FEDERAL COURT OF AUSTRALIA

Mitry Lawyers v Barnden [2014] FCA 918

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    Order 1 of the orders made by the Federal Circuit Court on 24 July 2013 be varied by deleting the words “and Mitry Lawyers are to jointly and severally”.

3.    Order 2 of the orders made the Federal Circuit Court on 24 July 2013 be set aside.

4.    Andrew James Barnden in his capacity as trustee of the bankrupt estate of George Tadrosse, pay the costs of the appellant, Mitry Lawyers, in relation to the Application in a Case filed 23 May 2013 in the Federal Circuit Court.

5.    The respondent to pay the appellant’s costs of this appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    This appeal concerns bankruptcy proceedings that went awry in the Federal Circuit Court. The issue is whether orders made by the primary judge requiring the bankrupt’s lawyers to pay the cost of those proceedings on an indemnity basis should stand. For the reasons that follow they should not.

Background

2    In May 2012, Mr George Tadrosse was made bankrupt. Like many bankrupts he did not think that he should have been. Despite this, aside from entering into some discussions with his Trustee in bankruptcy, Mr Andrew Barnden (the Trustee), who is the respondent to this appeal, Mr Tadrosse did little about this. That was until the Trustee took steps to sell Mr Tadrosse’s house in March 2013. That spurred him into action.

3    The auction was to take place on 23 March 2013. On 18 March 2013, Mr Tadrosse consulted Mitry Lawyers (Mitry), the appellants in this appeal. He spoke with an employed solicitor, Mr Yin. He told Mr Yin that he had to stop the sale of his house “no matter what”. Mr Yin took instructions and, after consulting his supervisor, Mr Rick Mitry, the principal of Mitry, Mr Yin briefed a barrister, Mr Tony Rogers. Mr Rogers was a barrister known to Mr Mitry. He had been a barrister for about 25 years. He was briefed to advise whether there was a basis to bring proceedings to stop the sale and, if so, to appear for Mr Tadrosse in the proceedings.

4    The following day Mr Yin attended a conference with Mr Rogers. Mr Rogers gave advice in conference to Mr Yin. He advised that Mr Tadrosse had a “good case” against the Trustee for the annulment of the bankruptcy. Pending the determination of that claim, Mr Rogers advised that Mr Tadrosse could seek an injunction preventing the sale of his house. Mr Rogers was briefed to draft the originating process.

5    Mr Yin met with Mr Tadrosse again the next day, 20 March 2013. This conference was also attended by Mr Tadrosse’s wife. It seems that this may have been because Mr Tadrosse was not completely fluent in English. The extent of that deficiency is a matter of some controversy. It is addressed in a little more detail later. In any event, Mrs Tadrosse assisted by interpreting during at least some parts of the conference.

6    During the conference, Mr Yin apparently took more detailed instructions from Mr Tadrosse and prepared an affidavit for swearing by Mr Tadrosse. Before having Mr Tadrosse swear the affidavit, Mr Yin read out each paragraph and had Mrs Tadrosse interpret the paragraph to Mr Tadrosse in his first language, Arabic.

7    Mr Yin also attended another conference with Mr Rogers later that day. This conference was also attended by Mr and Mrs Tadrosse. During this conference Mr Tadrosse provided further instructions to Mr Rogers (and Mr Yin) concerning the circumstances in which he was made bankrupt. There is no indication that Mr Tadrosse’s apparent English language difficulties hindered or compromised effective communications during this conference. It is not clear whether it was necessary for Mrs Tadrosse to assist by interpreting during this conference.

8    Later that day, Mitry filed an application in the Federal Circuit Court on behalf of Mr Tadrosse. That application was drafted by Mr Rogers. The affidavit sworn by Mr Tadrosse in support of the application was also filed. The court apparently listed the matter for urgent hearing before the primary judge on 22 March 2013. This was the day before the auction of Mr Tadrosse’s house.

9    The day before the hearing, Mr Rogers apparently did some more work on the matter. He drafted an amended application. This amended application included prayers for both final and interim relief. The final relief included an order extending the time for filing an application to review the decision to make the sequestration order, an order setting aside that decision, or alternatively an order annulling the bankruptcy. The interim relief sought was an order restraining the Trustee from selling Mr Tadrosse’s house.

10    Unfortunately, as apparently happens sometimes, Mr Rogers became “jammed” and was unable to appear for Mr Tadrosse at the hearing scheduled for the following day. As apparently also happens sometimes, Mr Rogers arranged for the brief to be “passed” to a colleague of his in chambers. This was done after consultation with Mitry. The colleague was Mr Walsh of counsel. Like Mr Rogers, Mr Walsh had been a barrister for some 25 years.

11    Mr Walsh met Mr Yin and Mr and Mrs Tadrosse at court the next day. There is no suggestion that Mr Walsh had not read and considered the brief or was not properly prepared for the hearing. Indeed, Mr Walsh told Mr Yin that he had read the brief and that the matter was “an interesting one” that “raises issues with the actions of the Trustee regarding the money.” There is no indication that Mr Walsh advised Mr Yin or Mr Tadrosse that Mr Tadrosse had a bad case, let alone a hopeless one.

12    Unfortunately for Mr Tadrosse and, as it turns out, Mitry, things did not go well at the hearing. In fact, they went very badly. By lunchtime it was all over.

13    The Trustee, who was represented at the hearing by Mr Eardley of counsel, opposed Mr Tadrosse’s application. Mr Walsh was permitted to file the amended application that had been drafted the previous day by Mr Rogers and the Trustee filed a notice of opposition. The Trustee also swore and filed an affidavit that exhibited a large volume of documents. As it happens, not much turned on the Trustee’s evidence.

