Plaintiff v Defendants

"9.2 Signing of notices by St George

Any statement, demand, certificate or notice to the Guarantor will be effectively signed on behalf of St George if it is executed or signed by St George, any director, or secretary or employee of St George, or any solicitor engaged by St George in connection with this agreement.

9.4 St George's statement of money owing conclusive evidence

Except in the case of manifest error, a written statement, certificate or determination by St George setting out the amount of money owing or any determination of an amount to be paid under this agreement or any component part, shall be conclusive evidence of the amount owing or the determination and will be binding on the Guarantor."

5 Exhibit "AB1" to the affidavit of Mr Bateson sworn 14 September 2006 is a certificate under cl 9.4 of the guarantee. Mr Bateson certified that the sum of $263,094.93 was owing as at 13 September 2006 with interest accruing at the rate of $75.68 per day.

6 A notice requiring Mr Bateson to attend for cross-examination had been given on 2 October 2006 but I was informed at the trial by counsel for the defendants that his attendance was no longer required.

7 On 9 October 2006 the defendants made complaints as to the discovery which had been provided by the Bank and sought an order directing the Bank to "justify the calculation" in the certificate referred to. For the reasons given in my ruling that day I did not accede to the application for an order that the Bank justify the calculation.

8 The sum claimed to be outstanding is substantially, if not exclusively, constituted by legal costs incurred in the various recovery proceedings. The Bank had been ordered to make discovery of documents relevant to the calculation of the quantum claimed. On 9 October 2006, amongst other things, counsel for the defendants complained that the solicitors' bills of costs so provided had had relevant material covered up or redacted. I found this complaint to be well founded and I ordered that unredacted copies of the bills be provided. I adjourned the trial to 12 October 2006.

9 On 12 October 2006 I permitted the defendants to rely on further affidavits sworn by a forensic accountant, Mr Douglas Abrahams, and by the defendants' solicitor, Mr Charles Leonidas. These affidavits raised issues as to reconciliation of the unredacted bills with the relevant bank statements and as to any costs agreement relevant to the bills. The Bank sought an adjournment in order to answer that material. I adjourned the trial to 30 October 2006.

10 Further affidavits were sworn on both sides as a result of which it emerged that there were relevant costs agreements and that those agreements entitled the Bank to a rebate of fees from the Bank's solicitors on a sliding scale based upon total annual fees for all matters.

11 On 30 October 2006 I heard evidence from the defendants' expert, Mr Abrahams, as to the period he needed to calculate the effect of these rebates. In addition to other directions, I adjourned the trial to 12 December 2006. I ordered that certain exhibits, relied upon by the Bank but said to be very confidential, be made available to counsel for the defendants and to the defendants' expert on a confidential basis and that the defendants file and serve a statement of the manifest errors, if any, relied upon.

12 The defendants did not comply with the order concerning service of a statement of manifest errors but their solicitors did forward to the Court and to the plaintiff an unsworn affidavit of Mr Abrahams, the defendants' expert. The explanation given for this course was that the affidavit could not be sworn before any person without possibly breaching the orders concerning confidentiality.

13 At the adjourned hearing on 12 December 2006 the defendants' expert, Mr Abrahams, was called to give evidence and adopted the unsworn affidavit with one correction. The unsworn affidavit was then tendered as Exhibit D 1. I made an order under Rule 28.05(2) in relation to that exhibit. At the adjourned hearing the plaintiff filed and sought to rely upon a further affidavit of Alan Bateson sworn 8 December 2006 which, amongst other things, produced a new certificate specifying the amount outstanding as at 30 November 2006 at $252,574.88 with interest accruing at $74.39 per day, and indicating that that amount had been calculated excluding the costs of this proceeding and taking into account certain errors of calculation referred to in an affidavit of an employee of the Bank's solicitors, Mr Brian James Arthur, sworn 25 October 2006. The defendants objected to reliance on that affidavit. I permitted the plaintiff to rely on it.

14 Counsel for the defendants, Mr Parncutt, then submitted that Mr Abrahams' evidence revealed manifest errors in that:

1. The rebates of costs which the Bank had received had not been credited. Mr Abrahams' had identified the total rebate said to be referrable to Pinnacle's account, but he said he was unable to recalculate the interest to reflect the credit or credits which ought to have been allowed on the material he had.

2. There were two payments which did not appear to be referrable to invoices and four invoices which had not been discovered.

15 In the circumstances, the defendants submitted that as manifest error had been established, the Bank could not rely on the certificate, and, there being no other evidence of the quantum of the debt, the claim should be dismissed.

