McLennan Asset Services Pty Limited v Macquarie Investments Limited

Supreme Court of NSW|2017-12-15|Before: McDougall J

T M Faulkner SC (Plaintiffs) K J Williams SC (Defendants)

William James Lawyers (Plaintiffs) Ashurst Australia (Defendants) File Number(s): 2017/375355

Judgment (EX TEMPORE - REVISED 15 DECEMBER 2017)

HIS HONOUR: The plaintiffs seek orders giving effect to what they say are their rights under clause 7 of a Settlement Deed made in June 2017 between them and the defendants. The Settlement Deed was made to record the compromise of litigation then pending in this court. The substantial issue is whether the plaintiffs are presently entitled to have the defendants pay into the trust account of the plaintiffs' lawyers a sum of money estimated to be required for the conduct, over the next three months, of litigation pending in the Grand Court of the Cayman Islands.

Background

The background is somewhat complex and, unfortunately, given that this matter has been heard in the duty list and is being decided on the last day of term, these reasons will not be able to express it in the requisite detail. Shortly, the first plaintiff was the trustee of two unregistered mortgage investment funds which can be called the Bear Fund and the Borg Fund. A major asset of the Bear Fund was an investment in the Torchlight Partnership based in the Cayman Islands. The general partner of that partnership, which effectively managed its business, commenced proceedings against the plaintiffs, their director, Mr Wallace, and other investors alleging an unlawful means conspiracy. The parties call those proceedings the conspiracy claim, and I will do the same.
The issues in the conspiracy claim are extremely complex, both factually and legally. The amount at stake is large and the claim is, in round figures, equivalent to about $235m. The plaintiffs have retained solicitors in Sydney, attorneys in the Cayman Islands and counsel from London to defend the claim. They are subject to an order to file their defences by 30 March 2018.
The first defendant, through the second defendant, held units in the Bear Fund and the Borg Fund. The defendants had a dispute with the plaintiffs as to whether the first plaintiff was validly appointed as the trustee of those funds. They commenced proceedings in this court to resolve the dispute.
It was those proceedings that were resolved on the terms set out in the Settlement Deed to which I have referred. In very broad outline, the plaintiffs agreed to pay the defendants a sum of money and to wind up the Borg Fund and hand its assets over to the defendants, and the first plaintiff agreed to retire as trustee in favour of a new trustee appointed by the defendants.
It will be seen that to the extent that there were claims against the first plaintiff in its capacity as trustee of the Bear Fund, it had denuded itself of the assets of the fund from which, otherwise, it might expect to recoup itself for the costs of defending that claim.

