Waldemar Drexler t/as Drexler & Partners Litigation Lawyers v Karabay & Ors

Judgment 1HIS HONOUR: These proceedings raise issues as to how funds that have been paid into Court should be dealt with. The claims arise from proceedings that were brought by the first defendant, Mr Karabay, against the third defendant, Mr Carr and the fourth defendant, Mr Kramer, for damages for alleged professional negligence in the conduct of an earlier personal injuries claim. 2The proceedings have a long and unfortunate history. Mr Karabay suffered an injury in July 1999, after falling on a basketball court during a trip organised and conducted by the University of Western Sydney. He retained Mr Carr as his solicitor to act for him in the personal injuries proceedings. Those proceedings were commenced in the District Court in 2002. 3On 25 March, 2003, the proceedings were dismissed in the District Court for non-compliance with certain procedural directions and the failure of Mr Karabay's legal representative to appear at a subsequent hearing to show cause as to why the proceedings should not be dismissed. 4The fourth defendant, Mr Kramer, received instructions from Mr Karabay to act in those personal injuries proceedings in April, 2005. Mr Kramer entered into an agreement called a Client Service Agreement with Mr Karabay on 6 June, 2005. That agreement referred to his instructions to act for Mr Karabay, "In connection with your claim for compensation for injuries you sustained in an accident on 21 July, 1999." The agreement set out the basis upon which Mr Kramer, or barristers who might be retained in the action, would be paid. The agreement included a term: "If you lose this case then we will not charge you any amount for legal costs or [sic] we will charge you any amount for expenses incurred on your behalf ... a bill for all our charges and expenses payable only on successful outcome of the Work will be given to you after completion of the Work." 5On 20 October, 2005, Mr Kramer filed an application in the District Court to restore Mr Karabay's matter. That application was successful and orders were made in the District Court for the proceedings to be reinstated. However, an appeal was successfully taken by the defendants in the personal injuries proceedings to the Court of Appeal. (See Torrac Nominees Pty Ltd v Karabay; UWS Macarthur Sports & Recreation Association Inc v Karabay [2007] NSWCA 96; (2007) 69 NSWLR 669). In substance, the Court of Appeal held that the rule under which the order for reinstatement was purportedly made had been repealed on the introduction of the Civil Procedure Act 2005 (NSW) and the Uniform Civil Procedure Rules in August 2005, and the District Court had no power to reinstate the proceedings. 6Mr Kramer advised Mr Karabay that he had a right to apply for special leave to appeal to the High Court from the Court of Appeal's judgment, but he did not recommend that course. He instead advised that Mr Karabay had a right to pursue compensation from Mr Carr's firm, Forshaws Neill, for professional negligence. In his letter of advice of 17 May, 2007, Mr Kramer stated that the Court of Appeal's judgment might give rise to a possible conflict of interest with respect to his continuing to act for Mr Karabay. He had discussed that with Mr Karabay and Mr Karabay's sister. Mr Kramer advised that whilst there was a potential for conflict of interest, if Mr Karabay was happy for him to act, being aware of that potential conflict, he was prepared to do so, and if the potential conflict in fact crystallised into a problem, then the matter would have to be reviewed. 7Proceedings against Mr Carr were commenced in January 2008. On 16 May, 2008, Mr Kramer advised Mr Karabay that he had concluded that he could no longer continue to act for Mr Karabay because he was concerned that there was a potential conflict of interest. 8Mr Karabay's file was taken over by Mr Pain who practised as a solicitor under the name of David Pain & Co. Mr Pain started acting in about June 2008. 9 On or about 6 June 2008 an agreement was entered into between Mr Karabay, Mr Kramer and Mr Pain. The agreement recited that its purpose was to secure the payment of Mr Kramer's unpaid costs and for the release of Mr Karabay's file to David Pain & Co, reserving Mr Kramer's right over any moneys that might be paid or become payable to the client. 