FEDERAL COURT OF AUSTRALIA

Rafferty v Time 2000 West Pty Limited (No 3) [2009] FCA 727

COSTS – application by applicants that second to fifth respondents pay costs forthwith – unsuccessful application by second to fifth respondents for transfer of proceeding to other Registry of Court – successful application by applicants for freezing orders against second to fifth respondents – unsuccessful application by second to fifth respondents for leave to appeal from freezing orders – successful application by second to fifth respondents for vacation of trial date with order made that they pay applicants’ costs thrown away as result of vacation

Held: order that costs be payable forthwith refused – application for adjournment not delaying tactic or result of reprehensible conduct and delay not of substantial order.  

LEGAL PRACTITIONERS – costs – lien – application by cross-claimants that cross-respondent produce papers it holds – whether client or solicitor who terminated retainer – general rule where solicitor terminates retainer that solicitor required to produce client’s papers upon undertaking that they will be returned to solicitor upon completion of proceeding – exception to general rule – scope of exception

Held: order for production made – general rule where solicitor terminates retainer should be applied.

Trade Practices Act 1974 (Cth) s 51AD

Federal Court Rules O 25A, O 62 r 3

Trade Practices (Industry Codes — Franchising) Regulations 1998 (Cth)

A v B [1984] 1 All ER 265 distinguished

Airservices Australia v Jeppesen Sanderson Inc [2006] FCA 906 referred to

Australian Securities and Investments Commission v Mining Projects Group Ltd (No 3) [2008] FCA 952 referred to

Gamlen Chemical Co (UK) Ltd v Rochem Ltd [1980] 1 WLR 614 followed

Heslop v Metcalfe (1837) 3 My & Cr 183; 40 ER 894 discussed

In the Matter of an Application by Weedman (unreported, Drummond J, 17 December 1996) referred to

IO Group Inc v Prestige Club Australasia Pty Ltd [2008] FCA 1147 referred to

Ismail v Richards Butler (a firm) [1996] QB 711 distinguished

Jianshe Southern Pty Ltd v Cooktown Pty Ltd (No 2) [2007] FCA 903 referred to

McKellar v Container Terminal Management Services Ltd [1999] FCA 1639 referred to

Rafferty v Time 2000 West Pty Ltd [2008] FCA 1925 referred to

Rafferty v Time 2000 West Pty Ltd (No 2) [2008] FCA 1931referred to

Robins v Goldingham (1872) 13 LR Eq 440 discussed

Spotwire Pty Ltd v Visa International Service Association (No 2) [2004] FCA 571 referred to

Starke v Dennett [2008] 2 Qd R 72 referred to

Time 2000 Systems (Australia) Pty Ltd ACN 127 853 614 v Rafferty [2009] FCA 216 referred to

Vasyli v AOL International Pty Ltd (unreported, Lehane J, 2 September 1996) referred to

PATRICK CAMPBELL RAFFERTY, SANTORA HOLDINGS PTY LIMITED ACN 128 467 550 and KARAVILLE HOLDINGS PTY LIMITED ACN 009 439 178 v TIME 2000 WEST PTY LIMITED ACN 127 893 270, TIME 2000 SYSTEMS (AUSTRALIA) PTY LIMITED ACN 127 853 614, TIME 2000 OPERATIONS (AUSTRALIA) PTY LIMITED, EMBLETON LIMITED (A COMPANY INCORPORATED IN HONG KONG), STEPHEN GERARD DONOVAN and MADGWICKS (A FIRM)

SAD 122 of 2008

BESANKO J

9 JULY 2009

ADELAIDE

THE COURT ORDERS THAT:

1.         The second to fifth respondents pay the applicants’ costs of the notice of motion dated 8 October 2008.

2.         Upon the undertaking of Cowell Clarke to return such documents at the conclusion of the within proceedings, Madgwicks produce to Cowell Clarke within 7 days all documents, including copies, which they hold in the following categories which relate to the within proceedings:

2.1       pleadings, affidavits, orders, transcript, reasons and all other documents filed at or generated by the Court;

2.2       discovered documents of all parties; and

2.3       all other documents held on file with respect to the within proceedings, including but not limited to communications between the parties’ solicitors, file notes of telephone conversations, draft documents, witness statements and advices.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                          There are two applications before the Court in this proceeding. One application is brought by the applicants against the second to fifth respondents and the other is brought by the second to fifth respondents (and cross-claimants) against the cross-respondent. It is convenient to begin by describing the nature of the applicants’ claim against the second to fifth respondents.