14    The primary judge considered that there were “fatal problems with the evidence and the application.” It will be necessary to return to these “fatal problems” in due course. Each of the supposed problems was urged upon the primary judge by the Trustee in his notice of opposition and submissions. Each of them was erroneous and displayed a misunderstanding of the nature of Mr Tadrosse’s application on the part of the Trustee and, ultimately, the primary judge.

15    In any event, the primary judge dismissed not only Mr Tadrosse’s application for interlocutory relief, but also his application for final relief. He delivered a brief ex tempore judgment.

16    There has been no appeal from the dismissal of Mr Tadrosse’s application in the Federal Circuit Court. The primary judge was probably correct to dismiss the application for interlocutory relief, though not for the reasons he gave. Even though there has been no appeal, it will be necessary later in these reasons to give some attention to the reasons of the primary judge for dismissing the application. That is because they bear on some of the issues for determination in this appeal.

17    Of more immediate relevance is that it would appear that, upon the dismissal of Mr Tadrosse’s application, the Trustee applied for an order that both Mr Tadrosse and Mitry pay his costs on an indemnity basis. The application that Mitry pay the Trustee’s costs was, not surprisingly, opposed by Mitry. His Honour, wisely, did not consider or determine the costs application against Mitry on 22 March 2013. Rather, the application was adjourned. In due course the Trustee filed an application which specified the grounds of his application for an indemnity costs order against Mitry. He also filed evidence in support of his application, as did Mitry in opposition to the application.

18    The Trustee’s application was heard on 1 July 2013. On 24 July 2013 the primary judge made the following orders:

1.    George Tadrosse and Mitry Lawyers are to jointly and severally pay the costs of Andrew James Barnden incurred in relation to the bankrupt’s application filed 20 March 2013 and dismissed on 22 March 2013 on an indemnity basis.

2.    George Tadrosse and Mitry Lawyers are to jointly and severally pay the costs of Andrew James Barnden incurred in relation to his Application in a Case filed 23 May 2013 on a party/party basis as agreed or failing agreement as assessed.

19    It is against that judgment and those orders that Mitry appeals. Mitry challenges the orders only to the extent that they require it to pay the Trustee’s costs. Mr Tadrosse, who did not appear at the hearing of the costs application, has not appealed the judgment.

20    Before turning to the reasons of the primary judge for ordering Mitry to pay the Trustee’s costs, as earlier foreshadowed something more should be said about the reasons of the primary judge for dismissing Mr Tadrosse’s substantive application. It is also necessary to give some consideration to the power to make a costs order against a lawyer and the principles that guide the exercise of that power.

The dismissal of Mr Tadrosse’s application

21    It will be recalled that the final relief sought by Mr Tadrosse was, in substance and effect, that his bankruptcy either be set aside on review or, alternatively, annulled. Without going into excessive or unnecessary detail, the grounds for this relief, in so far as they are able to be gleaned from the evidence filed by Mr Tadrosse, concerned the circumstances in which the bankruptcy order was made and Mr Tadrosse’s dealings with the Trustee following the bankruptcy.

22    In relation to the circumstances in which the sequestration order was made, Mr Tadrosse’s essential complaint was that he was overseas when the Creditors Petition which founded his bankruptcy was heard and determined. He claimed that he had instructed a solicitor to appear at the hearing of the petition. His instructions were that the solicitor should seek an adjournment and make submissions on his behalf. The solicitor did not, however, appear at the hearing. It is implicit in Mr Tadrosse’s story that he had grounds to, and indeed intended to, oppose the making of a sequestration order. As a result of the unexplained default of his former solicitor, however, Mr Tadrosse claimed that he was not given that opportunity. The sequestration order was made in his absence and was accordingly unopposed.

23    In relation to his dealings with the Trustee, Mr Tadrosse contended that following the making of the sequestration order he had a number of discussions with the Trustee with a view to having his bankruptcy annulled by agreement. The debt the subject of the Creditors Petition was somewhere in the order of $30,000. Mr Tadrosse claimed that as a result of his discussions with the Trustee he had agreed to pay to the Trustee that amount, together with an amount representing the Trustee’s costs of the administration. This payment was intended to secure the annulment. He claims to have paid that amount to the Trustee, but despite the agreement the Trustee refused to annul the bankruptcy.

24    Whatever might have been the merits of Mr Tadrosse’s application, based on these claims, to have his bankruptcy set aside or annulled, it is clear, that when Mr Tadrosse’s application came on for hearing before the primary judge, his counsel, Mr Walsh, sought only the interim relief specified in the application. That is, Mr Tadrosse sought only to restrain the Trustee from selling his house pending the determination of his substantive application. That was, after all, the only reason the matter was brought on urgently for hearing. The auction was to occur the next day.

25    Despite this, the primary judge appears to have approached the matter on the basis that Mr Tadrosse was seeking final relief. That is apparent not only from the nature of the “fatal problems” that his Honour found with Mr Tadrosse’s application, but also from the fact that he dismissed Mr Tadrosse’s application in its entirety.

26    The primary judge’s reasons are revealing. He found that there were three fatal problems with Mr Tadrosse’s application.

27    The first supposedly fatal problem was that Mr Tadrosse had not complied with r 7.06 of the Federal Circuit Court (Bankruptcy) Rules 2006. That rule provides as follows:

Review of Registrar’s decision

(1)    This rule applies in relation to an application for review of a decision by a Registrar to make a sequestration order against the estate of a debtor (the bankrupt).

(2)    The application must be served on the trustee at least 7 days before the hearing date fixed for the application.

(3)    The applicant must give notice of the application to each person known to the applicant to be a creditor of the bankrupt.

(4)    The notice must be in accordance with Form 12.

(5)    The applicant must serve the notice on each creditor at least 7 days before the hearing date fixed for the application.

(6)    If directed by the Court, the trustee must prepare a report in relation to the bankrupt in accordance with rule 7.04.

