LK Law Pty Ltd v Karas [2023] FCA 1464 | Case summary

LK Law Pty Ltd v Karas [2023] FCA 1464 | Case summary | Zoe

[11]

O'SULLIVAN J: 1 On 1 July 2022, I delivered judgment in LK Law Pty Ltd v Karas [2022] FCA 762 in which, amongst other things, I dismissed the 1st to 3rd respondents' (in these reasons, respondents) application as cross-claimants in the action for interlocutory injunctions restraining the applicants from using confidential information (as that term was defined for the purposes of the application). 2 The respondents' appeal to the Full Court against the refusal of the interlocutory injunctions was dismissed on 17 February 2023: Karas v LK Law Pty Ltd and Ors [2023] FCAFC 15; (2023) 296 FCR 39. 3 In LK Law at [9]-[43], I summarised the background to the business relationship between the first applicant, LK Law Pty Ltd (LKPL), the second applicant, Scipio John Lipman (Mr Lipman) and the first respondent, Jason Demetrios Karas (Mr Karas) as well as the genesis of the dispute between the parties. That summary was taken from the pleadings as they then stood and the affidavits filed on the application for interlocutory injunctions. I do not repeat it save as to repeat that in or about 2009, LKPL decided to establish a legal practice in Hong Kong which, after going through various iterations, is referred to in the pleadings and in these reasons as Lipman Karas Hong Kong (LKHK). My reference to LKHK should not be seen as anything more than an abbreviation for that entity in whatever form it may have existed from time-to-time. 4 The dispute between the parties as set out in the statement of claim filed 21 December 2021 concerns LKHK and alleged conduct by Mr Karas. In a cross-claim filed in the proceedings on 15 March 2022, Mr Karas and other cross-claimants allege breach of confidence and breach of contract on the part of the applicants. 5 In the statement of claim, the applicants pleaded in [22] that there existed a "profit sharing arrangement" between LKPL and LKHK. 6 The respondents pleaded in their defence filed 15 March 2022 that the "arrangement" was between Mr Lipman and Mr Karas. 7 An amended statement of claim was filed on 26 July 2022. The respondents filed an amended defence on 20 March 2023 in which they pleaded that the arrangement between Mr Lipman and Mr Karas for the sharing of profits was "contractual" (contractual plea). 8 On 11 August 2023, the applicants filed and served a further amended statement of claim. Pursuant to orders made on 10 July 2023, on 16 October 2023 the respondents filed a further amended defence (further defence) to the further amended statement of claim. 9 In the further defence, amongst other things, the respondents amended [22] by deleting it in its entirety and substituting a new pleading. 10 The applicants object to the amendments to [22] and submit that leave is required because the amendment withdraws the contratual plea and that plea is one which benefits them. 11 As a result of the applicants' objection to the withdrawal of the contractual plea, on 25 October 2023, the respondents filed an interlocutory application seeking leave to amend [22] in the form set out in the further defence. 12 The application refers to a number of rules, however it is r 26.11(2) of the Federal Court Rules (2011) (FCR) which is relevant. 13 Rule 26.11 provides: 26.11 Withdrawal of defence etc (1) A party may, at any time, withdraw a plea raised in the party's pleading by filing a notice of withdrawal, in accordance with Form 47. (2) However, a party must not withdraw an admission or any other plea that benefits another party, in a defence or subsequent pleading unless: (a) the other party consents; or (b) the Court gives leave. …

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The original pleadings 17 Paragraph 22 of the statement of claim pleaded that profits reported by LKPL and LKHK were considered together in determining distributions to Mr Lipman and Mr Karas, defined in the pleading as the "profit sharing arrangement". 18 In the defence, which was filed on 15 March 2022, prior to the hearing of the respondents' application for interlocutory injunctions heard on 27-29 April 2022, the respondents pleaded in answer to [22] of the statement of claim that Mr Karas and Mr Lipman agreed to share the profits of LKPL, LKHK and another entity, Lipman Karas UK Limited (LKUK), in a manner different to that set out in the statement of claim. At [22(b)], the respondents pleaded that to give effect to the profit sharing arrangement, Mr Karas obtained a waiver of r 4 of the Solicitors Practice Rules (Hong Kong) enabling LKHK to share profits with Mr Lipman. 19 Paragraph 22(c) of the defence pleaded the manner in which the profits were shared by reference to each of Mr Karas and Mr Lipman borrowing money from LKPL, with LKPL subsequently declaring dividends to Mr Karas and Mr Lipman which were applied to discharge the borrowings. Further dividends might also be declared in favour of Mr Karas and Mr Lipman respectively as trustees of their respective family trusts: [22(c)(v)] 20 The applicants filed a reply to the respondents' defence on 1 April 2022 admitting parts of [22] of the defence. 21 On 15 March 2022, the respondents also filed their cross-claim. 22 On 1 April 2022, the applicants filed a defence to cross-claim in which the applicants pleaded that Mr Karas conducted the practice of LKHK as agent for LKPL and held any assets of LKHK on trust for LKPL, or in the alternative conducted LKHK as trustee for LKPL. The applicants also pleaded that Mr Karas owed to LKPL various fiduciary duties, an equitable duty of confidence and statutory duties pursuant to ss 181, 182 and 183 of the Corporations Act 2001 (Cth) to LKPL. As an alternative plea in the defence to cross-claim, the applicants pleaded that Mr Lipman and Mr Karas were parties to a partnership agreement over identified corporate and trust entities defined as the "overarching partnership agreement" under which the affairs of LKPL, LKHK and LKUK: "were to be conducted with the object of generating profits to be shared by them both equally up until 2016 and thereafter on the basis that Mr Karas would be entitled to a greater share of the consolidated profits of LKPL and LKHK …". 23 The defence to cross-claim continued that as a result of the matters pleaded, Mr Karas owed a fiduciary duty to Mr Lipman and an equitable duty of confidence not to use confidential information available to him other than for a proper purpose in the discharge of his functions as a partner. 24 The respondents filed a reply to defence to cross-claim on 22 April 2022. In answer to the allegations in the applicants' defence to cross-claim that Mr Karas owed fiduciary duties to Mr Lipman and an equitable duty of confidence, the respondents pleaded at [14], amongst other things: (a) The waiver; and (b) At [14(a)(iv)] that: "the profit sharing arrangement was contractual, such that equity had no role". 25 A number of observations may be made about the plea in [14(a)(iv)]. First, it is a mixed plea of fact and law. Second, there is no detail about the contract such that the factual substrate to support the legal conclusion that the profit sharing arrangement was contractual is to be implied from other parts of the reply to defence to cross-claim. Third, the plea that because the profit sharing arrangement was contractual equity had no role to play, is misconceived in principle.

