Having come to the view (at 176) that on the evidence it was impossible for the Court to make out on which side the truth lay, he struck the plaintiff's name out.
51 Hood v Phillips (1842) 6 Beav 176 is another decision of Lord Langdale MR, which held at 177-8:
"Whenever the question arises, whether the authority has been given or not, and it becomes the subject of doubt and argument, the onus of proving it lies on the solicitor."
52 To similar effect is the decision of Wood VC in Maries v Maries (1853) 23 LJ Ch 154, and that of Lord Langdale MR in Allen v Bone (1841) 4 Beav 493; 49 ER 429.
53 These nineteenth century cases are not ones which made the distinction, which is now made in the law, between an onus of proof, and an onus of adducing evidence. If those nineteenth century cases cannot adequately be explained or distinguished on the basis that they were not making that distinction, I would, in light of the principles and authority earlier referred to, decline to follow them.
54 The distinction between an onus of proof and an onus of adducing evidence is of particular relevance in the present situation. Where party A has the legal onus of proving a negative proposition, and relevant facts are peculiarly in the knowledge of party B or where party B has the greater means to produce evidence relating to those facts, then provided party A establishes sufficient evidence from which the negative proposition may be inferred, party B then comes under an evidential burden, or an onus of adducing evidence: Hampton Court Ltd v Crooks (1957) 97 CLR 367 at 371-372; Apollo Shower Screens Pty Ltd & Anor v Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561 at 564-5; Baiada & Ors v Waste Recycling & Processing Service Of NSW [1999] NSWCA 139; (1999)130 LGERA 52 at [55].
55 I conclude that in the present case the plaintiffs bear the legal onus of proving that there is no retainer given by the second and third defendants, but that (in the words of Hunt J in Apollo Shower Screens Pty Ltd & Anor v Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561 at 565):
"… provided that the plaintiffs have established sufficient evidence from which the negative proposition may be inferred, the defendant carries what has been called an evidential burden to advance in evidence any particular matters with which (if relevant) the plaintiffs would have to deal in the discharge of their overall burden of proof … the plaintiffs' burden of proof of the negative proposition for which they contend is not as difficult in this case as it might otherwise have been because of the defendants' greater means to produce evidence which contradicts that proposition."
Is Ostensible Authority Relevant, for Present Purposes?
56 I accept that for the purpose of deciding whether a solicitor has been validly retained to act for a company in litigation, it is the actual authority of the person who has purported to act on behalf of the company which is of importance, not the ostensible authority of that person: Harry S Bagg's Liquidation Warehouse Pty Ltd v Whittaker (1982) 44 NSWLR 421; AW & LM Forrest Pty Ltd v Beamish (1998) 146 FLR 450 at 458.
Facts Relevant to Actual Authority
57 It is common ground that there has been no resolution of directors of either company to authorise the appearance in the proceedings. Nor has there been any informal consensus of the members, of the type that can sometimes amount to a decision by a corporation.
58 The "General Retainer" document does not suffice to confer authority on the fourth defendant. It is given only by the second defendant, and so could not be even part of a source of authority for the fourth defendant to act on behalf of the third defendant.
59 Even concerning the second defendant, it does not confer authority to act. There are numerous aspects of its verbiage, which are some of the words that I have emphasised in the extract from the general retainer at para [25] above, which suggests that it is a document directed to a particular piece of litigation which was either on foot or contemplated in August 2001. There is no evidence about the circumstances in which the document came into existence. As Michael signed the document, I can infer that he has knowledge of those circumstances. Even bearing in mind that it is the plaintiffs who bear the onus of proving lack of authority, the fact that the defendants have not explained those circumstances in evidence enables me to draw more strongly the inference which is available from the words of the document that it related to a single piece of litigation. As the present proceedings were not on foot in 2001, it could not have been this litigation.
60 A separate way in which the "general retainer" might be a source of authority is in the section headed "General Advice - annexure to fee agreement" which contemplates the bringing of different legal proceedings. However, the authority to commence, continue, or defend legal proceedings which is there conferred arises only "if instructed". Thus, that portion of the "general retainer" could be a source of the fourth defendant's authority to appear in the present litigation only if the person who instructed him to appear in the present litigation was himself acting on behalf of the second defendant when giving that instruction. The "general retainer" document thus does not achieve anything which is not achieved by a direct enquiry into whether the second defendant gave instructions to appear in these proceedings.
