Newell; Muriniti v De Costi

Leave to appeal

1. A preliminary question arose as to whether Mr Newell and Mr Muriniti required leave to appeal. The De Costi parties submitted that leave was required pursuant to the District Court Act 1973 (NSW), s 127(2)(b), which provides that leave is required for an appeal against "a judgment or order as to costs only". However, the De Costi parties did not oppose the grant of leave. Mr Newell and Mr Muriniti contended that they did not require leave to appeal.
2. There is an uncertainty as to whether an order that imposes a costs liability on a non-party is an order "as to costs only". This was referred to by Gleeson JA, with whom Macfarlan and Leeming JJA agreed, in Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [4]: "In Yu v Cao [2015] NSWCA 276 at [5], McColl JA (Sackville AJA and Adamson J agreeing) noted that there was room for debate about whether leave is required where the costs order is one against a non-party, albeit made in the exercise of the costs discretion in s 98(1) of the Civil Procedure Act 2005 (NSW) (Civil Procedure Act). Reference was made to the diversity of judicial opinion on this question which Campbell JA (McColl and Macfarlan JJA agreeing) referred to in Arena Management Pty Ltd (Receiver and Manager Appointed) Pty Ltd v Campbell Street Theatre Pty Ltd [2011] NSWCA 128; 80 NSWLR 652 at [104] - [121]. After reviewing authorities in England and different Australian states, Campbell JA did not express a preference for a particular approach, it being unnecessary for the decision in that case. It is unnecessary for this Court to resolve this question as, for the reasons that follow, I am of the view that, if required, leave to appeal should be granted and the appeal be allowed with no order as to costs."
3. Although I am inclined to the view that Mr Newell and Mr Muriniti need leave to appeal, it is not necessary to finally determine that question, as I consider that leave should be granted if required. The proceedings before the Court raise significant questions of principle, including questions of the circumstances in which it is appropriate to make an order against legal practitioners under either or both of the Legal Profession Act, s 348 and the Civil Profession Act, s 99. The outcome of these proceedings will also have significant consequences for the professional reputations of Mr Newell and Mr Muriniti: Rodi v Gelonesi [2012] NSWCA 424 at [24]; Collier v Lancer (No 2) [2013] NSWCA 186 at [7]; Lee v New South Wales Crime Commission (2012) 224 A Crim R 94; [2012] NSWCA 262 at [12]. Accordingly, this an appropriate case in which to grant leave to appeal, should leave be required.

Issues on the appeal

1. Mr Newell and Mr Muriniti raised the following issues in their notice of appeal: 1. Whether his Honour erred in finding that they were liable, pursuant to the Legal Profession Act, s 348, to provide an indemnity to the De Costi parties on account of the costs occasioned by the claim against Androulla Costi: appeal ground 1(a); 2. Whether his Honour erred in the approach he adopted for quantifying the extent of that indemnity: appeal ground 1(b); 3. Whether his Honour erred in finding that they were liable, pursuant to the Civil Procedure Act, s 99, to provide an indemnity against costs payable by the De Costi parties: appeal ground 2(a); 4. Whether his Honour erred in the means he adopted for quantifying the extent of that indemnity: appeal ground 2(b); and 5. Whether his Honour erred in drawing adverse inferences against them in accordance with the principle in Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8: appeal ground 3.
2. The De Costi parties cross-appealed against his Honour's determination as to the quantum of the indemnity ordered in respect of Androulla Costi.
3. Mr Newell and Mr Muritini were separately represented on the appeal and cross-appeal. However, to the extent applicable, their respective counsel divided the submissions so as to avoid duplication. In general terms, that division involved senior counsel for Mr Newell making submissions on broader issues of principle and counsel for Mr Muriniti dealing with the appeal grounds in greater detail. Accordingly, when reference is made in these reasons to the respective submissions of Mr Newell and Mr Muriniti, they are to be read in that light.

Legislative provisions

1. The Legal Profession Act provided, relevantly: "345 Law practice not to act unless there are reasonable prospects of success (1) A law practice must not provide legal services on a claim or defence of a claim for damages unless a legal practitioner associate responsible for the provision of the services concerned reasonably believes on the basis of provable facts and a reasonably arguable view of the law that the claim or the defence (as appropriate) has reasonable prospects of success. (2) A fact is provable only if the associate reasonably believes that the material then available to him or her provides a proper basis for alleging that fact. (3) This Division applies despite any obligation that a law practice or a legal practitioner associate of the practice may have to act in accordance with the instructions or wishes of the client. (4) A claim has reasonable prospects of success if there are reasonable prospects of damages being recovered on the claim. A defence has reasonable prospects of success if there are reasonable prospects of the defence defeating the claim or leading to a reduction in the damages recovered on the claim. (5) Provision of legal services in contravention of this section constitutes for the purposes of this Division the provision of legal services without reasonable prospects of success. … 348 Costs order against law practice acting without reasonable prospects of success (1) If it appears to a court in which proceedings are taken on a claim for damages that a law practice has provided legal services to a party without reasonable prospects of success, the court may of its own motion or on the application of any party to the proceedings make either or both of the following orders in respect of the practice or of a legal practitioner associate of the practice responsible for providing the services: … (b) an order directing the practice or associate to indemnify any party other than the party to whom the services were provided against the whole or any part of the costs payable by the party indemnified. …. (3) An application for an order under this section cannot be made after a final determination has been made under this Part by a costs assessor of the costs payable as a result of an order made by the court in which the proceedings on the claim concerned were taken. (4) A law practice or legal practitioner associate of the practice is not entitled to demand, recover or accept from a client any part of the amount for which the practice or associate is directed to indemnify a party pursuant to an order under this section. 349 Onus of showing facts provided reasonable prospects of success (1) If the court (the trial court) hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success. … (3) A presumption arising under this section is rebuttable and a person seeking to rebut it bears the onus of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success. (4) A law practice or legal practitioner associate of the practice may, for the purpose of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success, produce information or a document despite any duty of confidentiality in respect of a communication between the law practice or a legal practitioner associate of the practice and a client, but only if: (a) the client is the client to whom the legal services were provided or consents to its disclosure, or (b) the court is satisfied that it is necessary for the law practice or associate to do so in order to rebut a presumption arising under this section."
2. The Civil Procedure Act provided, relevantly: "99 Liability of legal practitioner for unnecessary costs (1) This section applies if it appears to the court that costs have been incurred: (a) by the serious neglect, serious incompetence or serious misconduct of a legal practitioner, or (b) improperly, or without reasonable cause, in circumstances for which a legal practitioner is responsible. (2) After giving the legal practitioner a reasonable opportunity to be heard, the court may do any one or more of the following: … (c) it may, by order, direct the legal practitioner to indemnify any party (other than the client) against costs payable by that party. (3) Before making such an order, the court may refer the matter to a costs assessor (within the meaning of Part 7 of the Legal Profession Uniform Law Application Act 2014) for inquiry and report. (4) The court may direct that notice of any proceedings or order under this section with respect to a legal practitioner be given: (a) in the case of a barrister, to the instructing solicitor or client, or both, as the court may direct, or (b) in the case of a solicitor, to the client. (5) The court may give ancillary directions to give full effect to an order under this section, including directions to a legal practitioner to provide a bill of costs in assessable form: (a) to the court, or (b) to a party to the proceedings, or (c) in the case of a barrister, to the instructing solicitor or client, or both, or (d) in the case of a solicitor, to the client. … (7) In this section, client includes former client."

Primary judge's earlier credit findings: De Costi Seafoods (No 3)

1. Before dealing with the primary judge's reasons for decision in De Costi Seafoods (No 6), it is relevant to refer to his Honour's findings as to Mr Wachtenheim's credit, made in the judgment on the cross-claim. In De Costi Seafoods (No 3), the primary judge found, at [67], that Mr Wachtenheim was "entirely discredited as a witness and that his evidence could not be relied upon". This finding, as his Honour observed, "created a substantial impediment" to Mr Wachtenheim being able to establish that the misrepresentations he alleged had been made.
2. Leading up to this finding, his Honour had referred to aspects of Mr Wachtenheim's evidence that he found demonstrated Mr Wachtenheim to be "less than frank in his evidence and morally obtuse": at [46]; to have engaged in a "deliberate falsehood to procure a substantial loan": at [47]; to have given evidence that was "an invention": at [53]; and that he had "falsely maintained" in an affidavit that all the receipts of the business were banked: at [54]. His Honour observed, at [60], that although the false affidavits Mr Wachtenheim had sworn in the proceedings had been corrected before trial, the evidence disclosed that that had been done only because the De Costi parties were aware of all of the evidence which would have exposed him to cross-examination had he not corrected his evidence. His Honour did not accept that the corrections were made because of a desire on the part of Mr Wachtenheim to correct an innocent mistake.

Primary judge's reasons: De Costi Seafoods (No 6)

1. In De Costi Seafoods (No 6), being the judgment the subject of the appeal, his Honour identified three matters for determination in relation to the claim for indemnity pursuant to s 348: first, whether there was evidence sufficient to displace the presumption he had found in De Costi Seafoods (No 4) that the legal services provided in the cross-claim proceedings against Androulla Costi were provided without reasonable prospects of success; second, whether the fact that Androulla Costi did not personally pay any costs precluded an order for recovery of the costs of the action against her; and third, whether the action against Androulla Costi was a minor part of the proceedings and what proportion of the costs of the proceedings was attributable to that action. The claim for indemnity under s 99 also fell for determination.
2. Neither Mr Newell nor Mr Muriniti gave evidence. His Honour observed, at [9], that no reason had been advanced to explain or excuse their failure to do so and stated that he "must infer, in accordance with Jones v Dunkel, that the evidence could not have assisted their case".
3. In relation to the first question identified above, the primary judge, at [14], found that there were no provable facts to provide a foundation for an arguable case of unconscionable conduct against Androulla Costi, or a proper basis for alleging such a cause of action. Accordingly, his Honour found that the presumption under s 349(1) was not displaced.
4. His Honour held, at [16], that s 345(1) was contravened so that, pursuant to s 345(5), legal services in respect of the claim against Androulla Costi were provided without reasonable prospects of success, which in turn enlivened the discretion to make an order under s 348(1)(b). In response to Mr Muriniti's submission that Androulla Costi had not, in fact, paid any costs to her legal representatives, his Honour, at [22], observed that that submission assumed that it was Androulla Costi who was the party indemnified, whereas s 348(1)(b) referred to "any party". His Honour found no reason to read down the words "any party" to refer only to Androulla Costi.
5. Accordingly, whilst his Honour was of the view that the indemnity under s 348(1)(b) should be limited to the costs connected with the baseless claim against Androulla Costi, he considered, at [27], that on the proper construction of s 348(1)(b), the indemnity was not restricted to an order in her favour. Rather, an order "in favour of any party (other than the party to whom the services were provided) [could] be made". It followed on his Honour's view that it was immaterial that Androulla Costi had not personally paid the costs and that s 348(1)(b) permitted an order in favour of the De Costi parties in respect of the costs of the claim against her.
6. His Honour next dealt with the question whether the costs of defending the claim against Androulla Costi were minor. His Honour considered, at [30], that the claim against Androulla Costi was "not trivial" and observed that the claimed damages, which he described as "substantial", were the same as those claimed against the other De Costi parties, so that all issues as to damages were part of the case against her. His Honour stated that this included the credit issues that arose in respect of the evidence of major witnesses in the case, such as Mr Wachtenheim, Ross McGowan, Richard Mare and Mr Theodore. Mr McGowan and Mr Mare, who were former employees of the De Costi companies, were witnesses called in Mr Wachtenheim's case.
7. His Honour observed that Androulla Costi was required to swear four substantial affidavits, that she was cross-examined extensively and that she was referred to on 13 pages of the sixth further amended statement of claim. His Honour also noted that the appellants had not attempted to identify any portion of the evidence or the time spent at trial that was not relevant to the claim against her.
8. His Honour considered, at [31], that the costs of the claim against Androulla Costi "should be treated as an equal portion of the whole of the costs of the proceedings", which he determined to be 20 per cent of the costs of the cross-claim against the De Costi parties, on the basis that the De Costi parties comprised five parties.
9. His Honour, at [33], determined that, subject to his decision in respect of s 99, an order should be made under s 348 directing Mr Newell and Mr Muriniti to indemnify the De Costi parties for the costs of the claim against Androulla Costi, being 20 per cent of the cost of the proceedings.

First issue on the appeal: whether his Honour erred in finding that the appellants were liable, pursuant to the Legal Profession Act, s 348, to provide an indemnity against costs payable by the De Costi parties: appeal ground 1(a)

1. The appellants did not challenge his Honour's finding that the proceedings against Androulla Costi were commenced without reasonable prospects of success. However, they challenged his Honour's finding that they were liable to indemnify the De Costi parties for the costs they had incurred, being an amount equivalent to 20 per cent of the costs incurred in the proceedings.
2. The appellants submitted that on its proper construction, s 348(1)(b) only applied to a person who had the benefit of a finding that proceedings were commenced against the person without reasonable cause , where that person had an actual liability to pay costs in defending the claim. They submitted that the first of these qualifications was not satisfied, as the other De Costi parties did not have the benefit of a finding to that effect. As to the second qualification, the appellants submitted that the word "indemnify" in s 348 bore its ordinary meaning, namely, a liability to compensate for an actual loss. The appellants acknowledged that an indemnity could operate prospectively, but that it only crystallised if there was an actual liability. This in turn led to a consideration of the meaning of the word "payable" in s 348. The appellants submitted that on its ordinary meaning, "payable suggests that there must be an actual liability to pay something".
3. The appellants submitted that it was common ground that there were no costs payable by Androulla Costi. They also relied upon the fact that notwithstanding that she had every opportunity to do so, Androulla Costi did not adduce any evidence of a personal liability to pay costs to her legal representatives, including any evidence of an agreement that she had entered into in respect of costs. Nor did she adduce evidence of any liability to account to the other De Costi parties for any costs they may have paid.
4. The appellants submitted that the construction given to s 348(1) by the primary judge undermined the purpose of the statutory provision. They submitted that the practical effect of the order made by his Honour was to provide a partial indemnity to the other De Costi parties in circumstances where they had not established the necessary precondition to entitle them to an order under s 348(1)(b), namely, that proceedings had been commenced against them without reasonable prospects of success.
5. The De Costi parties at all times acknowledged that Androulla Costi did not personally pay any costs to her legal representatives in respect of the claim and that all costs incurred were paid by a single corporate entity. However, they denied that it was common ground between the parties that there were no costs "payable" by Androulla Costi. In their submission, the fact that costs are met by another party does not mean that there is no actual liability in respect of costs arising from the claim brought against a party without reasonable prospects of success. They argued that if the construction for which the appellants contended was correct, significant injustice would be rendered in circumstances where there were multiple parties and the costs of their representation was met by one party.

Consideration

1. The starting point for the consideration of appeal ground 1(a) is the proper construction of s 348(1). In accordance with the established principles of statutory construction, it is necessary to begin with a consideration of the text. As the plurality stated in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27; [2009] HCA 41, at [47]: "… The language which has actually been employed in the text of legislation is the surest guide to legislative intention."
2. More recently, in SZTAL v Minister for Immigration and Border Protection (2017) 347 ALR 405; [2017] HCA 34 the plurality explained, at [14], that: "The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected." (footnotes omitted) See also Gageler J at [37].
3. Having regard to these principles, it is necessary to turn to the terms of s 348(1). Section 348(1) has a number of elements. First, it applies where a court has determined that a law practice has provided legal services to a party on a claim for damages "without reasonable prospects of success". The primary judge made that finding in respect of the legal services provided by the appellants to the Wachtenheim parties in respect of the claim against Androulla Costi. That is not in contest on the appeal.
4. The second element, relevantly, is that the court may make an order on the application of "any party", directed to the law practice or associate of the law practice. The third element is that the order that the court may make is to indemnify "any party … against the whole or any part of the costs payable by the party indemnified".
5. In my opinion, this language does not constrain the making of an order for indemnity in respect of costs only in favour of the person against whom proceedings were brought without reasonable prospects of success. It permits a costs order in favour of "any party". That party must have a liability for or have paid the costs that were incurred in respect of proceedings brought without reasonable prospects of success. The text of the provision does not require that the party in whose favour an indemnity order is made be the party against whom proceedings were brought without reasonable cause. This is clear from the concluding words of para (b) of s 348(1).
6. If the construction for which the appellants contended were correct, it would be expected that the legislature would have said so by the use of a phrase such as "costs payable by the person against whom the proceedings were brought without reasonable cause". However, that is not the language used. The section provides that an order may be made to indemnify "the whole or part of the costs payable by the party indemnified".
7. There is nothing in the context or purpose of the section that compels or even indicates a different construction. In this regard, I accept the submission of the De Costi parties that significant injustice would be rendered in circumstances where there were multiple parties and the costs of their representation was met by one party, or some only of the parties.
8. In my opinion, ground 1(a) of the appeal should be rejected.