16 Mr Parncutt also made a further submission based on public policy and illegality. This had not been pleaded, but Mr Parncutt submitted that I was bound to refuse relief as the matter had been brought to my attention. The submission was that the rebate arrangements contravened s 317 of the Legal Practice Act 1996 and s 2.2.9 of the Legal Profession Act 2004 as they amounted to income sharing by the solicitors' firm. He relied in particular upon Beneficial Finance Corporation Limited v Conway (No 2)[6] and Hamilton v Haw.[7] He submitted the costs arrangements were "tainted" and that no relief should be given to the Bank as a consequence. Alternatively, he submitted that the Bank ought only to be entitled to party/party costs, in which case he said no sum would be now outstanding.

17 Mr Garratt QC, senior counsel for the Bank, began by indicating that the illegality argument had been raised without any prior notice to the Bank. He sought to file and serve written submissions on that issue.

18 As to the purported errors, other than those concerning the costs rebates, Mr Garratt submitted that the material established that the two payments and the four invoices referred to all concerned the costs of this proceeding, which costs are expressly excluded from the certificate relied upon and form no part of the sum claimed in this proceeding.

19 As to the rebate issue, it was submitted on behalf of the Bank that there was no manifest error because the rebate was a payment made by the solicitors' firm to the client based upon the total volume of that client's work and was not referrable to the account of any particular bank customer. He submitted that in any event any error was merely arguable and was not "manifest". He relied in particular upon Legal and General Life of Australia v A Hudson Pty Ltd[8] and Dobbs v National Bank of Australasia Limited.[9]

20 When asked what should be done if I concluded that there had been a manifest error, Mr Garratt sought the opportunity to file an affidavit deposing to the effect on the amount outstanding of a crediting of the relevant proportion of the rebates and a consequent recalculation of the interest.

21 On 12 December 2006 I adjourned the further hearing of the trial to a date to be fixed and made directions for the filing and service by the Bank of its written submission on illegality and any further affidavit concerning recalculation assuming an entitlement to a credit for the rebates, and for the filing and service of any written submission and affidavit in response by the defendants.

22 I was unable to adjourn the trial to a fixed date on that occasion.

23 I arranged for the matter to be mentioned on 6 March 2007 and after the hearing that day I made an order fixing the resumption of the trial on quantum for 8 March 2007. By then the material which had been before the Court on 12 December had been supplemented by two affidavits on behalf of the Bank, affidavits of Brian Arthur sworn 20 December 2006 and 12 February 2007; and by two affidavits on behalf of the defendants, affidavits of Douglas Abrahams sworn 23 January 2007 and 26 February 2007.

24 Objection was taken to reliance upon an exhibit to the affidavit of Brian Arthur sworn 12 February 2007. I upheld the objection but permitted the Bank to file and serve a further affidavit by 1.00 pm the following day. A further affidavit of Brian James Arthur was sworn and filed on 7 March 2007.

25 On 6 March counsel for the defendants applied to amend the defence so as to plead the public policy and illegality issue. I did not permit that amendment as counsel for the defendants indicated that nothing was sought to be raised which had not already been the subject of submissions and counsel for the Bank indicated that no point would be taken on the basis of a failure to plead matters which had been the subject of submissions. Given the history of the matter I was anxious not to have the parties embark upon another round of pleadings.

26 The trial on the issue of quantum resumed on 8 March 2007. The Bank relied upon the affidavit of Brian James Arthur sworn 7 March 2007. Some further submissions were made. Counsel for the respective parties confirmed that the material and submissions were complete and I reserved my decision.

Manifest error: failure to account for rebates

27 An affidavit sworn by a partner of the Bank's solicitors, Peter William Nankerville, on 25 October 2006 revealed that as part of the "panel arrangements" which the Bank's solicitors have with the Bank those solicitors are "required to pay to the Bank a rebate of fees paid by the Bank, calculated by a sliding scale". Copies of the relevant documents and a summary of the total rebates paid were produced as confidential exhibits to that affidavit.

28 Before me the Bank did not accept that the defendants were entitled to have the rebates taken into account in assessing the amount due. It was argued on behalf of the Bank that the arrangements were referrable to the total fees paid by the Bank to the firm in any given year, were not in any relevant sense referrable to particular customers, and were what was described as "counter payments" paid by the solicitors so as to secure for themselves the benefit of being on the Bank's panel.

29 I reject this approach. The Bank alleges in this proceeding that the terms of the finance facilities provided to Pinnacle require Pinnacle to pay on demand all costs and expenses incurred by the Bank including legal costs on a full indemnity basis: statement of claim, para 4. It is then alleged that by the guarantee the defendants irrevocably guaranteed due payment and performance of the facilities and indemnified the Bank in respect of non-payment and non-performance: statement of claim, para 5. I do not consider that costs or expenses "incurred" by the Bank include costs and expenses which have been repaid to it. Nor, in my view can guarantors be required to pay to the Bank by way of "indemnity" legal costs and expenses which have been repaid by the solicitors' firm. Accordingly, my conclusion is that the calculation of the amount outstanding must give appropriately calculated credits for the rebates.

