New South Wales Supreme Court CITATION : ZIMMERMAN HOLDINGS & ORS v. WALES & ORS and BAREL v. ZIMMERMAN HOLDINGS P/L [2002] NSWSC 447 CURRENT JURISDICTION: EQUITY FILE NUMBER(S) : SC 4586/01 and 1639/02 HEARING DATE(S) : 23/05/2002 JUDGMENT DATE : 31 May 2002 Zimmerman Holdings Pty Ltd - 1st Plaintiff Yaqob Rajwan - 2nd Plaintiff Baruch Rajwan - 3rd Plaintiff John Andrew Wales - 1st Defendant PARTIES : Downunder Pty Ltd - 2nd Defendant Eli Barel - 3rd Defendant Damiz Pty Ltd - 4th Defendant Isaac Barel - 5th Defendant Dennis Cooney - 6th Defendant JUDGMENT OF : Bryson J at 1 J. Simpkins & M. Dempsey (Massey Bailey) S. White (2nd & 3rd Pliantiffs) COUNSEL : C.J. Stevens QC (1st & 2nd Defendants) F. Corsaro SC (3rd, 4th, 5th Defendants) D.L. Williams & I. Griscti (6th Defendant) Massey Bailey (2nd & 3rd Plaintiffs) SOLICITORS : Kosmin & Associates (1st & 2nd Defendants) McLellands Solicitors (3rd, 4th, 5th Defendants) Riley Gray-Spencer (6th Defendants) CATCHWORDS : COSTS - solicitors - costs order against solicitors for purported plaintiff where no decision by company to bring proceedings and purported retainer by part of board was ineffective - consideration of basis on which order should be made - discretionary order under SCA s.76(1) not enforcement of common law liability for breach of warranty of authority - on review of discretionary considerations, solicitors were ordered to pay defendants' costs on indemnity basis with further order against purported directors who instructed them. LEGISLATION CITED : Supreme Court Act 1970; subs.76(1) Yonge v. Toynbee [1910] 1 KB 215 CASES CITED : Myers v. Elman (1940) AC 282 Nelson v. Nelson [1997] 1 WLR 233. AW & LM Forrest Pty Ltd v. Beamish (1998) 146 FLR 450 DECISION : See para.19 - Solicitors to pay defendants' costs on indemnity basis. OF NEW SOUTH WALES EQUITY DIVISION BRYSON J. FRIDAY 31 MAY 2002 4586/01 ZIMMERMAN HOLDINGS & ORS v. WALES & ORS JUDGMENT 1 HIS HONOUR: At the conclusion of the hearing on 23 May I made orders which had the effect that the claims purportedly made on behalf of the first plaintiff Zimmerman Holdings Pty Ltd against the defendants were dismissed on the ground that the company had not authorised the proceedings. I also made orders for costs against the second and third plaintiffs, who had caused the proceedings to be initiated in the name of the company and had given instructions to Messrs Massey Bailey solicitors to do so; the second plaintiff Mr Yaqob Rajwan was a director, the third plaintiff Mr Baruch Rajwan purported to be a director but had not been appointed in an effectual way, and the third defendant Mr Barel was Yaqob Rajwan's only co-director and had not participated in any decision to bring the proceedings or instruct solicitors. All defendants applied for orders that Messrs Massey Bailey pay the costs of the proceedings on the indemnity basis. The defendants already have the benefit of costs orders against the second and third plaintiffs. 2 The powers of the court with respect to costs are stated in subs.76(1) of the Supreme Court Act 1970 in these terms: Subject to this Act and the rules and subject to any other Act – (a) costs shall be in the discretion of the Court; (b) the Court shall have full power to determine by whom and to what extent costs are to be paid; and (c) the Court may order costs to be assessed on the basis set out in Division 6 of Part 11 of the Legal Profession Act 1987 or on an indemnity basis. 3 The relevant powers of the court are further dealt with in Pt.52A r.4 of the Rules of Court: subrr (2) and (5) deal with orders for costs against a person who is not a party in these terms: Pt.52 r4(2) Subject to subrule (5), the Court shall not, in the exercise of its powers and discretions under section 76 of the Act, make any order for costs against a person who is not a party. Subr.(5) provides as follows: Subrule (2) shall not limit the power of the Court to make any order - … (e) in exercise of its supervisory jurisdiction over its own officers; or (f) against a person who purports without authority to conduct proceedings in the name of another person. …" 4 Rule 43 deals with the liability of a solicitor where costs are incurred improperly or without reasonable cause. In my view the application against Messrs Massey Bailey does not fall to be considered under r.43. 5 Yonge v. Toynbee [1910] 1 KB 215 has often been referred to in the context of applications for costs against solicitors. It appears that the Court of Appeal of England proceeded on the basis that a solicitor who does not in fact have authority to represent a plaintiff is liable to other parties on an implied contract that he had authority: see Buckley LJ 255 and 257. Buckley LJ was of the view that it was open to the solicitors to prove facts excluding an implied contract but that that had not been done: 227 and 228. Swinfen Eady J also appears to have disposed of the matter on contract law and agency law principles of warranty of authority; see 341, but also referred to a different basis in principle for his conclusion: see his Lordship's reference at 234 to the Court's authority over its own officers. Vaughan Williams LJ agreed with expressions of doubt – see 235. The judgments were not, in any clear way, grounded on discretionary considerations supporting the making of an order for costs; the Court of Appeal appears to have seen itself as directly enforcing a contractual or quasi contractual liability which the solicitor had incurred. 6 With respect, I do not think that the same approach should be taken by this court now in view of the provisions of subs.76(1) which confer a discretionary power. Further and with respect I should say that I find unpersuasive the analysis of the court's action as giving effect to a contractual or other liability incurred on a breach of warranty of authority by the plaintiff's solicitors to the defendant. I see nothing in the nature of a contractual relationship between the plaintiff's solicitor and the defendant, or between the solicitor who purported to have but did not have the plaintiff's authority and the defendant. 