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Amended statement of claim, the amended defence and an amended reply 26 The applicants filed an amended statement of claim on 26 July 2022 in which [22] remained unamended. An alternative plea was raised that Mr Lipman and Mr Karas were parties to a partnership agreement, defined as the "overarching partnership agreement" in terms which reflected the same plea as that that appeared in the applicants' defence to statement of cross-claim filed on 1 April 2022. 27 After the applicants had filed their amended statement of claim, but before the respondents filed an amended defence, the Full Court heard and delivered its judgment in the respondents' appeal in Karas v LK Law. 28 On 20 March 2023, approximately one month after the Full Court's decision, the respondents filed an amended defence to the amended statement of claim in which the respondents pleaded an amended [22]. The amendments included a plea at [22(b)(ii)] that the arrangements to share profits between Mr Lipman and Mr Karas "… was contractual and the terms of the agreement are as described in sub-paragraph 22(b)(i) above". 29 Paragraph 22(c) of the amended defence contained a general plea denying the allegations in [22] of the amended statement of claim. 30 The contractual plea in [22(b)(ii)] of the amended defence is similar to that in the respondents' reply to defence to cross-claim but had clearly been the subject of some consideration because it identifies the terms of the alleged contractual arrangement and withdraws the assertion that equity had no role to play. 31 When the amended defence was filed, the then solicitor for Mr Karas certified in accordance with FCR 16.01(c) that the factual and legal material available "at present" provides a proper basis for each allegation, denial and non-admission in the pleading. 32 The same certification appears in the reply to the applicants' defence to cross-claim. 33 Apart from making the contractual plea, much of the emphasis in the amendments to [22] of the amended defence was to remove any reference to the phrase "profit sharing arrangement" and to plead that the agreement to share profits related to the after-tax profits of LKPL and LKHK (being after-tax receipts in the hands of Mr Karas) and LKUK equally. 34 On 31 March 2023, the applicants filed a reply to the respondents' amended defence. The applicants do not plead specifically to the contractual plea in the amended defence but generally deny the matters in [22] to the extent they have not been otherwise pleaded to. That is, the applicants deny the contractual plea. 35 The pleading in the original defence at [22(b)] that Mr Karas obtained the waiver was also withdrawn in the amended defence. The applicants did not object to that withdrawal in the reply to the respondents' amended defence which was filed 31 March 2023, but stated that the respondents had not obtained the applicants' consent or the Court's leave to withdraw the plea of waiver, which the applicants characterised as an admission, such that they assert the respondents remain bound by that plea.

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Further amended statement of claim and further defence 36 The applicants filed a further amended statement of claim on 11 August 2023 in which [22] remained unamended. 37 On 16 October 2023, the respondents filed the further defence. In the further defence, the respondents amend [22] of the amended defence by deleting it in its entirety and substituting a new pleading. 38 Paragraph [22] of the further defence deleted any reference to the contractual plea and substituted a pleading in [22(e)] that the determination of allocation of "further dividends" was a voluntary practice and was not pursuant to any agreement between Mr Lipman and Mr Karas (whether enforceable or not) and in any event did not amount to the receipt of a share of the profits of LKHK by Mr Lipman for the purposes of the Partnership Act 1891 (SA). 39 Insofar as the contractual plea is concerned, the withdrawal of the contractual plea from [22] of the amended defence has two aspects. First, on its terms, the contractual plea referred to the "profit sharing arrangement" (whether defined in that way or not) as a whole and did not separate out the "further dividends" from the profit sharing arrangement. Second, not only has the contractual plea been withdrawn, the plea has been recast such that the reference to the declaration of further dividends which, again on its terms, was previously encompassed as part of the contractual plea, has now been separated from the profit sharing arrangement. The result is that it is now pleaded LKPL would declare further dividends as agreed between Mr Karas and Mr Lipman with that allocation of further dividends being a voluntary practice, which was not pursuant to any agreement. 40 The plea in [22(e)] that, "… by reference to paragraph 22(d)(iii) of this defence, in determining the allocation of further dividends as agreed by Mr Karas and Mr Lipman that was a voluntary practice and was not pursuant to any agreement, …", is vague in that the word "voluntary" is ambiguous in the context in which it is used. I say more about that later in these reasons. 41 Overall, the respondents deny that there existed any profit sharing arrangement as between Mr Karas and Mr Lipman in the manner pleaded by the applicants in [22] of the further amended statement of claim. 42 There are further amendments to [22], however the focus of the application and the argument centred on the contractual plea although in submissions mention was also made of the withdrawal of the waiver plea in the amended defence.

