Holmes v DMS Pacific Exports

DECISION : Plaintiffs to pay the costs of the defendants of the proceedings. Katerina Muc and Gregory Harrison Healey jointly and severally to pay the defendants' costs of the proceedings on an indemnity basis. Any payment on account of those costs made by them to the defendants will pro tanto discharge the plaintiffs' liability to pay the defendants' costs

CATCHWORDS : LEGAL PRACTITIONERS - Conflict of interest - Verification by solicitor of statement of claim where not qualified to do so and without proper basis - COSTS - Legal practitioners ordered to pay successful defendants' costs on an indemnity basis - Costs of successful defendants to be borne by unsuccessful plaintiffs on party and party basis

Uniform Civil Procedure Rules 2005 (NSW) LEGISLATION CITED : Legal Profession Act 2004 (NSW) Civil Procedure Act 2005 (NSW)

Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 Holmes v DMS Pacific Exports Pty Ltd [2007] NSWSC 137 CASES CITED : Park v Allied Mortgage Corporation Limited (1993) ATPR (Digest) 46-105 Australian Securities Commission v Bell (1991) 32 FCR 517 Lemoto v Able Technical Pty Limited (2005) 63 NSWLR 300 Milne v Attorney-General for the State of Tasmania (TAS) (1956) 95 CLR 460

Paul Holmes (First Plaintiff) PARTIES : Maria Luisa Holmes (Second Plaintiff) DMS Pacific Exports Pty Limited (First Defendant) Jeffrey Neil Thomas (Second Defendant)

Mr R.C. Byrne (Solicitor) (Plaintiffs) COUNSEL : Mr R.G. Forster SC with Mr S Docker (First Defendant) Mr N. Maley (Solicitor) (Ms K. Muc & Mr G.H. Healey)

Mr R C Byrne (Plaintiffs) SOLICITORS : G.H. Healey & Co (First Defendant) Thomson Playford (Ms K. Muc & Mr G.H. Healey)

• 10 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2329/2006; 3342/2006 HOLMES V DMS PACIFIC EXPORTS PTY LTD; RE: KATERINA MUC AND GREGORY HARRISON HEALEY JUDGMENT

1 This case is a paradigm illustration of solicitors impermissibly engaging in a situation where their own interests conflicted with the duty owed by them to their clients: Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 at 170 per Street CJ. 2 On 28 February 2007 I gave judgment on the principal issues in this matter. I dismissed the plaintiffs' claims: Holmes v DMS Pacific Exports Pty Ltd [2007] NSWSC 137 ("the principal judgment"). This judgment should be read in conjunction with the principal judgment. 3 I did not in the principal judgment determine issues of costs. 4 The plaintiffs' solicitors on the record until after the principal judgment were G H Healey & Company ("the firm"), the sole principal of which is Ms Katerina Muc. Mr Gregory Harrison Healey, who had carriage of the matter before me, is employed by Ms Muc as a consultant. Ms Muc and Mr Healey are together referred to as "the Practitioners".

5 During the course of the hearing (which took place over three days commencing on 19 February 2007) there emerged a number of aspects of the conduct of the Practitioners which gave rise to concern on my part.