7 A passage in the judgment of Swinfen Eady J at p234 was approved by Lord Porter in Myers v. Elman (1940) AC 282 at 336 in terms which appear to recognise that the order for costs was not enforcement of an existing liability. Consideration in speeches in Myers v. Elman appears to reflect the view that the court was acting in exercise of powers of control over its officers in ordering a solicitor to pay costs, and that the source of control over the officer is the solicitor's duty to the court, not a view that the court was giving effect to a common law obligation of the solicitor to other litigants; see Viscount Maugham at 290, Lord Atkin at 302 and Lord Wright at 319. 8 In acting under subs.76(1) the court must exercise a discretion and should only order costs on the basis of some sound or positive ground for making the order, and on a review of relevant discretionary considerations to which its attention is directed. It would not be correct to regard the court as committed to some established outcome by earlier judicial decisions, or by analyses found in them, such as the treatment in Yonge v. Toynbee of the situation as one of breach of warranty of authority. 9 The Court of Appeal of England continued to analyse such an application in terms of warranty of authority in Nelson v. Nelson [1997] 1 WLR 233. 10 Young J considered the liability of a solicitor who purports to act for a company but without the actual authority of the company in AW & LM Forrest Pty Ltd v. Beamish (1998) 146 FLR 450 at 458 to 460. Young J said at 458: "As to costs, the ordinary rule is that the solicitors whose retainer is challenged pay all the costs of the proceedings up until the order is made." His Honour thus stated the outcome which would usually be produced in a sound exercise of discretion; his Honour was not, of course, attempting to state a legal rule, and the reference to the ordinary rule is an indication that, on adequate grounds, the ordinary rule may be departed from. The burden of his Honour's consideration was directed to whether the costs should be assessed on the indemnity basis, in support of which counsel contended that there was a warranty of authority and relied on cases including Yonge v. Toynbee which have referred to a warranty of authority. Young J said of Nelson v. Nelson (at 459) "However, it is also authority for the proposition that the analogy with breach of warranty of authority cases must not be pressed too far, and that the circumstances and degree of negligence or fault in the solicitor is relevant to the order to be made as to costs." In my respectful view this is correct; the references to breach of warranty of authority are figures of speech but are not closely related to the true basis on which orders should be made. 11 In the present case correspondence early in September 2001, which became known to Mr Massey about the time he received instructions on 10 September, indicated that the authority of solicitors who earlier acted on the instructions of Mr Yaqob Rajwan was questioned. Mr Massey made an electronic search of ASIC records about the time he received instructions; the search paper confirmed that Mr Yaqob Rajwan and Mr Baruch Rajwan were directors. However it did not deal fully with the questions which had been raised by the challenge, in which it was suggested that Mr Eli Barel had not taken any part in or known of the proposal to appoint Mr Baruch Rajwan as an additional director. In any event the situation confronting Mr Massey was that persons who said they were two of three directors of the company purported to give instructions on behalf of the company to sue, among other persons, the third director; reasonable consideration of the implications of these events should in my view have directed attention to the question whether those two directors truly were able to make a decision to bring proceedings and instruct solicitors, and also to whether such a decision had been made, and whether there had been any irregularities in it. I appreciate that, according to the terms of the instructions, there was a need and wish for urgent action and for the commencement of litigation within a short time. However in circumstances where authority was already under challenge I regard it as clear that there was more which Mr Massey should reasonably have done before accepting that he in fact had instructions on behalf of the company. 12 On 20 September Mr Massey asserted in a letter that authority had been conferred by Mr Yaqob Rajwan as managing director; no evidence explains the source of this statement and there is no reference anywhere else in the evidence to the company having a managing director, or to Mr Rajwan as holding that office. Plainly enough there was no managing director in fact. Other circumstances which show the continuing importance of the question of authority are that an Amended Summons was filed on 26 September adding a fourth defendant, and then a Statement of Claim was filed on 23 October, adding two more plaintiffs and two more defendants; at each of these stages the number of persons potentially affected if there was a want of authority was widened and the importance of full consideration was given emphasis. 13 Mr Massey's evidence shows that he was aware from the first instructions that there were issues between the Rajwans and Mr Barel, meaning issues relating to control of the company, and that the apparent appointment of Mr Barel occurred on the same date as the notice of termination, which was an event in a conflict with interest relating to Mr Barel; yet he did not make any inquiries about the circumstances in which Mr Baruch Rajwan came to be appointed as a director. 