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Issue 1 - Are the amendments to [22] of the further defence such that the amendments withdraw a plea which benefits the applicants? 43 As I have noted, FCR 26.11(2) provides: 26.11 Withdrawal of defence etc … (2) However, a party must not withdraw an admission or any other plea that benefits another party, in a defence or subsequent pleading unless: (a) the other party consents; or (b) the Court gives leave. 44 A substantially similar, but not identical provision is found in rr 12.6(1) and (2) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) which provide: (1) A party raising any matter in a defence or subsequent pleading may withdraw the matter at any time. (2) Despite sub-rule (1), a party may not withdraw any admission, or any other matter that operates for the benefit of another party, except with the consent of the other party or by leave of the court. 45 As to the pleadings to which FCR 26.11(2) applies, in Khouri v National Australia Bank limited [2007] NSWSC 987 at [1]-[2], Gzell J rejected a submission that UCPR r 12.6(2) was confined to defences or subsequent pleadings. Given I am not considering any pleading other than a defence, that is a matter I need not consider further. 46 There has been some consideration of what comprises a plea that "benefits another party". In Sergi v Sergi [2019] NSWSC 865, Darke J was dealing with a matter which included a plea in the cross-claim that a partnership in issue was a partnership at will. An amended cross-claim was filed in which the allegation of a partnership at will was withdrawn and a reference in the defence in reliance upon that plea was also withdrawn. The plaintiffs objected to the withdrawal on the basis of UCPR r 12.6(2). 47 The defendants applied for leave to file the amended cross-claim and defence. The plaintiffs had submitted that the pleading of a partnership at will was an admission or other matter that operated to their benefit. 48 At [23] his Honour held that the pleading of a partnership at will in the cross-claim was not an admission within the meaning of UCPR r 12.6(2). His Honour also held: at [25], that the pleading of a partnership at will did not operate to the benefit of another party within the meaning of the rule. His Honour considered that the assertions made about the existence of the partnership formed part of an affirmative claim advanced within the proceedings which, until that time, had contained no issue about the existence of any partnership. His Honour continued that, "The making of the assertion of a partnership at will did not itself render it more likely that the plaintiffs would obtain the relief they sought. Viewed objectively, the assertion ought not be considered to be a matter that operates for the benefit of the plaintiffs …". 49 Sergi was distinguished by Ward CJ in Eq (as her Honour then was) in Nanevski Developments Pty Ltd v Slaveski [2020] NSWSC 617, [176], [179] on the basis that the admissions in question were, on their face, made in the context of responding to an allegation made by the opposing party notwithstanding that the party in question had chosen to go further than what might have been required for strict pleading purposes. 50 In Quirk v Suncorp Portfolio Services Ltd in its capacity as trustee for the Suncorp Master Trust [2022] NSWSC 398, Rees J considered Sergi before identifying the following questions which her Honour considered may assist in considering whether a defendant required leave under UCPR r 12.6(2): at [61] 61. Thus, in considering whether a defendant requires leave under UCPR rule 12.6(2), the followings questions may assist: (a) Did the defence, now sought to be amended, admit an allegation of fact or simply a legal argument or characterisation said to arise from facts elsewhere admitted or asserted by the defendant? (b) Viewed objectively, is the defendant seeking to withdraw a matter which made it more likely that the plaintiff would succeed? (c) Did the defence contain a concession in response to an allegation made by the plaintiff or make an assertion in support of an affirmative case? In considering this matter, the Court will rely on a plain, objective reading of the pleadings. This may not be straightforward where the pleadings contain a mixture of factual allegations and legal conclusions or mixed questions of law and fact. 51 After referring to a number of cases applying UCPR 12.6(2) in the context of an application to withdraw an admission, Slattery J in Chiu v Sheh [2021] NSWSC 19 summarised the relevant principles: at [23] The following relevant principles emerge from these cases. Whether the admission operates "for the benefit of another party" must be determined objectively and can in most cases be judged on the face of the pleadings. A full and proper explanation for making the admission is required. It is undesirable for the case to be decided on a false issue by reason of the refusal to withdraw the admission. There must be some evidence to show how the admission was made (whether by mistake, confusion or inadvertence rather than being a deliberate course of conduct) and to show that the admission was erroneous. The balance of prejudice arising from the withdrawal of an admission is relevant to the Court's exercise of its discretion. 52 I agree with the objective approach taken by Darke J in Sergi at [25], Rees J in Quirk and Slattery J in Chiu. 53 As to what comprises a benefit to another party, in so far as the plea was contained in a defence, Darke J referred at [25] to it being "… more likely that the plaintiffs would obtain the relief they sought", an approach identified by Rees J in Quirk when considering the withdrawal of an admission. 54 It is apparent from Slattery J's reasons in Chiu that his Honour considered the issue of an admission operating "for the benefit of another party". 55 FCR 26.11(2) is slightly differently phrased to UCPR 12.6(2). The first limb of FCR 26.11(2) refers to admissions, whereas the second limb refers to "or any other plea that benefits another party …". UCPR 12.6(2) in its second limb refers to "or any other matter". That difference may have the consequence that UCPR 12.6(2) is wider than FCR 26.11(2) but that is not something that I need to consider in these reasons. 56 With respect to both Darke J and Rees J, when considering the second limb of FCR 26.11(2), I would not use the expression that the plea in question must be such as to make it "more likely" that the party asserting the plea is to their benefit would obtain the relief being sought. To do so is to engage in an evaluative exercise as to the prospects of success of a cause or causes of action. Further, that exercise may well be required at an early stage of the proceedings. In my view, when considering pleas that are not admissions but which "benefit another party", the required objective assessment occurs against the background of the applicant's cause or causes of action and whether the "any other plea" in question assists, in this case the applicant, in establishing one or more of the elements of their cause or causes of action. It is in that sense that the plea "benefits another party" such that the plea in question may benefit a party without necessarily making it more likely that a party would obtain the relief it seeks. 57 The applicants submit that the benefit of the contractual plea is that if the parties bind themselves to an agreement whereby they are going to share profits between different businesses, whilst not conclusive, that is an essential characteristic of a partnership or as the applicants plead it, the overarching partnership agreement. 58 The respondents submit that the plea of a contractual arrangement did not benefit the applicants in circumstances where even if there was some overarching partnership agreement which had a particular legal status or character, it does not follow that any arrangement carried out pursuant to that partnership had to have a similar status. Further, if it did have some benefit, one might expect the applicants to have pleaded specifically such an arrangement. 59 That, of course, does not mean that the respondent should not be kept to their plea but it shows that, at least at that time, the significance of the legal characterisation of the arrangement as contractual was not as the applicants now submit. Had it been, I would have expected the applicants to admit the contractual plea. 60 Although I accept the respondents' submission that it does not follow as a matter of course that any profit sharing arrangement necessarily has to have a similar status to any overarching partnership, I also accept the applicants' submission that the existence of an arrangement for profit sharing which the respondents had described as contractual may well be an important factor when considering an issue which has arisen on the pleadings, namely whether an overarching partnership agreement did, in fact, exist (although as I have noted neither the legal characterisation of the arrangement nor the existence of arrangement by itself are determinative). 61 It is for these reasons that I consider that the amendments to [22] of the further defence by which the contractual plea was withdrawn comprises the withdrawal of a plea that benefits the applicants. The extent or weight of that benefit is an issue but given it is of benefit in the sense I have described, then in the absence of consent, leave is required.