10Clause 1 of the agreement provided that: "Subject to the client's statutory right to assessment, the client agrees to pay such of the former solicitor's [Mr Kramer's] costs as he might be liable to pay taking into account the work necessarily undertaken by Mr Kramer and excluding any work that was not reasonable or necessary in the circumstances and excluding any work undertaken by Mr Kramer which may have arisen out of negligence on his part." 11David Pain & Co undertook to pay within 21 days of the receipt of cleared funds of Mr Karabay's, the costs and interest were applicable owed to Mr Kramer as might be determined in accordance with the clause I have just summarised or pursuant to the exercise of the statutory right to assessment. 12David Pain & Co acted for Mr Karabay in the professional negligence proceedings from about June 2008 to about 28 July 2009. Mr Kramer was joined as a second defendant to the professional negligence proceedings. 13David Pain & Co entered into a costs agreement with Mr Karabay on 10 July 2008 and made a further agreement with him on 20 April 2009. The first of the costs agreement contained an estimate of David Pain & Co's professional fees and an estimate of expenses and disbursements. The second of the costs agreements contained an estimate of professional fees but no estimate of expenses and disbursements. 14Counsel for Mr Pain accepts that for that reason David Pain & Co did not comply with its obligations of disclosure under the Legal Profession Act 2004 (NSW). The consequence of that is that until those costs are assessed, Mr Karabay is not liable to pay costs and proceedings cannot be maintained against him for their recovery. Prima facie, on an assessment, the costs of David Pain & Co would be assessed in accordance with the costs agreement (s 319(1)(b)). 15Mr Karabay deposed that some time before about July 2009 he was told by Ms Ross-Maranik, the solicitor at David Pain & Co's office acting in the matter, that, "As no barrister would do my work, therefore, I should hire another firm of solicitors." 16Ms Ross-Maranik gave evidence, which I accept, that the retainer of David Pain & Co was terminated by Mr Karabay because Mr Karabay advised that he had lost confidence in the barrister retained by David Pain & Co and that because he had lost confidence, he considered he should find a new solicitor. Mr Karabay contacted Ms Ross-Maranik and told her who he had engaged as his new solicitor. She prepared appropriate notes for the transfer of the files. 17The new solicitor retained was a solicitor with a firm known as Drexler & Partners. They are the plaintiffs in the present application. 18On the transfer of the file from David Pain & Co to Drexler & Partners, an agreement was entered into called a tripartite agreement to a similar effect to the previous tripartite agreement made between Mr Kramer, David Pain & Co and Mr Karabay. Mr Karabay and Drexler & Partners acknowledged that Mr Karabay had entered into a similar agreement with Mr Kramer and David Pain & Co. Drexler & Partners and Mr Karabay agreed to be bound by that agreement. They agreed to the obligation arising under that agreement for the payment of such fees as may be properly payable to Mr Kramer. 19It was agreed that if Drexler & Partners ceased to act for Mr Karabay for any reason, Mr Karabay and that firm undertook to enter into a similar agreement with any future firm of solicitors. The agreement of 13 July 2009 was also for the purpose of securing payment of David Pain & Co's unpaid costs. Those were estimated in an amount of $72,052.50 for solicitors's costs and counsel's fees, but the obligation of Mr Karabay to pay that sum was subject to his statutory right to assessment. David Pain & Co had provided a detailed memorandum of their costs and copies of counsel's fee notes to Mr Karabay on 8 July 2009. 20Drexler & Partners acted in the matter between July 2009 and about the end of 2010. They have not provided a detailed draft bill but have provided a statement of their charges, including expenses, for acting for Mr Karabay in the proceedings of $120,810. Mr Kramer had rendered a bill on 8 August 2011 for his professional costs and disbursements (including counsel's fees) for acting in the professional negligence claim in the amount of $47,189.20. Thus, excluding a claim for interest made by David Pain & Co, the amount of solicitors' costs and disbursements, including counsel's fees, claimed by the three firms of solicitors in question in relation to the professional negligence proceedings total approximately $240,000. 