Clause 7 of the Settlement Deed

Because the first plaintiff had effectively lost at a practical level its right of indemnity, the Settlement Deed included what was clearly intended to be some sort of replacement for that lost indemnity. That is set out in cl 7 of the Settlement Deed which is headed (for convenience only and not so as to affect interpretation): Indemnity to MAS concerning Bear, and requirement to pay costs of the conspiracy claim.
There are two substantive parts to cl 7 and a number of procedural parts. The first substantive part (cl 7(a)) is an indemnity given by the defendants to the plaintiffs in respect of any liability incurred by the plaintiffs in respect of the first plaintiff's proper performance of its duties and powers in respect of the Bear Fund.
The second substantive part is that set out in cl 7(b), by which the defendants undertook to pay the reasonable legal costs of the plaintiffs and Mr Wallace of defending the conspiracy claim.
Clause 7(c) was, in effect, ancillary to, or intended to create mechanisms to make practical, the cl 7(b) costs promise. It provided, amongst other things, for costs estimates to be given to the defendant on a three month rolling basis, for the defendants to pay the amounts of the estimates into the trust account of the plaintiffs' lawyers Williams James, and for the defendants to pay "Conspiracy Claim Lawyer Invoices" (a defined term, the content of which is obvious) in accordance with their terms.
There were further machinery provisions in subclauses (d-g).
Since that summary does not really illustrate the real nature of the dispute, I set out the entire wording of cl 7: 7. indemnity to mas concerning bear, and requirement to pay costs of conspiracy claim (a) Subject to clauses 7(f) and 9, MIML and Bond Street indemnify MAS and MCM in respect of any liability which MAS and MCM incur or may incur or has incurred in the proper performance by MAS of its duties and powers in respect of Bear. (b) Subject to clauses 7(d), 7(e), 7(f) and 9, MIML and Bond Street will: (i) pay the reasonable legal costs of MAS, MCM and Thomas Wallace, and any other director, officer or employee or former director, officer or employee of MAS or MCM that is personally named as a defendant in the Conspiracy Claim, on a solicitor and client basis; and (ii) pay the reasonable out of pocket witness expenses of Thomas Wallace and any other director, officer, or employee or former director, officer or employee of MAS or MCM that is personally named as a defendant in the Conspiracy Claim (which for the avoidance of doubt will not include payment in respect of their time or own exertions but will include business class air travel and accommodation costs), of defending the Conspiracy Claim. (c) In respect of MIML and Bond Street's obligations pursuant to clause 0: (i) MIML and Bond Street will use their best endeavours to enter into an agreement with the lawyers acting for MAS, MCM and Thomas Wallace in relation to the Conspiracy Claim (Conspiracy Claim Lawyers) to pay on their behalf the legal costs of MAS, MCM and Thomas Wallace on a solicitor and client basis. (ii) MAS and MCM will take all steps reasonably necessary for MIML and Bond Street to enter into and give effect to the agreement referred to in clause 0; (iii) If MIML and Bond Street fail to enter into an agreement with the lawyers acting for MAS, MCM and Thomas Wallace pursuant to clause 000 above, MAS, MCM and Thomas Wallace may enter into an agreement with the Conspiracy Claim Lawyers on terms entirely satisfactory to them and without direction from MIML and Bond Street; (iv) MAS and MCM will instruct the Conspiracy Claim Lawyers to: (A) provide directly to MIML, by the end of each calendar month, an estimate of legal costs and disbursements that will be incurred over the following three calendar months in relation to the Conspiracy Claim, including a general description of work to be carried out (Conspiracy Claim Lawyer Estimates); (B) provide directly to MIML invoices in respect of work done in relation to the Conspiracy Claim, such invoices to include a detailed description of the work carried out (Conspiracy Claim Lawyer Invoices); (C) discuss Conspiracy Claim Lawyer Estimates and Conspiracy Claim Lawyer Invoices with MIML, as reasonably required by MIML in order for MIML to satisfy itself that they are reasonable; (v) MAS and MCM, if reasonably required by MIML or Bond Street to do so, will exercise any rights they may have to challenge, review, tax or assess the Conspiracy Claim Lawyer Invoices, provided MIML agrees to meet the costs of MAS and MCM doing so; (vi) MAS and MCM will obtain Conspiracy Claim Lawyer Estimates from the Conspiracy Claim Lawyers and provide them to MIML by the end of each calendar month; (vii) within 14 days of receipt of each Conspiracy Claim Lawyer Estimate, MIML and Bond Street will deposit into the trust account of the Conspiracy Claim Lawyers sufficient funds to ensure that the balance of money in the Conspiracy Claim Lawyers' trust account which is held on account of the legal costs and disbursements for MAS, MCM and Thomas Wallace relating to the Conspiracy Claim equals no less than the amount of the Conspiracy Claim Lawyer Estimate; (viii) MAS and MCM will provide MIML all Conspiracy Claim Lawyer Invoices within seven days of receiving them; (ix) MIML and Bond Street will, by the due date for payment or within 28 days of receiving them (whichever is the later), pay all Conspiracy Claim Lawyer Invoices or allow funds held on trust pursuant to clause 0 to be applied towards them. The parties acknowledge that it is not intended that by doing so MIML, Bond Street, MAS, MCM or Thomas Wallace waive or lose any right they may have to challenge, review, tax or assess the Conspiracy Claim Lawyer Invoices; (x) MAS and MCM must act reasonably in seeking to obtain costs orders in favour of them and Thomas Wallace where available in the Conspiracy Claim, and in enforcing such costs orders as reasonably required by MIML. MAS and MCM must pay to MIML an amount equal to the proceeds of any such costs order to the extent the costs were paid by MIML or taken from the assets of Bear or Borg. (d) If any of MAS, MCM or Thomas Wallace are found liable and ordered to pay any money in respect of causes of action in the Conspiracy Claim based upon unlawful conspiracy or unlawful interference or a finding of dishonesty or fraud of any of MAS, MCM or Thomas Wallace, MAS and MCM must, within 28 days of such liability being found or order being made (whichever occurs first) and (in either case), finally determined, pay to MIML an amount equal to the amount of all sums paid pursuant to clause 0. (e) MAS and MCM are to provide to MIML such information about the defence and legal fees of the Conspiracy Claim as MIML reasonably requires from time to time. (f) The indemnity in clause 0 does not extend to any liability under or as a result of breach of this document, the executed Deed of Novation or the executed Deed of Retirement, Nomination and Appointment. (g) Clause 25 does not apply to this clause 7.
The dispute has arisen because on 20 November 2017, William James sent to the defendants an estimate of costs likely to be incurred over the following three months. In Australian dollars, those estimated costs were in the sum of $1,071,000. There was some, although brief, detail given of the purposes for which (it was said) those costs were required, and of the various legal service providers by whom invoices would be rendered.
The amount of which payment is now claimed is the amount of $1,071,000 less an amount presently held in trust, in effect left over from previous contributions. That is how the sum that is the subject of these proceedings, $973,623.51, is calculated. There is no objection to the calculation.