30 Considerable material was exchanged concerning how the credits should be calculated.

31 On behalf of the Bank reliance was placed upon an affidavit of Mr Arthur sworn 20 December 2006 which produced calculations made by Mr Bateson as confidential exhibit "BJA-1". This document calculated a credit by applying the percentage which the legal fees referrable to Pinnacle bore to total fees during relevant periods to the total rebates and the recalculated interest assuming simple interest at 10.5%. On this basis, the rebate credit was calculated at $81,303.35 and the interest adjustment at $18,262.86, making a total of $99,566.21. The interest rate applied was described as a "notional" rate, as the actual rates varied between 9.25% and 10% during the period.

32 In his affidavit sworn 23 January 2007 Mr Abrahams, on behalf of the defendants, criticised this approach saying that the calculation assumed simple interest rather than compound interest and failed to include proper allowance for GST. He performed a calculation of the rebate credit, still assuming an interest rate of 10.5% but applying it on a compound basis, and adjusting for GST, and reached a total credit due of $105,113.22. Thus, neither calculation was made relying upon the interest in fact charged, as both calculations assumed an interest rate of 10.5%, one on a simple basis and the other on a compound basis.

33 Mr Arthurs' affidavit of 7 March 2007 disputed the additional allowance made by Mr Abrahams for GST suggesting that GST allowance had already been made and in relation to interest suggested that the Bank assumption of a 10.5% interest rate throughout the relevant period on a simple interest basis was an assumption which "has tended to favour the defendant in the interest reduction calculation".

34 Mr Abrahams' response (which is in his affidavit sworn 26 February 2007 as that affidavit responded to material originally set out in a fax from Mr Arthur dated 8 February 2007) disputed the proposition that a proper GST allowance had already been made and asserted that the use of a calculation on a simple interest basis "highlights the error in the purported Certificate of Indebtedness".

35 Given my conclusion that allowance for the rebates must be made, in my view the certificate relied upon does contain a manifest error. The error is a significant one in the context of the amount claimed. Whilst the difference between the contending calculations of the appropriate credit is not great, both of the contending calculations proceed upon at least one express assumption (as to the interest rate) which does not accord with the terms and conditions of Pinnacle's facilities. In the circumstances, I do not consider it to be appropriate for me to proceed to attempt some form of rehabilitation of the certificate by making a necessarily inaccurate estimate of the extent of the error.

Manifest error: other issues

36 Whilst the defendants' material has suggested through the course of the proceeding a great number of alleged manifest errors, in the end the only further errors in issue were the following:

(a) It was said that detail had not been provided in relation to two payments and four invoices. The Bank material deposes that these payments and invoices concern the costs of this proceeding. That has not been contradicted. The certificate now relied upon, which is that exhibited to the affidavit of Alan Bateson sworn 8 December 2006, makes it clear that no claim is made for the costs of this proceeding. In the circumstances I find that there is no manifest error on that ground.

(b) Manifest error was also asserted by reference to an alleged failure to substantiate an amount of $138,791.41 debited to Pinnacle's account on 27 November 2006. In part this complaint was a repetition of the complaint I have referred to in sub-paragraph (a) above. The material reveals a further issue concerning that debit. In paragraph 7 of Mr Douglas's affidavit sworn 26 February 2007 he refers to a facsimile transmission from Mr Arthur and observes that within the amount of $138,791.41 there is apparently an "overpayment" of $37,106.67 by the Bank, as to which it is said that instructions have been sought by the solicitors from the Bank. Mr Arthur's affidavit of 7 March 2007 contains the following response:

"11. The debit to the Pinnacle account of $138,791.41 ('payment') to which Mr Abrahams refers comprises payments for which copy invoices have previously been provided, namely, invoices 312928, 311586 and 310277.

12. The balance of the payment refers to invoices referred to at paragraph 8 of Mr Abrahams' affidavit which relate to costs of the present proceeding and an overpayment by St George Bank of $37,106.67 which amounts have been excluded from the debt claimed. Instructions have been sought from St George Bank as to adjustment of the overpayment."

On the material as it stands I am not confident that I understand the position in relation to the overpayment. If the amount has been excluded, what are the instructions sought? The position with the overpayment fortifies my conclusion that, having found a manifest error in relation to the failure to give credit for the rebates, I should not attempt a recalculation of the amount due based upon the continued efficacy of the certificate subject to correction of the error.

(c) It was suggested that there were errors as to hourly rates and that further substantiation of counsel's fees was required. I accept the submission on behalf of the Bank that it is not my task to undertake a taxation. No manifest error in relation to the certificate has been demonstrated on those matters.

Illegality and public policy

37 Section 317 of the Legal Practice Act 1996 and s 2.2.9 of the Legal Profession Act 2004 each provide that a legal practitioner may not enter into an arrangement with a non-practitioner under which that person is entitled to share in the income of the practitioner.