21Mr Perivolaris, a partner of Drexler & Partners, deposed that that firm ceased to act for Mr Karabay on or about November 2010. Drexler & Partners wrote a letter to Mr Karabay on or about 9 November 2010 in which they advised that they considered that they had to terminate their retainer and were in the process of filing a notice of ceasing to act (presumably a notice of intention of ceasing to act) which would be filed and served within seven days. 22Drexler & Partners terminated the retainer because Mr Karabay refused to accept the advice of counsel who had been retained in the matter. They reported that counsel, who had been acting on a no win/no fee basis, were no longer willing to be involved in the matter following the rejection of their advice. Drexler & Partners noted that counsel had the right to terminate their involvement for that reason, having regard particularly to the risks associated in running a lengthy trial. They referred to earlier expressed dissatisfaction by Mr Karabay with the advice and expertise of counsel chosen. Drexler & Partners advised that counsel had terminated their retainer. They had come to the view that they had no choice but also to advise that Drexler must cease to act on Mr Karabay's behalf. 23It was a term of the retainer of Drexler & Partners that Drexler & Partners could stop acting for Mr Karabay if he indicated to that firm that the firm had lost his confidence, or if he failed to accept that firm's advice or counsel's advice in any aspect of the matter. 24I am satisfied that Mr Karabay had failed to accept at least counsel's advice and had indicated that he had lost confidence in Drexler & Partners and that that firm was justified in terminating the retainer. 25Following the termination of the retainer of Drexler & Partners, Mr Karabay's case was taken up by a Queensland solicitor, Mr Clough of Paul Clough & Co. He acted for Mr Karabay in the proceedings which were heard by Hidden J and determined on 7 November 2012. Mr Karabay's claim against Mr Carr succeeded; his claim against Mr Kramer was dismissed. But Mr Karabay received only a small part of the damages that he claimed. 26The damages claim made by Mr Karabay was for his lost cause of action for damages in respect to his personal injuries. The damages claimed exceeded $2 million plus an indemnity in respect of costs and liabilities in respect of the earlier proceedings of $203,000. The damages awarded were $159,402.96 in respect of the lost cause of action and $118,247.77 in respect of cost liabilities of the District Court action and subsequent Court of Appeal proceeding, that is the first appeal, which had been agreed in the sum of $118,247.77, less a suitors fund contribution of $20,000 in respect of costs paid by Mr Karabay to the defendants in the personal injury proceedings. (See Karabay v Carr [2014] NSWCA 143 at [21].) 27The agreed amount of $118,247.77 in respect for costs liabilities which was included in the damages recovered by Mr Karabay included the sum of $33,365 for costs of Mr Kramer. In the present application, Mr Karabay disputes that he is liable to pay Mr Kramer the figure of $33,365 because Mr Kramer acted for him in the original proceedings on the basis that he would not charge any fees or expenses unless Mr Karabay succeeded. In fact Mr Karabay failed. I do not think it lies in Mr Karabay's mouth to make that contention when he has recovered damages which reflect his acceptance that he has such a liability to Mr Kramer. That agreement was evidently made during the course of the proceedings to which Mr Kramer was a party. The same damages would have been sought against Mr Carr and Mr Karabay because it would have been alleged that but for the alleged negligence of either or both of them, the liabilities asserted would not have been wasted. I think that Mr Karabay is estopped as against Mr Kramer from disputing his liability to pay Mr Kramer's costs of $33,365. 28The Court of Appeal varied costs orders made in Mr Karabay's favour against Mr Carr, but the effect of the costs orders is that Mr Carr is liable to pay Mr Karabay's costs of the professional negligence proceedings on the ordinary basis. Mr Karabay is liable to pay Mr Kramer's costs. 29On 9 September 2014 the insurers for Mr Carr paid the sum of $244,590.07 into Court. This represents the amount of damages for which Mr Carr is liable at Mr Karabay's suit. The amount of the costs payable by Mr Carr have not yet been agreed or assessed. 30In the present application Mr Kramer, Mr Pain and Drexler & Partners assert an equitable lien over the funds in Court. The lien claimed is a particular lien, also known as a fruits of litigation lien, described by Jordan CJ in Ex Parte Patience; Mackinson v The Minister (1940) 40 SR (NSW) 96 at 100 as follows: "A solicitor has no lien for his costs over any property which has not come into his possession. If, however, as the result of legal proceedings in which the solicitor has acted for the client, the client obtains a judgment or award or compromise for the payment of money, although the solicitor acquires no common law title to his client's right to receive the money or to any part of that right, he acquires a right to have his costs paid out of the money, which is analogous to the right which would be created by an equitable assignment of a corresponding part of the money by the client to the solicitor. That is to say, the solicitor has an equitable right to be paid his costs out of the money; and if he gives notice of his right to the person who is liable to pay it, only the solicitor and not the client can give a good discharge to that person for an amount of the money equivalent to the solicitor's costs." 