Gigi Entertainment Pty Limited v Basil John Macree

Gigi Entertainment Pty Limited v Michael Karl Schmidt 15The principal proceedings are in an intense phase of preparation for the hearing on 22 August 2011, now a little over a week away. Orders and directions were made on Monday, 8 August 2011 for detailed further pre trial directions. 16In the principal proceedings the client, as plaintiff, seeks to recover damages from Mr Michael Schmidt, the tenant in respect of alleged breaches by the defendant of alleged obligations under the lease of the hotel known as the "Tattersall Hotel" Lithgow, New South Wales. The principal proceedings seem to be in the nature of a building case. In April 2010, a referee gave a determination about some aspects of the plaintiff's claim. Hall J adopted parts of the referee's report and rejected other parts in a determination in the proceedings in August last year: Gigi Entertainment Pty Limited v Schmidt [2010] NSWSC 906. The legal representatives on both sides argued the case before me on the basis that the effect of his Honour's decision was that the client's claim against Mr Schmidt, which had originally been in excess of $523,000, was reduced by his Honour's decision by an amount of $250,000. The client said in submissions that it was proposing to amend the amount claimed to pursue a larger sum. But this close to trial that may be quite a difficult application. 17The client is a recent purchaser of the Tattersall Hotel. In a three way arrangement with the vendor it reduced the purchase price by $250,000 and took on the liability to repay to Mr Schmidt at the end of the lease a tenant's bond in that same amount. Mr Schmidt has cross-claimed in the principal proceedings for that sum. The solicitor submits that if the client cannot amend the principal proceedings and the cross-claim succeeds that the client's return from the proceedings is likely only to be marginal. 18There was no evidence before the Court of solicitor's or counsel's advice about the client's prospects of success in the principal proceedings, evidence that is sometimes put before the Court on similar applications: see for example Pembroke J's decision in Tyneside Property Management Pty Limited & Ors v Hammersmith Management Pty Limited & Ors [2011] NSWSC 22. Mr Schmidt was a interested member of the public watching these proceedings closely. Although Ms Bateman, on behalf of the solicitor, tended in her submissions, as might be expected, to emphasise the risks in the principal litigation, and Mr Brown on behalf of the client to emphasise the strengths of the plaintiff's position, nothing was disclosed in these proceedings about the client's real prospects of success in the principal proceedings. I approach the matter on the basis that the client has a claim for a little over $250,000 but which may be neutralised by a cross-claim of about the same order but which may also be amended to claim a higher figure. 19This analysis starkly illustrates what happens in many building cases, that the cost of the parties can rapidly run ahead and even exceed the amount in issue.

The Client's Capacity to Pay Legal Costs 20The parties debated the client's capacity to eventually pay the solicitor's bill after assessment. This bears closely upon whether any security additional to the usual tripartite agreement should be ordered and whether such an order might stultify the client's capacity to conduct the principal proceedings. Two major factors here are the client's existing access to assets and the financial demands of the principal proceedings. 21The client has put the new solicitor in funds. The solicitor issued notices to produce to the client, the response to which indicated that as at 31 July 2011 O'Neill Partners held $72,306 to the client's credit in its trust account. That figure is now slightly out of date and I anticipate recent deductions have either been made from it or are liable to be made from it for O'Neill Partners' work in progress in the principal proceedings. 22The principals of the client are Mr George Gerzilis and Ms Gina Gerzilis. The uncontested evidence is that Mr Gerzilis owns real estate to the value of $300,000 mortgaged up to $120,000, with no other liabilities that exceed the value of his moveable assets. Ms Gerzilis is in a similar position but she has an equity of a little over $130,000 in her home. 23The client's corporate balance sheet shows negative equity of $328,054.62. Although this balance sheet has only been produced from management accounts, it gives little confidence in the client's capacity to pay the solicitor's costs from its own resources when called upon to do so. 24But Mr Brown declared in submissions that in the principal proceedings Gigi Entertainment is acting as a trustee and has an indemnity against all trust assets in respect of the proceedings. The balance sheet of the Gerzilis Family Trust of which the client is a trustee was also in evidence. But it shows a net equity of zero. The trust has total assets, including a freehold hotel (presumably the Tattersall Hotel) of $2,175,564.42 and total liabilities of the same amount. This evidence gives little confidence that the Trust will be able to source funds to pay the solicitor. 25A trust's creditor may have a right to payment from trust property by way of subrogation to the trustee's right of indemnity against trust assets: Re Raybould; Raybould v Turner [1900] 1 Ch 199, Benett v Wyndham (1862) 4 DF&J 259; 45 ER 1183 and Gatsios Holdings Pty Limited v Nick Kritharas Holdings Pty Limited (2002) ATPR 41-864; [2002] NSWCA 29. But in this case that right would appear to be of limited value to either the solicitor or indeed to Mr Schmidt were he to be successful. 26I mention at this point that although the 22 January 2008 costs agreement on one analysis may appear to have been made with Mr Gerzilis, it was accepted on all sides for the purposes of argument that Gigi Entertainment Pty Limited, the plaintiff in these proceedings, was the client and that Mr and Ms Gerzilis nevertheless had co-ordinate legal responsibility for payment of the solicitor's costs.