The parties' submissions

The fundamental dispute between the parties is whether, on the proper construction of cl 7, the defendants are required to pay the amounts of legal costs and disbursements that are the subject of each estimate within 14 days of the provision of those estimates, or whether they are required to pay those estimates only in so far as they can be said to be "reasonable": that is to say, picking up the qualification set out in cl 7(b)(i).
Mr Faulkner of Senior Counsel, who appeared for the plaintiffs, submitted that there was no inherent restriction (in respect of the obligation to pay estimated costs and disbursements) of the kind for which the defendants contended. He noted that the adjective "reasonable" explicitly qualified the obligation to pay the costs of defending the conspiracy claim, the subject of cl 7(b). He noted, in contrast, that the estimates that were to be provided were not said to be estimates of the "reasonable" legal costs and disbursements likely to be incurred over the following three months. Further, he submitted, given that what was required were estimates, it would be very difficult to see how they could be so qualified.
Likewise, Mr Faulkner submitted, in cl 7(c)(vii) and in cl 7(c)(ix), the obligations to pay the amounts estimated, and to pay costs invoices rendered respectively, were not qualified by reference to any requirements of reasonableness. In short, Mr Faulkner submitted, there was a careful scheme designed to ensure that the plaintiffs and Mr Wallace could continue to defend the conspiracy claim, and could be funded to do so, without quibbles along the way as to whether any particular amount estimated (or indeed invoiced) could be said to be "reasonable".
Mr Faulkner submitted that there was a clear scheme of risk allocation, under which (by analogy with legislation not infrequently the subject of litigation in this Court), the parties had agreed to a "pay now, argue later" scheme.
Mr Faulkner submitted that this characterisation was supported by cl 7(d) under which, in effect, the defendants took the risk that, if costs were refundable for the reasons set out in that subclause, the plaintiffs and Mr Wallace might not be able to refund them.
Ms Williams of Senior Counsel, who appeared for the defendants, stressed the introductory words - the "chapeau" as it is sometimes called - of subcl (c). Those words, she submitted, tied the obligations set out in subcl (c) back to the fundamental obligation set out in cl 7(b): namely, the obligation to pay (and, I interpolate, pay only) "reasonable legal costs ... of defending the Conspiracy Claim".
In those circumstances, Ms Williams submitted, the estimates that were to be given must, of necessity, be estimates of reasonable legal costs, and indeed, the fee invoices that were submitted and were to be paid must be invoices for reasonable legal costs for services of defending the conspiracy claim. Ms Williams submitted, therefore, that the payment obligations set out in cl 7(c) (vii), (ix) were, on the proper construction of the clause as a whole, limited to the obligation to pay reasonable amounts on account and reasonable costs actually incurred and invoiced.
In support of that submission, Ms Williams pointed to cl 7(c)(iv)(C), which may be read in conjunction with cl 7(e). She submitted that the plaintiffs were required to discuss the Conspiracy Claim Lawyer Estimates and Invoices with the defendants, as the defendants might require, so that the defendants - more specifically the first defendant - could be satisfied that those estimates and invoices were reasonable. It may be noted that cl 7(c)(iv)(C) calls up the concept of subjective reasonableness - that is to say, the first defendant must be satisfied that the invoices and estimates are reasonable - and not the concept of objective reasonableness which is clearly imported by cl 7(b).
In those circumstances, Ms Williams submitted, the defendants were entitled to satisfy themselves as to the reasonable quality of the estimates and invoices before they could be obliged to pay them.
The submissions of counsel were more detailed and more complex (and indeed more subtle) than the summary I have given, but once again, bearing in mind the time at which these reasons are given, I will say no more.