31Mr Kramer asserts the lien both in respect of the amount of $47,189.20, which was the subject of his invoice in professional negligence proceedings, and for $33,365 for his costs in respect of the earlier proceedings. Different considerations apply to each of those claims. 32None of the three parties, that is Mr Kramer, Mr Pain and Drexler & Partners, claim that they are entitled to payment of a specific sum out of the moneys held in Court in respect of the costs incurred in running the professional negligence claims for the periods for which they were acting for Mr Karabay. They all accept that no sum could be recovered from Mr Karabay until their costs are either agreed or assessed and a certificate of assessment issued under the provisions of the Legal Profession Act. In no case was there adequate disclosure of the estimates of costs which would entitle the solicitors to immediate recovery. That, however, is not a bar to the assertion of a particular lien. 33Mr Clough has not made a claim to the fund in Court. That is to say, he has not sought to assert an equitable lien over that fund. But he does say that the costs of all of the solicitors should be assessed, including his costs, and, as I understood his submissions, he foreshadowed that he might in the future make such a claim if it were necessary to do so. 34Until there have been delivered at least detailed bills from each of the solicitors, it is highly unlikely that the insurers for Mr Carr will agree on an amount for which Mr Carr is liable under the costs order and until detailed bills are provided, it seems unlikely that Mr Karabay will agree to an amount of costs for which he might be liable to at least the three firms of solicitors who are making the present claims. In all likelihood, those claims will have to be determined by assessment. 35The first question is whether or not the claimants are entitled to a lien over the fund in Court. Mr Clough made a submission from the bar table that the files he eventually received contained no useful information and were not of any assistance in the ultimate conduct of the litigation. However, there was no evidence to that effect. Counsel for Mr Karabay accepted, I think correctly on the materials in evidence, that there was a sufficient causal link between the work done by each of the firms of solicitors and the resulting payment of moneys into Court to entitle the solicitors to a lien over the fruits of the litigation. For a solicitor to be entitled to such a lien, the fruits of the litigation must be produced by the industry of the solicitor (e.g. Grogan v Orr [2001] NSWCA 114 at [62]) but that is not an exacting standard. It is not necessary to demonstrate that a judgment came about as a result of specific efforts, although some causal link must be established (Jackson v Richards [2005] NSWSC 630 at [47] and following). 36It was submitted, as I understood it, by counsel for Mr Karabay, and I think by Mr Clough speaking in his own right, that the solicitors were not entitled to a lien because there had not been adequate disclosure of the estimated costs and because no detailed bills had been rendered, although a detailed bill was rendered in the case of Mr Pain. These are not grounds for rejecting the claim to an equitable lien. See, for example, G Dal Pont, The Law of Costs, 3rd ed at [27.12] where the learned author says: "The existence of the lien itself is not dependent upon the process of taxation or assessment having been either commenced or completed." 37Professor Dal Pont refers to differing first instance authority in this State on the question whether a lien would be lost if there is a failure by the solicitor to comply fully with disclosure requirements. He expresses the view, which in my opinion is correct, that as the Legal Profession Act does not identify the loss of the lien as an outcome of failing to fulfil the disclosure requirements, the preferable view is that non-disclosure does not oust either the client's liability to pay the costs, or the lien to secure them (at [27.14]). 