6 The predicament in which the plaintiffs had found themselves as against DMS on the principal claim was the result of Mr Healey failing to ensure that DMS was paid within time under the Agreement As To Judgment ("the Agreement"). He failed to do so even though the firm was holding money specifically paid to it in trust for that purpose and despite having received a reminder from Mr Holmes on the last day for payment to pay. 7 Notwithstanding a clear and obvious conflict between the Practitioners' duty as solicitors to their clients on the one hand and the protection by them of their own personal interests (given their obvious potential exposure to liability to the plaintiffs for professional neglect) on the other, the firm remained on the record for the plaintiffs, and the carriage of the matter before me remained in the hands of Mr Healey. Mr Healey was also a witness in the proceedings. 8 In Park v Allied Mortgage Corporation Limited (1993) ATPR (Digest) 46-105 at 53,469 Davies J dealing with a not dissimilar factual situation to the present one held that: "Parties to proceedings should have independent advice in respect of the institution and conduct of proceedings and that should plainly be seen to be the case. That cannot be seen when an issue in the proceedings is whether negligence on the part of the applicants' solicitor had caused the applicants' loss." 9 It has also been held that it is in the best interests of the community, the legal profession and the attainment of justice that lawyers do not represent clients where there could be a reasonably held perception that they are compromising the integrity of the profession for the pursuit of personal advantage arising from their representation, whatever may be the ultimate truth of the facts which underlie that perception: Australian Securities Commission v Bell (1991) 32 FCR 517 at 520 per Lockhart J. 10 I raised the issue of this conflict with counsel for the plaintiffs on the first day of the hearing. I was assured that the plaintiffs had received independent advice. It has since come to light that Mr Healey first referred the plaintiffs to an independent solicitor on 9 February 2007 and they received that advice less than a week before the commencement of the hearing. 11 As Davies J did in Park v Allied Mortgage Corporation Limited, having received counsel's assurance, I permitted the matter to proceed. 12 As the hearing proceeded, certain other matters became evident which appeared to me to be symptomatic of the position of conflict in which the solicitors stood. 13 The first related to verification of the statement of claim dated 21 June 2006 filed on behalf of the plaintiffs. The verifying affidavit required by r 14.23 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") was deposed to by Ms Muc when she was not a person qualified to give it under UCPR r 35.3(1). More importantly, the evidence in the proceedings gave rise to no suggestion of any knowledge, involvement or participation on the part of Ms Muc in the events out of which the proceedings arose so as to have put her in a position honestly to swear that affidavit. 14 The second related to testimony given by Mr Holmes under cross-examination which on one view appeared to indicate that the proceedings were being conducted by the Practitioners without proper instructions from the plaintiffs to prosecute them. 15 The third concerned the certificate, included in the statement of claim, signed by Ms Muc, certifying as required by s 347 of the Legal Profession Act 2004 (NSW) "that there are reasonable grounds for believing on the basis of provable facts and a reasonably arguable view of the law that the claim for damages in these proceedings has reasonable prospects of success". 16 The claims brought by the plaintiffs included a claim for damages against the second defendant, Mr Thomas, a solicitor and a director of DMS, on the grounds that he aided and abetted DMS and was knowingly concerned in its contravention of s 52 of the Trade Practices Act 1974 (Cth) and was a person involved in the contravention by it of s 42 of the Fair Trading Act 1987 (NSW). No other claim was brought against Mr Thomas and the claim against him was abandoned during the hearing. 17 By the end of the hearing it seemed to me that there was an issue as to whether the certificate as to prospects had been properly given, particularly with respect to the damages claim against Mr Thomas. 18 Having regard to these matters, and immediately after having given the principal judgment, in accordance with par 11 the Practice Note SC Gen 5 (which is concerned with costs orders against legal practitioners) and consistently with the approach considered in Lemoto v Able Technical Pty Limited (2005) 63 NSWLR 300, I invited submissions from the Practitioners upon a number of specific matters and any other matter or circumstance which they considered relevant to the exercise of the Court's discretion to make an order that one or other or both of them pay the costs of the proceedings, and if it were appropriate to make such an order, the scale of costs that should apply. See also s 99 of the Civil Procedure Act 2005 Act (NSW).