Nature of the applicants’ claim against the respondents

2                          The following summary is, for the most part, taken from my reasons for an earlier judgment I delivered in this proceeding: Rafferty v Time 2000 West Pty Ltd [2008] FCA 1925.

3                          The applicants in this proceeding are Mr Patrick Campbell Rafferty, Santora Holdings Pty Limited (“Santora”) and Karaville Holdings Pty Limited (“Karaville”). Santora is a wholly-owned subsidiary of Karaville and Mr Rafferty and his wife own all of the issued shares in Karaville.

4                          The respondents in the proceeding are Time 2000 West Pty Limited (“T2W”), Time 2000 Systems (Australia) Pty Limited (“T2S”), Time 2000 Operations (Australia) Pty Limited (“T2O”), Embleton Limited (a company incorporated in Hong Kong) (“Embleton”) and Mr Stephen Gerard Donovan.

5                          The directors of T2W are Mr Rafferty and Mr Donovan, and the shareholders are Santora and T2O. T2W is the joint venture vehicle under the agreements described below. It has taken no active part in the proceeding.

6                          It is convenient to refer to the second to fifth respondents as “the respondents”. T2S is a wholly-owned subsidiary of Almere Pty Limited (“Almere”) and Mr Donovan is the sole director of T2S. Almere is a company incorporated in Hong Kong and Mr Donovan is its sole director. T2O is a wholly-owned subsidiary of Time 2000 Services Limited (previously Welltron Limited) and Mr Donovan is the sole director of T2O. Time 2000 Services Limited is a company incorporated in Hong Kong and Almere is its sole corporate director. Embleton is a company incorporated in Hong Kong, and Almere is its sole corporate director.

7                          Mr Rafferty, and companies associated with him, and Mr Donovan, and companies associated with him, entered into three agreements. The agreements embodied or reflected a proposal to exploit certain intellectual property interests (patents, patent applications and trade marks) with a view to marketing, selling and installing modular accommodation units in Western Australia and the Northern Territory. Mr Rafferty, Mr Donovan, T2S and Embleton entered into a Heads of Agreement on 8 October 2007. Mr Rafferty, Santora, T2O and T2W entered into a Joint Venture and Shareholders’ Agreement on 23 November 2007. Mr Rafferty, Santora, Karaville, T2S, T2W and Embleton entered into a Rights Agreement on 19 December 2007. It is alleged by the applicants that, under the agreements, they paid sums totalling $1.7 million to the respondents.

8                          The applicants allege that the agreements together constituted a “franchise agreement” and a “franchise system” within the meaning of the Trade Practices Act 1974 (Cth) (“the TPA”) and cll 3(1) and 4 of the Franchising Code of Conduct (“the Code”), which is a schedule to the Trade Practices (Industry Codes — Franchising) Regulations 1998 (Cth). It is alleged by the applicants that T2S was a franchisor and T2W was a franchisee. It is further alleged by the applicants that Mr Rafferty and Santora were franchisees or, alternatively, Mr Rafferty, Santora and Karaville were franchisees, being persons with an interest in the franchise within the meaning of “franchisee” in cl 3(1) of the Code. It is alleged that Embleton and Mr Donovan were associates of T2S within the meaning of cl 3(1) of the Code. It is alleged that Mr Rafferty, Santora and Karaville were not provided with the required documents under the Code by T2S or any respondent or associate of the respondents and that, in turn, the applicants did not provide to T2S the documents T2S was required to obtain from them under the Code.

9                          It is alleged by the applicants that each of the respondents contravened a mandatory industry code: s 51AD of the TPA. In addition to seeking various declarations, the applicants seek

“an order that the money paid by the applicants, or any of them, in respect of the Heads of Agreement, the Joint Venture and Shareholders’ Agreement and the Rights Agreement be repaid to the applicants by the respondent [sic], forthwith.”

10                        In their defence filed and served on 15 October 2008, the respondents denied the allegation that the agreements together constituted a “franchise agreement” and a “franchise system”. In the alternative, the respondents alleged that at no time did the applicants request the relevant documents and that the applicants were provided with the information needed in order to make an informed decision about whether to enter into the three agreements. The respondents alleged that the applicants were estopped and precluded from relying on any alleged breaches of the Code or, in the alternative, that they had waived any rights in relation to the Code.  

11                        On 19 June 2009, I gave the respondents leave to file and serve an amended defence in terms of a draft document put before the Court. For the purposes of considering the present applications, it is not necessary to set out the effect of the amendments to the defence filed and served on 15 October 2008.

The history of this proceeding

12                        The applicant commenced this proceeding on 14 August 2008. The respondents issued a notice of motion on 8 October 2008, seeking an order that the proceeding be conducted and continued in the Victoria District Registry. The applicants issued a notice of motion on 5 December 2008, seeking freezing orders against the respondents under O 25A of the Federal Court Rules.

