Kermani v Westpac Banking Corporation [2012] VSCA 42

Kermani v Westpac Banking Corporation [2012] VSCA 42 - VSCA 2012 case summary — Zoe

[99]

Illegality and public policy

[37] Section 317 of the Legal Practice Act 1996 and s 2.2.9 of the Legal Profession Act 2004 each provide that a legal practitioner may not enter into an arrangement with a non-practitioner under which that person is entitled to share in the income of the practitioner.

[38] The defendants submitted that the arrangements between the Bank and its solicitors contravened this prohibition. Reliance was placed on Hamilton and on Beneficial Finance.

[39] I do not consider that there is any relevant 'sharing' of income provided for by the relevant arrangements. The arrangements provide for a rebate of fees paid. In other words, they are arrangements for a return to the client of a portion of the fees paid by the client. The rebate is calculated on a sliding scale based upon the annual total of fees. This is not sharing income. It is returning a portion of the client's payment as a volume discount.

[40] The cases relied upon do not assist the defendants in this context.

[41] In Beneficial Finance an arrangement whereby 50% of every solicitor's bill was to be paid to a non-practitioner in consideration of the provision of accommodation and secretarial services was held not to contravene the then relevant provision.

[42] Hamilton concerned an arrangement between a solicitor and a debt collector under which the solicitor would issue warrants of distress claiming the judgment debt and specified professional costs and would then account to the debt collector for the total amount recovered less an amount for costs which was less than the specified professional costs purportedly due on the warrants. At first instance it was held that this arrangement was (in part only) tainted with illegality because it (in part) contravened the then relevant provision concerning the sharing of receipts with unqualified persons. On appeal, the Full Court held that this approach was incorrect. There was no 'sharing' of costs because the solicitor was never entitled to any costs other than the lesser amount agreed with the debt collector. The Full Court went on to hold that, although the provision about sharing had not been contravened, the arrangement was still tainted with illegality because '... it contemplated the improper exaction of excessive costs from judgment debtors ...'.[52] It seems to me that the Full Court characterised the arrangement as being one tantamount to an agreement to perpetrate a fraud on third parties, although the Court noted that the trial judge had not made an express finding to that effect.

[43] The defendants sought to distinguish the aspect of Hamilton whereby it was held that there had not been a contravention of the prohibition on sharing, by submitting that here all the receipts were receipts of legal costs, unlike in Hamilton where only the lesser sum was characterised as a receipt of legal costs. That is a valid distinction but it does not meet the point that here there is no 'sharing', but rather a volume rebate or discount.

[44] The defendants also submitted that the arrangements here contemplated the improper exaction of costs from third parties just as was found to have been the case by the Full Court in Hamilton. I do not think that is so. The arrangements here do not, in themselves, concern third parties at all. It is only where for some reason a third party becomes liable to indemnify the client that the arrangement has any potential effect on a third party. (my emphasis) It is not like the arrangement in Hamilton concerning the warrants which were themselves expressly directed to, and made demands upon, third parties. In the course of this proceeding the existence of the rebate arrangements has been revealed and I have held that the indemnifying parties are entitled to a credit for the rebates payable under the arrangements.

[45] I reject the defendants' submissions based upon illegality and public policy.

[104]

[36] As appears above, during the course of argument on appeal, senior counsel for the guarantors abandoned the contention that the costs agreements were illegal agreements to share legal fees. On appeal, the guarantors raise the following contentions based on illegality or public policy. As I have said, there is an issue as to whether one or more of these contentions was advanced below and, if not, whether it is procedurally fair to allow the guarantors to raise them on appeal.

[37] The guarantors contend that the Court should infer that the bank intended at all relevant times, and adopted a 'deliberate policy', to conceal the volume rebate provisions of the costs agreements. It was submitted that the bank intended to rely upon the combined effect of those provisions, and the standard form of indemnity costs provisions contained in its facility agreements and related security documents ('transaction documents'), to exact payment from its customers and guarantors of legal costs which, after the rebates were taken into account, exceeded the costs which the bank had incurred in connection with the facilities and their enforcement.