61 The various legal bills relating to the second defendant do not, in my view, advance the matter. As they all relate to the second defendant, they could not provide any basis for the fourth defendant having authority to act on behalf of the third defendant.
62 Even if it were the case that those fee memoranda related to matters concerning which the fourth defendant was validly instructed on behalf of the second defendant, the fact that a solicitor is instructed to act on behalf of a client concerning one matter, confers no authority to act concerning a different matter. Indeed, in Hawkins Hill Gold Mining Co v Briscoe (1887) 8 NSWR (Eq) 123, at 129-130, Stephen J (with whom Deffell and Owen JJ concurred) held that a general authority to act for a client is not enough to authorise a solicitor to commence a suit, and a more specific authority to do so is needed - though a general authority to institute suits would suffice. As well, there is a question about whether those fee memoranda indeed relate to matters concerning which the fourth defendant was validly instructed on behalf of the second defendant. The terms of the fee memoranda, and the involvement of Mr Patakas, suggests that by the time of the work to which they relate the brothers were already at loggerheads.
Implied Actual Authority of a Managing Director or De Facto Managing Director
63 I shall assume, without deciding, that the pleading of the plaintiffs that Brett and Michael are joint managing directors, admitted by the second, third, and fourth defendants, is sufficient to establish, as against them, that Michael is indeed a managing director of the company. I shall also assume, without deciding, that it is possible for the third defendant to appoint Michael as Managing Director, even though its Articles of Association do not create any such office. I shall (without deciding that it is proper to do so) ignore any limitations on Michael's authority which might arise from him being a joint managing director rather than a sole managing director.
64 There is no resolution of either company identifying Michael's duties as Managing Director, nor are such duties defined by the Articles of either company.
65 Counsel for Michael pointed out that para 19 of the Amended Statement of Claim said:
"It is an express term of the Shareholders' Agreement that each of the Hawksfords have established areas of responsibility within Bremick for its management, including management of the Bremick Business, that are known to and accepted by each other, which are as follows:
a) Brett Hawksford shall have the responsibility, control and authority over Bremick's respective areas of marketing and sales, the sales and marketing department of Bremick; and shall hold the position of Marketing and Sales Director, in addition to his position as Joint Managing Director of Bremick (together with Michael Hawksford);
b) Michael Hawksford shall have the responsibility, control and authority over Bremick's purchasing, finance and warehouse management."
66 He submits that, if Brett is marketing and sales director, Michael has authority over other areas of the operations of the second defendant, which would include giving instructions to solicitors on behalf of the company.
67 In my view, para 19 of the Amended Statement of Claim does not lead to that conclusion. Firstly, that paragraph is not admitted by any defendant and so does not give rise to the sort of admission on the pleadings which is an incontrovertible fact for the purpose of proceedings in which there is such an admission. Secondly, even if it had any evidentiary force (cf Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70 at 85-6, 98 and cases cited at Ritchie's Supreme Court Practice para 18.3.2 - though I note that Brett has verified the Amended Statement of Claim), it would need to be taken as a whole. Its allegation of Michael's area of responsibility being "Bremick's purchasing, finance and warehouse management" does not, in my view, cover authority to instruct solicitors for the second defendant concerning a dispute about the administration and internal mode of operation of the company, like the present one. Thirdly, in any event the allegation says nothing about Michael's authority in relation to the third defendant.
68 When a person is given the title of "Managing Director" by a company, that brings with it implied actual authority to do all such things as fall within the usual scope of that office: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 583 per Lord Denning MR; State Bank of Victoria v Parry & Ors (1990) 2 ACSR 15 at 29 per Nicholson J; Corporate Affairs Commission (NSW) v Transphere Pty Ltd (No 2) (1985) 9 ACLR 1005 at 1009 per Young J; Fraser Henleins Pty Ltd v Cody (1945) 70 CLR 100 at 113, 129, 134-5. Thus, for example, it is part of the implied actual authority of the managing director of a company to order goods of a category in which the company deals: Capper's Pty Ltd v L & M Newman Pty Ltd [1960] NSWR 143.
69 Concerning whether a managing director has implied actual authority to instruct solicitors in litigation, Lehane J in Nece Pty Ltd v Ritek Incorporation; Ritek Incorporation v Nece Pty Ltd & Anor (1997) 24 ACSR 38 at 43 said:
"No doubt because in most cases a managing director's actions are likely, if necessary, to be ratified, the question in practice rarely arises. Where it does arise, however, it is unlikely to be answered by reference to an abstract or general question such as, did the managing director have authority to instruct solicitors for the company?