28    That rule would no doubt have been a good reason for not entertaining any application for final relief on 22 March 2013 insofar as it related to a review of the decision to make the sequestration order. But Mr Tadrosse was not seeking that final relief at the hearing on 22 March 2013. He was only seeking urgent interim relief. Rule 7.06 did not in any way preclude him from seeking this urgent relief. The primary judge erred in finding otherwise. The rule also provided no basis for dismissing the application. The appropriate order would have been to adjourn the application for final relief and direct Mr Tadrosse to give notice to his creditors in accordance with the rule. The rule also did not apply to the annulment application.

29    The second supposed fatal flaw, which the primary judge said was the “most significant problem”, was that according to the primary judge Mr Tadrosse lacked standing to bring the application. His Honour’s reasoning was that because Mr Tadrosse was bankrupt, he did not own or have any interest in his house. That was the case unless his bankruptcy was annulled or set aside. The primary judge reasoned that because Mr Tadrosse had no interest in the house, he had no standing to seek an order preventing its sale.

30    With the greatest respect to his Honour, this reason again exposes a misunderstanding of the nature of the application that Mr Tadrosse was making on 22 March 2013. Mr Tadrosse’s application was that, pending the determination of his application that this bankruptcy should be set aside or annulled, the Trustee should not be permitted to sell his house. That was because he would suffer irreparable harm or prejudice if the Trustee was permitted to sell his house in the course of the administration of his bankruptcy, but it turned out that Mr Tadrosse was able to demonstrate in due course that he should never have been made bankrupt. Mr Tadrosse unquestionably had standing to seek that interlocutory relief. The effect of the primary judge’s ruling was that Mr Tadrosse had to obtain the final relief before he had standing to seek the interlocutory relief. That reasoning was circular and wrong.

31    According to the primary judge, the third supposed fatal flaw in Mr Tadrosse’s application was that the evidence showed that Mr Tadrosse was insolvent. It is again difficult to see why this was a fatal flaw in respect of the application for interim relief. It may readily be accepted that if Mr Tadrosse was unable to demonstrate that he was solvent when the matter come on for final hearing, that may have been fatal. But again, on 22 March 2013 Mr Tadrosse was only seeking interim relief. It may also be that if, in fact, the evidence did demonstrate that Mr Tadrosse was insolvent on 22 March 2013, this may have provided a discretionary reason to refuse the interlocutory relief. But it was not necessarily fatal.

32    In any event, the evidence concerning the insolvency or otherwise of Mr Tadrosse was by no means clear. Indeed, it was positively murky. So much so was conceded by the Trustee’s counsel at the hearing of this appeal. The primary judge’s finding was based primarily on the statement of affairs of Mr Tadrosse that had been lodged with the Trustee. However, it appeared that Mr Tadrosse claimed that he did not prepare or approve the statement of affairs and that its contents were incorrect. There was also evidence that, if accepted, was capable of at least casting some doubt on the position otherwise portrayed in the statement.

33    It is unnecessary for the purposes of this appeal to get to the bottom of this issue. It is sufficient to simply observe that the evidence was by no means as clear as suggested by the primary judge in his reasons. It did not support a finding that Mr Tadrosse’s application for interim relief was fatally flawed or hopeless.

34    The real questions for consideration by the primary judge at the hearing on 22 March 2013 were; first, whether Mr Tadrosse had demonstrated at least a serious question to be tried (or a prima facie case) in relation to his final relief; second, that he would suffer irreparable harm unless the interim relief (the injunction) was granted; and third, that the balance of convenience favoured the granting of the injunction: Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238 at [49]-[67] and the cases there cited. The primary judge did not, however, approach the matter on this basis on 22 March 2013. He approached the matter on the basis that Mr Tadrosse had to prove his case for final relief on that day. He was wrong to do so.

35    That said, had the primary judge addressed the correct questions on 22 March 2013, there appears to have been some good reasons for refusing the interim relief. It certainly would have been open to his Honour to do so. Some of the considerations that would have strongly militated against the granting of the injunction are adverted to in the reasons of the primary judge. They include the largely unexplained delay in bringing the application and the prejudice to the Trustee and Mr Tadrosse’s creditors if the auction of his house was halted at the eleventh hour. Mr Tadrosse was, of course, in no position to provide any meaningful undertaking as to damages. It follows that the balance of convenience weighed strongly against granting the interlocutory relief sought by Mr Tadrosse. On any view he faced an uphill battle to obtain the injunction.

36    As already indicated, there has been no appeal from the primary judge’s dismissal of Mr Tadrosse’s substantive application. But the point of going into some detail about the primary judge’s reasons for dismissing the application is this: the Trustee’s claim in the court below that Mitry should be ordered to pay his costs of the application on an indemnity basis was based almost entirely on the ground that Mr Tadrosse’s application was “doomed to fail, futile, had no prospects of success and was an application without merit.” That contention must be considered in the context of what has just been said about the reasons given by the primary judge for dismissing the application. First, the main reasons given by the primary judge for dismissing the application were misconceived, if not plainly wrong. Second, whilst it could perhaps be said that Mr Tadrosse faced significant, if not insurmountable, hurdles in obtaining the injunction he sought, it is by no means clear that his application for an injunction was doomed to fail, or futile, or had no prospects of success.

Costs orders against lawyers

37    Subsections 79(2) and (3) of the Federal Circuit Court of Australia Act 1999 (Cth) provides as follows:

(2)    The Federal Circuit Court of Australia or a Judge has jurisdiction to award costs in all proceedings before the Federal Circuit Court of Australia (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs must not be awarded.

(3)    Except as provided by the Rules of Court or any other Act, the award of costs is in the discretion of the Federal Circuit Court of Australia or Judge.

38    Rule 21.07 of the Federal Circuit Court Rules 2001 (the Rules) provides as follows:

(1)    The Court or a Registrar may make an order for costs against a lawyer if the lawyer, or an employee or agent of the lawyer, has caused costs:

    (a)    to be incurred by a party or another person; or

    (b)    to be thrown away;

because of undue delay, negligence, improper conduct or other misconduct or default.