[38] It was submitted that such an inference was inescapable on the facts. Reliance was placed upon the warning given to the bank by its solicitors in 2002 that the volume rebate provisions may require a disclosure to customers and other third parties who may be liable to the bank to indemnify it in respect of its legal costs; the fact that this warning was deleted from subsequent proposals from those solicitors; the bank's failure to disclose the volume rebate provisions of the costs agreements to Pinnacle or the guarantors; the fact that the bank did not discover the costs agreements until a specific order was made that it do so; the fact that the bank persists in its contention that it is not obliged to give credit for the volume rebates in fact received by it; and the fact that the indemnity costs provisions relied upon by the bank were, on their face, obviously standard form provisions contained in its transaction documents.

[39] In these circumstances, it was submitted on behalf of the guarantors that the evidence justified a finding that the bank engaged in the tort of deceit, misleading or deceptive conduct (or unconscionable conduct) in contravention of the Trade Practices Act 1974 (Cth) or, at the very least, intentional sharp practice which was contrary to public policy.

[40] It was submitted on behalf of the bank that this case had not been raised below and that it was too late to do so for the first time on appeal.[53] This was especially so in circumstances where the guarantors were raising a case based upon dishonesty, breach of statute or immoral conduct on the part of the bank. It was submitted that, had these matters been raised at trial, the bank's case would have been conducted differently. For example, it could have led evidence that it acted honestly upon legal advice that it was entitled to retain the whole of the volume rebates for itself as constituting payments by the solicitors to secure for themselves the benefit of being on the bank's panel of solicitors. It was submitted that, in these circumstances, the only fair inference which the Court could draw was that the bank, acting honestly, made a mistake in failing to credit Pinnacle's account with an appropriate proportion of the fee rebates received by the bank.

[41] In order to determine whether the guarantors should be entitled to raise this issue on appeal, it is necessary to consider the pleadings and the conduct of the trial.

[42] As matters stood on 12 December 2006, no allegation was made against the bank in the defence and counterclaim that it had acted illegally or contrary to public policy. Arguments based on such contentions were first raised, without any prior notice, at the hearing on 12 December 2006. On that day, the evidence on the quantum hearing before the trial judge was completed. Counsel then acting for the guarantors made submissions first. After making submissions that there was manifest error in the certificate of indebtedness because no credit was given in respect of the volume rebates received by the bank, counsel for the guarantors stated that he wished to submit that the bank's claim should be dismissed on grounds of illegality or public policy. At this point, it became apparent that no notice of these arguments had been given to the bank. Notwithstanding this, the trial judge allowed counsel for the guarantors to develop his submissions. In summary, it was submitted that the costs agreements were illegal agreements between the bank and its solicitors to share income from a legal practice and that, accordingly, the whole of those agreements were unenforceable against third parties such as the guarantors. It followed that the bank's claim for indemnity costs, being based upon the illegal costs agreements, should be dismissed and the bank should be limited to claiming costs under the applicable practitioner remuneration order or scale of costs,[54] or alternatively legal costs which are of a reasonable amount on a solicitor and client taxation.[55]

[106]

[50] Parts of these passages [from Hamilton v Haw] were drawn [to] the trial judge's attention by counsel for the guarantors. However, the submission was not squarely made that the trial judge should find that the bank and its solicitors intended to deceive customers and third parties, such as Pinnacle and the guarantors. Indeed, the reference by Adam J to the costs agreements possibly being illegal because they required the commission of a fraud on a third party was not read to the Court. It appears that counsel for the guarantors limited his submissions to the fact that, viewed as a whole, the costs agreements in this case, like in Hamilton v Haw, 'contemplated the improper exaction of excessive costs'.

