94], in the context of a claim for costs against Mr Wachtenheim, I was unable to conclude that the proceedings against Mr Shnider were unreasonably commenced, or that Mr Shnider would almost certainly have succeeded. These findings may increase the difficulty Ms Thomson has in establishing an entitlement under s 348 of the LPA or under s 99 of the CPA. So might the findings in De Costi (No 4) at [27]-[57]. But this does not persuade me that I should form a final view about these entitlements before the Trustee's motion is properly ventilated. Even if those entitlements were given some consideration in argument before my decision in De Costi (No 4), it seems the fairer course is for the matter to be fully ventilated, especially since there has been no challenge to my findings at [110]-[112] in De Costi (No 4).
5. Mr Newell raises a number of matters against the orders sought in the notice of motion by the Trustee: that the Court is functus officio, that to allow Ms Thomson to make a fresh application is contrary to the principle of finality, that s 98 of the CPA does not permit costs orders after the proceedings have been determined, that the liberty granted on 3 May 2013 to seek further costs orders does not assist the Trustee, that neither Ms Thomson nor Mr Shnider are a party to the proceedings and so are not within s 348(1) of the LPA, that the Court has no power to make an order under s 99 of the CPA and that the Court should decline to exercise its discretion to make orders 4 to 6 in favour of the Trustee. Some of these matters were also maintained by Mr Muriniti.
6. These issues were not previously determined by me, nor were they, in my view, fully ventilated at a previous hearing. Nor does a determination of these issues follow from findings in the previous judgment of De Costi (No 4). They are matters that should be determined after each party has had a full opportunity to be heard. Some or all of them may have force. But they raise new issues not directly connected with any finding in the previous decision. Unlike the orders sought against De Costi, the orders sought against Ms Thomson do not, irrespective of the evidence in her application, follow inexorably from the earlier judgment.
7. Nor do I think that, as a matter of fairness, I should embark on the determination of an application for summary dismissal of a motion part way through the hearing of that motion. In a different context McColl JA in Lemoto at [100] referred to the general rule that: " '… every litigant ha[d] a right to have matters of law as well as of fact decided according to the ordinary rules of procedure, which give him full time and opportunity for the presentation of his case to the ordinary tribunals': see Burton v Shire of Bairnsdale (1908) 7 CLR 76 at 92, per O'Connor J. Every citizen was entitled to his or her day in court."
8. Ms Thomson is entitled to present her full case, her notice of motion having been commenced but not concluded.
9. The words at [137] of Lemoto apply to the notice of motion by Ms Thomson: "Alternatively, the question whether a s [348] order should be made might arise for reasons which are extrinsic to the judgment…An application of this nature or one initiated by the court independently of its factual findings would not trigger the s [349] rebuttable presumption. The onus would remain upon the applicant throughout to demonstrate that the solicitor or barrister had provided legal services without reasonable prospects of success." (Current provisions inserted).
10. In such a case "the procedure to be adopted [is] a matter for the judge [but] must be devised having regard to the principles of natural justice. It should be fair and 'as simple and summary as fairness permits'" (Lemoto at [143]). Further, "[w]here an application is made by a party as [s 348] contemplates, it is that party who should have its carriage" (Lemoto at [144]). This applies to the position of the Trustee.
11. A prima facie case by De Costi for a s 348 order has been considered, and, with regard to the seventh cross-defendant, established. It has been rejected in respect of the other parties comprising De Costi. But the claim by the Trustee for a s 348 order has not been sufficiently ventilated.

Future procedure

1. Hodgson JA indicated in Lemoto at [5] that issues under ss 348 and 349 should be decided "expeditiously, inexpensively and without undue formality" but that "contrary to this objective" a "strict application of the principles of natural justice" might require three hearings, and that this legislation discloses no intention to displace the requirements of natural justice (Lemoto at [7]). The difficulty of avoiding multiple hearings is accentuated in the present case because of the applications under s 98 of the CPA as well as ss 348 and 349 of the LPA, and because of the significant differences between the factual bases of the notices of motion by De Costi and by Ms Thomson.
2. The words of McColl JA in Lemoto also indicate the potential need for three hearings. At [146] and [149] her Honour stated: "[146] The Court must ensure that the legal practitioner has full and sufficient notice of the complaint and full and sufficient opportunity of answering it. Insofar as the degree of particularity of notice is concerned, cases concerning the requirement that allegations against a legal practitioner in disciplinary proceedings be specifically identified provide an apt analogy: see Smith v NSW Bar Association [1992] HCA 36; (1992) 176 CLR 256 at 270 per Deane J. Specifying the allegation with particularity guides the court as to the proper approach to its task and facilitates making clear findings as to the nature and quality of the legal practitioner's conduct so as to determine whether a s 198M order ought be made: cf O'Reilly v Law Society of New South Wales (1988) 24 NSWLR 204; R v Solicitors Disciplinary Tribunal; Ex parte L [1988] VR 757 at 770; Johns v Law Society of New South Wales [1982] 2 NSWLR 1 at 6 per Moffitt P … [149] While recognising that the procedure to be adopted pursuant to Div 5C is a matter for the court considering making a s 198M order, I would suggest that such a court: (1) consider whether there is a prima facie case that a solicitor or barrister has provided legal services to a party without reasonable prospects of success within the meaning of s 198J; the solicitor or barrister should be given an opportunity to be heard on whether a prima facie case has been made out; full particulars of the basis of the application should be provided; (2) if the court considers there is a prima facie case, the legal practitioner should be given the opportunity to show cause why a s 198M order should not be made; again this requires giving the solicitor or barrister sufficient particulars of the prima facie case; (3) after any explanation is provided, the court should determine whether a finding that the legal practitioner has provided legal services to a party without reasonable prospects of success within the meaning of s 198J should be made; in considering this issue the onus of proof may differ depending upon whether or not the rebuttable presumption in s 198N(1) and (2) is operative; (4) if the court concludes the legal practitioner has provided legal services to a party without reasonable prospects of success within the meaning of s 198L the court should consider whether it is, in all the circumstances, just to make a s 198M order; (5) if an order is made, it should specify whether it is a repayment order or an indemnity order and whether the solicitor or barrister is ordered to pay 'the whole or any part of' the relevant costs; (6) provide reasons for the decision."
3. This procedure contemplates three hearings comprising the prima facie case, the final determination of whether services were provided without reasonable prospects, and whether an order should be made to pay any (and what) costs.
4. Whether this procedure suggested by the Court of Appeal for a s 348 of the LPA application is also appropriate for an application under s 99 of the CPA was not considered in Lemoto nor raised on this application. This question, and the utility of having the residue of the notices of motion of Ms Thomson and De Costi heard together, is a matter that should be the subject of a directions hearing.
5. The proceedings should be listed for directions at a convenient date to determine the appropriate procedure going forward.

Orders

1. The orders of the Court are: 1. Dismiss paragraphs 3 and 4 of the De Costi motion except insofar as they relate to the seventh cross-defendant. 2. Otherwise dismiss the application by Mr Newell and Mr Muriniti. 3. Reserve all questions of costs. 4. Residue of the notices of motion to be listed for directions at a convenient date.

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: 13 February 2015