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White Industries v Flower & Hart: unfounded allegations of fraud

January 25th, 2014 · No Comments

This post is a case note of Justice Goldberg’s famous decision in White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169; [1998] FCA 806 as well as of associated decisions and surrounding controversy.  Because it is what I am working on at the moment, it concentrates on that part of the case which relates to the unjustified pleading settled by Ian Callinan QC and signed by his instructor Michael Meadows, alleging that the builder lied to the developer in relation to the cost of building a shopping centre just north of Brisbane.  It’s a big post, to kick off the year.

Facts (not all drawn from the judgments)

George Herscu died just before Christmas, aged 85. He was the alter ego of a property development group headed up by the Hersfield Development Corporation. According to 4 Corners, he was the biggest property developer in the country. According to The Australian, he lived in a Toorak mansion, owned a Melbourne Cup winner, and was once the third richest man in Australia after Robert Holmes a Court and Kerry Packer, one place ahead of Alan Bond.  He was a millionnaire by 30, and made and lost a fortune of $500 million.  He left Australia for California in 1997 and rebuilt substantial wealth.  Towards the end of his life, he was engaged in bitter litigation with his son, who described him as ready to spend whatever is needed to “crush anyone that stands in his way”.  Ironically, given what follows, Mr Herscu’s lawyers accused the son of mis-using the deposition process.  According to The Australian, they said:

‘Your clients’ continued insistence on trying to push an 80-year-old man with hypertension, a heart condition, failing hearing and many other health problems into a deposition room – having already deposed him for 27 hours – is shocking and wrong.  The only conclusion one can reasonably draw from your clients’ posture is that their litigation strategy involves attempting to subject George Herscu to so much stress and pressure he simply dies. To use the tools of discovery for this purpose is reprehensible, and indeed revolting.’

Very alarmingly, he was asked in those depositions about allegations that he had watered down the beer in a pub.

Anyway, he developed and built shopping centres and was a crook. In 1983, he pleaded guilty to giving secret commissions to officials of the Builders Labourers Federation – remember the BLF? — and as we will see, he went to jail for corruption following the Fitzgerald Inquiry.

In 1985:

(a)            Mr Herscu bought the Hooker group for $450 million;

(b)            Hersfield Development was extending its shopping centre in Capalaba, a suburb of Brisbane 19 km from the city centre, doing the building itself; and

(c)            Hersfield Development, through a wholly-owned subsidiary, Caboolture Park Shopping Centre Pty Ltd (whom I refer to as ‘the developer’ below), sought to develop and have someone else build another one in Caboolture, a town about 44 km from Brisbane.

There were four tenderers.  The lowest by a long way, was White Industries (Qld) Pty Ltd’s (whom I refer to below as ‘the builder’), at $14.8 million.  Mr Herscu told the builder that the price was too high.  Two weeks later, when the drawings progressed a bit, the builder told the developer that it would in fact cost about $15.1 million, including a fee for the builder of $300,000.  One of Mr Herscu’s people suggested lower figures for the sub-contractors, believing those figures to be reasonable.  The developer said it would use its buying power to chisel down the costs of sub-contractors. On this basis, the builder signed a contract in which a ‘target sum’ was specified as the contract price: $13.4 million including a fee of $350,000 for the builder.  The possibility of costs going over budget was specifically contemplated in the contract and a formula agreed upon for who should bear those costs and in what  proportion.  $12 million of the $13.4 million was expressly made up of ‘provisional sums’ and the contract allowed for a variation in the sum depending on what the cost turned out to be.

By December 1985, costs blow-outs which had been acquiesced in by the developer were more than $2 million. About a year later, the architect – who held an arbitral role under the contract – had certified claims for payment in the sum of $16 million on the written approval of the developer’s supervisor for the project, and the builder advised the developer that the total payable under the contract was about $19.5 million, but required approval from the architect for adjustments of more than $2 million.