[51] It was submitted on behalf of the bank that counsel for the guarantors at the trial relied upon Hamilton v Haw for the sole purpose of supporting an argument based upon illegal sharing of the receipts of an illegal practice and that, for this purpose, counsel for the guarantors sought to distinguish the facts in Hamilton v Haw. I do not accept that submission. Counsel for the guarantors placed express reliance upon the actual decision in Hamilton v Haw and sought to have the trial judge apply it to the facts of this case. The trial judge certainly understood this to be the case. Having dismissed the argument based upon illegal sharing of the receipts of a legal practice, the trial judge stated:

The defendants also submitted that the arrangements here contemplated the improper exaction of costs from third parties just as was found to have been the case by the Full Court in Hamilton.[57]

[52] However, I accept the bank's submission that, before the trial judge, no submission was made on behalf of the guarantors that the evidence justified a finding that the bank engaged in the tort of deceit, conduct in contravention of the Trade Practices Act 1974 (Cth) or that the conduct of the bank constituted intentional sharp practice which was contrary to public policy. Nor was any such case pleaded or particularised. In these circumstances, I would not allow the guarantors to raise these grounds on appeal. However, the submission that the relevant arrangements between the bank and its solicitors on the one hand, and the bank, Pinnacle and the guarantors on the other, contemplated the improper exaction of excessive costs was put before the trial judge and considered by him.

[53] The trial judge rejected the submission that the arrangements contemplated the improper exaction of costs from third parties.

[Hargrave AJA then set out paragraph [44] of Whelan J's judgment set out above.]

[54] It was submitted on behalf of the guarantors that the trial judge was in error in finding that the relevant arrangements 'do not, in themselves, concern third parties at all.' It was submitted that the arrangements, when implemented, had an immediate, albeit deferred, effect upon third parties who were liable to indemnify the bank for its legal costs. I accept that this is so. However, this is of no assistance to the appellants because, as the trial judge held, the existence of the rebate arrangements was revealed during the course of the proceeding and, as a result, the judge ordered that the guarantors were entitled to a credit for the rebates payable under the arrangements. In this circumstance, there was in fact no wrongful exaction of excessive costs from the guarantors.

[55] Further, as a result of the rejection of the bank's submissions that the guarantors were not entitled to credits in respect of the rebates payable under the arrangements, the trial judge ordered that the bank pay the whole of the guarantors' costs of and incidental to the trial on the issue of quantum from 23 June 2006 until 3 October 2007 when formal orders were made that an account be taken by a master pursuant to Order 52. The costs order was made on a party and party basis and not on an indemnity basis as claimed by the guarantors before the trial judge. No appeal is pursued in respect of this basis for awarding costs.

[56] In my view, when taken as a whole the relevant arrangements did contemplate the improper exaction of excessive legal costs from the bank's customers, their guarantors and other third parties liable to indemnify the bank in respect of its legal costs. The fact that the bank may have acted in the honest belief that it was entitled to be paid all of its legal costs without any credit in respect of the volume rebates attributable to legal costs debited to Pinnacle's account is not to the point. Viewed objectively, the conduct of the bank in seeking to retain the volume rebates for itself was wrongful and unjust. If the guarantors had paid all of the legal costs demanded of them, I can see no good reason why they could not have recovered the excessive costs from the bank as moneys paid by mistake on principles of unjust enrichment.[58]

[57] In summary, although the bank sought to wrongfully exact excessive legal costs from Pinnacle and the guarantors, it did not do so. The trial judge found that the bank was obliged to give credit to Pinnacle and the guarantors for the relevant proportion of the volume rebates received by it. This aspect of the trial judge's decision is not challenged on appeal. Accordingly, although the trial judge did not accept it, the effect of his decision is to give full recognition to the submission before him that recovery of all of the legal costs claimed by the bank would be against public policy because such recovery would include the wrongful exaction of excessive costs, as explained in Hamilton v Haw. This is the commercial effect of the trial judge's decision at the quantum hearing, when he found that the certificate of indebtedness contained a manifest error because it did not give credit for the volume rebates and ordered that an account be taken of the amount due after appropriate allowance was made for those rebates.