(2)    A lawyer may be in default if a hearing may not proceed conveniently because the lawyer has unreasonably failed:

(a)    to attend, or send another person to attend, the hearing; or

(b)    to file, lodge or deliver a document as required; or

(c)    to prepare any proper evidence or information; or

(d)    to do any other act necessary for the hearing to proceed.

(3)    An order for costs against a lawyer may be made on the motion of the Court or Registrar, or on application by a party to the proceeding or by another person who has incurred the cost or costs thrown away.

(4)    The order may provide:

(a)    that the costs, or part of the costs, as between the lawyer and party be disallowed; or

(b)    that the lawyer pay the costs, or part of the costs incurred by the other person; or

(c)    that the lawyer pay to the party or other person the costs, or part of the costs, that the party has been ordered to pay to the other person.

(5)    Before making an order for costs, the Court or Registrar:

(a)    must give the lawyer, and any other person who may be affected by the decision, a reasonable opportunity to be heard; and

(b)    may order that notice of the order, or of any proceeding against the lawyer be given to a party for whom the lawyer may be acting or any other person.

39    The power to order costs against a lawyer is a power that must be exercised with care and discretion and only in clear cases: Ridehalgh v Horsefield [1994] Ch 205 (Ridehalgh) at 229; Re Bendeich (1994) 53 FCR 422; Deputy Commissioner of Taxation v Levick (1999) 168 ALR 383 per Hill J at [11]; Levick v Deputy Commissioner of Taxation [2000] FCA 674; (2000) 102 FCR 155 (Levick) at [44]; Gitsham v Suncorp Metway Insurance Ltd [2002] QCA 416 at [8] per White J (with whom Davies and Williams JJA agreed); De Sousa v Minister for Immigration, Local Government and Ethnic Affairs (1993) 41 FCR 544; Money Tree Management Service Pty Ltd v Deputy Commissioner of Taxation (No 3) [2000] SASC 286.

40    Rule 21.07 is in terms not dissimilar to the former Order 62 r 9 of the former Federal Court Rules. Order 62 r 9 provided for costs orders to be made against a lawyer if costs were incurred “improperly or without reasonable cause, or [were] wasted by undue delay or by any other misconduct or default, and it [appeared] to the Court that a lawyer [was] responsible.” Order 62 r 9 has now been replaced by rule 40.07 of the Federal Court Rules 2011. The new rule differs in a number of respects from Order 62 r 9.

41    Despite the differences in the wording of r 21.07 and the former Order 62 r 09, the principles that have been applied in the context of Order 62 r 9 of the former Federal Court Rules are relevant to a consideration of the principles that should be applied in relation to r 21.07.

42    The relevant principles emerge from three decisions of this Court: the judgment of Goldberg J in White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169; and two Full Court decisions; Levick; and Macteldir v Roskov [2007] FCAFC 49. The principles may be summarised as follows:

1.    Instituting or maintaining a proceeding on behalf of a client which has no, or substantially no, prospect of success will not, without more, invoke the jurisdiction to make a costs order against a lawyer.

2.    Something which involves “unreasonable conduct” is required.

3.    What constitutes unreasonable conduct will depend on the circumstances of the particular case.

4.    The element of acting unreasonably involves some deliberate or conscious decision taken by reference to circumstances unrelated to the prospects of success, with either a recognition that there is no chance of success, or an intention to use the proceeding for an ulterior purpose, or to abuse the processes of the court, or with a disregard of any proper consideration of the prospects of success.

5.    The circumstances must involve or result in a serious dereliction of duty owed to the court, or serious misconduct in promoting the course of, and the proper administration of, justice.

6.    An ulterior purpose or an abuse of process cannot be assumed simply because the case is hopeless.

7.    The reason that the mere pursuit of an unmeritorious case is not so sufficient to invoke the jurisdiction to make a costs order against a lawyer is that a party is entitled to have a practitioner act for him or her in an unmeritorious case. The court is concerned to avoid the risks of a practice developing whereby lawyers endeavour to browbeat their opponents into abandoning clients, or particular issues or arguments, for fear of personal costs orders being made against them.

43    An additional procedural consideration, which has particular relevance to this matter, is that a lawyer against whom a claim for costs is made must have full and sufficient notice of the complaint and full and sufficient opportunity of answering it: Myers v Elman [1940] AC 282 at 318; Orchard v South Eastern Electricity Board [1987] QB 565 at 572; Ridehalgh at 229; Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300 (Lemoto) at [92(e)], [143]-[149]. This is also required by the terms of r 21.07(5)(a).

The costs application and judgment

44    The Trustee’s amended application specified that the sole ground upon which it was contended that Mitry should be required to pay his costs was that the proceedings were doomed to fail, were futile, had no prospects of success or had no merit in law.

45    Mitry relied, in opposition to the costs application, on affidavit evidence from both Mr Mitry and Mr Yin. Mr Yin was cross-examined by the Trustee’s counsel. Mr Mitry was not. Mr Mitry’s unchallenged evidence was that he had been briefing Mr Rogers for about 20 years and regarded him as highly experienced and competent. He felt he was able to rely on Mr Rogers’ advice.

46    Mr Yin’s evidence was that when he briefed Mr Rogers he believed he was a very experienced barrister. He believed that Mr Tadrosse had reasonable prospects of success on the application for annulment and for the interlocutory injunction restraining the Trustee from selling his house. That was because Mr Rogers gave advice to that effect in conference. Whilst Mr Yin was cross-examined, this aspect of his evidence went effectively unchallenged.