Mr Herscu was no stranger to litigation.  Justice Goldberg was less direct in his description of him, but it is a fair summary to say that Mr Herscu was a litigation cowboy.  His go-to lawyers were Michael Meadows, a partner at the establishment Brisbane firm Flower & Hart, and Ian Callinan QC.  Flower & Hart regarded Mr Herscu as a sensitive and difficult client, and Mr Meadows, who was not a litigation partner, was the interface between the client and the firm regardless of the subject matter of the retainer.  The developer was a major client of Flower & Hart, and Mr Meadows carried out a substantial amount of its legal work.[1]

On 9 December 1986, Mr Meadows received instructions from Ian Bennett, the developer’s chief estimator.  Exactly what Mr Meadows’s instructions were is critical.  Justice Goldberg found that:

‘Mr Bennett told Mr Meadows that he had been delegated by Mr Herscu the task of negotiating the price with White, that tenders were called on a target sum basis due to the expedition required and that prime cost items in the tender were rejected by Mr Herscu as being too expensive. Mr Herscu told Mr Bennett and White that $13,500,000 was the most he could spend on construction. Mr Bennett said that in response to White’s figures he had put it to the White representatives that the shopping centre could be constructed for $13,375,000 which was the aggregate of his estimate for each trade which would be involved and that he based his estimates on his experience and HDC’s costs and the carrying out of extensions to its Capalaba Shopping Centre. Mr Bennett told Mr Meadows that he went through each item on White’s summary sheet with White, proposed lower figures for most items and supplied the figures that made up the $13,375,000. Mr Bennett had told White that HDC would help White negotiate prices with subcontractors as HDC had the purchasing power.

Mr Bennett said that the representatives of White considered the matter overnight and the next day they met with Mr Briggs and himself and said words to the effect that they agreed with the figures that he had put forward and believed they could do the job for that price. Mr Bennett said that he then summarised the position for the meeting. He went through the figures which he had provided for the individual trades again and explained why he thought they were reasonable. He stressed that some of the trades might come in under or over the budget, nevertheless White was to carry out the works for around $13,375,000. Mr Bennett said that Mr Dugan from White had agreed with his summary. Mr Bennett said he outlined the agreement reached to Mr Herscu who agreed and Mr Bennett then returned to the meeting and said they had an agreement and White said they would submit the formal contract for signature as soon as possible.’

Furthermore, Mr Bennett’s instructions were that the builder did not say that the figures he was proposing to it were reasonable or unreasonable.  (p. 185)

The Full Court summarised the situation, at [11], like this:

‘What is significant in regard to this meeting, which constituted the only instructions which Mr Meadows had dealing with the circumstances surrounding the making of the contract before proceedings were instituted … is that there is no suggestion that [the builder] represented that the contract could be completed for around [$13.4 million].  That figure was suggested by [the developer’s chief estimator].  There was no suggestion that the figure of [$13.4 million] was unreasonable.  To the contrary [the chief estimator] regarded that figure as reasonable.  There was no suggestion that in any way Caboolture relied upon any representation regarding the figure of [$13.4 million] in entering the contract.  It relied on [its chief estimator].  [The developer’s] only complaint was that it had been overcharged under a cost plus contract, notwithstanding that a large part of that cost related to variations to the contract works that had been approved by [the developer] and certified as such by the architect under the contract.’

One thing which was admirable about Mr Meadows was his concise and practical advices.  Following these instructions, he advised the developer that since it and not the builder had come up with the figures and because it seemed like it had relied on its own expertise rather than relying on anything the builder said, he was not at all optimistic that the law provided redress to the developer.  But, he said, ‘If you wish, we can discuss the matter with Mr Callinan QC to see if he can come up with any avenue of relief to your company.’

Mr Callinan disagreed with Mr Meadows’s advice that because the figures had emanated from the developer’s man, there could be no representation case against the builder; he said that if the builder had adopted them, then there was a weak claim for misleading and deceptive conduct under s. 52 of the Trade Practices Act 1975.  As most lawyers would be aware, that is a cause of action in which fraud – deliberate or reckless misleading – is not an element.  Innocent misrepresentation is enough.