Second issue on the appeal: whether his Honour erred in quantifying the extent of the indemnity: appeal ground 1(b)

1. The appellants submitted that if his Honour's construction of s 348(1)(b) was correct, he nonetheless erred, at [31], in determining that "the costs of the claim against [Androulla Costi] should be treated as an equal portion of the whole of the costs of the proceedings". In this regard, the appellants submitted that there was a "disjunct" between the reasons given by the primary judge, especially at [30], where his Honour gave reasons why the claim against Androulla Costi was not trivial, and the quantification of the costs at 20 per cent of the whole of the costs incurred by the De Costi parties, that assessment being solely based upon Androulla Costi being one of five parties.
2. The appellants further contended that his Honour's approach was unsupported by authority and in any event was flawed, as the section required that specific attention be paid to the likely costs incurred or wasted by reason of the joinder. In this regard, the appellants pointed out that any costs in joining Androulla Costi would have been negligible, that the claim against her was a minor part of the proceedings and that even had she not been a party to the proceedings, she was an important witness and would have given evidence in any event.
3. The appellants submitted that his Honour took an impermissibly broad approach to the section. They contended that the proper approach to an order for indemnity under s 348 was the same as that required under s 99, namely, that the indemnity was in respect of costs thrown away or lost by reason of the impugned conduct. In other words, it was only the extent to which costs were increased by the bringing of the proceedings against a party without reasonable cause that may be the subject of an order under the section and that the order could only be made in favour of that party.
4. Mr Muriniti submitted that, at the least, there should have been evidence that costs were wasted. He cited, by way of example, that there could have been evidence of costs incurred in obtaining instructions on the claim against Androulla Costi that ought not to have been incurred as the claim was brought without reasonable prospects of success. Mr Newell submitted that an appropriate approach for his Honour to have taken was to refer the matter out to a costs assessor to determine what costs, if any, were 'wasted' as a result of the joinder of Androulla Costi.
5. The De Costi parties supported his Honour's reasoning and submitted that his Honour's determination that the claim against Androulla Costi should be treated as an equal portion of the whole of the De Costi's costs was "sound, clear and appropriate".

Consideration

1. Pursuant to s 348(1)(b), if it is found that legal services were provided in respect of a claim that did not have reasonable prospects of success, the court may make an order against the law practice or legal practitioner or associate responsible for providing the service directing that the practice or associate "indemnify … against the whole or any part of the costs payable by the party indemnified".
2. The purpose of s 348(1)(b) was to impose a costs sanction on a law practice or practitioner who provided legal services in respect of a proceeding which ought not to have been brought because it did not have reasonable prospects of success. The phrase "reasonable prospects of success" is not defined in the Legal Profession Act, although s 345 provides some guidance as to its meaning. It is not a high or inflexible bar as Barrett J (as his Honour then was) explained in Degiorgio v Dunn (No 2) (2005) 62 NSWLR 284; [2005] NSWSC 3 (his Honour's judgment was in respect of the former s 198M(1), the terms of which were substantially the same as the present s 348). As Barrett J observed in that case, at [28]: "... 'without reasonable prospects of success' ... equates its meaning with 'so lacking in merit or substance as to be not fairly arguable'. The concept is one that falls appreciably short of 'likely to succeed'."
3. His Honour's reasons were approved by this Court in Lemoto v Able Technical Pty Ltd at [131]-[132]. See also Fowler v Toro Constructions Pty Ltd [2008] NSWCA 178 and Keddie v Stacks/Goudkamp Pty Ltd (2012) 293 ALR 764; [2012] NSWCA 254 at [58].
4. If proceedings were brought against one party only and found not to have reasonable prospects of success, the court could order that, subject to any determination by the court that part only of the costs of that party ought to be indemnified, then all the costs incurred by that party in defending the claim would be subject to the indemnity. Such costs are often referred to as 'wasted costs', a convenient enough label. However, I would prefer to use the terminology of the costs that are to be indemnified under the section.
5. The position may not be as straightforward where the claim is brought against more than one party. If the claim against all parties had no prospect of success and the parties were separately represented, then, again, subject to the court determining that part only of the costs that were incurred in defending the claim were to be indemnified, each party would be entitled to be indemnified for the costs of defending the claim.
6. The present case is different from either of those two straightforward examples. The claim against one of several defendants, Androulla Costi, has been held to have had no reasonable prospects of success. She was one of the De Costi parties amongst whom there were corporate and familial relationships: see at [4] above. Those parties decided to engage the services of one law practice and one counsel to represent all of them.
7. However, it does not follow that, because there were five defendants, 20 per cent of the costs of the whole claim were "costs payable" in respect of the claim against Androulla Costi. The following simple example illustrates why this is so. Having regard to the findings in favour of Androulla Costi in De Costi Seafoods (No 4), the conference time required to take instructions and a witness statement would have been limited, and in particular, limited relative to the time required in respect of those of the De Costi parties involved in dealing with the Wachtenheim parties in relation to the franchise. In addition, the factual and legal issues involved in respect of the corporate liability of the De Costi companies, which may have been different as between them, would not, on the findings made, have involved Androulla Costi in De Costi Seafoods (No 4).
8. In follows, in my opinion, that his Honour erred in his determination that the costs of the claim against Androulla Costi should be treated as an equal portion of the whole of the costs of the proceedings. There were a number of orders that his Honour could have made so that the costs attributable to the claim against Androulla Costi were indemnified. One could simply have been an order that the appellants pay the costs of the proceedings insofar as they related to the claim against Androulla Costi on an indemnity basis. That would have left the parties to either agree to what those costs were or to have those costs assessed. Alternatively, his Honour could have referred the quantification of those costs to an expert costs assessor pursuant to the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 20.14. In my opinion, nothing in s 348(3) would have prevented his Honour from taking that course, the application for the order under s 348 having already been made.
9. However, as none of those steps were taken, there is a question as to what orders this Court ought to make in the circumstances. I deal with that question later in these reasons.
10. It follows, in my opinion, that ground 1(b) of the appeal should be allowed. It also follows that it is unnecessary to determine the De Costi parties' cross-claim.

Third and fifth issues on the appeal: whether his Honour erred in finding that the appellants were liable, pursuant to the Civil Procedure Act, s 99, to provide an indemnity against costs payable by the De Costi parties: appeal ground 2(a); whether his Honour erred in drawing adverse inferences against the appellants in accordance with the principle in Jones v Dunkel: appeal ground 3

1. The De Costi parties, in the proceedings before the primary judge, relied upon the following matters to establish "serious neglect, serious incompetence or serious misconduct" within the meaning of s 99(1)(a): first, the multiple versions of the cross-claim; second, the form of the pleaded representations and particulars; third, that the cross-claim was inconsistent with the evidence; fourth, that the matter was poorly prepared, irrelevant, false, and based upon improper evidence; fifth, there had been a failure to produce documents; sixth, there had been inappropriate dealing with witnesses; and seventh, that there had been serious allegations of impropriety without a proper basis.
2. His Honour upheld each allegation. These matters are dealt with in detail below. It is sufficient at this point to note his Honour's conclusion, at [94]: "… there is a proper basis for a costs order on three bases: (a) Specifically in respect of the costs attributable to the action against Mrs Costi under s 348 of [the Legal Profession Act], which I have assessed as 20% of the costs of the claim. That same conduct of providing legal services for a baseless claim against Mrs Costi is serious misconduct that would justify a similar order under s 99 of [the Civil Procedure Act]. (b) Specifically in respect to the evidence of Mr Shnider. The basis for such an order rests upon the illegal recording and its use, the inappropriate joint conference, and the false and unsupported allegations of impropriety. Mr Shnider's evidence consumed nine days of the trial, about 12% of the total. (c) The other unexplained incidences of serious misconduct, serious neglect and serious incompetence identified earlier in this judgment, in particular, the inappropriate preparation of a false affidavit by Mr Wachtenheim and the improper instructions given to Mr Birrell and Mr Dent, but also the excessive amendments, the prolixity of the pleadings, the causes of action pleaded which were unsupported by evidence, the volume of irrelevant, ill-prepared or improperly prepared evidence and the nonproduction of documents."
3. As a significant portion of the appellants' challenge to his Honour's findings of serious neglect, serious incompetence or serious misconduct was based on their challenge to his Honour's drawing of a Jones v Dunkel inference, the third and fifth challenge fall to be considered together. Before looking at his Honour's specific findings, it is appropriate first to make certain observations by way of overview about the proceedings, next to consider the proper construction of the Civil Procedure Act, s 99 and the principles that govern the jurisdiction to make an order under that section, next to consider the principle in Jones v Dunkel and then to consider whether the appellants were constrained in the evidence they might have been able to give by legal professional privilege.

Overview of proceedings

1. The orders made by his Honour were based upon the time taken for the hearing of the Wachtenheim parties' cross-claim over and above what his Honour considered was reasonable. The following is an overview of the proceedings as they were conducted before his Honour: 1. The matter had been set down for hearing for a period of 10 weeks. At the time that it was set down for hearing, all parties had agreed that this was a reasonable estimate. 2. The hearing took 75 hearing days. 3. 60 affidavits were served by the Wachtenheim parties. 4. 35 subpoenas (other than subpoenas to give evidence) were served by the Wachtenheim parties. 5. The first 13 days of the hearing were spent dealing with objections to evidence and other procedural matters. 6. The Wachtenheim parties called 24 witnesses. Cross-examination of those witnesses took 34 days. 7. The voir dire examination took place over three days. Mr Newell accepted that the costs involved in the voir dire were costs that could properly be ordered against him. 8. More than a day was spent dealing with the Wachtenheim parties' application to file a sixth further amended cross-claim. 9. Closing addresses occupied nine days. 10. The evidence of the other franchisees involved nine witnesses, 17 affidavits and about 400 pages and many folders of exhibits.
2. The time spent in dealing with the objections to evidence referred to in 69 above needs to be considered in the context where the substantive hearing of the Wachtenheim parties' cross-claim had been subject of a pre-trial process dealing with the admissibility of certain evidence, particularly that of the other franchisees, as tendency or coincidence evidence: see the Evidence Act 1995 (NSW), s 192A. That process, which involved objections to 28 affidavits, was heard by Johnstone DCJ over three days. None of Mr Wachtenheim's affidavits were subject to that application. Johnstone DCJ excluded all or some of the evidence in seven affidavits. When the matter came before the primary judge, the De Costi parties sought to re-agitate the rulings on the objections on the basis that they were not bound by them. They submitted to the primary judge that it was open to him to make rulings on the objections to the affidavit evidence regardless of the fact that the objections had previously been subject to rulings by a different judge. That application was acceded to by the primary judge.

Construction of s 99

1. Section 99, insofar as it is relevant to this case, applies where costs have been incurred "by the serious neglect, serious incompetence or serious misconduct of a legal practitioner" (the serious misconduct), in which case the court may, by order, direct the legal practitioner to indemnify any party (other than the client) against costs payable by that party. There is thus a causation requirement in the section. It is not sufficient that there be conduct which falls within any of the three matters with which the section deals. Such conduct must have caused costs to have been incurred that would not otherwise have been incurred but for that conduct. Before making such an order, the court may refer the matter to a costs assessor (within the meaning of Pt 7 of the Legal Profession Uniform Law Application Act 2014 (NSW)) for inquiry and report.
2. The order that a court may relevantly make under the section is an order that a legal practitioner "indemnify" a party against the costs payable by that party. In my opinion, the word "indemnify" bears its ordinary meaning, namely, that it is an indemnity for loss. However, the order that may be made is only in respect of costs that are "payable by" the party to be indemnified. In this respect, I consider that "payable" means that the party to be indemnified has an obligation to pay costs. However, I consider that an order could be made under this provision where there was an arrangement in place as between a party, a third entity and the party's legal representative for the payment of the costs.
3. It should also be noted that the De Costi parties bore the onus on the notice of motion to establish that s 99 was engaged because "costs [had] been incurred by the serious neglect, serious incompetence or serious misconduct of a legal practitioner". The De Costi parties did not call expert evidence in the matter, but rather relied upon the objective circumstances of the trial which were the subject of the seven specific matters of impugned conduct. It was thus necessary for his Honour to make his own assessment as to whether it "appear[ed]" that the conduct particularised involved "serious neglect, serious incompetence or serious misconduct". The appellants did not suggest that this course was not open to his Honour.
4. His Honour's approach reflected authority to that effect. In Attard v James Legal Pty Ltd (2010) 80 ACSR 585; [2010] NSWCA 311, Tobias JA (myself and Giles JA agreeing) stated, at [131]: "In this context it may be noted that it is now well established that on the questions of professional legal practice, particularly in professional negligence cases, and except possibly, but not necessarily, in specialist legal areas, a court does not need expert evidence to be advanced as to the appropriate professional standards from which it is alleged a defendant has departed. The court can resort to its own knowledge of such practices: Neagle v Power [1967] SASR 373 at 376 per Bray CJ; Dickson v Creevey [2002] QCA 195 at [15] per Holman J (McPherson JA and Mullins J agreeing); Keesing v Adams [2010] NSWSC 336 at [35] per Brereton J.
5. The question of his Honour's approach in assessing the quantum of costs raises different questions and is the subject of the fourth issue on the appeal: ground 2(b).

Principles governing the jurisdiction to make orders under s 99

1. The principles governing the exercise of the court's power to make costs orders against legal practitioners were summarised by McColl JA in Lemoto v Able Technical at [92] and again in Kelly v Jowett (2009) 76 NSWLR 405; [2009] NSWCA 278 at [60]. The jurisdiction is to be exercised with care and only in a clear case. The procedure adopted should be "as simple and summary as fairness permits ... measured in hours, and not days or weeks". Of particular relevance to this case are the observations in Lemoto v Able Technical, at [92], that: "… (c) the legal practitioner is not 'the judge of the credibility of the witnesses or the validity of the argument' … the legal practitioner is not 'the ultimate judge, and if he reasonably decides to believe his client, criticism cannot be directed to him' …: … (f) Where a legal practitioner's ability to rebut the complaint is hampered by the duty of confidentiality to the client he or she should be given the benefit of the doubt …; in such circumstances '[t]he court should not make an order against a practitioner precluded by legal professional privilege from advancing his full answer to the complaint made against him without satisfying itself that it is in all the circumstances fair to do so'…" (citations omitted)
2. Observations to similar effect were made by Bingham LJ in Medcalf v Mardell [2003] 1 AC 120 at [23] to which reference is made below.

Jones v Dunkel

1. The rule in Jones v Dunkel applies where there is an unexplained failure of a party to give evidence or to call a witness. Such failure may have either or both of the following consequences in the fact finding process. It "may lead rationally to an inference that the evidence would not help that party's case": Jones v Dunkel at 321; Holloway v McFeeters (1956) 94 CLR 470; [1956] HCA 25 at 480-481. It also enables the court more readily to draw an affirmative inference in support of the opposing party's case: Commonwealth of Australia v McLean (unreported, NSW Court of Appeal, 31 December 1996); Manly Council v Byrnes [2004] NSWCA 123 at [51]; Carolyn Sappideen and Prue Vines, Fleming's Law of Torts (10th ed, 2011, Lawbook Co) at 13.50.
2. His Honour first referred to Jones v Dunkel at [9] of his reasons in De Costi Seafoods (No 6). At that stage, his Honour was dealing with the question whether there was evidence to displace the presumption that he had found arose under s 349 that the legal services were provided to the Wachtenheim parties on the claim against Androulla Costi without reasonable prospects of success: see De Costi Seafoods (No 4). Having observed that no reason was advanced to explain or excuse why the appellants had not given evidence, his Honour stated "I must infer, in accordance with Jones v Dunkel, that their evidence could not have assisted their case".
3. If, by that statement, his Honour meant that the rule in Jones v Dunkel required him to draw the inference, not only that he might draw the inference, then, with respect, that was a misstatement of the rule. There is no such requirement to draw the inference. Rather, as I have explained, the rule in Jones v Dunkel allows for a form of inferential reasoning that is available to a judge in determining the facts upon which a case is to be decided. However, if his Honour meant no more than that, in the circumstances with which he was dealing, it was appropriate to draw the inference that their evidence would not assist their case (thus explaining his Honour's use of the phrase "must infer"), then there was no misstatement of the relevant rule. However, on balance, I consider that his Honour's language indicates that he considered that as the circumstances enabled him to draw the inference, the inference thereby was required to be drawn.
4. The appellants complained that having misstated the rule at the outset, his Honour's subsequent application of the principle when dealing with the various bases upon which he concluded that there had been "serious misconduct, serious neglect or serious incompetence" within the meaning of s 99(1)(a) was erroneous. Whether this is so, or alternatively whether the Court exercising its appellate function by way of rehearing pursuant to the Supreme Court Act 1970 (NSW), s 75A(5) would come to the same or a different conclusion as the primary judge on a correct application of the rule, requires an examination of the primary judge's reasons in relation to each of the seven particulars of "serious misconduct, serious neglect or serious incompetence" that his Honour found to have been established. That examination is undertaken below in detail at [97]ff.

Were the appellants constrained from giving evidence because their communications with Mr Wachtenheim were protected by legal professional privilege?

