John Ljubomir Atanaskovic and the persons named in Schedule A trading as Atanaskovic Hartnell v Birketu Pty Ltd - Supervisory Jurisdiction - [2020] NSWSC 573 - NSWSC 2020 case summary

Supreme Court of NSW|2020-04-08|Before: Hammerschlag J

) Category: Principal judgment Parties: John Ljubomir Atanaskovic and the persons named in Schedule A trading as Atanaskovic Hartnell - Plaintiffs Birketu Pty Ltd - First Defendant WIN Corporation Pty Ltd - Second Defendant Representation: Counsel: AJ Sullivan QC with J Hutton - Plaintiffs M Ashhurst SC with A Vincent - Defendants

Solicitors: Atanaskovic Hartnell - Plaintiffs HWL Ebsworth - Defendants File Number(s): 2018/164411

INTRODUCTION

HIS HONOUR: On 9 August 2019 I delivered the first judgment in this case: John Ljubomir Atanaskovic and the persons named in Schedule A trading as Atanaskovic Hartnell v Birketu Pty Ltd [2019] NSWSC 1006 (the first Judgment).

BACKGROUND TO THIS JUDGMENT

On 28 September 2017, it was discovered that Clarke, a senior and well-paid solicitor employed by AH, had defrauded Birketu and WIN (collectively Birketu), companies belonging to AH's longstanding and valued client Bruce Gordon, out of some millions of dollars. Clarke's frauds fell into two categories.
First, in connection with matters in which AH was instructed by Birketu, he dishonestly told Birketu that a Westpac bank account number into which Birketu was to pay funds, was AH's trust account, whereas in fact it was his own personal account. Birketu paid more than a million dollars into Clarke's account. Clarke stole the money. I will refer to these frauds as the Westpac frauds.
Second, Clarke twice duped Deutsche Bank into paying him money, totalling over $7 million, held by Deutsche to Birketu's account. To achieve this, Clarke committed forgery. I will refer to these frauds as the Deutsche frauds.
Birketu, at that time represented by AH, commenced proceedings. It obtained freezing orders against Clarke's assets, such as they were.
With new representation, Birketu sued AH for damages equivalent to what was paid into Clarke's Westpac account and not recovered, claiming that AH was vicariously liable for Clarke's actions. AH disputed that Clarke acted within the course and scope of his employment with AH.
Birketu also sued Deutsche to restore to its account the amounts which Deutsche debited as a consequence of Clarke's conduct, claiming that Deutsche had no mandate to affect its account. Deutsche raised only one defence to the claim. It said that Clarke had ostensible authority from Birketu to conduct the dealings with Deutsche that led it to debit Birketu's account. Birketu contended that if Clarke had (which it denied) ostensible authority, AH was vicariously liable to it for Clarke's actions. Deutsche argued that if Clarke did not have ostensible authority, it was entitled to recover from AH whatever it had to pay Birketu because AH was vicariously liable to it for Clarke's actions. AH's primary position was that Clarke did not have Birketu's ostensible authority. AH disputed, with respect to both the Westpac frauds and the Deutsche frauds, that Clarke acted within the course and scope of his employment with AH.
On any scenario, a principal question in both the Westpac frauds and the Deutsche frauds was obviously and inevitably going to be whether Clarke acted in the course and scope of his employment with AH. [2] It was going to arise directly in the Westpac frauds case because Birketu was claiming (and AH was denying) that AH was vicariously liable for Clarke's actions. It was going to arise in the Deutsche frauds case because if Clarke did not have Birketu's ostensible authority, Deutsche was claiming that AH was vicariously liable, and, if Clarke did have Birketu's ostensible authority, Birketu was claiming (and AH was denying) that AH was vicariously liable to Birketu for its loss.
AH, for its part, sued Birketu for unpaid fees and disbursements covered by seven invoices, six of which were either not or not directly related to the dispute about the frauds.
Under a formal engagement letter dated 16 November 2017 (the retainer), AH accepted a retainer from Birketu (with effect from 18 October 2017) to advise and assist it in connection with the possibility of a dispute with Deutsche.
Although it is set out in the first Judgment, it is convenient to set out the retainer here again, although it will contribute to the prolixity of this judgment. Dear Mr Gordon Engagement Letter - Deutsche Bank AG and Purported NEC Swaps Agreements Variations re Alleged "$7m Loan" You have requested us to provide you and your company with legal advice and assistance from about 18 October 2017 in connection with the above, including the possibility of dispute with Deutsche Bank AG, Sydney Branch (DB). The purpose of this letter is to confirm our engagement and the terms and conditions on which we act on this matter. 1. Responsible Partner John Atanaskovic will be the partner primarily responsible for this matter. 2. Fees and disbursements We will charge professional fees for all services rendered by reference to the time spent by our lawyers in working for you on this matter. We will also charge for any out-of-pocket expenses we incur on your behalf in accordance with our standard Terms of Engagement attached. The partners and employed solicitors who will or may primarily be involved in this matter and their current hourly rates (exclusive of GST) are: Name Level of Lawyer Hourly Rate John Atanaskovic (JLA) Partner $900 Michael Sophocles (MJS) Partner $675 Lawson Jepps (LAJ) Senior Solicitor $650 Paul Springthorpe (PYS) Senior Solicitor $625 JLA will be attending to most of the work, certainly initially. MJS and PYS are litigation specialists, and it may be that the matter does not proceed to that stage, in which case they are not likely to do much, if any, work on the matter. If additional partners or employees are required to work on this matter, they will be charged for at hourly rates that are commensurate with their experience and expertise. We may adjust our hourly rates and overall fees in accordance with our standard Terms of Engagement attached. […] 5. Terms of Engagement and Possible Conflicts of lnterests and/or Duties Attached are our standard Terms of Engagement. These form part of the terms and conditions of our engagement on this matter. It has been suggested, in particular by DB, and officers and external lawyers of DB, that this firm suffers a conflict of interests and/or duties in acting for Birketu and/or you on this matter. We presently do not consider that such a conflict has in fact arisen directly in relation to this matter since, based on your instructions and the information known to us to date: (a) we do not see why Birketu or you would have a liability to DB in the circumstances of this matter, for example in relation to the alleged $7m loan asserted by Ashley Seeto of DB, and (b) if Birketu does not have, and/or you do not have, such a liability to DB, we cannot see why this firm would have obligation or liability to Birketu or you in relation to the matter. (It is possible, however, that conflicts of interests and duties may still possibly arise or exist by reason of other matters and circumstances, such as referred to (and some of which are expanded on) below, although most are not related to this matter.) On the other hand, if (contrary to our views) Birketu and/or you does have a liability to DB in relation to this matter then, as we have explained to you, this firm may suffer from a conflict of interests and/or duties in relation to this matter (and conflicts of interests and/or duties may also arise as a result of other matters and circumstances, such as referred to above (in brackets) and below). If this is the case, subject to the waivers/consents referred to below, we should not act as lawyers for Birketu or you, and instead another lawyer or law firm should act for Birketu and you in relation to this matter. You have indicated that you understand the above, but that