The builder was threatening proceedings for millions of dollars, and the architect was going to have to make a decision on the adjustments shortly which would be very difficult to challenge and was likely to go substantially the builder’s way.  The issue of proceedings was thought to be imminent.  Mr Callinan and Mr Meadows’s advice was given on 16 December 1986:

‘the strict legalities are against you and your contractual position is weak … your legal position is weak … Is there anything that can be done to try to give you, at the very least, a temporary bargaining stance?’

It was thought to be extremely advantageous tactically to be the person commencing proceedings.

Mr Meadows’s letter went on to advise that he had briefed Ian Callinan and a junior, Richard Perry to draw s. 52 proceedings for urgent filing in the Federal Court, noting that ‘Fraud on the ground of recklessness may also be available to be pleaded against the builder.’  No instructions to sue anyone had been received at that time (p. 207), and the commencement of proceedings was the lawyers’ idea. But, he warned, ‘you could not win any litigation if put to the test’.

Mr Herscu said, in effect: ‘Great! Go for it.’  And they did: Mr Meadows signed a statement of claim drawn by Mr Perry and Mr Callinan and it was filed the day before Christmas Eve, 1986.  As may be predicted given the rush, it was a very poor pleading.  ‘Representations’ and ‘implied representations’ were said to have been made, but it was not alleged why the representations were false.  The representations were that the target contract sum was attainable, and that the builder ‘was capable of and undertook to achieve a total construction cost consistent with’ it.  The implied representations were that the builder knew of matters which justified the making of the representations and that it possessed the skills to have properly considered and assessed an appropriate target contract sum and total construction cost. The fraud pleading was nothing more than this:

‘the representations … were made fraudulently in that they were made with knowledge that they were false, or without knowledge that they were true or with reckless indifference to their truth or falsity.’

It was the lawyers who came up with the proposition that the builder had misled the developer. Before issuing, Mr Meadows did not read a single document which pre-dated the entry into the contract, though there were many such documents and interviewed only the chief estimator despite the fact that there were several participants to the contract negotiations.  He knew that the developer’s chief estimator had come up with the figures which added up to $13.4 million, in part based on his recent experience at the other project in Capalaba and that the chief estimator believed those figures to be reasonable.  Between the letter of advice recording Mr Meadows’ and Mr Callinan’s advice and the pleading drawn by counsel and signed by Mr Meadows, the fraud allegation (which had never been discussed with the developer except by the fleeting reference in the letter) had morphed from one based on recklessness to one based on knowledge of the falsity of the representations.

Mr Callinan’s advice as to the arguability of the claim as pleaded was predicated on the existence of evidence as to the falsity of the representations and reliance, and loss, which he believed probably existed, but ignorant of whether or not it did exist, he advised the institution of proceedings immediately.  As Goldberg J put it:

‘The urgency was for [the developer] to issue a proceeding first; there was no time to investigate, collect or collate evidence.  Although Mr Callinan turned his mind to the question of evidence and advised that subject to the evidence being available there was an arguable, albeit weak, case he did not make the obtaining of the evidence a pre-condition to the issue of the proceeding.  The whole tenor of the letter [recording Mr Meadows and Mr Callinan’s advice] is that – you cannot win but we think you should issue proceedings urgently to obtain a temporary bargaining stance and bargaining position.’

The proceedings were commenced in the Federal Court on 23 December 1986 .  They came on for trial on 7 June 1988 by reference to pleadings which included particulars which had been dragged out of the developer by interlocutory process. A Melbourne judge, Justice Donnell Ryan, his associate, his personal assistant and his family including two school-aged children, moved to Brisbane for two years to hear the case.

