SMITS & ORS v ROACH & ORS

Court of Appeal (NSW)|2004-05-24|Before: Sheller JA, Ipp JA, Bryson JA, McClellan J

CITATION : SMITS & ORS v ROACH & ORS [2004] NSWCA 233 revised - 15/07/2004 HEARING DATE(S) : 24 May 2004, 25 May 2004, 26 May 2004 JUDGMENT DATE : 15 July 2004

JUDGMENT OF : Sheller JA at 1; Ipp JA at 98; Bryson JA at 99 DECISION : 1 Appeal allowed; 2 Set aside orders 1-4 made by McClellan J on 6 August 2002; 3 In lieu thereof ; (a) Dismiss the proceedings against Mr and Mrs Roach; (b) The appellants within fourteen days to bring in short minutes of orders for specific performance by the Roach companies of the agreement made on or about 16 September 1999 (the Ten Point Plan); 4 The appellants to pay Mr and Mrs Roach's costs of the proceedings and of this appeal on a party and party basis; 5 The Roach companies to pay one-half of the appellants' costs of the proceedings before McClellan J and of this appeal but in respect of the costs of this appeal to have a certificate under the Suitors' Fund Act 1951 if so entitled.

LOWER COURT Supreme Court JURISDICTION : LOWER COURT 50099/99 FILE NUMBER(S) : LOWER COURT McClellan J JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40753/02 SC 50099/99

SHELLER JA IPP JA BRYSON JA

SMITS & ORS v ROACH & ORS From 1 July 1995, Smits Leslie was engaged on behalf of the first, third and fourth respondents ('the Roach clients') to act for them in an action to recover damages for alleged negligence then proposed against Freehill Hollingdale & Page ('Freehills'). Freehills is a firm of solicitors who acted for the Roach clients in the late 1980's and early 1990's in relation to the potential exploitation of peat deposits in Victoria. Smits Leslie continued to act as solicitors for the Roach clients in this matter, until there was a breakdown in the relationship which resulted in the termination of their retainer on 7 April 1999.

Smits Leslie prepared two retainer agreements. The first was signed in April 1997 ('the first retainer agreement') and the second on 23 June 1998 ('the second retainer agreement'). The terms of the second retainer agreement are the subject of this appeal. Following the termination of the Smits Leslie retainer, the third and fourth respondents ('the Roach Companies') went into voluntary litigation, as part of a scheme to facilitate litigation funding.

The appellants commenced proceedings on 12 July 1999 to recover the legal fees they claimed were owing as a result of the Freehills litigation. A Ten Point Plan was developed in an attempt at settlement and resulted in a binding settlement between Smits Leslie and the Roach Companies. The first and second respondents did not join in this settlement and remained as defendants in the proceedings. Problems resulted with the implementation of the Ten Point Plan and the Roach Companies were joined as defendants as were the liquidators. The proceedings against the liquidators were eventually settled. The claims by Smits Leslie in the proceedings, relevant for the purposes of this appeal, included claims against the first and second respondent based on the second retainer agreement and against the Roach Companies based on the Ten Point Plan.

The trial Judge held that all claims by Smits Leslie, for remuneration for their work as solicitors for the Roach clients, failed and should be dismissed. His Honour also dismissed a motion brought by Smits Leslie for the trial Judge to disqualify himself on the grounds that his brother was a partner and Chairman of Freehills, the defendant in the Freehills proceedings.

The appellant challenged the findings of the trial Judge in relation to the enforceability of the first and second retainer agreements and the settlement agreement. It was also contended that his Honour erred when he failed to disqualify himself on 26 June 2002 from determination of the proceedings.

There was not the slightest suggestion, nor could there be, that the trial Judge conducted the case and decided it other than impartially and fairly, without favour, affection or ill will and without regard to any pecuniary interest Freehills may have in the outcome. 2. Where the allegation is of apprehended not actual bias, a judge is disqualified "if a fair-minded lay observer might reasonably apprehend that the Judge might not bring an impartial mind to the resolution of the question the Judge is required to decide." Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 3. Waiver is available as an answer to an appeal grounded on an allegation of apprehended bias. Dovade Pty Ltd v Westpac Banking Group (1999) 46 NSWLR 168; Vakauta v Kelly (1989) 167 CLR 568. 4. At the time when consideration was being given to whether objection should be taken to McClellan J sitting in the proceedings, Mr Lindsay, counsel for the appellants, knew that the Judge's brother was a partner at Freehills. As counsel, Mr Lindsey was bound to disclose this knowledge to his clients and indeed, according to the evidence, he may well have done so. If the appellants did not act on that information at that time, or if Mr Lindsey did not inform them, they waived their right to seek to have the trial Judge disqualify himself on this ground. 5. The legislature in New South Wales, by amendments to the Legal Profession Act 1987, has now clearly marked out the parts of champertous agreements between solicitors and their clients which are void. There is no ground for this court to move beyond these boundaries. Accordingly, the trial Judge erred in failing to hold that the second retainer agreement was unenforceable only to the extent that it was inconsistent with s188 of the Legal Profession Act . 6. In this case, there was a retainer agreement whereunder, excluding the champertous provisions, the appellants were entitled to recover their costs. However, the agreement legitimately made recovery contingent upon a successful outcome of the matter. Furthermore, the parties deliberately made no provision for the appellants to be paid anything if the solicitors decided to stop acting for their clients before that outcome was achieved. 7. Clearly, the appellants were prepared to receive remuneration only if there was a successful outcome of the Freehills proceedings and took the risk that for one reason or another the venture would not reach fruition. The terms of the second retainer agreement make it plain that the appellants are not entitled to recover anything from their clients in contract or on a quantum meruit. Independent Grocers Co-operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525 distinguished. 8. The appellants by seeking to revive or institute a claim against the Roach Companies for repudiation of the second retainer agreement indicated an absence of readiness or willingness to abide by the Ten Point Plan. However, it is not clear that the Roach Companies accepted this repudiation. The Alternative Defence of Accord and Satisfaction filed by the Roach Companies in October 2001, in part, affirmed and relied on the existence of the Ten Point Plan. 9. When on 25 February 2002, by their second further amended cross-claim, the Roach Companies asserted repudiatory breach and their election to treat the Ten Point Plan as being at an end, the appellants' repudiation was no longer operative because on 18 February 2002 the appellants had sought specific performance of the plan. Apart from the Roach companies alleged acceptance of the appellants' repudiation of the plan, the third and fourth respondents advanced no answer to the appellants' claim for specific performance and the appeal succeeds in this respect. 10. The appellants should have succeeded at trial on the claim against the Roach companies for specific performance of the Ten Point Plan and the trial Judge's costs order against the appellants in this regard must therefore be set aside.

Builders Licensing Act 1971 Fair Trading Act 1987 Legal Profession Act 1987 Maintenance and Champerty Abolition Act 1993 Trade Practices Act 1974

Awwad v Geraghty & Co (a firm) [2001] QB 570 Bank Nationalisation case (Bank of New South Wales v The Commonwealth (1948) 76 CLR 1 Blackburn, Low & Co v Vigors (1887) LR 12 App Cas 531 Cachia v Isaacs (1995) 3 NSWLR 366 Clyne v The New South Wales Bar Association (1960) 104 CLR 186 Dimes v Proprietors of Grand Junction Canal (1852) 3 HL Cas 759; (1852) 10 ER 301 Dovade Pty Ltd v Westpac Banking Group (1999) 46 NSWLR 168 Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 Fitzgerald v F J Leonardt Pty Ltd (1997) 189 CLR 215 Herman v Jeuchner (1885) 15 QBD 561 Hogarth v Gye (2002) NSWSC 32 Holman v Johnson (1775) 1 Cowp 341; 98 ER 1120 Independent Grocers Co-operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525 Kearley v Thomson [1890] 24 QB 742 Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1997) 72 FCR 261 McGowan v Commissioner of Stamp Duties (2001) 47 ATR 357 Nelson v Nelson (1995) 184 CLR 538 Pavey & Matthews Proprietary Ltd v Paul (1987) 162 CLR 221 Permanent Trustee Australia Limited v FAI General Insurance Company Ltd (2001) NSWCA 20 Permanent Trustee Australia Limited v FAI General Insurance Company Ltd (in Liquidation) (2003) 77 ALJR 1070 Thai Trading Co v Taylor & Anor [1998] QB 781 Underwood Son & Piper v Lewis [1894] 2 QB 306 Vakauta v Kelly (1989) 167 CLR 568 Webb v The Queen (1994) 181 CLR 41 Wild v Simpson [1919] 2 KB 544 Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410

Set aside orders 1-4 made by McClellan J on 6 August 2002;

(a) Dismiss the proceedings against Mr and Mrs Roach; (b) The appellants within fourteen days to bring in short minutes of orders for specific performance by the Roach companies of the agreement made on or about 16 September 1999 (the Ten Point Plan);

The appellants to pay Mr and Mrs Roach's costs of the proceedings and of this appeal on a party and party basis.

The Roach companies to pay one-half of the appellants' costs of the proceedings before McClellan J and of this appeal but in respect of the costs of this appeal to have a certificate under the Suitors' Fund Act 1951 if so entitled.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40753/02 SC 50099/99

SHELLER JA IPP JA BRYSON JA

Thursday, 15 July 2004 SMITS & ORS v ROACH & ORS Judgment 1 SHELLER JA:

The first respondent, Walter Edward Roach, wished to sue his former solicitors Freehill Hollingdale and Page (Freehills) to recover damages for that firm's alleged negligence in advising or failing to advise him in the late 1980s and early 1990s about steps to be taken in the potential exploitation of substantial peat deposits in Victoria. For the purpose of pursuing such recovery, Mr Roach approached a solicitor, the second appellant, John Anthony Leslie, and subsequently retained the firm Smits Leslie, which comprised Mr Leslie and another solicitor, Leonardus Gerardus Smits, the first appellant. On 15 November 1995 Smits Leslie began proceedings (the Freehills proceedings) in the Equity Division of the court (4266/1995) against Freehills on behalf of the Roach clients, consisting of Mr Roach and two family companies, Sydtech Pty Ltd and Winnote Pty Ltd (the Roach companies), each of which had an interest in the peat mining venture. Smits Leslie continued to act as solicitors on behalf of these plaintiffs in the Freehills proceedings until their retainer was terminated on 7 April 1999.