13                        On 17 December 2008, I made an order that the application of the respondents for an order transferring this proceeding to the Victoria District Registry be refused. I further ordered that the costs of the respondents’ notice of motion be reserved to the next directions hearing (Rafferty v Time 2000 West Pty Ltd [2008] FCA 1925). On the same day, I decided that it was appropriate to make the freezing orders sought by the applicants (Rafferty v Time 2000 West Pty Ltd (No 2) [2008] FCA 1931) and those orders were made on 19 December 2008.

14                        The applicant applied for leave to appeal from the freezing orders that I made. The application for leave to appeal was heard by Lander J, who, on 4 March 2009, refused the application (Time 2000 Systems (Australia) Pty Ltd ACN 127 853 614 v Rafferty [2009] FCA 216).

15                        I held a directions hearing on 20 May 2009. On that occasion, I made the following orders, relevantly:

“1.        Each party is to file the affidavits containing the evidence in chief on which it or he intends to rely at the trial on or before 4pm on Wednesday, 17 June 2009.

2.         The trial be set down for Monday, 6 July 2009 at 10am (5 days set aside).”

16                        The respondents issued a notice of motion on 17 June 2009, seeking a number of orders. First, they sought an order that they have leave to file an amended defence and a cross-claim against the applicants. There was no existing cross-claim against the applicants. Secondly, they sought an order that Madgwicks (a firm) be joined as an additional cross-respondent to the proceeding and that they have leave to issue and serve a cross-claim against Madgwicks. Thirdly, they sought an order that Madgwicks produce the papers which the firm holds. The precise terms of the order sought against Madgwicks are set out in [26] below. Fourthly, they sought an order that the time within which they were permitted to file the evidence in chief on which they intend to rely at the trial be extended. Finally, they sought an order that the trial date be vacated.

17                        The respondents’ notice of motion came on for hearing before me on 19 June 2009. On that day, I made the following orders:

“1.        Leave be given to the second to fifth respondents to amend the defence in the form annexed as ‘RLC2’ to the affidavit of Robert Lawrence Comazzetto sworn on 17 June 2009.

  2.       Leave be given to the second to fifth respondents to institute a cross-claim against Madgwicks.

  3.       The trial date of 6 July 2009 at 10am be vacated.

  4.       The trial date of the proceeding between the applicants and second to fifth respondents be fixed for Monday, 7 September 2009 (two weeks set aside).

  5.       The argument on the first order set out in the draft minutes of order handed up by the respondents will take place on Tuesday, 23 June 2009 at 2:15pm.

  6.       The second to fifth respondents pay the applicants’ costs of the notice of motion dated 17 June 2009 and any costs thrown away as a result of the vacation of the trial date.

  7.       The question of whether an order should be made that those costs be payable forthwith be reserved to next Tuesday.”

The “first order” referred to in paragraph 5 of the above orders is the order sought by the respondents against Madgwicks that the latter produce the papers the firm holds.

18                        On 23 June 2009, the applicants sought, in addition to an order that the costs referred to in paragraph 6 above be paid forthwith, the following orders:

“2.        The second to fifth respondents pay the applicants’ costs of the respondents’ notice of motion dated 8 October 2008 to transfer these proceedings to another registry payable forthwith.

  3.       All previous costs orders in favour of the applicants be payable forthwith, including those costs orders in action SAD 6/2009.”

As I understand the position, it is not disputed that the respondents should pay the applicants’ costs of the notice of motion dated 8 October 2008, and I will make an order to that effect. The only reason such an order has not been made previously is that it was overlooked by the applicants. For the reasons set out below, I will not make an order that the costs be paid forthwith. The action referred to in paragraph 3 above, namely, action SAD 6 of 2009, is the action in which the respondents sought leave to appeal against the freezing orders which I made (see [14] above). Costs orders have been made in that proceeding. Again, for the reasons set out below, I will not make an order that the costs be paid forthwith.

The application by the applicants that the respondents pay costs forthwith

19                        Order 62 r 3 of the Federal Court Rules provides as follows:

“(1)      The Court may in any proceeding exercise its powers and discretions as to costs at any stage of the proceeding or after the conclusion of the proceeding.

  (2)      Where the Court makes an order in any proceeding for the payment of costs the Court may require that the costs be paid forthwith notwithstanding that the proceeding is not concluded.

  (3)      An order for costs of an interlocutory proceeding shall not, unless the Court otherwise orders, entitle a party to have a bill of costs taxed until the principal proceeding in which the interlocutory order was made is concluded or further order.”

