Muriniti; Newell v Lawcover Insurance Pty Ltd

Judgment

1. HER HONOUR: On Friday 15 June 2018, the appellants, Mr Muriniti and Mr Newell, sought an adjournment of the hearing of the appeal in this matter, which is set down for an expedited hearing on 19 June 2018, until after the determination of a special leave application and, if granted, their appeal to the High Court in respect of this Court's decision in King v Muriniti [2018] NSWCA 98. Subject to the adjournment application, the appeal is otherwise ready for hearing.
2. The basis of the adjournment application is the appellants' contention that, having regard to this Court's finding in King v Muriniti that a party cannot challenge, in costs proceedings, findings made in the substantive proceedings, they will be precluded from advancing one of their principal arguments on their appeal. This is dealt with further below.
3. It was indicated to me on the hearing of the adjournment application that in order to understand the appellants' contention, it was necessary to have an understanding of three decisions of the Land and Environment Court, which concerned a dispute between a client of the appellants, Mrs Young, and her neighbours, Mr and Mrs King, in relation to a drainage issue. Those proceedings are briefly reviewed in the following paragraphs.

Land and Environment Court proceedings

1. In 2004, consent orders were made in proceedings brought by Mrs Young against the Kings, in which Mrs Young had sought the removal of allegedly unlawful works and the reinstatement of a pre-existing drainage system. By consent, McClellan CJ LEC dismissed the proceedings following an undertaking by the Kings to carry out certain drainage and building works. The undertaking was based upon a solution proposed in a joint report given in the proceedings.
2. There were various other proceedings relating to the matter, including a number of appellate proceedings, which it is not presently necessary to canvass.
3. Subsequently, Mrs Young sought to set aside the consent orders on the following bases: that the undertaking was uncertain; that Mrs Young and/or the Kings were mistaken as to the purport of the undertaking; and that the Kings had made fraudulent misrepresentations to the court that the undertaking was a solution to the drainage issue.
4. That application was dismissed by Sheahan J on 9 July 2015: Young v King (No 6) [2015] NSWLEC 111. His Honour also ordered Mrs Young to pay the Kings' costs of proceedings in the Land and Environment Court since 8 March 2004.
5. His Honour's reasons for dismissing the application, in summary, were as follows: 1. The Kings' undertaking was sufficiently certain, despite the absence of any stipulation of a particular discharge point at the rear of the Kings' property. His Honour held that neither Mrs Young's opinion, nor the opinions of the experts she later engaged to interpret the joint report, were relevant to the determination of whether the undertaking was uncertain. Rather, his Honour confined his consideration to the consent orders, McClellan CJ LEC's judgment, the transcript of the proceedings and the original pleadings. Based on these sources, his Honour held, at [205], that the undertaking, construed objectively, was: "… a simple 'drain and retain' solution to the problem, involving the isolation of drainage for a completed retaining wall, and a change of the drainage of that wall from the front of [the Kings' property] to the rear at a level of RL 7.95." His Honour noted, at [208], that the clarity of the works required was reinforced by the fact that Mrs Young had initially sought to have the undertaking enforced. 1. Mrs Young failed to prove that the undertaking was void on the basis of either common or unilateral mistake. His Honour held that Mrs Young's claims of mistake disregarded the principle of agency, in circumstances where Mrs Young's representatives were involved in formulating, accepting and entering into the agreement reflected in the joint report and consent orders. His Honour held that Mrs Young's hindsight, in realising that she may have made a 'mistake' in accepting the solution contained in the joint report, was not a mistake in any legal sense. His Honour noted that no evidence had been adduced to establish that her representatives were mistaken as to the content of the joint report. 2. His Honour was not satisfied, on the balance of probabilities, that the Kings made any fraudulent representations to the court. His Honour noted, at [227], that a finding of fraud must be supported by strong and probative evidence and that, although a plethora of material had been tendered, he was not taken to any evidence of any real, probative value that would have warranted a finding of fraud.
6. In the course of his judgment, at [84], [88]-[91], [147], and [227]-[228], his Honour made remarks critical of the appellants.