The developer’s case did not go well.  The developer’s chief estimator’s credit was totally destroyed in cross-examination and one of the other developer’s people involved in the negotiations with the builder admitted in cross-examination to lying on oath in his evidence in chief.  (I know nothing of the details of this testimony touched on by Goldberg J at p. 197, but the possibility occurs to me that the extraordinary upping of the ante by the mutual expenditure of millions of dollars of legal costs and the dispute playing out in a public forum made liars of relatively honest men.  If so, they might be included in the list of victims of the lawyers’ wrongdoing.)

The litigation partner at Flower & Hart who had taken carriage of the matter from Mr Meadows urged the developer to withdraw the fraud allegations following several invitations from Justice Ryan to do so and warned that ‘There is some authority which would indicate that if your company does not withdraw allegations of fraud (where the allegation can not be substantiated) then the judge may make an order that your company pay costs calculated on a solicitor and own client basis rather than the usual party party costs.’  The developer did take that advice.

Receivers were appointed to Hersfield Developments on 28 July 1989. Flower & Hart ceased to act on 9 August 1989, by which time the proceeding had occupied 150 hearing days. Receivers were appointed to the developer on 17 August 1989.  On that day, there was no appearance at the trial for the developer and the trial judge struck out its claim with indemnity costs and entered judgment the next day.  The indemnity costs order was based on the proposition that the developer, properly advised,

‘should have known before instituting its application, or early in the lengthy process of amendment needed to torture the statement of claim into disclosing causes of action in fraud and under s 52 and to provide appropriate particulars, that it had no chance of successfully proving those causes of action.’ (p. 198)

Predictably, the developer conducted the proceeding with a view to delaying trial (amazingly, Mr Callinan actually reduced the following to writing:

‘[the developer] is anxious to make the matter difficult generally as it can be for [the builder] and I reiterate that the most promising way of achieving this is by having ready as soon as possible, an extremely comprehensive set of interrogatories’.)

They ran to 700 pages.

And, incredibly to 2014 eyes, junior counsel let this slip off the pen:

‘We have also, as instructed, drawn a Request for Further and Better Particulars, which is enclosed herewith.

We were tempted to prepare a Request which was even more searching and extensive; however, on reflection, we consider that the client’s tactical objectives will be best served by adopting an attitude which is not transparently obstructive.’

Justice Goldberg used this conduct to infer that the litigation partner was aware of the hopelessness of the case and was making things as hard as possible for the other side in order to delay trial or force a settlement.  See also the Full Court’s reasons at [23].

When I first read the case, I thought that perhaps the cost of the litigation had ruined Mr Herscu, but that seems unlikely.  The 1989 / 1990 collapse of his Hooker Corporation was the biggest corporate bankruptcy in Australia at the time, with creditors left owed $1.77 billion.  The year before, Mr Herscu reportedly spent $52,000 on flowers for his daughter’s wedding.

On 6 April 1990, Justice Ryan gave judgment on the builder’s cross-claim for $5.5 million, together with interest and costs. That was less than what the builder had claimed and the diminution in the claim represented the only success for the developer in the case.  And that success had nothing at all to do with the developer’s fraud and s. 52 claims and could and would have been achieved had they waited to be sued and raised a defence strictly under the building contract. Judgment was entered on 30 April 1990. The costs were ordered to be the subject of a gross sum assessment.  But the builder never sought to conduct that assessment because the developer was thought to have no money.  According to ‘4 Corners’, the builder had incurred $3.5 million in costs.

Mr Herscu became a bankrupt within 6 months and was in jail for corruption by the end of 1990.  He had paid a bribe of $100,000 to Russ Hinze, a corrupt minister in the Bjelke-Peterson government to sort out some regulatory problems with one of his developments.  Both were stars of the Fitzgerald Inquiry.