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Principles 63 The discretion to grant leave is broad and dictated by the interests of justice: Juno Pharmaceuticals v Millennium Pharmaceuticals Inc [2019] FCA 526, [38] (Besanko J). 64 In Selveratanam at [27] Stewart J summarised the principles applicable to the granting of leave for the withdrawal of an admission or other pleading that benefits another party under FCR 26.11(2): 27 The applicable principles with regard to whether leave to withdraw an admission or other pleading that benefits another party are, relevantly, the following, noting that for simplicity I will refer only to the withdrawal of an admission: (1) The court has a broad discretion to weigh up all matters with the overall question being to ensure that there is a fair trial: Jeans v Commonwealth Bank of Australia Ltd [2003] FCAFC 309; 204 ALR 327 at [18] and [23] per Hill, Madgwick and Conti JJ. (2) The court will require an explanation for the making of the admission which is now sought to be withdrawn; the explanation must be a sensible one based on evidence of a solid and substantial character: Celestino v Celestino [1990] FCA 449 at 8 [12] per Spender, Miles and von Doussa JJ (noting that the AustLII MNC for this case is [1990] FCA 299). (3) The object of the courts is to decide the rights of the parties, and not to punish them for mistakes they make in the conduct of their cases; if the mistake is not fraudulent or intended to overreach, can be corrected without injustice to the other party, and if not corrected will not lead to a decision on the real matters in controversy, it should generally be corrected: Celestino at 7 [10]. (4) The overriding consideration is the interests of justice: Australian Competition and Consumer Commission v Construction, Forestry, Mining and Energy Union [2007] FCA 1390 at [4] per Finn J. (5) The court will not lightly permit a party to withdraw an admission where the other party has acted to its detriment on the admission or is otherwise prejudiced by the withdrawal; if the other party has in good faith relied on the admission to its detriment so as to give rise to an estoppel the court will not permit the admission to be withdrawn: Celestino at 10 [14]. 65 See also: Rochecoust v Tasman Rope Access Pty Ltd (No 2) [2021] FCA 1161 at [15]-[17] (Colvin J). 66 Case management principles are also relevant. I deal with those matters later in these reasons.