47    Mr Yin was cross-examined about Mr Tadrosse’s ability to communicate fluently in English. The starting point for this line of cross-examination was apparently a file note made by Mr Yin that recorded that Mr Tadrosse could not read English. That file note was produced in answer to a notice to produce called on by the Trustee at the hearing. In cross-examination Mr Yin agreed that he believed that Mr Tadrosse could not speak or read English fluently. That was why, before Mr Tadrosse swore his affidavit, Mr Yin had Mrs Tadrosse interpret each paragraph of the affidavit for him. It was not suggested to Mr Yin in cross-examination that there was any problem with using Mrs Tadrosse to interpret for this purpose. It was not suggested that Mrs Tadrosse was unable to properly interpret during the conference. Nor was it put to Mr Yin that Mr Tadrosse’s apparent deficiencies with the English language meant that he was unable to properly communicate with Mr Tadrosse, or that he had any reason to believe that Mr Tadrosse did not fully understand the nature and potential consequences of the proceedings.

48    Mr Yin was cross-examined about other aspects of Mr Tadrosse’s application and the evidence in support of it. Some of the questioning was directed at matters that, for the reasons already given, were based on a misconception of the nature of the application. Some of Mr Yin’s answers tend to demonstrate that Mr Yin also failed to completely grasp the true nature of Mr Tadrosse’s interim application. Mr Yin agreed that he was familiar with r 7.06 and knew it had not been complied with. He also agreed that there was no evidence of Mr Tadrosse’s solvency and no evidence to justify the granting of an extension of time to seek a review of the decision to bankrupt Mr Tadrosse. Mr Yin maintained in cross-examination, however, that he believed that Mr Tadrosse had standing to bring the application because Mr Yin was an occupant of the property.

49    Mitry’s submissions before the primary judge, in broad terms, were that Mr Yin believed that Mr Tadrosse’s application had reasonable prospects, that it was reasonable for Mr Yin to rely, in this respect, on advice provided by very experienced counsel and that, based on the authorities referred to earlier, it was in any event not enough for the Trustee to merely allege that Mr Tadrosse’s case was hopeless. Accordingly, it was submitted by Mitry that the conduct of Mr Yin was not improper for the purposes of r 21.07. Mitry also submitted that the Trustee had not shown, or even attempted to show, that any improper conduct by Mr Yin had relevantly caused the Trustee to incur or throw away costs. In particular, it was submitted that the Trustee had not shown that Mr Tadrosse would not have carried on the proceedings himself if Mitry had refused to act for him on the basis of the apparent limited prospects of success.

50    The primary judge rejected the submissions advanced by Mitry. His Honour found that Mr Yin’s conduct of the proceedings was improper and relevantly caused costs to be incurred by the Trustee. His reasons for so concluding are revealing.

51    The primary judge accepted that the discretion to award costs against a lawyer had to be exercised with care and discretion and only in clear cases. He appeared to accept that the conduct in question was required to go beyond merely acting for a client whose case was doomed to fail. His Honour said that the court must not impose too high a standard on solicitors in respect of matters relating to creditability of witnesses and validity of argument. His Honour agreed that a relevant policy consideration in this context was the desirability of having clients represented in hopeless cases.

52    Critically, however, the primary judge considered, apparently despite the clear terms of the Trustee’s amended application, that “the [T]rustee’s argument goes beyond mere considerations of pursuing hopeless claims” (at Judgment [22]) The main “argument” his Honour fixed on was that Mr Yin had not made any attempt to ensure that Mr Tadrosse understood the “possible consequences” of the application. Nor, according to the primary judge, had Mr Yin carried out a “reality test” of Mr Tadrosse’s instructions.

53    In fact the Trustee had not advanced any argument in these terms. It was certainly not pleaded in his application.

54    Nevertheless, his Honour pointed out that there was no evidence that Mr Yin had done either of these things and that he was entitled to infer that “no evidence was led because none of these things took place” (at Judgment [23]).

55    According to the primary judge, the likelihood that Mr Yin did not make sure that Mr Tadrosse understood the consequences of the proceedings, and did not “reality check” his instructions, was cemented by what his Honour concluded were the “formidable language difficulties that existed” (at Judgment [23]). His Honour “wondered” whether in light of these difficulties “these issues could ever have been properly communicated in the first place” (at Judgment [23]). His Honour said that the use of Mrs Tadrosse as an interpreter did not “assist” Mitry. That was because his Honour found that Mrs Tadrosse was “hardly a disinterested bystander” (at Judgment [24]) and that she did not owe any of the professional duties owed by a properly trained and a qualified interpreter.

56    The primary judge concluded as follows (at [25] of his judgment):

On the evidence before the court it is not possible to conclude that the bankrupt was fully informed that the litigation and its potential consequences. The lawyers must take some responsibility for that. When all the evidence of Mr Yin is considered he must have known that there were difficulties in the case and yet he did not even take the precaution of reasonably satisfying himself that the bankrupt properly understood what was going on. Not only was there no apparent reality testing of the client’s case, there was not even the communication medium available for that to occur. This is, in the court’s opinion, improper conduct in the context of this case, for the purposes of r.21.07.

57    As for whether this improper conduct caused costs to be incurred by the Trustee, his Honour again returned to Mr Tadrosse’s supposed language difficulties. He found that having regard to the language difficulties “the court does not accept the likelihood of the bankrupt having initiated any application on his own” (at Judgment [28]). His Honour concluded that, viewing the question of causation “realistically, not hypothetically”, “[b]ut for the lawyers’ improper conduct” the litigation would not have been commenced and the Trustee would not have incurred the costs he has (at Judgment [29]).

Four errors that infect the costs decision

58    Mitry contends that the primary judge made four errors in considering and arriving at the costs decision. Each will be considered in turn. Each has merit.

Denial of procedural fairness

59    Mitry contends that the Trustee and the court were obliged to give full and sufficient notice of the allegations that grounded the Trustee’s costs application. This it did not do. The only notice that was given was that the Trustee alleged that the conduct of Mr Yin was improper because he acted for Mr Tadrosse in proceedings that were doomed to fail, futile, had no prospects of success and no merit in law.