7. On 20 August 2015, Mrs Young filed a notice of motion in which she sought orders for indemnity costs in her favour against 18 respondents, being the Kings and 16 non-parties. That application, together with applications by some of the non-parties against whom costs were sought seeking relief from the court in respect of the applications against them, was set down for hearing on 30 November 2015. On 11 November 2015, Mrs Young sought an adjournment of that hearing due to the ill health of her counsel, Mr Newell. The adjournment application was refused. However, Sheahan J directed that the Kings were excused from attendance at the hearing on 30 November 2015 and that their application for Mrs Young's lawyers to pay their costs be stood over to a later date: Young v King (No 7) [2015] NSWLEC 178.
8. Mrs Young's application for costs against the Kings and the other non-parties was dismissed by Sheahan J on 19 February 2016: Young v King (No 9) [2016] NSWLEC 4. His Honour ordered that the costs order made against Mrs Young in Young v King (No 6) be amended to order that costs be payable on an indemnity basis. His Honour also ordered that Mrs Young pay the costs of the Kings and the non-parties in respect of her costs applications against them on an indemnity basis.
9. Appeals from Young v King (No 6) and Young v King (No 9) were dismissed by this Court on 19 October 2016: Young v King [2016] NSWCA 282.
10. On 27 March 2017, pursuant to the Civil Procedure Act 2005 (NSW), ss 98 and 99 and/or the Legal Profession Uniform Law Application Act 2014 (NSW), Sheahan J ordered the appellants to pay, jointly and severally, on an indemnity basis, the costs of the Kings and 11 of the non-parties in respect of the various costs applications that had been brought in the proceedings: Young v King (No 11) [2017] NSWLEC 34.
11. In making the costs orders against the appellants, Sheahan J was satisfied that a clear case had been established for personal costs orders to be made against the appellants and for those orders to be made on an indemnity basis. His Honour found, at [210]-[213], that the appellants were "the impetus" for the costs applications, and that they had: "… behaved incompetently, unprofessionally, inappropriately, and against the true interests of their client, who was entitled to expect competent and reasonable representation. They not only brought, on her behalf, a costs application which had no arguable basis … they, and especially [Mr Newell], were the real authors of the folly which it became, so compounding his mounting of a conspiracy case, without a factual basis, in the substantive proceedings. Having embarked on these futile courses, the lawyers continued to incur, on [Mrs Young's] behalf, unnecessary liability for her own costs and the costs of those she unreasonably pursued, and they must be held responsible."
12. Lawcover Insurance Pty Ltd (Lawcover), the respondent in the appeal presently before the Court, was the professional liability insurer for L C Muriniti & Associates and had had the conduct, on behalf of Mr Muriniti and Mr Newell, of the costs applications made against them. On 11 April 2017, a notice of intention to appeal was filed on behalf of the appellants by Lawcover, notwithstanding that, at that time, a view had been formed within Lawcover that an appeal ought not be brought against the orders made in Young v King (No 11). Lawcover subsequently determined not to appeal.
13. On 26 June 2017, Mr Muriniti wrote to Lawcover's solicitors, Sparke Helmore, advising that he would be commencing proceedings against Lawcover, and would also file an appeal from the decision in Young v King (No 11). In the meantime, Mr Newell had filed a notice of appeal from the decision.
14. On 28 June 2017, Lawcover filed a summons, seeking, inter alia, interlocutory and final orders restraining the appellants from taking any steps to conduct or prosecute any appeal against the orders made in Young v King (No 11). On 16 November 2017, Sackar J made an order restraining the appellants from taking any steps to prosecute any such appeal: Lawcover Insurance Pty Ltd v Muriniti [2017] NSWSC 1557. His Honour's order was based upon the terms of the professional indemnity insurance policy between Lawcover and L C Muriniti & Associates and, in particular, cls 21-23, which provided as follows: "Deciding Whether To Appeal 21. We will seek the insured's consent before deciding whether or not to pursue an appeal. 22. If the insured do not consent to our decision as to whether or not to pursue an appeal, the insured have 14 days within which to notify us that they require an opinion from a lawyer under clause 33. However, in case of urgency, we may require the insured to notify us within a shorter period specified by us in writing. 23. If the insured do not notify us under clause 22 they will be deemed to have consented." It appears that, at some point, Mr Newell was employed or engaged by the practice of L C Muriniti & Associates and, it appears the policy of insurance extended to him.