Retainer agreements 2 Smits Leslie prepared two retainer agreements, both partly, at least, champertous. The first was signed in April 1997 (the first retainer agreement) and the second on 23 June 1998 (the second retainer agreement). For the purpose of this appeal, the first retainer agreement is only of historical significance. The terms of the second retainer agreement are central to the appeal. 3 On 24 June 1998 Mr Smits signed a letter addressed to Mr Roach and the two companies stating that the firm had had another look at the first retainer agreement and accompanying documents and were concerned: "that they may be unfair or inequitable to yourselves and contrary to the intentions of the parties. For example, let us assume that you are successful in recovering only $3 or $4 million notwithstanding the fact that your claim amounts to $971 million. Under clause 2.3 of the Retainer Agreement you would be obliged to pay that $2 or $3 million to us on account of fees. You will observe that clause 2.5 is operative without limiting clause 2.3. Hence, notwithstanding the fact that under clause 2.5(d) the amount payable by you would only be $300,000 or $400,000 in those circumstances, that would not override the operation of clause 2.3, under which you would be liable to pay the $3 or $4 million to us. In our opinion that was not the intention of the parties. Accordingly, we seek to reach a reasonable and equitable adjustment or compromise with you. Our proposal is that if the amount recovered from the defendants is less than $10 million then we should be entitled to receive an amount equivalent to 10% of the amount recovered by you, and for values over $10 million dollars an extra maximum of 5% recovered by you, together with any costs and disbursements which might be recoverable from the defendants. Of course, in so far as you have paid any of those disbursements, those amounts would be reimbursed to you. Also, in the event that you are totally unsuccessful in the proceedings, which seems unlikely, we confirm that you would not be liable to pay any amounts to us on account of any outstanding costs or disbursements, including Counsel's fees; although, you might be liable to pay costs and disbursements to the defendants." 4 The letter, which ended with printed spaces for execution by all parties, was executed by Mr Roach and with the seal of the two companies and by Mr Smits and Mr Leslie in the places provided. The second retainer agreement dated 23 June 1998, the day before the date of the letter, was made between Mr Smits and Mr Leslie as solicitors and Mr Roach and the Roach companies as clients. The subject matter was the Freehills proceedings "and any action, steps or proceedings taken 'in respect of' (as defined herein) all or any part of the subject matter of the said equity court proceedings" described as "the subject matter". The relevant terms of the second retainer agreement were as follows: " 1. Hourly Rates: Mr Leo Smits $350.00 Any other partner $280.00 Solicitor of more than 4 years' experience $200.00 Any other solicitor $150.00 Counsel (Mr S J Archer) (daily rate $3,000) $300.00 2. Moneys to be paid in advance: $3,000.00 3. Estimate of costs: $10,000,000.00 4. Estimate of recoverable cost: TBA 5 . Interest rate on overdue payments: The rate prescribed from time to time under the Supreme Court rules for payment on Judgments under Section 95 of the Supreme Court Act (currently 12% per annum) TERMS AND CONDITIONS 1. BASIC TERMS OF AGREEMENT As provided herein: 1.1 The Solicitors agree to provide legal services to the Clients in respect of the Subject Matter. 1.2 The Solicitors will act in the interests of the Clients and in accordance with their instructions subject to the requirements of professional ethics and duty. 1.3 On the information presently available, the costs that the Clients will have to pay to the Solicitors are estimated in Item 3 on page 1 hereof. This is an estimate only and may be decreased. 1.4 These terms constitute exclusively and entirely the Agreement between the Solicitors and the Clients and shall remain in effect until varied by agreement in writing signed by the parties hereto. 2. CONDITIONAL COSTS AGREEMENT 2.1. The Clients' obligation to pay all of the Solicitors' and the barrister's costs otherwise payable under this Agreement is contingent on the successful outcome of the matters in which the Solicitors and barrister provide the legal services to the Clients. 2.2 The circumstances constituting the successful outcome of the matter shall be the recovery of any moneys by any of the Clients and/or any Associates of any of the Clients from any of the defendants in any proceedings comprised in the Subject Matter or from any Associates of any of those defendants in respect of such proceedings. 2.3 The Clients undertake to pay to the Solicitors (inclusive of Counsel's fees) the estimated amount of their costs upon recovery of any moneys referred to in Clause 2.4 hereof provided always that the liability of the Clients under this Clause shall not exceed the amount of moneys recovered as stated in Clause 2.2 hereof. 2.4 As this Agreement may not provide that costs are to be determined as a proportion of, or are to vary according to the amount recovered in any proceedings to which the Agreement relates: (a) if any provision of this Agreement is determined to be void or any moneys provided for in this Agreement are unrecoverable for any reason, the Solicitors and the barrister shall nonetheless be entitled to claim payment of their costs and fees on the hourly rates basis specified herein; (b) in event (a), the Solicitors and the barrister shall be entitled to charge a premium of twenty-five per cent (25%) on the aggregate sum of such costs and disbursements; and (c) the Solicitors undertake to review and decrease their estimated costs by an appropriate and equitable amount in the circumstances if during the course of the proceedings it becomes apparent or is determined that the Clients will recover less than fifty per cent (50%) of the amounts claimed in the proceedings in accordance with Clause 2.5. 2.5 The amount of any decrease determined for the purposes of Clause 2.4(c) hereof, the Solicitors undertake to reduce their entitlement to their estimated costs (under Item 3 above) if the amounts recovered by the Clients in respect of the Subject Matter are less than: (a) $200,000,000 to an amount not exceeding $6,000,000 in costs; (b) $100,000,000 to an amount not exceeding $4,000,000 in costs; (c) $30,000,000 to an amount not exceeding $2,000,000 in costs; and (d) $10,000,000 to an amount not exceeding ten per cent (10%) of the recovered moneys. 2.6 Each sub-paragraph of Clause 2.5 hereof shall be construed and applied as an independent provision and the balance thereof shall be subjected specifically to Clauses 2.3 and 18 hereof. 2.7 In addition to any other moneys, the Solicitors shall be entitled absolutely to retain for their own benefit any costs recoverable or recovered by the Clients from the defendants. … 4. SOLICITORS' DISCLOSURES TO THE CLIENTS THE CLIENTS ACKNOWLEDGE THAT THE SOLICITORS HAVE DISCLOSED TO THE CLIENTS: (A) THE BASIS OF CALCULATING THE COSTS OF LEGAL SERVICES TO BE PROVIDED TO THE CLIENTS BY THE SOLCITORS AND THE BARRISTER ENGAGED WITH RESPECT TO THE SUBJECT MATTER; (B) THE BILLING ARRANGEMENTS; (C) THE CLIENTS' RIGHTS UNDER DIVISION 6 OF PART 11 OF THE ACT IN RELATION TO A REVIEW OF THE COSTS; (D) THE CLIENTS' RIGHTS UNDER DIVISION 4 OF THAT PART OF THE ACT TO RECEIVE A BILL OF COSTS; AND (E) ANY OTHER MATTER REQUIRED TO BE DISCLOSED PURSUANT TO THE REGULATION (AS DEFINED HEREIN) BY THE SOLICITORS TO THE CLIENTS. 5. ACKNOWLEDGMENTS BY CLIENTS 5.1 The Clients acknowledge that: (a) unless the Clients agree to these terms, the payment due to the Solicitors may be controlled by scales fixed by the relevant authority which limits the amount of fees a solicitor can recover whatever the amount of time spent on the Subject Matter ('the scale costs'); (b) the rates set out in this Agreement are higher than the scale costs; (c) the Clients hereby waive their rights to pay only scale costs; (d) subject to Clause 8 below, so far as permissible at law, the Clients hereby waive the right to receive an itemised bill of costs; (e) the Clients may have this Agreement or any charges made under it reviewed in accordance with the applicable legislation or common law (insofar as the same cannot be excluded contractually) to determine whether the costs charged are fair and reasonable; (f) the Clients have been advised to seek independent legal advice before entering into this Agreement; (g) a sum of $______ is accrued and payable by them to the Solicitors in respect of the aforesaid litigation as at the date hereof; and (h) it was not reasonably practicable for the Solicitors to estimate their costs at a figure other than as stated at Item 3 on page 1 hereof. 5.2 The Solicitors' estimate of their costs is fair and reasonable in the light of the fact that the Clients estimate their claims in the proceedings to be of the order of $971,000,000. 5.3 This is a conditional costs agreement and as such is affected by Division 3 of Part 11 of the Act. 6. CLIENTS TO PAY AND INSTRUCT Subject to Clause 2 hereof, the Clients agree jointly and severally to: 6.1 pay the Solicitors in accordance with the hourly rates in Item 1 on page 1 hereof subject to any increases which may be notified by the Solicitors to the Clients from time to time and not be objected to in writing sent by the Clients to the Solicitors within twenty-one (21) days of such notification (time being of the essence); 6.2 pay for the legal services provided by the Solicitors for the Clients in respect of the Subject Matter at the rates shown herein or as varied by agreement; 6.3 provide instructions to the Solicitors for the purposes of the Subject Matter as, when and to the extent necessary or as, when and to the extent reasonably requested by the Solicitors; 6.4 pay all outstanding accounts issued by the Solicitors to the Clients upon the earlier of: (a) the actual or constructive receipt or derivation by any Clients or any Associates of any Clients of any sum or sums of money exceeding in aggregate $50,000 and arising in respect of the Subject Matter; and (b) 30 May 2002 or any later date agreed by the Solicitors in writing; 6.5 pay all other accounts in respect of disbursements and out of pocket expenses issued by the Solicitors to the Clients within thirty (30) days of the issue of those accounts to the Clients. 7. MONEYS IN ADVANCE AND APPROVAL OF ACCOUNTS 7.1 The Clients agree to pay the Solicitors upon the signing of this Agreement the amount set out in Item 2 on page 1 hereof on account of anticipated expenses. 7.2 The Clients agree to pay the Solicitors moneys in advance as and when reasonably required by the Solicitors to cover anticipated expenses. This can be done as often as the Solicitors consider it to be necessary or appropriate. 7.3 The Solicitors will, when requested by the Clients at any reasonable time, provide to the Clients particulars of costs incurred to date, and the costs then estimated which the Clients will have to pay to the Solicitors to complete the Subject Matter. 7.4 Subject to Clause 2 hereof, the Solicitors will render interim accounts from time to time in respect of both expenses and professional fees and the Clients agree to pay those accounts within thirty (30) days of the issue of same and to approve or reject for payment items for professional fees recorded in any account within thirty (30) days after the issue of such accounts, subject to Clause 6.4 above. 7.5 If an account, interim account or a request for money in advance is not paid or approved, as applicable, within thirty (30) days of the date of the account or request, the Solicitors may suspend the completion of any work. … 10. IRREVOCABLE UNDERTAKING The Clients hereby irrevocably undertake to: 10.1 pay or procure payment out of any moneys referred to in Clause 6.4(a) or Clause 7.3 any liability of the Clients to the Solicitors to the extent that the Solicitors may request or direct the Clients to do so; and 10.2 hold such moneys on trust for the Solicitors. … 13. EXPENSES INCURRED BY SOLICITORS The Clients accept that expenses incurred by the Solicitors: 13.1 may not be recovered in full or in part from any other party whatever might be the result or outcome of the Subject Matter; and 13.2 must be paid within thirty (30) days by the Clients after the Solicitors issue an account therefor to the Clients. 14. SOLICITORS CEASING TO ACT 14.1 The Solicitors may stop acting for the Clients forthwith if: (a) the Clients have not carried out any term or condition of this Agreement, and in this respect time limitations are of the essence; (b) the Clients do not give adequate instructions to the Solicitors within a reasonable time of being asked to do so; (c) the Solicitors reasonably form the opinion that mutual confidence and trust no longer exist between the Solicitors and the Clients; (d) the Solicitors reasonably decide that continuing to represent the Clients may breach the requirements of professional ethics or duty; or (e) the Solicitors otherwise in their absolute discretion decide to cease to act. 14.2 Where the Solicitors decide, pursuant to Clause 14.1(e) above, to stop acting for the Clients, the Solicitors will give not less than seven (7) days' prior written notice to that effect to the Clients. 14.3 The Clients may terminate this Agreement by written notice to the Solicitors and such termination will not affect the Clients' responsibility to pay costs to the Solicitors to the time of termination. … 18. SEVERABILITY OF PROVISIONS Any provision of this Agreement which is prohibited, void, voidable, invalid, null, inoperative or unenforceable in any jurisdiction shall, as to such jurisdiction, be limited pro tanto without affecting adversely the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction." Litigation funding 5 In September 1998, when it had become apparent that the prospect of settling the Freehills proceedings was remote and that the preparation of the matter for trial and the funding of counsel would involve significant financial commitments, with risk to Smits Leslie in relation to its own fees and those of counsel if the proceedings were unsuccessful, Mr Smits decided to investigate the possibility of engaging litigation funders and in particular a company called Justice Corporation Pty Ltd. As it happened, Mr Smits did not tell Mr Roach about his investigations. When Mr Roach became aware of this he began his own discussions with Mr Rivkin, a principal of Justice Corporation. The discussions continued and a draft agreement was proposed by Justice Corporation, amended by Mr Smits and provided to Mr Roach. A proposal discussed was that an up-front fee of $500,000 be paid to Smits Leslie "on account of legal costs and disbursements incurred prior to the date of this agreement". This represented a fundamental change from the contingent fee arrangement under the retainer agreements. Discussions continued. The parties were at odds about whether it was agreed that Smits Leslie should receive an amount "up-front" on account of fees. 6 By 17 December 1998 the relationship of solicitor and client between Smits Leslie and the Roach clients was under threat. On 18 December 1998 Mr Roach telephoned the offices of Smits Leslie and left a message to the effect that he would be using other solicitors from then on. However, Smits Leslie continued to act until the retainer came to an end in April 1999. In March 1999 Smits Leslie issued a notice of rescission of the second retainer agreement. The basis stated for the termination was as follows: "(A) Anticipatory breach by you of the Agreement, which we have accepted, in the light of the conduct referred to below. (B) Further or alternatively, breaches by you of essential conditions of the Agreement, including: (1) your failure to carry out terms and conditions of the Agreement (and in respect of which time limitations are of the essence), including your wrongful suspension of our work and failure to give instructions in a timely manner, adequately or at all, thereby precluding us from complying with judicial directions for the filing of witness statements and counsel's agreed availability to settle your witness statement on 12 April 1999 [clause 14.1(a)]; (2) your failure to give us adequate instructions within a reasonable time of being asked to do so, in respect of important matters concerning witness statements, including your failure, neglect, refusal or omission to give us adequate instructions as to content or finalisation of witness statements, the retention of suitable expert witnesses, and briefing of counsel [clause 14.1(b)]; and (3) we have formed the reasonable opinion that mutual confidence and trust no longer exist between yourselves and ourselves [clause 14.1(c)], which situation was evidenced and compounded by: (a) the abusive and defamatory utterances made by you, Mr Roach, to us on 25 March 1999, and your utterly false, baseless and unsubstantiated allegations that we have made side agreements and arrangements and had discussions with, Justice Corporation Pty Limited (Rivkin) concerning deals to favour ourselves at your expense in respect of the Proceedings; (b) your consultation, behind our backs, with un-named senior counsel and other solicitors concerning our alleged lack of performance and bad reputations; (c) the opportunistic positions adopted by you relative to issues or concerns which have arisen adverse to yourselves in relation to the Proceedings, by blaming or 'shafting' our Mr Leslie for your own shortcomings, after you have taken into account, with the benefit of hindsight, counsel's written opinions and our on-going advice; (d) your attempts to contrive complaints in respect of the alleged lack of performance of our Mr Leslie in order to conceal, or misdirect attention from, your own shortcomings. (e) the denials made in your letter of 25 March 1999, given the wording and substance of Mr Roach's inappropriate remarks on 25 March 1999 to our Mr Leslie, and in a later conversation on that day between you, Mr Roach, and our Mr Smits which was overheard by two other persons in our offices; (f) your insistence that we must follow absolutely your dictatorial directives on the basis that you, Mr Roach, are 'the general' and we are merely 'commissioned soldiers' and have no role to fulfil as 'independent solicitors', or ethics to adhere to in the conduct of our practice as solicitors of the Court; (g) the undisclosed, unprincipled and undermining contact made by you, Mr Roach, to our Mr Leslie's spouse to question whether he had ever been 'cheated' by our Mr Smits, on the basis that Mrs Leslie would not disclose the existence or content of the conversation to our Mr Leslie; and (h) your on-going vexatious attempts, Mr Roach, to divide and 'wedge' our partnership arrangements, to your own self-advantage." 7 The notice of rescission was served on 7 April 1999. A notice of intention to cease acting as solicitor was served on the same day. 8 Negotiations took place to no avail. On 3 May 1999 Garrett Walmsley Madgwick wrote to Smits Leslie seeking copies of the relevant files and documents. Smits Leslie declined to give them up. On 7 May an administrator was appointed to both Winnote and Sydtech and they were placed in voluntary liquidation on 28 May 1999 as part of a scheme to facilitate litigation funding. By a document entitled 'Particulars of Debt (Informal claim)' the appellants claimed amounts on account of costs for work done and unliquidated damages for lost future profit costs. They also corresponded with the administrator or liquidator and his solicitors. In that correspondence, Smits Leslie alleged fraud, conspiracy and impropriety against the liquidator. The liquidator continued to seek the files in relation to the litigation. Ultimately the liquidator took proceedings to recover the documents (2731/99). At the same time he was attempting to conclude funding arrangements with Justice Corporation to allow the Freehills proceedings to go forward. 9 On 5 July 1999 Windeyer J held that the solicitors could maintain a lien over the documents. An appeal was lodged (40573/99). On 3 August 1999 the solicitors began proceedings for the removal of the liquidator, John Sheahan (2909/99). On 11 August 1999 the solicitors and their service company, Plantoy Pty Ltd, began these proceedings (50099/99) by summons against Mr Roach, Andrew John Rayment, Mr Rivkin, Justice Corporation and Mr Roach's wife, Valerie Ann Roach. (The appellants concede that there is no ground upon which, in this appeal, they could succeed against Mrs Roach and that Plantoy has no viable claim on any basis in the proceedings.) Mr Sheahan resigned as liquidator and Messrs Shirlaw and Cussen were appointed liquidators of Winnote and Sydtech on 26 August 1999. Mr Cussen had numerous conversations with various parties including the representative of Justice Corporation from whom it emerged that that body would not sign a litigation funding agreement unless all the issues between the parties had been resolved and agreement reached. Discussion led to a document known as the Ten Point Plan included in a facsimile dated 15 September 1999 and sent by Mr Cussen to Mr Rayment of Justice Corporation, to Mr Smits, to Piper Alderman, who acted for the liquidators, to Mr Swift of Garrett Walmsley Madgwick, acting on behalf of the Roach interests and Mr Roach. The ten points were: "1. That the draft consent orders prepared by Smits Leslie be subscribed by solicitors for Justice Corporation, Mr Andrew Rayment, Mr Rene Rivkin and Smits Leslie in relation to proceedings No 50099 of 1999 in the Equity Division of the Supreme Court of NSW; and by the solicitors for the liquidators, namely Piper Alderman and Smits Leslie, in relation to the proceedings No 2909 and 2731 of 1999 in the Equity Division of the Supreme Court of NSW and proceedings No 40573 of 1999 in the Court of Appeal of the Supreme Court of NSW. 2. In relation to Supreme Court proceedings No 2909 of 1999 the undertaking of the defendants to pay the cost of the plaintiff in the amount of $25,000 will be undertaken by Justice Corporation. 3. That the Liquidators agree to admit Smits Leslie as ordinary unsecured creditors of both Winnote and Sydtech in the sum of $500,000 in respect of their time charges up to 1 December 1998. 4. That Smits Leslie may submit to the Liquidator for their consideration on a proof of debt for their out of pocket expenses to 19 April 1999 limited to $75,000. 5. That in respect of the period 1 December 1998 to 19 April 1999, Smits Leslie may submit to the Liquidators for their consideration proofs of debt in accordance [with] their retainer agreement up to a limit of $100,000. 6. That Smits Leslie refrain from making an application to the Equity Division of the Supreme Court of NSW for a Charging Order in respect of their unpaid costs. 7. That Smits Leslie immediately deliver up to the liquidators all books and records of Winnote, Sydtech and Mr Roach held by them in relation to the negligence claims made by Winnote, Sydtech and Mr Roach as against Messrs Freehill Hollingdale & Page. 8. That Smits Leslie may submit a proof of debt to the Liquidators of Winnote and Sydtech in respect of their claim for unliquidated damages which may arise from the alleged wrongful termination of their retainer by Mr Roach, Winnote and Sydtech or in respect of any participation claimed by Smits Leslie or Plantoy Pty Ltd in respect of the claim proceeds defined in their funding agreement (a ten per cent interest). 9. That Smits Leslie, agreed not to sue Mr Sheahan as the former Liquidator of Winnote and Sydtech in respect of any claims liabilities or obligations owed by Mr Sheahan to Smits Leslie as creditors of Winnote and Sydtech. 10. All of the above points are interdependent." 10 On 16 September 1999 Mr Cussen faxed Smits Leslie stating that all parties had agreed in principle to the ten points listed in his facsimile dated 15 September 1999. "We are arranging for the consent orders to be signed accordingly. Thank you for confirming that you shall prove your claims in the liquidations in due course." Subsequently, the consent orders contemplated in the Ten Point Plan were executed. They were given effect to by consent orders made in various proceedings involving the liquidators and as between other parties, not including Mr and Mrs Roach. The proceedings by the liquidator, including the appeal, were settled as were the proceedings by Smits Leslie seeking to have the liquidator removed. Consent orders in the proceedings, the subject of this appeal (50099/99), were executed discontinuing the proceedings against Justice Corporation and its representatives. The proceedings remained on foot against Mr and Mrs Roach. The Roach companies were not, at that time, parties to the proceedings. 11 The Ten Point Plan did not provide for Mr or Mrs Roach being joined in the settlement. Mr Roach said he was not aware of the agreed terms. There was no agreement that Smits Leslie would not pursue its claims against Mr Roach. On 28 September, after consent orders had been made in the proceedings, a creditors' meeting of Sydtech and Winnote was held and $25,000 paid by Justice Corporation to Smits Leslie pursuant to the consent orders in proceedings 2909/99. Smits Leslie delivered up the documents in relation to the Freehills proceedings. 12 By letter dated 12 January 2000 to the liquidators, Smits Leslie reminded the liquidators, that they were of a mind to join the Roach companies and the liquidators in these proceedings. If the threat to sue was to be avoided, the liquidators were to agree to judgment being entered in effect for $10 million against the companies. A further letter of 13 January 2000, which sought to justify the claim for $10 million, offered to compromise for the sum of $5 million. The offer was not accepted.

