Personal Costs Orders Against Legal Practitioners Under the Uniform Law

Personal Costs Orders Against Legal Practitioners Under the Uniform Law

by Konrad de Kerloy, Barrister, Fourth Floor Chambers

A recent New South Wales Court of Appeal decision (Muriniti v Mercia Financial Solutions Pty Ltd [2021] NSWCA 180 (18 August 2021) should be of interest to Western Australian legal practitioners as it explains the operation of the soon to be introduced provisions of the Uniform Law which allow the court to make costs orders personally against the legal practice o r the solicitor who acts for an unsuccessful party in litigation involving claims for damages.

The case is also a salient reminder of the very high legal and ethical obligations imposed on legal practitioners by the Uniform Law and the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 not to plead or allege fraud and other criminality or misconduct without a proper basis to do so.

Relevant Provisions

Cl 2(1) of Sch 2 to the Uniform Law stipulates that:

A law practice must not provide legal services on a claim or defence of a claim for damages unless a legal practitioner associate responsible for the provision of the services concerned reasonably believes on the basis of provable facts and a reasonably arguable view of the law that the claim or the defence (as appropriate) has reasonable prospects of success.

That provision must be read with rule 21 of the Conduct Rules 2015.

Rule 21.3 provides that a solicitor must not allege any matter of fact in any court document settled by the solicitor, in any submission during any hearing, in the course of an opening address, or in the course of a closing address or submission on the evidence, unless the solicitor believes on reasonable grounds that the factual material already available provides a proper basis to do so.

Rule 21.4 provides that a solicitor must not allege any matter of fact amounting to criminality, fraud or other serious misconduct against any person unless the solicitor believes on reasonable grounds that available material by which the allegation could be supported provides a proper basis for it, and the client wishes the allegation to be made, after having been advised of the seriousness of the allegation and of the possible consequences for the client and the case if it is not made out.

Clause 5(1) of Sch 2 of the Uniform Law provides:

5 Costs order against law practice acting without reasonable prospects of success

(1) If it appears to a court in which proceedings are taken on a claim for damages that a law practice has provided legal services to a party without reasonable prospects of success, the court may of its own motion or on the application of any party to the proceedings make either or both of the following orders in respect of the practice or of a legal practitioner associate of the practice responsible for providing the services—

(a) an order directing the practice or associate to repay to the party to whom the services were provided the whole or any part of the costs that the party has been ordered to pay to any other party,

(b) an order directing the practice or associate to indemnify any party other than the party to whom the services were provided against the whole or any part of the costs payable by the party indemnified.

Clause 6(1) of Sch 2 of the Uniform Law provides:

6 Onus of showing facts provided reasonable prospects of success

(1) If the court (the trial court) hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Schedule that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success.

Facts in Muriniti

The substantive proceedings

Mr Muriniti had been the solicitor for the defendant in the underlying substantive proceedings, involving a claim for possession and monies due and owing under a loan agreement and mortgage. In these proceedings, a cross-claim was brought on behalf of Mr Muriniti’s client, alleging that the cross defendants had engaged in fraudulent misrepresentation and conspiracy to defraud the defendant. In his judgment on the substantive proceedings (Kaji Australia Pty Ltd v Glover (No 4) [2019] NSWSC 1779), Davies J dismissed the cross-claim, finding that there was no evidentiary basis for the allegations of fraudulent misrepresentation and conspiracy and that it was “difficult to see in the present matter how [Mr Muriniti’s] ethical responsibilities have been complied with”.

The substantive judgment was upheld on appeal: see Glover v Kaji Australia Pty Limited [2020] NSWCA 222.

The costs judgment

In the costs judgment, which was delivered following the appeal judgment, the primary judge ordered that Mr Muriniti was to indemnify certain of the cross-defendants in the substantive proceedings for 65% of their costs and/ or out-of-pocket expenses actually and reasonably incurred. In making the relevant orders, the primary judge held that the filing of the cross-claim was in breach of Mr Muriniti’s professional and ethical obligations, and that the operation of cl 6(1) of Sch 2 to the Uniform Law was engaged.

The rebuttable presumption under cl 6 Sch 2 of the Uniform law

Under cl 6 of Sch 2 of the Uniform Law, solicitors are bound by any findings by the trial judge of the kind referred to in that clause, to lead to the rebuttable presumption that the legal services were provided without reasonable prospects of success.

In the substantive proceedings, the findings made by the primary judge, and the acceptance of those findings by the Court of Appeal, clearly identified the absence of evidence to justify the particular claims of fraudulent misrepresentation and conspiracy that were made. In that way those findings gave rise to a presumption for the purposes of cl 6 of Sch 2 of the Uniform Law.

There was, therefore, an onus on Mr Muriniti to establish that there were provable facts that provided a basis for a reasonable belief that the claim had reasonable prospects of success. Mr Muriniti attempted to rebut the statutory presumption by simply repeating in his affidavit and oral evidence the facts and arguments which had been considered by the primary judge (and the Court of Appeal) in rejecting the fraudulent representation and conspiracy claims. The attempt failed.