15. Sackar J held that, viewed in context, cl 21 did not contemplate the insured being 'consulted' or asked to give permission to embark upon a decision-making process. His Honour held, at [169], that: "… while clause 21 is inelegantly worded, the most sensible construction is that the clause is predicated, at least by implication, upon the basis the insurer has made a decision as to whether or not to appeal, but that it will not actively pursue (by continuing or proceeding with) that course without giving the insured an opportunity to consent, or not, to that course. If the insured consents, then the insurer's decision is pursued. If the insured does not consent, clauses 22 and 23 will operate according to their terms."
16. On this construction, his Honour held that the appellants must be deemed to have consented to Lawcover's decision not to appeal. His Honour held that, by an email dated 11 April 2017, Lawcover had sought the appellants' consent to its decision not to appeal from Young v King (No 11) and that, as the appellants had failed to notify Lawcover that they required an opinion from a lawyer under cl 33, cl 23 was engaged.
17. In relation to the appellants' allegations of bad faith on the part of Lawcover, his Honour held that they were without substance. Relevantly, his Honour made the following findings: 1. There was no evidence to support the appellants' allegations about the independent lawyer process being corrupted; 2. There was no substance in the appellants' claim that Lawcover kept them "in the dark" and did not adequately defend them in the personal costs applications. His Honour found that Lawcover kept the appellants "informed at all times … were transparent in how they intended to conduct the defence and conducted it in a professional and competent manner"; 3. Lawcover provided sufficient reasons for why it decided not to pursue the appeal in its advice dated 11 April 2017. His Honour held that the advice: "… reads as a well-considered and comprehensive review of how Lawcover had reached its decision. It summarises and analyses [Young v King (No 11)] and identifies potential errors before concluding the prospects of the costs orders being overturned on appeal was less than 50%." 1. Objectively viewed, the above conclusion that the prospects of success on appeal were less than 50 per cent was reasonable. His Honour held that an appeal "would likely fail".
18. His Honour also held that cls 21-23 and 33 of the insurance policy did not offend the Insurance Contracts Act 1984 (Cth), ss 13, 14 and 52. His Honour held that the policy did not exclude, restrict or modify the operation of the Insurance Contracts Act and that it was not "some sort of impermissible attempt under [s 52] to contract out of the Insurance Contracts Act".
19. Finally, his Honour held that, contrary to the appellants' submission that it would be contrary to public policy to prevent them from conducting an appeal at their own cost, they were contractually prevented from doing so. They were obliged by operation of their deemed consent under cl 23 to comply with Lawcover's decision not to appeal Young v King (No 11).
20. On 16 February 2018, the appellants filed a notice of appeal against the orders made by Sackar J. The issues raised by the notice of appeal are as follows: 1. Whether, on a proper construction of the insurance policy: 1. The appellants had consented to Lawcover's decision not to appeal Young v King (No 11); 2. The appellants were disentitled from appealing Young v King (No 11) in person; 1. If so, whether the appellants should be permitted to appeal on the basis of public policy considerations; 1. Whether Lawcover failed to act in utmost good faith: 1. By failing, allegedly, to defend the proceedings in Young v King (No 11) properly; 2. By deciding not to appeal Young v King (No 11); 3. By failing, allegedly, to give adequate reasons for its decision not to appeal Young v King (No 11); 1. Whether Sackar J failed to give adequate reasons for his finding that Lawcover did not fail to act in utmost good faith; 2. If Lawcover did in fact fail to act in utmost good faith, whether: 1. It should be found that the appellants had not consented to Lawcover's decision not to appeal Young v King (No 11); 2. Lawcover was entitled to rely upon those provisions of the insurance policy which entitled it to control and conduct an appeal of Young v King (No 11); 1. Whether cls 21-23 of the insurance policy were unenforceable on the basis that they offended the Insurance Contracts Act, ss 13, 14 and 52; 2. Whether the appellants' apprehension about corruption of the independent lawyer process was supported by evidence or was well founded; 3. Whether Sackar J erred in finding that the appellants would have poor prospects of success on appeal; 4. Whether Sackar J's reasons support the existence of a reasonable apprehension of bias.

