Suit for fees goes badly wrong but could have gone much worse

An ACT practitioner seems to me to have been skilfully represented, escaping with findings of unsatisfactory professional conduct, a reprimand and a fine.  The decision in Council of the Law Society of the ACT v LP [2017] ACAT 74  just shows how far cooperation and a persuasive articulation of remorse and insight can go.

The practitioner illegally sued his former client for fees in circumstances where he knew that the very person who had instructed him, a director of the client who had given a director’s guarantee and so was a third party payer, had sought taxation.  Generally speaking, solicitors cannot sue their clients for fees once the client has commenced taxation.

In support of applications for default judgment, and to wind up the corporate client, the practitioner represented to the court, including on oath, that there was no dispute about fees.  Given that the director, a builder, was the alter ego of his building company client, the proposition that the company did not dispute the fees attracted a charge of professional misconduct by swearing a false affidavit, a thoroughly serious allegation.  By a plea bargain, it was downgraded to a weird charge of unsatisfactory professional conduct (varied by me for readability):

The practitioner breached his general law ethical duty of professional conduct or the duty owed to the director of his former client pursuant to Rule 1.1 of the Legal Profession (Solicitors) Rules 2007 to continue to treat the former client fairly and in good faith, and not to treat it otherwise than in an honourable and reputable manner during the dispute over costs owed by the director or the former client.

Rule 1.1 was itself a weird old rule:

‘A practitioner should treat his or her client fairly and in good faith, giving due regard to the client’s position of dependence upon the practitioner, his or her special training and experience and the high degree of trust which a client is entitled to place in a practitioner.’

Perhaps the horribleness of the original false affidavit charge’s drafting contributed to the prosecution’s willingness in the end to back away from it and retreat into the weirdness set out above.  The original charge (again, varied by me for readability) was:

The practitioner, deliberately or recklessly, swore an affidavit accompanying a Creditor’s Statutory Demand, falsely denying the existence of any dispute about the debt of his former client or the quantum of it at a time when he knew, or ought to have known, that the legal costs out of which the alleged debt arose were the subject of an application for taxation filed by the director of the former client  in the circumstances set out in paragraphs 24 to 28 above.

Why not ‘The practitioner deliberately sought to mislead the Federal Court by filing an affidavit in which he swore to the truth of a lie, namely that there was no dispute about the debt set out in the creditor’s statutory demand in support of which the affidavit was filed’?

The practitioner did not recklessly swear an affidavit.  He knew it was an affidavit and meant to swear it, so he swore it deliberately.  What the prosecution must have intended to assert to have been deliberate or reckless was the falsity of the proposition that there was no dispute.  But how could the practitioner not have known that there was a dispute?  How could it be that the man with whom he had exclusively interacted could dispute the fees sufficiently to seek their taxation while the corporate manifestation of that man and his wife was content with them?  And how could the practitioner not have known of the summons for taxation? There is another problem with ‘ought to have known’.  If in fact the practitioner did not know of the sumons, then he was not deliberately dishonest or dishonest by recklessness, he was in fact not dishonest at all.  This is a recurrent problem of mealy-mouthed pleading (c.f. Legal Services Commissioner v Brereton [2011] VSCA 241 at [80]).  Finally, isn’t the gravamen of the charge the filing with an intention to mislead the court, rather than the swearing of the affidavit?

Let’s take a look at the detail.

A building company whose directors were a husband and a wife claimed a home owner owed it over $300,000 for building a house.  The practitioner acted for the building company under a costs agreement regulated by A.C.T. legislation more similar to Victoria’s Legal Profession Act 2004 (Vic) than the Legal Profession Uniform Law.  The costs agreement was with the client company and the practitioner also took a deed of guarantee and indemnity given by one of the company’s directors which in fact amounted to a principal promise by the director to pay the fees personally, whether or not demand had first been made on the company.  The director was a ‘third party payer,’ and as such had standing to seek taxation.

The practitioner charged $117,000 in fewer than 12 months.  The client terminated the retainer and did not pay the last outstanding amount of $13,368.

The client emailed the firm advising it would be having the fees taxed.   Two days later, the practitioner said he would sue unless he received a sealed summons for taxation by 11 July 2014.  By that date, a director of the client delivered an unsealed copy of the front page of the summons for taxation with a court lodgement date of the 9th, and a receipt for the filing fee.  The applicant for taxation was the director and not the corporate client itself.  The practitioner thought the wrong applicant had been named, but in fact both the director as third party payer and the company as client had standing.

On 18 August 2014, the practitioner served a Magistrates’ Court suit for fees against the client, entered default judgment and issued a creditor’s statutory demand.  The default judgment application and the creditors statutory demand both required verifying affidavits.  In the latter, the practitioner said ‘There is no genuine dispute about the existence, or amount, of the debt.’

Service of the full suite of documents initiating the taxation was effected by the director on the practitioenr in October 2014.  The following month, an employee of the practitioner told the Supreme Court that the practitioner had never entered into any costs agreement with the sole applicant for taxation, and did not mention the fact that the practitioner already had judgment against the client, despite the fact that the Court made orders for the substitution of the client for the director as sole applicant for taxation.

Then the practitioner sought to wind up his former client.  Would you believe it?  The client applied to set aside the default judgment and complained to the Law Society.  The practitioner gave up his claim for fees, paid costs of the Magistrates’ Court proceedings and scrambled to settle the dispute over fees with the client.  Unsuccessfully.

The Tribunal accepted that because the third party payer had sought taxation, the practitioner had been prohibited by s. 298(b) of the Legal Profession Act 2006 (ACT) from suing the client for fees.  No one seems to have taken issue with this proposition though it is not immediately apparent to me that the prohibition on suing in the face of a taxation includes a prohibition on suing someone other than the person seeking the taxation.

The Tribunal annexed to its reasons the prosecution’s submissions which the practitioner essentially joined in, but the Tribunal did not expressly agree with them, making the judgment hard to interpret.  One is left with the impression that if the Tribunal disagreed with them, it would have said so.

The submissions commenced with a bald but controversial proposition:

The withdrawal of the retainer did not bring to an end the duty of good faith owed to the client.

They continued (with many amendments for readability by me):

The practitioner was entitled to seek to recover what was alleged by him to be monies owed by the client. He was aware that the company was, for all intents and purposes, the manifestation of the economic interests of its husband and wife directors. The lodging of the Cost Assessment Application by the husband indicated a clear intent on the part of the husband to challenge the liability for the further costs that the client (and effectively the husband) allegedly owed.

The practitioner was of the view (a view which was wrong in law) that the summons for taxation had been brought in the wrong name.  If he had been diligent in ensuring he understood the effect of the Legal Profession Act, he would not have caused the suit for fees in the Magistrates’ Court and the winding up application in the Federal Court to have been brought.

However, even within the litigation paradigm created by his lack of diligence, the practitioner chose to effectively take advantage of the mistake he assumed the husband had made in bringing those proceedings in the wrong name. Further still, given the client through its director, the husband, had manifested an intention to challenge the costs allegedly owed, the practitioner owed a duty of good faith to the client.

This included not unreasonably taking advantage of the mistake it appeared to have made in filing the summons for taxation in the name of the husband and not the corporate client. Given that the practitioner understood that the amount of costs was in reality in dispute, he should have either refrained from bringing the debt recovery proceedings or, in the alternative, ensured that the corporate client was given the opportunity to, and be informed they had the opportunity to, put a point of view to the court. The failure of the corporate client to enter an appearance in the Magistrates’ Court should have been taken as a signal either that service had not in fact been effective or that there was a misunderstanding on the client’s part as to the import of those proceedings (which was more than a possibility given the way the client’s approach to the making and serving of the summons for taxation).

Given the contact details that were on file (email, phone and (up to date) home address) more should have been done to contact and inform an unsophisticated client of the (supposed) error that had been made and how it may allow the firm to pursue its costs without resistance. The behaviour of the Respondent constituted “sharp practice”. The representation made by the Respondent in the affidavit supporting the Statutory Demand was legally incorrect. On the Respondent’s understanding of the law he may have believed it to be literally true. However, it had the potential to mislead given that the director had attempted, by instituting proceedings in the Supreme Court, to put the quantum of the debt in issue. The attempt to wind up the company had the potential, at the very least, to jeopardise the company’s capacity to favourably resolve the litigation it had engaged the Respondent to prosecute on its behalf. The winding up application had the potential to be disastrous both for the company and its directors and those who relied on the company for their employment and livelihood.

More should have been done by the Respondent in the proceedings in the Magistrates Court and the Federal Court to paint a realistic picture of the position of the corporate client in respect of the debt that was allegedly owed. The Respondent did not discharge the duty it owed to its former client, nor perhaps his duty as an officer of the Court. That latter issue is complicated somewhat by the role that others played in that litigation. Nevertheless, as principal of the firm, he owed a duty to ensure that litigation under his general supervision was conducted in a manner that accorded with the law and did not tend to be misleading.

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