[58] For the above reasons, the grounds of appeal based upon illegality and public policy fail. However, notwithstanding my conclusion on this issue, I would express my strong disapproval of the bank's conduct in seeking to wrongfully exact excessive costs from Pinnacle and the guarantors, and in continuing to maintain (including before this Court on appeal, but without filing any notice of crossappeal or crosscontention) that it was entitled to do so. Further, on the evidence in this case, and taking into account the bank's continued submission that it was not obliged to give credit for the volume rebates received by it, the inference is open that the bank has for some years been wrongfully exacting excessive costs from borrowers, their guarantors and other third parties who are liable to indemnify the bank in respect of legal costs. The issue is not limited to this case, or even to this state. It appears that the bank has adopted a similar approach throughout the country. Having regard to the way in which the trial of this case was conducted, no inference can be drawn in this case that the bank acted otherwise than honestly in seeking to exact excessive costs, in the belief that it had a proper entitlement to do so.

[59] In my view, it is incumbent upon the bank, and other banks and financiers which have similar arrangements in place to those considered in this case, to ensure that they establish a system which ensures that customers, their guarantors and other third parties who are liable to indemnify them for their legal costs are given the appropriate credits forthwith upon the receipt of any volume rebate or like discount. In some cases, this may involve the relevant bank or financier repaying money to the person who has been charged excessive costs; for example, in a case where the person responsible no longer maintains an account with the bank or financier which can be credited.

[60] Having regard to the likelihood that the bank's conduct in this case is of a kind which may be widespread in the banking and financial community, I would refer the Court's reasons for judgment in this case to the Australian Securities and Investments Commission to take such action as it considers appropriate.

[110]

....

[6] It was a term of the Pinnacle mortgage that Pinnacle was to fully indemnify SGB fully in respect of all legal costs incurred by SGB (the Pinnacle costs agreement).

[7] That it was a term of the guarantee and of Dr Kermani's mortgage that she was liable to pay to SGB any legal costs that Pinnacle was liable to pay to SGB under the Pinnacle costs agreement (the guarantee costs agreement).

[8] That it was a further term of the guarantee, and of Dr Kermani's mortgage and charge, that SGB was entitled to sell her property and share portfolio to discharge her liability to SGB pursuant to the securities, including in respect of legal costs;

[9] These terms were standard terms employed by SGB in its loan and guarantee agreements with borrowers and guarantors (the default terms);

[10] From year to year between 2002 and 2006, SGB and its solicitors (HGR) entered into a costs agreement (HGR costs agreements) concerning SGB's liability to pay the solicitors' legal costs in which the solicitors were acting for SGB in respect of defaults by borrowers or guarantees under the default term (loan defaults).

[11] It was a term of those costs agreements that SGB was entitled to receive a reduction in, or a rebate of, legal costs calculated by reference to the annual volume of work carried out by the solicitors acting as SGB's solicitors (the costs rebates).

[12] On the date that SGB entered into each of the HGR costs agreements, and at all material times thereafter, SGB intended to, and thereafter did, rely upon and enforce the default terms by exacting from borrowers (including Pinnacle) who were the subject of loan defaults, and from guarantors in respect of those borrowers (including Dr Kermani), SGB's gross legal costs:

(a) without taking into account, or accounting for, the rebate;

(b) without disclosing the rebates to the borrowers (including Pinnacle), or to the guarantors (including Dr Kermani).

[13] After Pinnacle defaulted in respect of repayment of the loan, SGB sold Dr Kermani's property and share portfolio and n reliance upon the terms of the Pinnacle costs agreement and the guaranteed costs agreement, appropriated for its benefit out of the proceeds of sale, the gross amount of the legal costs claimed by HGR to be payable in respect of Pinnacle's default in relation to the loan without taking into account, or accounting for, the rebates (the Pinnacle legal costs).

[14] From time to time, HGR paid or credited rebates to SGB, which included rebates in respect of the enforcements for securities for Pinnacle's loan (the Pinnacle costs rebates). The particulars set out amounts paid in 2004, 2005, 2006 and 2007 for legal costs relating to Pinnacle amounting to $89,500.90.