Consideration

1. It is necessary to return to the basis advanced by the appellants as to why the hearing of the appeal should be adjourned.
2. King v Muriniti concerned an application for costs made by the Kings against Mr Muriniti, pursuant to the Civil Procedure Act, s 99, that he pay the costs the court had ordered Mrs Young to pay the Kings in four of the proceedings brought by Mrs Young against them. Relevantly, for present purposes, the issue on the appeal was whether the Court could rely on findings that had been made in the Court's principal judgment when determining whether costs should be ordered against Mr Muriniti.
3. Basten JA (with whom Gleeson JA agreed) identified, at [12], the argument advanced by Mr Muriniti as follows: "The argument put on behalf of [Mr Muriniti] was that he, not being a party to the original appeal, was not bound by the findings made by this Court in proceedings between Ms Young and Mr and Ms King. Further, it was submitted that the Kings could not rely upon the judgment in this Court as evidence of the facts as found. In other words, not only was the respondent not bound by the findings, but the findings themselves were not evidence on which the Kings could rely. The latter argument depended upon the terms of s 91 of the Evidence Act which reads as follows: 91 Exclusion of evidence of judgments and convictions (1) Evidence of the decision, or of a finding of fact, in an Australian or overseas proceeding is not admissible to prove the existence of a fact that was in issue in that proceeding. (2) Evidence that, under this Part, is not admissible to prove the existence of a fact may not be used to prove that fact even if it is relevant for another purpose."
4. Basten JA considered, at [22], that the purpose behind the argument was to permit Mr Muriniti to re-open the entire proceedings with the possible consequence and intent of there being inconsistent findings from those made in the principal judgment. In his Honour's view: "… the result sought would tend to undermine the finality of an otherwise 'final' judgment and would thus constitute an abuse of process."
5. His Honour observed, at [46], that Mr Muriniti could have adduced evidence "by way of confession and avoidance or mitigation", but that he had not done so.
6. The appellants have recently filed an application for special leave to appeal from the decision in King v Young. That brings me to the present matter.
7. In brief summary, so far as is relevant to the adjournment application, the appellants' proposed argument on the appeal is that Lawcover's decision not to appeal from Young v King (No 11) was taken in breach of its obligation of utmost good faith. As I understand it, the appellants contend that the findings of Sheahan J in Young v King (No 6) and Young v King (No 11), that the various applications brought by Mrs Young, including the costs applications, were hopeless and that their conduct of those proceedings was unprofessional, incompetent and inappropriate, were wrong. On the adjournment application, Mr Newell submitted that this Court's decision in King v Young in relation to the operation of the Evidence Act 1995 (NSW), s 91 meant that the appellants would not be able to challenge those findings. For that reason, Mr Newell submitted that the hearing of the appeal should abide the outcome of the special leave application.
8. However, it seems to me that there is a real question as to whether the findings in the Land and Environment Court decisions will in fact be in issue in the manner for which Mr Newell contended. Whilst Lawcover made its decision not to appeal on the basis of findings made in the Land and Environment Court proceedings, what is in issue on the appeal is whether Lawcover breached its obligation of utmost good faith by relying upon the findings in those decisions in making its determination not to appeal from Young v King (No 11). This is apparent from grounds 8 and 9 of the notice of appeal, which are in the following terms: "8. The learned primary judge should have found that the respondent had not acted in utmost good faith in that the respondent had not properly defended the proceedings the subject of [Young v King (No 11)]. 9. The learned primary judge erred in finding that there was no evidence that the proceedings the subject of [Young v King (No 11)] had not been properly defended."
9. As with any appeal, it will be permissible for the appellants to challenge the findings of the primary judge including the primary judge's factual findings. Grounds 8 and 9 of the appeal raise the question of what evidence there was, if any, to support their claim that Lawcover had not properly defended Young v King (No 11). As I see it at this stage, the proper application of s 91, as determined in King v Muriniti, is not an impediment to that argument being raised. Should any other issue arise, that can be dealt with on the hearing of the appeal.
10. In the circumstances, I have concluded that the appeal should proceed and that the adjournment application be refused. The appellants will, as is the usual case, have every opportunity to develop their argument in accordance with their grounds of appeal.

Orders

1. I make the following orders: (1) Confirm order made on 15 June 2018 that the application for adjournment is refused. (2) The appellants to pay the costs of the notice of motion.

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