Lawyers’ Civil Procedure Act duty to correct opponents’ misapprehensions

A judge of the Supreme Court of NSW has reiterated that litigation is not a game, and foreshadowed the possibility of a personal costs order against lawyers for a respondent who took improper advantage of their opponent’s ignorance of a provision in the Corporations Act, 2001. The provision terminates proceedings for winding up in insolvency 6 months after their issue, unless a court otherwise orders.  They took advantage by agreeing to proposed consent orders providing for an interlocutory timetable pursuant to which the proceedings would be brought to a premature end before trial, without pointing that pitfall out to the other side.  Justice Richard White’s comments in
In the matter of Fratelli’s Fresh Pasta Pty Ltd [2011] NSWSC 576 at [18] to [26] follow below.  Note that his Honour expressly drew upon s. 56 of the Civil Procedure Act, 2005 (NSW), which provides:

‘(1) The overriding purpose of this Act and of rules of court, in their application to a civil dispute or civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the dispute or proceedings.

(4) Each of the following persons must not, by their conduct, cause a party to a civil dispute or civil proceedings to be put in breach of a duty identified in subsection (3) or (3A) [to further the overriding purpose and to take reasonable steps to resolve or narrow the issues in dispute]:

(a) any solicitor or barrister representing the party in the dispute or proceedings

(5) The court may take into account any failure to comply with subsection (3), (3A) or (4) in exercising a discretion with respect to costs.’

His Honour said:

‘Application to Extend Time pursuant to s 459R

On the hearing of the applications on 30 May 2011 the plaintiff’s counsel acknowledged that she and the plaintiff’s solicitor had overlooked the requirement in s 459R(1) that an application that a company be wound up in insolvency be determined within six months. I was surprised to be informed that the defendant’s legal advisers had not overlooked that requirement. The second defendant’s solicitor, Mr Zraika, and subsequently his counsel, Mr Ginges, made it clear that they understood that had the last proposed consent orders been made and the matter stood over to 6 June 2011, then the proceedings would have been automatically dismissed pursuant to s 459R after 1 June 2011. They made it clear that the defendant proposed to submit that the plaintiff’s interlocutory process would then also have to be dismissed because the proceedings would no longer be on foot. Mr Zraika submitted that the defendant was under no obligation to alert the plaintiff to the pitfall of s 459R of which the plaintiff’s legal advisers were evidently oblivious.

I disagree. The ambush approach to litigation is discredited. It should be rejected by any solicitor or barrister. It is inconsistent with the duties of parties and their legal representatives under s 56 of the Civil Procedure Act 2005 to ensure the just, quick and cheap resolution of the real issues in proceedings. The real issue on the Originating Process is whether the first defendant is insolvent. The second defendant and his legal advisors, as much as the plaintiff and his legal advisors, have a duty to co-operate in seeing that that issue is resolved as quickly and as cheaply as it properly can be, consistent with its being resolved justly. That issue would not be resolved at all if s 459R were allowed to apply with no attention having been given as to whether an extension of time should be ordered under s 459R(2).

In White v Overland [2001] FCA 1333 Allsop J (as his Honour then was) said (at [4]):

However, by way of general principle I would simply like to make perfectly plain my view that in the efficient and proper conduct of civil litigation, even civil litigation hard fought between parties, it should always be recognised that in the propounding of issues for trial the parties should take steps to ensure that all relevant parties to the dispute are cognisant of what the issues are. … Even if something has been said, where it is evident, or indeed suspected, that the other side is proceeding on the basis of a misconception or has not appreciated something, as a general rule, efficiency, common sense and an appreciation of the costs and resources (both public and private) likely to be wasted by confusion in litigation will mandate that a party through his or her representative ensure that the other is not proceeding on a misconception or that the other does appreciate something that has been said. Litigation is not a game. It is a costly and stressful, though necessary, evil. … Representatives do not owe duties to the other side’s client. They owe duties to their own client. But no one’s interests are advanced by litigation proceeding on assumptions which are seen or suspected to be false. … ” (emphasis in original)

This was approved by the Court of Appeal in Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346; (2001) 53 NSWLR 116 where the ambush approach to litigation was condemned. The court noted that it was common in equity and commercial litigation that counsel volunteer to each other what points will be argued (at [27] and [29]). In Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Ltd [2008] NSWCA 243 Allsop P said (at [160]):

… it cannot be emphasised too strongly that it is the responsibility of the parties, through their legal representatives, to exercise a degree of co-operation to express the issues for trial before and during the trial. Such co-operation can now be taken as an essential aspect of modern civil procedure in the running of any civil litigation, including hard-fought commercial cases. The need for clarity, precision and openness as part of this co-operation has been emphasised in the context of ambush or surprise: White v Overland [2001] FCA 1333 at [4], expressly approved in Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346; 53 NSWLR 116 (Heydon JA, with whom Mason P and Young CJ in Eq agreed); Glover v Australian Ultra Concrete Floors Pty Ltd [2003] NSWCA 80 at [59]-[60] (Ipp JA, with whom Sheller and Hodgson JJA agreed); Sutton v Erect Safe Scaffolding (Aust) Pty Ltd [2006] NSWCA 265 at [4] (Bryson JA with whom Basten JA agreed); and Hooker v Gilling [2007] NSWCA 99 at [52] (McColl JA, with whom Ipp and Basten JJA agreed).”

In Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No. 2) [2011] NSWSC 113 a director of a company that had been served with a statutory demand made it clear to a solicitor for the person serving the demand that he assumed that the demand had been served on a particular day when the solicitor knew it had been served some days earlier. I was critical of the solicitor’s failure to correct the director’s misapprehension. I observed that litigation is not a game in which parties or their legal advisors should keep their cards close to their chest to achieve a tactical advantage (at [21]). This was critical to my decision to exercise a discretion that I found was available under s 459S to permit the company to oppose the winding-up application on a ground that could have been relied upon for the purposes of an application to set aside the statutory demand.

In the present case the second defendant and his legal advisors went beyond merely staying silent in the hope that the plaintiff would fall into the trap of s 459R. The second defendant consented to orders that provided for the future fixing of a hearing date for the plaintiff’s interlocutory process in the expectation that before the time arrived for fixing a date to hear that interlocutory process the proceeding would have been dismissed by force of statute. They did not alert the plaintiff or the judge who was asked to make the consent order that this would be the result. Even if an ambush approach to litigation could otherwise be condoned, consenting to an order in those terms could not. That is not acceptable conduct.

Nor is it acceptable that the plaintiff’s legal advisors should have failed to acquaint themselves with the requirements of s 459R.

Had the proceeding been dismissed by virtue of s 459R it would have been open to the plaintiff to have instituted a fresh application to wind up the first defendant in insolvency. Nothing would have been achieved for the defendants by their allowing the time to have expired without alerting the plaintiff to the consequences. It was submitted for the defendants that in that event the plaintiff would have been ordered to pay the costs of the proceedings, and an order would have been sought that no fresh proceeding be brought until the costs were paid. It is unnecessary to express a concluded view on what costs order would have been made. But it would be wrong to assume that the plaintiff would necessarily have been ordered to pay the costs. Depending upon the view that the judge hearing the application took as to the conduct of both parties and their legal advisors the burden of costs might well have not fallen on the plaintiff, but on the parties’ legal advisors.

I have reserved questions of costs arising out of the applications heard on 30 May 2011 until after the determination of the other issues in the proceedings. At that time I may consider whether the costs should be borne wholly or partly not only by the plaintiff and the second defendant, but by their respective legal advisors.’

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