38 The defendants submitted that the arrangements between the Bank and its solicitors contravened this prohibition. Reliance was placed on Hamilton and on Beneficial Finance.

39 I do not consider that there is any relevant "sharing" of income provided for by the relevant arrangements. The arrangements provide for a rebate of fees paid. In other words, they are arrangements for a return to the client of a portion of the fees paid by the client. The rebate is calculated on a sliding scale based upon the annual total of fees. This is not sharing income. It is returning a portion of the client's payment as a volume discount.

40 The cases relied upon do not assist the defendants in this context.

41 In Beneficial Finance an arrangement whereby 50% of every solicitor's bill was to be paid to a non-practitioner in consideration of the provision of accommodation and secretarial services was held not to contravene the then relevant provision.

42 Hamilton concerned an arrangement between a solicitor and a debt collector under which the solicitor would issue warrants of distress claiming the judgment debt and specified professional costs and would then account to the debt collector for the total amount recovered less an amount for costs which was less than the specified professional costs purportedly due on the warrants. At first instance it was held that this arrangement was (in part only) tainted with illegality because it (in part) contravened the then relevant provision concerning the sharing of receipts with unqualified persons. On appeal, the Full Court held that this approach was incorrect. There was no "sharing" of costs because the solicitor was never entitled to any costs other than the lesser amount agreed with the debt collector. The Full Court went on to hold that, although the provision about sharing had not been contravened, the arrangement was still tainted with illegality because ... "it contemplated the improper exaction of excessive costs from judgment debtors ...".[10] It seems to me that the Full Court characterised the arrangement as being one tantamount to an agreement to perpetrate a fraud on third parties, although the Court noted that the trial judge had not made an express finding to that effect.

43 The defendants sought to distinguish the aspect of Hamilton whereby it was held that there had not been a contravention of the prohibition on sharing, by submitting that here all the receipts were receipts of legal costs, unlike in Hamilton where only the lesser sum was characterised as a receipt of legal costs. That is a valid distinction but it does not meet the point that here there is no "sharing", but rather a volume rebate or discount.

44 The defendants also submitted that the arrangements here contemplated the improper exaction of costs from third parties just as was found to have been the case by the Full Court in Hamilton. I do not think that is so. The arrangements here do not, in themselves, concern third parties at all. It is only where for some reason a third party becomes liable to indemnify the client that the arrangement has any potential effect on a third party. It is not like the arrangement in Hamilton concerning the warrants which were themselves expressly directed to, and made demands upon, third parties. In the course of this proceeding the existence of the rebate arrangements has been revealed and I have held that the indemnifying parties are entitled to a credit for the rebates payable under the arrangements.

45 I reject the defendants' submissions based upon illegality and public policy.

Conclusions and orders

46 I have found that there is manifest error in the certificate of indebtedness relied upon.

47 It was submitted on behalf of the defendants that in those circumstances I should simply dismiss the proceeding as the Bank has no other evidence of the quantum of its debt. It was submitted on behalf of the Bank that if I reached that position I should refer the question of quantification to a Master to be determined without reliance upon the certificate.

48 I think that referral to a Master is the appropriate course to take. The Bank is owed whatever is properly found to be due. The defendants should not escape liability because of issues which amount to no more than the need for accurate calculations to be done once the proper credits are allowed. The Bank's failure to establish its case on quantum before me will have to be addressed in relation to the issue of costs. Dodds-Streeton J dealt with the costs of the application before her as a result of which she made the declaration of liability in the order of 4 August 2006, but otherwise I have to date reserved issues of costs.

49 I propose to make an order under Order 52 for the taking of an account before the Master of the amount due to the Bank by Pinnacle, excluding the costs of this proceeding and crediting the rebates, and to order that the defendants pay to the Bank the amount found to be due. I will hear the parties on the form of that order and any consequent directions and on the issue of costs of the proceeding to date insofar as those costs have not already been dealt with by a prior order.

[1] Irani v St George Bank Ltd [2004] VSC 260.

[2] Irani v St George Bank Ltd [2005] VSC 403.

[3] Irani v St George Bank Ltd [2005] VSC 456.

[4] Irani v St George Bank Ltd [2007] VSCA 33.

[5] St George Bank Ltd v Irani [2006] VSC 217.

[6] Beneficial Finance Corporation Limited v Conway (No 2) [1971] VicRp 72; [1971] VR 594 ("Beneficial").

[7] Hamilton v Haw [1962] VicRp 32; [1962] VR 215 ("Hamilton").

[8] (1985) 1 NSWLR 314.

[9] [1935] HCA 49; (1935) 53 CLR 643.

[10] Hamilton v Haw [1962] VicRp 32; [1962] VR 215, 219.