38Counsel for Mr Karabay also submitted that it should be a condition of any enforcement of the lien that the solicitors undertake to do what is necessary on their part to prepare bills of costs in a form which will be suitable to be submitted for assessment. Without their having done that work, Mr Karabay, and Mr Clough acting for him, are seriously hindered in pursuing the claim for costs against Mr Carr. I think there is considerable force in that submission and counsel for Drexler & Partners, Mr Kramer and Mr Pain, indicated that their clients would undertake to do what was necessary for the preparation of such bills. The file will be needed for that purpose. It is presently with Mr Karabay, under storage conditions which were of some concern. I understand that it is agreed that the files will be delivered in the first instance to the offices of Drexler & Partners. 39Counsel for both Drexler & Partners and Messrs Kramer and Pain submitted that the quantum of the costs to which their clients are entitled should not be determined by the process of assessment under the Legal Profession Act with consequent rights reviewed by an appeal panel and potential appeal to the Court, but should be determined by a costs assessor appointed as a referee who should provide a report to the court. Mr Karabay does not agree with that proposal. In my view, there is no sufficient basis for depriving Mr Karabay of his rights under the Legal Profession Act of assessment under the provisions of that Act, review by an appeal panel, if required, and potential appeal to a court from the appeal panel. Indeed I think there are advantages in proceeding under the Legal Profession Act even if there were power, which is a question which has not been the subject of serious submissions, to order otherwise. 40The reason for that is that a reference to a costs assessor as referee made in the present proceedings, assuming there is power to make such a reference for that purpose, could bind Mr Karabay and the three firms of solicitors in question but it would not bind Mr Carr or his insurer. On the other hand, if the quantum of costs could not be agreed, counsel accepted that a reference could be made under the Legal Profession Act for one assessment of both the costs payable by Mr Carr and the costs payable by Mr Karabay to each of the solicitors who have acted for him. In my view, proceeding under the Act is the appropriate course. 41The consequence is that no orders can be made for the payment of moneys out of Court until the quantum of the costs payable by Mr Karabay to each of the solicitors making claims on the funds has been determined. At present no question of priority as between the solicitors arises. Each of Mr Kramer, Mr Pain and Drexler & Partners acknowledge that by reason of the tripartite agreements, if not for other reasons, Mr Kramer has the first claim on the fund for the costs to which he is entitled, followed by Mr Pain, and followed by Drexler & Partners. 42As I have said, Mr Clough has not yet made a claim. I think it is possible that Mr Clough might make a claim after assessments have been made. But it is to be hoped that at least by the time the insurers pay a further sum for the costs payable by Mr Carr, there will be sufficient funds to meet the claims of all the solicitors involved. If not, questions of priority might have to be considered at a later date. 43Drexler & Partners seek a declaration that they are entitled to a lien over the moneys paid into Court on behalf of Mr Carr and relevantly they seek an order that the Registrar pay out of the proceeds the amount of fees, charges and disbursements properly incurred by the plaintiffs, that is to say by Drexler & Partners, in their conduct of the proceeding on behalf of Mr Karabay in an amount assessed or otherwise agreed. I think Drexler & Partners are entitled to the declaration, but until the quantum of the costs for all the solicitors have been paid or agreed, I do not think I should make an order for payment of moneys out of Court. 44Messrs Pain and Kramer also sought declarations that they are entitled to a lien over the proceeds paid into Court and in their cross-summonses; or they sought orders for payment of specific amounts or for the payment of the fair and reasonable amount of costs incurred as agreed or assessed. Again, I do not think I should order payment of moneys out of Court at this stage, but those parties are entitled to a declaration as to their entitlement to a lien in respect of amounts that they may be found to be entitled to on agreement or assessment. 