The history of the proceedings 13 The summons filed on 11 August 1999 in these proceedings by Smits Leslie pleaded breaches of contract and included claims under the Trade Practices Act 1974 and the Fair Trading Act 1987. The pleading was appropriately described as an ambit claim. On 3 March 2000 an amended summons was filed in which Mr and Mrs Roach were named as the first and second defendants and the Roach companies (in liquidation) were for the first time joined. The claim was that the retainer had been wrongfully repudiated by the Roach interests and the action relied on an implied term that Smits Leslie had a present entitlement to damages. In the alternative, Smits Leslie sued on an alleged agreement of 11 December 1998 claiming $500,000 and 10 per cent of the proceeds from the litigation and claiming that their interests had not been protected in the funding arrangement with Justice Corporation. No claim was based on the Ten Point Plan. 14 On 14 April 2000 the Roach interests filed a cross-claim alleging a breach by Smits Leslie of the retainer agreement with the alleged consequence that the Roach interests lost the opportunity of being represented on a contingency basis. On 20 July 2001 a further amended summons was filed. In September 2001 Mr Roach applied to the Court for leave to intervene in the name of the Roach companies. That leave was granted as was an application to file amended pleadings. On 9 October 2001 the Roach companies filed a defence claiming that the Ten Point Plan was not a valid and binding agreement and, in the alternative, pleaded that if the Ten Point Plan was binding the plan discharged them from liability. On the same date the Roach companies filed a further amended cross-claim which claimed a declaration that there was no binding agreement arising from the Ten Point Plan. On 12 October 2001, by leave of the Court, the solicitors filed a second further amended summons. In addition to the Roach companies the liquidators Shirlaw and Cussen were joined as defendants. The solicitors alleged that the liquidators had breached the Ten Point Plan agreed in September 1999 by refusing to admit Smits Leslie as a creditor in the sum of $500,000. The proceedings against the liquidators were settled in February 2002 and, according to the trial Judge, on 15 February 2002 were dismissed by consent. On 18 February 2002 Smits Leslie filed a third further amended summons seeking, for the first time, an order for specific performance of the settlement agreement (the Ten Point Plan). In this amended summons the claim against the Roach companies for damages based on repudiation of the second retainer agreement was maintained. Paragraph 37A sought an order for specific performance of the Ten Point Plan or alternatively, damages referable to the liquidators' refusal or failure to admit the plaintiffs to proof as creditors of the Roach companies pursuant to the terms of the Ten Point Plan. On 22 February 2002 the Roach companies filed a defence to the third further amended summons and on 25 February 2002 a second further amended cross-claim which sought declarations that there was no binding agreement arising from the Ten Point Plan and that the Ten Point Plan had been validly terminated by the Roach interests. 15 The claims by Smits Leslie relevant to this appeal can be described as follows: (a) Against Mr and Mrs Roach and the Roach companies, claims based on the second retainer agreement. (b) Against the Roach companies, damages and specific performance claims based on the Ten Point Plan. No agreement with Mr Roach was alleged to have been made in September 1999.

Application for disqualification and decision at first instance 16 The hearing of these proceedings (50099/99), on issues of liability only, began before McClellan J on 11 March 2002. On 21 March 2002 his Honour reserved his judgment which was published on 19 June 2002. By a notice of motion dated 25 June 2002 the plaintiffs applied to McClellan J to disqualify himself from making final orders in the proceedings and from hearing and determining any aspects of the proceedings other than the notice of motion and for his Honour to withdraw his reasons for judgment published on 19 June 2002. This application was supported by Mr Leslie's affidavit of 25 June 2002. Mr Leslie said that neither he nor Mr Smits nor their junior counsel at the hearing, Mr Haffenden, was aware that, as the trial Judge had disclosed on 14 and 17 June 2002, his brother, Geoffrey Alan McClellan was a partner and Chairman of Freehills, and a defendant in the Freehills proceedings. Though in his affidavit Mr Leslie said otherwise, it became apparent that the plaintiffs' senior counsel Mr Lindsay SC, was aware that the judge's brother was a partner at Freehills. 17 The application was dealt with on 26 June 2002 and refused by the trial Judge, who, after a further hearing on costs on 6 August 2002, went ahead and made orders that the proceedings be dismissed, the cross-claim dismissed, the plaintiffs pay the defendants' costs of the proceedings up to 19 September 2000 on a party/party basis and after 19 September 2000 on an indemnity basis and the defendants pay the plaintiffs' costs of the cross-claim on a party/party basis.

Appeal 18 The plaintiffs appealed from the whole of the decision of McClellan J. The grounds upon which they relied in the amended notice of appeal were as follows: "1. The trial Judge erred in finding illegal and unenforceable in whole: (a) the first retainer agreement made between the parties on or about 9 April 1997 ('the first retainer agreement'); (b) the second retainer agreement made between the parties on 24 June 1998 ('the second retainer agreement'); (c) the settlement agreement made between the parties on 16 September 1999 ('settlement agreement'). 2. His Honour erred in failing to find that the said agreements were unenforceable only to the extent that they were inconsistent with s188 of the Legal Profession Act 1987. 3. His Honour erred in concluding that any claim by the appellants for a quantum meruit was precluded by the public policy of the Legal Profession Act 1987. 4. His Honour erred in finding that the appellants were not entitled to recover reasonable remuneration for the legal services provided by them on a quantum meruit basis. 5. His Honour erred in failing to find that the settlement agreement was valid and enforceable by virtue of s477 of the Corporations Law. 6. His Honour erred in finding that the appellants had repudiated the settlement agreement. 7. His Honour erred in finding that the respondents had accepted a repudiation by the appellants of the settlement agreement. 8. His Honour erred in finding that the termination of the second retainer agreement precluded the appellants from any recovery against the respondents. 9. His Honour erred in failing to disqualify himself on 26 June 2002 from determination of the proceedings. 10. His Honour erred in making a costs order against the appellants and in failing to order the respondents to pay the appellants' costs of the cross-claim on an indemnity basis."