19 I also invited the defendants to make submissions. 20 I gave directions that the Practitioners provide written submissions by no later than 14 March 2007, that any submissions from the defendants be delivered by 21 March 2007, and that any submissions in reply from the Practitioners be delivered by 28 March 2007. 21 I received submissions on behalf of the Practitioners, signed by a solicitor, dated 14 March 2007. Those submissions did not deal with the specific matters upon which I had directed submissions, presumably because the solicitor had not been properly instructed by the Practitioners. 22 The matter was re-listed before me on 19 March 2007 when I extended the time for written submissions from the Practitioners to 28 March 2007 to afford them further time to address the specific matters. On that occasion Mr Byrnes, solicitor, appeared for the plaintiffs and has continued to appear for them before me. On that occasion I stood the matter over to 30 March 2007. 23 I received supplementary submissions on behalf of the Practitioners dated 28 March 2007. 24 On 30 March 2007 I stood the matter over for directions to 26 April 2007. 25 I received written submissions on behalf of the defendants dated 16 April 2007. 26 On 26 April 2007 I stood the matter down to 8 May 2007 for brief oral submissions. 27 On 8 May 2007 the Practitioners, represented by Mr Maley, solicitor, unconditionally offered and consented to pay the defendants' costs of the proceedings on an indemnity basis as agreed or assessed. He proffered short minutes of order signed by a solicitor on behalf of the Practitioners reflecting an order to that effect. 28 On this occasion Mr Forster SC who appeared with Mr Docker for the defendants, drew to my attention, and it was accepted by Mr Maley, that Mr Healey is an undischarged bankrupt. He put that in these circumstances the defendants should not be put to having to recover their costs from the Practitioners without any recourse to the unsuccessful plaintiffs in the proceedings, and that costs should, in addition, follow the event. 29 Mr Byrnes for the plaintiffs put that the circumstances which had arisen here were such that the plaintiffs should not be ordered to pay the defendants' costs but that they (the defendants) should look exclusively to the Practitioners. He sought, and I granted him leave, to put on affidavit evidence on that issue together with brief written submissions. I gave the other parties liberty to respond with brief written submissions. Those present on that occasion consented to the determination of the outstanding questions of costs without any further hearing. 30 I received written submissions on behalf of the plaintiffs dated 22 May 2007 together with an affidavit of Gregory Miles, a solicitor in the employ of Mr Byrnes and an affidavit of Mr Holmes each deposed to on 21 May 2007. I received written submissions from the defendants dated 24 May 2007. 31 The gravamen of the defendants' submissions is that the Practitioners should be ordered to pay their costs on an indemnity basis but that the defendants should not be required bear the risk of non-payment by the Practitioners. They put that they are entitled to their costs from the plaintiffs (although not on an indemnity basis) in accordance with the ordinary rule (now enshrined in UCPR r 42.1). 32 The substance of the plaintiffs' position is that just as it is appropriate that the Practitioners pay the defendants' costs of the proceedings on an indemnity basis, so they should be ordered to pay the plaintiffs' costs on that scale. 33 They submit that had they received independent advice at an earlier stage than they did, a claim would have been made against the firm and it may well have been unnecessary to institute any action against the defendants. 34 They assert that they were unaware of the issue of the statement of claim, were never asked to verify it, and until 9 February 2007, when they were served with a subpoena to attend the hearing, they were unaware of the proceedings. They put that the proceedings were commenced without their express authority. 35 In the submissions on behalf of the Practitioners, it is maintained that they were instructed by the plaintiffs to commence the proceedings. 36 I do not consider it appropriate, nor do I consider that I am in a proper position, to determine whether the Practitioners had the authority (express or implied), of the plaintiffs to prosecute the proceedings at any particular stage or at all. That determination requires resolution of disputes of fact which cannot properly be resolved in the context of this costs determination. 37 If the plaintiffs are to seek redress for any detriment arising from the conduct of the Practitioners (including from the original failure to ensure payment on time under the Agreement and any costs liability which falls on them as a consequence of failure in the proceedings), that dispute is properly to be ventilated in another forum in circumstances where a full trial of the facts is possible, not in the present summary procedure. 38 The circumstances in which the plaintiffs find themselves is not due to the conduct of the defendants. 39 There is no good reason why the ordinary principle, now enshrined in UCPR r 42.1, that costs should follow the event, should not apply as between the plaintiffs and the defendants: Milne v Attorney - General for the State of Tasmania (1956) 95 CLR 460 at 477. There is no basis however, for an order that the plaintiffs be ordered to pay any costs on an indemnity basis.

40 I accordingly propose to order that the plaintiffs pay the defendants' costs of the proceedings. 41 This is however, a clear case where the Practitioners should be ordered to pay the costs of the defendant on an indemnity basis and by their consent they have acknowledged it. 42 It is a case where the Practitioners should have guided their clients to obtain early independent advice. Had this been the case, it would have almost been inevitable that an appropriate cross-claim against them would have been made. In any event, they should not have remained on the record for the plaintiffs.

43 Quite properly, Mr Maley did not seek to justify the circumstances concerning the verification affidavit. Those circumstances are additional compelling reasons why the order is appropriate. 44 In their written submissions dated 14 March 2007 the Practitioners disclosed an advice from senior counsel as to prospects in the proceedings upon which they relied in submitting that the prospects certificate was appropriately given. 45 Significantly, the opinion does not assist Ms Muc with respect to the claim which was prosecuted against Mr Thomas. At best it may have provided her with a basis to have concluded that the view of the law expressed in it with respect to the claim against DMS was reasonably arguable.

46 On 8 May 2007 Mr Forster indicated to me that the defendants would consent to orders in the following terms: a The plaintiffs are to pay the defendants' costs. b Mr Healey and Ms Muc are to pay the defendants' costs on an indemnity basis and that any payment on account of those costs made by Mr Healey or Ms Muc to the defendants will pro tanto discharge the plaintiffs' obligations.

47 The orders of the Court will be as follows: · The plaintiffs are to pay the defendants' costs of the proceedings.

· Katerina Muc and Gregory Harrison Healey are to pay the defendants' costs of the proceedings on an indemnity basis. That liability shall be joint and several. Any payment on account of those costs made by either of them to the defendants will pro tanto discharge the plaintiffs' liability to pay the defendants' costs. ********** - 10 -

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