In reaching his conclusion, the primary judge had regard, as an important part of the context, to r 21 of the Conduct Rules. His Honour took the view (at CJ [65]) that

nothing in Mr Muriniti’s affidavit or his oral evidence identifies any available material, as cl 21.4.1 requires, which supports the allegations.

The primary judge also drew attention (at CJ [79]) to the fact that, given that the alleged conspiracy was advanced by reference to circumstantial matters:

… a reasonable solicitor would need to ask himself or herself why it might be that the cross-defendants would be acting in a fraudulent, improper or illegal way”. The only answer that could be proffered by Mr Muriniti was entirely speculative.

In the appeal judgment, Bell P (with whom the other members of the Court agreed) observed (AJ [12]):

Clause 6(1) of Sch 2 of the Uniform Law is a forensically significant provision because it erects a statutory presumption by reference to findings in the underlying proceedings to which the legal practitioner is not a party (although he or she will have been intimately involved in the proceedings). Whilst the presumption built on such findings may be rebutted, the legal practitioner is bound by the findings in the sense that he or she may not be heard to say that, because he or she was not a party to the proceedings, they have no legal effect on the legal practitioner.

Bell P also made a number of other important observations concerning the rebuttable presumption. Firstly, a practitioner will be afforded the opportunity to lead evidence in support of the reasonableness of the position taken in the conduct of the underlying litigation. At AJ [84] Bell P stated:

Judges are astute to the fact that different views may be open on particular evidence and that just because a witness, for example, may not ultimately be accepted as credible under cross-examination or come up to proof, it may have been entirely reasonable for a practitioner to have based his or her view as to arguability of a case on such evidence. Judges are also conscious of the fact that, for various reasons not always within the control of the practitioner, litigation may take an unexpected turn, resulting in a case which originally may have appeared to have fair or reasonable prospects to be a hopeless one. On a third party costs application, the legal representative will have the opportunity to explain such a circumstance.

Secondly, costs orders against legal practitioners should not be used in a way that discourages acceptance of instructions in cases which are fairly arguable, even if not strong or even weak. Bell P cited at AJ [85] a passage from Barrett J’s judgment in Degiorgio v Dunn (No 2) (2005) 62 NSWLR 284; [2005] NSWSC 3 at [27]:

A statutory provision denying to the community legal services in a particular class of litigation cannot be intended to stifle genuine but problematic cases. Nor do I see the statutory provisions as intended to expose a lawyer to the prospect of personal liability for costs in every case in which a court, having heard all the evidence and argument, comes to a conclusion showing that his or her client’s case was not as strong as may have appeared at the outset to be. The legislation is not meant to be an instrument of intimidation, so far as lawyers are concerned.

Thirdly, there will be cases where evidence about facts were unknown to the primary judge because for forensic or other reasons they were not deployed or did not emerge in the trial but which supply some additional basis for the solicitor’s belief as to the viability of the allegations and rendered the approach taken a reasonable one. Where such evidence exists, it may be presented to rebut the presumption.

Fourthly there may also be cases where the constraints of legal professional privilege impede the ability fully to explain the practitioner’s basis for making the problematic allegations. Where such constraints exist, they can be taken into consideration in determining whether the presumption has been rebutted.

Fifthly, in order to demonstrate a reasonable belief that the claim or the defence had reasonable prospects of success it is not sufficient to demonstrate that the legal practitioner had a genuine and honest belief that his or her reasoning process underpinning the allegations was cogent. There must be a reasonable basis for the allegations being made. As Bell P observed (albeit in relation to s 99 of the Civil Procedure Act 2005 (NSW)) at AJ [103]:

An honest and genuine belief that a matter is reasonably arguable does not make it so. This is an objective matter which is separate from the subjective belief and understanding of the legal practitioner.

Sixthly, while the obligation to have a reasonable basis for the allegations being made applies to all allegations, allegations of fraud and other criminality add a further dimension in that they engage the well-known principles of professional conduct embodied in the Conduct Rules calling for due circumspection and care in the making of such allegations.

Seventhly, the repetition of facts and arguments which have already been considered by the primary judge in the substantive hearing will not be sufficient to rebut the statutory presumption. As Bell P observed at AJ[93]:

In that context, the key point is that, in the present case, no evidence was adduced which operated to rebut the statutory presumption which arose from the primary judge’s undisturbed findings in the underlying substantive judgment.

Conclusion

Legal practitioners must test their case theory and the allegations which they propose to make in support of that theory against the facts as they exist at the time of making them and against any facts which emerge in the course of the case which might demonstrate objectively the flimsiness and insecurity of the theory. That is particularly so where the case theory involves allegations of fraud or other serious misconduct. Failure to do so may have serious financial consequences to the practitioner concerned.