Kaji Australia Pty Ltd v Glover (No. 5)

1. [1]

   On 17 December 2019 I delivered my reasons for orders that I subsequently made on 6 February 2020: Kaji Australia Pty Ltd v Glover (No. 4) [2019] NSWSC 1779 (the “principal judgment”). The orders were that there be judgment for the plaintiffs in the sum of $473,455.00, there be judgment for possession of the land at 15 Vincent Street, Mount Druitt and that the cross-claim be dismissed. The costs were reserved because some of the parties indicated that they wished to apply for special costs orders.

2. [2]

   On 3 February 2020 the defendant filed a notice of motion seeking an order that the plaintiffs pay the defendant’s costs of the proceedings or such portion as the Court determines was just and reasonable; alternatively that there be no order as to costs as between the plaintiffs and the defendant, and an order that if an order for costs was made in favour of the defendant against the plaintiffs that the proceeds of the sale of the defendant’s house be paid into Court pending determination of the quantum of the defendant’s costs. At the hearing of the defendant’s motion, the defendant abandoned the claim that the plaintiffs pay the defendant’s costs.

3. [3]

   On 14 May 2020 the third and fourth cross-defendants (the “Nicholson interests”) filed an amended notice of motion which claimed orders that the cross-claimant pay the third and fourth cross-defendants’ costs on a party party basis. The Motion also sought the following orders:

4. [4]

   In addition, the plaintiffs orally sought an order that the defendant/cross-claimant should pay their costs on the ordinary basis. Finally, Mr Shields, the fifth cross-defendant, who appeared for himself, sought orders that the defendant and/or Mr Muriniti and/or Mr Newell pay his out of pocket expenses. His sought a further order that my judgment be referred to the NSW police pursuant to s 192E of the Crimes Act 1900 (NSW).

5. [5]

   In the meantime, and notwithstanding that the issue of costs had not been argued, nor any orders made by me giving effect to my reasons, the defendant appealed against my judgment to the Court of Appeal. The appeal was heard on 14 July 2020. When I became aware that the appeal was to be argued before I had made any costs orders, I refrained from considering the matter of costs until the Court of Appeal gave judgment. I considered that there was little point in determining claims for costs on the basis of my judgment when there was a possibility that my judgment would be overturned by the Court of Appeal. If it was, different costs orders would then be made, probably by the Court of Appeal.

6. [6]

   The Court of Appeal delivered its judgment on 22 September 2020: Glover v Kaji Australia Pty Limited [2020] NSWCA 222. The appeal was dismissed with costs, without any findings being made inconsistent with my judgment.

Costs between the plaintiffs and the defendant/cross-claimant

1. [7]

   Although in his notice of motion the defendant first sought that the plaintiffs pay the defendant’s costs of the proceedings or such proportion of those costs as the Court determines to be just and reasonable, Mr Newell in his submissions proposed only that the orders should be that each party pay their own costs of the proceedings. He submitted that such an order was the appropriate one because the plaintiffs never made clear in the claim they made that they were seeking only interest at the lower rate of 3% per month. The amount claimed in the statement of claim was a figure based on the higher rate of 5%.

2. [8]

   Mr Newell submitted that the failure to disclose that only the lower rate was claimed prevented the possibility of the proceedings being settled. He submitted that in claiming the higher rate, the defendant was given no alternative but to defend the proceedings.

3. [9]

   Mr Newell submitted that although the plaintiffs claimed interest at the higher rate, they were unsuccessful as a result of my finding that they were estopped by reason of the commencement by the plaintiffs of the District Court proceedings where only the lower rate was claimed, from claiming the higher rate in the present proceedings. In that way, Mr Newell submitted that the defendant achieved substantial success in the proceedings.

4. [10]

   Mr Newell submitted that the plaintiffs did not respond to various offers of settlement made on behalf of the defendant which had the effect of making settlement on the basis of anything other than a complete capitulation basis impossible.

5. [11]

   Mr Newell submitted that, in any event, the defendant should not be responsible for any of the costs incurred by reason of the application to set aside the judgment in the District Court and the Supreme Court. This was because of the convoluted procedure adopted by the plaintiffs to obtain possession of the land. Mr Newell submitted that the reason for the procedure adopted “was not calculated to alert the defendant that what was at stake was the question of possession of his home”. Mr Newell submitted that following the orders made by Gibb DCJ on 22 January 2016 by which the District Court judgment was set aside, the plaintiffs unreasonably resisted the setting aside of the order for possession which was based on the judgment in the District Court.