Justice Goldberg’s decision

In November 1992 – six years after the critical contractual negotiations – the builder sought leave to appeal the costs order out of time and to substitute for the costs orders against the developer orders that its former solicitors, Flower & Hart, pay its costs, other than those exclusively referable to its cross-claim, on an indemnity basis.  It did so after it came into possession of a trove of privileged written communications between the developer and its former lawyers.  How it came upon that trove is recounted by Goldberg J in White Industries (Qld) Pty Ltd v Flower & Hart (No 2) (2000) 103 FCR 559 at 571; [2000] FCA 1132 at [33] to [35].  The developer had been wound up and a liquidator appointed on 18 May 1990.  The privilege in the communications between the developer and its solicitors was transferred to the liquidator.  The liquidator demanded Flower & Hart’s file.  First they claimed a lien.  Then they provided only the documents traditionally owned by the client.  After a year and nine months, the liquidator got everything, and the builder purchased it. See the Full Court’s reasons at [34].

The bringing of an application for leave to appeal was the wrong procedure.  At the Court’s suggestion, it appears, the builder sought to join Flower & Hart to the original proceeding and sought by an application in that proceeding an order that they pay its costs.  The solicitors took a jurisdictional point, essentially that the Federal Court was functus officio, s. 43 of the Federal Court Act 1976 was available only in respect of extant proceedings, and the Federal Court had no summary inherent jurisdiction over lawyers who appeared before it. In September 1993, the Full Federal Court found that it had jurisdiction to entertain the application, under s. 43 of the Federal Court Act 1976, and suggested in dicta that it did have a summary disciplinary jurisdiction which could have been availed of had s. 43 been unavailable in the circumstances: Caboolture Park Shopping Centre Pty ltd (in liq) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224.  The Court was not functus officio in relation to the question of whether the solicitors should pay the costs personally; any such order would be supplemental to, and not vary, the original order that the developer pay the builder’s costs, the Full Court found.

The application was heard not by the trial judge but by Goldberg J. That hearing occurred over 10 days mainly in April 1998 – 12 years after the contract negotiation. His Honour awarded the builder the relief it sought on 14 July 1998: White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169; [1998] FCA 806.

Flower & Hart were the only respondents to the builder’s suit.  Mr Callinan was not a respondent.  Perhaps it was because it was thought – pre-D’Orta-Ekenaike – that he but not the solicitors might be immune from suit.  But it was not because he was a High Court judge.  Judges are not immune from negligence suits in respect of their pre-judicial life, but Justice Callinan had not been appointed at the time the builder commenced its claim against Flower & Hart and went to the High Court straight from the Queensland Bar.  So Goldberg J’s findings in relation to Justice Callinan were findings in a case to which he was not a party. He gave evidence for Flower & Hart, however, and was cross-examined.  Justice Goldberg relied on Browne v Dunn inferences arising from what evidence Justice Callinan did not give, in circumstances where he was not always cross-examined directly about it.  The Full Court approved of that course, but commented that it was unnecessary for the purposes of the proceeding against Flower & Hart to make findings in relation to Justice Callinan’s conduct.

Instructed by Minter Ellison, John Karkar QC from the Melbourne Bar prosecuted the builder’s claim and was Justice Callinan’s cross-examiner.  (Justice Callinan had himself cross-examined Justice Kirby in his capacity as prosecutor of Justice Lionel Murphy.)

Justice Goldberg found that Mr Meadows’s (and Mr Callinan’s) principal purpose in commencing the proceeding (noting that lawyers and clients may well have different purposes) was to delay the payment by the developer of what was owing to the builder.  Mr Callinan had unfortunately written this:

‘when this action was commenced … the expectation was, not that the action would succeed, but that the institution of proceedings would probably defer the payment, by [the developer], of the money demanded by [the builder] for some 12 months.’

Flower & Hart said ‘expectation’ and ‘purpose’ are different things.  Justice Goldberg accepted that argument but found that the expectation and purpose in this case were precisely congruent. To commence proceedings for a principal purpose other than the vindication of a bona fide legal right is an abuse of process, and it is the analysis of this principle for which the case is probably best known.  This was a key foundation for the personal costs order made against Flower & Hart.  But my focus is on the other foundation: the making of allegations of fraud without adequate factual foundation and persisting in them.