60    Yet the primary judge found that Mr Yin’s conduct was improper on a different basis. The finding of improper conduct was based on the finding that Mr Yin did not fully inform Mr Tadrosse about the litigation and its potential consequences, and did not reality test Mr Tadrosse’s instructions. This, in turn, was based on a finding that there were “formidable language difficulties” that Mr Yin inappropriately dealt with by using Mrs Tadrosse, who was not a qualified interpreter and was not impartial.

61    In his submissions, the Trustee implicitly accepted that he did not put Mitry on notice that he alleged that Mr Yin acted improperly because he failed to retain a qualified interpreter and failed to properly advise Mr Tadrosse about the consequences of his application. The Trustee submits, however, that this was because the fact that Mr Yin was aware of Mr Tadrosse’s language difficulties only became apparent on the day of the hearing. That was because Mitry’s file was not produced until the day of the hearing. Mr Yin was then cross-examined about his file note that recorded that Mr Tadrosse had language difficulties. The Trustee submits that Mitry did not seek an adjournment as a result of the cross-examination of Mr Yin. He also submits that the findings concerning Mr Tadrosse’s language difficulties and the use of Mrs Tadrosse as an interpreter were not determinative of the costs application.

62    Mitry’s submission that there was a denial of procedural fairness because insufficient notice was given of the Trustee’s complaint has considerable force. The Trustee’s submissions have no merit and are rejected.

63    There can be no doubt that the court was obliged to ensure that Mitry had full and sufficient notice of the basis of the complaint and sufficient opportunity to answer it: Lemoto at [92(e)] and [146]; r 21.07(5)(a). What was required was the specification of the allegation with particularity. That was not done here. The allegation made by the Trustee was put in narrow terms in the amended application. It was simply alleged that Mitry acted for Mr Tadrosse in a hopeless case. That was the only allegation that Mitry was given a fair opportunity to respond to.

64    It is no excuse or justification that the issue concerning Mr Tadrosse’s supposed language difficulties and Mr Yin’s response to this problem was only discovered on the day of the hearing. If that was the case, and the Trustee wanted to rely on these facts in support of his complaint and costs application, he was obliged to apply to amend his application. He did not seek to do so. Had he done so, Mitry could then have sought an adjournment, with some justification, so it was able to properly respond to this new allegation.

65    This is no mere academic or hypothetical point. There was real practical unfairness: Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Lam (2003) 214 CLR 1 at [37]. Counsel for Mitry complained before the primary judge that issues relating to the alleged language difficulties and inadequate interpretation fell outside the pleaded case. These complaints fell on deaf ears.

66    Moreover, the primary judge based most of his critical findings on the fact that Mitry had led no evidence in respect of these matters, that this evidence ought “sensibly to have been led” and that he was accordingly entitled to draw adverse inferences from the absence of evidence. This was particularly the case in relation to whether Mr Yin had advised Mr Tadrosse of the possible consequences of the application. Yet why would Mitry be expected to lead evidence about these matters when they clearly fell outside the case pleaded and particularised against it?

67    It was manifestly unfair not to put Mitry on notice of these matters if they were to be relied on. Mitry was not afforded a fair or sufficient opportunity to respond to these allegations. The situation was exacerbated by the fact that the primary judge drew adverse inferences from the fact that Mitry had not addressed these matters in evidence.

68    The Trustee’s submission that these findings in respect of these matters were not determinative is wrong. A fair reading of the primary judge’s reasons reveals that they were central to his findings of impropriety on the part of Mr Yin.

69    It follows that Mitry’s contention of denial of procedural fairness has been made good. This ground of appeal has been made out.

70    To make matters worse, most of the relevant inferences or findings made by the primary judge that formed the basis of his finding of impropriety were not, in any event, fairly open on the evidence.

71    There was no evidence to support the finding that there were “formidable language difficulties”. The evidence, at its highest, was that Mr Tadrosse was not fluent in spoken English and could not read written English. That does not amount to a formidable language difficulty. It was never put to Mr Yin that such formidable difficulties existed.

72    There was no evidence that Mr Yin did not adequately explain the consequences of the application to Mr Tadrosse or “reality test” his instructions (whatever that may mean). There is no evidence that Mr Yin could not have done either of these things because of language difficulties. None of these matters were even touched on in cross-examination of Mr Yin.

73    There was no evidence to support a finding that Mrs Tadrosse did not do an adequate job in interpreting, despite the fact that she was not professionally qualified. There was no evidence that she did not faithfully interpret because she was not impartial and supposedly had an interest in the matter. Exactly why her presumed interest in the house would cause her to deliberately misinterpret is unclear. The use of Mrs Tadrosse to assist in the interpretation of Mr Tadrosse’s affidavit in the circumstances was not even negligent, let alone improper: cf. Provident Capital Ltd v Naumovski [2013] NSWSC 40 at [350].

74    In these circumstances, the critical findings by the primary judge that founded the finding of impropriety on the part of Mr Yin were both unfair and unavailable on the evidence. That alone would be sufficient to allow the appeal.

75    But there is more.

Allegation and findings that the application was hopeless

76    Here Mitry advances two contentions. First, it is submitted that the Trustee pleaded only that Mitry acted in a proceeding that was hopeless or doomed to fail. Yet the authorities referred to earlier make it plain that merely acting in a hopeless case is not sufficient to invoke the jurisdiction to make a costs order against a lawyer. It follows that even if the Trustee made out its pleaded case, the costs order still should not have been made.

77    Second, if the primary judge did in fact find, for the purposes of the costs application, that Mr Tadrosse’s substantive application was hopeless (and this is not entirely clear from the reasons of the primary judge), Mitry submits that this finding was not open on the evidence. Or, at the very least, the finding was based on an erroneous approach to the application.