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The reason for the error 69 The respondents submit that the contractual plea was made in error. 70 The authorities are clear that an explanation as to how the contractual plea was made in error needs to be provided. 71 The affidavits upon which the respondents read and rely do not address that issue directly. In particular, the first Grieve affidavit is silent on the point. Under those circumstances, after I had reserved judgment I provided a further opportunity for the respondents to file affidavit evidence explaining how it is that the error occurred. 72 On 8 November 2023, the respondents filed and served the affidavit of Gordon Grieve sworn that day (second Grieve affidavit) in which Mr Grieve deposes to Mr Karas' instructions at [6]-[9]. 73 On 10 November 2023, the applicants filed a responding affidavit of Nathan Peter Day sworn 10 November 2023 (second Day affidavit). 74 Mr Grieve deposes in the second Grieve affidavit that he spoke with Mr Karas by telephone on 7 November 2023 for the purposes of taking instructions as to how the "error" in making the contractual plea occurred. 75 Although not stated, as I understand the position, Mr Karas is in Hong Kong and I infer that is the reason why Mr Grieve spoke to Mr Karas on the telephone. 76 The applicants object to the Court receiving [6]-[9] of the second Grieve affidavit on a number of grounds. 77 First, instead of providing a direct account of Mr Karas' statements to him, whether in the form of direct speech or words to the effect of what Mr Karas said, Mr Grieve states his understanding of the overall effect of the instructions received by him from Mr Karas on 7 November 2023. 78 Whilst accepting hearsay evidence is admissible on the hearing of an interlocutory application, the applicants submit that Mr Grieve deposes to his subjective understanding of his instructions and does not depose to what Mr Karas said to him was the reason for the respondents seeking to withdraw the contractual plea. 79 Alternatively, the applicants submit that the Court should exercise its discretion to exclude the evidence of Mr Grieve pursuant to s 135(a) of the Evidence Act 1995 (Cth). That provision provides that the Court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might be unfairly prejudicial to a party. The applicants submit that Mr Grieve's evidence is vague in so far as it does not disclose either the words used by Mr Karas or the effect of what Mr Karas said such that it is unfairly prejudicial to the applicants. 80 I do not accept these submissions. Whilst the matters to which Mr Grieve at [6]-[9] of his second affidavit are undoubtedly hearsay, that evidence is admissible on the hearing of an interlocutory application. I do not accept that Mr Grieve is deposing as to his subjective understanding of his instructions. In [5] of his second affidavit, Mr Grieve deposes to his instructions by reference to the substance of the conversation with Mr Karas. 81 Although it would have been preferable for Mr Grieve to have used direct speech, nonetheless Mr Grieve deposes to the effect of what Mr Karas told him. 82 I overrule the objection on this first ground. 83 The second ground is that the affidavit is from Mr Grieve and not Mr Karas and therefore contrary to the Full Court in Tamaya Resources Ltd (in liq) v Deloitte Touche Tomatsu [2016] FCAFC 2; (2016) 332 ALR 199 at [155] (Gilmour, Perram and Beach JJ) where in reference to a delay in making an amendment, the Full Court said that an explanation is required from the moving party and not merely their solicitor or counsel. There is no reason advanced why Mr Karas could not have sworn an affidavit in Hong Kong and provided it to Mr Grieve for filing or annexing it to an affidavit of Mr Grieve. 84 I agree that the statement of principle in Tamaya is equally applicable to an amendment made as a result of an error although its significance will vary with the circumstances. 85 Nonetheless, the objection goes to weight and not admissibility. The weight to be afforded to the affidavit of a party swearing an affidavit as opposed to that party's solicitor or counsel will vary with the particular circumstances under consideration but the fact a solicitor or counsel swears an affidavit and not the client is a factor to be considered in the exercise of the discretion. I overrule the objection on this second ground. 86 Third, the applicants submit the evidence given by Mr Grieve is neither responsive to the leave given by the Court nor sufficient to discharge the respondents' onus of providing an explanation for the making of the error. I do not accept that submission. The explanation does not need to explain the error at the time the plea was made. An error may be discovered or realised as a result of subsequent matters coming to the attention of a party. Further, the objection goes to weight and not admissibility. I overrule the objection on this third ground. 87 Fourth, the applicants refer to a letter by Mr Grieve to the applicants' solicitors annexed to the second Day affidavit which the applicants seek to read on the application. Again, the complaints by the applicants are matters which go to the weight I should afford to the second Grieve affidavit. I do not consider the matters raised by the applicants in this fourth ground are such that the second Grieve affidavit should not be read on the application and I overrule the objection on this fourth ground. 88 There was no objection to the second Day affidavit being read such that the second Grieve affidavit and the second Day affidavit will both be read on the application. 89 Mr Grieve deposes at [6]-[9] of his second affidavit that in the course of preparing Mr Karas' trial affidavit, Mr Karas: (a) Reviewed the numerous exhibit materials and the evidence relied upon by the applicants; (b) During the course of that preparation, and in particular when reviewing the plea of the profit sharing arrangement pleaded by the applicants and Mr Lipman's evidence, "Mr Karas noted the correspondence mentioned at paragraph 201 and 242 of Mr Lipman's [trial] affidavit which referred to discussions to implement the arrangement, and the equivocating language used by Ms Copley and by the representatives of Nexia Edwards Marshall." (square brackets provided); and (c) It was at that stage that Mr Karas realised the contractual plea did not reflect the true position as between him and Mr Lipman with a true position being deposed to in [97] and [98] of Mr Karas' trial affidavit. 90 In Celestino at p 7 the Full Court referred to the observations of Bowen L J in Cropper v Smith (1884) 26 Ch D 700 at 710-711, subsequently approved by the High Court in Clough & Rogers v Frog (1974) 48 ALJR 481 saying that the object of the courts is to decide the rights of the parties, and not to punish them for mistakes they make in the conduct of their cases; if the mistake is not fraudulent or intended to overreach, can be corrected without injustice to the other party, and if not corrected will not lead to a decision on the real matters in controversy, it should generally be corrected. 91 The Full Court also said at p 8, after referring to Lord Bridge of Harwich in Langdale & Anor v Danby [1982] 1 WLR 1123, 1134: … in the absence of clear evidence to the contrary, a court is entitled to assume that counsel who makes an admission in the course of the conduct of the trial is satisfied himself that the admission was, on his client's version of the facts, a proper admission to make. 92 That: In our opinion a court, and other parties to litigation, are similarly entitled to make that assumption about admissions made by solicitors on their client's behalf in the course of litigation whether in pleadings or in correspondence. 93 The Full Court continued that an explanation for the making of the admission which is sought to be withdrawn is required and that the explanation must be a sensible one based on evidence of a solid and substantial character. 94 The applicants submit that the instructions given to Mr Grieve by Mr Karas do not provide an explanation as to how the asserted error came about. In particular, Mr Grieve does not depose that Mr Karas told him that the contractual plea was made in error by him or his then solicitors or counsel. They submit there is no explanation as to how the contractual plea came to be made in the first place not only in the reply filed by Mr Karas on his cross-claim but in submissions made by the respondents before me on the interlocutory injunctions argument, the Full Court on appeal and in the amended defence such that the evidence is insufficient to justify the Court exercising its discretion to grant leave to withdraw the plea. 95 I do not accept that there is no explanation as to how the error came about. On the contrary, there is an explanation as to how it was discovered. The instructions to Mr Grieve establish that when preparing his trial affidavit, Mr Karas realised the error.