The Parties' Conduct 27Both parties pressed upon the Court the relevance of the conduct of the parties at the time of termination to the exercise of the Legal Profession Act , s 728 discretion. Not all of this conduct was dealt with in the principal judgment. For the reasons that appear below, although this conduct in my view can be taken into account in exercise of the discretion, it is not of decisive importance in this case. 28First there was contention about which of the Solicitors Rules applied. The Solicitors Rules reflect the authorities dealing with possessory liens; are applied subject to Legal Profession Act , s 728; and provide a framework for the steps that solicitors must observe where a former client seeks access to documents: B Bechara t/as Bechara & Co v Atie & Anor [2005] NSWCA 268 at [61]. The Solicitors Rules were originally made under Legal Profession Act 1987, s 57B. They remain in force and bind legal practitioners under Legal Profession Act 2004, Schedule 9, Clause 24. Rules 8 and 29 were the focus of submissions. "8. Ownership of clients' documents - Termination of retainer 8.1 The following Rules apply subject to any contrary order which may be made in respect of clients' documents by the Supreme Court of New South Wales under section 728 of the Legal Profession Act 2004. 8.2.1 A practitioner must retain, securely and confidentially, documents to which a client is entitled, for the duration of the practitioner's retainer and at least seven (7) years thereafter, or until such time as the practitioner gives them to the client or another person authorised by the client to receive them, or the client instructs the practitioner to deal with them in some other manner. 8.2.2 A practitioner is not entitled to recover from the client any costs for storage of documents as required by this Rule and is not entitled to charge any costs for retrieval from storage as requested by or on behalf of the client unless such costs have been disclosed to the client pursuant to the disclosure requirements set out in Part 3.2 of the Legal Profession Act 2004 or with the informed consent of the client. 8.2.3 "Costs" in this Rule includes fees, charges, disbursements, expenses and remuneration. 8.3 Upon completion or termination of a practitioner's retainer, a practitioner must, when requested so to do by the practitioner's client, give to the client, or another person authorised by the client, any documents related to the retainer to which the client is entitled, unless - 8.3.1 the practitioner has completed the retainer; or 8.3.2 the client has terminated the practitioner's retainer; or 8.3.3 the practitioner has terminated the retainer for just cause and on reasonable notice; and the practitioner claims a lien over the documents for costs due to the practitioner by the client. 8.4 Despite Rule 8.3, a practitioner who claims to exercise a lien for unpaid costs over a client's documents, which are essential to the client's defence or prosecution of current proceedings, must: 8.4.1 deal with the documents as provided in Rule 29, if another lawyer is acting for the client; or 8.4.2 upon the practitioner's costs being satisfactorily secured, deliver the documents to the client. 8.5 For the purposes of the above Rules - The documents to which a client of a practitioner should be entitled will include: 8.5.1 documents prepared by a practitioner for the client, or predominantly for the purposes of the client, and for which the client has been, or will be, charged costs by the practitioner; and 8.5.2 documents received by a practitioner from a third party in the course of the practitioner's retainer for or on behalf of the client or for the purposes of a client's business and intended for the use or information of the client. ... 29. Taking over a matter from another practitioner 29.1 Where a practitioner's retainer is terminated before the completion of the client's business to which it relates, and the client instructs another practitioner to take over the conduct of the client's business, the following rules shall apply, subject to any orders which may be made by the Supreme Court in respect of the delivery of documents pursuant to Section 728 of the Legal Profession Act 2004. 29.2 The first practitioner must promptly, on receipt of a direction in writing from the client, deliver to the second practitioner all relevant documents to which the client is entitled and any information which is necessary for the proper conduct of the client's business, unless the first practitioner claims a lien over the documents for unpaid costs. 29.3 If the client has terminated the first practitioner's retainer, the first practitioner may retain possession of the documents until the practitioner's costs are paid, or their payment to the practitioner is satisfactorily secured. 