1. The appellants also contended that it was impermissible for the primary judge to draw any Jones v Dunkel inference at all, in circumstances where they were each prevented from giving evidence because of a claim for legal professional privilege asserted by Mr Wachtenheim. In that respect, the appellants relied upon the observations of Bingham LJ in Medcalf v Mardell.
2. Mr Newell and Mr Muriniti differed to some extent as to whether there was evidence that Mr Wachtenheim had maintained privilege in respect of their communications and in respect of some, at least, of the documents they had in their possession. Mr Muriniti, for his part, contended that the correspondence between his solicitors and Mr Wachtenheim's solicitor demonstrated that although Mr Wachtenheim's consent to waive privilege had been sought, that consent had not been forthcoming.
3. In oral submissions, Mr Newell accepted that there was no direct evidence that the reason he was unable to give evidence was because there had been no waiver of privilege but submitted it was a matter of speculation as to how any claim for privilege might have affected the appellants' ability to give evidence.
4. The De Costi parties did not contend that privilege had not been waived. Rather, without making any concession, their submission proceeded on the basis that if privilege existed, it was not apparent how that could have prevented the appellants from meeting all aspects of the individual claimed breaches of s 99. In their oral submissions, the De Costi parties submitted that Medcalf v Mardell would not apply in the circumstances.
5. The questions of legal professional privilege and lawyers' duty of confidentiality to their clients which can arise where costs are claimed against a legal practitioner, which, as I have indicated, is sometimes called the 'wasted costs' jurisdiction, was considered in Ridehalgh v Horsefield [1994] Ch 205. The Court of Appeal (Bingham MR, Rose and Waite LJJ) observed, at 237, that: "… the respondent lawyers may find themselves at a grave disadvantage in defending their conduct of proceedings, unable to reveal what advice and warnings they gave, what instructions they received. … Judges who are invited to make or contemplate making a wasted costs order must make full allowance for the inability of respondent lawyers to tell the whole story. Where there is room for doubt, the respondent lawyers are entitled to the benefit of it. It is again only when, with all allowances made, a lawyer's conduct of proceedings is quite plainly unjustifiable that it can be appropriate to make a wasted costs order."
6. This observation was adopted in Medcalf v Mardell at [23], in which Lord Bingham considered it appropriate to emphasise two matters arising from Ridehalgh v Horsefield. First, where, in the absence of a waiver by the client, the practitioner is precluded by reason of legal professional privilege from giving an account of the instructions and material received at the time of settling the impugned document, the court "must be very slow to conclude that a practitioner could have had no sufficient material". His Lordship considered that: "Only rarely will the court be able to make 'full allowance' for the inability of the practitioner to tell the whole story or to conclude that there is no room for doubt in a situation in which, of necessity, the court is deprived of access to the full facts on which, in the ordinary way, any sound judicial decision must be based."
7. The second matter emphasised by Bingham LJ was that: "The court should not make an order against a practitioner precluded by legal professional privilege from advancing his full answer to the complaint made against him without satisfying itself that it is in all the circumstances fair to do so. This reflects the old rule, applicable in civil and criminal proceedings alike, that a party should not be condemned without an adequate opportunity to be heard. Even if the court were able properly to be sure that the practitioner could have no answer to the substantive complaint, it could not fairly make an order unless satisfied that nothing could be said to influence the exercise of its discretion. Only exceptionally could these exacting conditions be satisfied."
8. Thus, his Lordship concluded that: "Where a wasted costs order is sought against a practitioner precluded by legal professional privilege from giving his full answer to the application, the court should not make an order unless, proceeding with extreme care, it is (a) satisfied that there is nothing the practitioner could say, if unconstrained, to resist the order and (b) that it is in all the circumstances fair to make the order."
9. The appellant's reliance on the considerations to which reference was made in Ridehalgh v Horsefield and Medcalf v Mardell begs the question whether their communications with Mr Wachtenheim were protected by legal professional privilege. This needs to be considered at the outset.
10. On 9 June 2015, Mr Muriniti's solicitors wrote to Mr Wachtenheim seeking his consent to waive privilege over those parts of the file that were subject to legal professional privilege. Mr Muriniti stated that if privilege was waived, material in the file that was otherwise confidential may become available to other parties in the proceedings. Mr Muriniti wrote to Mr Wachtenheim again on 15 June 2015, stating that the file had been reviewed and that previously, on 30 May 2013, Mr Wachtenheim had filed an authority waiving privilege over the file to the appellants. The letter noted that Mr Wachtenheim may not have had independent legal advice at the time that he gave the authority and asked whether he was "still content to provide this authority". Not having received a response, the solicitors for Mr Muriniti wrote again on 30 June 2015, asking for a response as soon as possible. It should be noted that the authority waiving privilege was not in evidence before the primary judge. It was indicated that it could be made available to this Court, but that did not occur.
11. On 31 July 2015, a response was received from solicitors stating that they acted for Mr Wachtenheim "for the limited purpose of assessing whether it is in his best interests to release that file as requested". The file comprised many, many boxes of material. However, notwithstanding a number of telephone calls, the boxes of material were not inspected by Mr Wachtenheim's solicitors and there was no response to an email of 6 October 2015 and a letter dated 12 October 2015 from Mr Muriniti's solicitor to those solicitors.
12. It was suggested in the course of argument on the appeal that Mr Wachtenheim's written authority in 2013 was directed to the appellants only. I am not sure I understand the relevance of that argument. But in any event, there may be a question as to whether the authority, having been given, Mr Wachtenheim could withdraw his consent to the use of privileged material by the appellants and whether he did withdraw that consent. Those questions were not agitated before the primary judge and were not answered satisfactorily when raised on the appeal. It may be that the terms of Mr Wachtenheim's solicitors' letter of 31 July 2015 were such as to purportedly withdraw the authority to use privileged material. However, it is by no means certain that that was the case. But in any event, at common law, the relevant principle is that once privileged material is disclosed in circumstances whereby privilege was lost, the privilege cannot be regained. As Kirby J stated in Ampolex Limited v Perpetual Trustee Company (Canberra) Limited (1996) 137 ALR 28; [1996] HCA 15 at [7]: "Once that advice is disclosed, particularly if disclosed to all parties in a public trial, the genie cannot be returned to the bottle. The privilege is effectively lost. It cannot be retrieved." (See Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Limited (2013) 250 CLR 303; [2013] HCA 46, as to an accidental or inadvertent disclosure.)
13. Privilege is now governed by the Evidence Act, s 122(1), which provides that evidence of privileged communications or documents may be adduced where the client consents to the disclosure of that material. Section 122(2) provides that the client cannot claim privilege where it has acted in a way that is inconsistent with the client objecting to the disclosure of the privileged material. In my opinion, the provision of an authority waiving privilege constitutes conduct which is inconsistent with the maintenance of privilege under s 122(2).
14. However, in circumstances where the De Costi parties did not contend that privilege had been waived, I will proceed on the basis that, at the least, the communications between Mr Wachtenheim and the appellants were protected by legal professional privilege.
15. Against that background, it is now necessary to consider each of the individual matters that were the subject of his Honour's findings.

The multiple versions of the cross-claim

1. There were 16 versions of the cross-claim comprising nine unfiled versions and seven filed versions. His Honour considered, at [45], that 16 versions of a cross-claim, whether filed or not, was "grossly excessive if unexplained". His Honour, at [42], accepted that amendments to pleadings were common, but considered, at [45], that while three versions of a pleaded claim might be excused, the same could not be said of the service of 16 versions of a pleading if unexplained. His Honour considered that that: "… raise[d] the possibility that the costs thrown away or occasioned by the amendments reflected in the fifth further amended statement of cross-claim and subsequent versions should be borne by the legal practitioners."
2. His Honour, at [46], considered that the fact that a pleading had been verified by the client did not mean that it fell "outside the application of s 99". His Honour noted at [47] that Mr Muriniti in his submissions had "ignored the assertion of service of eight draft versions of the fifth further amended statement of cross-claim", by which I understand his Honour to mean that Mr Muriniti did not deny that assertion. His Honour, at [48], then stated that: "… in the absence of explanation, the repeated serving of amended pleadings ultimately resulting in the filing of the fifth further amended statement of cross-claim suggests serious incompetence and, therefore, enlivene[d] the application of s 99."

Submissions

1. The appellants submitted that they were constrained from giving evidence because to do so would have involved a breach of Mr Wachtenheim's legal professional privilege and submitted for that reason, in accordance with the observations of Bingham LJ in Medcalf v Mardell, that his Honour should not have made this finding, as they were constrained from giving a full answer to the complaint.

Consideration

1. The error for which the appellants contended in this part of his Honour's reasons was that having regard to the manner in which he expressed himself at [9], his Honour at [48] wrongly considered himself compelled to draw a Jones v Dunkel inference in respect of the service of 16 versions of the cross-claim and thereby misapplied the rule. The error was apparent, as I understand the submission, by the use of the phrase "in the absence of explanation" in that paragraph.
2. His Honour's reasons have to be read as a whole and in context. His Honour had already expressed the view, at [45], that 16 versions of a cross-claim was "grossly excessive if unexplained". That view was unexceptional. Indeed, it could hardly be gainsaid that that was so and the appellants adduced no evidence by way of explanation. Thus, even if his Honour considered he were bound to draw a Jones v Dunkel inference, the position, quite simply, on the facts with which he was dealing, was that the repeated serving of so many cross-claims, filed or unfiled, would indicate serious incompetence unless there was some explanation as to why that had occurred.
3. In making that observation, I have borne two matters in mind. The first is that s 99 permits the making of an order where "it appears to the court that costs have been incurred by the serious … incompetence" of a practitioner. His Honour's language that the conduct "suggested" serious incompetence was, in my opinion, a finding to the effect of the requirements of the section. The second observation is that a Jones v Dunkel inference is not one that requires a particular finding. Rather, the drawing of a Jones v Dunkel inference, as I have explained, relevantly, enables a court to more readily draw an affirmative inference in support of the opposing party's case. In my opinion, this was an unexceptional application of the rule in Jones v Dunkel, given the factual circumstances of this case. It is an inference I would draw on the exercise of the court's rehearing function.
4. The appellants submitted, however, that they were constrained from giving evidence because to do so would have involved a breach of Mr Wachtenheim's legal professional privilege. Putting aside my doubts as to whether the appellants were entitled to shelter behind a claim of legal professional privilege, a person bound by legal professional privilege is only constrained from giving evidence of matters covered by the privilege.
5. In a case such as this, it would not be a breach of legal professional privilege to give evidence as to the circumstances in which the repeated changes to the pleadings were made or why the non-filed copies of the pleadings were served. For example, if it were the case, either or both of the appellants could have given evidence, as White JA pointed out in argument, that the various iterations of the pleading were each based on a proof of evidence. Mr Newell and Mr Muriniti could have given evidence as to why the various unfiled pleadings were served, or at least they could have explained that aspect of what had occurred. If, in cross-examination, any matter was raised on the assumption presently being made that was subject to legal professional privilege, the appellants could have made that claim. It would then have been a matter for the judge to determine whether the claim for legal professional privilege in respect of the evidence should be upheld.
6. However, I consider that his Honour's failure to explain why he considered the appellants were equally liable, as appears to be the implication in [45] of his reasons, is problematic. The liability of a legal practitioner under s 99 depends upon the extent to which it appears to the court that the impugned conduct of the legal practitioner resulted in costs being incurred by the party seeking to be indemnified. That requires an examination of and the making of findings in respect of each practitioner against whom the claim is made. His Honour did not take that approach. Although a court may, on the facts and in given circumstances, such as a failure of each to give evidence, consider that two or more practitioners equally engaged in the impugned conduct, s 99 does not permit an assumption to that effect.
7. This is relevant in relation to Mr Newell. Although counsel may, and often is, involved in the drafting of pleadings, in the usual course, counsel is not involved in the service of documents. Indeed, it is contrary to the New South Wales Bar Association Barristers' Conduct Rules (8 August 2011) for a barrister to serve court process: r 17(f). His Honour's finding extended to both the filed and unfiled versions of the pleading. There may be a question whether the service of a draft document is in contravention of the Conduct Rules, but I would consider it to be irregular for counsel to serve a draft document on an opposing party's solicitor, unless it was done for the purpose of putting the solicitor on notice of an imminent application to amend, such as in court the following day.
8. Given that the service of documents is not part of a barrister's work, then, if Mr Newell was not a party to that conduct, he could have given evidence that that was so, without breaching any legal professional privilege of Mr Wachtenheim. If he had given advice that the documents should be served, there may well have been considerations or circumstances, not covered by legal professional privilege, of which he could have given evidence.
9. It is not necessary to keep postulating various possibilities of which either Mr Newell or Mr Muriniti could have given evidence. The position is that if there were reasons why there were 16 iterations of the pleadings, whether filed or not, all of which were served, the appellants were not necessarily constrained from giving evidence as to what those reasons were. Accordingly, I do not consider that the considerations in Medcalf v Mardell upon which the appellants relied provide any assistance to them or otherwise protect them from a finding being made against them on this issue.
10. Further, assuming that his Honour considered that he was compelled to draw a Jones v Dunkel inference and thereby erred, nonetheless, the appeal is by way of rehearing pursuant to the Supreme Court Act, s 75A(5). Accordingly, this Court may, if it considers it appropriate to do so, draw a Jones v Dunkel inference. In determining whether to do so, the same considerations arise as were relevant to the trial judge. For the reasons I have already given, I would draw the same inference as drawn by the primary judge.
11. I would therefore dismiss the complaint in respect of this finding.

The form of the pleaded representations and particulars

1. The complaint as to the pleaded representations and particulars related to the terms in which they were drafted.
2. The primary judge observed, at [52], that neither appellant addressed this matter in his submissions. His Honour, at [53], stated that a pleading that was "inconsistent with its particulars" and "riddled with ambiguity and prolixity" was "likely to involve serious incompetence" where no exculpatory explanation was provided. His Honour continued that such a pleading was "unlikely to be the result of a client's instructions, especially where there is evidence of a lack of understanding by the client of the meaning of the allegations". This, as the De Costi parties pointed out, had been demonstrated in the cross-examination of Mr Wachtenheim.
3. His Honour considered that costs were wasted when time was spent "trying to fathom needlessly complicated pleadings and inconsistencies", even if the costs thereby directly occasioned were difficult to assess.

Submissions

1. On the appeal, neither appellant directed specific written submission to the form of the pleaded representations and particulars of which complaint was made. Nor did they direct any specific submission to his Honour's findings at [53]. However, they maintained their general challenge to his Honour's use of the Jones v Dunkel inference.
2. Mr Muriniti, in his oral submissions, accepted that any duty of confidentiality or privilege would not hamper the ability of the legal representatives to answer the criticism his Honour made of the prolixity of the pleadings. However, he submitted that in circumstances where it was clear that the sixth further amended cross-claim was filed after Mr Wachtenheim had filed a number of affidavits, many of them being inconsistent with the other, it could not be inferred that the pleading was "unlikely to be the result of a client's instructions". Mr Muriniti submitted that the same could be said of the fifth further amended cross-claim. Mr Muriniti's principal argument, however, was that although the pleading was long and arguably could have been better set out, it did not reach the level of prolixity or ambiguity ascribed to it by his Honour at [53], as would demonstrate serious incompetence.
3. Mr Newell's approach in his oral submissions was essentially to rely on his general Jones v Dunkel submission and to make the overarching submission that it was not uncommon for legal representatives to be confronted with a client not coming up to proof. Otherwise, in accordance with the agreement between the appellants, Mr Muriniti addressed this part of the case.

Consideration

1. This matter can be dealt with relatively briefly. There is merit in Mr Muriniti's submission that, having regard to the point in the proceedings at which the sixth further amended statement of cross-claim was filed, it was not available to his Honour to infer that the pleading was unlikely to have been the result of instructions.
2. But in any event, I am not satisfied that the pleadings were "riddled with ambiguity and prolixity", to the extent where it could be said that they reflected or involved serious incompetence. At the least, assuming error in his Honour's understanding of the rule in Jones v Dunkel, it is not an inference that I consider this Court would draw in the exercise of its rehearing function. It follows that I would uphold the appellants' argument on this complaint.
3. Had this complaint not been upheld, there would arguably have been a problem with his Honour's finding which did not specifically address why each appellant was responsible. Whilst the failure of each to give evidence may have been sufficient for the inference to be drawn against each, the terms of s 99 required consideration of the causal effect of the conduct of each.

The cross-claim was inconsistent with the evidence

1. The primary judge, at [55], identified as an example of an allegation that was unsupported by the evidence, a representation identified in the pleadings as the "Fifth Theodore Representation". This representation, alleged to be misleading, was that the product would readily sell at a mark-up producing a 40 per cent gross profit margin. Mr Wachtenheim gave no evidence of any such representation. To the contrary, Mr Wachtenheim gave evidence that he was initially able to sell the fish at the recommended prices with no wastage, in effect, giving evidence supporting the truth of the representation.
2. His Honour, at [56], considered that it "may be serious neglect or serious incompetence to maintain any cause of action" unsupported by evidence and thus with no prospects of success. His Honour considered that this too "might enliven cost consequences" under s 99, particularly where there was: "… no submission identifying possible evidence to support the cause of action, or evidence identifying how Mr Newell and Mr Muriniti believed the cause of action might be proved."

Submissions

1. Both appellants relied upon their submission that the primary judge had erred in his use of the Jones v Dunkel inference. Mr Muriniti also relied upon his general submission in respect of Medcalf v Mardell. Additionally, he submitted that his Honour failed to make a clear finding of serious misconduct. In this regard, Mr Muriniti submitted that the fact that his Honour used language such as "may … be serious neglect"; "might enliven costs consequences", demonstrated that this was not a clear finding to satisfy the observation in Medcalf v Mardell that a costs order ought not to be made against a legal representative other than in a clear case.

Consideration

1. I agree with Mr Muriniti's submission that his Honour did not make a clear finding of serious neglect or incompetence and paid insufficient regard to the requirement that such a finding should only be made in a clear case. There is also the problem to which I have adverted above that his Honour did not identify which appellant or whether it was both appellants who had engaged in the conduct to which he was referring and if so to what extent.
2. However, his Honour's reference to the fact that no submission had been made identifying the evidence that supported the cause of action did not involve a Jones v Dunkel inference. Jones v Dunkel, as I have already stated, is a rule that relates to evidence and the inference that may be drawn if evidence that could have been given was not given. It is a not a rule that relates to submissions. However, if a party does not make a submission on a particular issue before the court, then subject to questions such as onus, a court may take the absence of submission as an indication that the matter is not, or at least is not seriously, in issue.
3. On the other hand, his Honour's statement that there was no evidence to identify how the appellants believed the cause of action might be proved, did involve a Jones v Dunkel inference. In my opinion, even if the appellants were constrained by legal professional privilege, they could nonetheless have given evidence that the pleadings were drafted on the basis of the client's instructions, as has already been discussed.
4. However, as I consider that his Honour did not make a clear finding on this question, I do not consider that the evidence was so clear that it is appropriate for this Court to do so in the exercise of its rehearing function. It is not necessarily the fault of the legal practitioner if a client or witness does not 'come up to proof', that is, that they fail to give evidence consistent with their earlier statements and instructions. It is not possible, however, on the evidence, to determine whether that was so in this case. This is relevant to the orders that ultimately ought to be made on the appeal.
5. Accordingly, I consider the appellants' argument on this should also be upheld.

