Plaintiff / Respondent v Defendant / Applicant

1 Before this court is the first defendant's summons seeking orders that:

▪ the plaintiff be restrained from retaining, and from continuing to retain, Wilmoth Field Warne (WFW) as its solicitors in this proceeding;

▪ the plaintiff withdraw a caveat over particular property; and

▪ the plaintiff pay the first defendant's costs of, and incidental to, the application.

2 The first two orders sought are somewhat interrelated. However, I will deal with each in turn.

3 The first defendant is a former employee of the plaintiff.

4 The first defendant submits that WFW acted on behalf of the first defendant in a previous matter which was in relation to a complaint lodged by a former employee of the plaintiff in the Equal Opportunity Commission against the first defendant, the plaintiff and a related company (the EOC matter).

5 The first defendant submits that the EOC matter raised issues, or required the investigation of issues, which relate to the allegations of fraud raised against the first defendant in this proceeding.

6 The EOC matter involved a complaint lodged by another former employee of the plaintiff, Ms W, who alleged that she had been sexually harassed in the course of employment. The complaint was brought against the first defendant, the plaintiff and a related company. It alleged sexual harassment as a result of statements allegedly made by the first defendant about Ms W to third parties. The complaint, and the investigation of it, seems to have touched on broader issues which included allegations of improper acts by the first defendant in the course of employment and allegations as to her character.

7 WFW acted for the first defendant and the plaintiff in the course of the investigation, conciliation and ultimate dismissal settlement and discontinuance of the complaint.

8 The first defendant submits that there are three bases to grant an injunction to restrain a solicitor from acting against a former client:

(a) to prevent the misuse of confidential information obtained by the solicitor from the former client;

(b) to prevent breach of a fiduciary duty of loyalty owed by the solicitor for the former client; and

(c) in the exercise of the court's jurisdiction to control the conduct of its officers.

9 In support of these submissions, the first defendant relies on two affidavits: an affidavit of Mr Robert Martin Phelan sworn 26 July 2007 and a supplementary affidavit of Mr Phelan sworn 16 August 2007.

10 It is submitted that the injunction is required to prevent the misuse of confidential information in the nature of the instructions and correspondence that the first defendant provided in the EOC matter and the 'getting to know you' factors[1] of the solicitor-client relationship.

11 The confidential instructions are said to be comprised in oral conversations with solicitors of WFW and letters on the EOC file. Further, the letters are, for the most part, between the first defendant and the plaintiff and are said to disclose issues directly relevant to the issues raised in this proceeding and may be relied upon by either party to the claim.

12 The first defendant submits that, in relation to the 'getting to know you' factor, WFW obtained 'general information about Ms Brown's personality and characteristics during the conduct of the EOC matter'. Notwithstanding that the two solicitors who worked on the EOC matter have since left WFW, the first defendant submitted that no evidence has been adduced that the former solicitors of WFW did not discuss confidential information with any other solicitor who may still work at WFW. It was also submitted that neither of the former solicitors was a partner of the firm and as such there must have been a partner overseeing the matter. Again, no evidence has been adduced in this regard.

13 In response, the plaintiff submitted that there is no conflict of duty and no other reason on the facts that WFW should not continue to act for the first defendant. The plaintiff set out the following factual reasons:

1. The individual solicitors who acted in defending the EOC claim are no longer working at WFW;
2. The EOC file had been in storage until its existence was raised by the first defendant. The first defendant, having received a copy of it, placed it into evidence in this application;
3. The first defendant has waived any claim for privilege or confidentiality. In any event, the plaintiff has always had an equal right of access to the file whether or not WFW was acting in this proceeding;
4. There is no confidential or privileged information in the EOC file. The particular letters to which the first defendant refers were letters that she sent to the plaintiff or related entities. There is nothing else on the file that records anything personal about the first defendant that would give an advantage to the current solicitor acting for the plaintiff;
5. To the extent that confidential or privileged information may have been imparted to the individual solicitors acting at the time which is not recorded on the file, such as 'getting to know you factors', those solicitors have since left the firm and, therefore, the information, if any, left with them;
6. The solicitor at WFW presently working on the file, Ms Solomon, deposed on an affidavit sworn 14 August 2007, that she is the only person currently working on the file. She also deposed that she was not aware WFW had acted for the first defendant until the latter raised it; and
7. It follows that there is no risk of any confidential or privileged information coming into, or being in, the possession of current solicitors or employees of the firm.

14 Furthermore, the plaintiff submits that the circumstances relating to this matter arose five years after the EOC matter and involves allegations of fraud by the first defendant of the plaintiff (which will be dealt with in more detail below).