29.4 If the first practitioner has terminated the retainer and the client's documents are essential to the defence or prosecution of proceedings which are continuing before a Court, the practitioner must surrender possession of the documents to the client, upon the terms prescribed in Rule 8.4.2 or to the second practitioner, if so directed by the client, and, provided that the second practitioner - 29.4.1 holds the documents subject to the first practitioner's lien, if that is practicable, and ensures the first practitioner's costs are satisfactorily secured; or 29.4.2 enters into an agreement with the client and the first practitioner to procure payment of the first practitioner's costs upon completion of the relevant proceedings. 29.5 A practitioner who receives a client's documents from another practitioner pursuant to an agreement between the client and both practitioners, providing that the practitioner receiving the documents will pay the first practitioner's costs from money recovered on the client's behalf in respect of the business or proceedings to which the documents relate, must do all things which are reasonably practicable on the practitioner's part to ensure compliance with the agreement." 29Although my principal judgment resolved the question of who terminated the retainer, the solicitor still argued that he did not have to deal with the file under Rule 29 as Rule 8.4 provides, because Rule 8.3 applies. The contention was that Rule 8.3.3 was satisfied as the solicitor had terminated the retainer "for just cause and on reasonable notice". Therefore the solicitor was not obliged to hand the documents over at the direction of the client in accordance with Rule 29. 30This argument fails because the retainer was not terminated "on reasonable notice". The findings in my principal judgment establish that the solicitor gave immediate notice of termination of the retainer to the client at 12.40pm on 4 July; did not give the 14 day notice provided for by the costs agreement; and, reversed that position within 3.5 hours but not before the client had acted on it: Gigi Entertainment Pty Limited v Basil John Macree (2011) NSWSC 856 at [4], [7] - [14], [28] - [29]. This was not termination "on reasonable notice". The termination was close to hearing, it did not comply with the contract and the solicitor's second thoughts in reversing it after speaking to the Law Society are an admission by conduct that it should not have happened. Rule 8.3.3 is not satisfied. Rules 8.4 and 29 apply. 31The solicitor also put that he terminated the retainer for "just cause". I did not have to decide that question but it must be said the client's conduct in dealing with the barrister as he did, makes the solicitor's reaction understandable, especially where the solicitor professed at least to have attempted to reduce the client's fees in what was an essentially difficult and costly building case. 32Some of the parties' conduct during the retainer is also relevant. The client has paid the solicitor $146,218 in costs for the principal proceedings. Although the cost agreement between solicitor and client provides for the recovery of legal costs thirty days after the issuing of a bill of costs that complies with the Legal Profession Act , it is evident from the billing pattern itself, if nothing else, that the solicitor was willing to "carry" the client through a considerable period. The client complains that the solicitor reversed this position in June of this year, which no doubt led to the recent tensions between solicitor and client. But in my view the solicitor was merely at that time reinforcing the actual terms of the cost agreement in making it clear that he could not carry the client all the way through contested litigation. In many ways the solicitor's decision to defer issuing the third invoice for eighteen months has given the client not inconsiderable assistance in the conduct of the proceedings. Moreover the cost agreement did not provide for payment only at the end of the proceedings or only upon success. I do not think it was reasonable for the client to expect the solicitor to have carried him indefinitely. 33The question therefore now becomes the application of Rule 29.4. There was no issue between the parties that the client's documents are essential to its prosecution of its claim in the principal proceedings and to its defence of its cross-claim in those proceedings. The point at issue was whether a tripartite agreement should be entered into under Rule 29.4.2 between the solicitor, the client and the new solicitor or whether the new solicitor should hold the documents subject to the solicitor's lien and ensure that the solicitor's costs "are satisfactorily secured". Rule 8.4.2 achieves a similar result. Although the Court of Appeal has pointed to an "unhappy discontinuity" between Rule 8.4, Rule 29.3 and Rule 29.4: Bechara t/as Bechara & Co v Atie & Anor [2005] NSWCA 268 at [62]. 34The new solicitor offered by letter dated 10 August 2011 to enter into the standard tripartite deed provided for under the Solicitors Rules. Under the tripartite deed the client irrevocably authorises the new solicitor to allow any settlement, award or verdict to be paid to the solicitor upon the conclusion of proceedings; the solicitor agrees to transfer the file to the new solicitor; and the new solicitor promises to preserve the lien and pay the solicitor out of any available funds. But Ms Bateman contends that this represents insufficient security in this case.