The matter was poorly prepared, irrelevant, false, and based upon improper evidence

1. The primary judge, at [57], rejected Mr Muriniti's submission that the De Costi parties were not entitled to complain about evidence which was not objected to or which was admitted over objection. His Honour considered that a decision to admit evidence was not determinative of whether its tender involved serious incompetence enlivening s 99 of the Civil Procedure Act. His Honour considered, at [58], that legal practitioners have an obligation to exclude voluminous evidence that, while possibly technically relevant, had no real probative value to the issues in dispute.
2. Aside from one matter, his Honour upheld each of the De Costi parties' complaints on this issue. That one matter related to the service of five affidavits that were not read, and the issue of subpoenas to 13 persons who were not called. His Honour accepted, at [62], that this could cause wasted costs, but was not persuaded that it amounted to serious neglect or incompetence. It is necessary to deal with each of the other complaints on this issue individually.

(a) Mr Wachtenheim's excessive affidavits

1. There was a complaint as to the excessive material in the case. His Honour considered, at [58], that there was an obligation on practitioners to ensure that that the costs and extent of preparation were appropriate to the amount and issues in dispute. He considered that this extended to voluminous material that had no real probative value.
2. His Honour considered, at [59], by way of example of this point that the failure to reduce Mr Wachtenheim's numerous affidavits to one, or at least considerably fewer than the number ultimately read, involved serious neglect and had the effect of multiplying the number of reply affidavits that the De Costi parties were required to file.

Submissions

1. The appellants submitted, relying on Medcalf v Mardell, that this finding ought not to have been made. Mr Muriniti also submitted that this was not a clear case of serious neglect or serious incompetence in circumstances where, after extensive argument, the court admitted the evidence. He further submitted that the primary judge's suggestion that Mr Wachtenheim's affidavits could have been consolidated into one version was an approach that might have been adopted, but it was not serious neglect to adopt a different approach in circumstances where the client had provided ever-changing instructions which had been committed to affidavit evidence and served.

Consideration

1. From what I have been able to deduce from the indexes to the appeal books and schedules of affidavits that had been prepared for the s 192A affidavit, the Wachtenheim parties filed in excess of 60 affidavits. Many of these were not read. However, for the purposes of the consideration of this complaint, I will confine my remarks to the matter upon which his Honour focussed, namely, the failure to combine Mr Wachtenheim's evidence into one affidavit, once the falsity and inaccuracies in his affidavit evidence had been uncovered.
2. As I have already indicated, it is not unknown for a client not to 'come up to proof', or to provide contradictory accounts of events during the course of the preparation for and during the hearing of proceedings. When that occurs, it places the legal practitioner in the invidious position of how best to put the client's case before the court. In this regard, it is to be remembered that the matter presently under consideration is not whether proceedings were brought without reasonable prospects of success. Rather, given the "obsolete, inconsistent or false material" contained in the numerous affidavits of Mr Wachtenheim, it was the failure to consolidate his evidence that was the stated concern of his Honour.
3. His Honour's findings on this question were made in the context of his consideration of excessive material in the case. His Honour found that the failure to prepare and adduce the evidence in a particular way "seem[ed] to [him] to involve serious neglect". In this regard, I do not consider that his Honour drew a Jones v Dunkel inference. Rather, as I understand it, it was his Honour's assessment of how the proceedings were conducted. As I have explained above, his Honour was entitled to make assessments of that type having been the trial judge cognisant of the manner in which the hearing proceeded.
4. Having said that, there are difficulties with his Honour's finding. Whether or not the preparation by the De Costi parties would have been aided by Mr Wachtenheim's evidence being consolidated into one affidavit depended upon when the affidavits were served and whether the De Costi parties had already responded to them. Unfortunately, the information available to this Court does not enable a finding on this to be made. There were no affidavits in the appeal book filed by the De Costi parties in reply to the various false and inaccurate affidavits sworn by Mr Wachtenheim. The De Costi parties' submission was to the effect that it was "pretty sure" that Mr Wachtenheim's August affidavit would have been answered by December 2011. It should be noted that in their submissions in the court below, the De Costi parties' submission was confined to stating that they were not informed that the August affidavit was not going to be used. However, both in the court below and on appeal, they submitted that there were wasted costs expended in detecting the missing $150,000 and that the work done to examine Mr Wachtenheim's bank records had put him on notice that he needed to account for the discrepancy and that he did so in his affidavit of 15 December 2011.
5. The observation in the preceding paragraph does not apply, however, to the manner in which the affidavits were deployed in the trial. It seems to me that his Honour was able to make an assessment that the reading of affidavits in the trial that, in effect, was overtaken by the last affidavit filed, was something that competent counsel would not have done. In the circumstances, I consider that it was a matter for his Honour's assessment, as the trial judge, as to whether the reading of all the affidavits at trial involved serious incompetence.
6. Although his Honour did not make a specific finding that costs were incurred as a result of this conduct, that would appear to be implicit in his statement, at [59], that the failure to reduce the volume of material multiplied the number of reply affidavits required from the De Costi parties, as well as in his finding that the conduct involved "serious neglect", and his subsequent assessment of the extent to which the proceedings were prolonged by the conduct in question.
7. However, his Honour did not make an express finding as to which of the appellants had engaged in conduct that involved serious neglect. Conformably with the way his Honour expressed his reasons in respect of other issues, this finding presumably was made against both appellants. However, as I have already stated, I consider that his Honour was required under s 99 to explain why the parties were equally liable. That may have involved no more than a statement that as neither party had stated that he had not engaged in the impugned conduct, it was reasonable to infer that both were equally liable. However, the matter should not be assumed as I have earlier explained. The consequence of what I consider to be an erroneous approach in this regard is, again, appropriately dealt with in conjunction with the fourth issue, that is, his Honour's approach to the quantification of the costs order.

(b) Use of evidence of witnesses from other franchise stores

1. His Honour considered, at [60], that the form, volume and use of substantial evidence which was the subject of separate Supreme Court proceedings and which concerned the performance of other De Costi franchise stores indicated serious neglect and incompetence in preparing the matter for hearing. His Honour said that this evidence, which involved nine witnesses, 17 affidavits and about 400 pages and many folders of exhibits, "plainly could not assist in determining the performance of the subject store" and there was no suggestion that any attempt had been made to confine the material so as to be relevant. His Honour noted that no submission had been made as to whether the material was probative.
2. His Honour examined, by way of example, the Wachtenheim parties' cause of action for supply of defective product, which he considered had no relevant evidence to support it, was contradicted by Mr Wachtenheim's own evidence and had no reasonable prospects of success. His Honour concluded, at [61], that: "It is an example of neglect by the legal practitioners in advancing an entirely unmeritorious claim and in putting forward voluminous, but, ultimately, irrelevant evidence from litigants in other proceedings in an attempt to buttress it."
3. His Honour also considered, at [74], that the use of the expert evidence of Mr Batchelor and Mr Turner manifested serious incompetence which had serious consequences on the efficient conduct of the trial. His Honour said, at [73], that these experts were former De Costi franchisees who were each in litigation with the De Costi parties, such that there was no realistic prospect of their opinion being accorded weight, since their independence was "hopelessly compromised" by their position as litigants against the De Costi parties.

Submissions

1. In relation to the finding of serious neglect and serious incompetence in the use of evidence of witnesses from other franchise stores, including the expert evidence of Mr Batchelor and Mr Turner, the appellants relied on their general Jones v Dunkel submission and on Medcalf v Mardell. Mr Muriniti also submitted that this was not a case of serious neglect or serious incompetence in circumstances where, after extensive argument, the Court admitted the evidence.

Consideration

1. The appellants challenged this finding both by way of their general Jones v Dunkel submission and on the basis that the evidence having been admitted, there could not have been serious neglect or serious incompetence involved in adducing it.
2. As I have already pointed out, a comment that no submission was made in respect of a particular matter, here as to how the material was probative, does not involve a Jones v Dunkel inference although it may lead a court to determine the matter on the basis that as no submission was made, no submission could appropriately be made or that there was implicit acceptance that an adverse finding would be made. Nor did his Honour's further observation, at [60], that "[t]here was no evidence as to how [the evidence] was believed to be of assistance" involve a Jones v Dunkel inference. It was merely a statement of that fact. His Honour next stated that he regarded the "form, its volume and its use at trial as indicating serious neglect and incompetence in preparing a matter for hearing".
3. As I understand his Honour's reasons, he came to that view on his own assessment of the evidence. In that circumstance, his Honour's finding did not involve drawing a Jones v Dunkel inference.
4. The second complaint was that as the evidence was admitted there could not have been serious incompetence involved in adducing it. However, his Honour's finding, at [60], was as to the "form … volume and … use at trial" of this material. That is different from the question of admissibility, the premise of which is that the evidence was relevant and/or probative.
5. I agree with the primary judge that the mere fact that evidence was relevant does not mean that there could not be serious neglect or serious incompetence in the form in which the evidence was adduced, in its volume or in its use. However, questions of form, volume and use are matters that could or ought to have been dealt under the Evidence Act, s 135. That section provides that the court may refuse to admit evidence on the basis that its probative value was substantially outweighed by the danger that the evidence might be misleading or confusing or cause or result in undue waste of time.
6. A determination could have been made to that effect by his Honour without an application having been made by the De Costi parties, but it is not apparent on the face of the reasons that his Honour had regard to s 135 at the trial. This Court is also unaware whether an application was made by the De Costi parties under the Evidence Act, s 135, as part of their objection to the material relating to the other franchisors. Again, from the manner in which his Honour's reasons are framed, I consider the better view is that they did not do so.
7. On the assumption that no such application was made, the De Costi parties cannot now complain that the form, volume and use of this evidence involved serious neglect or incompetence. It was a matter for the De Costi parties to make an assessment, including the likely weight to be given to it in the proceedings, the extent of its probative value and whether the evidence might otherwise satisfy the provisions of s 135. That is part of the professional expertise of a litigation lawyer. The time to do that, of course, was at the trial.
8. It may have been that the De Costi parties made a forensic decision not to make an application under s 135, if that is the correct position, because, for example, it suited their purpose to use the evidence to undermine Mr Wachtenheim's evidence, given that some of the evidence was inconsistent with his. If any such forensic choice was made, the De Costi parties cannot now visit the costs associated with the use of the material on the appellants.
9. Alternatively, if the De Costi parties made an application under s 135 which was unsuccessful, then again, there is no basis to find that it involved serious neglect or incompetence.
10. It follows that I would uphold the appellant's complaint on this matter.

(c) Inappropriate instructions to Mr Dent

1. His Honour, at [63], reproduced correspondence from Mr Muriniti to Mr Dent, one of the expert witnesses in Mr Wachtenheim's case. His Honour, at [63]-[64], stated that inappropriate instructions had been given to expert witnesses, noting the communication with Mr Dent as an example of this. His Honour stated that the instructions given to Mr Dent, suggested a conclusion from which the expert was not at liberty to depart, pressing the witness to give favourable evidence.
2. Mr Muriniti did not challenge his Honour's finding on this but submitted that the primary judge did not identify the costs thrown away or lost by the impugned conduct. He contended that it was important that orders not be made under s 99, which was essentially a summary jurisdiction, unless the court was satisfied that there had been costs thrown away or incurred by the serious misconduct. Mr Newell did not make any submissions on this matter.
3. Although his Honour did not say so in express terms, it is apparent from his Honour's reasons that the finding in respect of the instructions given to Mr Dent was made against Mr Muriniti only. The remarks I have made above with respect to his Honour's failure to determine the extent to which the impugned conduct resulted in costs being incurred by the party seeking to be indemnified apply here. Again, the consequences of his Honour's approach are discussed below in conjunction with the fourth issue and the orders that ought to be made.

(d) Preparation of false affidavit evidence and instructing expert witness to "cover up" dishonesty

1. His Honour, at [71], stated that he was satisfied that Mr Muriniti had engaged in serious misconduct in relation to evidence that Mr Wachtenheim had removed $150,000 from the business for his personal use. His Honour noted, at [65], that an earlier affidavit of Mr Wachtenheim to the contrary was false, and that, in a later affidavit prepared by Mr Muriniti, Mr Wachtenheim gave a knowingly false account of how this discrepancy was discovered. His Honour also noted, at [71], that Mr Muriniti instructed Mr Wachtenheim's accountant to prepare evidence that was inconsistent with the facts as Mr Muriniti understood them, instructing him to characterise part of the amount removed as a loan to Mr Wachtenheim.
2. His Honour drew a Jones v Dunkel inference against Mr Muriniti, finding, at [68], that "the most likely conclusion [was] that Mr Muriniti was involved with Mr Wachtenheim in the preparation of false affidavits". His Honour said, at [70], that this misconduct: "… must have had a significant impact on the length of the trial because it covered up improperly a fundamental weakness in Mr Wachtenheim's case".
3. His Honour considered, at [72], that Mr Muriniti's desire not to give evidence because of possible disciplinary implications did not preclude the operation of a Jones v Dunkel inference.

Submissions

1. In relation to the finding that Mr Muriniti knowingly prepared false affidavit evidence for Mr Wachtenheim and that he asked Mr Birrell to "cover up" Mr Wachtenheim's dishonesty, Mr Muriniti again relied upon the observations in Medcalf v Mardell to which I have referred.
2. More significantly, however, Mr Muriniti submitted that the findings against him, which were of the gravest kind, were not supported by the evidence. He submitted that there was no evidence to support the finding that he knew that what Mr Wachtenheim stated in his August affidavit was false. In relation to the December affidavit and the instructions to Mr Birrell, he submitted that this could be explained, not as a denial that the $150,000 was taken and as an attempt to cover that up, but rather as an attempt to account for whether that money was spent on business expenses or whether that money was profit that went to Mr Wachtenheim personally.
3. Mr Muriniti said that this issue should be resolved in his favour by reference to the affidavit evidence itself.
4. Mr Newell did not make any submissions on this matter, as the findings were made against Mr Muriniti.