15 In addition, the plaintiff submits WFW has performed a considerable amount of work to date in this proceeding which has been on foot since late 2005. In light of this, it is submitted that it would be unfair and inappropriate to restrain WFW from continuing to act.

16 The authorities clearly establish several principles. First, a solicitor has a duty of confidentiality to its client and to its former clients.[2] Not only is this clear on the authorities, but it is a statutory requirement of the profession, a breach of which may lead to disciplinary proceedings.[3] Secondly, an injunction should be granted to restrain a solicitor from acting against a former client if there is 'a real and sensible possibility of the misuse of confidential information'.[4] Thirdly, the 'confidential information' may include instructions, as well as the 'getting to know you' factors.[5] These include the client's strengths and weaknesses, honesty or lack thereof, reactions to situations and attitudes to litigation.[6] Fourthly, the applicant bears the burden of identifying 'with some precision the confidential information' which is said to be held.[7] Fourthly, determining whether such an injunction should be granted must involve the 'question of balancing the competing considerations - one party's right to be represented by solicitors of its choosing against another party's right not to have its (former) solicitors acting against it in the same or substantially the same proceeding.'[8]

17 In this matter, I do not consider that there is a real and sensible possibility of the misuse of confidential information. I am satisfied that knowledge of any oral communications between the first defendant and WFW that are not recorded on the EOC file left WFW with the former solicitors. Similarly, knowledge of any 'getting to know you' factors is not held by WFW. The written communications said to comprise confidential information are letters between the first defendant and the plaintiff, a related company and officers and employees of those companies. The correspondence was not received by WFW. The first defendant conceded the documents were not confidential. However, it was submitted that her instructions about the correspondence to WFW were confidential. It was not disputed that the particular solicitors to whom the instructions were given had left WFW.

18 The first defendant submitted that if WFW is restrained from acting for the plaintiff, the EOC file could not be provided to the new solicitors without her consent, which she would not provide. However, as submitted by the plaintiff, the letters were written by the defendant to the plaintiff, who may subsequently make such use of them as it sees fit. No claim of privilege has been made by the first defendant of the contents of the EOC file. As far as any information in the file may be confidential, it is not confidential against the plaintiff who was involved in the EOC matter and the events that led to it.

19 It has not been shown, with any precision, what confidential information is in the possession of WFW that would not otherwise be in the possession of the plaintiff and, so far as it may be relevant, would be provided to its solicitors in the course of preparing for the matter at hand.

20 The first defendant also submitted that, further or in the alternative, WFW owes a duty of loyalty to the first defendant as a former client. The duty of loyalty may preclude a solicitor from acting against a former client in the same or a closely related matter.[9] The first defendant submitted that the EOC matter involved allegations as to the first defendant's character, improper acts during employment, her honesty and loyalty and the misappropriation of the plaintiff's funds. These proceedings also involve allegations concerning the first defendant's character and fraud on the plaintiff. On the authorities, the obligation of 'loyalty' may preclude the solicitor from acting against a former client in the 'same matter', a matter arising out of a previous matter, or a 'closely related matter'.

21 In Spincode Pty Ltd v Look Software Pty Ltd,[10] Brooking JA said:[11]

'the danger of misuse of confidential information is not the sole touchstone for intervention where a solicitor acts against a former client. That danger can and usually will warrant intervention, but it is not the only ground. [Another ground is that] it may be said to be a breach of duty for a solicitor to take up the cudgels against a former client in the same or a closely related matter.'

22 In this matter, it is not the same solicitor or solicitors who are seeking to act against the former client. As I have stated already, I do not consider that there is a real question of the use of confidential information. Furthermore, I do not consider that the proceeding at hand falls out of the EOC matter. It would therefore appear that WFW would only be restrained if there is an appearance of disloyalty by the firm acting against the first defendant.

23 In light of all the circumstances, particularly that the former solicitors have since left the firm, there is no evidence that information other than that on the file is retained by WFW, the information on the file is otherwise accessible to the plaintiff, I do not consider that there is an appearance of disloyalty. Furthermore, in balancing the competing interests of the plaintiff and the first defendant as mentioned above, I observe that WFW have acted for the plaintiff for approximately 15 years on a variety of matters. In addition, there is evidence of the volume of work that WFW has undertaken on the matter at hand, prior to it being brought to WFW's attention that it had previously acted for the first defendant.

24 There is a further important factor in the exercise of the discretion, namely, delay. The first defendant did not raise the alleged impropriety of WFW acting for the plaintiff until 22 March 2007. Following that delay and an exchange of correspondence between solicitors the present application was made. The application ought to have been brought promptly and at the earliest opportunity. The proceeding was commenced in late 2005. WFW has been acting throughout. It would constitute substantial prejudice and inconvenience to the plaintiff to change lawyers at this stage.

