2 MARCH 2005
SIMON EDWARDS MARKS-ISAACS v STUART GRANT FOWLER & ORS
Judgment
1 HANDLEY JA: The Court has before it notices of motion by respondents seeking orders that the appellant give security for their costs of the appeal.
2 The appellant sued the respondents in the District Court alleging that they had been guilty of professional negligence in advising him to settle property litigation in the Family Court and otherwise acting for him in those proceedings. The proceedings were settled during the hearing before Chisholm J on 1 December 1994. The District Court proceedings were commenced on 29 November 2000 immediately before the six-year limitation period expired.
3 On 23 April 2004 Phegan DCJ dismissed the appellant's action and on 25 June he ordered the appellant to pay the respondents' costs of the proceedings on an indemnity basis.
4 Following the dismissal of his action the appellant filed an application for leave to appeal and after some interlocutory proceedings in this Court he filed a notice of appeal as of right on 8 November. The notices of motion seeking orders for security for costs were filed by the respondents on 2 November and 27 October.
5 The evidence at the trial lasted for 13 days and this was followed by two days of oral argument supported by extensive written submissions. The respondents' affidavits estimate the costs of the trial of the solicitor defendants at approximately $200,000 and those of the barrister defendant at approximately $165,000. This evidence was not challenged. Each of the respondents estimate that their costs of the appeal will be of the order of $30,000. This evidence was not challenged.
6 Three affidavits by the appellant's solicitor Mr Ken Harkness were read in part and he was cross-examined. There was no affidavit from the appellant. The respondents obtained production of a substantial quantity of documents under subpoenas directed to the appellant and his solicitor but they did not tender any of the documents and no one tendered the subpoenas.
7 SCR Pt 51 r 16(1) provides that "the Court of Appeal may, in special circumstances, order that such security as the Court of Appeal thinks fit be given for the costs of the appeal". The principles which govern the exercise of the discretion under this rule are established by the decisions of this Court in Transglobal Capital Pty Ltd v Yolarno Pty Ltd (2004) 60 NSWLR 143 and Porter v Gordian Runoff Ltd [2004] NSWCA 171.
8 Mr Harkness, the solicitor for the appellant, swore an affidavit of 5 November which annexed a statement of the appellant's financial position as at 4 November prepared by him on the appellant's instructions. It showed minimal realisable assets and liabilities of $72,000 apart from certain loans and the costs of the trial.
9 Exhibit A tendered during the hearing included a letter from the Australian Taxation Office (ATO) of 17 June 2004 agreeing to the appellant paying his outstanding income tax debts by instalments. The instalments due between 30 November 2004 and 28 May 2006 totalled $27,258, the last being for $16,758.70. Exhibit A also included amended Income Tax Assessments dated 30 May 2003 for the 1998, 1999 and 2000 years under which $28,587 was owing to the ATO. As a result of the settlement referred to in the letter the appellant appears to have accepted the amended assessments but obtained time to pay by instalments without liability to the general interest charge.
10 The annexure stated that the appellant conducted a small business consultancy practice the net income from which fluctuates significantly but is generally about $12,000 per month. His listed outgoings totalled $9,900 a month including $3,300 for the rent of an apartment on the Finger Wharf, Woolloomooloo shown as his address in the notice of appeal, $2,300 for household expenses and $2,000 for general living. Other non-domestic expenses produced an overall total of $9,900 a month, leaving an apparent surplus of $2,100.
11 The $12,000 a month is said to be the appellant's net income and this presumably means net income after business expenses but before tax. On this basis the appellant's monthly surplus of $2,100 would have to cover income tax payable on a net business income of some $144,000 a year. On the current tax scales this is $53,000 or $4,416 a month.
12 This evidence of the appellant's financial position on information and belief leaves many unanswered questions. The appellant met, for some time, his own costs of the proceedings in the District Court, until he could no longer pay his solicitor's monthly accounts. His solicitor continued to act on a contingency basis. The trial lasted, with interruptions, from 5 August to 26 September 2003. The appellant paid over $60,000 to his own solicitors for the trial. Mr Harkness said in his oral evidence that his arrangements with the appellant for the appeal require the appellant to pay his legal bills to Mr Harkness in the ordinary course as an ordinary client (T 15). As at 4 November $12,000 was owed to Mr Harkness.
13 There is no evidence as to the appellant's income tax liabilities for the years ended 30 June 2001, 2002 and 2003 and there is no direct evidence that they have been paid. There is no reference to such liabilities in the annexure and presumably they had been paid in full but the amount is not known. The annexure states that the appellant's anticipated tax liability for the year ended 30 June 2004 is $20,000 which is significantly less that the $53,000 payable on a net business income of $144,000.