Applicable Legal Principles 35When the Court considers making orders under Legal Profession Act , s 728 and the solicitor has terminated the retainer the Court: does not act automatically but in an equitable manner exercising its discretion having regard to "the nature of the case, the stage which litigation had reached, the conduct of the solicitor and the client respectively, and the balance of hardship which might result from the order the Court is being asked to make": see Stark v Dennett [2008] 2 Qd R 72; [2008] QCA 50 at [41] per Keane JA (Muir JA and Mullins J agreeing), citing Templeman LJ in Gamlen Chemical Co (UK) Ltd v Rochem Ltd [1980] 1 All ER 1049 at 625. 36The expression "satisfactorily secured" in Rules 8.4.2 and 29.4.1 has received judicial attention. In Bechara t/as Bechara & Co v Atie & Anor [2005] NSWCA 268 the Court of Appeal discussed the meaning of the expression at [64] and [65] as follows:- "[64] The expression "satisfactorily secured" should be understood, both by reference to the authorities dealing with possessory liens, and in its textual context, to refer to the provision, in lieu of payment, of something of monetary value which would ensure the satisfaction of the possessory lien. Like should be replaced with like. This is reinforced by r 29.5 which requires a practitioner 'who receives a client's documents from another practitioner pursuant to an agreement between the client and both practitioners, providing that the practitioner receiving the documents will pay the first practitioner's costs from money recovered on the client's behalf in respect of the business or proceedings to which the documents relate, [to] do all things which are reasonably practicable on the practitioner's part to ensure compliance with the agreement'. [65] Accordingly, in the case of litigation, as here, undertaken on payment only in the event of a successful outcome, that security would commonly, in my view, take the form of an agreement, to which both the former client and the substituted solicitor are parties, that the verdict or settlement monies would be retained by the substituted solicitors to the extent necessary to meet the former solicitor's costs. While the test of what constitutes satisfactory security is clearly objective, it might be accepted that a solicitor whose services had been terminated would be entitled to feel uncomfortable with anything less: cf Hughes v Hughes (at 228)."