25 Accordingly, I refuse the injunction to restrain WFW from acting as solicitors for the plaintiff, the first defendant having failed to make out a serious question to be tried.

26 The first defendant seeks an order pursuant to s 90(3) of the Transfer of Land Act 1958 that caveat number AD728467S lodged by the plaintiff on certificate of title volume 8450 folio 315 on 1 July 2005 be removed.

27 Section 90(3) provides that:

Any person who is adversely affected by any such caveat may bring proceedings in the Court against the caveator for the removal of the caveat and the Court may make such order as the Court thinks fit.

28 The plaintiff claims a proprietary interest in the property on the following basis:

An interest pursuant to a constructive trust over the land arising from the use of the Caveator's funds to acquire an interest in the land in the name of the registered proprietor.

29 This application for removal of the caveat is an interlocutory application in a proceeding in which the plaintiff seeks final declarations at trial against the defendant of constructive trust over the caveated land. It is alleged that the first defendant defrauded funds from the plaintiff by forging cheques and used those funds to finance mortgages in respect of the caveated property. The plaintiff claims an interest in the property in such proportion as the total proceeds of the forged cheques, plus interest.

30 In response, the defendant submits that the plaintiff's statement of claim alleges a constructive trust over the monies allegedly misappropriated by the first defendant, which may give rise to a remedy according to the principles of tracing.[12] However, a constructive trust over the monies cannot, it is submitted, give rise to a proprietary interest in the first defendant's property. Further, to establish such a proprietary interest the plaintiff must prove that the trust monies were used to purchase the property. The first defendant acquired the property approximately 14 years before the alleged misappropriation commenced. As to the evidence that funds of misappropriated cheques were deposited in the first defendant's home loan account, it is submitted that discrepancies in the evidence mean that it must be inferred that those funds must have at times been mixed with funds from other sources and that it was the mixed funds that were used to make the loan payments.

31 It is further submitted that even if the Court infers that misappropriated funds were used to make loan payments, it does not follow that the plaintiff has a proprietary interest in the property that secures the loan. If the mortgagee had known that the loan was repaid from misappropriated trust moneys, then there may be a claim according to the principles of 'knowing receipt'.[13]

32 Lastly, the first defendant submits that a caveator must demonstrate that it has an interest at the time the caveat is lodged or at the time of application for removal.[14] At these times, the only outstanding mortgage was one held by ING Bank Australia Limited. Evidence adduced pertains to deposits to two Bank of Melbourne accounts and a BankWest account. As such, it is submitted that the plaintiff has not discharged its burden of proof of a caveatable interest.[15]

33 In an application for the removal of a caveat, the following broad principles apply:

1. The Court has a wide discretion under s 90(3);[16]

2. The onus is on the caveator to justify the maintenance of the caveat;[17]

3. The caveator must persuade the Court that there is a serious question to be tried as to the existence of the equitable interest claimed to support the caveat. If there is a serious question to be tried, the Court will not normally order the removal of the caveat on the basis of affidavit evidence, unless the balance of convenience favours removal.[18]

34 In relation to the plaintiff's claimed interest, the relevant principles of equity are as follows. A person who misappropriates funds holds those funds on trust for the defrauded party.[19] Where those trust funds are used exclusively to acquire property, 'so long as the trust property can be traced and followed into other property into which it has been converted, that remains subject to the trust'.[20] The beneficiary does not lose its equitable rights by the mere fact that the misappropriated funds are mixed with other funds.[21] The beneficiary may claim a charge over the acquired property to the value of the misappropriated funds.[22]

35 The recent English case of Foskett v McKeown[23] is relevant as it dealt with misappropriated funds, mixed with other funds, that were used to make insurance premium payments. In what Lord Millet commented was 'a textbook example of tracing through mixed substitutions',[24] it was held that the misappropriated funds could be traced, not only to the premium payments, but to the moneys paid out under the policy. Moreover, even where the policy was first acquired, and premium payments made, with the trustee's own money, if misappropriated funds were subsequently used to make one or more premium payments then a proportionate, or pro rata, amount could be traced to proceeds paid out under the policy. As stated by Lord Millett, these principles form part of the law of property, as opposed to the law of unjust enrichment. The rights of the claimant are determined by fixed rules and are not discretionary; 'they do not depend upon ideas of what is "fair, just and reasonable".'[25]

Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of money misapplied.

37 On the evidence, it is at least arguable that funds misappropriated from the plaintiff were used, either separately or mixed with the first defendant's own funds, to make loan repayments. It is further arguable that the equitable principles of tracing would give rise to the plaintiff's claim of a caveatable interest in the property.