Disqualification [ground 9 of the appeal] 19 It is appropriate to deal first with ground 9 of the notice of appeal. Before McClellan J formally published his reasons for judgment, a draft copy was handed to the parties. This gave rise to some debate about a question of confidentiality in which Freehills was interested. On 17 June 2002, Mr Haffenden, junior counsel for the solicitors, Mr Finnane, junior counsel for the defendants and Mr Drinnan, for Freehills, appeared. The debate which took place between counsel is not material for present purposes until McClellan J stated that a judgment would be prepared in which two pages were replaced with other pages and that the matter would be listed at 9.30 the following morning. Shortly afterwards his Honour said: "I said this on Friday to the parties who were here then. My brother is the chairman of Freehills. I would normally not sit in relation to a matter which would involve Freehills' interests but I do not think I have any choice in this case. If anyone has any problem and can see a way in which another judge could deal with the matter, I would gladly do so. I do not think there is a way." 20 On Monday 24 June 2002, further discussion took place between the trial Judge and Mr Haffenden and Mr Finnane not presently material. Mr Drinnan was present but said nothing. 21 The transcript of Wednesday 26 June 2002, records as follows: "[HAFFENDEN]: I have a notice of motion which I am instructed to ask to file in court with an appropriate return date to seek to disqualify your Honour from the hearing by reason of the announcement in the court about your Honour being related to the chairman of Freehills. That was something that we weren't aware of. It was not appropriate. HIS HONOUR: Disqualify me from doing what? HAFFENDEN: From sitting any further on the matter. HIS HONOUR: Why would I disqualify myself? HAFFENDEN: For two reasons. We say there is an issue of substance in relation to the relationship between your Honour and the chairman of Freehills. HIS HONOUR: So what? HAFFENDEN: We say it is a matter that should have been disclosed at the beginning and it would be inappropriate for your Honour to sit further by reason of that and for your Honour to disqualify yourself. HIS HONOUR: You say what? HAFFENDEN: It would be inappropriate for your Honour to sit further in relation to the proceedings. HIS HONOUR: I don't follow. How can my relationship with my brother, who happens to be the chairman of Freehills, affect the issues in the relationship between your client and Mr and Mrs Roach? HAFFENDEN: There are a number of points. The first one was that the proceedings between Smits Leslie and Roach related to Roach's proceedings against Freehills. And secondly, it was made very clear by the other side to the court the reason why this matter had to be heard before those Freehills proceedings, and your Honour will recall the argument. We were flagging that we thought these proceedings should be heard after the Freehills proceedings. HIS HONOUR: I gathered there was some debate about that before Hunt J [Scil - Hunter J]. HAFFENDEN: I think my leader flagged that point just at the-- HIS HONOUR: Mr Lindsay would have known that my brother was at Freehills without the slightest question. I find this an extraordinary proposition. Are you telling me that Mr Lindsay did not know that my brother was a partner at Freehills? HAFFENDEN: No, I'm not saying that. I can't speak for Mr Lindsay. HIS HONOUR: I don't know about Mr Leslie, but I would imagine that probably counsel on both sides knew that my brother was at Freehills. HAFFENDEN: I didn't know, your Honour. HIS HONOUR: I would be certain Mr Lindsay knew. HAFFENDEN: The argument, your Honour, would go along the lines that would put your Honour in a position of potential conflict. HIS HONOUR: What is the potential conflict? HAFFENDEN: The argument was always been, as we perceive it from Mr Roach, that the position of his cases were that there was a need to have these proceedings heard before the Freehills proceedings. The reason being is there was a need to quantify his costs in order to consider negotiations with regard to Feeehills, if the Freehills matter was going to settle. Now the issue of what costs there may have been may very well impact upon those Freehills proceedings or any claim against Freehills or any settlement with Freehills. That is the argument. Your Honour might be against me or for me. I would seek leave to file the documents in court. HIS HONOUR: I don't know what the motion is. HAFFENDEN: I can hand it up to your Honour. HIS HONOUR: The proceedings have been disposed of. I have given you my judgment and my reasons. HAFFENDEN: That may be your Honour's view and I appreciate that is your Honour's view, but the-- HIS HONOUR: What utility is there in me allowing you to file a notice of motion? Why should I allow it when the proceedings have come to an end? HAFFENDEN: Your Honour would be prejudging the notice of motion without letting me file it in court. HIS HONOUR: Why would I allow you leave to file in court something which has absolutely no utility? HAFFENDEN: Your Honour, with the greatest respect we dispute the fact it has no utility. We have asked your Honour to disqualify yourself and for a new judge to be appointed to hear the matter. HIS HONOUR: Does Mr Lindsay make this application? HAFFENDEN: I am here making the application. HIS HONOUR: Have you discussed it with Mr Lindsay? HAFFENDEN: I discussed it with him this morning. HIS HONOUR: I will see the documents. (Handed up) [It is agreed that the notice of motion and affidavit of Mr Leslie of 25 June 2002 were handed to the trial Judge.] Mr Haffenden, I have already published my reasons. How can you seek order 3? [Order 3 was that the publication of reasons delivered be prohibited until further order.] HAFFENDEN: Yes, that can't be pressed, your Honour. I appreciate that. HIS HONOUR: What else do you want to say about this notice of motion? HAFFENDEN: I can't say anything further other than seeking leave to file it. HIS HONOUR: Do you want to press it? HAFFENDEN: I press the seeking leave to file the notice of motion with the return date. HIS HONOUR: What am I supposed to do then? HAFFENDEN: Hear it. HIS HONOUR: I have got to deal with the other problem. HAFFENDEN: I wouldn't be proposing to have this heard today. HIS HONOUR: And I have got to make orders HAFFENDEN: I appreciate that. HIS HONOUR: Well, what would you want me to do? HAFFENDEN: We would be suggesting that those orders are virtually in a form which is - save the application I am making now - inappropriate to make and we would be asking your Honour to stand it over as soon as your Honour resolves this issue. If your Honour is against me on that, your Honour will make the orders. HIS HONOUR: I still don't follow. Mr Leslie, would you come forward, please? HAFFENDEN: He doesn't have his hearing aid today. HIS HONOUR: Can you ask Mr Leslie to come forward? Can you hear me, Mr Leslie? LESLIE: Just. HIS HONOUR: Do you say that you have spoken to Mr Lindsay, do you? LESLIE: I did speak to him last week. I understand, since I swore my affidavit, that Mr Lindsay now says that he did say that and that part of my affidavit is incorrect, according to Mr Lindsay. My recollection is I spoke to him last week and after your Honour made the disclosure, either on the 14th or the 17th - and in my mind when I saw that affidavit I thought that was the correct situation. I was told after I swore that affidavit yesterday that that is incorrect, as far as Mr Lindsay is concerned, but I did speak to him last week and it was my impression that that is what he told me then. HIS HONOUR: Thank you. Is that the evidence you want to bring in support of the motion, Mr Haffenden? HAFFENDEN: Yes, your Honour. HIS HONOUR: Do you want me to deal with the motion now? HAFFENDEN: I was proposing to stand it over. HIS HONOUR: Why wouldn't I deal with it now? Is there anything more you want to say about it? HAFFENDEN: No, your Honour. HIS HONOUR: Very well." 22 McClellan J delivered the following reasons for judgment: "1 This matter was before me this morning for the purpose of finalising the position in relation to the maintenance of the confidentiality of evidence tendered in the proceedings which may be the subject of legal professional privilege. Arrangements have already been made which, with the consent of Messrs Freehill Hollingdale & Page have facilitated the publication of my reasons in the matter. However, there is a need to consider the protection of other material which was tendered and which may have continuing sensitivity. 2 Before asking counsel to address me further in relation to those matters, junior counsel for the plaintiffs sought leave to file a notice of motion in the proceedings. I acceded to the filing of that motion. The motion is supported by an affidavit of Mr Leslie sworn on 25 June 2002. 3 The motion is brought in the following circumstances. During the course of the making of submissions in relation to the publication of my reasons and the maintenance of the confidentiality of some of the material tendered in these proceedings, it was appropriate that Messrs Freehill Hollingdale & Page have the opportunity of addressing me in relation to aspects of that matter which directly affected that firm's interests. 4 To that end I asked that a representative of Freehills be present in court before I published my reasons for judgment in the matter in the event that there may be material in that judgment which Freehills sought to keep confidential. 5 On Monday, 17 June 2002, and later occasions, Freehills appeared before me and at that time, I disclosed to the parties the fact that my brother, Geoffrey McClellan, is a partner and presently the chairman of Freehills. I did this because at that point of the proceedings it was obviously necessary for me to have regard to the interests of Freehills as well as the interests of the defendants in relation to any claim that evidence remain confidential, the privilege being that of either the defendants or Freehills. Smits Leslie were not affected by these matters. 6 At that point no party suggested that I should disqualify myself from dealing with the issue of confidentiality and, as it happened, the issues relating to Freehills were resolved by consent. 7 Since that occasion, the matter has been before me on further occasions when progress has been made towards identifying the documents in respect of which an order for confidentiality is to be made. 8 As I have indicated, junior counsel for the plaintiffs sought leave to bring a motion this morning. The substance of that motion is that I disqualify myself from these proceedings, withdraw my reasons for judgment, make no final orders and make arrangements for another judge to hear the matter. 9 In his affidavit, Mr Leslie deposes to the fact, which is true, that before the proceedings commenced I did not disclose that my brother is the chairman of Freehills. He says this fact was not known to him and swears that he was informed by his partner, Mr Smits, Mr Geoffrey Lindsay of senior Counsel, and Mr William Haffenden of junior counsel, that none of those persons were aware of that fact. 10 Although I accept that this may be the case in relation to Messrs Leslie, Smits and Haffenden, I thought it unlikely to be the case in relation to Mr Lindsay. I asked Mr Leslie to tell me from the bar table whether he sought to sustain the allegation that Mr Lindsay was not aware that my brother was a partner of Freehills. He indicated that he did not and that that part of his affidavit was wrong. 11 The proceedings which I have determined relate to a dispute between the solicitors, Smits & Leslie, and the defendants, Mr and Mrs Roach, and relevant companies. Although those proceedings involve a claim for professional fees in relation to proceedings brought by the Roaches against Freehill Hollingdale & Page, I did not believe that fact caused me any embarrassment in determining the dispute between the present parties. For that reason, I did not believe it necessary for me to disclose that my brother is the chairman of Freehills, although I always believed, as it happens correctly, that at least Mr Lindsay would have been aware of that fact. 12 The present application having been made, I have reflected upon the position. It is submitted by the plaintiff that because my decision in these proceedings may impact upon the costs which Freehills may have to pay in the, as yet undetermined proceedings between the defendants and Freehills, I should now disqualify myself. This would, of course, assume that Freehills was ordered to pay costs which included costs claimed by the plaintiff. 13 The test to be applied is that laid down in Reg v Watson; ex parte Armstrong (1976) 136 CLR 248 which was stated in Livesey v New South Wales Bar Association (1983) 151 CLR 288 as: 'A judge should not sit to hear a case if in all the circumstances the parties or the public might entertain a reasonable apprehension that he might not bring an impartial and unprejudiced mind to the resolution of the questions involved in it.' P294 14 The questions involved in the present dispute did not require the resolution of any issue relating to Freehills or any of its partners. Although the fact that Freehills have been sued has given rise to the current proceedings, the proceedings are otherwise so remote, that I am satisfied, having regard to the appropriate test, I should not disqualify myself 15 In any event as the plaintiff's senior counsel was apparently aware that my brother was a partner at Freehills but the matter was never raised, any right to object has been waived Vakauta v Kelly (1988) 13 NSWLR 502. 16 I confirm that I feel no difficulty in determining the proceedings before me and do not believe there is any need for me to disqualify myself. 17 I have granted leave to file the notice of motion but the motion is dismissed." 23 The following matters are established and not in dispute. His Honour's brother was on the date of judgment a partner and the chairman of Freehills. It is assumed that he had been both from the time the proceedings began before McClellan J. Neither of the plaintiff solicitors nor junior counsel, Mr Haffenden, was aware of this before the trial Judge's announcement on 17 June 2002. The application was made at the end of a trial which had occupied five hearing days and after the trial Judge's judgment had been published. The judgment was apparently published on 19 June 2002, two days after the first disclosure on 17 June 2002 though it had been distributed in draft form to the parties before 17 June 2002. The degree to which the plaintiffs in the proceedings before McClellan J were entitled to recover their costs from the Roach interests would translate into an increase in the costs that the Roach interests could recover in the proceedings against Freehills, if they were successful. In that way, success by the plaintiffs in the proceedings before McClellan J could add to the amount for which Freehills would be liable to indemnify the Roach interests by an amount in the order of $500,000. 24 An important question was whether the plaintiffs, because of senior counsel's stated knowledge, had waived the right to rely on the relationship between the trial Judge and his brother as a ground for disqualification. Mr Ireland QC, who appeared on the appeal for the appellants, applied to file in the Court of Appeal an affidavit by Mr Lindsay of 25 May 2004. Mr Smith SC, who appeared on the appeal for the respondents, took no objection to this and did not seek to cross-examine Mr Lindsay. 25 Mr Lindsay's affidavit, omitting formal parts, was: "INTRODUCTION 1. I am admitted to practise as a legal practitioner of the Supreme Court of New South Wales. 2. I am (and I have been since 13 July 1979) in practice as a barrister. 3. I was appointed Senior Counsel in New South Wales on 4 November 1994. 4. I appeared as senior counsel (with Mr W Haffenden of counsel) for the Plaintiffs (Mr L G Smits and Mr J A Leslie) at the hearing of the proceedings in March 2002 that culminated in publication by Justice McClellan in June 2002 of a judgment that has since been reported at (2002) 55 NSWLR 166. 5. I did not appear in the proceedings upon the publication of McClellan J's Reasons for Judgment or any subsequent occasion. McCLELLAN J's CONNECTION WITH FREEHILLS 6. At or about the time McClellan J first published his Reasons for Judgment (before he made final orders in the proceedings) I was informed by Mr Haffenden, and I believe, that, in publishing those Reasons his Honour announced that his brother (Mr Geoff McClellan) was a partner, and the Chairman of the Partners, of the firm of solicitors known as 'Freehills'. 7. At the time of the hearing of the proceedings before McClellan J in March 2002: a. I knew that Mr Geoff McClellan of Freehills was a brother of the Judge. b. I did not know (although his Honour might have assumed that I did know) that Freehills had a 'Chairman of Partners' or that Mr Geoff McClellan held that position. 8. I served articles of clerkship, and worked as a solicitor, under Mr T O Jones of Freehill Hollingdale & Page (as Freehills were then known) before my admission to the Bar on 13 July 1979. THE HEARING BEFORE McCLELLAN J IN MARCH 2002 9. At the commencement of the hearing before McClellan J on Monday 11 March 2002 I made an announcement to the effect that no objection was taken by the Plaintiffs to his Honour hearing the proceedings. 10. At the time I made that announcement I believed that each of the Plaintiffs knew that his Honour was the brother of Mr Geoff McClellan, a partner of Freehills. 11. As I recall, that belief, which I acknowledge might have been mistaken, was based upon the following facts: a. On or about the afternoon of Thursday 7 March 2002 I was informed by Mr Haffenden that: i. McClellan J had been allocated as the judge to preside at the hearing of the proceedings listed to commence on Monday 11 March 2002. ii. His Honour had invited the parties to indicate, if possible by close of business on Friday 8 March 2002, whether they had any objection to his presiding at the hearing. b. At that time (on Thursday 7 March 2002) I told Mr Haffenden that he should discuss the matter with, and take instructions from, the Plaintiffs because I was heavily engaged in the preparation for the hearing of documents that were required to be filed and served on Friday 8 March 2002 in anticipation of the commencement of the hearing on Monday 11 March 2002. c. I continued to be heavily engaged in the preparation of those documents throughout Friday 8 March 2002. d. At various times on Friday 8 March 2002 I was in communication with each of Mr Haffenden (personally and by telephone or email) and Mr Leslie (by telephone or email) in relation to the preparation of the documents required to be filed and served that day. I did not speak to Mr Smits until towards the end of the day, at which time our conversation was limited (in a brief telephone conversation) to observations by me, and an acknowledgement by him, that I had been in contact with Messrs Haffenden and Leslie and it was necessary for the Plaintiffs to consider over the weekend whether they objected to McClellan J as the trial judge. e. In the course of my conversations with Mr Haffenden on 7-8 March 2002, and with Mr Leslie on 8 March 2002, I believe that I mentioned to each of them separately that: (i) it would be necessary for the Plaintiffs to make a decision about whether or not to object to McClellan J presiding at the hearing, bearing in mind that (as practitioners who regularly appeared before all the judges of the Equity Division of the Court) they were known to all the judges; and (ii) as I was fully occupied in the preparation of documents required to be filed and served on 8 March 2002, I was unable to devote any substantial time to consideration of whether or not the Plaintiffs should object to McClellan J. Our conversations on this topic were not lengthy. f. I believe, but I may be mistaken, that in the course of those conversations I referred to the fact that McClellan J's brother, Mr Geoff McClellan, was a partner of Freehills as one of the factors to be taken into account. I did not engage in any detailed discussion of that fact with either Mr Haffenden or Mr Leslie. g. As preparation for commencement of the hearing continued throughout 8 March 2002, the question whether any objection would be taken to McClellan J was deferred until the morning Monday 11 March 2002, at which time it was anticipated that Mr Haffenden, the Plaintiffs and I would confer. h. At a conference between myself, Mr Haffenden and the Plaintiffs on the morning of 11 March 2002 I was instructed by the Plaintiffs that they took no objection to McClellan J presiding at the hearing. i. At that conference the Plaintiffs were enthusiastic about the prospect of McClellan J presiding at the trial. 12. At no time before the time of publication of McClellan J's Reasons for Judgment in June 2002 did I discuss with any or all of Mr Haffenden, Mr Smits or Mr Leslie that his Honour was the brother of the 'Chairman of Partners' of Freehills. That fact, if it was ever known to me, was not a fact of which I was at all conscious before I was informed of his Honour's announcement at the time of publication of his Reasons. 13. At no time before the time of publication of his Honour's Reasons for Judgment in June 2002 did I discuss with any or all of Mr Haffenden, Mr Smits or Mr Leslie (other than as set out in paragraph 11 of this Affidavit) the fact that his Honour was the brother of Mr Geoff McClellan, a partner of Freehills. 14. I did not make a conscious tactical decision about whether or not the Plaintiffs should object to his Honour's participation in the hearing. Given the range and frequency of contact between the Plaintiffs and all of the judges of the Equity Division, and the fact (as I believed) that Mr Geoff McClellan was only one of a very large number of members of Freehills, I did not consider a decision by the Plaintiffs not to object to McClellan J as remarkable. 15. Had McClellan J announced, at the time of commencement of the hearing on 11 March 2002, that his brother was 'the Chairman of Partners' of Freehills - that fact being unknown to me - I would have taken specific instructions in relation to it. I was unconcerned that he did not refer to the fact that his brother was a partner of Freehills because I believed that fact to have been known to all parties. 16. In announcing to the Court, at the commencement of hearing on 11 March 2002, that the Plaintiffs took no objection to his Honour presiding at the hearing I was particularly conscious of my instructions from the Plaintiffs that there had been social contact between McClellan J and Mr Leslie on a number of occasions. I was anxious to record that fact, in particular, on the record so as to forestall any problems arising from it. 17. I have never had any social connection with either McClellan J, his brother Geoff McClellan or any member of their respective families. Any professional contact I have had with them has been infrequent and of a limited character. Although I hold each of them in high regard I do not regard either of them as more than professional acquaintances. Our contact has been so limited that I could not say that I know either of them personally. So far as I can recall I have never been briefed by Mr Geoff McClellan, although (as I now recall) he might have worked in the office of my master solicitor (Mr T O Jones) for a short time after my admission to the Bar." 26 On 11 March 2002 counsel announced their appearances in court before McClellan J. Mr Lindsay said: "A question having risen as to whether or not an objection would be taken to your Honour dealing with the case because of past contact with one of the plaintiffs, I am instructed to inform the court that on our side of the record, and I understand on the defendants' side of the record as well, there is no objection to your Honour dealing with the matter." 27 As appears from a comment shortly thereafter on that day McClellan J was aware that Mr Roach and the two Roach companies were all parties to the Freehills proceedings. 28 Where, as here, the allegation is apprehended and not actual bias, the governing principle to be applied is stated in the judgment of Gleeson CJ and McHugh, Gummow and Hayne JJ in Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at 344-345 [6-8]: "[6] Where, in the absence of any suggestion of actual bias, a question arises as to the independence or impartiality of a judge (or other judicial officer or juror), as here, the governing principle is that, subject to qualifications relating to waiver (which is not presently relevant) or necessity (which may be relevant to the second appeal), a judge is disqualified if a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide; R v Watson; Ex parte Armstrong (1976) 136 CLR 248; Re Lusink; Ex parte Shaw (1980) 55 ALJR 12; 32 ALR 47; Livesey v NSW Bar Association (1983) 151 CLR 288; Re JRL; Ex parte CJL (1986) 161 CLR 342; Vakauta v Kelly (1989) 167 CLR 568; Webb v The Queen (1994) 181 CLR 41; Johnson v Johnson (2000) 201 CLR 488. That principle gives effect to the requirement that justice should both be done and be seen to be done, R v Sussex Justices; Ex parte McCarthy [1924] 1 KB 256 at 259, per Lord Hewart CJ, a requirement which reflects the fundamental importance of the principle that the tribunal be independent and impartial. It is convenient to refer to it as the apprehension of bias principle. [7] The apprehension of bias principle may be thought to find its justification in the importance of the basic principle, that the tribunal be independent and impartial. So important is the principle that even the appearance of departure from it is prohibited lest the integrity of the judicial system be undermined. There are, however, some other aspects of the apprehension of bias principle which should be recognised. Deciding whether a judicial officer (or juror) might not bring an impartial mind to the resolution of a question that has not been determined requires no prediction about how the judge or juror will in fact approach the matter. The question is one of possibility (real and not remote), not probability. Similarly, if the matter has already been decided, the test is one which requires no conclusion about what factors actually influenced the outcome. No attempt need be made to inquire into the actual thought processes of the judge or juror.