Consideration

1. It was not in dispute that Mr Wachtenheim's August affidavit was false in that it asserted that all of the business takings were banked.
2. Subsequent to that affidavit, in an email dated 21 November 2011, Mr Muriniti informed Mr Birrell that a bookkeeper had recently been retained to undertake a reconciliation of Deist's purchases so as to compare that against what the De Costi parties maintained it had sold to Deist. Mr Muriniti noted that the returns prepared by Mr Birrell had been based on monies deposited into Deist's bank account. Mr Muriniti said that when Mr Wachtenheim had been pressed about the difference, it emerged that he was taking money out of the till for living expenses. Mr Muriniti stated that Mr Wachtenheim had understated his real earnings by a significant margin and that this was known to the De Costi parties. Mr Muriniti continued: "It is necessary to now very quickly amend his financial records to take into account the drawings which he made [but] were not properly accounted for".
3. Mr Muriniti also observed that this meant that Mr Wachtenheim's real earnings were significantly greater than he had maintained. He noted that if the corrections to the accounts could be made and a new affidavit sworn then "we may just be able to save [Mr Wachtenheim's] credibility".
4. Mr Muriniti emailed Mr Birrell again on 24 November 2011 in relation to the understatement of sales by approximately $150,000. He said that following further discussions with Mr Wachtenheim, they had been able to determine that the $150,000 could be accounted for by "the fact that Mr Wachtenheim was taking money out of the cash register to pay for his wages and living expenses and failed to appreciate" that he needed to inform Mr Birrell of that. He said that the $150,000 was comprised of two components, cash for Mr Wachtenheim's wages and monies for living expenses. The email continued: "Doing the best that we can, it appears that over the 20 months that [Deist] was trading Mr Wachtenheim seems to have [taken] an amount of about $90,000.00 to meet the living expenses as the wages he was drawing were insufficient to cover [that amount] …"
5. Mr Muriniti suggested that the proper categorisation of the $90,000 was as a loan from Deist to Mr Wachtenheim. He said that Mr Wachtenheim agreed with this categorisation. Mr Muriniti again referred to the fact that the De Costi parties were aware of the discrepancy and presumably intended to ambush Mr Wachtenheim with this at the trial. He reiterated that it was important that the accounts be amended to account for the missing money so as to ensure that Mr Wachtenheim's credibility was not damaged or permanently impaired.
6. Mr Birrell eventually prepared the accounts in which he categorised a sum of $120,000 as a loan.
7. In his affidavit of 15 December 2011, Mr Wachtenheim stated that when it had become apparent that there was a $150,000 shortfall in the figures that he had provided in relation to sales, he had told Mr Birrell that he remembered that cash was being taken from the till to pay himself and to pay staff. He said in the affidavit that he also spoke to his former manager who reminded him that he (the former manager) was also being paid cash which was not reported. Mr Wachtenheim gave further explanations as to how he began to remember how money was used that had not been accounted for. He also said that he instructed Mr Birrell to amend the accounts if the missing money could be found.
8. I have referred above to his Honour's finding in the judgment on the cross-claim that Mr Wachtenheim was entirely discredited as a witness. That finding was not been the subject of either challenge or submission on the appeal. Rather, the point that Mr Muriniti sought to make in his submissions was that there was no evidence to support a finding that he was implicated in Mr Wachtenheim's dishonesty in relation to either the August affidavit or the December affidavit, and that Mr Muriniti's instructions to Mr Birrell could be explained other than as an attempt to cover up that dishonesty.
9. The two findings of his Honour on this matter based on a Jones v Dunkel inference were at [67] and [68]. Having regard to the contents of the emails and Mr Wachtenheim's affidavit evidence, it is necessary to consider the precise terms in which his Honour made those findings. They were as follows: "67 In circumstances where Mr Muriniti has given no evidence on this application, it is difficult to avoid a conclusion of dishonourable conduct, of serious misconduct, by Mr Muriniti. The August affidavit of Mr Wachtenheim may have been believed by Mr Muriniti to be correct when it was prepared, but it was known to be false when it was later read in evidence at the trial. That error might perhaps be excused by the reading of a later affidavit dated 15 December 2011 which revealed the falsity of the earlier affidavit, but that later December affidavit was also false. In it Mr Wachtenheim claims ignorance about the cause of the error, whereas Mr Muriniti's emails disclose that Mr Wachtenheim had explained that his cash withdrawals for personal expenses were the cause of the error. 68 The absence of any explanation from Mr Muriniti leaves as the most likely conclusion that Mr Muriniti was involved with Mr Wachtenheim in the preparation of false affidavits, attributing the error to something inexplicable which required Mr Birrell's efforts to identify, whereas both Mr Wachtenheim and Mr Muriniti knew beforehand the precise nature of the explanation. Further, Mr Muriniti's directions to Mr Birrell in the email - 'It is important the accounts be amended ... to ensure that Serge's credibility is not damaged' - indicates a full understanding of what he was asking Mr Birrell to cover up and the significance of Mr Wachtenheim's claim of ignorance."
10. The inconsistency his Honour identified between the emails and the December affidavit related to Mr Muriniti's advice to Mr Birrell in the email of 21 November 2011 that the shortfall that had been revealed by the De Costi sale figures and Deist's bank account, and that when Mr Muriniti had pressed Mr Wachtenheim for an explanation, "what emerged is a story that he was taking money out of the till for living expenses". This was reiterated in the email of 24 November 2011, as is apparent from Mr Muriniti's statement that "[a]fter discussing the matter at length with Mr Wachtenheim", it had been ascertained that cash was being taken out of the till to pay for wages and living expenses and that he had failed to appreciate the necessity to report that to Mr Birrell, as the accountant.
11. This is to be contrasted with the version that Mr Wachtenheim gave in his December affidavit. Having stated that when he had been unable to explain the discrepancy in relation to the "$150,000 in sales", he contacted Mr Birrell "to make inquiries about how this could have occurred". He said that the following conversation then took place: "6. … Mike Birrell said words to the following effect:- 'I worked out your sales by reference to the money that you deposited into Deist's bank account'. 7. I said words to the following effect:- 'Yes but we are short $150,000.00'. 8. Mike Birrell said words to the following effect:- 'That can only be explained if cash had been taken out of the cash register'. 9. I said words to the following effect:- 'There were things that were paid for in cash and money was taken out of the cash register but there should be some kind of record as to where that money went to'. 10. Mike Birrell said words to the following effect:- 'I will have [to] go over your accounts records to find out what has happened'. 11. I said words to the following effect:- 'If you find the missing money, can you please prepare the necessary amended accounts and Profit & Loss Statements and whatever else needs to be prepared otherwise its going to look like I have taken $150,000.00 out of the business in cash and under reported my sales'. 12. Mike Birrell said words to the following effect:- 'Leave it to me, I will have a look and find out if I can find the answer'."
12. Mr Wachtenheim then said that he had a further conversation with Mr Birrell as follows: "13. About a week after I had this telephone conversation with my accountant, Mike Birrell, Mike Birrell telephoned me and said words to the following effect:- 'Serge, I have worked out why your sales were understated'. 14. I said words to the following effect:- 'What happened Mike?' 15. Mike Birrell said words to the following effect:- 'There have been some duplications in the accounts prepared by the first bookkeeper who did the bookkeeping for you. I have now fixed everything up and I will be sending to your solicitors the amended accounts'."
13. In my opinion, the difference between the emails drafted by Mr Muriniti and the affidavits is stark and justified a finding that Mr Muriniti was implicated in the presentation of false information to the Court, unless some explanation was given. In this regard, even if his Honour had carried over his error in the statement of the principle in Jones v Dunkel to its application throughout the judgment, it is an inference that I would draw in the course of appellate review of his Honour's reasons. Further, even if this is a matter in which Mr Muriniti was precluded from giving evidence because of legal professional privilege, the differences between his emails and Mr Wachtenheim's affidavit are such that this is a clear case where a finding under s 99 was appropriately made against him.

(e) Illegal tape recordings

1. The primary judge found, at [75], that the incident involving the illegal tape recording, which was the subject of the second judgment: De Costi Seafoods (No 2), involved serious misconduct by Mr Newell and Mr Muriniti.
2. Mr Newell did not challenge his Honour's finding that the use of the illegal tape recording involved serious misconduct and accepted that the s 99 consequences "would follow" as against him.
3. Mr Muriniti did not challenge the finding that there were costs thrown away or lost because of the use of the tape recording. However, he submitted that there was no evidence to support the finding that he was involved in the planning of the illegal recording or that he knew about it, until after it had been done. In those circumstances, he challenged the primary judge's finding on this point on the basis that it was "unsafe".
4. In order to determine whether that is so, it is necessary to consider his Honour's reasons in relation to the illegal tape recording in De Costi Seafoods (No 2). In that judgment, the primary judge recorded, at [14], that at about 4:30pm on 16 July 2012, Mr Turner, Mr Newell, Mr Wachtenheim, Mr Muriniti and Mr Muriniti's wife, Mrs Faith Muriniti, went into a conference room at the District Court. His Honour noted that Mr Turner remained under cross-examination at that time, his evidence having been suspended earlier that day after he stated that he felt unwell, and that Mr Wachtenheim, "the most crucial witness in the cross-claimants' case", had not yet given evidence.
5. His Honour noted, at [16], that it was not disputed that Mr Wachtenheim telephoned and spoke to Mr Shnider, a cross-defendant in the proceedings, that Mr Newell and Mr Shnider had a telephone conversation, that at some point the phone was put on loudspeaker, and that some of the conversation was recorded. His Honour noted that there was evidence that Mr Turner recorded the conversation on his mobile phone.
6. His Honour observed, at [18], that Mr Wachtenheim, Mr Newell and Mr Muriniti declined to give evidence and offered no explanation as to why they did not do so when his Honour was dealing with the question of the admissibility of the illegal tape recording. His Honour was not persuaded, at [48], that the recording happened on a whim of Mr Turner. Rather, in the absence of evidence from Mr Newell and Mr Muriniti, he was persuaded that the recording was planned before the call was made and that Mr Newell, Mr Muriniti and Mr Wachtenheim were all aware of the plan to record the telephone call.
7. His Honour considered, at [65], that there was impropriety on the part of Mr Newell and Mr Muriniti in having Mr Turner, who was still under cross-examination, and Mr Wachtenheim, who had not yet given evidence, present at the time of the conversation with Mr Shnider, and that this was a basis for the exclusion of the evidence. His Honour also considered, at [68], that the recording of the conversation without the consent of Mr Shnider was an impropriety within the Evidence Act, s 138(1)(a) and (b), the gravity of which was increased by the involvement of Mr Newell and Mr Muriniti and because it concerned proceedings then being heard.
8. His Honour found, at [81], that there was disregard by Mr Newell and Mr Muriniti of the propriety and lawfulness of the conduct undertaken in speaking to Mr Shnider on loudspeaker with other relevant witnesses being present. His Honour said, at [34] and again at [82], that in the absence of evidence from Mr Newell and Mr Muriniti, he would infer that they could see Mr Turner's phone and understood its purpose, that is, recording the conversation. Thus, his Honour found that Mr Newell and Mr Muriniti had knowledge of, or reckless disregard for, the unlawfulness and impropriety involved in this conduct. His Honour also said, at [83], that even on Mr Turner's account, Mr Newell and Mr Muriniti became aware of the recording immediately after the conversation concluded, when Mr Turner announced it and they said it was a good idea. Thus, his Honour found that the breach of the law was either known to Mr Newell and Mr Muriniti at the time it was occurring or immediately afterwards.
9. There was no application for leave to appeal from the orders made in De Costi Seafoods (No 2). In my opinion, his Honour's finding against each appellant in respect of this matter were justified on the evidence and I would dismiss Mr Muriniti's specific challenge that his Honour's findings were unsafe. Further, there was nothing preventing either Mr Newell or Mr Muriniti giving evidence as to their involvement in or knowledge of the illegal recording.

(f) Non-production of diary

1. His Honour referred, at [77], to a chronology which was forwarded to Mr Dent, an expert accountant, as part of the instructions to him for the purposes of preparing his expert evidence. His Honour noted that the chronology indicated that it was based on a diary, which was never produced, and that the chronology was inconsistent with the affidavit of Mr Wachtenheim that Mr Muriniti was preparing at the same time. His Honour stated that there was no satisfactory explanation for the differences between the chronology and the affidavit. His Honour concluded that the explanation for those differences and the absence of the diary were "likely to be attributable to serious incompetence and neglect as much as to misconduct".

Submissions

1. Mr Muriniti relied again on the principles in Medcalf v Mardell, submitting that the non-production of the diary depended on what was occurring within Mr Muriniti's conduct of the case and any instructions he might have been receiving from Mr Wachtenheim in relation to the instructions to Mr Dent as to whether there was a diary and, if so, why it was not to be produced to the De Costi parties.
2. Mr Newell made no submission, as no findings were made in respect of his conduct on this matter.

Consideration

1. Mr Muriniti's submission that the diary was produced but after a delay was contrary to his Honour's finding that the diary was never produced. However, whether the position was that there was a delay in producing the diary or whether it was not produced at all, as his Honour stated, I do not consider that Mr Muriniti would have been constrained by legal professional privilege from saying whether there was a diary or that the chronology was not prepared by reference to a diary. Accordingly, there was no error in his Honour's findings in this respect. The question of his Honour's approach to quantification is dealt with under the fourth issue.

(g) Failure to produce documents

1. The De Costi parties had contended before the primary judge that Mr Wachtenheim failed to discover documents, including his diaries for relevant years, bank statements and emails between Mr Shnider and the appellants, and that this was known to the appellants.
2. His Honour considered, at [78], that these documents existed and were relevant. His Honour accepted that the fault for the failure to discover some of the documents was attributable to Mr Wachtenheim, but that the failure to discover the emails and the diaries from which the appellants had prepared a chronology was their own failure.
3. His Honour considered that the De Costi parties had incurred costs as a result. His Honour pointed out, at [81], that the De Costi parties had repeatedly raised the question of the non-production of documents, had been required to explore different avenues of proof and "to gather other material to resist or discredit the claim".

Submissions

1. Mr Newell questioned whether his Honour had made any relevant s 99 finding on this matter. Mr Muriniti submitted that his Honour drew a Jones v Dunkel inference in his observation at [80] that he was persuaded that the diaries existed and his observation that neither their existence nor knowledge of their existence was denied by the appellants. However, Mr Muriniti informed the court that there was nothing he could say about the failure to discover correspondence between himself, Mr Newell and Mr Shnider.

Consideration

1. In the absence of any specific submission, his Honour's findings on the failure to produce should stand.

Inappropriate dealing with witnesses

1. At trial, the De Costi parties contended that there had been "inappropriate dealings with witnesses" in the following respects: 1. Misconduct in obtaining an affidavit from Mr Kevin Ng; 2. Misconduct in obtaining an affidavit from Mr Stephen Vial; 3. Misconduct in assisting or enabling two witnesses, Mr Batchelor and Mr Turner, to prepare nearly identical evidence; and 4. Misconduct in relation to the nature and circumstances in which Mr Shnider was proofed as a witness, the tape recording, and the provision of conference notes by Mr Newell to Mr Dent of a conference between Mr Newell and Mr Shnider.
2. The De Costi parties also pointed to aspects of the conduct involved in (1), (2), and (4) above as evidence to support a submission that Mr Newell and Mr Muriniti had engaged in misconduct by holding meetings or conferences with witnesses while other witnesses were present, or where witnesses were discussing evidence. The De Costi parties submitted to the primary judge that Mr Newell, as counsel, either did know or ought to have known that a witness statement must be taken without other witnesses in the proceedings being present, and that a breach of the Bar Rules had occurred.
3. The primary judge, at [87], found in favour of the De Costi parties in relation to the dealings with Mr Ng, but not in relation to the evidence of Mr Vial and Messers Batchelor and Turner (at [82]-[86]). In relation to Mr Shnider, his Honour relied upon his findings of impropriety made in respect of the tape recording in the earlier proceedings of De Costi Seafoods (No 2).
4. Having regard to the seriousness of the finding of misconduct in relation to the dealings with Mr Ng, further consideration of the allegation and the finding is warranted. The De Costi parties contended that improper pressure had been placed on Mr Ng to prepare an affidavit in the presence of Mr Batchelor and Mr Turner, who formerly had been Mr Ng's employers, in March 2010. Mr Batchelor and Mr Turner had been franchisees of another De Costi store and were cross-claimants in their own proceedings against the De Costi parties. They were also witnesses in the present proceedings.
5. Mr Ng prepared the affidavit over the course of three meetings with Mr Newell. Mr Batchelor and Mr Turner were present during the first two meetings. At the final meeting, Mr Ng felt pressured to sign the affidavit without being given a proper opportunity to read over it. He was not subsequently sent a copy, as promised. Upon eventually viewing the affidavit, he resiled from his statements in a new affidavit dated 27 March 2012. In both the 27 March 2012 affidavit and in oral examination at trial, Mr Ng testified as to the circumstances in which he prepared the March 2010 affidavit.
6. The primary judge held that this conduct, in relation to Mr Ng, constituted serious misconduct. His Honour noted, at [84], that "[n]o evidence was proffered by Mr Newell or Mr Muriniti to counter these claims or the evidence" and considered that the conduct in question was prohibited under the NSW Bar Rules and the NSW Solicitors Rules. It appears therefore that his Honour's finding was made against both Mr Muriniti and Mr Newell.

Submissions of Mr Muriniti and Mr Newell

1. In the written submissions on appeal, Mr Newell relied on his general Jones v Dunkel submission to challenge this finding. Mr Muriniti adopted the submissions of Mr Newell as they related to this issue. In his oral submissions, Mr Muriniti stated that he was not challenging the finding of serious misconduct against him. He also specifically stated that he did not rely upon the principle in Medcalf v Mardell in relation to the joint conference with Mr Ng. Rather, his complaint was the absence of any identification of the costs incurred or thrown away by the De Costi parties. He pointed out that Mr Ng was one of three witnesses called on day 62 of the trial. The point sought to be made, as I understand it, was that his Honour should and could have specified the extent to which costs were thrown away, rather than making a generalised assessment of the total costs thrown away, as he did in the conclusion to his reasons. This aspect of the complaint is best dealt with in relation to the fourth issue.

Serious allegations of impropriety without a proper basis

1. This claim related to allegations made in an outline of evidence of the witness Mr Shnider, as provided by Mr Newell and Mr Muriniti. As explained by his Honour at [89], the outline alleged misconduct on the part of Mr Thorpe, the solicitor for the De Costi parties, in particular, that he had prepared the affidavit of Mr Shnider to conceal the true nature of certain representations made by the De Costi parties, and had attempted to induce Mr Shnider to falsely exaggerate the earnings of Mr Wachtenheim. The outline also alleged impropriety on the part of the De Costi parties in the form of threats or inducements made to obtain a misleading affidavit from Mr Shnider. However, the allegations in the outline did not become the subject of any evidence by Mr Shnider.
2. His Honour, at [90], stated that as these allegations lacked a proper foundation, they should not have been made. His Honour again observed that the costs that resulted from this conduct were not clear, but pointed to the significant time that had been spent at trial in relation to Mr Shnider's evidence. As his Honour commented, at [91], that evidence: "… was tainted by the illegal recording, by the joint conferences with Mr Wachtenheim, and was central to the serious but unfounded allegations of impropriety contained in the outline of evidence …"
3. His Honour considered that those factors supported a conclusion that the De Costi parties should not bear the costs occasioned by Mr Shnider's evidence.
4. His Honour, at [92], also considered that it was relevant that at the hearing, the first appellant had made an application under the Evidence Act, s 38 to cross-examine Mr Shnider on the basis that he had doctored his evidence and then colluded with the De Costi parties. His Honour observed that these allegations were also not supported by evidence.

Submissions

1. Mr Muriniti did not challenge the finding that there were serious allegations of impropriety contained in an outline of evidence of the witness Mr Shnider which were made without a proper basis, except to submit that if the findings in respect of the illegal tape recording and Mr Shnider's evidence were to stand, then the quantification of the costs thrown away should be reduced because these two events happened in the same period and so the time wasted should not be counted cumulatively.
2. In oral submissions, Mr Newell did not seek to resist an adverse finding in respect of the tape recording. However, he submitted that a discrete amount of costs could be calculated in relation to the three day hearing as to the admissibility of the tape recorded evidence.

Consideration

1. Given that there was no dispute that the outline of the evidence of Mr Shnider contained serious allegations of impropriety without a proper basis, his Honour's findings on this issue should stand.