you nevertheless have confidence in this firm, and there are practical reasons why Birketu and you would still desire this firm to act as lawyers for Birketu and you in relation to this matter. In consequence of your indication, and at your request, we have informed you that, even if conflicts of interests and/or duties exist as between a lawyer and a client, the lawyer may still act for the client, if the client on a "fully informed" basis gives its consent to the conflict of interests and/or duties. There is no precise formula that will determine "full information", but for this purpose, we briefly confirm below aspects of our oral advice as regards some of the main ways in which such conflicts may arise in the present case, some of the consequences thereof, and the operation of the applicable rules regarding consent to such conflicts, as follows: (a) As you know, Brody Clarke (BJC) was formerly an employed solicitor at this firm. His employment was immediately terminated on 28 September 2017 when the background to this matter became known to JLA and MJS. But this does not remedy or remove all (or even most) of any conflicts issues as may exist or arise. (b) It is reasonably clear that BJC acted reprehensibly, and fraudulently, including as follows (but the following is not exhaustive): (i) in apparently suggesting that moneys should be paid by Birketu and/or you and/or other of your companies (such as WIN Corporation Pty Ltd) into a personal bank account of BJC at the Leura branch of Westpac (BJC Account), although on the misleading basis that BJC represented that such account was a general client trust account of this firm (notwithstanding that we do not have, and have never conducted, a general client trust account, and we regularly, such as in engagement letters like this one, disclose the former); and we understand that some moneys were then placed into the BJC Account by Birketu and WIN, and that material amounts of such moneys have subsequently, in one way or another, been dissipated or largely dissipated by BJC. This firm may arguably be liable to reimburse some or all of such moneys or other damage incurred by Birketu, you and/or your other companies in relation to such wrongs, and we have indicated to Birketu, you and WIN that you should take separate independent legal advice on this; (ii) one of the payments which was apparently made was a payment of about $2m by WIN, apparently loosely relating (in ways which even now we have not had explained to us by WIN, and we do not understand) to liabilities once owed by WIN to Ten Network Holdings Limited, which payment only became known to the partners of this firm on 28 September 2017; (iii) BJC appears to have fraudulently procured DB to enter into certain alleged agreements, and forged documents, which make it appear that Birketu has entered into agreements with DB, and assumed liabilities to DB under those agreements, on the basis of which DB alleges it advanced two tranches of money into the BJC Account, which money (save about $1.5m thereof) BJC has subsequently dissipated; (iv) DB claims that, in the process of the foregoing, Birketu has become liable inter alia for the moneys so advanced by DB; (v) in the foregoing circumstances, it may be argued by DB and/or by Birketu that this firm may have a liability to Birketu for any liabilities which Birketu would have incurred to DB for the moneys so advanced, and for other moneys and obligations also, such as interest, fees and expenses payable to third parties, and certain Birketu pre-emption obligations to DB; (c) in addition to contractual and other obligations and duties to carry out with competence, etc the legal work entrusted to him, a solicitor has fiduciary and other duties, including duties of loyalty and honesty, to the solicitor's clients, including a duty to avoid conflicts between his own interests with his duties to his clients, and the interests of his clients; (d) a solicitor has a duty to place the interests of his clients and his duties to his clients above his own interests, and to avoid the solicitor's client's interests being in conflict with his own interests; and (e) by virtue of what is described above, this firm may arguably have practical interests in seeking to avoid liabilities and duties, or seeking to avoid satisfying duties and liabilities, to Birketu or you or your other companies, or even to DB and other third parties, and thus may therefore not give the advice, or act in a way, which this firm would properly otherwise do, were we not to have those possible interests which arguably conflict with our duties to Birketu, you or your other companies. Birketu and you have requested that this firm nevertheless act as lawyers for Birketu and you in relation to this matter, on the footing that Birketu and you, on an informed basis, consent to such conflicts of interests and/or duties this firm may have in so acting for Birketu and you. We have agreed to do so, on the following footing: (a) that in the time available to date, we have explained in a general way, and some of the specific ways, the conflicts of interests and/or duties as may presently exist, or come to exist, such as those described above, that you on an informed basis so consent to any conflicts that may exist in us acting for Birketu and you, and have offered further to explain the general and specific ways to you, as and when requested; (b) that we have recommended (and continue to recommend), that Birketu and you also obtain independent legal advice inter alia as follows: (i) as to the advisability of you appointing us as your legal counsel in this matter, and on the issue of the potential conflicts of interests/duties that we do or may in future face, and that we meet your legal expenses in you so doing; and/or (ii) even if we do act for Birketu and you, you receive independent advice on a continuing basis on the legal work we do for you on this matter (ie in a sense "audit advice" or "looking over our shoulder advice"), (c) that the relevant conflicts issues be kept under review, and if necessary, Birketu and you do thereafter take additional independent legal advice on those issues, or that Birketu and you thereafter take legal advice and assistance more generally from another lawyer or law firm (including as referred to above); and (d) that Birketu and/or you understand that you are each at liberty at any time to seek and take legal advice and assistance from another lawyer or law firm, either in lieu of, or in addition to, this firm's advice and assistance (but on the basis that Birketu and you are still liable for our fees and disbursements that are then or thereafter payable by Birketu or you for or in connection with legal work already done, as set out in this letter and its attachments). We take this opportunity again to thank you for your instructions, and also your continuing confidence in this firm (despite the events and circumstances involving BJC which have so far come to light and become known to us and you), and look forward to working with you on this matter. Yours faithfully ATANASKOVIC HARTNELL
Under the retainer, AH would investigate, and charge Birketu for investigating, the circumstances in which Clarke had perpetrated frauds, where Clarke might (and was ultimately found to) have been acting in the course and scope of his employment with AH. As earlier adverted to, this question was going to be central in both the Westpac frauds and the Deutsche frauds cases. AH would also investigate Deutsche's contention of ostensible authority. At the time, Deutsche was also contending (as it happens, correctly) that AH was in a position of conflict and was saying that AH could not act for Birketu.