[15] By reason of the matters in paragraphs 11, 12, 13 and 14, at all material times on and after each of the HGR costs agreements were entered into, SGB wrongfully intended to, and did:

(a) rely upon and enforce the default terms, the securities, the Pinnacle costs agreement and the guaranteed costs agreement, by exacting from Pinnacle, Dr Kermani (and other borrowers and guarantors), the gross amount of legal costs, including the rebates (and in particular, the Pinnacle costs rebates);

(b) appropriate for its own benefit the rebates (and in particular, the Pinnacle costs rebates);

(c) rely upon and enforce the default terms in respect of costs an amount of that was contrary to public policy and/or legal.

The particulars provide that no rebate credits were credited to the bank account of Pinnacle on the day the rebates were received by SGB or at any material time thereafter. Details are then given of the credits received by the SGB in respect of Pinnacle's legal costs totalling $89,599.90.

[16] SGB neglected, failed and refused to disclose these matters to the borrowers (including Pinnacle) or the guarantors (including Dr Kermani) nor these matter known at any time by those borrowers (including Pinnacle) or by the guarantors (including Dr Kermani).

[17] By reason of the foregoing the costs agreement, the Pinnacle costs agreement and the guarantee costs agreement were acted upon and enforced by SGB in a manner that was contrary to public policy and/or illegal and accordingly were unenforceable as against Dr Kermani.

[18] Further or alternatively, it is alleged that by reason of the maters pleaded,

(a) SGB, which was an unqualified person within the meaning of the Legal Practice Act 1996 (Vic), and HGR agreed that SGB was to share in the income from HGR's legal practice by SGB being entitled to the rebates;

(b) SGB wrongfully shared legal costs, including the Pinnacle costs, with HGR.

The particulars allege that SGB received a share of the legal costs rendered by HGR for SGB.

[19] Accordingly the rebates received by SGB constituted a sharing of legal fees by an unqualified person contrary to s 317 of the Legal Practice Act 1996 (Vic) and s 2.2.9 of the Legal Profession Act 2004 (Vic).

[20] By reason of these matters the HGR costs agreements were contrary to public policy, illegal and unenforceable as against Dr Kermani.

[21] By reason of these matters, SGB is liable to repay Dr Kermani the amount of the Pinnacle legal costs. Particulars are given of costs totalling $2,400,830.93.

Dr Kermani claims:

[144]

(1) The court possesses an inherent jurisdiction to stay its proceedings as an abuse of process if the proceedings are unjustifiably oppressive and vexatious or manifestly unfair or otherwise bring the administration of justice into disrepute among right-thinking people: Walton v Gardiner;[81] Rogers v R[82] and PNJ v R;[83] Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd.[84]

(2) The jurisdiction should only be exercised in exceptional cases or sparingly with the utmost caution: Jago v The District Court (NSW).[85]

(3) The jurisdiction to stay for abuse of process is not limited to cases where the proceedings have been brought for an improper purpose or where there is no possibility of the court affording the affected party a fair hearing: Walton v Gardiner;[86] Rogers v R.[87]

(4) The circumstances in which abuse of process may arise are extremely varied and the courts have refrained from limiting the circumstances to fixed categories: Hunter v Chief Constable of the West Midlands Police;[88] Rogers v R[89]; Batistatos v Roads and Traffic Authority (NSW).[90]

(5) In considering whether to grant a stay as an abuse of process, the court should undertake a weighing process involving a subjective balancing of a variety factors and considerations: Walton v Gardiner.[91]

(6) Among those factors and considerations are the requirements of fairness to the accused, the legitimate public interest in the disposition of charges of serious offences and in the conviction of those guilty of crime, and the need to maintain public confidence in the administration of justice: Walton v Gardiner.[92]

(7) These principles apply to civil penalty proceedings: Gill v Walton.[93]

(8) The rationale underlying the principle against double jeopardy, in that an individual should not be vexed twice for the same cause, is a factor properly to be taken into account in the weighing exercise: Walton v Gardiner.[94]

(9) It is prima facie vexatious to bring two extant civil actions where one will lie: Moore v Inglis;[95] Thirteenth Corporation Pty Ltd v State.[96]

(10) This prima facie rule applies whether or not the two proceedings are in separate courts or one: Branir Pty Ltd v Wallco Pastoral Co Pty Ltd.[97]

(11) The prima facie rule applies where the issues overlap or significantly overlap or there is a similarity of subject matters of the proceedings.