Justice Goldberg found that Mr Meadows never turned his mind to whether there was sufficient or any material to justify a plea of fraud by the developer against the builder (p. 223).  That finding assisted him to find that there was in fact no factual foundation for the allegation.  He rejected evidence given by Mr Meadows as ‘an after-thought and rationalisation’ but in any event found that Mr Meadows’s professed reasoning was inadequate.  Justice Callinan did not give any evidence of his beliefs in relation to the justification for pleading fraud.  Mr Meadows had said he believed fraud could be inferred from the facts that the tender had been $14.8 million, then $15 million, the developer had told the builder there would be no deal unless for something like $13.5 million and the builder had come back and said they believed they could build it for $13.5 million, and it then cost $20 million and was not even finished.

His Honour concluded at p. 223:

‘A consideration of the two tenders, in my view, would not have warranted the formulation of an opinion that a plea of fraud was arguable, especially in the circumstances in which the final figures which made up the components of the $13,375,000 came about. Mr Meadows had an inadequate basis prior to [issuing proceedings] on which to consider whether fraud should be alleged. He had not taken any witness statements and although [five days earlier] on 18 December 1986 he had called for Mr Bennett to prepare a spreadsheet showing amounts for budget, contracts let and amendments and variations, he did not receive that document until [more than a month after proceedings were issued]. However he did not read it; had he done so he would have realised that the dispute between the parties had nothing to do with representations as to the cost of building but rather was concerned with whether items were properly classified as variations.’

His Honour said at pp 241-2:

‘Allegation of fraud

White submits that Flower & Hart should pay its costs because it delivered a statement of claim alleging fraud in circumstances where there was no factual basis for making the allegation. The principle of law upon which this allegation is based is rooted in the serious consequences of an allegation of fraud which should not be made lightly. The relevant obligation cast upon legal practitioners in pleading fraud was identified by the New South Wales Court of Appeal in Minister Administering the Crown Lands (Consolidation) Act and Western Lands Act v Tweed Byron Aboriginal Land Council (1990) 71 LGRA 201 in the following terms at 203 – 204:

“In the pleading of fraud, some requirements of the law are clear beyond argument. These requirements are not only rules of pleading and practice established by decisions of the courts. They are rules of ethical conduct binding on members of the legal profession. It is a serious matter to allege fraud against a party in pleadings to which attach the privileges incidental to court proceedings. Reports of such allegations may be recounted in the community and through the public media. They may do great harm to a party before a word of evidence has been offered and submitted to the searching scrutiny of cross-examination or to rebuttal. It is for this reason, amongst others, that legal practitioners must take care to have specific instructions and an appropriate evidentiary foundation, direct or inferred, for alleging and pleading fraud. We say inferred, because it will sometimes be impossible to prove fraud by direct evidence. The tribunal of fact may be invited to draw an irresistible inference of fraud from the facts proved. Of its nature, fraud is often perpetrated covertly. The perpetrators of fraud will often take pains to cover their tracks.”

The Court went on to say:

“Professional discipline may follow if allegations of fraud are made where the foregoing conditions are not satisfied. By such means, courts protect their process from the abuse which would follow from the too ready assertion of fraud against a party, in circumstances where it could not be proved to the high standard required of such allegations: cf Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362 and Panama and South Pacific Telegraph Co v India Rubber, Gutta Percha and Telegraph Works Co (1875) 10 Ch App 515 at 530.”

The Court also observed that behind the principle relating to the need to plead fraud specifically and not as a general allegation was the policy relating to the protection against the risk of abuse of Court process. These passages were cited by Mahoney JA (with whom Clarke JA agreed) in Ghazal v Government Insurance Office of New South Wales (supra) at 348 to support his observation that:

“In relation to allegations of this kind [of fraud], obligations are placed upon lawyers who seek to raise them”,

His Honour then cited these passages and continued:

“It is important that the substance of these principles be adhered to.”