On 25 October 2017 (that is, before the retainer was formalised but after it had taken effect informally), there was detailed consideration within AH of whether it could accept the retainer. Skene, an AH partner, sent an email to Atanaskovic and other lawyers in the firm analysing the position and drawing attention to the complications involved. It is appropriate to set out the email in full: From: Jon Skene To: John Atanaskovic Cc: Lawson Jepps , Michael Sophocles , Jeremy Kriewaldt Date: Wed, 25 Oct 2017 06:06:34 +1100 John, thanks for those case references. I've read Soyfer (co-incidentally enough, the Soyfers lived a stone's throw from me on Chaleyer St, Rose Bay, at the time of that decision, though I never knew them personally), Frenmast, and Prince Alfred College. I have to say that when the BJC fraud first came to light, I had initially assumed that Brody's actions were plainly not in the course of, and were unconnected with, his employment. Having now read Prince Alfred College, and in particular the reference therein to Lloyd v Grace, Smith & Co (para. 49), where a firm of solicitors was vicariously liable for the fraud of its managing clerk, I see that the position might not be so simple and clear cut as I initially thought. Indeed, I think it will ultimately be necessary to carefully consider separately each of Brody's fraudulent acts as against all the surrounding facts and circumstances. My initial thoughts on the ss.127-129 issue is that it will be a stretch for DB to successfully run this defence, given that Brody was not a director of Birketu or otherwise having any formal authority to act on Birketu's behalf, but I've little doubt that they will run it and will push it as far as they reasonably (or even unreasonably) can. One thing that is clear to me is that for both the vicarious liability issue and the ss.127-129 issue, the precise facts and surrounding circumstances will be critical to determining the proper legal position. To that end, do we have some sort of 'running sheet' that lists all relevant facts relating to, and evidence of, the actions of Brody, DB, and the client, (including AH internal instructions to Brody, or AH representations to BD [sic] or the client as to Brody's authority), in some sort of chronological order? Whilst no-doubt a major task to assemble, I would have thought this would be necessary to properly assess likely liability (or instruct Counsel on the issue)? With respect to the money released/given away by DB at least, the issue of vicarious liability seems to me to be a secondary issue to that of whether the loss must in the first instance fall upon DB or upon Birketu. Only the party which is found to have suffered the loss can be in a position to seek compensation from the tortfeasor (BJC), or vicariously from AH. However, as a matter of procedural litigation, I imagine that both issues are likely to end up being litigated together in a 3 way dispute. By which I mean, were Birketu to bring an action against DB, wouldn't DB (1) defend against Birketu's claim, and (2) in the alternative (that DB's defence against Birketu is unsuccessful so that DB is the party which has suffered the loss in paying out its own money to BJC) DB cross claims against BJC/AH? If that is the case then I'm afraid I see a potential conflict of interest in that AH pressing Birketu's claims against DB may, if successful, lead to AH facing DB's cross-claim for vicarious liability. Of course, AH might argue that is in AH's interest, on the basis that its alleged vicarious liability to DB might be easier to defend than its vicarious liability to Birketu might be were Birketu to fail in its claim against DB and subsequently bring a claim against AH. However, given the uncertainties and vagaries of the law on vicarious liability (at least as described in the Prince Alfred College decision) and its dependence upon all the facts and circumstances (which will apply differently depending upon whether Birketu or DB was ultimately seeking to claim against AH), there are some obvious complications in relying upon such a position. Even if DB did not seek to bring a claim or cross-claim against AH for vicarious liability, to the extent Birketu's claim against DB fails then there is the risk that Birketu may bring a claim against AH. The mere existence of this risk creates a potential conflict in AH advising Birketu in proceedings against DB. For example, a settlement offer from DB might be for 75% of the losses suffered. An independent adviser might objectively recommend that such offer ought to be accepted by Birketu, whereas it might be in AH's interest to advise Birketu to refuse such offer, if there is a risk that AH might be required to make up the 25% shortfall following a claim by Birketu against it in vicarious liability. Ultimately, reluctant as I am to play devil's advocate, I think we do need to consider whether there is a risk of AH being in breach of Rule 12 of the Solicitors Conduct Rules in continuing to act for Birketu. From what I've seen thus far in relation to Rule 12, a conflict between the duty to serve the best interests of the client and the interests of the solicitor cannot be resolved by obtaining the informed consent of the client (save in the very narrow exceptions contained in rule 12 which are not applicable here), but this is only a preliminary view as I've not yet had researched the position properly. I would similarly emphasise that the above are not 'settled views' on my part and I appreciate that they do not appear to be consistent with the views you have previously put (or propose to put) to DB. Given the potential disciplinary consequences, however, I do wish to raise them immediately to make sure that everyone thinks through the issues carefully, and to that end, I would appreciate hearing the opinions of yourself and others. I'm also very happy to continue to look into these issues further over the coming days. Best regards Jon Skene
Despite the obvious impediments in the way of doing so, AH accepted the retainer. It warrants observation that in the retainer, AH said that it did not presently consider that a conflict of interest and/or duties in acting for Birketu had in fact arisen directly.
For its work under the retainer, AH rendered to Birketu an invoice being Statement of Account / Tax Invoice B10582 for $172,686.27 comprising fees on a time costs basis of $165,000 (including GST) and disbursements (including Counsel's fees) of $7,686.27 (the invoice).
The attendances included services where AH was in a position of actual conflict with its client and where subsequently it was engaged in heavily contested litigation with it over the issues that gave rise to that very conflict. [3]
It is these fees which AH seeks to recover, and with which this judgment is concerned. [4]
In fact, Clarke's fraudulent behaviour, including that relating to Deutsche, was in the course and scope of his employment. [5]
In fact, Birketu did not clothe Clarke with ostensible authority to deal with Deutsche as he did. [6]
Thus, had the proceedings not settled, Birketu would have succeeded against AH on the Westpac frauds, Birketu would have succeeded against Deutsche on the Deutsche frauds, and Deutsche would have succeeded against AH on the Deutsche frauds.
On 9 January 2018, Atanaskovic, on behalf of AH, gave the following oral undertaking to Lancaster and Bruce Gordon on behalf of Birketu (the undertaking): AH will not charge Birketu for any of the work done by AH in defending Birketu against Brody and the Deutsche fraud situation because this whole matter was created as a result of one of my staff members.
In the same conversation, Atanaskovic had earlier said: The total claim against AH as a result of this is roughly $1.025M. I am currently talking to my insurer with a view to having this resolved by next week. Now if they do not pay the $1.025M or only agree to pay part of it, then whatever the shortfall is, I will make it good. WIN/Birketu will not be out of pocket as a result of this conduct. (Atanaskovic was referring here to the Westpac frauds. He did not make the amount good. Birketu had to sue.)
The undertaking was not supported by consideration. [7]
$14,930.15 (including GST) claimed by AH as part of the invoice is for work done in relation to the extension of the NEC Swap (the NEC Swap fees). [8]