38 I observe the first defendant's submissions in opposition to those of the plaintiff, particularly that there is no evidence to support the interest claimed, that the property was registered to the first defendant prior to the alleged misappropriation, the previous mortgages have been discharged and that no misappropriated funds were paid to the ING loan. I do not consider that these arguments preclude the finding that there is a serious question to be tried in this matter. I do not consider that the principles of tracing are so easily dismissed. I make no comment as to the veracity of either party's claim. However, there is a proceeding on foot to determine the true nature, if any, of the plaintiff's interest.

39 The court has a wide judicial discretion in making any order it sees fit in the circumstances.[27] As these matters are to be ventilated in the main proceeding and no evidence has been adduced as to any negative effect of maintaining the caveat (for example, if the first defendant was seeking to dispose of the property), I consider that there is a serious question to be tried as to the interest claimed in the property by the plaintiff and that the balance of convenience appears to favour maintaining the caveat until such time as the relevant issues are determined or relevant circumstances vary.

[1] Yunghanns v Elfic Ltd (formerly known as Elders Finance & Investment Co Ltd) (unreported, Supreme Court of Victoria, Gillard J, 3 July 1998).

[2] See eg Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248; (2001) 4 VR 501; Farrow Mortgage Services Pty Ltd (in liq) v Mendall Properties Pty Ltd [1995] VicRp 1; (1995) 1 VR 1.

[3] Professional Conduct and Practice Rules 2005, r 3.

[4] Farrow Mortgage Services Pty Ltd (in liq) v Mendall Properties Pty Ltd [1995] VicRp 1; (1995) 1 VR 1, 5.

[5] Yunghanns v Elfic Ltd (formerly known as Elders Finance & Investment Co Ltd) (unreported, Supreme Court of Victoria, Gillard J, 3 July 1998).

[7] Carindale Country Club Estate v Astill [1993] FCA 218; (1993) 42 FCR 307, 313. See also Bureau Interprofessional Des Vins De Bourgogne v Red Earth Nominees Pty Ltd (trading as Taltarni Vineyards) [2002] FCA 588.

[8] Australian Liquor Marketers Pty Ltd v Tasman Liquor Traders Pty Ltd [2002] VSC 324, [25].

[9] Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248; (2001) 4 VR 501; Australian Liquor Marketers Pty Ltd v Tasman Liquor Traders Pty Ltd [2002] VSC 324 (14 August 2002); Macquarie Bank Ltd v Myer [1994] VicRp 22; [1994] 1 VR 350; McVeigh v Linen House Pty Ltd [1999] VSCA 138; [1999] 3 VR 394.

[10] (2001) 4 VR 201.

[12] See Re Diplock (1948) 1 Ch 465.

[13] As established in Barnes v Addy (1874) LR 9 ChApp 244. See also Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 236 ALR 209.

[14] Cases cited: Lintel Puines Pty Ltd v Nixon [1991] VicRp 20; [1991] 1 VR 287, 290; Holt v Anchorage Management Ltd [1987] NZCA 5; [1987] 1 NZLR 108, 115; Martin v Official Trustee in Bankruptcy [1990] Tas R 68, 71; Twenty-Sixth Shackle Pty Ltd v Drever (1994) V Con R 54-493.

[15] To be clear, it should be noted that the first defendant put its case as that the plaintiff does not have the interest claimed. It was not put that the interest claimed is not capable of supporting a caveat.

[16] Commercial Bank of Australia Ltd v Schierholter [1981] VicRp 32; [1981] VR 292.

[17] Lewenberg and Pryles v Direct Acceptance Corporation Ltd [1981] VicRp 36; [1981] VR 344; Bell v Graham [2000] VSC 142; McMillan v Dunoon [2005] VSC 440; Austwide Property & Developments Pty Ltd v Vukasinec [2004] VSC 333.

[18] Gibson v Co-ordinated Building Services Pty Ltd (1989) NSW Conv R 55-481; Mitrangas v Makalias [2003] VSC 251; Lawrence v Appleby [2001] NSWSC 649; (2002) NSW Conv R 55-993.52; Austwide Property & Developments Pty Ltd v Vukasinec [2004] VSC 333.

[19] Black v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105, 110.

[20] Frith v Cartland [1865] EngR 262; (1865) 71 ER 525, 526.

[21] Re Hallett's Estate (1880) 42 LT 421; Brady v Stapleton [1952] HCA 62; (1952) 88 CLR 322, 336.

[23] [2000] UKHL 29; [2001] 1 AC 102.

[24] Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102, 126.

[27] See Commercial Bank of Australia Ltd v Schierholter [1981] VicRp 32; [1981] VR 292; Schmidt v 28 Myola Street Pty Ltd & Anor [2006] VSC 343.