[22]

The contractual plea does not reflect the true position 96 The respondents submit that if the application for leave is refused, the case will be conducted on a factual basis that is not connected to the "true position", ie there was no contractual arrangement. The respondents submit the contractual plea is contrary to the actual facts deposed to in the Karas trial affidavit and admissions made in the Lipman trial affidavit and that factor is one that weighs heavily in favour of leave being granted. 97 The applicants submit that it is not apparent why the explanation by Mr Karas, through Mr Grieve, that Mr Karas realised after reviewing Mr Lipman's evidence concerning the nature and integers of the "profit sharing arrangement" and the correspondence referred to at [201] and [242] of the Lipman trial affidavit, leads to the conclusion the contractual plea does not reflect the true position as between he and Mr Lipman. 98 The position is not as clear cut as the applicants would have it. 99 In the Karas trial affidavit, Mr Karas deposes at [63]-[64] that although the waiver was granted, it transpired that he received all the profits of LKHK such that the waiver was never utilised and by way of summary at [96]-[98] that: (a) The LKHK profits were allocated solely to him; (b) Since 2013 his Australian tax returns recorded assessable foreign source income and foreign income tax offsets but not any income from any partnership; and (c) The accountants for LKPL, LKHK and LKUK carried out a post-year and accounting "equalisation" exercise with a view to adjusting the overall after-tax profit of those three entities as between Mr Lipman and himself. 100 At [98] Mr Karas deposes that: The "equalisation" of after-tax profits between Mr Lipman and me was, in my belief, a voluntary arrangement, in that it did not occur pursuant to any legally binding contractual or other agreement. Mr Lipman benefitted financially from this "equalisation" exercise beyond his legal entitlements and well beyond market remuneration for a senior partner in a law firm in Adelaide. Conversely, by reference to the Hong Kong legal market, the "equalisation" arrangement operated to my detriment. However, it was an arrangement which was acceptable to me for as long as Mr Lipman and I remained friends, for as long as we operated by consensus and for as long as we did not rely upon, or seek to enforce against each other, any strict legal rights. Until 2019, I trusted Mr Lipman and our relationship operated by reference to that trust. 101 Although the pleading, if left unamended, might, on one view, be inconsistent with Mr Karas' evidence of his belief in [98] of his trial affidavit, that evidence is as to his belief. 102 In contrast, during argument on the interlocutory applications on 27 April 2022 before me, the respondents read the Karas injunctions affidavit. Mr Karas deposes at [29] of that affidavit that he and Mr Lipman had a profit sharing arrangement which was structured on the basis that Mr Karas was the sole owner of the Hong Kong practice and that the profit earned by him in Hong Kong were his profits. Mr Karas deposes at [32] of that affidavit that he obtained the waiver to allow the sharing of profits. 103 In the Karas injunctions affidavit at [27]-[32], Mr Karas deposes repeatedly to the "profit sharing arrangement", which utilises the definition used by the applicants in the statement of claim which was current at the time Mr Karas swore that affidavit. At [27]-[32], Mr Karas is referring to two matters. The first is the monthly drawings which he deals with at [27]-[28], and the second, the profit sharing arrangement which he deals with at [29]-[32]. I accept he does not refer to the "profit sharing arrangement" being "contractual" when dealing with this topic. 104 Whereas I accept the evidence Mr Karas gives in his trial affidavit and injunctions affidavits is, on one view, inconsistent with the contractual plea, on another view, it is consistent. That is also a function of the nature of the plea itself which is a plea of mixed fact and law that gives a legal character to a factual arrangement.

[28]