SUPERVISORY JURISDICTION

A solicitor is an officer of the Court. [9]
The Court has a well-established inherent supervisory jurisdiction, to which solicitors are amenable, which is designed to impose on them higher standards than the law applies generally: United Mining & Finance Corporation Limited v Becher [1910] 2 KB 296 at 304; Wade v Licardy (1993) 33 NSWLR 1 at 6-9. A solicitor is expected to act honourably and ethically. A solicitor is expected to keep her or his word.
This jurisdiction is disciplinary and compensatory. It is not exercised for the purposes of enforcing legal rights, but for the purpose of ensuring honourable conduct on the part of the Court's own officers. It is distinct from any legal rights or remedies of the parties, it is unaffected by anything which affects the strict legal rights of the parties, and it is not limited to technical principles: Re Gray [1892] 2 QB 440 at 443 per Lord Esher MR; R & T Thew Limited v Reeves (No 2) [1982] 1 QB 1283 at 1285; Countrywide Banking Corporation Limited v Kingston [1990] 1 NZLR 629 at 637; Australian Guarantee Corporation (NZ) Ltd v East Brewster Urquhart & Partners [1990] 2 NZLR 167 at 173; McIlriath v Ilkin [2007] NSWSC 911 at [10].
The jurisdiction extends to ensuring that a solicitor honours an undertaking given by her or him in that capacity. The fact that the solicitor may have a defence to an action at law on the undertaking does not preclude the Court from exercising the jurisdiction, but it is a factor which the Court may take into account in deciding whether or not to exercise its discretion and, if so, how: Udall v Capri Lighting Limited [1987] 3 All ER 262 at 269; Countrywide Banking Corporation Limited v Kingston [1990] 1 NZLR 629 at 637. It is no answer to a complaint that a solicitor acted in breach of an undertaking given by her or him that there was no consideration for it: United Mining & Finance Corporation Limited v Becher [1910] 2 KB 296 at 303-4; John Fox v Bannister, King & Rigbeys [1988] QB 925 at 928, 931; Wade v Licardy (1993) 33 NSWLR 1 at 9.
In some circumstances, such as when the jurisdiction falls to be exercised in the course of an active proceeding, and needs to be exercised swiftly, the Court may act summarily. That is not this case. There has been a full contest on the facts and the law: Myers v Elman [1940] AC 282 at 319; John Fox v Bannister, King & Rigbeys [1988] QB 925 at 930.
Rule 6.1 of the Legal Profession Uniform Law Australian Solicitors' Conduct Rules 2015 (NSW) (the Solicitors' Rules) provides: A solicitor who has given an undertaking in the course of legal practice must honour that undertaking and ensure the timely and effective performance of the undertaking, unless released by the recipient or by a court of competent jurisdiction.
Leaving the Rule aside, fidelity to undertakings in the course of professional practice is an important component of a lawyer's professional responsibility, and directly relevant to the court's continuing accreditation of her or his fitness to practice: GE Dal Pont, Lawyers' Professional Responsibility (6th ed, 2017, Thomson Reuters) at [22.05]. The Court exercises the supervisory jurisdiction to ensure that confidence is maintained in relation to the special nature of solicitors' undertakings: Commissioner of Inland Revenue v Bhanabhai [2006] 1 NZLR 797 at 830.

COSTS AGREEMENTS

Costs agreements between solicitors and their clients are subject to control by the Court in the exercise of its inherent powers: McNamara Business & Property Law v Kasmeridis (2007) 97 SASR 129 at 137-8; Athanasiou v Ward Keller (6) Pty Ltd (1998) 8 NTLR 23 at 30; Law Society of New South Wales v Foreman (1994) 34 NSWLR 408 at 422.
The Court will not permit a solicitor to enforce an agreement with a client which requires the client to pay to the solicitor for services rendered an amount which represents an overcharge beyond the bounds of professional propriety: Law Society of New South Wales v Foreman (1994) 34 NSWLR 408 at 422. Such an amount would, of course, be excessive as being unfair and unreasonable.
The Court has jurisdiction to ascertain by taxation, moderation or fixation, the costs, charges and disbursements of a solicitor from the client: Athanasiou v Ward Keller (6) Pty Ltd (1998) 8 NTLR 23 at 28; Baalman (JS & JH) v Dare Reed (1984) 52 ACTR 3 at 17.