[8] The apprehension of bias principle admits of the possibility of human frailty. Its application is as diverse as human frailty. Its application requires two steps. First, it requires the identification of what it is said might lead a judge (or juror) to decide a case other than on its legal and factual merits. The second step is no less important. There must be an articulation of the logical connection between the matter and the feared deviation from the course of deciding the case on its merits. The bare assertion that a judge (or juror) has an "interest" in litigation, or an interest in a party to it, will be of no assistance until the nature of the interest, and the asserted connection with the possibility of departure from impartial decision making, is articulated. Only then can the reasonableness of the asserted apprehension of bias be assessed." 29 The trial Judge was related as brother to a partner in, and chairman of, a firm of solicitors, whose liability to pay costs in proceedings brought against the firm by parties to the proceedings before the Judge, might be significantly affected by the outcome of the proceedings before the Judge. The appellants claimed that these matters might give rise to a reasonable apprehension by a fair minded lay observer that the trial Judge might not bring an impartial mind to the resolution of the proceedings before him. The appellants' formal application to the Judge came after the hearing was complete and a judgment delivered. It was not a claim without substance. There was no evidence about the relationship between the trial Judge and his brother. The Court should assume that it was close. There was not the slightest suggestion, nor could there be, that the trial Judge conducted the case and decided it other than impartially and fairly, without favour, affection or ill will and without regard to any pecuniary interest Freehills might have in the outcome. Freehills were before the Court only on the very limited question of privilege that might be infringed by the publication of McClellan J's reasons for judgment. 30 In Webb v The Queen (1994) 181 CLR 41 Deane J at 74 identified at least four distinct, though sometimes overlapping, main categories of case encompassed by the doctrine of disqualification by reason of the appearance of bias. The first was disqualification by interest, that is to say, some direct or indirect interest in the proceedings whether pecuniary or otherwise and the third, disqualification by association, which his Honour said would often overlap the first giving the example of a case where a dependant spouse or child had a direct pecuniary interest in the proceedings. At 75 Deane J observed that in the case of such a relationship it was obvious that the person concerned was disqualified by reason of a reasonable apprehension of bias. These remarks leave open the case where a non-dependant spouse or child has a direct pecuniary interest in the proceedings or the case of other relationships on their face less close and perhaps, if the facts were known, quite distant such as a brother who had lost touch with the Judge many years before the particular case was heard. 31 In Dovade Pty Ltd v Westpac Banking Group (1999) 46 NSWLR 168 a judge heard a case between on one side a bank and its subsidiary and on the other side borrowers and guarantors for the repayment of money lent by the bank or its subsidiary and not repaid. In a cross-claim the borrowers and guarantors argued various matters to support, amongst other things, relief under the Trade Practices Act or Fair Trading Act. They failed and appealed. The amounts which the appellants were ordered to pay to one or other of the bank or its subsidiary were in round figures $4.6 million, $15.3 million and nearly $20 million. 32 On appeal the appellants submitted, amongst other things, that the trial judge's failure to disclose his relationship with Westpac meant that the trial miscarried. One aspect of this relationship was that the judge's wife, in 1995, held 16,600 ordinary shares in the bank, which of course is one of the four major banks carrying on business in Australia and which in 1995 had an issued capital of 1,906 million shares and a market capitalisation of $10,197 million. The parcel of shares owned by the judge's wife was worth approximately $89,000. At 188 this Court referred to the inherited structure of the common law which distinguishes between the judge or juror's direct pecuniary interest in the outcome of the litigation on the one hand and other bases for disqualification such as bias or apprehended bias. "The automatic rule of preclusion in the former case does not apply in the latter. And the position of the pecuniary interest of a family member, however close, cannot be equated automatically with that of the judge." 33 The facts of that case, including those relating to the shareholding in Westpac of the judge's wife, did not attract the "bright line" principle which stemmed from the well known decision of Dimes v Proprietors of Grand Junction Canal (1852) 3 HL Cas 759; (1852) 10 ER 301 in which the House of Lords set aside a decree of Lord Cottenham LC who had decided a case despite being a shareholder in the canal company concerned. In the present case it is unnecessary further to discuss that principle. McClellan J did not have any direct pecuniary interest in the outcome of the proceedings which would have resulted in automatic disqualification from sitting. 34 Turning to the claim of reasonable apprehension of bias, the Court said at 188-9: "A claim of apprehended bias should be considered in the context of the judicial function and the public perception of it. There is a presumption that public officers have acted with honesty and discretion: Broom's Legal Maxims, 10th ed at 642. In the case of a judicial officer, this is no empty form. It is reinforced by the accountability necessarily inherent in the public processes of litigation and the disappointed litigant's right of appeal. Every judge swears to 'do right to all manner of people according to law without fear or favour, affection or ill-will'. This public oath is not a talisman against error, but it forms the constant back-drop to the way in which each judge functions on and off the bench." 35 The Court referred to a statement made by Latham CJ in the course of argument in the Bank Nationalisation case (Bank of New South Wales v The Commonwealth (1948) 76 CLR 1). It was pointed out, and must be remembered, when considering some of the older cases, that the applicable test is now accepted to be that stated in Ebner in the passage I have quoted. It is not whether there was a "real likelihood of bias" but whether a fair minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question in hand. Against that test has to be weighed the nature of the interest of the Judge's brother in the outcome of the litigation and the relationship between the Judge and his brother which, in the absence of any other information, might reasonably be regarded as close. If the trial Judge had had a pecuniary interest such as shares in a private company which stood in the same litigation relationship to the respondents as Freehills did, even if automatic disqualification did not follow, the appellants could rightly have claimed that a fair minded lay observer might reasonably apprehend that the Judge might not bring an impartial mind to the resolution of the case. The question was whether the fact that the trial Judge had no pecuniary interest whatever in Freehills but his brother did, might give rise to a reasonable apprehension of bias. In the circumstance that so far as was known the relationship was close, a fair minded lay observer might reasonably have apprehended that the Judge might not bring an impartial mind to the resolution of the case. 36 The trial Judge should have disclosed to the parties that his brother was a partner or chairman of Freehills when the proceedings began. His failure to do so is explained by the fact that, when considering whether they might object to McClellan J sitting, the parties were directing their minds to social relationships apparently enjoyed by the plaintiffs with various judges. Those matters were canvassed and dealt with. Clearly, the Judge gave no consideration to the position of his brother. Mr Lindsay did. In the course of conversations with his junior and with Mr Leslie in early March he mentioned to each of them separately that it would be necessary for the solicitors to make a decision about whether or not to object to McClellan J. Mr Lindsay believes, though he may have been mistaken, that in the course of those conversations he referred to the fact that the Judge's brother was a partner in Freehills as a factor to be taken into account. However, he was unable to devote any substantial time to consideration of whether or not the plaintiffs should object to McClellan J. On 11 March 2002 Mr Lindsay was instructed by the plaintiffs that they took no objection to McClellan J presiding at the hearing. Paragraph 14 in Mr Lindsay's affidavit is important. Amongst other things, he says that given the range and frequency of contact between the plaintiffs and all of the judges of the Equity Division and the fact (as he believed) that Mr Geoff McClellan was only one of a very large number of members of Freehills, he did not consider a decision by the plaintiffs not to object to McClellan J as remarkable. In para 15 Mr Lindsay said he was unconcerned that the trial Judge did not refer to the fact that his brother was a partner of Freehills "because I believed that fact to have been known to all parties." 37 Waiver is available as an answer to an appeal grounded on an allegation of apprehended bias: Dovade at 181 referring to Vakauta v Kelly (1989) 167 CLR 568 at 572 and 577-579. In Vakauta at 572, in a different context from the present, Brennan, Deane and Gaudron JJ observed, about comments made by a judge during the course of a hearing: "Where such comments which are likely to convey to a reasonable and intelligent lay observer an impression of bias have been made, a party who has legal representation is not entitled to stand by until the contents of the final judgment are known and then, if those contents prove unpalatable, attack the judgment on the ground that, by reason of those earlier comments, there has been a failure to observe the requirements of the appearance of impartial judgment. By standing by, such a party has waived the right subsequently to object. The reason why that is so is obvious. In such a case, if clear objection had been taken to the comments at the time when they were made or the judge had then been asked to refrain from further hearing the matter, the judge may have been able to correct the wrong impression of bias which had been given or alternatively may have refrained from further hearing. It would be unfair and wrong if failure to object until the contents of the final judgment were known were to give the party in default the advantage of an effective choice between acceptance and rejection of the judgment and to subject the other party to a situation in which it was likely that the judgment would be allowed to stand only if it proved to be unfavourable to him or her." 38 At 577-9 Dawson J reviewed the cases as follows: "There can, I think, be no doubt that an objection upon the ground of bias can be waived. Even where it is a question of the public apprehension of bias, the parties themselves must be competent to waive the objection. Although justice must manifestly be seen to be done, where a party, being aware of his right to object, waives that right, there will be little danger of the appearance of injustice. In the case of a criminal prosecution where the public is directly interested in the outcome, it may be different, but even in such a case, Isaacs J, in Dickason v Edwards (1910) 10 CLR 243 at 260, was clearly of the view that a party may waive the objection. He said: 'So that the principle seems to me to be this - that, if the person whose presence is challenged can fairly be said to be biased, either by reason of his necessary interest or by reason of some pre-determination he has arrived at in the course of the case, then he ought not to act unless there is something to relieve him from these disqualifications. Even in a public prosecution a party may waive the objection. One of the strongest examples of this is the case of Wakefield Local Board of Health v West Riding and Grimsby Railway Co (1865) 6 B & S 794; 122 ER 1386. There the Statute provided that the justices should be disinterested parties, but the words were held not necessarily to prevent waiver. A distinction has been drawn between public judicial tribunals and private judicial tribunals, but I am not satisfied that that is a sound distinction.' There is abundant authority which establishes, at all events in civil cases, that a party may waive his right to object on the ground of bias. As Hood J said in Re McCrory; Ex parte Rivett (1895) 21 VLR 3 at 6: 'A litigant who knows (as the applicant did here) that there may be some objection to the constitution of the Bench is bound to mention it at once, in fairness both to the magistrate and to the other side, and even if the objection be a good one the litigant cannot afterwards be allowed to complain if with knowledge he remains silent …' See also Reg v Cheltenham Commissioners (1841) 1 QB 467; 113 ER 1211; 'The Vernon' (1864) 1 QSCR 119; Raven v Burnett (1895) 6 QLJ 166; R v Byles; Ex parte Hollidge (1912) 108 LT 270; R v Essex Justices; Ex parte Perkins [1927] 2 KB 475; In the Marriage of Murphy and Armstrong (1978) 35 FLR 482; and Nickelseekers v Vance [1985] 1 QdR 266. In Re Alley; Ex parte Australian Building Construction Employees' and Builders Labourers' Federation (1985) 60 ALJR 181 at 182; 64 ALR 6 at 7, this Court said: 'The law has, in the past, taken a strict view of the consequences of the failure of a party to object to the participation in proceedings by a member of a tribunal who is said to be biased. In some cases it has been held that a party entitled to object to the participation of an adjudicator, disqualified by interest or likelihood of bias, will be deemed to have waived that entitlement if, being fully aware of the circumstances, he fails to object as soon as is reasonably practicable. In other cases it has been held that a party failing to take objection may be refused relief if he seeks a discretionary remedy. The question whether it is possible to waive a right of this kind raises interesting questions which it is not necessary to consider here.' The guarded manner in which the Court expressed itself in that case does not, I think, throw any doubt upon the possibility of waiver of the right to object on the ground of bias in a civil trial. Cf. Reg v Watson; Ex parte Armstrong (1976) 136 CLR at 263. In my view, where a party in civil litigation, being aware of the circumstances giving rise to a right to object, allows the case to continue for a sufficient time to show that he does not presently intend to exercise that right, he may be held to have waived it." 39 At the time when consideration was being given to whether objection should be taken to McClellan J sitting in the proceedings Mr Lindsay knew that the Judge's brother was a partner at Freehills. This was a fact or circumstance material to the question of whether, on behalf of his clients, objection should be taken to McClellan J sitting in the proceedings in which Mr Lindsay was briefed. Mr Lindsay's knowledge was relevant to his conduct of his retainer to act for the appellants in the proceedings. Part of Mr Lindsay's function was to advise on whether objection should be taken to McClellan J's sitting and, on instructions, to act on that advice. Mr Lindsay's knowledge related to the subject matter of his retainer, namely to act for the appellants in the proceedings. His knowledge of possible conflict as a result of the relationship between McClellan J and a partner in Freehills was a matter it was his duty to communicate to his clients. 40 To adapt the language of Lord MacNaghten in Blackburn, Low & Co v Vigors (1887) LR 12 App Cas 531 (a case concerned with imputing to a shipowner the knowledge of a broker instructed to re-insure a ship) at 542, there is nothing unreasonable in imputing to a litigant all the information with regard to proceedings which the barrister to whom the management of those proceedings is committed, possessed at the time and should in the ordinary course of things have communicated to the litigant. That being so, Mr Lindsay's knowledge was the knowledge of the appellants as from the time Mr Lindsay and the appellants were considering whether objection should be taken; see generally Bowstead and Reynolds on Agency, 17th ed Art. 97 at 441. 41 In Permanent Trustee Australia Limited v FAI General Insurance Company Ltd (2001) NSWCA 20, Handley JA reviewed the law relating to the imputation to a principal of an agent's knowledge and referred to what Lord MacNaghten said in Blackburn, Low & Co v Vigors. His Honour dissented from Lord MacNaghten's later statement about imputation in the case where an agent is employed for the special purpose of effecting insurance. Nothing in his Honour's judgment dissents from that part of Lord MacNaghten's reasoning which I have referred to above. 42 The decision of the Court of Appeal was reversed in the High Court; Permanent Trustee Australia Limited v FAI Insurance Company Ltd (In Liquidation) (2003) 77 ALJR 1070. At 1086 [87] Gummow and Hayne JJ approved this statement from Handley JA (50 NSWLR at 697): "Where the agent acts within his authority with the knowledge in question present to his mind, the principal should be bound by that knowledge, however acquired. I see no basis for ignoring any part of the agent's knowledge, present to his mind, when he is doing the authorised act. The source of the knowledge seems irrelevant. What must matter is the agent's state of mind when doing the authorised act." 43 As counsel, Mr Lindsay was bound to disclose to his clients that McClellan J's brother was a partner at Freehills. Indeed, according to his evidence, Mr Lindsay may well have done so. If the appellants did not act on that information at that time, or if Mr Lindsay did not inform them, they waived their right to seek to have the judge disqualify himself on the ground of his relationship with a partner in Freehills who was also the chairman. Ground 9 of the appeal accordingly fails.