Conclusion on the third and fifth issue

1. It follows from my various conclusions on the individual items that were subject to challenge that some have been successful and some have not. It is a useful exercise at this point to summarise my conclusions findings as they are relevant to the fourth issue and to the final orders that ought to be made.
2. My conclusions may be summarised as follows.
3. First, I have rejected the appellants' challenges to the following matters: (i) The multiple versions of the cross claims: see at [110]; (ii) The instructions to experts (this finding related to Mr Muriniti only): see at [176]; (iii) The illegal tape recording: see at [185]; (iv) Non production of the diary (this finding related to Mr Muriniti only): see at [189]; (v) Failure to produce documents (this finding related to Mr Muriniti only): see at [194]; (vi) Inappropriate dealing with witnesses: see at [201].
4. Although I have rejected the appellants' challenge to the matter identified in (ii), (iv) and (v) above, I have considered nonetheless that his Honour erred in his ultimate determination that the appellants should bear the costs order equally.
5. Secondly, I have upheld the appellants' challenges to the following matters: (i) Form of the pleaded representations: see at [118]; (ii) Cross-claim inconsistent with the evidence: see at [127]; (iii) The use of the evidence of other franchisees: see at [153].
6. Thirdly, I have upheld in part the challenge to his Honour's finding as to the preparation and use of excessive affidavit evidence: see at [135], [137].
7. Fourthly, the only challenge to his Honour's finding in respect of the instructions to Dent was that his Honour did not identify the costs associated with the impugned conduct: see at [155].
8. Fifthly, the only challenge to his Honour's finding of serious allegations of impropriety was in respect of quantum.
9. It will be immediately apparent, therefore, that his Honour's orders, considered below in relation to the fourth issue, cannot, in any event, stand. However, there are other questions raised in respect of the fourth issue which are considered below.

Fourth issue on the appeal: whether his Honour erred in the means he adopted for quantifying the extent of the indemnity under s 99: appeal ground 2(b)

Primary judge's reasons

1. His Honour rejected, at [99], the submission that s 99(2) only permitted the court to order the legal practitioner to pay costs that a party had been "ordered" to pay. His Honour considered that the only restrictions in the section were that the party not be a client and that the costs be "payable by that party". He also considered, at [103], that under s 99 the court could order that the lawyers indemnify the relevant party against the costs payable by them, or against some of, a part of, or a proportion of, those costs.
2. The primary judge said, at [106], that "there must be an appropriate nexus between the costs incurred by the applicants as a result of the wrongful conduct and the order in respect of costs". His Honour added, at [107], that the real issue was whether the assessment of the costs was a "fair and reasonable assessment", and that the decision in Kelly v Jowett did not preclude a global percentage approach to costs in the appropriate case. His Honour observed, at [108], that a "broad brush approach" had been "mandated" in Lemoto at [92]. His Honour continued: "… when numerous items of misconduct are found, the need for a connection between the wasted costs and the order would permit the Court to do its best to ascertain what proportion of the total costs are due to misconduct rather than seek to identify the precise costs incurred in relation to every item of misconduct, a near impossible task."
3. His Honour considered, at [109], that whether costs were wasted by Mr Wachtenheim was irrelevant to the critical question, which was whether costs were wasted by the De Costi parties as a result of the conduct of Mr Newell and Mr Muriniti that involved serious neglect, or serious incompetence, or serious misconduct. His Honour also considered, at [111], that while the commencement and continuation of a cross-claim against the De Costi parties other than Androulla Costi had reasonable prospects of success, that did not preclude a finding that the commencement and continuation of some of the causes of action within the cross-claim, including against the De Costi parties other than Androulla Costi, were without reasonable prospects of success and were a consequence of, or involved instances of, serious neglect, serious incompetence or serious misconduct.
4. His Honour cited, at [114], the "uncontroversial proposition" that caution must be exercised under s 99 so as not to make orders that interfere with or weaken the substantial public interest in impoverished clients with difficult cases receiving vigorous legal assistance. His Honour accepted that personal costs orders against legal practitioners should be made only in clear cases.
5. His Honour said, at [115], that: "Inevitably in this case, I have had to utilise the experience of conducting the lengthy trial, standing back and assessing in that context the extent of wasted costs arising from the established items of wrongful conduct."
6. His Honour observed, at [116]-[117], that where there was a difficulty or an inability to determine the precise costs wasted by the particular item of wrongful conduct, the reasonable approach to assessing the wasted costs occasioned by the wrongful conduct was to compare the time actually taken in the trial with a reasonable estimate of the time a trial on the arguable causes of action ought to have taken. In this regard, his Honour estimated, at [119], that a reasonable estimate was, at most, 19 days. Accordingly, in circumstances where the trial took 75 days, the amount attributable to the wrongful conduct of the appellants was "56/75 or 75%".
7. His Honour further considered, at [118], that it was fair and just to apportion the pre-trial costs in accordance with the proportion adopted in relation to the costs of the trial.
8. His Honour found, at [120], that none of the extra time taken in the preparation and trial of the matter beyond what was reasonable was attributable to the De Costi parties. However, his Honour said that it did not follow that all of the extra time could be attributed to the appellants and still less to their instances of serious neglect, serious incompetence or serious misconduct. He considered that some delay must have resulted from the combined effect of the conduct of Mr Wachtenheim, from the style, technique and approach of counsel and solicitor, and from neglect and incompetence which did not rise to the level of "serious".
9. His Honour considered, at [122], that in all the circumstances it was appropriate to reduce the additional delays and costs attributable to the serious wrongful conduct of Mr Newell and Mr Muriniti by a further third, from 75 per cent to 50 per cent.
10. His Honour also said, at [123], that in circumstances where both practitioners relied on the submission of the other on the application, and where neither gave evidence or sought to absolve themselves because of the conduct of the other, or their ignorance of the conduct of the other, the proceedings "were a joint enterprise between them" and it was not appropriate to make any division between the costs for which the first appellant and the second appellant were separately responsible. Accordingly, his Honour held them "both liable equally".

Consideration

1. In my opinion, on the proper construction of s 99, his Honour's approach to the assessment of the costs was not available to him. Rather, it was necessary for him to determine in respect of each appellant and in respect of the specific conduct found to constitute serious neglect, serious incompetence or serious misconduct whether costs were incurred by the De Costi parties. In this regard, I consider that his Honour erred in finding that the proceedings "were a joint enterprise between [the appellants]".
2. Whilst a finding against both was available in respect of some of the conduct, that was not universally so, as his Honour's findings recognised. His Honour's findings in respect of the preparation of the false affidavit evidence, instructing the expert witness to 'cover up' dishonesty, the non-production of the diary and the failure to produce other relevant documents were made against Mr Muriniti only. These matters could not be considered minor in terms of the likely costs incurred by the De Costi parties in dealing with them. Rather, as required by the section, his Honour was required to determine the costs incurred by the impugned conduct. Accordingly, to find a generalised "joint enterprise" resulting in costs being awarded jointly against the appellants was, in my opinion, in error.
3. I also consider that there are difficulties with his Honour's observation at [111] to which I have referred above. Section 348, to which his Honour was referring, deals with "a claim without reasonable prospects of success". It does not deal with proceedings per se. A proceeding is comprised, relevantly, of one or more causes of action or claims. Section 348 could have applied, to the extent relevant, if one only of a number of claims or some of several claims were without reasonable prospects of success.
4. Had his Honour been of the view that specific causes of action or claims against the De Costi parties were without reasonable prospects of success, that determination should have been made when considering that part of the De Costi parties' claim for costs pursuant to s 348. However, his Honour dismissed that claim other than against Androulla Costi. I consider, therefore, that his Honour led himself into error in his remarks at [111]. In making that observation, it is important to remember that his Honour was dealing with a claim for costs under s 99(1)(a) on the basis that there was serious neglect, serious incompetence or serious misconduct. His Honour was not dealing with a claim under s 99(1)(b), which applies when a claim has been brought improperly or without reasonable cause. But even were his Honour considering the De Costi parties' claim for indemnity costs under s 99(1)(b), he did not identify which causes of action were brought without reasonable prospects of success, if indeed he made any such finding.
5. The next general observation to be made is that, in determining that a reasonable time for the hearing was 19 days, his Honour appears to have overlooked that some 13 days were taken up dealing with objections and ancillary matters. That is of particular significance, given that the De Costi parties sought to re-agitate the rulings on evidence that had been made in the s 192A hearing and, as the Court was informed, in large measure, the challenges to admissibility were resolved in favour of the Wachtenheim parties. Thus, account should have been taken of the time taken in hearing the objections to evidence, which should not have been attributed to any serious neglect, serious incompetence or serious misconduct of the appellants unless a specific finding to that effect was made. Accordingly, his Honour's starting point of 75 days was itself in error. Some allowance should have been made for the fact that there had already been a hearing pursuant to s 192A on the admissibility of evidence, and also for the fact that the De Costi parties' objections were rejected, at least to a significant extent.
6. Finally, I do not consider that it was open to his Honour to combine the assessment to be made under s 348 with the assessment under s 99. The assessment of costs required identification of whether costs were incurred in relation to each of the specific instances of conduct alleged to impugn s 99(1)(a), as well as identification of the extent to which costs related to the claim against Androulla Costi for s 348, rather than the "global" combined approach adopted. In addition, as I have explained, the "global" approach taken by his Honour failed to account for the different roles played by Mr Newell and Mr Muriniti.
7. It follows that the fourth issue on the appeal, appeal ground 2(b), should be allowed.

Conclusion

1. The appellants have failed in their appeal to the extent that his Honour found a liability under s 348 in respect of the claim against Androulla Costi and under s 99(1)(a) in respect of the matters I have identified. They have succeeded, however, in their challenge to his Honour's method of computation of the indemnity. That raises the question of the appropriate orders that ought to be made as well as the appropriate costs orders.
2. I have expressed the view above that the most efficient course was for the computation aspects of the s 348 claim to be referred to a referee pursuant to the UCPR, r 20.14. As to the computation of the s 99 claim, the primary judge at the outset could have engaged the very useful process specified in s 99(3). But in any event, there is no reason why an order could not now be made confining an inquiry under s 99(3) to an assessment of the costs incurred resulting from the conduct found to involve serious neglect, serious incompetence or serious misconduct. Alternatively, an order for referral could be made under UCPR, r 20.14 so that the indemnity under both statutory provisions could be determined at the same time. I consider, however, that it is a matter for the primary judge to make that determination.
3. I should also indicate that although I have found the approach taken by the primary judge on this matter was not permissible, I do not consider that s 348 or s 99 necessarily requires a court to engage in a particularised costs assessment. For example, it may be appropriate in a particular case to determine that there be an indemnity in respect of the costs of certain affidavit evidence, or of a portion of the pleadings, or of certain number of days of a hearing, provided that the necessary causal effect had been the subject of a finding.
4. As to costs of the appeal, given that neither party has had complete success, I am inclined to the view that all parties should pay their own costs and I propose to make an order to that effect.

Orders

1. I propose the following orders: 1. To the extent required, grant leave in each proceeding to the applicant to appeal from the orders. 2. In each proceeding, appeal allowed in part. 3. In each proceeding, cross-appeal dismissed. 4. Declare that the appellant in proceedings 2016/385849, Mr Newell, is liable to indemnify the respondents in respect of the costs incurred by the respondents by reason of: 1. the joinder of the fifth respondent as cross-defendant; 2. the filing or service of more than three versions of the cross-claim; 3. the failure to reduce the evidence in the various affidavits of Mr Wachtenheim to one affidavit or to at least many fewer affidavits than those served; 4. the making, deployment, submissions, and hearing in respect of the illegal tape recording that was the subject of the second judgment: De Costi Seafoods (No 2) including the costs of the application dealt with in De Costi Seafoods (No 2); 5. the failure to discover correspondence between Mr Newell, Mr Muriniti and Mr Shnider; 6. the affidavit of Mr Ng; 7. the allegations of impropriety against Mr Thorpe; 8. the allegations of impropriety that the respondents obtained a misleading affidavit from Mr Shnider and Mr Shnider's evidence. 1. Declare that the appellant in proceedings 2016/382130, Mr Muriniti, is liable to indemnify the respondents in respect of the costs incurred by the respondents by reason of: 1. the joinder of the fifth respondent as cross-defendant; 2. the filing or service of more than three versions of the cross-claim; 3. the failure to reduce the evidence in the various affidavits of Mr Wachtenheim to one affidavit or to at least many fewer affidavits than those served; 4. the instructions given by Mr Muriniti to Mr Dent; 5. the false account contained in Mr Wachtenheim's affidavit dated 15 December 2011 as to how he was alerted to the issue of the understatement of sales revenue in Mr Wachtenheim's affidavit dated 23 August 2011; 6. the making, deployment, submissions and hearing in respect of the illegal tape recording that was the subject of the second judgment: De Costi Seafoods (No 2) including the costs of the application dealt with in De Costi Seafoods (No 2); 7. the non-production of a diary indicated by the chronology of events forwarded by Mr Muriniti to Mr Dent; 8. the failure to discover correspondence between Mr Newell, Mr Muriniti and Mr Shnider; 9. the affidavit of Mr Ng; 10. the allegations of impropriety against Mr Thorpe; 11. the allegations of impropriety that the respondents obtained a misleading affidavit from Mr Shnider and Mr Shnider's evidence. 1. Remit both proceedings to the District Court for further hearing and determination in accordance with the above declarations and these reasons; 2. Otherwise order that the appeals be dismissed.
2. Finally, I would note that the primary judge reserved the question of the costs of the notices of motion determined by him in the judgments of De Costi Seafoods (No 3), De Costi Seafoods (No 4) and De Costi Seafoods (No 5). It is a matter for the parties as to what steps they wish to make in respect of the determination of those costs. In addition, there is a question of the costs of the appeal. Given that the appellants have had some success on the appeal, but have also been unsuccessful on a number of their challenges, I am of the opinion that there should be no order as to the costs of the appeal.
3. GLEESON JA: I agree with the orders proposed by Beazley P for the reasons given by her Honour. I would prefer to refrain from expressing a view on the question of whether Mr Newell and Mr Muriniti need leave to appeal. It is sufficient to say that I agree with Beazley P that this is an appropriate matter in which leave should be granted if required.
4. WHITE JA: I have had the advantage of reading in draft the reasons for judgment of the President. I generally agree with her Honour's reasons. As we are differing in some respects from the conclusions of the primary judge, I will briefly state my reasons for joining in the orders proposed by the President. I also think it desirable to comment on the procedures adopted in this matter for the determination of the issues arising under ss 348 and 349 of the Legal Profession Act 2004 (NSW) ("the LPA") that resulted in the costs applications against Mr Muriniti and Mr Newell by the De Costi parties being dealt with in three separate hearings over 10 days.
5. Like Gleeson JA, I prefer to express no view on whether Messrs Newell and Muriniti require leave to appeal from the orders of Taylor DCJ. If leave is required, it should be given.

Joinder of Mrs Androulla Costi: Costs order under s 348 of the LPA

1. Section 348 of the LPA, so far as it is presently relevant, is quoted by Beazley P at [25].
2. The primary judge concluded (judgment [27]) that although the power in s 348(1)(b) of the Legal Profession Act should be limited to costs connected with the baseless claim against Mrs Costi, the section was not restricted to an order being made only in her favour, but could be made in favour of any party other than the party to whom the services were provided. His Honour concluded that for this reason the fact that Mrs Costi did not personally pay the costs is immaterial. It would also follow that it is immaterial whether or not Mrs Costi had a personal liability to the solicitors to pay costs or was liable to contribute to the other De Costi parties for the costs paid by them.
3. I agree with this conclusion. I agree with Beazley P (at [47]) that s 348(1)(b) does not require that the party whom the law practice or associate may be directed to indemnify need be the party against whom proceedings were brought without reasonable cause. The express language of s 348(1)(b) that the court may make an order directing the law practice or associate to indemnify "any party other than the party to whom the services were provided …" indicates that there is no such limitation.
4. The primary judge held that the costs of the claim against Mrs Androulla Costi should be treated as an equal portion of the whole of the costs of the proceedings. His Honour said that subject to his decision in respect of s 99 of the Civil Procedure Act 2005 (NSW) an order should be made under s 348 of the LPA directing Messrs Muriniti and Newell to indemnify the De Costi parties for 20 per cent of the costs of the proceedings, being the costs of the claim against Mrs Costi. (Judgment at [31] and [33].)
5. If Mrs Costi had paid or was liable to pay 20 per cent of the costs incurred by all of the De Costi parties, this conclusion would be unexceptionable, given the unchallenged finding that the proceedings brought against Mrs Costi had no reasonable prospects of success. But it was common ground that Mrs Costi had not paid and was not liable to pay that amount. In those circumstances in my view the indemnity provided for by s 348(1)(b) must be limited to the additional costs incurred by the other De Costi parties by reason of the joinder of Mrs Costi. An order under s 348(1)(b) is an order directing an indemnity against the whole or any part of the costs payable by the party indemnified. An order directing payment of costs that would have been incurred by the De Costi parties even if Mrs Androulla Costi had not been joined as a cross-defendant, would go beyond the provision of an indemnity. I agree with what Beazley P has said on this issue (at [59]-[63]).
6. That reasoning should be given effect to by this Court's declaring that Messrs Newell and Muriniti are liable to indemnify the De Costi parties in respect of the additional costs incurred by them as a result of the joinder of Mrs Androulla Costi as the fifth cross-defendant as provided for in the orders proposed by the President.