SOLICITORS AND CONFLICT OF INTEREST

A solicitor is classically a fiduciary to her or his client, and as such owes certain duties in each particular case: Maguire v Makaronis (1996) 188 CLR 449 at 463.
In Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 at 170 (Harvey), Street CJ, delivering the judgment of the Court of Appeal, pointed out that the duty of a solicitor to his client is paramount and he must not prefer his or the interest of another to that of his client. His Honour referred to the holding of Lord Westbury in Tyrrell v Bank of London 11 ER 934 at 939-940, the principle being that the client is entitled to the full benefit of the best exertions of the solicitor, and the solicitor is not permitted to make a gain for himself at the expense of the client beyond the amount of the just and fair professional remuneration to which he is entitled.
In the well-known passage at 170-1, Street CJ went on to say: Where there is any conflict between the interest of the client and that of the solicitor, the duty of the solicitor is to act in perfect good faith and to make full disclosure of his interest. It must be a conscientious disclosure of all material circumstances, and everything known to him relating to the proposed transaction which might influence the conduct of the client or anybody from whom he might seek advice. To disclose less than all that is material may positively mislead. Thus for a solicitor merely to disclose that he has an interest, without identifying the interest, may serve only to mislead the client into an enhanced confidence that the solicitor will be in a position better to protect the client's interest. The conflict of interest may, and usually will, be such that it is not proper, or even possible, for the solicitor to continue to act for and advise his client. A solicitor, who deals with his client while remaining his solicitor, undertakes a heavy burden. Where a solicitor discovers that continuing to act for his client will, or may, bring the interests of his client and his own interests into conflict, it will be a rare case where he should not, at least, advise his client to take independent legal advice.
In Spector v Ageda [1973] Ch D 30 at 47, Megarry J said: …in all ordinary circumstances a solicitor ought to refuse to act for a person in a transaction to which the solicitor is himself a party with an adverse interest; and even if he is pressed to act after his refusal, he should persist in that refusal. Nobody can insist upon an unwilling solicitor acting for him, at all events when there is a conflict of interests.
Added to and consistent with this, r 12.1 of the Solicitors' Rules provides that: A solicitor must not act for a client where there is a conflict between the duty to serve the best interests of a client and the interests of the solicitor or an associate of the solicitor, except as permitted by this Rule.
As a fiduciary, a solicitor has obligations to the client both in respect of the making of a costs agreement and in the carrying of it out: Law Society of New South Wales v Foreman (1994) 34 NSWLR 408 at 435; Moss v Moss (No 2) (1900) 21 LR (NSW) Eq 253 at 258; Chan v Zacharia (1984) 154 CLR 178 at 198; United Dominions Corporation Limited v Brian Pty Ltd (1985) 157 CLR 1 at 11-12.
Fully informed consent from the client may provide a defence to a breach of fiduciary duty. How far the doctrine of fully informed consent goes to sanitise a breach of fiduciary duty consisting of a solicitor acting in conflict with the interests of the client, is a question which is not without its complexities. It is not necessary in this case to examine what might be the outer reaches of fully informed consent.
Whether there is fully informed consent, is a question of fact in all the circumstances of each case. There is no precise formula with which will determine in all cases if fully informed consent has been given: Maguire v Makaronis (1996) 188 CLR 449 at 466; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at 97 [465].