78    The Trustee did not appear to dispute or challenge the submission that the authorities demonstrate that it is not sufficient to merely allege or prove that the lawyer acted in a hopeless case to justify a costs order against the lawyer.

79    In his written submissions, the Trustee referred to a decision of a Federal Magistrate in Mahoney v CP White (No. 2) [2005] FMCA 1578 (Mahoney v White). That decision was also referred to by the primary judge. To the extent that the Federal Magistrate in that case suggested that a costs order can be made against a lawyer merely because the lawyer acts in a hopeless case, or a case not supported by adequate affidavit evidence, the decision is wrong. It is contrary to the decisions of this Court referred to earlier. It appears, in any event, that the Federal Magistrate’s decision in Mahoney v White turned on its own particular facts and is not authority for so broad a proposition.

80    The Trustee’s primary submission is that Mr Yin knew that the case was hopeless. This was sufficient, so it was submitted, to make his conduct improper. The Trustee relies, in support of this submission, on the concessions made by Mr Yin in cross-examination concerning his knowledge that r 7.06 had not been complied with, that as a result of his bankruptcy Mr Tadrosse did not have a legal or equitable interest in his home, and that there was no evidence of solvency.

81    There are at least three difficulties with the Trustee’s submission. First, the Trustee’s amended application did not clearly plead or allege that Mr Yin knew that the case was hopeless. Accordingly, this submission is outside the Trustee’s pleaded case.

82    Second, it is not in any event readily apparent that the primary judge relevantly found that Mr Yin knew that Mr Tadrosse’s application was hopeless.

83    Third, and perhaps most significantly, if the primary judge did make such a finding, that finding was not open on the evidence.

84    Mr Yin’s evidence was that he believed that the application had reasonable prospects. That belief was, at least in part, based on the fact that experienced counsel had advised that Mr Tadrosse had a good case. It was never put to Mr Yin that there was some reason why he should not have relied on counsel’s advice. It was never put to Mr Yin in cross-examination that he knew the case to be hopeless. For the reasons given earlier, the concessions made by Mr Yin in cross-examination that are relied on by the Trustee are essentially irrelevant. They flow from a misconception of the nature of Mr Tadrosse’s application. They ignore the fact that the application was for an interlocutory injunction, not for final relief.

85    Even putting aside Mr Yin’s knowledge or belief, it is unclear whether the primary judge even found, for the purposes of the costs application, that Mr Tadrosse’s application was in fact hopeless. It would seem from the primary judge’s ex tempore judgment dismissing the substantive application by Mr Tadrosse that his Honour believed that the application was hopeless. But those reasons did not appear to carry through to the costs judgment.

86    If, on the other hand, the primary judge did find that the application was hopeless, that finding was not open on the evidence. For the reasons already given, the majority of the reasons given by the primary judge for dismissing Mr Tadrosse’s substantive application were misconceived. They flowed from an apparent misunderstanding of the nature of the application. It was an interlocutory application, not a claim for final relief.

87    Whilst Mr Tadrosse’s application had difficulties, in particular in relation to the balance of convenience, and was probably properly dismissed, it is difficult to conclude that it was hopeless. At the very least, it was not hopeless for the reasons given by the primary judge.

88    The contentions advanced by Mitry in support of this ground of appeal have been made good. It was not open to the primary judge to find that Mr Yin’s conduct was improper for the purposes of r 21.07 on the basis that Mr Tadrosse’s application was hopeless. Even if it was hopeless, that was not enough to establish relevant impropriety. Contrary to the Trustee’s submissions, there was also no proper basis to conclude that Mr Yin knew that the application was hopeless.

Failure to take into account counsel’s positive advice

89    Mitry’s contention in relation to this ground is that the primary judge failed to give any, or any adequate, weight to Mr Yin’s unchallenged evidence that he retained experienced counsel who had advised that Mr Tadrosse had a good case. Reliance is placed on the observations of Basten JA in Fowler v Toro Constructions Pty Ltd [2008] NSWCA 178 at [85] and [87] to the effect that the fact that a solicitor obtained counsel’s advice and that no order is sought against counsel is a matter which militates against the conclusion that the solicitor acted without a proper basis.

90    Mitry submits that the reasons given by the primary judge for dismissing the relevance of counsel’s advice were erroneous. Those reasons appear to be that there was no evidence that counsel was experienced in bankruptcy, that no advice was given in writing and that there was no evidence concerning whether counsel “considered the issues of standing, non-compliance with r 7.06 and solvency … [a]ll of which were critical to the success of the bankrupt’s application.”

91    The Trustee’s submission is that it was open to the primary judge to reject the relevance of counsel’s advice. He points to the fact that there was no evidence that Mr Walsh advised as to prospects, as well as to the fact that Mitry did not call evidence from either counsel.

92    There is again considerable force in Mitry’s submissions and no merit in the Trustee’s.

93    Mr Yin’s evidence that Mr Rogers advised him that Mr Tadrosse had good prospects was essentially unchallenged. In these circumstances it was unnecessary for Mitry to call evidence from Mr Rogers or Mr Walsh. It is immaterial that the advice was not given in writing. For the reasons already given, it was even less material that there was no evidence that counsel had considered the essentially irrelevant issues of standing, non-compliance with r 7.06 and solvency.

94    The primary judge was wrong to reject the significance of the fact that experienced counsel had advised that the application had reasonable prospects. It is, with respect, difficult to see how the primary judge could conclude that Mr Yin’s conduct was improper in circumstances where he briefed experienced counsel, counsel provided positive advice on prospects, drafted the originating process and conferred at least twice with the client. There is no evidence that the conferences with counsel were hindered by any language difficulties. If, as the Trustee contended, Mr Yin’s conduct was improper, the Trustee’s case must also have been that the conduct of counsel was equally improper. But he sought no costs order against counsel. Nor did he explain why.