The respondents' submissions on the interlocutory injunctions 113 The applicants submit the contractual plea was a deliberate plea, made for tactical reasons and ought not be permitted to be withdrawn notwithstanding a later explanation about why it is Mr Karas now wishes to change his position. 114 The applicants submit that in these circumstances the evidence produced by the respondents is not sufficient to discharge the onus of providing an explanation for the apparent error. They point to the submissions before me on the respondents' application for interlocutory injunctions, in which senior counsel for the respondents informed me that it was admitted on the pleadings that the profit sharing arrangement was contractual: Day affidavit, annexure NPD-109, p 31, transcript 27 April 2022 T 33.20-43. That was not the case in relation to the defence as it then stood, but it was the case in relation to the respondents' reply to the defence to cross-claim filed 22 April 2022. 115 The applicants submit that the same submission was made during the course of the appeal to the Full Court, when senior counsel for the respondents submitted to the Full Court that "… as monies were received, distributed through those entities, Mr Karas and Mr Lipman had a personal arrangement which equalised what they got in their pockets" and accepted that this was a profit sharing enterprise, on any view between the individuals: Day affidavit annexure NPD-111, transcript 24 November 2022 T 20.25-32, T 21.20-26. 116 I note that in the exchange between Charlesworth and Colvin JJ: Day affidavit, annexure NPD 111, T 20-40-21.7 senior counsel put the profit-sharing arrangement at a high level with an apparent reluctance to accept it as being binding. In particular, senior counsel referred to it being an understanding but with only a possibility that one could withdraw from it unilaterally without there being consequences in equity. 117 Accordingly, the submission that was made before me that the profit sharing arrangement was contractual was not made before the Full Court. It is clear that before the Full Court, senior counsel was being circumspect in his description of the nature of the profit sharing arrangement such that the respondents did not accept that the profit sharing arrangement was binding or contractual. 118 There is a reference by senior counsel to a contractual arrangement before the Full Court at NPD-111, T 20.6-19, however senior counsel was there dealing with the service arrangements as between LKPL and LKHK. 119 Next, the applicants submit that the contractual status of the profit sharing arrangement was highly material to the dispositive reasoning of the Full Court, I do not accept that submission. First, as I have already noted, although the submission that the profit sharing arrangement was contractual was put to me in submissions by senior counsel, it was not put in the same terms to the Full Court and there is no mention in the Full Court's reasons of the profit sharing arrangement being contractual. The passages of the Full Court's judgment to which the applicants refer: Karas v LK Law at [54]-[56] make no mention of a contractual profit sharing arrangement. 120 Second, I accept that at [53] of Karas v LK Law, the Full Court observed that even in the face of evidence to the effect that LKHK was operated by Mr Karas as a sole trader, which the Full Court assumed to be correct for present purposes, that did not stand in the way of a claim that there was a partnership in respect of the profits generated by the three firms (LKPL, LKHK and LKUK) within the overarching partnership case. 121 Third, the Full Court noted that Mr Karas did not refute the evidence to the effect that the profit earned by him and Mr Lipman from the three practices were shared. 122 It is not apparent to me, however, that those observations allow for a conclusion that any profit sharing arrangement between Mr Lipman and Mr Karas was contractual was "highly material to the dispositive reasoning of the Full Court".

[32]

Case management and prejudice to the applicants 127 In Selveratanam Stewart J identified case management principles as also being relevant to the exercise of the discretion. At [28]: 28 There are also other relevant factors to be considered that are applicable more generally to the amendment of pleadings. In Australian Competition and Consumer Commission v Productivity Partners Pty Ltd (No 2) [2020] FCA 863 at [6], with reference to Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; 239 CLR 175 at [5], [30], [71], [90], [93], [94], [98] and [102], I identified those factors to include the following: (1) prejudice to another party that cannot be adequately compensated by an award of costs, which would include the inevitable prejudice of unnecessary delay where that exists; (2) inefficiencies in the use of the court as a publicly funded resource arising from the vacation or adjournment of trials; (3) the need to maintain public confidence in the judicial system, which has a potential to be lost where a court is seen to accede to applications made without adequate explanation or justification; (4) the objective of doing justice between the parties; (5) the objective that the pleadings identify the "real" issues between the parties; (6) the overriding purpose of the civil practice and procedure provisions in s 37M of the Federal Court of Australia Act 1976 (Cth), namely to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible; and (7) the nature and the importance of the amendment to the party that is seeking it. 128 The applicants refer to Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175, [98] and the observations by Gummow, Hayne, Crennan, Kiefel and Bell JJ that in view of the stated purpose in the Court Procedures Rules under consideration of the timely disposal of the proceedings at an affordable cost and whereas speed and efficiency, in the sense of minimum delay and expense are essential to just resolution of proceedings and although the parties should be given a proper opportunity to plead their case that is subject to limits that may be placed on that re-pleading when delay and cost are taken into account. 129 Sections 37M and 37N of the Federal Court of Australia Act 1976 (Cth) are to like effect. 130 Amongst the factors the plurality referred to in Aon as relevant to the exercise of the power to permit amendment include the extent of any delay and the associated costs, the ill effects of any delay upon the parties to proceedings, the nature and importance of the amendments to the party applying, the prejudice which might follow any amendment and the reasons for the amendment particularly in circumstances where there was a delay in applying for it: at [101]-[103]. 131 Prejudice to the applicants is an important consideration. In the Day affidavit, Mr Day deposes to the prejudice said to flow to the applicants should leave be granted to make the amendments. Without doing any disservice to the matters to which Mr Day deposes, it is fair to say that in part, the prejudice comprises the costs to be incurred in preparing further evidence on the part of the applicants' witnesses to deal with the change in position by the respondents. In particular, Mr Day refers to the matters deposed to by Mr Lipman in his trial affidavit sworn 31 July 2023 which was prepared in circumstances where the respondents have admitted a contractual arrangement for the sharing of after-tax profits of the three firms. Mr Day deposes that on that basis he did not focus on obtaining surrounding evidence as to how each year's dividend was calculated and paid. Should leave be granted, that exercise will need to be undertaken and further affidavits filed and served. Mr Day deposes to the further steps required at [48] of his affidavit and also notes that at the same time the applicants are required to take a number of further steps as part of the case management orders in the lead up to trial. I accept the matters to which Mr Day deposes. 132 A further matter is that on 1 December 2023, I have listed a hearing for one day to deal with objections to affidavits. Mr Day deposes, and again I accept, that if leave is granted to amend [22] in the manner proposed, the applicants will require leave to file and serve further affidavits of evidence in chief and that it is unlikely the applicants will be in a position to do that prior to the hearing on 1 December 2023. 133 Mr Day deposes that if leave is granted to the respondents, it will significantly reduce the time he would otherwise have devoted to undertaking the trial preparation and other tasks required prior to trial. I accept that submission. 134 All matters to which Mr Day deposes are matters which carry weight on the question whether the Court should exercise its discretion to allow the withdrawal of the contractual plea. 135 I accept Mr Grieve's evidence in the first Grieve affidavit as to the reasons for the delay in any amendment. His firm has been retained in this matter for a relatively short period of time and I accept there is a great deal of correspondence and other documentation to consider as well as a number of interlocutory applications to address. I do not consider the delay in withdrawing the contractual plea as unreasonable.