THE REFERENCE

On 9 August 2019, under Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 20.14, I referred to the Honourable Roger Gyles AO QC, for inquiry and report, which of the items in the invoice are referable to: 1. work done for the benefit of AH; or 2. attendances where AH's interests were adverse or potentially adverse to the interests of Birketu.
Mr Gyles provided a characteristically succinct report on 4 February 2020.
The parties agreed (although there was apparently some initial hesitation by AH) that the report should be adopted. I adopt it.
The report provides a convenient series of categories (sometimes overlapping) into which the work covered by the invoice may be divided.
It contains some useful observations as to the facts, the accuracy of which neither party challenges.
It makes a number of pertinent observations, but it properly refrains from engaging with matters of principle which are for the Court. The exercise of the supervisory jurisdiction is a matter only for the Court.
The invoice contains 21 line items, none of which has an amount attributed to it. They were "notionally" numbered by Mr Gyles for convenience and I have adopted his numbering. They are as follows. 1. • Drafting and revising letter on 18 and 19 October 2017 for Birketu to send to Deutsch [sic] Bank regarding the purported transactions; 2. • Drafting, finalising and sending emails to S Bainbridge of Deutsch [sic] Bank on 20 and 21 October 2017 regarding the purported transactions; 3. • Reviewing and considering letter received by Birketu from Deutsch [sic] Bank on 24 October 0217 [sic] regarding alleged conflict issues; 4. • Attending to email correspondence with Herbert Smith Freehills on 24 October 2017 including reviewing and considering letter from Herbert Smith Freehills regarding alleged conflict issues; 5. • Drafting and revising letter on 24 and 25 October 2017 for Birketu to send letter to Deutsch [sic] Bank on 25 October 2017 regarding alleged conflict issues; 6. • Drafting, finalising and sending letter to Herbert Smith Freehills on 27 October 2017 regarding alleged conflict issues and alleged authority; 7. • Reviewing and considering letter received from Herbert Smith Freehills on 31 October 2017 regarding alleged authority and s129 assumptions, and drafting, finalising and sending letter to Herbert Smith Freehills on 31 October 2017 regarding same; 8. • Advising D Collis on timing of increased Birketu exposure to NEC swaps including by email correspondence on 6 and 7 November 2017; 9. • Reviewing and considering letter received from Herbert Smith Freehills on 8 November 2017 regarding alleged authority and NSWSC proceedings; 10. • Telephone conference with A Bell SC of counsel and D Thomas of counsel on 9 November 2017; 11. • Drafting, finalising and sending letter to Herbert Smith Freehills on 9 November 2017 regarding alleged ostensible authority and NSWSC proceedings; 12. • Preparation for an attendance at conference with A Bell SC of counsel on 10 November 2017; 13. • Advising on extension of NEC swaps including emails to D Collis and A Lancaster on 13, 14, 15 and 17 November 2017 regarding "without prejudice" extension; 14. • Preparation for and attendance at conference with D Thomas of counsel on 17 November 2017; 15. • Reviewing NEC swap extension amendment confirmation on 20 November 2017 and preparing "without prejudice" signature blocks for amendment confirmation; 16. • Conferring with D Thomas of counsel by email and phone on 21 and 23 November 2017 settling letter to Herbert Smith Freehills; 17. • Drafting, revising, finalising and sending letter to Herbert Smith Freehills regarding authority and s129 claim made by Deutsche Bank; 18. • Reviewing and considering letter received from Herbert Smith Freehills on 8 December 2017 regarding alleged ostensible authority, negligence by Deutsche Bank and alleged vicarious liability; 19. • Drafting, finalising and sending letter to Herbert Smith Freehills on 11 December 2017 regarding NSWSC proceedings; 20. • Preparing and revising a draft reply letter to Herbert Smith Freehills of 8 December 2017. 21. • All other attendances and correspondence throughout.
The invoice concludes with the following notation. Fees on a time costs basis over $173,000, but, if paid within our usual terms, namely within 7 days, say $120,000 (plus 10% GST), but otherwise $150,000.00 GST @ 10% $15,000.00 Total + GST: $165,000.00
The invoice was sent under cover of the following letter. 28 February 2018 Mr Bruce Gordon Chairman, Birketu Pty Ltd care of Andrew Lancaster, WIN Corporation Pty Ltd PO Box 8800 WOLLONGONG NSW 2500 Dear Sir Deutsche Bank AG - Purported NEC Swaps Agreements Variation re Alleged "$7m Loan" Given the time that has passed since we commenced acting in this matter, and (based on correspondence we have recently received from HWL Ebsworth) your now apparent desire to change solicitors in the matter, we enclose our account for professional costs and disbursements in respect of the matter for the period ended 28 February 2018. On a strictly solicitor work time costing basis, fees of over $173,000 have accrued. In the circumstances, however, we have charged professional fees of $150,000, although if the bill is paid within our standard payment time (ie within 7 days), we will accept $120,000 (plus 10% GST) in satisfaction to our fees, disbursements being payable in addition to such fees (and GST). If you have any queries in relation to this memorandum of fees, please do not hesitate to contact us. Thank you for your instructions in this matter. Yours faithfully ATANASKOVIC HARTNELL
As Mr Gyles reported, AH had an internal system of record keeping of costings on a time basis. A costings report was produced from this system which fairly closely but not exactly matches the amount for fees in the invoice. Nothing relevant turns on the mismatching.
Mr Gyles reported that the fraudster (Clarke) was an employee of AH and was involved with Deutsche and Birketu because of his position with AH, thus enabling the fraud. He pointed out that on any view, AH was seriously at risk of a finding of vicarious liability from either or both of Deutsche and Birketu, and of being joined in litigation.
He correctly observed that by acting for Birketu in dealings with Deutsche, AH had an opportunity of managing issues between them and in particular it lessened the chance that Deutsche and Birketu would down tools and take aim at AH. Closely investigating the facts and the internal workings of Birketu would be a great advantage if AH was subsequently sued in relation to issues such as causation and negligence.
I interpolate that this type of mischief is one which the fiduciary rules and the Solicitors' Rules aim to avoid.
Mr Gyles reported that the authority, particularly the ostensible authority of Clarke to bind Birketu, and the vicarious liability of AH for the actions of Clarke, depended upon overlapping of a complicated underlying set of facts and that it would be difficult to investigate the facts for one purpose without having the other in mind. Mr Gyles did observe that he did not detect any failure by AH to properly put what could be put in defence of Birketu for any actions actually contrary to the interests of Birketu.
Mr Gyles reported that work done for the benefit of Birketu obviously included work related to the allegation of conflict of interest on the part of AH. It also encompassed work that would reduce any amount that it might ultimately bear if vicariously liable - either on account of liability or damages. That would include all work in relation to pursuit of assets, including the freezing order proceedings, and in relation to possible negligence by Deutsche.
Mr Gyles reported that attendances where Birketu's interests were adverse or potentially adverse to the interests of AH would include work on vicarious liability and might include the authority of the fraudster (subject to the ruling by the Court).
Mr Gyles reported (using his notional numbering) that: Items Referable to work done for the benefit of AH were Conflict of interest - items 3, 4, 5, 6, 7, 9 Freezing and tracing assets - items 2, 7, 9, 11, 19. Negligence of Deutsche - items 11, 14, 16, 17, 18, 20 Items Referable to attendances where AH's interests were adverse or potentially adverse to the interests of Birketu were Vicarious liability - items 2, 6, 18, 20. Authority - 1, 2, 6, 7, 9, 10, 11, 12, 14, 16, 17, 18, 20.
Item 21 of the invoice is a catch-all. Mr Gyles reported that he did not regard this item as justifying charges in relation to an identified heading or as being an appropriate balancing item to make up a shortfall or fill any substantive gap. Because I have determined that AH will only receive the NEC Swap fees, Item 21 can be disregarded.