It is, I should think, highly unlikely that a managing director entrusted with the day to day management of a company would not have implied authority to instruct solicitors to take proceedings to recover debts or to resist claims against the company where the transactions concerned occurred in the daily operation of the company's business. It would not follow, however, that the managing director should be regarded as having implied authority, if the evidence went no further, to instruct solicitors to oppose a winding-up application of any apparent substance. Rather, it might be expected that that would be a matter with which the board would be directly and immediately concerned.
… while evidence of what happened in the daily business affairs of Nece might be relevant to the question of the managing director's authority to instruct solicitors in matters arising in the course of those daily affairs, it would not, in my view, cast any light on the implied authority of the managing director to take steps (including instructing solicitors) in response to a winding-up application by Ritek. …
It is possible to imagine circumstances which might lead to a finding of implied authority for that purpose: for example, if it were established that, during the course of the transactions giving rise to the claim founding the statutory demand, and perhaps also the circumstances giving rise to an alleged offsetting claim, Mr Sidney consistently, and to the knowledge of the board, represented the interests of Nece in its dealings with Ritek. Such evidence might establish that Mr Sidney was recognised by the directors of Nece as representing Nece in all, or substantially all, aspects of the relevant transactions; and, if that were so, it might not be a difficult step to conclude that he was authorised equally to deal with disputes arising out of the transactions, including, should Ritek choose to pursue any claims it might have by initiating winding-up proceedings, by taking steps on behalf of Nece in those proceedings, including making an application under s459G to set aside a statutory demand. But that is speculation."
70 The litigation which Brett brings against the second and third defendants makes allegations of a kind, relating to the internal administration of the company, which it would not be within the usual scope of a managing director's authority to deal. Michael did not have implied actual authority from either the second or third defendant to instruct solicitors to deal with them.
71 Nece Pty Ltd v Ritek Incorporation; Ritek Incorporation v Nece Pty Ltd & Anor (1997) 24 ACSR 38 involved a company with two shareholders, and two directors, who were in deadlock. The following remarks of Lehane J at 46 apply equally in the present case.
"The reason there is no authority, and no ratification, is that it is not given because one of the parties - particularly, one the directors - whose affirmative vote is needed in order that it should be given is unwilling to give that affirmative vote. It could hardly be said, where lack of authority resulted from a positive decision of the competent authority of a company - ordinarily the board of directors - to refuse it, that an act done in purported exercise of the authority thus refused was invalid by reason of a contravention of the articles. That must equally be true, I think, if authority is sought by way of a proposal to the board but refused. The situation can be no different, in my view, where in the circumstances it is plain that authority, if sought, would be refused."
Agency of Necessity
72 The second, third and fourth defendants rely upon the doctrine of agency of necessity as enabling Michael to act on behalf of the second and third defendants. They rely upon Burns, Philp & Company Limited v Gillespie Brothers Proprietary Limited (1947) 74 CLR 148 at 175, where Latham CJ said:
"But the phrase "agent of necessity" is, in my opinion, only a convenient expression used in rationalizing to some extent the rights and obligations which are created in certain circumstances of emergency. It is a "shorthand" method of saying that such circumstances may create an authority to act in relation to the property of another person or to impose a liability upon him which would not exist in ordinary circumstances. Thus in some circumstances a wife may be an agent of necessity to pledge her husband's credit for necessaries. She may have no express authority to bind him, and the husband may even expressly repudiate her authority. But he cannot effectively do so. The authority is said to be irrevocable - see cases in Halsbury's Laws of England, 2nd ed Vol 16, p 700. In such a case there is no express or implied agreement that the wife shall be the agent of the husband. The phrases of the law of agency are used to describe, not the means of constituting the relationship which enables the wife to create a liability in the husband, but the result which follows from the marital relationship in certain circumstances of necessity. The so-called agency arises as what has been described an irrebuttable presumption of law - see Bowstead on Agency, 8th ed (1932), Art 15, pp 31, 32. Agency of necessity arises from action in circumstances of necessity and not from any real or presumed agreement between the person who becomes an "agent of necessity" and the person in whose interest he has acted."