20                        The general rule, which is embodied in O 62 r 3(3), is that the costs of an interlocutory proceeding are not to be taxed until the principal proceeding is concluded or until further order. The general rule serves a number of purposes. First, it avoids multiple taxations in a proceeding. Secondly, it avoids the apparent unfairness which may arise where, at an early stage of a proceeding, a party who is ultimately successful is required to pay costs to a party who is ultimately unsuccessful. Finally, it prevents interlocutory proceedings being used as a weapon to exhaust the financial resources of one of the parties.

21                        At the same time, the Court may order that costs be paid forthwith, and the cases suggest that that power may be exercised in circumstances in which there is an element of unreasonableness in the conduct of the unsuccessful party, and it is likely that there will be a long delay between the interlocutory proceeding and the conclusion of the principal proceeding. One example of the former which has been discussed in the cases is where an unsuccessful party makes multiple attempts to plead its case. It seems to me that another consideration which may be relevant to the question of whether an order should be made that the costs of an interlocutory proceeding be paid forthwith is the nature of the interlocutory proceeding and the likely quantum of the costs involved. It seems to me that if the interlocutory proceeding is a substantial one and the costs payable are substantial then that may be a matter which, together with other matters, may lead to an order being made that the costs of the interlocutory proceeding be paid forthwith.

22                        Each party referred me to a number of cases which discuss the relevant principles. The respondents emphasised statements to the effect that the Court’s power to order that the costs of an interlocutory proceeding be paid forthwith is exercised only in very special circumstances (Vasyli v AOL International Pty Ltd (unreported, Lehane J, 2 September 1996)). The applicants referred to statements in the authorities to the effect that the power to order that the costs of an interlocutory proceeding be paid forthwith should be used less sparingly than it has in the past (Airservices Australia v Jeppesen Sanderson Inc [2006] FCA 906 at [31] per Graham J).

23                        In addition to the authorities which I have mentioned, I refer to Spotwire Pty Ltd v Visa International Service Association (No 2) [2004] FCA 571 at [103]-[109] per Bennett J; IO Group Inc v Prestige Club Australasia Pty Ltd [2008] FCA 1147 at [20]-[25] per Flick J; McKellar v Container Terminal Management Services Ltd [1999] FCA 1639 at [13]-[20], [24], [41] per Weinberg J; Australian Securities and Investments Commission v Mining Projects Group Ltd (No 3) [2008] FCA 952 at [24] per Gordon J; and Jianshe Southern Pty Ltd v Cooktown Pty Ltd (No 2) [2007] FCA 903 at [35].

24                        In my opinion, this is not an appropriate case for an order that any of the three categories of costs be paid forthwith. Such an order would not be appropriate, even in relation to the order that the respondents pay the costs thrown away as a result of the vacation of the trial date (where the applicant’s argument is at its strongest), unless I was satisfied that the application for an adjournment of the trial was a delaying tactic by the respondents or was the result of some form of reprehensible conduct on their part and the delay between the first trial date and the new trial date was of a substantial order. I am not satisfied of the former matter and, even if substantial delay is of itself sufficient to justify an order that costs be paid forthwith, there is no substantial delay in this case.

The application by the respondents (and cross-claimants) that the cross-respondent produce the papers it holds

25                        In the context of this application, it is convenient to refer to the respondents and cross-claimants simply as the cross-claimants.

26                        The order sought by the cross-claimants is as follows:

“Upon the undertaking of Cowell Clarke to return such documents at the conclusion of the within proceedings, Madgwicks produce to Cowell Clarke within 7 days all documents, including copies, which they hold in the following categories which relate to the within proceedings:

1.1       pleadings, affidavits, orders, transcript, reasons and all other documents filed at or generated by the Court;

1.2       discovered documents of all parties; and

1.3       all other documents held on file with respect to the within proceedings, including but not limited to communications between the parties’ solicitors, file notes of telephone conversations, draft documents, witness statements and advices.”

Background

27                        The cross-respondent acted as legal adviser for the cross-claimants in relation to the transactions which are the subject of the claim made by the applicants. It prepared the Heads of Agreement, the Joint Venture and Shareholders’ Agreement and the Rights Agreement. Members of the cross-respondent were involved in meetings held during the period leading up to the execution of the agreements. In addition, the cross-respondent was involved in the implementation of the agreements. Under the Rights Agreement, it received the licence fee of $1 million and was authorised to disburse it in the manner set out in the agreement. In substance, the cross-claimants claim in their cross-claim that, if they failed to comply with the provisions of the TPA, that resulted from negligent advice provided by the cross-respondent. There is also a claim based on s 75B of the TPA, but for present purposes it is sufficient to refer to the cross-claimants’ claim as a claim in negligence. The relief claimed is damages and an order that the cross-claimants be indemnified by the cross-respondent against any amount they are found liable to pay the applicants.