14 The appellant's amended taxable incomes for 1998, 1999 and 2000 shown in the amended assessments were $98,377, $54,442 and $29,835. Two of the amended assessments included modest capital gains and two refer to franking rebates, that for the 2000 year being $2,598 indicating the receipt of significant dividend income. The appellant's taxation position may be affected by his so called tax effective investments referred to in the annexure which involve him in loan repayments of $1,800 a month. The interest component would be deductible but presumably the principal component is not. There may be other associated deductions. The annexure disclosed acquisition loans on which $42,000 and $53,000 respectively was owing, and stated that each of these tax effective investments had a negative value. What these were was not stated.
15 There is no evidence that the appellant has remarried or is in a relationship and he appears to have no dependents. The annexure does not contain any break down of the $2,300 a month for household expenses, or of the $2,000 a month for the other general living expenses. Nothing is said about a car, or the associated expenses. The amount of $4,300 a month for living expenses appears high for a single man without dependents even when allowance is made for the appellant's need, given his occupation, to maintain appearances. On the information available the Court is entitled to find that the appellant is maintaining a luxurious lifestyle.
16 Mr Harkness gave oral evidence that he had been instructed shortly before the hearing that there had been no substantial change in the appellant's financial position since 4 November 2004.
17 The appellant has not himself sworn an affidavit, and his solicitor's affidavits provide minimal information. The appellant's tax return for the year ended 30 June 2004 may have been lodged before 31 January 2005, or been ready for lodgement because an estimate of the tax payable was provided on 5 November, but the return was not tendered.
18 If the appellant had his office in his apartment some part of his rent and other expenses may have been deducted in computing his net business income of $12,000 a month.
19 The appellant, as a self-employed consultant, should be filing quarterly business activity statements containing realistic estimates of his taxable income for the year to date. His agreement with the ATO required him to meet his current lodgement and payment obligations. His business activity statements for 2004 were not produced.
20 Taxpayers lodging such statements which disclose taxable incomes are required to pay a tax instalment either in the amount notified by the ATO or in an amount based on their own estimate. The estimated tax liability of $20,000 for the 2004 tax year should be the balance after giving credit for the quarterly payments. If so it would reflect an income greater than that for the previous year.
21 The Court has no information as to the quarterly tax payments made by the appellant since 17 June 2004. The appellant could not meet his inferred quarterly tax payments out of the monthly surpluses disclosed by the annexure.
22 There is no reason to think that the appellant has capital assets of any value which could be used to provide security for the respondents' costs. In December 1994 the capital assets of the parties to the former marriage were not large and on the evidence the appellant would have had little opportunity to acquire substantial capital assets since in view of his other liabilities and difficulties. On the other hand the Court only has the untestable assertion of the appellant to his solicitor that his tax-effective investments have a negative value.
23 The appellant's net business income is substantial and he is spending large amounts each month on what appears to be a luxurious lifestyle. He has to pay his own solicitor for the costs of the appeal but has made no offer to provide anything, from his income, by way of security for the costs of the respondents. If the appeal fails the appellant will be liable for the respondents' costs of the trial and of the appeal which, on the evidence, he will not be able to pay once they are assessed, leading in all probability to his bankruptcy. The agreement of 17 June 2004 which the appellant negotiated with the ATO provides for a final payment of $16,758.79 on 28 May 2006. Presumably the appellant was able to persuade the ATO that he had a realistic prospect of paying this amount. That agreement requires the appellant to meet his current tax liabilities as they fall due but there is no basis for finding, on the present evidence, that the appellant could pay his 2004 assessment in the order of $20,000 by the probable due date.
24 The appellant has chosen not to put this information before the Court. The facts relating to his financial position are peculiarly within his knowledge and he bears an evidentiary onus of establishing that any order for security would stultify his appeal although the ultimate onus of establishing special circumstances rests on the respondents.
25 The appellant has not disclosed his full financial position, even on information and belief, and he did not swear an affidavit. The inference is open that the appellant's actual cash flow position is substantially more favourable than that which has been revealed. In Insurance Commissioner v Joyce (1948) 77 CLR 39, 49, in a passage that has often been quoted, Rich J said:
"But when circumstances are proved indicating a conclusion and the only party who can give direct evidence of the matter prefers the well of the court to the witness box a court is entitled to be bold."
26 In these circumstances it is necessary to make a preliminary assessment of the merits of the appeal and for this purpose I have read and considered the 82 page judgment of the trial Judge. I have also considered the notice of appeal, the appellant's written submissions in support of his summons for leave to appeal, and his written submissions handed up during the hearing. I have not read the further material submitted by the respondents without leave after I had reserved my decision. The relief sought in the appeal is a general new trial.