THE CONTENTIONS

The parties provided the Court with comprehensive written submissions prior to oral argument, which took the best part of a day.
Birketu argues that AH should be precluded from recovering the invoiced fees as not being fair and reasonable (or being unfair and unreasonable) because AH was in a position of profound conflict of interest with it. Birketu argues that AH should not have accepted the retainer (even if there was fully informed consent - which Birketu says there was not) because the conflict was so basic. It argues that all of the work covered by the invoice was "infected" by this conflict. Birketu argues that AH gave the undertaking, in its professional capacity, and should be held to it.
AH accepts that it was in a position of conflict, but it says it disclosed it and obtained fully informed consent from Birketu to keep acting. It makes the point that Birketu was a sophisticated, commercially experienced, and well-resourced party. It argues that the retainer was a binding contract and that no order setting it aside has been made. It contends that there is an implicit finding in the first Judgment that the retainer was legally efficacious.
It argues that it is not unfair or unreasonable for a solicitor to recover fees for work properly and reasonably undertaken which advances the cause of the client but incidentally produces some benefit for the solicitor's firm. It says that the work in relation to Clarke's ostensible authority was clearly to Birketu's advantage because it suited Birketu to establish that Clarke did not have ostensible authority to bind Birketu. It says that the same considerations apply to AH's work on investigating Deutsche's possible negligence. It says that whilst AH may have "concurrently obtained an incidental benefit", this is not a reason to deprive it of its fees because of the alignment of interests.
At this point, it is worthy of mention, as being perhaps illustrative of the difficulty of AH's position, that it also made the following written submission at the trial. Birketu, not Deutsche Bank, is the victim of Mr Clarke's fraud, and is the victim because it clothed him with ostensible authority to deal with Deutsche Bank on its behalf. [10]
AH argues the work done on freezing and tracing Clarke's assets was done in Birketu's interests and any incidental benefit to AH should not disentitle AH to its fees. It argues that the work it did on the topic of conflict of interest was done only to respond to assertions made by Deutsche that AH had a conflict of interest and it was necessary to carry out Birketu's instructions to act for Birketu in the dispute.
It argues that the undertaking should not be enforced because it is not a binding contract (no consideration having passed) and does not give rise to some other general law legal or equitable right or remedy in Birketu. It is a commercial arrangement, between commercial parties. It argues that AH was not acting in its professional capacity in giving it and the parties should be left to their legal and equitable rights.
It argues that the bulk of the work had been done before the undertaking was given and there was in place a detailed retainer. The work was done by AH for Birketu's benefit and not contrary to its interests and Birketu obtained the benefit of other work that AH did and did not charge for.
It says that there was no reliance by Birketu on the undertaking as given.
It argues that the Court should not exercise a discretion to enforce the undertaking because there has been no finding of dishonesty and no basis to find it, and this is not a clear case where enforcement is appropriate.
AH argues that the Court's supervisory jurisdiction should only be exercised if there are special circumstances and that there are none here.