28                        The cross-respondent acted for the cross-claimants in this proceeding from the date it was commenced on 14 August 2008 to 1 May 2009. The relationship between the cross-claimants and the cross-respondent broke down in April 2009 and, on 1 May 2009, the cross-respondent filed a notice of ceasing to act for the cross-claimants in this proceeding. Before that date, the cross-respondent had written to the cross-claimants on 23 April 2009, terminating its retainer to act for the cross-claimant in the proceeding. It said that it did so because of outstanding fees and “our difficulty in obtaining instructions”. There is evidence before the Court as to outstanding fees, but no evidence of the alleged difficulty in obtaining instructions.

29                        The evidence before the Court is not precise as to the amount of the cross-respondent’s outstanding fees in relation to this proceeding. As far as accounts rendered are concerned, and doing the best I can, the outstanding fees seem to be in the order of $70,000. In addition, legal services have been rendered by the cross-respondent for which accounts have not yet been sent totalling approximately $120,000.

30                        The cross-respondent also carried out legal work for the cross-claimants in a number of unrelated matters in 2008. Again, the evidence is not precise as to the amounts, and, doing the best I can, the outstanding fees appear to be between approximately $110,000 and $140,000.

31                        The parties put before the Court a number of emails which passed between Mr Donovan, representing the cross-claimants, and Mr Graeme Levy, representing the cross-respondent. Mr Levy is a partner of the cross-respondent. Some of the emails were sent in October and November 2008 and others in February and March 2009. It is clear that I do not have all the emails. Nor do I have evidence of other communications between the parties. In those circumstances, and bearing in mind I am not conducting a final hearing at this stage, it  is not for me to make firm and complete findings dealing with the relationship between the cross-claimants and the cross-respondent.

32                        The cross-respondent asked me to conclude from the emails that the cross-claimants have at no time raised any matter (other than the possibility of a counter-claim), which suggests that they are not liable for the outstanding fees in relation to the unrelated matters. In fact, various proposals for the payment of those fees were discussed, and apparently agreed. I think those conclusions should be drawn.

33                        The cross-claimants asked me to conclude from the emails that from an early stage in the proceeding they have claimed that they will look to the cross-respondent to meet their loss if they are held liable to the applicants. The cross-respondent raised a conflict of interest as a result of that assertion and it was agreed, or apparently agreed, that the cross-claimants would seek advice from an independent barrister as to their rights against the cross-respondent. For reasons which are not explained, that matter was not progressed as quickly as it could have been. Again, having regard to the emails, I think those conclusions should be drawn.

Relevant principles

34                        A solicitor’s lien over the papers of his client secures the payment of his outstanding fees. It is a possessory lien. In other words, the lien exists only for so long as a solicitor has possession of the papers. The lien is a general lien in that it enables a solicitor to retain the papers in a matter, even though the outstanding fees it secures have arisen in relation to another matter. The papers must have come into the solicitor’s possession in his capacity as a solicitor.

35                        Difficulties arise where a solicitor’s retainer is terminated during the course of an existing proceeding. A client is likely to need the papers in order to conduct the proceeding. A failure to obtain the papers may have grave consequences in terms of the result of the proceeding. Solicitors are officers of the court and, in order to avoid the grave consequences of a client being unable to obtain his papers, the courts have exercised a jurisdiction of an equitable nature to make an order which effectively qualifies the lien, namely, an order that the papers be handed over to the client or his new solicitor upon an undertaking to return them at the conclusion of the proceeding.

36                        The exercise of the jurisdiction depends on a number of considerations. The principal one appears to be whether it was the client who terminated the retainer or the solicitor who terminated his retainer. In Robins v Goldingham (1872) 13 LR Eq 440, Malins V-C said (at 442):

“Now it is well settled that where a solicitor is discharged by the client he has a lien for his costs upon the papers in his hands, and can retain them till he is satisfied; but it is different where the discharge is by the solicitor. There is no blame to be imputed to Mr. Suckling for declining to go on with the suit; but it is clear that a solicitor is not entitled to stop litigation, because he cannot obtain funds to enable him to carry it on. There is no injustice in this view, because when the papers are in the hands of the new solicitor, Mr. Suckling will retain any lien to which he is entitled.”