27 The Judge made findings adverse to the appellant's credit based on his oral evidence and other matters where, as Mr Margo SC demonstrated, his findings could be strongly attacked. The Judge preferred the evidence of Mr Fowler and Mr Henshaw to that of the appellant and on most issues he preferred the evidence of the barrister. He described the credit of the principal witnesses as a matter of fundamental importance (p 45).
28 His adverse view of the appellant's credit was based in part on his view that the appellant "was rarely prepared to meet his financial obligations without at least challenging their extent if not their basis" (p 46). Mr Margo said this was a reasonable response on the appellant's part to the difficult financial position in which he found himself. He also submitted that the dispute with an interstate firm of solicitors which the Judge referred to could not reflect adversely on the appellant's credit in the absence of evidence as to the merits of that dispute and it was unfair to rely upon this where the appellant had not been cross-examined on the topic. There is force in these submissions.
29 It seems that a significant error occurred when the Judge said (p 60) that "a further example of a shift in the evidence which undermined the plaintiff's credit … was his failure to include in his own case, either by way of reference or exhibit, the document which became known as the 'scenario document'". The appellant annexed this document to his principal statement and the Judge was simply wrong. He added (p 64) that "the attempt by the plaintiff through a combination of recent invention and concealment to make such a case only served to seriously damage his credit". This, so far as any concealment was concerned, was also wrong.
30 If, as appears, significant errors undermine a trial Judge's credit findings, this Court must consider whether "a substantial wrong or miscarriage has thereby been occasioned" (SCR Pt 51 r 23(1)) before it orders a new trial. For that purpose the Court must consider whether the errors are immaterial because the judgment can properly be supported on other grounds which are independent of the credit findings.
31 In this case there are substantial grounds for thinking that the judgment can be supported on other grounds. The Judge rejected the appellant's case that the respondents were negligent in failing to advise him that he would or could remain responsible for the ANZ Bank writ debts of $36,602 (p 37) although these were secured by the joint mortgage over the home unit under an all moneys clause. Written settlement offers to the wife prepared under the appellant's instructions included the ANZ Bank writ debts as debts of the appellant. Moreover the appellant's letters of 12 and 24 January 1995 to his solicitor, after the settlement, and before the transfer of his interest in the home unit to the wife did not mention the ANZ Bank writ debts (p 41).
32 Under the terms of settlement the appellant had no right to be indemnified by his wife against these liabilities. Under the general law he was, in respect of these debts, the principal debtor and his wife, although liable for them under the mortgage was only a surety as between herself and the appellant. As such she was entitled to be indemnified by him. See Permanent Trustee Co of NSW Ltd v Hinks (1934) 34 SR (NSW) 130, 139-140 per Jordan CJ.
33 The Judge found, on the basis of objective facts and the probabilities, that the appellant gave up any attempt to obtain an express indemnity against the ANZ Bank writ debts after 29 November (pp 73-4). Mr Brereton SC, in his report, referred to the risk that, if a request for an express indemnity from the wife had been pressed the appellant may have been worse off (p 74). The Judge found (p 74):
"The failure on the part of the defendants to advise the plaintiff to include a clause in the terms of settlement requiring the wife to indemnify the plaintiff for the ANZ writ debts did not amount to any failure on their part to exercise reasonable care …"
34 The Judge also rejected the appellant's claim in respect of the car owned by the family company which was in the wife's possession. The appellant's scenario document set out four possible outcomes if the case went to judgment, but none referred to his claim to the car or its value (p 75). The company had been deregistered by ASIC on 15 November, shortly before the hearing (p 43), and there was no possibility of having it reinstated in time (p 44). It had substantial liabilities, including unpaid group tax, and was insolvent (pp 44, 76). As the Judge held, it was more than likely that as an asset of the company, whether in the hands of ASIC or a liquidator, the car had no net value for the appellant because the proceeds of its sale would have been used to meet its liabilities (p 79).
35 The Judge thought that the barrister may have taken an over legalistic approach to this part of the appellant's claim because the Family Court may have been prepared to disregard the separate legal existence of the company and look at the underlying interests. However he held that the barrister's failure to advise the appellant more comprehensively about the car did not translate into any compensable loss (p 78).
36 The Judge asked himself whether the advice to settle the property proceedings could reasonably have been given by persons exercising and professing to have the special skills of a legal practitioner. He said that the answer rested very much on expert evidence given the specialised nature of the jurisdiction of the Family Court (p 70). He had available expert reports from Mr Millar for the appellant and from Mr Brereton SC and the Honourable Eric Baker SC on behalf of the respondents. The Judge accepted the evidence of Mr Brereton and the Honourable Eric Baker.