14 (The situation in September 2001 is complicated, slightly but irrelevantly, by the fact that through some accident a Mr Seklaoui was also notified to ASIC as having become a director; this was a mistake and soon afterwards his name was removed; yet for several weeks the ASIC record appeared to show that there were four directors). 15 It has been asserted that advice was obtained from senior counsel that the maintenance of the proceedings was authorised. However the advice has not been put in evidence, the facts as represented on which the advice was obtained are not known, and I do not regard this as an available mitigation. 16 At an early stage in the litigation the plaintiff was directed to produce the company's books and records. The time limited for so doing was not complied with, and indeed the books and records were not produced for inspection by representatives of the defendants for some months until a few days before the hearing. This disarmed criticism and observations that the defendants did not apply to the court to challenge the retainer or take any other firm action earlier than the month of the hearing; it would have been rash indeed for the defendants to make an application challenging the retainer without ascertaining what directors' minutes or other documents among the company's records underlay the decision to bring the proceedings. 17 A respect in which I regard imposing liability on the solicitors for the costs as open to question is that the solicitors, in a more literal sense than any other person involved, received a warranty of authority from Messrs Rajwan that they were directors and that they had the company's authority to commence proceedings. It does not seem to be just or appropriate that Messrs Rajwan and the solicitors should stand in the same ranking with respect to liability for costs. The problem was in truth caused by Messrs Rajwan, and all concerned including the solicitors should be in a position to look to them for any liability for costs flowing from their having claimed to have an authority which they in fact did not have. This does not however excuse the solicitors in relation to defendants. The opportunity to ascertain facts and come to a position of certainty about whether authority existed was in the hands of the solicitors, both before the litigation was commenced and at all times while it was pending, in a way which and with opportunities which were simply not available to defendants. The loss was considerable, as the litigation was pending for months and was prepared for hearing, and the responsibility of the solicitors goes further than simply accepting what was represented to them by an apparently reliable source, as there were means of inquiry and further grounds of consideration available to them which they did not follow up in an effectual way. 18 Counsel for Messrs Massey Bailey made several submissions contending that their liability should be restricted in various ways. It was contended to the effect that the liability should be restricted to the costs which would have been recoverable under an order for costs against the company itself; the significance of this contention is that the company appears to be insolvent and at the time of argument was on the verge of being wound-up, and later was wound-up. In my view consideration of what the company would have been able to pay under an order for costs if it had brought the proceedings is not in point; the company did not bring the proceedings, and there is no true perspective of the order as damages or recompense for breach of warranty of authority; there simply was no authority, or true connection with the company at all in bringing the proceedings. It was also contended that the order should be limited to such costs as flowed from an act or omission found to constitute misconduct, and that the order should relate only to costs incurred from the date of that act or omission and until the solicitors ceased to act for the company on 3 May 2002. In my view the solicitors' responsibility extends from the commencement of the proceedings, and was not brought to an end when they ceased to act, as the consequences of their having brought the proceedings continued; and indeed they later again acted for the second and third plaintiffs, although they did not after 3 May purport to act for the company. 19 In the situation of known conflict and challenge to authority Mr Massey did not take any steps to review and establish, on a proper basis, whether or not Mr Yaqob Rajwan and Mr Baruch Rajwan were in a position to give instructions and to commence proceedings on behalf of the company. There may perhaps have been a need for very prompt action at the beginning, but the interval between commencement of the proceedings on 14 September and the second joinder of additional parties on 23 October provided ample time for full review and mature consideration, with advertence to the provisions of the company's constitution, a review of the minute book, and mature address to the implications of Mr Barel's not being involved in any way in the process of decision. It has not been established that steps of these kinds were taken, and I infer that they were not taken, or not taken in any effectual way. 20 My conclusion is that in the exercise of my discretion I should order: (1) Order that Massey Bailey Solicitors pay the costs of the defendants assessed on the indemnity basis; (2) Order that the second and third plaintiffs pay to the solicitors all costs of defendants liability for which falls upon the solicitors ********** Last Modified: 06/11/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.