Second Retainer Agreement; claims in contract and quantum meruit (Grounds 1(b), 2, 3, 4 and 8; ground 1(a) was not relied on) 44 At trial the appellants relied upon the second retainer agreement to recover in contract for professional costs and counsel's fees contingent on a successful outcome in the Freehills proceedings, for payment of other disbursements incurred by them other than counsel's fees within thirty days of the issue of any account and a premium of 25 per cent on costs and disbursements contingent on a successful outcome. They claimed that by 6 April 1999 when they forwarded their notice of rescission the Roach interests had failed to give adequate instructions and accordingly Smits Leslie was entitled to form the opinion that mutual trust and confidence no longer existed. The appellants submitted that cl 14.1(a), (b) and (c) of the second retainer agreement operated. In any event, they pointed out that pursuant to cl 14.1(e) they could decide to cease to act "in their absolute discretion". McClellan J referred to the defendants' first response that because the agreement was contingent and the contingency, that is to say, success in the Freehills proceedings, had not occurred the cause of action was presently incomplete. His Honour said: "But for the submission by the plaintiffs that upon termination it is implied that Smits Leslie were immediately entitled to professional costs, … the defendants' submission must be correct." 45 The defendants' second response was that the agreement, being champertous in nature, failed entirely. The trial Judge upheld this second response. The appellants accepted that they could not maintain cl 2.5, 2.6 and 2.7 of the second retainer agreement. 46 By Act No 87 of 1993 the Legal Profession Act 1987 was amended, inter alia, by the substitution of a new Part 10 "Complaints and discipline" and a new Part 11 "Legal fees and other costs". Part 11 included a new Division 3 headed "Costs agreements". At the same time the Maintenance and Champerty Abolition Act 1993 (the Abolition Act) (Act No 88 of 1993) came into force. The Abolition Act and the amendments to the definition of professional misconduct in s127 in Pt 10 Div 2 and to Pt 11 Div 3 of the Legal Profession Act were each part of one legislative reform. The Abolition Act abolished the offence of maintenance (including champerty) and provided that an action in tort could no longer be sustained. McClellan J said: "232 The amendments to the Legal Profession Act made detailed provision for the charging of fees by legal practitioners and at the same time, modified the common law prohibition on champerty. Essential to the capacity of a solicitor to recover fees was the requirement for disclosure of the proposed fee arrangements. This is to be done by the making of a costs agreement (s184). A conditional costs agreement providing for payment of costs by the client only in the event that litigation is successful is sanctioned (s186), together with an uplift of fees to a maximum of 25 per cent." 47 Section 184 in Pt 11 Div 3 of the Legal Profession Act enables an agreement as to costs of the provision of legal services to be made by a solicitor with a client (a costs agreement). Section 186 enables a solicitor to make a costs agreement under which the "payment of all" of the solicitor's costs was contingent on the successful outcome of the matter in which the solicitor provided the legal services (a conditional costs agreement). The conditional costs agreement has to set out the circumstances constituting the successful outcome of the matter but might exclude disbursements from the costs payable only on the successful outcome of the matter. Section 187 allows a conditional costs agreement to provide for the payment of a premium, on the costs otherwise payable under the agreement only on the successful outcome of the matter, to be a specified percentage separately identified in the agreement and not to exceed 25 per cent of those costs. Section 188 provides that if a costs agreement was made it might not provide that costs were to be determined as a proportion of, or were to vary according to, the amount recovered in any proceedings to which the agreement related. Section 189 provides: "(1) Any provision of a costs agreement or other agreement that is inconsistent with this Division is void to the extent of the inconsistency. (2) In particular, any provision of a costs agreement or other agreement that purports to waive rights to an assessment of costs under this Part, or the right to receive a bill of costs in the form required for assessment under this Part, is void." 48 Section 189 renders void, as the appellants conceded, at least cl 2.5, 2.6 and 2.7 of the second retainer agreement. 49 Section 6 of the Abolition Act provides: "This Act does not affect any rule of law as to the cases in which a contract is to be treated as contrary to public policy or as otherwise illegal, whether the contract was made before, or is made after, the commencement of this Act." 50 The question which McClellan J posed was whether even though by force of the Abolition Act, maintenance and champerty were no longer crimes or civil wrongs, s6 left in place the common law rule with respect to the enforceability, or lack of it, of an arrangement tainted by champerty. His Honour said: "Unless the common law has changed or it has been otherwise provided by statute, the common law will operate to render such a costs agreement unenforceable and leave the legal practitioner without remedy as to his or her costs." 51 The trial Judge went on to examine with care the position following this legislative reform. In doing so he referred to Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1997) 72 FCR 261 where the full Federal Court pointed out that despite amendments such as the Abolition Act in New South Wales, policy considerations which gave rise to the offence and tort of maintenance had not necessarily lost all significance. "The ability of the Courts to treat agreements for maintenance as contrary to public policy, and therefore illegal, remains unaffected by the statutory provisions: see Trendtex Trading Corporation v Credit Suisse [1980] 1 QB 629 at 653; McFarlane v EE Caledonia (No 2) (1995) 1 WLR 366 at 370; Roux v Australian Broadcasting Commission (1992) 2 VR 577 at 605; Giles v Thompson [1994] 1 AC 142. The giving of financial assistance to a litigant by a non-party will not however conclude the question as to whether it is unlawful on this ground. Questions of public policy with which the Courts will be concerned, as Byrne J observed in Roux v ABC at 605, are those which have regard to litigation and its funding in the contemporary world." 52 McClellan J referred to Thai Trading Co v Taylor & Anor [1998] QB 781 where in the course of discussing the current law Millett LJ said at 788: "I would regard the solicitor who enters into such an arrangement, not as charging a fee if he wins, but rather as agreeing to forgo his fee if he loses. I question whether this should be regarded as contrary to public policy today, if indeed it ever was." 53 In Awwad v Geraghty & Co (a firm) [2001] QB 570 at 598 May LJ said that he was not persuaded as was Millet LJ in Thai Trading Co v Taylor that there was any difference in substance between an agreement to charge a fee or an enhanced fee if the client wins and an agreement to forego some or all of the fee if he loses. 54 McClellan J observed that the courts rely upon the integrity of those who are admitted to practice before them, not only to represent the interests of their clients but to do so in a way which does not compromise the duties owed to the court. "When a legal practitioner has a significant financial interest in the outcome of the litigation, there will inevitably be a temptation for that practitioner to depart from that duty. In my opinion, it would be entirely wrong for the law to allow this to occur." Moreover, his Honour observed that it was a common concern of those holding high office in the law that the professional and ethical obligations which practice as a lawyer imposes are being eroded to the dictates of commercial imperatives. He concluded: "252 The court should not lend itself to the possible further erosion of those ethical obligations by acknowledging a change in public policy in relation to the enforceability of champertous arrangements without the clearest indication by Parliament that it has occurred. In my opinion, to do so would be likely to seriously erode the confidence which this Court must have in the professional integrity of those who appear before it. The ultimate consequence would be to erode the confidence which the public has in the judicial system to resolve disputes. 253 The present case reflects one aspect of the difficulties which can emerge. Because of their financial interest in the litigation itself, Smits Leslie seriously compromised the duty owed to their client, in an endeavour to secure their own financial position. By demanding an upfront payment from Justice Corporation, they advanced their own interests ahead of those of the clients from whom they accepted the retainer. … 255 As Atkin LJ made plain in Wild v Simpson [1919] 2 KB 544, the only effective sanction which the law has to dissuade legal practitioners from entering unlawful champertous arrangements is to provide that a practitioner who enters into such an arrangement cannot recover, either under any non champertous component of the agreement, or on a quantum meruit. I see no reason why the protection of the public interest in the administration of justice which was thereby intended, should be diminished or removed because limited contingent fee arrangements have received legislative sanction." 55 His Honour could discern no reason either in policy or in the terms of the legislation to the effect that s188 and 189 of the Legal Profession Act operated to alter the law so that the common law sanction preserved by s6 of the Abolition Act was irrelevant. He referred to s127(3) of the Legal Profession Act, a subsection introduced in 1993 with the substitution of the new Pt 10, which provided: "(3) Maintenance or champerty by a legal practitioner (except in connection with a conditional cost agreement under Part 11) may constitute professional misconduct despite the Maintenance and Champerty Abolition Act 1993." 56 I have the firm impression, as did McClellan J, that those responsible for drafting the second retainer agreement were aware of the possibility that by reason of provisions such as cl 2.5 parts of the agreement might be void and moneys payable thereunder irrecoverable. The design was to make possible the recovery of the estimated costs of $10 million if, for example, in the flush of success the clients were prepared to pay this amount, but if the clients were not prepared to do this on the grounds of illegality, to have a fallback position in the retainer agreement for recovery of costs on a legitimate basis. 57 In the result McClellan J held that the second retainer agreement, being champertous, failed and that not only were the solicitors unable to recover costs pursuant to it but the law did not allow recovery on any other basis. 58 In disposing of the solicitors' alternative argument in restitution, McClellan J referred to Mason & Carter, Restitution Law in Australia, 1995 and Kearley v Thomson [1890] 24 QB 742 and said: "The capacity to frame a claim in restitution which does not plead the illegal contract, may not be conclusive. The concern is with substance not form. With respect to a contract of employment, as the authors describe it, although the services rendered may be lawful, if the contract under which it is provided offends public policy, 'the employee is not entitled to recover a reasonable sum for services rendered.' That proposition is supported by reference to Wild v Simpson at para 2616." 59 In conclusion his Honour said: 263 The retainer agreement executed with Smits Leslie in April 1997 was also champertous. Although, when drafting it, Smits paid careful regard to the Legal Profession Act and was conscious that the agreement might fail for champerty, he nevertheless sought to include within it, solicitors' entitlements by reference to the amount recovered in the proceedings. Clause 2.4 was no doubt drafted having regard to s 188 of the Legal Profession Act . However, clause 2.5 was intended to operate so that the costs payable to the solicitors were dependent upon the sum actually recovered. The agreement, being champertous, fails. Not only are the solicitors unable to recover costs pursuant to it, I am satisfied that the law does not allow recovery on any other basis.

264 The retainer agreement executed in June 1998 was also champertous for the same reasons. However, the arrangements between the parties now included the letter from Smits Leslie of 24 June 1998 executed by the parties. By that letter, it was provided that 'if the amount recovered from the defendants is less than $10 million then we (the solicitors) should be entitled to receive an amount equivalent to ten percent of the amount recovered by you, and for values over $10 million dollars an extra five percent recovered by you, together with any costs and disbursements which might be recoverable for the defendants.' 265 Mindful of the fact that the retainer agreement continued to provide that the client's estimate of their claim in the proceedings was of the order of $971 million dollars, the personal interest of the plaintiffs in the outcome of the Freehills litigation was very substantial . 266 Whether the retainer agreement is read on its own or together with the letter of 24 June, the arrangements were champertous and the plaintiffs are not entitled to recover any monies." 60 The appellants submitted in the alternative that as they were entitled to terminate the agreement pursuant to cl 14.1 they were entitled, under the agreement, to be paid their costs for the work done to the date of termination. They submitted that although there was no term of the retainer agreement which provided for such a payment, a term to this effect should be implied. McClellan J rejected this submission saying that the contract for the provisions of legal services was an entire contract and referred to McGowan v Commissioner of Stamp Duties (2001) 47 ATR 357 at 359. The trial Judge said: "278 … In this case, the arrangement was that the fee would be payable only in the event of a successful outcome in the litigation. If the solicitors decided to terminate, as in fact occurred, the defendants were likely to be left without the means either financial or professional to pursue the case.

279 Accordingly, it was reasonable for the agreement to provide a strong disincentive to the solicitors taking this step, which had a significant possibility of bringing the Freehills litigation to an end. In these circumstances, I do not believe it is necessary to imply such a term to give business efficacy to the retainer agreement. 280 The plaintiffs emphasise that the agreement provides in clause 14.3 that, if the clients terminate the agreement, they remain liable for costs incurred prior to the time of termination. They question why the position should be otherwise if the solicitors, with justification, exercise a right to terminate. 281 The first and most obvious answer is that the agreement made no provision for solicitor costs if the solicitors terminated the agreement, whereas it did if the clients terminated. This, no doubt, provided protection to the solicitors in the event that the client elected to terminate. 282 The second answer is that, as the agreement was conditional on a successful outcome in the Freehills litigation, the solicitors accepted that they would only be paid if the retainer was maintained and a verdict recovered. Given that the agreement was itself contingent on a successful outcome, I see no unfairness in it operating so that, in the event that the relationship was no longer effective, the solicitors could withdraw, but could not seek remuneration."