73 The judgment of Latham CJ was a dissenting one, but even if it is taken at face value it does not suggest that the doctrine of agency of necessity has any operation outside the scope of a wife being the agent of her husband, or a ship's master being the agent of the owners of the ship and cargo. More recent textbook discussion does not suggest that the doctrine was ever regarded as capable of conferring authority on anyone other than ships' masters, carriers by land, acceptors for honour of bills of exchange, bailees, and wives or de facto wives - and even some of those categories are debateable: Bowstead & Reynolds on Agency 16th ed paras 4-001 - 4-012; Dal Pont, Law of Agency paras 6.1 - 6.14. Its application to wives has now been abolished in New South Wales by section 7 Married Persons (Equality of Status) Act 1996. What matters for present purposes is that it is a doctrine of the common law, which has never been regarded as applying to a corporation that is unable to act because its internal organs are in a state of deadlock.
74 Equity developed a doctrine applicable to corporations which had some analogies with the common law's doctrine of agency of necessity. The law developed from Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 and had as its starting point that the company was the proper plaintiff to enforce rights of the company, but there were some exceptions to that general principle. It is not necessary, for present purposes, to examine the full scope of those exceptions. (They are discussed in Ford Austin and Ramsay, Ford's Principles of Corporations Law 8th ed para [11.250 - 11.340].) One category of exception permitted a shareholder sometimes to bring a derivative action, in the name of the company, to assert the company's rights when the board could not or would not act. However it is noteworthy that the principle in Foss v Harbottle is referred to as the "proper plaintiff rule" (not the "proper defendant rule"), and that what the exceptions sometimes allowed was a "derivative action" (not a "derivative defence"). More general principles of the law of procedure, applicable to any action, might possibly have given the court power to enable someone to intervene in court proceedings brought against a company if the company was not being represented (section 23 Supreme Court Act 1970; Shales v Lieschke (1985) 3 NSWLR 65 at 80-1, 90; United States Tobacco Co v Minister for Consumer Affairs (1988) 20 FCR 520; Rushby v Roberts [1983] 1 NSWLR 350 at 353-5 cf 360; Corporate Affairs Commission v Bradley [1974] 1 NSWLR 391. The reversal of the actual decision in Shales v Lieschke by J v Lieschke (1987) 162 CLR 447 was on the basis that a parent in proceedings which challenge the parent's right to continue to have custody of the child has a right to be heard, rather than the court having a discretionary power to permit the parent to be heard - that does not cut down the scope of the Court of Appeal's decision about when discretionary intervention can be permitted.)
75 The general law's principles on these topics, of derivative actions and interventions to put a case that a company being sued is not itself putting, are now abolished. Section 236 and 237 of the Corporations Act 2001 (Cth) now provide:
"236(1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:
(a) the person is:
(i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or
(ii) an officer or former officer of the company; and
(b) the person is acting with leave granted under section 237.
(2) Proceedings brought on behalf of a company must be brought in the company's name.
(3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
237(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2) The Court must grant the application if it is satisfied that:
(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and
(e) either:
(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.
(3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:
(a) the proceedings are:
(i) by the company against a third party; or
(ii) by a third party against the company; and
(b) the company has decided:
(i) not to bring the proceedings; or
(ii) not to defend the proceedings; or
(iii) to discontinue, settle or compromise the proceedings; and
(c) all of the directors who participated in that decision:
(i) acted in good faith for a proper purpose; and
(ii) did not have a material personal interest in the decision; and
(iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv) rationally believed that the decision was in the best interests of the company.
The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
(4) For the purposes of subsection (3):
(a) a person is a third party if:
(i) the company is a public company and the person is not a related party of the company; or
(ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and
(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company."
76 This statutory power is sufficient to enable the Court to grant leave in appropriate cases for a person to, in effect, conduct the defence of an action on behalf of a company which is being sued. The extensive scope of the power is made clear by sections 241 and 242, which provide:
"241(1) The Court may make any orders, and give any directions, that it considers appropriate in relation to proceedings brought or intervened in with leave, or an application for leave, including:
(a) interim orders; and
(b) directions about the conduct of the proceedings, including requiring mediation; and
(c) an order directing the company, or an officer of the company, to do, or not to do, any act; and
(d) an order appointing an independent person to investigate, and report to the Court on:
(i) the financial affairs of the company; or
(ii) the facts or circumstances which gave rise to the cause of action the subject of the proceedings; or
(iii) the costs incurred in the proceedings by the parties to the proceedings and the person granted leave.