DISPOSITION

It is not in issue that: 1. at the time that AH accepted the retainer, and for so long as AH remained retained, it was in a position of actual and potential conflict of interest with its client; 2. work that it did under the retainer included work that was done for its own benefit where its interests were adverse or potentially adverse to those of Birketu; 3. the invoice charges, other than the NEC Swap charges, are within the terms of the undertaking; and 4. the supervisory jurisdiction is available to preclude recovery by AH.
I have concluded that, except for the NEC Swap fees, the Court must withhold its assistance from AH in AH's quest to recover the fees claimed in the invoice.
To permit AH to recover more would be to: 1. give efficacy to the retainer which, in my view, it was not open to AH, acting ethically, to accept in the face of the clear and profound conflict between its own interests and the duties which it owed to Birketu; 2. require Birketu to pay AH for work which AH did in its own interests and for its own benefit, or contrary to the interests of Birketu (or both); 3. allow AH, dishonourably, to renege on the undertaking which it gave to Birketu in a professional capacity.
The ultimate consequence, were the Court to permit AH to recover, would be that AH would be the beneficiary of unfair and unreasonable charges excessive beyond the bounds of professional propriety and the confidence which the Court and the public are entitled to have that solicitors will honour their undertakings would be eroded. This should not be allowed.
The NEC Swap work falls into a different category. It was commercial work done to extend the NEC Swap which would have needed to be done in Birketu's commercial interests anyway. The conflicted position of AH had no impact on it. I think that it falls outside the undertaking, but, in any event, its distance from AH's conflict is sufficient that I would not exercise my discretion to preclude AH from being paid for it. It follows that AH is entitled to judgment for the further amount of $14,930.15.
It is apt to emphasise that in exercising supervisory jurisdiction, the Court does not engage in a final determination of legal rights but determines whether one of its officers should be held to ethical and honourable behaviour.
In exercising its discretion, the Court will have regard to all the circumstances, which, in this case, includes the state of the legal relationship and rights and duties between the parties. But the Court is concerned not with strict legal rights and duties or matters of technicality.
That the retainer has not been impeached, in the sense of it being set aside, is no bar to the exercise by the Court of the supervisory jurisdiction. The same goes for the fact that the undertaking is not legally enforceable as a contract and the fact that there was no subsequent reliance on it so as, for example, to give rise to an equitable estoppel.
It is also to be remembered that the retainer was terminated and that Birketu's position has, from the time that it obtained proper representation, been to dispute AH's claimed entitlement to the fees charged pursuant to it. The first Judgment did not deal with the contractual or legal efficacy of the retainer.
I find that AH did not obtain fully informed consent.
As Street CJ pointed out in Harvey, the solicitor in a conflicted situation undertakes a heavy burden. AH did not discharge it.
AH did not, or did not sufficiently, disclose that the retainer would be a vehicle by which AH would be given access to information which it might use against Birketu in subsequent litigation between them.
AH did not, or did not sufficiently, disclose that the investigation of Clarke's ostensible authority from Birketu to deal with Deutsche was closely connected and overlapped inextricably with the subject of whether Clarke was acting within the course and scope of his employment with AH both in the context of the Deutsche frauds and in the context of Birketu's rights against AH directly in connection with the Westpac frauds.
AH did not, or did not sufficiently, disclose that if Clarke did have Birketu's ostensible authority, the contest would then be between Birketu and AH, and in that contest Clarke's course and scope of employment would be a critical issue in respect of which the interests of Birketu and AH were plainly at odds.
AH did not, or did not sufficiently, disclose the potential benefits to itself and corresponding potential disadvantages to Birketu to which the retainer might, and in my view did, give rise.
As Skene pointed out in his 25 October 2017 email, it was ultimately going to be necessary to carefully consider separately each of Clarke's fraudulent acts as against all the surrounding facts and circumstances. This would of course include facts and circumstances known to Birketu and, by all accounts, unbeknown to AH, of which facts AH would learn with Birketu's cooperation in the investigation.
As Mr Gyles pointed out, by acting for Birketu in dealings with Deutsche, AH had an opportunity of managing issues between them and in particular it lessened the chance that Deutsche and Birketu would down tools and take aim at AH. Closely investigating the facts and the internal workings of Birketu would be a great advantage if, as came to pass, AH was subsequently sued in relation to issues such as causation and negligence.
Birketu's sophistication, experience and resources did not excuse AH from the heavy burden of full disclosure. Atanaskovic himself is sophisticated, experienced and no doubt possessed of resources, and the retainer itself reflects an acute awareness of the position of conflict of interest.
But even if, contrary to my finding, there was full disclosure, this too is not a bar to the exercise of the supervisory jurisdiction.
In support of its argument that the fees are not unfair or unreasonable, AH placed significant reliance on Mr Gyles' observation that he did not detect any failure to properly put what could be put in defence of Birketu for any actions actually contrary to the interests of Birketu. This observation is pertinent to communications which AH had with Deutsche's solicitors in relation to Deutsche's assertion of ostensible authority. It is to be read together with Mr Gyles' other observations about the position of conflict of interest in which AH was. It is not pertinent to the conflict that was present, on the assumption that those arguments failed. AH may have adequately put arguments on one aspect of the wider dispute, but this has little to say about its position generally.
The present case is of the type, I think, that Street CJ had in mind where the conflict of interest is such that it is not proper or even possible for the solicitor to continue to act for and advise her or his client, even with consent.
For example, and not far off from the present circumstances, a solicitor could not, even with consent, act for a client in a litigious dispute between the client and the solicitor.
If there was fully informed consent, and it was effective to constitute a defence to a breach of fiduciary duty, it was not effective to make AH's position any less untenable from the point of view of its professional ethical obligations.
As Skene correctly pointed out, r 12.1 of the Solicitors' Rules does not provide as an exception that a solicitor can act if there is a conflict provided there is fully informed consent.
As to the work for which AH seeks payment, as Mr Gyles pointed out, Clarke's authority and AH's vicarious liability for his actions depended on an overlapping of a complicated underlying set of facts which it would be difficult to investigate for one purpose without having the other in mind.
I think that the conflict of interest work, the freezing and tracing of assets work, and the work related to the negligence of Deutsche are in the same position with respect to their connectivity to Clarke's authority and AH's vicarious liability and to each other. This work was as much infected by the conflict of interest as the work on authority and vicarious liability.
It is difficult to see what, if any, benefits Birketu actually obtained from the work. I am inclined to the view that it received no benefit, but only detriment. It can hardly be suggested that Birketu benefited from AH's investigations into its own manifest position of conflict. Birketu had to retain different representation not long after. It found itself embroiled in substantial and hotly contested litigation against its erstwhile solicitors, who took an adverse position on the most significant issue in the case, namely the course and scope of Clarke's employment, in which contest AH had the benefit of investigations for which it wishes Birketu to pay. I do not accept AH's submission which characterises what occurred as AH doing work for the benefit of Birketu from which AH received some incidental benefit.
In my view, the acuteness of the conflict and the significance of the potential and actual consequences, disadvantageous to Birketu and advantageous to AH, are reasons why recovery would result in Birketu having to pay fees which are unfair and unreasonable.
Added to what has been said earlier, the undertaking was not given in a vacuum. It was given at a time when it had become well understood that Birketu's situation had been brought about by an AH solicitor. As observed in the first Judgment, the commercial, moral and ethical imperatives of the situation supported Lancaster and undermined Atanaskovic as to whether the undertaking had been given. [11] The finding that the undertaking was given credits Atanaskovic with, despite everything else that had gone before, having done the right thing at that time. Unfortunately, he did not keep to that course. The absence of consideration is of little moment here. That the bulk of the work was done before the undertaking explains and re-enforces it rather than undermines it.
I reject the submission (although I think it was only made faintly) that Atanaskovic was not acting in a professional capacity. That is the only capacity in which he was acting. He was retained in his professional capacity, he did work covered by the retainer in his professional capacity, he claims the fees in his professional capacity and he gave the undertaking in his professional capacity. The undertaking is concerned with his professional entitlement and position.
The special circumstances necessary for the exercise of the supervisory jurisdiction are present.

CONCLUSION

There will be judgment for the plaintiffs for the additional amount of $14,930.15 (including GST).
The remainder of the summons is dismissed.
Should it be necessary, I will hear the parties on costs and on any aspect which requires attention to bring these proceedings to an end.
Within fourteen days, each party is to send to the other and to my Associate, a position paper with respect to costs (and any other remaining aspect), and its proposed short minutes of order.

Endnotes

First Judgment paras [58]-[66], [69], [361]-[371].
First Judgment para [24]-[25].
First Judgment, para [72].
By the first Judgment, AH obtained an interim verdict in respect of the other six invoices for $928,982.
First Judgment, para [72].
First Judgment, para [327]-[345].
First Judgment, para [358]-[370].
First Judgment, para [182] and following.
Legal Profession Uniform Law (NSW) No 16a, s 25.
Closing submissions, para [261].
First Judgment, para [355]. 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 May 2020

Legal Profession Uniform Law Australian Solicitors' Conduct Rules 2015(NSW)rr 6.1, 12.1

John Ljubomir Atanaskovic and the persons named in Schedule A trading as Atanaskovic Hartnell v Birketu Pty Ltd - Supervisory Jurisdiction

At a glance

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Judgment (12 paragraphs)

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Legislation Cited (2)

Cases Cited (10)

Cited By (13)