Section 99 of the Civil Procedure Act

1. The President has set out the relevant terms of s 99 of the Civil Procedure Act at [26]. There is a question whether an order under s 99(2)(c) can be made only in respect of costs payable by a party to another party and not in respect of costs payable by a party to that party's lawyers (Re Felicity [2015] NSWCA 19 at [16]-[17]). In this case it was accepted that the power under s 99(2)(c) extended to the court's ordering Messrs Newell and Muriniti to indemnify the De Costi parties against the costs payable by them to their lawyers. I do not consider there is sufficient reason to doubt the correctness of this position to warrant departure from it (Furlong v Wise & Young Pty Ltd [2016] NSWSC 647 at [79] per Stevenson J). In any event, as explained in Re Felicity, that power exists at common law.
2. The primary judge ordered that Messrs Newell and Muriniti indemnify the De Costi parties against 50 per cent of the costs payable by them in the proceedings up to the conclusion of the trial on 11 October 2012. To reach that conclusion the primary judge had to be satisfied that 50 per cent of the costs payable by the De Costi parties to their lawyers had been incurred "by" the serious neglect, serious incompetence or serious misconduct of Messrs Newell and Muriniti or, improperly, or without reasonable cause, in circumstances for which they were responsible. His Honour also had to be satisfied that Messrs Newell and Muriniti were equally responsible for the incurring of such costs (s 99(1)), or else identify in respect of each of them what costs were incurred by his serious wrongful conduct. In reaching his conclusion the primary judge addressed the particular allegations of serious misconduct, serious neglect or serious incompetence that are addressed by Beazley P. The primary judge found: (a) serious incompetence in the service of multiple versions of the claim (judgment at [48]). The De Costi parties' allegation of serous wrongful conduct in this particular was made against both Mr Muriniti and Mr Newell. Mr Muriniti's written submissions before the primary judge addressed the issue. Mr Newell's did not. As neither Mr Muriniti nor Mr Newell gave evidence, there was no basis on which the primary judge could say that either Mr Newell or Mr Muriniti had the sole or primary responsibility for the misconduct. The preparation and amendment of pleadings could have been done by either or both of them. I agree with Beazley P for the reasons her Honour gives that the appeal in respect of this finding fails. I regard the finding as having been made against both Mr Muriniti and Mr Newell. There is no reason to allocate greater responsibility to one than the other for the wasted costs incurred by the multiplicity of pleadings; (b) serious incompetence in the form of the pleading and particulars that were riddled with ambiguity and prolixity (apparently a finding against both Mr Muriniti and Mr Newell) (judgment at [53]). I agree with Beazley P that the form of the pleadings did not reflect or involve serious incompetence (at [118]). That particular does not survive appeal; (c) serious neglect in the preparation and reading of numerous affidavits from Mr Wachtenheim, without their being reduced to one affidavit or fewer affidavits (judgment at [59]). I agree with Beazley P's reasons at [137] that this finding was open to his Honour. In my view, the finding is to be understood as having been made against both Mr Muriniti and Mr Newell. As they did not give evidence, there is no reason to allocate responsibility for this misconduct to only one of them, or to allocate greater responsibility to one rather than the other; (d) serious neglect and incompetence in the deployment of nine witnesses, 17 affidavits of about 400 pages and many folders of exhibits referable to the performance of four other De Costi franchise stores. The finding was apparently made against both Mr Muriniti and Mr Newell (judgment at [60]). I agree with Beazley P's reasons at [144]-[153] in relation to this particular. In my view the appellants have succeeded in establishing that the deployment of evidence in relation to the performance of other De Costi franchise stores was not serious neglect and incompetence. That evidence was tendency evidence that could only have been admitted over objection if it had significant probative value (Evidence Act 1995 (NSW), s 97(1)(b)). The fact that the evidence was either not objected to or was allowed over objection indicates that it was at least prima facie properly adduced. The primary judge said (at [60]) that no submission was advanced on the costs application as to how the material was probative to the issues in the trial. But if it could have been seen at the time the evidence was adduced that it was not probative, it should have been rejected. If the lack of probative value only became apparent after cross-examination, no sufficient reason is shown as to why this should have been apparent to Messrs Newell and Muriniti so as to justify the finding of serious wrongful conduct; (e) the maintenance of an allegation that defective product was returned from Mr Wachtenheim's store was contrary to the evidence served and was an example of neglect by the legal practitioners (both Mr Muriniti and Mr Newell) in advancing an entirely unmeritorious claim that involved putting forward voluminous but ultimately irrelevant evidence from litigants in other proceedings (judgment at [61]). This finding overlaps with or is a subset of the facts giving rise to the finding of serious neglect in para [60] that should be overturned; (f) the giving of inappropriate instructions by Mr Muriniti to Mr Dent (an expert) (judgment at [63] and [64]). It can be inferred that the primary judge concluded that this was serious misconduct. The finding was made only against Mr Muriniti. The finding was not challenged; (g) the preparation of Mr Wachtenheim's affidavit of 15 December 2011 that falsely stated that Mr Wachtenheim was alerted to the issue of underreporting of revenue after a bookkeeper had undertaken a reconciliation and was unable to explain the missing amount and that he sought the advice of Mr Birrell to discover what had happened (judgment at [66]-[67]). This was serious misconduct on the part of Mr Muriniti (judgment at [70]). I agree with Beazley P's reasons for rejecting Mr Muriniti's challenge to this finding (at [164]-[176]); (h) the use of the evidence of former De Costi franchisees, Mr Batchelor and Mr Turner, was incompetent and the incompetence was serious having regard to its consequences. It was incompetent because the utility of the evidence of Mr Batchelor and Mr Turner depended upon proof that fish allegedly delivered by the De Costi parties was equivalent to the fish asserted by Messrs Batchelor and Turner to be comparable in seeking to establish that the De Costi parties charged too high a price (judgment at [73]). Having regard to their lack of independence there was also no realistic prospect of the opinion being accorded weight (judgment at [73]). This finding is in the same position as the finding set out at (d) above; (i) the incident involving the illegal tape recording was serious misconduct on the part of both Mr Muriniti and Mr Newell (judgment at [75]). The primary judge said that Messrs Newell and Muriniti should bear the costs of and incidental to the recording of Mr Shnider's telephone conference (at [76]). There was a three-day hearing in respect of the admissibility of the recording (De Costi Seafoods (Franchises) Pty Ltd v Wachtenheim & Anor (No 2))]; (j) the failure to produce a diary, the existence of which was indicated by a chronology provided as part of the instructions to Mr Dent, was serious incompetence or neglect (judgment at [77]) that resulted in the incurring of legal costs before and during the hearing (at [77]). I infer that this was a finding against Mr Muriniti who would have been responsible for producing the diary. I agree with Beazley P on this matter (at [189]); (k) failure to produce correspondence between Mr Newell, Mr Muriniti and Mr Shnider that caused costs to be incurred by the De Costi parties in being compelled to raise repeatedly the non-production of documents and to explore different avenues of proof (judgment at [80] and [81]). Again, I agree with Beazley P (at [194]). It can be inferred that both Mr Newell and Mr Muriniti were both responsible in equal degree in the absence of evidence to the contrary; (l) improper pressure on a witness, a Mr Ng, to make and sign an affidavit before reading it and in being asked to affirm the content of evidence in the presence of other witnesses was serious misconduct (judgment at [83] and [84]). The primary judge held that this conduct, so far as it concerned Mr Ng, was serious misconduct (at [84]). There is no reason to disturb that finding. It applies equally to Mr Muriniti and Mr Newell; and (m) the making of serious allegations of impropriety against Mr Thorpe (the De Costi parties' solicitor) and Mr Shnider that lacked a proper foundation and should not have been made that support a conclusion that Mr Newell and Mr Muriniti should bear the costs in relation to a Mr Shnider's evidence (at [89]-[91]). This involved both Mr Newell and Mr Muriniti.
3. The question then for the primary judge was how he should determine what costs were incurred by the De Costi parties by the serious misconduct, neglect or incompetence that his Honour found. This was not an easy task. The primary judge recognised (at [106]) the need for a nexus between the costs incurred by the De Costi parties as a result of the wrongful conduct and the order to be made in respect of costs under s 99. His Honour said (at [107]-[108]): "107 … The Court is entitled both to award the 'costs thrown away or lost because of the conduct complained of' (Kelly v Jowett at [61]) and to determine fairly the amount of those costs or the proportion those costs bear to the costs of the proceedings. Correctly, as Mr Muriniti submits, (submissions at [13]) 'no order may be made unless the Court is satisfied that costs have been wasted as a result of the practitioner', but if the Court is so satisfied, the orders should fairly compensate the party for the amount of those wasted costs. The decision in Kelly v Jowett does not preclude a global percentage approach to costs in the appropriate case. 108 I do not think the need for a connection between wasted costs and the costs ordered precludes a global order. A broad brush approach has been mandated by the Court of Appeal in Lemoto (at [92]) and when numerous items of misconduct are found, the need for a connection between the wasted costs and the order would permit the Court to do its best to ascertain what proportion of the total costs are due to misconduct rather than seek to identify the precise costs incurred in relation to every item of misconduct, a near impossible task. To this extent, I reject the submission that in all cases a global percentage approach offends the principle in Kelly v Jowett. Such an approach is, if anything, endorsed in Bendigo and Adelaide Bank Limited. A global percentage approach does not offend the requirement that the misconduct must result in costs to the parties seeking to be indemnified; rather, it concerns the quantification of those costs or the formulation of orders to deal fairly with them."
4. I accept that in an appropriate case a trial judge may be able to determine the extent to which costs were incurred by the serious neglect, misconduct or incompetence of a legal practitioner by the judge's assessing the proportion of total costs that were incurred that were due to misconduct, rather than by seeking to identify the precise costs incurred in relation to every item of misconduct. An example of the broad brush approach is the order made at first instance in Myers v Rothfield [1939] 1 KB 109 referred to on further appeal in Myers v Elman [1940] AC 282 at 286 where Singleton J ordered the solicitor to pay one-third of the taxed costs of the action (at 286), holding that but for the solicitor's misconduct "… the action would, in all probability, have been brought to trial much more speedily and might well have been more fruitful in its results" (Myers v Rothfield at 128).
5. My difficulty is not with the principle upon which the primary judge acted, but with its application. The primary judge said that a properly conducted hearing should have taken no more than 19 days. Ultimately, it took 75 days. In his Honour's view the appropriate amount attributable to the wrongful conduct involving Mr Newell and Mr Muriniti was a proportion of the extra 56 days of the trial. In other words, the primary judge found that the trial took four times as long as it should have done. His Honour found (at [117]) that there had been no suggestion by Mr Newell or Mr Muriniti, nor could there have been, that the time taken by the De Costi parties enlarged the length of the trial inappropriately. His Honour said that it did not follow that all of the extra 56 days of trial could be attributed to Mr Newell and Mr Muriniti, still less to their instances of serious neglect, serious incompetence or serious misconduct and that some delay must have resulted from the conduct of Mr Wachtenheim (at [120]). He also took into account that the trial would have been extended by the technique and approach of Mr Newell and Mr Muriniti that would not warrant the appellation of being "serious" misconduct, incompetence or neglect (at [121]). The primary judge then reduced the additional delays and costs attributable to the serious wrongful conduct of Mr Newell and Mr Muriniti by a further third from 75 per cent to 50 per cent. That is, he attributed two-thirds of the additional 56 days to the serious misconduct of the lawyers.
6. As Beazley P observes (at [232]), the assessment that a reasonable time for hearing would be 19 days overlooked the extraordinary period of 13 days taken in the making and reventilation of the De Costi parties' objections to evidence. Most of the evidence was admitted.
7. Secondly, not all the findings of serious wrongful conduct made against Mr Muriniti were made against Mr Newell, yet they were both ordered to indemnify the De Costi parties against 50 per cent of their costs.
8. Moreover, a significant part of the excessive length of hearing attributed by the primary judge to serious wrongful conduct on the part of Mr Newell and Mr Muriniti would have been attributable to the evidence concerning the performance of other De Costi franchise stores that involved nine witnesses and 17 affidavits. As Beazley P explains, if this evidence apparently relied upon as tendency evidence, did not have significant probative value, it should have been rejected on objection. This Court was told that a substantial part of the objections taken at a hearing over four days before the commencement of the trial before the primary judge related to this evidence, but the evidence was substantially admitted and was also admitted after further objection was taken before the primary judge. It is not apparent why the De Costi parties were permitted to reventilate objections that had already been ruled upon.
9. This Court is not in a position to make the kind of evaluative or impressionistic assessment of the extent to which costs were increased by the acts of serious wrongful conduct, the findings in respect of which have been upheld, as the primary judge made. It is not possible to proceed by way of an adjustment to the impressionistic assessment made by the primary judge. Having identified the extent to which the primary judge's finding of serious wrongful conduct has been upheld, appropriate declarations should be made and the matter should be remitted to the District Court to determine the quantum of indemnity in accordance with those declarations and the court's reasons. The District Court might well think it appropriate to require the De Costi parties to prepare a bill of costs and to appoint a costs assessor as an expert to report to the District Court on the extent to which costs were incurred by the De Costi parties by the acts of serious wrongful conduct that have been identified, as well as by reason of the joinder of Mrs Androulla Costi. That would be a matter for the judge dealing with the case on remitter. Accordingly, I agree with the orders and declarations proposed by the President. It does not seem that any final costs order has been made in respect of the De Costi parties' notice of motion. Both parties have had a measure of success and failure on the appeal. I agree with the President that there should be no order as to the costs of the appeal to the intent that the parties bear their own costs of the appeal.