Decision

It should be noted, as a matter of fact, that the defendants have entered into a costs agreement with William James (who are the "Conspiracy Claim Lawyers") as contemplated by cl 7(c)(i). That costs agreement makes it clear that the clients continue to be the plaintiffs, and that the defendants are third party payers. It reiterates the terms of cl 7 of the Settlement Deed (in part) and emphasises the requirement for funds to be deposited on a three month rolling basis to cover estimated costs and disbursements.
It should also be noted that the estimate provided on 20 November 2017 has generated a very substantial amount of correspondence seeking further information and disputing, on reasonableness grounds and otherwise, the defendants' obligation to pay it. I do not propose to refer to the detail of that correspondence.
The approach to be taken to questions of construction of commercial contracts is well known. The relevant principles need not be set out in any detail. I will do no more than refer to the decision in Electricity Generation Corporation v Woodside Energy Limited [1] .
It is, of course, necessary to construe cl 7 as a whole and in context. The context includes the matters to which I have referred, in so far as they indicate the genesis of the transaction and the factual matrix within which the Settlement Deed came into existence. In substance, the parties intended for the plaintiffs to surrender their rights in respect of the two funds, and to receive in exchange both the specific cl 7(a) indemnity and the wider (because it is not limited to costs incurred by the plaintiffs in relation to actions as trustees) cl 7(b) quasi indemnity.
The other matter of context which seems to me to be significant is, as I have said, that at the time the settlement deed was made, the Cayman Islands conspiracy claim proceedings were on foot. They were very obviously proceedings of extreme factual and legal complexity. The amount of the claim is very large indeed. It must have been obvious to the parties, at the time they made the settlement deed, that the defence of those proceedings would be extremely costly, and would require to be funded over a lengthy period of time even before the proceedings were set down for hearing.
It must also have been understood by the parties, I think, that lawyers generally are unwilling to commit themselves to undertake substantial legal work unless they have some assurance of payment. Certainly, so far as Williams James are concerned, that was made clear by the requirements of the costs agreement to which I have referred already. It can scarcely be suggested that parties of the commercial experience of the defendants could have thought that lawyers in London and, perhaps, the Cayman Islands, would have acted on any other basis.
To my mind, looking at cl 7 as a whole, the obligation to pay estimates of costs and costs invoices set out in cl 7(c) (vii), (ix) respectively are not qualified by some requirement that the costs in question should be, whether objectively or subjectively, "reasonable". To my mind, the clear scheme set out by cl 7 as a whole is that although the obligation is only to pay the reasonable legal costs of defending the conspiracy claim, the obligation to fund the defence of the conspiracy claim requires that the defendants should pay amounts invoiced either on account of costs (the estimates) or on account of work actually done (the costs invoices).
Any other construction would cause enormous commercial and practical difficulties. It would mean (as has happened already) that the payment of moneys into trust, to fund future work, might be held up while the parties squabbled over various items in the various estimates. It would mean, likewise, that payment of invoices for fees rendered could be held up on the same basis and in the same manner.
The document is clearly one very carefully drafted (to the extent it matters, it was drafted by the defendants' lawyers). The express qualification of "reasonable", used in relation to costs in cl 7(b), is conspicuously absent from 7 (v)(iv)(a) and cl 7(c)(vii), (ix). I find it very hard to imagine that the omission of that word was anything other than deliberate. In circumstances where well advised and well resourced parties have taken very considerable care to document their agreement, the proposition that the Court should proceed, in effect, by implying a qualification that the parties themselves did not allude to, is difficult to understand.
There are, however, other textual indications that seem to me to support the view that I have expressed. The first is that the obligations set out in cl 7(b) are to pay the costs of defending the conspiracy claim. That is a well-known expression. It indicates that the costs in question must be properly characterised as having been expended for the purpose of defending that claim. By contrast, the estimates of costs that are to be given (and paid) are of costs incurred in relation to the conspiracy claim.
The words "in relation to" are generally thought to be capable of denoting a very loose degree of connection between the two subjects that they do connect. What they normally require (although the context may often tell otherwise) is that there be some logical and discernible connection, but not necessarily one that can be said to be immediate. Again, it seems to me, the very careful drafting effort in the deed would be taken to indicate that the distinction between costs of defending the claim and costs likely to be incurred in relation to the claim, is deliberate.
I accept, of course, that there is an express obligation in cl 7(c)(iv)(C) to discuss the estimates and the invoices, as the defendants might reasonably require so that the defendants can satisfy themselves that the estimates and invoices are reasonable. But what discussions may be characterised as reasonable, and when they are to be conducted, is not specified. As the circumstances of this case show, it might be difficult for the parties to get themselves together to have those discussions, particularly within 14 days after receipt of each estimate. There is no time limit specified for the obligation to discuss, whereas a strict time limit is specified for the obligation to pay. In the case of the estimate, that is within 14 days of receipt. In respect of the costs invoices, that is within the later of their due dates or 28 days of receipt. Clearly enough, there is no guarantee (nor indeed any apparent reason) why the cl 7(c)(iv)(C) discussions should have terminated before either of those cut off dates.
I do accept, as Ms Williams submitted, that the introductory words to cl 7(c) specify that the machinery set out in the subclause is a machinery constructed "in respect of" the cl 7(b)(i) obligation to pay reasonable costs of defending the conspiracy claim. That indicates, of course, that there must be some nexus between the estimates and invoices that are set out for which cl 7(c) provides and the defence of the conspiracy claim itself. But not only are the introductory words of the chapeau - "in respect of" - capable of denoting a wide or loose connection between the two subjects which they connect, that impression is, as I have said already, reinforced by the words "in relation to" in cl 7(c)(iv)(A).
Finally, I note that cl 7(d) to which I have referred already, makes express an obligation to repay costs if the circumstances set out in that subclause are found to apply. There can be no certainty that the plaintiffs would be able to meet their obligations. That seems to me to be consistent with the scheme of risk allocation which, to my mind, is evident in cl 7 set out as a whole. Relevantly for that purpose, the clause envisages that the defendants will pay costs estimates that comply with the requirements of cl 7(c)(iv)(A) within the time required and likewise will pay invoices, and will depend upon some later resolution to ensure that they have paid no more than falls within cl 7(b).
As I have said, there were many other matters argued and other fascinating questions that, no doubt, could and should be pursued were there but world enough and time. However, for the reasons I have given, it is not necessary to do more.