37                        The question of determining the party who terminated the retainer is approached as a matter of substance, not form. In other words, it may be that, although it is the client who has formally terminated the retainer of his solicitor, he has been compelled to do so by the solicitor’s misconduct. In that case, a court will have regard to the solicitor’s misconduct and not confine itself to the fact, as a matter of form, that the client terminated the retainer.

38                        Assuming no misconduct by the solicitor, the general rule is that, where the client terminates the retainer of his solicitor then the Court will not exercise the power to order that the solicitor produce his client’s papers. The interest in the client having his papers for the purpose of conducting an existing proceeding is outweighed by the unfairness to the solicitor (or possibly a number of solicitors) in having to give up his lien in circumstances where, without any just or reasonable cause, the client has terminated his instructions and retained a new firm of solicitors.

39                        The position is different where it is the solicitor who brings his retainer to an end. In that case, it is said in the authorities that the general rule is that the solicitor will be required to produce the client’s papers upon an undertaking that they be returned to the solicitor upon the completion of the proceeding. The rationale for the general rule was explained by Lord Cottenham LC in Heslop v Metcalfe (1837) 3 My & Cr 183 at 188-9; 40 ER 894 at 896-897:

“Undoubtedly, that doctrine may expose a solicitor to very great inconvenience and hardship, if, after embarking in a cause, he finds that he cannot get the necessary funds wherewith to carry it on. But, on the other hand, extreme hardship might arise to the client, if—to take the case which is not uncommon in the smaller practice in the country—a solicitor, who finds a poor man having a good claim, and having but a small sum of money at his command, may go on until that fund is exhausted, and then, refusing to proceed further, may hang up the cause by withholding the papers in his hands. That would be a great grievance and means of oppression to a poor client, who, with the clearest right in the world, might still be without the means of employing another solicitor. The rule of the Court must be adapted to every case that may occur, and be calculated to protect suitors against such conduct. Now, a solicitor, if he knows that he must trust to the result of the cause for his remuneration will, of course, be disposed to proceed with it in such a way as, while it promotes the interest of his client, is most likely to render his lien available. I have no doubt, therefore, that the existence of the lien, while it is a great protection to the solicitor against his client, is also a great benefit to the client; but the benefit would be entirely lost, if the solicitor might stop short in the middle of the suit, and insist upon retaining the papers, because then no other solicitor could take up and carry on the cause.”

40                        This general rule is subject to an exception, but the precise boundaries of the exception have not been clearly identified in the authorities.

41                        In Gamlen Chemical Co (UK) Ltd v Rochem Ltd [1980] 1 WLR 614; [1980] 1 All ER 1049 (“Gamlen”), Goff LJ held that the general rule in a case where the solicitor terminates the retainer applied. His Lordship did not rule out an exception where the solicitor discharged himself for good cause but said that the solicitor would have difficulty establishing that fact in circumstances where the client alleges that the solicitor’s charges were excessive or there had been a breach of duty by the solicitor. His Lordship said (at 623; 1057):

“… a solicitor can withdraw for good cause and ‘good cause’ is ‘non-payment.’ But we cannot decide the questions which the defendants have raised when they say that the appellants’ charges are excessive, and also a further charge which they have made, of some kind of negligence or breach of duty on the part of the appellants. They have not yet formulated that in any definite terms, but one way is suggested in the correspondence in that they allowed their partner, then an assistant solicitor, to become so involved that the plaintiffs have seen fit to add him as a defendant. There may be absolutely nothing in this at all, but Mr. Churchward still remains a party, and the allegation that he joined the conspiracy still remains upon the record. As it seems to me, we cannot decide the question of ‘good cause’ either on the point of the allegation that the charges are excessive, or on the second ground.”

42                        Templeman LJ referred to the general rule and the exception to it in the following passages (at 624-625; 1058-1059):

“The solicitor himself may determine his retainer during an action for reasonable cause, such as the failure of the client to keep the solicitor in funds to meet his costs and disbursements; but in that case the solicitor’s possessory lien, i.e. his right to retain the client’s papers of any intrinsic value or not, is subject to the practice of the court which, in order to save the client’s litigation from catastrophe, orders the solicitor to hand over the client’s papers to the client’s new solicitors, provided the new solicitors undertake to preserve the original solicitor’s lien and to return the papers to the original solicitor, for what they are worth, after the end of the litigation.

…

Where the solicitor has himself discharged his retainer, the court then will normally make a mandatory order obliging the original solicitor to hand over the client’s papers to the new solicitor against an undertaking by the new solicitor to preserve the lien of the original solicitor.