The s 349 threshold hearing

1. As Beazley P has explained, the De Costi parties filed a notice of motion on 5 August 2013 seeking orders that Mr Newell and Mr Muriniti indemnify them in respect of the whole of the costs arising from the cross-claim either pursuant to s 348 of the Legal Profession Act 2004 or s 99 of the Civil Procedure Act. It appears from the primary judge's reasons in De Costi Seafoods (No 5) [2015] NSWDC 8 that on 28 August 2013 an order was made at the request of the parties that the motion (together with another motion relating to costs concerning an unrelated party) be listed: "for the purposes of determining whether the facts established by the evidence before the Court do not form a basis for a reasonable belief that the claim and defence had reasonable prospects of success, and accordingly whether there is a presumption under s 349(1) of the Legal Professional Act 2004 (NSW) that legal services provided on the claim and defence were provided without reasonable prospects of success."
2. In De Costi Seafoods (No 4) [2014] NSWDC 70 the primary judge made findings as follows: "(2) Note that I do not find under s 349(1) of the Legal Profession Act 2004 that the facts established by the evidence at trial do not form a basis for a reasonable belief that the claim by Serge Wachtenheim and Deist Safety Equipment Australia Pty Ltd against Frank Theodore, De Costi Seafoods (Franchises) Pty Limited, De Costi Seafoods (Holdings) Pty Limited, or George Costi had reasonable prospects of success. (3) Note that I do find under s 349(1) of the Legal Profession Act 2004 that the facts established by the evidence at trial do not form a basis for a reasonable belief that the claim by Serge Wachtenheim and Deist Safety Equipment Australia Pty Ltd against Androulla Costi had reasonable prospects of success."
3. The finding recorded in the first of the notes quoted above led to a successful application by Mr Newell and Mr Muriniti for summary dismissal of the application by the De Costi parties (other than Androulla Costi) for orders under s 348. In De Costi Seafoods (No 5) the primary judge said if the De Costis could not establish the matters necessary to give rise to a presumption under s 349 they could not establish a breach of s 348 (judgment [23]). There was no cross-appeal by the De Costi parties against the dismissal of their claims (other than that of Androulla Costi) for orders under s 348 of the LPA.
4. The relevant terms of ss 348 and 349 of the Legal Profession Act for the determination of the appeal are set out at [25] of the President's reasons. It is convenient however to set out the whole of ss 348 and 349: "348 Costs order against law practice acting without reasonable prospects of success (1) If it appears to a court in which proceedings are taken on a claim for damages that a law practice has provided legal services to a party without reasonable prospects of success, the court may of its own motion or on the application of any party to the proceedings make either or both of the following orders in respect of the practice or of a legal practitioner associate of the practice responsible for providing the services: (a) an order directing the practice or associate to repay to the party to whom the services were provided the whole or any part of the costs that the party has been ordered to pay to any other party, (b) an order directing the practice or associate to indemnify any party other than the party to whom the services were provided against the whole or any part of the costs payable by the party indemnified. (2) The Supreme Court may on the application of any party to proceedings on a claim for damages make any order that the court in which proceedings on the claim are taken could make under this section. (3) An application for an order under this section cannot be made after a final determination has been made under this Part by a costs assessor of the costs payable as a result of an order made by the court in which the proceedings on the claim concerned were taken. (4) A law practice or legal practitioner associate of the practice is not entitled to demand, recover or accept from a client any part of the amount for which the practice or associate is directed to indemnify a party pursuant to an order under this section. 349 Onus of showing facts provided reasonable prospects of success (1) If the court (the trial court) hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success. (2) If the Supreme Court (when the Supreme Court is not the trial court) is satisfied, either as a result of a finding of the trial court or otherwise on the basis of the judgment of the trial court, that the facts established by the evidence before the trial court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success. (3) A presumption arising under this section is rebuttable and a person seeking to rebut it bears the onus of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success. (4) A law practice or legal practitioner associate of the practice may, for the purpose of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success, produce information or a document despite any duty of confidentiality in respect of a communication between the law practice or a legal practitioner associate of the practice and a client, but only if: (a) the client is the client to whom the legal services were provided or consents to its disclosure, or (b) the court is satisfied that it is necessary for the law practice or associate to do so in order to rebut a presumption arising under this section."
5. Section 349(1) of the LPA stated the consequences if "… the court (the trial court) hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success …" (Underlining added.)
6. By contrast s 348(1) sets out the orders that can be made "if it appears to a court in which proceedings are taken on a claim for damages that a law practice has provided legal services to a party without reasonable prospects of success". (Emphasis added.)
7. By s 348(2) the Supreme Court may make an order under s 348(1) even though it was not the court in which the proceedings were taken. This reflects the Supreme Court's disciplinary jurisdiction over the legal profession. Under s 349(2), if the Supreme Court is not the trial court, that is, if it is not the court hearing proceedings on a claim for damages, then, it may make a finding that gives rise to a rebuttable presumption that legal services were provided on a claim or defence which had no reasonable prospects of success. Such a finding is to be based on the judgment and findings of the trial court.
8. Section 349(1) does not provide that a court, other than the court hearing proceedings on a claim for damages or the Supreme Court, can make a finding that gives rise to a rebuttable presumption that legal services had been provided on a claim or defence without reasonable prospects of success. It does not provide that the court that has heard proceedings on a claim for damages can make such a finding.
9. Division 5C of Part 11 comprising ss 198J-198N of the Legal Profession Act 1987 (NSW) was introduced by the Civil Liability Act 2002 (NSW). Those sections were replicated in the Legal Profession Act 2004 and are again materially replicated in Schedule 2 to the Legal Profession Uniform Law Application Act 2014 (NSW). The context in which those provisions were introduced was that at common law a finding of fact by the trial judge in the proceeding in which the lawyer acted was admissible on the summary hearing of an application that the lawyer pay the whole or part of the successful party's costs if, having regard to the solicitor's connection with the proceedings, it was fair and just to do so (Brendon v Spiro [1938] 1 KB 176 at 192 per Scott LJ and at 195 per Swift J; Bahai v Rashidian [1985] 1 WLR 1337 at 1342.H-1343.A per Sir John Donaldson MR, at 1344.E-1344.F per Parker LJ; Symphony Group Plc v Hodgson [1994] QB 179 at 193.E-193.F per Balcombe LJ, 196.G per Staughton LJ; and Flinn v Flinn [1999] VSCA 134 at [4] ff).
10. In Symphony Group Plc v Hodgson Balcombe LJ said (at 193): "(6) The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action. Thus, subject to any relevant statutory exceptions, judicial findings are inadmissible as evidence of the facts upon which they were based in proceedings between one of the parties to the original proceedings and a stranger: see Hollington v. F. Hewthorn & Co. Ltd. [1943] K.B. 587; Cross on Evidence, 7th ed. (1990), pp. 100-101. Yet in the summary procedure for the determination of the liability of a solicitor to pay the costs of an action to which he was not a party, the judge's findings of fact may be admissible: see Brendon v. Spiro [1938] 1 K.B. 176, 192, cited with approval by this court in Bahai v. Rashidian [1985] 1 W.L.R. 1337 1343D, 1345H. This departure from basic principles can only be justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice by allowing this exception to the general rule."
11. That statement of principle was endorsed by the Victorian Court of Appeal in Flinn v Flinn [1999] VSCA 134 at [4] and referred to by McColl JA in Lemoto v Able Technical Pty Ltd & Ors (2005) 63 NSWLR 300, 333 at [147]; [2005] NSWCA 153 ("Lemoto").
12. Section 91 of the Evidence Act provides that evidence of a decision or of a finding of fact is not admissible to prove the existence of a fact that was in issue in that proceeding, even if that evidence is relevant for another purpose. It may be the case that, by reason of s 91 of the Evidence Act, findings of fact in the principal proceeding cannot be relied upon in an application for a wasted costs order, whether the application is made by the successful party against the solicitor for the unsuccessful party who might have been responsible for bringing a claim or defence that had no prospects of success or otherwise misconducted himself or herself, or whether it is brought by the unsuccessful party who both incurred costs and became liable to pay costs by fault of its lawyer. Whether that is the effect of s 91 is a question that has been raised but not determined (In the Matter of Condor Blanco Mines Ltd (No 3) [2017] NSWSC 65 per Barrett AJA at [9]-[11]; Young v Hughes Trueman Pty Ltd (No 4) [2017] FCA 456 per Lee J at [12]-[23]).
13. It is unnecessary for this Court to decide that question, which was not raised or argued by the parties in these proceedings. It is sufficient to observe that when ss 198M and 198N were enacted, and at all times thereafter, subject to the possible operation of s 91 of the Evidence Act, findings of fact made in the principal proceedings might be admissible against a lawyer on a subsequent application for a wasted costs order if that is fair and just, having regard to the lawyer's involvement in the proceeding. (See Lemoto per McColl JA at [147], 333.)
14. In this context the difference in language between s 198M(1) of the Legal Profession Act 1987 on the one hand, and s 198N(1) on the other (their counter parts in the Legal Profession Act 2004 being ss 348(1) and 349(1)), is significant. The court that might make an order against a law practice that acted for a party without reasonable prospects of success under s 348(1) is the "court in which proceedings are taken on a claim for damages". The finding of a court that gives rise to a presumption that legal services provided on a claim or defence were provided without reasonable prospects of success under s 349(1) is "the court (the trial court) hearing proceedings on a claim for damages".
15. This distinction was not adverted to in the reasons of this Court in Lemoto. In that case the Court was concerned with the issue of how the principles of natural justice should be accommodated within ss 198M and 198N. In that case the primary judge had made a costs order against the solicitor without giving the solicitor the opportunity to be heard. The Court held that the legislation did not disclose an intention to displace ordinary requirements of natural justice (per Hodgson JA at [7]; per McColl JA at [123]). McColl JA observed that the procedure to be devised for dealing with an application under s 348 should be fair and as simple and summary as fairness permits (quoting Ridehalgh v Horsefield [1994] Ch 205 at 238 (at [143], 333)).
16. Hodgson JA said: "[8] In some cases, particularly where an oral judgment is delivered, it may be possible for a judge, at the conclusion of the judgment, to indicate to a person or persons who provided legal services that the judge is contemplating a finding in terms of s 198N, for reasons then disclosed, and to invite submissions; and after hearing submissions, to make a finding in terms of s 198N(1) then and there. [9] But in my opinion, it would usually be preferable to indicate the possibility of a s 198N(1) finding, and then to give directions with a view if possible to a single hearing in which all issues can be determined. If there is a question arising under s 198N(4), the legal adviser might not be able safely to serve evidence disclosing confidential communications on anyone other than the client with whom there were such communications, until that question is resolved; so if the other party to the proceedings is involved in the application for the s 198M order, it may be necessary to decide whether a s 198N(4) issue needs to be determined in advance of the hearing, so that this other party knows before the hearing what the legal adviser's evidence is to be."
17. McColl JA proposed that: "[149] While recognising that the procedure to be adopted pursuant to Div 5C is a matter for the court considering making a s 198M order, I would suggest that such a court: (1) consider whether there is a prima facie case that a solicitor or barrister has provided legal services to a party without reasonable prospects of success within the meaning of s 198J; the solicitor or barrister should be given an opportunity to be heard on whether a prima facie case has been made out; full particulars of the basis of the application should be provided; (2) if the court considers there is a prima facie case, the legal practitioner should be given the opportunity to show cause why a s 198M order should not be made; again this requires giving the solicitor or barrister sufficient particulars of the prima facie case; (3) after any explanation is provided, the court should determine whether a finding that the legal practitioner has provided legal services to a party without reasonable prospects of success within the meaning of s 198J should be made; in considering this issue the onus of proof may differ depending upon whether or not the rebuttable presumption in subs 198N(1) and (2) is operative; (4) if the court concludes the legal practitioner has provided legal services to a party without reasonable prospects of success within the meaning of s 198L the court should consider whether it is, in all the circumstances, just to make a s 198M order; (5) if an order is made, it should specify whether it is a repayment order or an indemnity order and whether the solicitor or barrister is ordered to pay "the whole or any part of" the relevant costs; (6) provide reasons for the decision."
18. Ipp JA agreed with both judgments.
19. Hodgson JA expressly contemplated at [8] 304 that a s 198N (later s 349(1)) finding could be made after judgment had been delivered on the claim for damages. McColl JA did not expressly so decide, but did propose a staged procedure where the court would first determine whether there was a prima facie case that the lawyer provided legal services where the claim or defence had no reasonable prospects of success. That was understood by the parties and the primary judge in this case as requiring a determination under s 349(1). This may not be what McColl JA intended, but it is possible to see why the parties and the primary judge adopted the understanding that they did. It is otherwise not clear why procedural fairness would require a separate hearing on whether a prima facie case is established.
20. The Court's views in Lemoto as to the appropriate procedures to be followed on an application under s 198M were obiter and are therefore not binding.
21. In Firth v Wowk & Ors [2008] NSWCA 104 Mr Kennedy had made a claim for damages arising from a workplace injury. The proceedings were dismissed before the hearing date. The District Court found that the solicitor had provided legal services to Mr Kennedy without reasonable prospects of success, and made a costs order against the solicitor pursuant to s 348. Giles JA, with whom McColl and Bell JJA agreed, rejected the submission that the reference in s 349 to "the court … hearing proceedings on a claim for damages" had the effect that an order under s 348 could only be made by a court hearing a claim for damages. His Honour said: "[17] The second [submission] was that the effect of s 349 was that an order can only be made by the District Court where it is the court hearing proceedings on a claim for damages, and that Mr Kennedy's claim did not come to a hearing. Accordingly, it was said, only the Supreme Court could make an order against Mr Firth pursuant to s 348(2). I do not agree. Section 349 operates to establish a rebuttable presumption where the court has heard proceedings on a claim for damages and finds that the facts established by the evidence did not form a basis for a reasonable belief. The presumption may suffice to establish what must appear to a court as required by s 348(1), but is not necessary. For s 348(1) it is enough that it appears to the court that the law practice has provided legal services to a party without reasonable prospect of success, and that may appear for reasons other than a finding in a substantive hearing. The court for that purpose is the court 'in which proceedings are taken on a claim for damages', in the present case the District Court, and taking proceedings on a claim for damages is less than conducting a hearing."
22. Although his Honour used the past tense "has heard" and the present tense "finds", it appears from the context that his Honour was saying that the rebuttable presumption under s 349 arises where the court has heard proceedings on a claim for damages and has found that the facts established by the evidence did not form a basis for a reasonable belief. The present issue did not arise in that case.
23. The procedure proposed in Lemoto was followed by the parties in the present case, but with no regard to the admonition that procedures for hearing costs applications against lawyers should be as simple and summary as fairness permits and hearings should be measured in hours, and not in days or weeks (Lemoto at 92, 321-322 per McColl JA quoting Ridehalgh v Horsefield). After the principal judgment was delivered on 3 May 2013 there was a hearing over two days from 16 December 2013 (part of which related to an unrelated costs application by another party) on the application of s 349(1) of the Legal Profession Act; a further hearing over two days on 27 and 28 August 2014 that addressed the consequences of the s 349(1) findings; and a final hearing over six days in March 2016 of Androulla Costi's s 348 application and the De Costi parties' s 99 application.
24. The finding that the facts established by the evidence at trial did not form a basis for a reasonable belief that the claim of the cross-claimants against Androulla Costi had reasonable prospects of success, and the notation that the primary judge did not find under s 349(1) that the facts established by the evidence at the trial did not form a basis for a reasonable belief that the claim by the cross-claimants against the other De Costi parties had reasonable prospects of success, were not made in the hearing of the proceedings on the claim for damages. They were made at a separate hearing after the proceedings on the claim for damages had been determined. This is not a ground of appeal or cross-appeal.
25. When s 349(1) is read in the context that, at common law, findings of fact in the principal proceedings can be used in proceedings in which costs are sought against a lawyer, it can be seen that s 349(1) is engaged only if a court, on a hearing of proceedings on a claim for damages, makes a finding in terms of s 349(1) or a finding equivalent thereto; as in Metsikas v Quirk (No 2) [2010] NSWSC 757 at [3]-[4] per Brereton J (proceedings hopeless and doomed to fail from the outset). If such a finding is made, that finding creates a rebuttable presumption. Section 349(1) is narrower than the position at common law in that it requires a particular finding to be made that, on the evidence before the court, there was not a basis for a reasonable belief that the claim or defence had reasonable prospects of success. The section is also wider in that it creates a rebuttable presumption.
26. A party who contemplates seeking a costs order under s 348(1) may invite the court hearing the claim for damages to make such a finding. The making of such a finding by the court that hears the proceedings on a claim for damages is, at least arguably, a departure from the rules of natural justice that would entitle the lawyer to be heard on that question. However, it is not a significant departure having regard both to the fact that the finding is made only on the basis of facts established at the trial, and that a similar, although not identical, position existed at common law. To the extent there is a departure from the rules of natural justice, it is expressly provided for. The court would be guided by the principle that no such finding should be made unless it be fair and just to do so, having regard to the lawyer's connection with the proceedings, by analogy to the principles at common law on the admissibility of factual findings in subsequent costs applications.
27. Unless an application is made to the Supreme Court for a costs order under s 348 (now cl 5 of Sch 2 to the Legal Profession Uniform Law Application Act) and the Supreme Court was not the trial court, there need be only one hearing for an order under s 348 which would ordinarily be expected to be heard with any application for a wasted costs order under s 99 of the Civil Procedure Act. That is because either the trial court would have made a finding under s 349(1) (now cl 6 of Sch 2) in its judgment on the hearing of the proceedings of the claim for damages or it would not. If it did, the applicant for the costs order would have the benefit of the rebuttable presumption which could be displaced on the hearing of the application for the order under s 348. If the trial court had not made such a finding then the application could simply proceed under s 348 with the onus being upon the applicant to establish that the law practice provided legal services to a party without reasonable prospects of success.
28. Section 349(2) (now cl 6(2) of Sch 2) supports this construction. Section 349(2) provided: "349 Onus of showing facts provided reasonable prospects of success … (2) If the Supreme Court (when the Supreme Court is not the trial court) is satisfied, either as a result of a finding of the trial court or otherwise on the basis of the judgment of the trial court, that the facts established by the evidence before the trial court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success."
29. If the Supreme Court is not the trial court, there would have to be a separate hearing before the Supreme Court if the applicant for the costs order wished to obtain the benefit of the presumption under s 349(2) or cl 6(2) in advance of the hearing. But the Supreme Court's determination of that matter is to be based not on evidence of primary facts that might be adduced at such a hearing, nor on the evidence adduced at the hearing for damages in the trial court, but on the findings of the trial court or otherwise on the basis of its judgment.
30. This indicates that the purpose of s 349(1) and (2) was to streamline the procedure for determining a costs application under s 348 by allowing for the judgment on the damages claim to create a rebuttable presumption in the applicant's favour if sufficient findings were made. It points to the judgment of the trial court on the hearing of the proceedings on the claim for damages as being the judgment that can be relied upon under s 349(1) (or cl 6(1)), not a judgment of the trial court on a separate hearing after the claim for damages has been determined.
31. In Eurobodalla Shire Council v Wells [2006] NSWCA 5 the Court of Appeal (Ipp JA) relied in part on s 198N in finding that costs orders in relation to an unsuccessful application for leave to appeal should be made against the solicitor and barrister who provided legal services in connection with that application which was characterised as hopeless. His Honour said: "[26] Having re-examined the material I am satisfied that there is no reason for me to alter my concurrence with the view expressed by the Court of which I was a member, namely, that the case below was 'hopeless'. Simply put, the evidence adduced at trial did not establish necessary elements of Mrs Aldridge's cause of action. This should have been obvious prior to the launching of Mrs Aldridge's application for leave to appeal and her appeal. [27] I am satisfied, in accordance with s 198N of the Act, that the facts established by the evidence before the trial Court do not form a basis for a reasonable belief that Mrs Aldridge's claim had reasonable prospects of success. It follows that the presumption referred in s 198N applies and has not been rebutted."
32. It is clear from his Honour's earlier reference to s 198N(2) and (3) (at [12]) that his Honour was acting under s 198N(2).
33. The construction of the provisions advanced above does not accord with the views of Hodgson JA in Lemoto and may not be in accordance with the views of McColl JA. But their Honours, with respect, did not address the significance of the language of s 198N of the Legal Profession Act 1987, which provides that a presumption arising under s 198N(1) arises from a finding of the trial court "hearing proceedings on a claim for damages". When due consideration is given to those words in the context of the common law principles relating to the use of findings of fact in principal proceedings in the exercise of the court's summary jurisdiction to make costs orders against legal practitioners, it can be seen that the expensive and time consuming procedure adopted in this case was not warranted. It was not consistent with the apparent purpose of s 349(1); that is, to expedite the determination of an application for a costs order against a legal practice, and to give effect to the principle that the procedure for determining the application should be as simple and summary as fairness permits.
34. Clearly the law practice against whom an order under s 198M, s 348 or cl 5 of Sch 2, is sought must be given particulars of the grounds on which it is contended that an order under those provisions should be made. But the statutory provisions contain no indication that there should be a separate hearing on whether an applicant has a prima facie case for such an order. Such a procedure is not consistent with a simple and summary procedure and in at least most cases would not be required to provide fairness to the legal practice.
35. Just as the observations about the appropriate procedures to be adopted made by the court in Lemoto were obiter, so are these observations. They are not binding on lower courts. But trial judges asked to conduct a "threshold hearing" with a view to making findings that might trigger a rebuttable presumption under cl 6 of Sch 2 (formerly s 349) should consider these observations when deciding whether they have jurisdiction to do so. They should also consider these observations if an application for a costs order against a law practice is foreshadowed during the hearing of a claim for damages and they are asked to make a finding in terms of cl 6(1) in their judgment on the claim for damages.

Amendments 27 March 2018 - Typographical error corrected in Headnote. 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: 27 March 2018