Form of relief

In the course of the hearing, Mr Faulkner sought and obtained leave to amend the summons so as to claim declaratory relief and alternative mandatory relief in respect of payment. Ms Williams indicated that if the Court declared her clients' obligations to be as the plaintiffs submitted, they would meet them (of course, subject to their rights on appeal and the outcome of any appeal) without the need for a formal order. I am grateful for that, and it reflects the approach that one would expect to be taken by parties cognizant of their obligations under s 56 of the Civil Procedure Act 2005 (NSW).

Orders

There was no objection to the form of the declarations sought in prayers 1A and 1B. Ms Williams submitted that if a declaration were to be made in terms of prayer 1C, there should be added at the end the words "pursuant to cl 7(c)(vii) of the Settlement Deed". I agree. With that amendment, I make the declarations sought in prayers 1A, 1B and 1C of the amended summons filed in Court today.

[Counsel addressed]

The defendants submitted that there should be no order as to costs, or alternatively exclusion of the costs in relation to the amendment of the summons. Ms Williams submitted that the claim, as it was originally put forward, raised not only the proper construction of cl 7 but also the question of whether the costs, the subject of the particular estimate, were reasonable. She pointed to some evidence that could be said to have gone to that latter issue.
Mr Faulkner submitted that his clients have succeeded and that they made it clear on 13 December 2017 (the day before the commencement of the hearing) that the only issue in question was that of construction.
The simple reality is that these proceedings were brought on in an enormous rush because of what I have concluded is the defendants' breach of their contract. It is often the case that at the outset issues are perceived to be in play which, with perhaps greater time to reflect, might not have been pressed. In the scheme of things, it does not seem to me that there would be any significant amount of costs attributable to the relevant parts of Mr Wallace's affidavit (before the plaintiffs made it clear on 13 December that they were not raising reasonableness as an issue.)
Likewise, the amendment to the summons was something that was prompted by submissions put (I hasten to say, put properly) on behalf of the defendants in the course of the hearing yesterday.
Taking a broad brush approach, I see no reason to depart from the prima facie position established by UCPR r 42.1. I order the defendants to pay the plaintiffs' costs of the proceeding.
I will retain the exhibits.

Endnote

(2014) 251 CLR 640 at [35] (French CJ, Hayne J, Crennan and Kiefel JJ). DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 December 2017

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Judgment (11 paragraphs)

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