I wish to guard myself against possible exceptions to this general rule. The court in fact is asked to make a mandatory order obliging the original solicitor to hand over the papers to the new solicitor. An automatic order is inconsistent with the inherent, albeit judicial, discretion of the court to grant or withhold a remedy which is equitable in character. It may be, therefore, that in exceptional cases the court might impose terms where justice so required. For example, if the papers are valueless after the litigation is ended and if the client accepts that he is indebted to the original solicitor for an agreed sum and has no counterclaim, or accepts that the solicitor has admittedly paid out reasonable and proper disbursements, which must be repaid, the court might make an order which would only compel the original solicitor to hand over the papers to the new solicitor providing that in the first place the client pays to the original solicitor a sum, fixed by the court, representing the whole or part of the moneys admittedly due from the client to the original solicitor. Much would depend on the nature of the case, the stage which the litigation had reached, the conduct of the solicitor and the client respectively, and the balance of hardship which might result from the order the court is asked to make.”

43                        Templeman LJ considered whether there were exceptional circumstances which justified a modification of the general practice. His Lordship said (at 627; 1060):

“In my judgment, there are no grounds for modifying the usual practice. This action was begun in 1974; the appellants acted until June 1979 and the action was set down for March 1980—possibly a little optimistically. Whether the defendants this day can lay their hands on the money to pay the appellants’ demands, I know not, but the defendants dispute the appellants’ right to be paid in principle and in quantum. It would be disastrous for the defendants if their new solicitors could not, at this stage, obtain the papers held by the appellants.”

44                        In A v B [1984] 1 All ER 265 (“A v B”), Leggatt J applied the exception to the general rule and refused to order production of the client’s papers. In refusing the order, Leggatt J relied on the following matters:

(1)        the solicitors had a default judgment for their legal fees against the client;

(2)        the solicitors had performed a “massive” amount of work against a payment of no more than $10,000;

(3)        the possibility of considerable hardship to the client if the order for production was not made had passed;

(4)        the solicitors had behaved impeccably and their conduct could not be criticised; and

(5)        by contrast, the client had not advanced any reason for not paying the solicitors’ fees, nor had it produced any evidence to show that it could not do so.

45                        In Ismail v Richards Butler (a firm) [1996] QB 711 (“Ismail”), Moore-Bick J varied an order made by a master that there be production subject to the client paying £150,000 to the solicitors and £310,000 into Court by requiring instead that the client provide security for £450,000. The case for an exception to the general rule was not as strong as the case of A v B because there was not on the material before the Court sufficient to enable the judge to decide whether at the conclusion the solicitor would be held entitled to recover the full amount of his claim, or indeed any particular amount. Nevertheless, security was appropriate and Moore-Bick J said (at 731):

“However, when I consider the other aspects of this case I do think that some departure from the normal practice is called for in the interests of justice. I can see no basis for criticising Richards Butler’s conduct in this matter, and such indications as there are suggest that in some respects the plaintiffs’ attitude may owe more to negotiating tactics than to a real sense of grievance. I accept that the plaintiffs require the immediate delivery of the papers in the three matters mentioned in their summons which remain fully live, but if Richards Butler are required to hand over the papers on the usual terms their lien is likely to prove of little value when the papers are returned to them. It has not been suggested, on the other hand, that the plaintiffs are likely to suffer any real hardship if they are required to provide security of another kind other than the general effect on their cashflow of having to fund a payment into court. That is a difficulty which can probably be largely overcome by providing security in some other recognised form. Taking all these matters into account I am satisfied that the interests of justice in this case require that the plaintiffs provide some security for Richards Butler’s claim.”

46                        I refer also to the discussion of the general principles by Drummond J in In the Matter of an Application by Weedman (unreported, Drummond J, 17 December 1996) and by Keane JA in Stark v Dennett [2008] 2 Qd R 72.

47                        The scope of the exception is complicated by two considerations which arise out of the context in which the court’s decision is ordinarily made. First, as I read the authorities, a Court generally does not examine the papers and attempt to make a fine judgment as to their significance to the proceeding. Secondly, a dispute about the client’s liability to pay outstanding fees based on an allegation of negligence or excessive charging can rarely, if ever, be resolved at the time the client’s application for the production of papers is brought. The Court will not be in a position to form any views about these matters or, at best, its views will be no more than tentative views.

48                        It seems to me that the effect of the authorities is that the general rule is that, where the solicitor terminates the retainer, an order for production will be made. There may be exceptional circumstances which lead to a modification of the general rule. The modification of the general rule will, generally speaking, involve the imposition of terms, such as part payment or payment into court or the provision of security. In an extreme case like A v B, where the factors identified in [44] are present, that may lead to a refusal of an order for production. However, generally speaking, the presence of exceptional circumstances will lead to the imposition of terms. That to my mind is the effect of the decision in Gamlen and, I think the decision of Moore-Bick J in Ismail is consistent with that conclusion. In Ismail, Moore-Bick J said (at 731) that he could see no basis for criticising the conduct of the solicitors and that there was evidence to suggest that the client’s attitude owed more to negotiating tactics than a real sense of grievance.