45The remaining question concerns the sum of $33,625 which cannot be the subject of a fruits of litigation lien. Counsel for Mr Kramer submitted that the claim was nonetheless analogous to a fruits of litigation lien. I do not think that the analogy is particularly close. But I do accept, for reasons I have given, that Mr Karabay cannot be heard to deny Mr Kramer's entitlement to be paid that sum. The difficulty is that Mr Kramer's entitlement to $33,625 is not secured by a lien. He stands in the position of an unsecured creditor. If the funds in Court are ultimately insufficient to meet the claims of all of those entitled to security over them, then I do not think that Mr Kramer can claim the $33,625, or interest earned on it. However, I think the Court has power to order payment of that sum, after satisfaction of claims by the solicitors to a lien over the funds in Court. 46The question of the powers of the Court to deal with moneys paid into Court was considered in some detail by Lindsay J in JKB Holdings Pty Limited v de la Vega [2013] NSWSC 501, particularly at [95] and following. His Honour said (at [102]): "... if the funds paid into court are not the subject of a pre-existing trust but are the subject of a disputed liability in debt, no party has an interest in the funds that is vested in interest or possession; each party has no more than an interest contingent upon orders of the court; and competing claimants have an interest in the funds in the sense that they are entitled to insist that the funds be properly administered and applied for the purposes for which they were paid in." (citing Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 272-273.) 47In my view, if the only relevant contest is between Mr Karabay, on the one hand, and Mr Kramer in respect of the sum of $33,625 and interest, on the other hand, due administration of the fund would require payment out to Mr Kramer. However, his right to that payment would be subject to the rights of solicitors who could claim security over the funds in Court and, accordingly, there should be no payment out at this stage. 48Having regard to the time, I will stand this matter down to a time convenient to counsel for the parties to bring in short minutes of order consistent with these reasons. Consistently with what I have said, what I have in mind is declarations that each of the three firms of solicitors are entitled to a lien over the funds in Court for the amounts of costs and expenses properly payable to them as might be agreed or determined by assessment, and noting the undertakings, the detail of which might need to be fleshed out, for the delivery of the file initially to Drexler & Partners and the preparation by the solicitors of bills of costs to enable an assessment both of costs as between solicitors and client and party/party costs. 49The parties should seek to agree on the form of orders appropriate to give effect to these reasons. If by Monday, 15 December, the parties have not been able to agree on the form of the short minutes of order, each party should provide my Associate with the form of orders and declarations proposed and I will deal with that matter on the papers in chambers. The parties can provide a short note in respect of any such differences. 50In my view, costs should follow the event. I consider that the plaintiffs and the fourth and fifth defendants have been substantially successful. Additional costs have been incurred by the second and third defendants, which I hoped could have been avoided, but for the position of the first defendant, if he would seek costs against them, I order that the first defendant pay the costs of the plaintiffs and of the second to fifth defendants. 51Mr Clough is not here to seek costs. Having regard to the position taken by Mr Clough, I make no order as to costs as between the plaintiffs and the sixth defendant. 52The second and third defendants were joined, as I understand it, because they were paying the moneys into Court which have been the subject of the application. The insurer of Mr Carr has offered an undertaking to the Court that, on the determination of the amount of costs payable by agreement or assessment pursuant to the judgment of Hidden J as varied by the Court of Appeal, that amount of costs will be paid by Mr Carr's professional indemnity insurer into Court within 28 days, or in the event of reviews or appeals within 28 days after the final determination of such reviews or appeals. 53In my view, the second and third defendants need have no other involvement in the proceedings. Their continuation as parties to the proceedings are only likely to increase costs. 54I order that the proceedings against the second and third defendants be dismissed. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 December 2014