Discussion 61 The decision of the majority in Wild v Simpson was based on two concepts; first, the rule laid down by Brett MR in Herman v Jeuchner (1885) 15 QBD 561 at 563 that, when the object of either the promise or the consideration is to promote the committal of an illegal act, the contract itself is illegal and cannot be enforced, referred to by Bankes LJ in Wild v Simpson at 550; secondly, a person employed on an express contract to do work for a remuneration that is illegal cannot, where the special contract fails for illegality, recover upon a quantum meruit. Atkin LJ (as his Lordship then was) said at 565: "A solicitor would only have to bargain to receive the champertous sum in addition to his ordinary costs. He would never be in a worse position financially for the illegality. He could always recover as much as an innocent solicitor, and would take his chance of also recovering the fruits of the wrong-doing." 62 Atkin LJ acknowledged at 566 that in most cases of illegality the objection sounds very ill in the mouth of the defendant. His Lordship continued: "But, as Lord Mansfield said in Holman v Johnson (1775) 1 Cowp 341 at 343; 98 ER 1120 at 1121: 'It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may say so. The principle of public policy is this: ex dolo malo non oritur actio … it is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff.' " 63 In New South Wales since 1993 the offence of maintenance (including champerty) that would, but for s3 of the Abolition Act, be punishable by the common law is abolished (s3 the Abolition Act) and an action in tort no longer lies on account of conduct known as maintenance (including champerty) (s4 of the Abolition Act). 64 In Wild v Simpson at 562 Atkin LJ by reference to 2 Co Inst. 208 described maintenance as the unlawful intermeddling with litigation in which one has no concern and champerty as maintenance aggravated by an agreement to have a part of the thing in dispute. In Clyne v The New South Wales Bar Association (1960) 104 CLR 186 at 203 the High Court explained the special considerations which apply to a solicitor because it is, in a sense, the business of a solicitor to maintain litigation for clients. The legislative reform reflected in the Abolition Act and the insertion into the Legal Profession Act of s127(3) in Pt 10 means that maintenance or champerty by a legal practitioner (except in connection with a conditional costs agreement under Pt 11) may constitute professional misconduct despite the Abolition Act. Part 11 Div 3 s186 subject to the conditions set out enables a solicitor to make a conditional costs agreement and s187 allows a conditional costs agreement to provide for the payment of a premium not exceeding 25 per cent of the costs. 65 Section 188 provides that a costs agreement may not provide that costs are to be determined as a proportion of, or are to vary according to, the amount recovered in any proceedings to which the agreement relates. Section 189(1) provides that any provision of a cost agreement or other agreement that is inconsistent with Div 3 "is void to the extent of the inconsistency." Subsection (2) provides that in particular, any provision of a costs agreement or other agreement that purports to waive rights to an assessment of costs under Pt 11 or the right to receive a bill of costs in the form required for assessment under Pt 11 is void. 66 It is plain that the extent to which s189 makes any provision of a costs agreement void is limited, in the case of subs (1), to the extent of the inconsistency and, in the case of subs (2), to the particular provisions of the costs agreement described. One has to look elsewhere to find a basis for striking down more than those provisions bearing in mind that champerty is now neither a crime nor a tort but "may constitute professional misconduct". Public policy is said to strike down the whole agreement for the reasons advanced by Atkin LJ namely, that the law of champerty as between solicitor and client would be otherwise of little effect. No doubt, and this may be such a case, the solicitor takes his chance of recovering the fruits of the wrongdoing because the client relies on the solicitor and may have no other advice that the agreement, to the extent it is champertous, that is to say, inconsistent with s188, is void. So it is argued that the court will for reasons of public policy extend the effect of Pt 11 Div 3. The respondents rely upon s6 of the Abolition Act which provides that the Act does not affect any rule of law as to the cases in which a contract is to be treated as contrary to public policy or as otherwise illegal whenever the contract was made. 67 In Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 413 Gibbs ACJ stated the four main ways in which the enforceability of a contract may be affected by a statutory provision which renders particular conduct unlawful. The first of these was that the contract may be to do something which statute forbids. That is the present case though it was not, as his Honour pointed out at p413, the case in Yango. However, in that case at 429 Mason J said: "The main considerations from which the principle ex turpi causa arose can be seen in the reluctance of the courts to be instrumental in offering an inducement to crime or removing a restraint to crime..." 68 In Nelson v Nelson (1995) 184 CLR 538, after referring to the famous dictum of Lord Mansfield in Holman v Johnson referred to by Atkin LJ in Wild v Simpson and citing that passage, McHugh J said at 611 : "However, the Holman rule, stated in the bald dictum: 'No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act ( Holman (1775) 1 Cowp 341 at 343; 98 ER 1120 at 1121) is too extreme and inflexible to represent sound legal policy in the late Twentieth century even when account is taken of the recognised exceptions to this dictum."

At 612 his Honour described the broad judicial discretion upon the judge to determine whether the grant of relief would affront "the public conscience" as an unstructured discretion which, while providing a flexible approach, leaves the matter at large. McHugh J said at 612: "If courts withhold relief because of an illegal transaction, they necessarily impose a sanction on one of the parties to that transaction, a sanction that will deprive one party of his or her property rights and effectively vest them in another person who will almost always be a willing participant in the illegality. Leaving aside cases where the statute makes rights arising out of the transaction unenforceable in all circumstances, such a sanction can only be justified if two conditions are met. First, the sanction imposed should be proportionate to the seriousness of the illegality involved. It is not in accord with contemporaneous notions of justice that the penalty for breaching a law or frustrating its policy, should be disproportionate to the seriousness of the breach. The seriousness of the illegality must be judged by reference to the statute whose terms or policy is contravened. It cannot be justified in a vacuum. The statute must always be the reference point for determining the seriousness of the illegality; otherwise the courts would embark on an assessment of moral turpitude independently of and potentially in conflict with the assessment made by the legislature. Second, the imposition of the civil sanction must further the purpose of the statute and must not impose a further sanction for the unlawful conduct if Parliament has indicated that the sanctions imposed by the statute are sufficient to deal with conduct that breaches or evades the operation of the statute and its policies. In most cases, the statute will provide some guidance, express or inferred, as to the policy of the legislature in respect of a transaction that contravenes the statute or its purpose. It is this policy that must guide the courts in determining consistent with their duty not to condone or encourage breaches of the statute, what the consequences of the illegality will be. Thus, the statute may disclose an intention, explicitly or implicitly, that a transaction contrary to its terms or its policy should be unenforceable. On the other hand, the statute may inferentially disclose an intention that the only sanctions for breach of the statute or its policy are to be those specifically provided for in the legislation."

See also Fitzgerald v F J Leonardt Pty Ltd (1997) 189 CLR 215 at 227-230 and 249-250. 69 In New South Wales, the change of the law to that now in force affecting champertous retainer agreements between solicitors and clients from the common law under consideration in England, at the time Wild v Simpson was decided, means that that decision, with all due respect to the eminence of those who decided it, is of little more than historic interest in the present case. The legislature, by the amendments to the Legal Profession Act which were introduced with the abolition of the crime and tort of champerty, has stated with precision that the sanction imposed on a legal practitioner who enters into a champertous agreement for the payment of costs is a potential determination by the Administrative Decisions Tribunal that the legal practitioner is guilty of professional misconduct. Moreover, the legislature has stated in s189 the extent to which the champertous agreement is void. To adapt the language of McHugh J, I do not think it appropriate for a court in this legislative climate to go further and independently re-instate in such a case the "ex turpi causa maxim" by reference to a public policy which previously guided the courts in avoiding contracts which were illegal. The legislature has now marked out the parts of champertous agreements between solicitors and their clients which are void. There is no ground for the court to move beyond these boundaries. In particular, in light of what has been said in the High Court about the maxim, s6 of the Abolition Act should not be treated as an invitation to do so. 70 I agree with what Bryson J (as his Honour then was) said in Hogarth v Gye (2002) NSWSC 32 in paras 6, 7 and 10. Accordingly, and with due respect, I think the trial Judge erred in finding the second retainer agreement wholly void and unenforceable. By reference to the second retainer agreement I would uphold ground 2 in the amended notice of appeal. In my opinion, McClellan J erred in failing to hold that the second retainer agreement was unenforceable only to the extent that it was inconsistent with s188 of the Legal Profession Act. 71 Mr Ireland submitted that the second retainer agreement should be understood as providing for two separate costs regimes, one admittedly champertous and contingent upon success and found in cl 2, the other non-champertous and not contingent and found in cl 6. On this basis, he submitted that the solicitors were entitled to have an assessment of their costs based on the hourly rates set out in para 1 on the first page of the agreement. 72 One immediate problem with this contention is found in the covering letter to the second retainer agreement which stated, in part: "Also in the event that you are totally unsuccessful in the proceedings, which seems unlikely, we confirm that you would not be liable to pay any amounts to us on account of any outstanding costs or disbursements, including counsel's fees; although, you might be liable to pay costs and disbursements to the defendant."

It was accepted, as its form suggested, that the covering letter formed part of the second retainer agreement. 73 Clause 6 of the second retainer agreement was expressed to be subject to cl 2. Clause 2.1 provided that "the clients' obligation to pay all of the solicitors' and the barrister's costs otherwise payable under this agreement is contingent on the successful outcome of the matters in which the solicitors and barrister provide the legal services to the clients." Mr Ireland put an argument, which the respondent submitted was not put at trial, that the use of the phrase "all of the solicitors … costs" meant or emphasised that the successful outcome of the litigation was a pre-requisite only to receipt by the appellants of the success fee of $10 million, and ought not to be construed to deny the appellants' claim otherwise for remuneration whether under the second retainer agreement itself or outside the contract for restitution. It was said that cl 2.1 was directed only to payment of the estimate of costs, $10 million, reduced in accordance with cl 2.5. 74 The phrase "to pay all of the solicitors' … costs otherwise payable" (emphasis added) means "to pay all the solicitors' costs otherwise payable" (emphasis added) and makes that obligation contingent. The expression is almost certainly derived from the language of s186(1) of the Legal Profession Act. Plainly cl 2.1 was intended to be a conditional costs agreement within the meaning of the Legal Profession Act where the payment of all of the appellants' costs was contingent on the successful outcome of the matter. If the clients were obliged under cl 6 to pay the solicitors in accordance with the hourly rates, that was within the language of cl 2.1 an obligation to pay the solicitors' costs otherwise payable under the agreement and was accordingly contingent on the successful outcome of the matters. 75 With due respect, there is in my opinion, no merit in the argument that cl 2.1 applies only to the payment of the $10 million and has nothing to say about the clients' obligation to pay under cl 6. This argument fails. In the result, any contractual obligation of the respondents to pay the appellants' costs was contingent on a successful outcome. Moreover, this meant a successful outcome as a result of the provision by the appellants of the legal services they had agreed under cl 1.1 of the second retainer agreement to provide to the clients in respect of the Freehills proceedings. The appellants did not suggest otherwise. 76 The appellants pleaded that before 6 April 1999 Mr and Mrs Roach had failed to, and in fact refused, to provide proper instructions for the proper conduct of the proceedings which prevented the solicitors from discharging their obligation under the agreements. The trial Judge, acknowledging that there were delays which arose from the Roaches' actions, said he was unable to make such a finding. He was satisfied that the cause of many of the problems was the fact that Smits Leslie had failed to discharge their obligation to devise an effective litigation strategy and to prepare the matter in a timely fashion. "If Smits ultimately concluded that the litigation was beyond his firm's skill and capacity (as well as their financial resources), he was correct." Mr Roach did not submit that he terminated the arrangements but rather that he accepted Smits Leslie's repudiation. In his Honour's opinion, the position advanced by Mr Roach better reflected the events which occurred but in reality by 6 April 1999 the relationship between Smits Leslie and Mr Roach had deteriorated to the point where it was impossible for it effectively to continue. "Mutual trust was clearly lost and the solicitors were justified in terminating pursuant to cl 14.1(c) of the second retainer agreement." 77 As I have said, the trial Judge rejected a submission that although there was no term of the second retainer agreement which provided for the solicitors to claim any part of their costs in such circumstances, a term should be implied which entitled the solicitors under the agreement to be paid their costs for the work done to the date of termination. With due respect, I do not regard his Honour's conclusion in reliance on McGowan v Commissioner of Stamp Duties as complete. 78 In Cachia v Isaacs (1985) 3 NSWLR 366, a case cited in McGowan, Hope JA at 377-378 referred to Underwood Son & Piper v Lewis [1894] 2 QB 306 where it was held that a contract between a client and a solicitor who accepts a retainer in a common law action is, in the absence of agreement to the contrary, an entire contract to conduct the case of the client until the action is finished. But Hope JA remarked that the common law rule is only a prima facie rule and is subject to numerous qualifications. His Honour said: "One general qualification stated in Underwood Son & Piper v Lewis is that a solicitor may, for good cause and on giving reasonable notice to his client, decline to act further in the action for him, and thereupon sue for his costs in respect of the previous conduct of the case. No exhaustive list of appropriate causes has or can be made. Another qualification is stated in Halsbury's Laws of England, 4th ed Vol 44 (at para 97 at 69): 'It seems that a term will also be implied enabling the client to withdraw the retainer at any time.' It may be that this implication will not always be made, although it may accord with public policy that a client should not be forced to continue to retain a solicitor for the purposes of litigation in whom he has no confidence. The decisions as to what are or are not entire contracts of retainer, and in what circumstances they may be terminated, involve no more than the application to solicitor-client contracts of principles generally applicable to contracts, except to the extent that questions of public policy intrude. Whether a contract in respect of the conduct of proceedings at common law (or in any jurisdiction) is an entire contract must be determined by reference to the circumstances of the particular case, as must the question of what terms are to be implied as to the right of the solicitor or the client to terminate the retainer upon due notice or otherwise." 79 The feature of the second retainer agreement, which suggests that the solicitors having terminated the contract were not entitled by implication to recover disbursements or costs, is the contingency arrangement. While on the one hand the solicitors by terminating the retainer had lost disbursements made and costs earned for work done, the client had lost the benefit of the contingency arrangement whereunder if the proceedings were not successful the solicitors were entitled to no costs and if the proceedings were successful the client had the benefit of future work done by the solicitors on a deferred payment arrangement. This explains the contrast between cl 14.1 which enables the solicitors to stop acting for the clients in described circumstances, including the relevant circumstance that the solicitors in their absolute discretion decide to cease to act, and cl 14.3 which enables the clients to terminate the agreement but not in a way which will "affect the clients' responsibility to pay costs to the solicitors to the time of termination". What this responsibility may be is not explained. Where the clients terminated the solicitors were to be able to recover for costs incurred up to the date of termination. 80 On the other hand, if the solicitors decided to exercise their power to stop acting for the clients and effectively terminated the second retainer agreement, it was not intended that by that means they could circumvent the contingency arrangement under which they agreed to forego receipt of their costs until they brought the proceedings to a successful outcome. To imply a term to the contrary would subvert the parties' intention. 81 Grounds 3 and 4 of the amended notice of appeal were directed to claims based on quantum meruit. An immediate difficulty with such claims is that they defy the terms of cl 2.1 in the second retainer agreement that the clients' obligation to pay the solicitors' costs is contingent on the successful outcome of the matters. Further, claims to restitution are inconsistent with the provisions of cl 14 which enable the solicitors to stop acting for the clients but, as I have said, with the result that contractually they can recover nothing for costs. The appellants relied upon the decision of the High Court in Pavey & Matthews Proprietary Ltd v Paul (1987) 162 CLR 221. In that case the Court held that a licensed builder was not prevented from bringing an action upon a quantum meruit, for the value of work done and materials supplied under an oral building contract, by s45 of the Builders Licensing Act 1971 (NSW) which made the contract not enforceable by the builder against any other party to the contract unless the contract was in writing signed by the parties. The majority in that decision exposed the true basis of the action on a quantum meruit, not as an implied contract, but as the execution of work by one party and the acceptance of that work by another. The claim was for unjust enrichment arising from the defendant's acceptance of the benefits accruing to the defendant from the plaintiff's performance, in that case on the terms of an unenforceable oral contract; see generally at 227 per Mason and Wilson JJ and at 253, 256-7 and 263 per Deane J. At 256 Deane J, speaking of the tendency of common lawyers to speak in terms of implied contract rather than in terms of an obligation imposed by law, said: "That tendency should not be allowed to conceal the fact that, in that category of case, the action was not based upon a genuine agreement at all. Indeed, if there was a valid and enforceable agreement governing the claimant's right to compensation, there would be neither occasion nor legal justification for the law to superimpose or impute an obligation or promise to pay a reasonable remuneration. The quasi-contractual obligation to pay fair and just compensation for a benefit which has been accepted will only arise in a case where there is no applicable genuine agreement or where such an agreement is frustrated, avoided or unenforceable. In such a case, it is the very fact that there is no genuine agreement or that the genuine agreement is frustrated, avoided or unenforceable that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution." 82 In this case, there was a retainer agreement whereunder, excluding the champertous provisions, the appellants were entitled to recover their costs at an hourly rate for themselves and counsel and their expenses or outgoings. But the agreement legitimately made recovery contingent upon a successful outcome of the matter, as the appellants conceded, on the assumption that the appellants continued to act for their clients until there was an outcome. Furthermore, properly understood, the parties deliberately made no provision for the appellants to be paid anything if, pursuant to cl 14, the solicitors decided to stop acting for their clients before that outcome was achieved. In Mason and Carter, Restitution Law in Australia, (1995) para [1228] 477-8, in a section dealing with restitution for non-monetary benefits, the learned authors point out that in analysing the right to restitution the contractual allocation of risk must not be forgotten. They say: "All contracts are affected by a risk that the contract will be discharged prior to performance. The fact of discharge indicates that a risk has materialised. Cases of consensual discharge illustrate that contracting parties may themselves cause the risk to materialise. Discharge (without breach) under a contractual term occurs pursuant to a particular risk allocation, since the parties agreed in advance that they would not be bound on the occurrence of the event which activates the term. Although discharge by frustration, as an example of discharge by operation of law, assumes that the parties did not allocate the risk that the frustrating event would occur, it is nevertheless true that, at the moment before frustration, the parties were governed by their own particular allocation of risk. This is important, because it means that all the performance acts which occurred before the event were given and received under an agreed allocation. It is clearly relevant to claims for restitution based on performance prior to the discharging event. If the parties have expressly dealt with the impact of discharge on the performance rendered prior to discharge, their agreement governs the matter and no issue of restitution arises. This is very common in cases of consensual discharge, and not unusual where discharge is pursuant to a contractual term." 83 In para [1233] at 485, the learned authors refer to the South Australian decision of Independent Grocers Co-operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525. In that case the plaintiff accepted an appointment as a superannuation fund administrator and consultant actuary and agreed to promote a superannuation fund. The fund did not proceed, due to circumstances for which the defendant was not contractually responsible. The terms of the plaintiff's appointment stated that no remuneration other than that set out would be paid, and the South Australian Full Court refused to imply a term that the plaintiff would be paid reasonable costs and expenses if the fund did not materialise. However, the contract was treated as having been discharged without breach, and the majority of the court held that a claim for reasonable remuneration succeeded. The authors remarked that the case is important in acknowledging that unjust enrichment does not require a tangible benefit, but concluded: "However, the contractual allocation of risk, which gave effect to the understanding of the parties that the fund might not go ahead, makes the decision to award restitution questionable. Accordingly, we agree with the dissenting judgment of Duggan J in which that claim was rejected." 84 In Independent Grocers Co-operative at 539 Legoe J said that he had perused the reasons of the dissenting judge, Duggan J, and went on: "I do not agree, with respect, that the circumstances here are such as to compare them with 'some agents and consultants [who] are prepared to receive remuneration only if the venture proceeds or is successful. They take the risk that for one reason or another the venture will not reach fruition'."