37 Mr Margo said (T 45) that no reasons were given by the Judge for his acceptance of Mr Brereton's evidence but this is not so. The Judge said that Mr Brereton's opinion contained "a very thorough and well reasoned analysis" (p 70). His opinion was that the terms of settlement were almost identical to the order which the Court would have made (p 70) and the Honourable Eric Baker shared Mr Brereton's view (p 71). Mr Millar in his oral evidence agreed that the conclusion reached by Mr Brereton "fell within the range of predictable outcomes" (p 71). The Judge concluded (p 71):
"In the face of such a compelling body of expert opinion, there is no foundation for a conclusion that the defendants gave any advice in support of settlement which a person possessing and exercising the relevant professional skills could not reasonably have given."
38 The Judge had earlier considered the four possible outcomes ranging from best to worst reviewed in the scenario document (pp 60-4). The best yielded the appellant a net sum of $71,500 (p 60). The next best left him with $42,000 (p 61). The Judge said that the document demonstrated that the appellant "unaffected by any sudden change in the direction of the proceedings, had reconciled himself to a set of outcomes well within the range of the wife's final offer". The difference between the best scenario and the actual settlement was only $11,000 (p 62).
39 The decision of Chisholm J, on the morning of 30 November to refuse a late application by the appellant for leave to amend (p 76) which the trial Judge held, for reasons which appear good on their face, could not have been made any earlier (p 57), meant that the home unit would almost certainly be valued at $340,000 instead of $358,000, the figure shown in the best two scenarios. This reduced to $2,000 the difference between the appellant's best scenario and the settlement figure (p 63).
40 The appellant's claims for consequential losses due to his inability, as a result of the settlement, to enter the property market, face real difficulties with causation and remoteness.
41 These conclusions on the merits of the appellant's case do not depend on the Judge's adverse assessment of the appellant's credit. The appellant made other allegations of professional negligence which the Judge rejected for reasons which, on their face, are scarcely open to challenge, and do not depend on his view of the appellant's credit. These include the respondents' failure to subpoena the appellant's mother-in-law (pp 54-55) and a Mr Fisher, the proprietor of Noblewoods, who was in his eighties (pp 19, 54). The Judge recorded that counsel for the appellant had not submitted that the failure to subpoena these witnesses had caused any "identifiable loss" (p 52). The claim for the loss of his personal effects was also rejected for reasons other than credit.
42 Accordingly the essential findings in the judgment which led to the dismissal of the appellant's claims did not depend on credit and as a result the appeal has little prospects of success.
43 In my judgment special circumstances have been shown which enliven the discretion under SCR Pt 51 r 16(1) to order security for costs. The matters which, in combination, are capable of constituting special circumstances include the failure of the appellant to fully disclose his financial position and his failure to pledge his oath to the account that has been given; his apparently luxurious lifestyle; his slender prospects of success in the appeal; the modest amount that is realistically at stake; and the appellant's willingness and ability to fund his own costs of the appeal to the extent of some $30,000. It is also material that unless an order is made for security the respondents will incur further costs in defending an appeal judged to have little prospects of success with little chance of recovering those costs from the appellant in addition to the irrecoverable $370,000 already spent in their successful defences at the trial. The respondents' costs of the appeal will be substantial in relation to the amount that is realistically in issue and is only a fraction of the costs they incurred at the trial.
44 In view of the appellant's failure to fully disclose his true financial position it is not clear that the proposed appeal would be rendered nugatory by an order for security for costs in a moderate amount.
45 The respondents were separately represented at the trial and that was entirely appropriate but the position has now changed. There is no discernible conflict of interest between them and from now on they could and should be represented by the same counsel and solicitors. Compare SCR Pt 51 r 9(4), (6). I will therefore assess that their claims for security on the basis of one set of costs. The respondents are free to retain separate solicitors and counsel if they choose but this should not increase the burden on the appellant.
46 The appellant waited almost six years before commencing these proceedings and a further three years elapsed before the trial. The appeal has no intrinsic urgency and if it succeeds the remedy will be a new trial.
47 The Court does not always order security for the whole of the respondent's estimated costs of the appeal and I will not make such an order in this case. I consider that the appropriate sum to be provided by way of security is $15,000 for one set of costs between the respondents.
48 In my judgment modest changes in the appellant's luxurious lifestyle should enable him to find at least $1,000 a month for the provision of the security I propose to order. I will direct that a bank account be opened in the joint names of the solicitor for the appellant and a solicitor for the respondents and that the appeal should not be stayed if not less than $1,000 a month is paid into that account, but a hearing date should not be fixed until the full amount has been paid in. The following orders are made: