Liability of directors of incorporated legal practitioners for wrongdoing of fellow directors

Legislation regulating lawyers typically deals with directors of incorporated legal practices like Victoria’s Legal Profession Act 2004’s s. 2.7.11 as follows:

‘Each of the following is capable of constituting unsatisfactory professional conduct or professional misconduct by a legal practitioner director–

(a) unsatisfactory professional conduct or professional misconduct of an Australian legal practitioner employed by the incorporated legal practice;

(b) conduct of any other director (not being an Australian legal practitioner) of the incorporated legal practice that adversely affects the provision of legal services by the practice’.

A recent decision from Sydney illustrates how disciplinary tribunals approach applications to discipline innocent co-directors of wrongdoer-directors in incorporated legal practices.  Trusted non-legal practitioner directors do not necessarily need to be supervised in everything they do by legal practitioner directors unless there is a special reason to.

In the NSW case, there was a special reason: the co-director did not renew his practising certificate which lapsed on 30 June 2011.  He had failed (to the innocent co-director’s knowledge) to comply with earlier disciplinary orders requiring that he be mentored.  Contrary to his promises to the by-then-sole-legal-practitioner-director, he caused the firm to incur an unfunded liability to a valuer retained on behalf of a client in litigation.  The valuer was instructed by the wrongdoer director in August 2011.  The Tribunal found the remaining legal practitioner director guilty of unsatisfactory professional conduct, but on the basis that her failure to supervise the by-then non-legal practitioner director caused the firm to incur a debt which it was unlikely to be able to pay if the litigation in respect of which it was incurred did not succeed.  The decision is Council of the Law Society of New South Wales v Loris Hendy [2016] NSWCATOD 20.

One thing which is puzzling is exactly on what basis it was said that a firm contracting personally to pay valuers, and then not paying them because it did not have the money to do so, was said to be conduct warranting discipline which the practitioner had an obligation to prevent by supervision.  After all, had the firm caused the client to contract directly with the valuers, or made clear to them that the firm would not be personally liable, they presumably still would not have been paid.  Presumably the client was always up for the disbursements, whether there was a successful outcome or not, since that is fairly standard.  And so, presumably, if the client had any money, the firm would have sued the client.  And presumably the firm believed on the basis of senior counsel’s advice that the client would succeed in the litigation and that the valuer would get paid out of the favourable costs award, and that, even if that did not occur, the firm would be in a position to meet the valuer’s fees.  Certainly, there was no finding to the contrary.

In the Victorian solicitors’ conduct rules in place from 2005 until recently, r. 26 said:

‘A practitioner who deals with a third party on behalf of a client for the purpose of obtaining some service in respect of the client’s matters, must inform the third party when the service is requested, that the practitioner will accept personal liability for payment of the fees to be charged for the service or, if the practitioner is not to accept personal liability, the practitioner must inform the third party of the arrangements intended to be made for payment of the fees.’

Compare r. 35 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015. To similar effect was r. 35 of the New South Wales Professional Conduct and Practice Rules 2013 (Solicitors’ Rules).  None of those were in force, of course, in NSW in 2011 when the non-legal practitioner director of the firm caused it to incur the fees, and I do not know what the rules which were in force in NSW at that time said.  At any rate, there was no reference to any such conduct rule in the Tribunal’s reasons. Assuming some similar rule was in place, it is notable that the legal practitioner director was not apparently disciplined for allowing the firm to contract the liability, but for not meeting it, or perhaps for allowing it to be contracted in circumstances where there was no guarantee that it could be satisfied if things went pear-shaped.

There are numbers of cases about the misconduct of solicitors who fail to pay counsel’s fees for no particularly good reason.  I have listed them at the end of this post.  It seems to be well established by authority that such conduct is misconduct at common law or pursuant to the generally worded statutory definitions of unsatisfactory professional conduct and professional misconduct. Couldn’t agree more, and long may such cases accumulate.  But this was a bit different.

The facts in more detail are as follows.  A man and a woman effectively practised in partnership for 9 years, but through the vehicle of an incorporated legal practice of which they were both directors.  The man caused the firm to commence proceedings on behalf of a client, acting on a no-win no-fee basis.  The woman was not involved in those proceedings, but the man’s conduct of them was guided by senior counsel.  The woman agreed to the firm acting in those proceedings on that basis only on condition that the firm would not become personally liable for the client’s disbursements.