95    These were errors of principle, not merely errors of fact: cf. House v King (1936) 55 CLR 499 at 504-505. The primary judge’s erroneous factual findings and reasoning led him to ignore a matter that was plainly relevant to a consideration of whether Mr Yin acted improperly. Accordingly his discretion miscarried.

Failure to apply the proper test for causation

96    Mitry submits that the primary judge erred in principle in the way he dealt with the element of causation. There are essentially two limbs to this submission.

97    First, it is said that the primary judge erred in principle or applied the wrong test because he found (at Judgment [28]-[29]) that the question of causation had to be viewed realistically, not hypothetically. Mitry submits that the question of causation in the context of r 20.07 necessarily requires the court to address a counterfactual: would the costs have been incurred by the other party if the lawyers had not engaged in the improper conduct? Here, that meant that the primary judge had to consider whether Mr Tadrosse would have brought the application even if Mitry had not become involved.

98    Second, Mitry submits that the finding by the primary judge (at Judgment [29]) that but for the improper conduct of Mitry, the application by Mr Tadrosse would not have been made is unsupported by any evidence. It is said that his Honour’s reference to the improper conduct must be a reference to the finding that Mr Yin did not explain the consequences of the application to Mr Tadrosse or advise him not to proceed. That finding is also not able to be supported.

99    The Trustee’s submission is that the finding that but for Mitry’s improper conduct the application would not have been made was open on the evidence. The relevant improper conduct is said to be Mr Yin’s improper conduct in not advising Mr Tadrosse that this was a hopeless case and that he should not pursue it. The Trustee submits that it was open to his Honour to find that if Mr Tadrosse had been advised that the case was hopeless, he would not have pursued it. Therefore the Trustee would not have incurred any costs.

100    It is difficult to see that the causation element in r 20.07 requires a test as complex as Mitry submits. It may not be necessary in all cases to approach or express the test in terms of a counterfactual. In any event, the primary judge’s rejection of a hypothetical approach does not mean that he did not approach causation by asking what would have occurred, in terms of costs being incurred, if Mitry had not acted improperly. Indeed, his Honour appears to have squarely addressed this question. He found that if Mitry had not acted improperly the proceedings would not have been commenced.

101    The first limb of Mitry’s argument is accordingly rejected.

102    There is, however, merit in Mitry’s submission that this finding was not open on the evidence.

103    The primary judge’s reference to the “lawyers’ improper conduct” must be a reference to his Honour’s conclusion that because of the supposed “formidable language difficulties” or otherwise, Mitry did not advise Mr Tadrosse of the consequences of the application or that his application was hopeless. The effect of the primary judge’s finding was accordingly that if Mitry had provided this advice the application would not have been brought.

104    There are a number of factual findings wrapped up in this conclusion. They include; first, that the application was hopeless; second, Mr Yin knew it was hopeless; third, Mr Yin failed to advise Mr Tadrosse about the application and its consequences; and fourth, that if Mr Tadrosse had been so advised, he would not have commenced or prosecuted the action.

105    The availability of the first three of these factual findings has already been addressed. None of them was fairly open on the evidence. Nor was the fourth finding. The primary judge does not identify the facts or evidence from which he drew this inference. The evidence, such as it was, indicated no more than that when Mr Tadrosse first consulted Mitry, he told Mr Yin that “I have to stop the sale no matter what.” That statement suggested that Mr Tadrosse was determined to go ahead “no matter what”. Nothing was put to Mr Yin in cross-examination to lay a proper foundation for an inference that, if Mr Tadrosse had been advised that he did not have reasonable prospects, he would not have proceeded with the action.

106    It follows that fourth ground upon which Mitry attacks the costs finding has been made out.

Conclusion and disposition of appeal

107    The finding by the primary judge that Mitry relevantly acted improperly cannot be supported. The evidence demonstrated no more than that Mitry, acting on the instructions of Mr Tadrosse and the advice of experienced counsel, represented Mr Tadrosse on an interlocutory application that was ultimately dismissed. Whilst the application faced significant hurdles, in particular in relation to the balance of convenience, it is difficult to conclude that it was hopeless or doomed to fail. The reasons given by the primary judge for dismissing it do not assist because his Honour misconceived the nature of the application and dismissed it on largely erroneous grounds. In any event, merely acting for a client in a hopeless case does not constitute improper conduct for the purposes of r 20.07. The findings made by the primary judge that formed the basis of his finding of improper conduct were not open on the evidence and were outside the Trustee’s pleaded case. Mitry was denied procedural fairness.

108    The appeal must therefore be allowed.

109    The Trustee submitted that in the event that the appeal was allowed, the appropriate order would be to remit the matter to the Federal Circuit Court. The basis for that order was said to be to enable the issues concerning the supposed language difficulties and the problems with interpretation to be the subject of further evidence and argument.

110    Given the way the matter was conducted by the Trustee before the primary judge, as well as the other errors involved in the decision, it is not appropriate to remit the matter for further determination. It is also undesirable for further costs and resources to be expended on this matter.

111    The appropriate orders are:

1.    The appeal be allowed.

2.    Order 1 of the orders made by the Federal Circuit Court on 24 July 2013 be varied by deleting the words “and Mitry Lawyers are to jointly and severally”.

3.    Order 2 of the orders made the Federal Circuit Court on 24 July 2013 be set aside.

4.    Andrew James Barnden in his capacity as trustee of the bankrupt estate of George Tadrosse, pay the costs of the appellant, Mitry Lawyers, in relation to the Application in a Case filed 23 May 2013 in the Federal Circuit Court.

5.    The respondent to pay the appellant’s costs of this appeal.

112    The effect of these orders is that the costs of Mr Tadrosse’s failed application below are to be borne by Mr Tadrosse alone on an indemnity basis. Mr Tadrosse did not appear on the costs application below and did not appeal the determination that costs be paid on an indemnity basis. The costs of the appeal are to be paid by the Trustee.

Associate:

Dated:    26 August 2014