[33]

Overall consideration 136 Having considered the parties' submissions, it is evident that: (a) One of the key issues in this matter is whether there existed an overarching partnership. The nature of any relationship between the parties will be important; (b) The individuals who are parties to this action are highly competent solicitors with significant experience in complex commercial litigation. They have retained both solicitors and senior counsel who have great experience and competence in complex commercial litigation; (c) The reply to the applicants' defence to cross-claim was filed on 22 April 2022, just prior to me hearing the injunctions application argument, such that it must have been fresh in senior counsel's mind that the contractual plea had been made. That explains the information proferred to the Court by senior counsel on information from junior counsel that it was agreed on the pleadings that the profit-sharing arrangement was contractual; (d) The plea that the profit sharing arrangement was contractual was not dispositive in the interlocutory injunction decision in LK Law; (e) Senior counsel did not describe the profit sharing arrangement as contractual before the Full Court and it is not apparent to me that any suggestion the profit sharing arrangement was contractual was "highly material to the dispositive reasoning of the Full Court" in Karas v LK Law; (f) The contractual plea was made in the amended defence filed 20 March 2023 after the Full Court delivered its decision on 17 February 2023 but in slightly different terms; (g) The applicants' submission that there is a compelling inference that the respondents had considered the Full Court's reasons before filing the amended defence has force. As I have noted, the contractual plea in the amended defence is in different terms to the contractual plea in the reply to the applicants' defence to cross-claim. That demonstrates a consideration of the contractual plea leading to a refinement of the plea whilst leaving the substance of the plea intact; (h) The applicants do not plead specifically to the contractual plea in [22] of their reply filed 31 March 2023 (amended reply) to the amended defence. The amended reply pleads in the preamble that save as is expressly admitted in the amended reply, the applicants join issue with the defence; (d) Save for specific admissions in their reply to the amended defence that some of the allegations in [22] of the amended defence are consistent with [22(a)]-[22(c)] of the original defence, the applicants plead a general denial. That general denial is directed at the respondents' version of the profit-sharing arrangement, including the contractual plea such that the applicants did not admit the contractual plea; (i) The evidence read and relied upon by the respondents gives rise to an error in the sense that as a result of Mr Karas turning his mind to the detail of the arrangement when preparing his trial affidavit, it was then that the error became evident. That demonstrates why the plea is in error and when it became evident; (j) The contractual plea was not fraudulent or one of overreach as referred to by Bowen LJ in Cropper v Smith; (k) Although I give weight to the applicants' submission that the contractual plea is a "central plank" to the case that there existed an "overarching partnership agreement", it is not definitive. The provisions of s 2 of the Partnership Act make that clear. Conversely, the absence of a contractual arrangement is not determinative that no partnership existed. That question will need to be determined in all the circumstances and in light of the evidence given and tested in cross examination as to the relationship not only between the individuals but between the entities; (l) The discretion the Court is being asked to exercise is broad with the overall question being to ensure there is a fair trial: Jeans; (m) There has been an explanation for the error. It is only when Mr Karas has turned his mind to the arrangement when preparing his trial affidavit that the error has become evident; (n) The contractual plea is a plea as to the legal characterisation of the profit sharing arrangements, the details of which are in dispute. As litigation proceeds, positions that have been taken change on subsequent review in light of further material becoming available or being considered in a different light; (o) The objective of the Court is to decide the rights of the parties and not to punish them for mistakes they make in the conduct of their cases. If the mistake can be corrected without injustice to the other party and if not corrected will not lead to a decision on the real matters in controversy, it should generally be allowed: Celestino at 7 [10]; (p) I do not consider the applicants have relied to their detriment or are otherwise prejudiced by the withdrawal of the contractual plea: Celestino at 10, [14]; (e) There is no suggestion that the trial in this matter, listed to commence in early March 2024, will need to be adjourned as a result of the proposed amendments should leave be granted; (q) Notwithstanding the undoubted competence and experience in commercial litigation by Mr Karas, his solicitors and counsel, the question of whether an arrangement is contractual or not is one for consideration by the Court at trial having heard the evidence; and (r) I take into account the matters in Aon and the prejudice to which Mr Day refers. Given there is approximately four months prior to trial and that any prejudice to the applicants may be accommodated by appropriate orders granting leave to file further affidavits of evidence in chief, I do not consider the delay, of itself, to be a significant factor. There may be the need to provide leave to the respondents to respond to any affidavit evidence by the applicants dealing with any profit-sharing arrangement. If that is the case, it is likely they will be given a short time within which to file any responding evidence.

LK Law Pty Ltd v Karas

At a glance

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Judgment (36 paragraphs)

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Legislation Cited (6)

Cases Cited (23)