Decision 37In my view Ms Bateman's arguments on behalf of the solicitor are persuasive, especially when the case is analysed by reference to the considerations Keane JA identifies in Stark v Dennett [2008] 2 Qd R 72; [2008] QCA 50 at [41]. There should be an order for satisfactory security in the solicitor's favour. The decisive issue in the circumstances of this case is the balance of hardship which might result from making an order of the Court . The other ordinary factors appear to me to be neutral. 38Nature of the Case and Stage reached. As to the nature of the case and the stage that the litigation has reached: the principal proceedings is a labour intensive building case which is close to hearing and in which very considerable energy has been invested by both the solicitor and the client before the retainer was terminated. Such proceedings are always expensive. Although the solicitor defaulted in his obligation to give proper costs disclosure, but especially given the nature of the proceedings, I also have no basis to infer that his fees are excessive or are likely to be heavily discounted upon assessment. The client has paid the solicitor's first two invoices and invested considerable sums in the litigation which it wishes to bring to a successful conclusion. But the solicitor has carried the client for a long period by any standard. The client's urgent requirement to have the matter ready for hearing on 22 August is counter balanced by the solicitor's 18 months of support to the litigation. Nor do I regard the solicitor's decision in not "carrying" the client beyond June 2011 as conduct to be counted against him. 39The Parties' Conduct. The respective conduct of the solicitor and the client in relation to the termination of the retainer is also a neutral factor. I am conscious that where a solicitor has terminated the retainer, in seeking to strike an equitable balance between the interest of the former solicitor and the former client, the Court will not be "overly fastidious to ensure the adequacy of the former solicitor's security for his or her fees": Stark v Dennett [2008] 2 Qd R 72; [2008] QCA 050 at [49]. Although the solicitor's termination occurred without reasonable notice this circumstance is mitigated to a considerable extent by the client's apparently deliberate conduct attempting to mislead the barrister. 40The Balance of Hardship. But in my view the balance of hardship is decisive. This consideration favours the making of a security order rather than leaving the parties to enter a tripartite agreement for several reasons. 41First, the client has not advanced a case that the making of any security order in addition to the tripartite agreement offered will stultify the client's prosecution of the new proceedings. Such an order seems to be a further financial burden to the client but not an overwhelming one. 42Second, the client's principals have equity in residential properties, which is available to be charged. I am mindful that that equity may also need to be used to fund the conduct of rest of the principal proceedings, so any present charging order that consumed all the remaining equity in those properties may have the effect of impeding the client's conduct of the principal proceedings. 43Third, the tripartite agreement is of little value to the solicitor where the fruit of the principal proceedings is uncertain as it is here, where the quantum of the claim is in contention, where the cross-claim may reduce the outcome for the client even further, and where there is evidence of uncertainty of any recovery from Mr Schmidt. 44Fourth, in the absence of his lien the solicitor can be anticipated to have real difficulties in competing for his fees potentially with the new solicitor and possibly with Mr Schmidt or other creditors of Gigi Entertainment Pty Ltd and Mr Gerzilis. 45Finally, the question is what is an appropriate amount to constitute satisfactory security. This is holistic valuation of what I regard as appropriate. Being a discretionary matter, it is something upon which reasonable minds might differ. In my view the appropriate security which should be provided is in the sum of $100,000. This figure gives the solicitor security as to almost half his costs but allows Mr and Ms Gerzilis to use the combined equity in their real estate to continue to fund the proceedings, if that is what they require. The parties argued about costs upon the giving of judgment and then the judgment proceeded. 46The defendant argues that the plaintiff should pay its costs. But it seems to me that both parties have had a measure of success, the client in my first judgment, and the solicitor in this judgment. I do not see why one or other party should bear the costs of this contest. I will therefore note that there will be no order as to costs to the intent that each party bear his or its own costs of these proceedings. 47Accordingly, the orders of the Court will be:-

1. Order pursuant to Legal Profession Act , s 728 that the defendant deliver to O'Neill Partners his file or files in respect of proceedings 2008/289478.
2. Order 1 is subject to a condition that the plaintiff first provide security to the defendant in the sum of $100,000 for the purpose of payment of any outstanding costs found to be due to the defendant, either by: (a) the retaining that sum as security in the trust account of O'Neill Partners for that purpose, or (b) the giving of a charge over real estate for that purpose or, (c) the giving of a charge over some other property to which the defendant agrees for that purpose.
3. The defendant is ordered to implement Order 1 by providing the file to the solicitor's for the plaintiff by 12 noon on Monday, 15 August 2011 provided that by 10am on Monday 15 August 2011 the plaintiff has provided security in accordance with Order 2.
4. Grant parties liberty to apply on 24 hours notice in relation to the implementation of these orders.
5. Note that there will be no order as to costs to the intent that each party will bear his or its own costs of the proceedings.
6. The Summons is otherwise dismissed.

Amendments 15 August 2011 - Typographical errors Amended paragraphs: Category on Coversheet- changed to principal judgment.Paragraph 32 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: 15 August 2011