(2) A person appointed by the Court under paragraph (1)(d) is entitled, on giving reasonable notice to the company, to inspect any books of the company for any purpose connected with their appointment.
(3) If the Court appoints a person under paragraph (1)(d):
(a) the Court must also make an order stating who is liable for the remuneration and expenses of the person appointed; and
(b) the Court may vary the order at any time; and
(c) the persons who may be made liable under the order, or the order as varied, are:
(i) all or any of the parties to the proceedings or application; and
(ii) the company; and
(d) if the order, or the order as varied, makes 2 or more persons liable, the order may also determine the nature and extent of the liability of each of those persons.
(4) Subsection (3) does not affect the powers of the Court as to costs.
242 The Court may at any time make any orders it considers appropriate about the costs of the following persons in relation to proceedings brought or intervened in with leave under section 237 or an application for leave under that section:
(a) the person who applied for or was granted leave;
(b) the company;
(c) any other party to the proceedings or application.
An order under this section may require indemnification for costs."
77 It may be that a separate source of power to make such an order is to be found in sections 232 - 234 Corporations Act 2001, if the requirements of section 232(d) or (e) are met. So far as relevant sections 232 and 233 provide:
"232 The Court may make an order under section 233 if:
(a) the conduct of a company's affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d) contrary to the interests of the members as a whole; or
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.
233(1) The Court can make any order under this section that it considers appropriate in relation to the company, including an order:
…
(c) regulating the conduct of the company's affairs in the future;
…
(f) for the company to institute, prosecute, defend or discontinue specified proceedings;
(g) authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
…
(j) requiring a person to do a specified act."
78 As well, in at least some situations of corporate deadlock about what if any steps should be taken concerning litigation against a company, the provisions of section 1324 Corporations Act 2001 (Cth) may provide a means whereby the deadlock is broken.
79 A further way in which the interests of the company might in practice become represented in the litigation is if some sort of external administrator of the company, or receiver and manager of all or some of its assets, were to be appointed.
80 In all these circumstances I do not accept that there is any affront to justice, such as might encourage me to extend the law, in Brett being able, by non-cooperation, to prevent the usual organs of the company from making a decision that the company be represented in this litigation. In saying that, I am not prejudging whether any application by Michael under any of the statutory sections ought succeed. There are various matters of which the Court must be persuaded before an application under section 237 can succeed: Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313, and each of the other possible routes to a court order authorising the defence of the proceedings has its own requirements to be satisfied. Rather, the sections provide a range of ways by which a deadlock can be broken, in circumstances that Parliament has decided are appropriate ones. If, on an application under any of these sections the Court were to decide it as not appropriate for Michael to be given the conduct of the defence of the action on behalf of the company, the continuation of the deadlock would simply be the consequence of Michael and Brett being shareholders and directors in two companies which were set up with a structure in which deadlock is a distinct possibility. The law does not enable Michael to act unilaterally to break the deadlock; he can do so only if the Court approves, and on terms (including as to the financing of the defence) that the Court sets.
Election/ Waiver /Estoppel
81 The second, third and fourth defendants submit that the plaintiffs have lost any capacity they might have once had to question the authority of Michael to instruct solicitors for the second and third defendants in these proceedings. This arises, they say, from the sequence of events set out in paras [14] - [18] above, in which the plaintiffs not only delayed for nearly two months in filing a Notice of Motion challenging the retainer of the fourth defendant, but in that time took active steps to seek and obtain orders from the Court which imposed obligations on the second and third defendants. Further, they submit the bringing of the present Notice of Motion has something of a whiff of abuse of process about it, in seeking to stifle the second defendant's cross-claim.
82 The plaintiffs say it was appropriate for them to enquire by what right the fourth defendant claimed to have authority to act for the second and third defendants, and that they made that enquiry to the fourth defendant on 28 September 2004 (para [22] above). As well, on 28 September 2004 the solicitors for the plaintiffs wrote to the solicitors for Michael saying:
"We refer to the Notice of Appearance by Mr Daley of Colin Daley Quinn on behalf of Bremick Pty Ltd and BMB Investments Pty Ltd dated and filed 13 September 2004.
We note that our respective clients are the two directors of Bremick and BMB and that it goes without saying that our client did not agree to the retainer of Colin Daley Quinn. Accordingly, we request the following from your client as the only other director of each of those companies."