49                        The matters identified by Templeman LJ in Gamlen as going to whether or not a departure from the general rule is justified are as relevant to whether security is provided as they are to whether an order for production is refused. In other words, it is not the case that the only question in determining whether there should be terms such as part payment or payment into court or security is whether the client has negated an ability to pay. That is a relevant factor, no doubt, but it is only one factor among the others which have been identified.

50                        When, in the present case, the cross-claimants’ new solicitors asked the cross-respondent to produce the cross-claimants’ papers, the cross-respondent offered to do so in accordance with the professional conduct rules which govern its practice as a firm of solicitors, namely, the Professional Conduct and Practice Rules 2005 made by the Law Institute of Victoria Limited (“the Victorian Rules”)(cll 7, 23.4). The effect of the Victorian Rules is that, where the solicitor terminates the retainer and the client’s papers are essential to the client’s defence or prosecution of current proceedings, the solicitor must hand over the papers to the client upon receiving satisfactory security for the unpaid costs, or to the client’s new solicitor upon the new solicitor providing reasonable security for the payment of the solicitor’s costs on entering into an agreement with the client and the solicitor to procure payment of the solicitor’s costs upon completion of the relevant proceedings. As far as I can see, the South Australian Rules of Professional Conduct & Practice are to the same effect (cll 7, 23.4). The professional conduct rules set out circumstances in which a practitioner must hand over his client’s papers. They do not purport to define exhaustively the circumstances in which a practitioner must hand over his client’s papers. In any event, they could not do that, or do it in a way which binds the Court.

Application of principles

51                        The cross-respondent terminated its retainer with the cross-claimants. The cross-claimants are engaged in an existing proceeding and I am satisfied that they need their papers for the proceeding, and, in view of the proximity of the trial date, the papers are needed as a matter of urgency.

52                        The cross-claimants may have a substantial counter-claim against the cross-respondent. That counter-claim is potentially much larger than the cross-respondent’s claim for outstanding fees. That counter-claim has been brought and, subject to events not presently foreseeable, will be determined in the very proceedings for which the cross-claimants seek their papers. It seems common ground that at least some of the papers will be produced on discovery. Furthermore, I do not think I can, on the evidence before me, find that the cross-claimants have delayed in bringing forward their allegations against the cross-respondent. A conflict of interest in the cross-respondent acting for the cross-claimants while the cross-claimants were alleging negligence on the part of the cross-respondent was identified at an early stage. Unfortunately, the conflict was not resolved at that early stage. Of course, it may transpire that the cross-respondent is innocent of any negligence or of any criticism for its conduct of the proceeding. The point is that I cannot, on the evidence before me, find that the cross-claimants may not have a substantial claim against the cross-claimants which has not been brought forward in a timely, or reasonably timely, fashion.

53                        I recognise on the other hand that if the cross-respondent is right it is owed a substantial amount of money and that there appears to be no dispute that its fees for unrelated matters are due and owing. I also recognise that the cross-respondent’s lien is likely to be of little value to it at the conclusion of the proceeding if the order now sought is made. I also recognise that the cross-claimants have not adduced any evidence that they are unable to provide security. Having said that, I do not think that there are the type of exceptional circumstances which might justify a refusal to make an order for production or the making of an order which is conditional on part payment or payment into court or the provision of security.

54                        It seems to me that this case is clearly distinguishable from the case before Leggatt J in A v B. It is also distinguishable from Ismail because I cannot say that the cross-claimants do not have a real sense of grievance or indeed a substantial cause of action against the cross-respondent. It seems to me that this case is analogous to the decision in Gamlen. It presents the same problem identified by Goff LJ (see [41] above) in that there may prove to be nothing in the cross-claimants’ allegations against the cross-respondent, but it is simply not possible to say that at this stage. They are substantial, they arise directly out of the applicants’ claim and they are the subject of a cross-claim.

55                        In my opinion, it is proper to make the order for production sought by the cross-claimants.

Conclusion

56                        The respondents should pay the applicants’ costs of the notice of motion dated 8 October 2008. I refuse to order that those costs or the costs the subject of the other two orders identified by the applicants be paid forthwith.

57                        The cross-claimants’ application for the production of their papers should be granted.

Associate:

Dated:         9 July 2009