The man abandoned practice mid-way through the proceedings, apparently at least partly as a result of disciplinary problems he was having. But he remained as a non-legal practitioner director, though he was ‘inactive’.  Later, he was struck off.  Shortly after failing to renew his practising certificate, in his capacity as a non-legal practitioner director of the firm, the man, despite being ‘inactive’, retained valuers on behalf of the client as experts in the proceedings, and caused the firm to promise personally to pay them.  It must have been apparent, the Tribunal found, that the cost of the multiple valuations would be substantial.  In fact, they cost about $50,000, and, of course, the client’s case did not succeed.

The valuers complained to the Legal Services Commissioner about the woman as legal practitioner director of the firm, in respect of the firm’s failure to pay the debt and the judgment.  The woman conceded that the firm owed the debt, advised that she had been financially ruined by the man’s abandonment of practice, her marriage had failed as a result of financial stress, and she had been driven out of practice altogether.  She said the client had not paid, the firm did not have the monies to pay, and she personally did not have the monies to pay, though, she said ‘I am doing everything in my power to meet [the debts of the firm]’.

The Tribunal did not find that the woman’s conduct warranted professional discipline merely by virtue of having been the sole legal practitioner director.  After all, the Tribunal reasoned, the man was a lawyer of considerable experience, the litigation seemed to be under the general supervision of senior counsel, and the man had been the woman’s trusted business partner for nearly a decade, and had repeatedly assured her, essentially, that the firm was not in the gun for the valuer’s fees.

Rather, the Tribunal was satisfied that the woman had failed to comply with NSW’s Legal Profession Act 2004‘s obligations on legal practitioner directors to have proper management structures.  In this case, the failure was a failure on the part of the legal practitioner director to supervise the non-legal practitioner director.  Not just because the lawyer has to minutely supervise the non-lawyer in every aspect of what they do, for all time, but rather because there was a specific reason why the woman should have supervised the man more: she knew that he was not complying with the requirement of a previous disciplinary tribunal that he submit to mentoring, and also, presumably, because she knew of the conduct which caused him to be disciplined in the first place (causing the firm to fail to pay certain taxes).

The woman admitted in cross-examination that, had she acted ‘affirmatively and properly’ in some way unspecified by the Tribunal’s reasons following the man’s non-renewal of his practising certificate, the problem which arose probably would not have arisen.  From that point on, she was sunk, and the interesting question of how the Tribunal would have reasoned but for that concession is left a mystery.

The Tribunal reasoned:

’21  The Common Law test for professional misconduct propounded in Allinson v General Council of Medical Education and Registration [1894] 1 QB 750 and followed in a multitude of cases in this state is also helpful: conduct which would reasonably be regarded as disgraceful and dishonourable by professional brethren of good repute and competency.

22           Although the solicitor’s breach of the two sections of the Act is capable of constituting professional misconduct (s498(1)(a)), in our opinion her conduct falls far short of the test propounded in Allinson. In effect, her conduct is confined to a lack of adequate supervision of an employee to whom she had given explicit instructions and whom she had some reason to trust. This occurred over a relatively short period. On that basis, we are not satisfied that professional misconduct is established.

23           However, having particular regard to the fact that the solicitor knew that [the man] had not honoured his undertaking to the ADT regarding mentoring, we do find her guilty of unsatisfactory professional conduct. We are satisfied that a reprimand (which is the sanction sought by the Council), is appropriate.’

An incomplete list of recent cases about non-payment of debts by lawyers:

Rhodes v Fielder, Jones and Harrisons [1918-19] All ER 846 at 847 per Lush J (Sanke J agreeing)

Victoria Lawyers RPA Limited v M O Lawyers Lawyers Pty Ltd TO217 of 2002, 31 October 2001Law Society of

New South Wales v McCarthy [2002] NSWADT 58 at [46] per Malloy, Robinson QC and Kirk

Law Institute of Victoria Limited v Parsons & Singer, TO555 & TO556 of 2005 10 November 2005

Law Society of New South Wales v Graham [2007] NSWADT 67 at [29] per Karpin ADCJ, Pheils and Fitzgerald

Legal Services Commissioner v McCristal [2011] VCAT 231

Legal Practitioners Conduct Board v Wharff [2012] SASCFC 116

Council of the Law Society of NSW v Beasley [2012] NSWADT 153

Council of the Law Society of NSW v Ling [2012] NSWADT 146

Council of the Law Society of NSW v Isaac [2012] NSWADT 203 (where the NSW solicitor was struck off)

Council of the Law Society of NSW v Xenos [2012] NSWADT 283

Council of the Law Society of NSW v Narayanasamy [2014] NSWCATOD 18.

In general, in relation to the nature of the trust which arises when a client provides, see also Legal Services Board v Gillespie-Jones [2013] HCA 35.

See also:

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