(12) The fact that the parties may not be identical, or the relief different, does not necessarily disentitle relief under this principle: Moore v Inglis.[98]

(13) In considering whether the rule should apply, the court should consider whether there was no reasonable justification for the second proceeding based on legitimate considerations of convenience, cost or the like: Thirteenth Corporation Pty Ltd v State.[99]

(14) The guiding considerations are oppression and unfairness to the other party to the litigation and concern for the integrity of the system of administration of justice. Regard may be had to:

(a) the importance of the issue in and to the earlier proceeding, including whether it is an evidentiary or ultimate issue;

(b) the opportunity available and taken to fully litigate the issue;

(c) the terms and finality of the finding as to the issue;

(d) the identity between the relevant issues in the two proceedings;

(e) any plea of fresh evidence, including the nature and significance of the evidence and the reason why it was not part of the earlier proceeding;

(f) the extent of the oppression and unfairness to the other party if the issue was relitigated and the impact of the relitigation upon the principle of finality of judicial determination and public confidence in the administration of justice; and

(g) an overall balancing of justice to the alleged abuser against the matters supportive of abuse of process: Rippon v Chilcotin Pty Ltd.[100]

[221]

[37] It is plain that Dr Kermani did have a real interest in the outcome of the second proceeding. Dr Kermani was not a party to that proceeding but SGB was suing the other guarantors in reliance on a clause in their guarantees, which was contained in the same terms in Dr Kermani's guarantee. The defences raised by those guarantors were equally applicable to Dr Kermani. I reject the submission that it was not open to Dr Kermani to take any steps in the second proceeding in her own personal interest. I accept that the confidentiality order meant that Dr Kermani was unable to review the terms of the costs agreement, but equally so, the terms of the confidentiality order prevented each of the other guarantors from reviewing the cost agreement. This did not preclude them from raising defences based on claims of illegality and public policy. I also accept that the use of the costs agreement was subject to the Harman undertaking. Neither the confidentiality order nor the Harman undertaking would have prevented Dr Kermani from taking steps to have her claims determined in the second proceeding. Dr Kermani was plainly aware of the defences proposed to be agitated by the guarantors by reason that she was the sole director and shareholder of Shalridge, a party to the second proceeding. Armed with that knowledge, Dr Kermani could have applied to be joined as a defendant for the purpose also of relying on those defences.

[38] Fourthly, proceedings before a court will be stayed as an abuse of process if it amounts to a collateral attack on the judgment in the earlier proceeding. Consistent with the principle that a person who has a full opportunity to present their whole case will not be permitted to reargue the case, if a person stands by and waits to see the outcome of a case in which they have a distinct interest without making themselves a party, they will be bound by the result and will not be allowed to reopen the issue in another piece of litigation. As I have held, Dr Kermani had that opportunity but stood back, without making herself a party. In my view, it would be an abuse of process for Dr Kermani to re-litigate the same issues in these circumstances. Dr Kermani cannot escape that consequence because Whelan J and the Court of Appeal did not allow the guarantors to put their illegality argument in the way in which I have held that the claims in this proceeding also raise in substance. The second proceeding finally determined the dispute between SGB and the guarantors based on the costs agreement. The defendants in the second proceeding are bound by the Court of Appeal decision. In my view it would undermine public confidence in the administration of justice and bring the system into disrepute to allow Dr Kermani effectively to make a collateral attack on the refusal of the court to allow the additional claims to be raised, by raising them in this proceeding in the circumstance where she stood by and waited to see the outcome of the second proceeding.

At a glance

Court

Decision date

Before

Source

Judgment (315 paragraphs)

Kermani v Westpac Banking Corporation [2012] VSCA 42 (9 March 2012)

Parties

Legislation Cited (7)

Cases Cited (26)