As a matter of principle an unwarranted allegation of fraud by a solicitor or, putting the matter more precisely, an allegation of fraud when there is no factual basis for it is sufficient, in my view to constitute a serious dereliction of duty or serious misconduct by a solicitor which will enliven the jurisdiction to order costs against the solicitor.

The significance and seriousness attached by the law to the making of the allegation of fraud was identified by the Supreme Court of New South Wales in Oldfield v Keogh [1941] NSWStRp 33; [1941] 41 SR (NSW) 206. In the course of a defamation hearing an allegation was made that a document had been forged. The Court found it difficult to understand what could have led to the making of the charge as there was no evidence to support it. The Court said at 211:

“In this connection it is useful to repeat some observations by Lord Macmillan with respect to attacks on character. His Lordship points out that when such an attack is suggested, `counsel … must insist upon being supplied with all the information which is thought by his client to justify the attack, and then he must decide for himself whether the charges made are such as can be justifiably made. In exercising his judgment in such a matter the advocate is fulfilling one of the most delicate duties to society which his profession casts upon him. It is no small responsibility which the State throws upon the lawyer in thus confiding to his discretion the reputation of the citizen. No enthusiasm for his client’s case, no specious assurance from his client that the insertion of some strong allegations will coerce a favourable settlement, no desire to fortify the relevance of his client’s case, entitles the advocate to trespass, in matters involving reputation, a hair’s breadth beyond what the facts as laid before him and duly vouched and tested will justify. It will not do to say lightly that it is for the Court to decide the matter. It is for counsel to see that no man’s good name is wantonly attacked’: `The Ethics of Advocacy’ in `Law and other Things,’ pp 191-2.”

Although Lord Macmillan refers to counsel in this passage the principles are equally applicable, in my view, to solicitors particularly where the solicitors sign the pleading containing the allegation.’

Then his Honour made findings which are summarised by the Full Court at [54] – [55]:

‘that the allegation of fraud had been included in the proceeding without there being any basis for it. So far as this finding was made against Mr Meadows, it depended first upon there having been objectively no basis for an allegation of fraud, secondly upon the fact that the client had never suggested fraud and thirdly upon his Honour’s rejection of Mr Meadows’ evidence that he had at the time thought that a case in fraud was arguable. When Mr Herscu said he had been “ripped off”, he meant that he had been overcharged, not that fraudulent misrepresentations had been made to him. It may also be noted that Mr Meadows had conceded that he was able to recall the circumstances in which fraud was raised only with “great difficulty”. …

His Honour found that the prospect of pleading fraud had been raised by Mr Callinan but that it had not been the subject of any extensive discussion between Mr Meadows and Mr Callinan.’

And, at [57]:

‘The finding against Mr Meadows was made because his Honour rejected his evidence, and there was no other evidence adduced on the issue despite its centrality to the litigation. As his Honour held, Mr Meadows could not shelter behind advice received from counsel, particularly where the limits of the factual basis for such advice were set by the contents of the brief provided to counsel by Mr Meadows.’

Once the facts are appreciated, the conclusion is hardly surprising though it seems to have come as quite a shock to some parts of the profession at the time.  Mr Meadows signed a statement of claim alleging knowingly fraudulent misrepresentation in very dangerous circumstances: the client had not complained of the misrepresentations and indeed had not asked the lawyers to sue at all, and the law of misleading and deceptive conduct was being sought to be used to undermine the parties’ bargain in a way which the law might be thought likely to rail against. The most pertinent thing that Mr Meadows knew about whether they were lies, or honest incorrect predictions, or correct predictions which were made to appear wrong after the goalposts changed dramatically is that both the developer’s supervisers of the project and the architect had signed off on the costs which were now under attack.