It that be right the South Australian case is distinguishable from the present because here, quite clearly, the appellants were prepared to receive remuneration only if there was a successful outcome of the Freehills proceedings and took the risk that for one reason or another the venture would not reach fruition. 85 In my opinion, the appellants are not entitled to recover anything from their clients in contract or on a quantum meruit. The terms of the second retainer agreement properly construed make that plain. Accordingly, in my opinion, grounds 3 and 4 of the amended notice of appeal fail. The Ten Point Plan; September 1999 (Grounds 1(c), 5, 6 and 7) 86 McClellan J was of opinion that, after the consent orders made pursuant to the Ten Point Plan, the appellants would pursue any claim which they believed they had for remuneration from the Roach companies by the mechanism provided in the Ten Point Plan. His Honour said: "It was essential that Smits Leslie would not litigate those claims. There was otherwise no purpose to that agreement and a term to that effect should be implied. Indeed, the correspondence of 16 September between Smits and Cussen makes plain that Smits Leslie accepted that they would prove their claims in the liquidation rather than pursue litigation. However, there was no agreement that they would not pursue claims against Roach." 87 His Honour observed that although the Ten Point Plan represented a concluded agreement between the Roach companies and Smits Leslie whereby Smits Leslie could seek to recover in the liquidation of the companies, there could not be any recovery unless the Roach companies succeeded in the Freehills proceedings. Otherwise there were no funds available. McClellan J said: "290 By amending the proceedings to sue the Roach companies, not on the September 1999 agreement, but on the earlier retainers and agreements, Smits Leslie acted in a manner contrary to the September 1999 agreement. Although in February 2002, the pleading was amended to include a claim for specific performance, until that time, the claim made was for recovery pursuant to the previous agreements. 291 If, as I have found, the September 1999 agreement included a forbearance to sue, the bringing of the proceedings was a repudiation of the agreement. 292 At my request, consideration was also given to whether the September 1999 agreement, which sought to compromise agreements which I have found to be unenforceable, would for that reason, be unenforceable. As the agreement by clause 8 sought to preserve a prospective entitlement in Smits Leslie to ten percent of the claim proceeds, it was also argued that the September agreement was itself champertous. 293 Smits Leslie submit that as the enforceability of the September agreement was not the subject of any pleading which raised issues of champerty, either in relation to the retainer agreements, or the agreement itself, the court should not entertain the Roach submission. Although a court must be alert to an illegality and, in some circumstances, must itself raise the issue (see Mason and Carter Restitution Law in Australia para 2603 and the cases referred to), this is not such a case. As the matter was not pleaded and, as will become apparent, is not essential to the manner in which I have determined the proceedings, it need not be considered further. Complexities would immediately emerge, not least being whether an estoppel would arise from the position taken in the proceedings before Windeyer J and from the acceptance of the Smits Leslie documents. Whether the parties should have leave to tender further evidence relevant to these issues would also have to be considered. 294 Smits Leslie submit that even if the bringing of the proceedings against the companies was a repudiation of the Ten Point Plan, in the absence of any acceptance by the companies it cannot be relied upon. In response, the Roach interests submit that they have always asserted that there was no agreement. The original defence did not plead the September 1999 agreement as a defence to the claim and in addition, the final form of the defence pleads repudiation and abandonment. Although there can be no abandonment (there was no agreement to that effect), the parties joined issue as to the right of Smits Leslie to recover under the agreements which preceded the September agreement. 295 I am of the opinion that this submission is sound. As the Roach interests did not attempt to plead the September agreement in answer to the Smits Leslie claim, their act of repudiation was accepted. 296 As a consequence, Smits Leslie fail in all their claims." 88 Ground of appeal 1(c) is not consistent with what the trial Judge said in para 293 of his reasons for judgment. He made no finding that the Ten Point Plan was illegal or unenforceable and I need not consider this further. 89 On 3 March 2000 the appellants amended the summons in these proceedings to join the Roach companies as defendants and to rely in their claim for damages against them on an alleged repudiation of the second retainer agreement; see paras 2, 4, 7 and 9 of the amended summons. Professor Carter in Breach of Contract, 2nd ed at 701 adopts the following meaning of the word "repudiation" in this context: "a repudiation of obligation occurs when a party to a contract clearly indicates an absence of readiness or willingness to perform contractual obligations if the absence of readiness or willingness satisfies the requirement of seriousness." The appellants did not suggest that the Ten Point Plan was not, as McClellan J found, an agreement by them to pursue any claim they believed they had for remuneration from the Roach companies by the mechanism provided in the Ten Point Plan. In return the liquidators of the companies were to admit the appellants' proof of debt for $500,000 as unsecured creditors in the liquidations. It was common ground that the liquidators had failed to do this. The point was that the appellants were not seeking to enforce the Ten Point Plan at that time but were seeking to recover damages from the Roach companies for their alleged repudiation of the second retainer agreement. It was not until February 2002 that the appellants further amended the summons to seek an order for specific performance of the Ten Point Plan. I have no difficulty in accepting that the appellants by seeking to revive or institute a claim against the Roach companies for repudiation of the second retainer agreement indicated an absence of readiness or willingness to abide by the Ten Point Plan. 90 On the other hand, it is not clear to me that the Roach interests accepted the repudiation. Again to adopt the language of Professor Carter at 240, para 750: " 'acceptance' of a repudiation of obligation means an election to terminate the performance of the contract at the time when the repudiation is operative." 91 On 9 October 2001 the Roach companies filed a defence described as an Alternative Defence of Accord and Satisfaction which took the following form: "25 The Plaintiffs have alleged the existence of an agreement made on or about 16 September 1999 between the Plaintiffs and the Defendants, the effect of which was to compromise and settle the Plaintiffs claims in these proceedings. Particulars Letters dated 11 October 2000 and 2 March 2001 addressed to the solicitors for [Mr Roach]. 26 The agreement is alleged to arise out of a letter from Neil R Cussen to [Mr Roach], the [solicitors] and others dated 15 September 1999 and/or a letter from the [solicitors] to Kevin Shirlaw and Neil Cussen dated 16 September 1999. 27 The [Roach companies] have, in their cross-claim, denied that there was any agreement of the kind referred to in paragraph 26 above, which denial they repeat for the purpose of this Defence. 28 If (which is denied) there was an agreement of the type alleged by the [solicitors], then by virtue of that agreement the Defendants were discharged from any indebtedness or obligation in respect of the claims made herein." 92 With due respect this was not an acceptance of the appellants' repudiation of the second retainer agreement. In part, the alleged accord and satisfaction affirmed and relied on the existence of the Ten Point Plan. On 25 February 2002, by their second further amended cross-claim the Roach companies asserted repudiatory breach by the appellants of the Ten Point Plan and their election to treat it as being at an end (paras 37 and 38). This was put as an alternative to a claim for a declaration as to non-existence of the Ten Point Plan. However, the repudiation was no longer operative because on 18 February 2002 in their third further amended summons the appellants had sought specific performance of the Ten Point Plan. 93 With due respect it was not correct to say that the Roach companies had not attempted to plead the Ten Point Plan as an answer to the appellants' claim. On 9 October 2001 they pleaded accord and satisfaction based on it. 94 Apart from the Roach companies' alleged acceptance of the appellants' repudiation of the Ten Point Plan, the companies advanced no answer to the appellants' claim for specific performance of the Ten Point Plan. Accordingly, I would uphold grounds 7 and 8 of the amended notice of appeal.

Costs [Ground 10 of the appeal] 95 McClellan J, for reasons given in a judgment of 6 August 2002, ordered the appellants to pay the respondents' costs of the proceedings after 19 September 2000 on an indemnity basis. His Honour found that by letter dated 19 September 2000, which was marked "Without prejudice save as to costs", the respondents offered to settle the proceedings "on the basis that a proof of debt by your firm in the amount of $375,000 will be admitted in the winding up of [the Roach companies] in the event that they are successful in the Freehills proceedings." McClellan J said: "It must be remembered that when senior counsel for the plaintiffs opened the proceedings, he effectively disavowed all claims except a claim in the sum of $500,000 or for remuneration for costs on a quantum meruit basis. Having regard to the fact that that was the claim an offer to admit the plaintiffs to an amount of $375,000 in the winding up reflected a sensible if not generous compromise by the defendants." 96 The trial Judge was satisfied that, as the defendants had succeeded in resisting the plaintiffs' claim, an order for costs in their favour should be made and these costs should be on an indemnity basis after 19 September 2000. The appellants appeal against this order. 97 Since, in my opinion, the appellants should have succeeded at trial on their claim against the Roach companies for specific performance, the trial Judge's costs order must necessarily be set aside. Bearing in mind what the trial Judge said about the way in which the appellants opened the proceedings, it is appropriate that the appellants should pay Mr and Mrs Roach's costs of the proceedings and of this appeal and the Roach companies pay one-half of the appellants' costs of the proceedings and of this appeal but, in respect of those costs, have a certificate under the Suitors' Fund Act 1951 if so entitled.

Set aside orders 1-4 made by McClellan J on 6 August 2002;

The appellants to pay Mr and Mrs Roach's costs of the proceedings and of this appeal on a party and party basis.

The Roach companies to pay one-half of the appellants' costs of the proceedings before McClellan J and of this appeal but in respect of the costs of this appeal to have a certificate under the Suitors' Fund Act 1951 if so entitled. 98 IPP JA: I agree with Sheller JA. 99 BRYSON JA: I agree with Sheller JA. **********

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Builders Licensing Act 1971(NSW)

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Cases Cited (26)