Justice Goldberg ordered Flower & Hart to pay the builder’s indemnity costs of the proceeding commenced by the developer.  He ordered them to be paid on an indemnity basis for the same reasons as he ordered that Flower & Hart pay them personally.  His Honour specifically found that the unjustified and careless allegation of fraud by itself separately justified a personal costs order against Flower & Hart, at 251 and 252:

‘Independently of the finding that it was unreasonable to initiate the proceeding I am of the opinion that pleading fraud when there was no factual basis for the pleading and where no consideration was given to whether there was such a factual basis are circumstances which, of themselves, are sufficient to enliven the jurisdiction to order that Flower & Hart should pay White’s costs of the proceeding. That is to say, I am satisfied that the jurisdiction to order solicitors to pay the opposing party’s costs is enlivened where the solicitors institute proceedings relying on a cause of action in fraud where there is no factual basis for that allegation and where no consideration is given before the institution of the proceeding to whether there is such a factual basis.

The pleading of the fraud cause of action in the circumstances highlights and emphasises these conclusions. Even if there was no evidence and finding of the illegitimate purpose I have found I would conclude that the institution of a proceeding with a plea of fraud in the circumstances, or rather absence of circumstances, in which the plea of fraud came about is such as to fall within the principles and the authorities to which I have referred and warrants a costs order against Flower & Hart.’

I do not know whether Flower & Hart or any insurer paid all or part of the personal costs order or the costs of the personal costs application, but would be interested to know.

After Justice Goldberg’s decision

Justice Goldberg’s decision was confirmed on appeal in a joint judgment of Lee, Hill and Sundberg JJ: Flower & Hart (a firm) v White Industries (Qld) Pty Ltd [1999] FCA 773; (1999) 87 FCR 134 (Lee, Hill and Sundberg JJ) 11 June 1999.

Mr Callinan had been appointed a judge of the High Court in February 1998 – while the case against Flower & Hart was pending but before the commencement of the trial before Justice Goldberg – by the Howard Government’s Attorney-General, Daryl Williams.  Once Justice Goldberg’s decision was published on 14 July 1998, the appointment was controversial.  Bret Walker SC as President of the Law Council called for an inquiry.  So did Nick Bolkus, the shadow Attorney-General.  The then recently-former Premier of Queensland, Rob Borbidge, said:

‘What we’re seeing very clearly is a witch-hunt by a cabal of Labor lawyers who are out to get someone that they don’t think should be there and will stop at nothing to bring him down.’

A recently-former Crown Counsel for Victoria, Professor Greg Craven said, rather unfortunately, ‘If this is proved misbehaviour then we’ve just disqualified 95% of the commercial bar from High Court appointment’.  The Council for Civil Liberties and the Victorian Bar Council were not supportive of the Law Council’s stance, principally because Justice Callinan had not been a party to the proceedings and the decision was subject to appeal.  There never was an inquiry and so far as I am aware Justice Callinan never put forward publicly any explanation for pleading fraud.

The parties subsequently agreed the costs at $1.65 million, and Goldberg J heard a dispute over interest on the costs giving judgment for interest on 14 August 2000: White Industries (Qld) Pty Ltd v Flower & Hart (No 2) (2000) 103 FCR 559.  That was overturned on appeal (2001) 109 FCR 280.  On 26 June 2002, the builder unsuccessfully sought leave to appeal to the High Court.  There the matter appears to have rested, about 16 years after the contract negotiations.

Other than the personal costs order, the making of which is an instance of the Court’s summary disciplinary jurisdiction, there were no disciplinary consequences for Mr Meadows, his litigation partner, Flower & Hart generally, Justice Callinan or any of his juniors in the matter.  Flower & Hart flourished and merged with Middletons (now K & L Gates).  Mr Meadows is Chairman of Qld Law Society’s Professional Standards Committee and makes recommendations to the Legal Services Commissioner in relation to what he should do with disciplinary complaints referred by the Commissioner to the Society for investigation.

 


[1] See the Full Court’s judgment at [8].

See also:

Tags: Abuse of process · Alleging fraud & misconduct · Client Legal Privilege · duties regarding witnesses · duty to court · Ethics · litigation ethics · Professional fees and disbursements · Wasted costs