6. [12]

   The plaintiffs submitted that, despite not recovering the higher rate of interest, at no time did the defendant put an offer that was superior to the judgment obtained for the lower interest rate. Further, at no time did the defendant pay the principal sum that he undoubtedly owed to the plaintiffs. The plaintiffs contended, in any event, that the vast majority of the hearing time was spent dealing with the fruitless cross-claim brought by the defendant against the plaintiffs and others.

7. [13]

   The plaintiffs submitted that there was no obligation on them to respond to offers of settlement that were made. In that regard, they submitted that the defendant had available to him the Uniform Civil Procedure Rules 2005 (NSW) in relation to offers of compromise. Further, the plaintiffs submitted that any offers made by the defendant were inferior to the outcome achieved by the plaintiffs.

8. [14]

   In relation to the taking of the District Court proceedings, the plaintiffs submitted that there was no evidence to support the assertion that the procedure was contrived with the view to not alerting the defendant that the possession of his home was at stake. The plaintiffs submitted that the District Court judgment was set aside because of an irregularity by a registrar in the Court and through no fault of the plaintiff. The plaintiffs submitted that although the process adopted by them could be described as unorthodox, nothing further could be made of that fact.

9. [15]

   Leaving to one side the question of the District Court proceedings and what followed, I can see no basis upon which the costs of the plaintiffs’ claim and the defendant’s cross-claim should not follow the event. The question of whether the plaintiffs were entitled to recover interest at the higher or lower rate was a relatively insignificant issue between those parties. There was really no dispute, but for the matters raised in the cross-claim, that the plaintiffs were entitled to obtain a judgment for what was held to be owing by the defendant, and a judgment for possession on the basis of a breach of the mortgage and loan agreement. The two main issues between the plaintiffs and the defendant were whether the loan contract and mortgage were unjust or unconscionable, and whether the plaintiffs and their agent, Mr Shields, were part of a conspiracy to deprive the defendant of his land. The defendant was entirely unsuccessful on both of those issues.

10. [16]

    Ordinarily, the Court will award the costs of the proceedings to the successful party without attempting to differentiate between the particular issues upon which it was successful and those on which it failed: Waters v P C Henderson (Australia) Pty Ltd [1994] 254 ALR 328; Sabah Yazgi v Permanent Custodians Limited (No 2) [2007] NSWCA 306. It is only where a particular issue or group of issues is clearly dominant or separable that it will ordinarily be appropriate to differentiate between those particular issues on which it was successful and those on which it failed: Elite Protective Personnel Pty Ltd & Anor v Salmon (No 2) [2007] NSWCA 373.

11. [17]

    The matter concerning the District Court judgment is a matter related to wasted or unnecessary costs and is not a matter concerned with success on a particular issue by a party. The defendant submitted, in effect, that costs associated with commencing proceedings in the District Court were wasted costs. I agree.

12. [18]

    In my principal judgment, I described the procedure of instituting proceedings for debt based on the loan contract in the District Court and thereafter commencing proceedings for possession in this Court based on the District Court judgment as bizarre. And so it was. It is difficult to see what benefit there is to any party proceeding in that way. A party need only file a statement of claim in the Possession List in this Court alleging a default under a loan agreement and/or mortgage to justify an order for possession. No explanation was forthcoming from the plaintiffs as to why that convoluted procedure was adopted. The problem was compounded by the fact that judgment was irregularly entered in the District Court necessitating its being set aside. Although that was not the fault of the plaintiffs, if the plaintiffs had proceeded in the ordinary way, there would have been no District Court proceedings and no judgment in that court to set aside.

13. [19]

    Nor should the plaintiffs have resisted the application in this Court to set aside the judgment for possession. The statement of claim in this Court pleaded:

14. [20]

    It is clear from that pleading that the default was said to be established as a result of the judgment obtained in the District Court. When that judgment was set aside, the basis of obtaining a judgment for possession in this Court was removed. No attempt was made to amend the statement of claim in this Court to plead the matter on a different basis; for example, that there was default in repayment of the principal sum.

15. [21]

    In those circumstances, it was inevitable that judgment would be set aside. The plaintiffs should not have resisted that application.

16. [22]

    I disallow from the costs order which will be made in favour of the plaintiffs costs relating to the District Court proceedings and costs relating to the setting aside of the judgment in this Court. Otherwise, the defendant/cross-claimant should pay the plaintiffs’ costs of the proceedings including the costs of the cross-claim.

Costs between the defendant/cross-claimant and the third and fourth cross-defendants

1. [23]

   In the first place, the Nicholson interests seek their costs against the defendant/cross-claimant on the basis that he was unsuccessful on his cross-claim against them. No submissions were made on behalf of the defendant/cross-claimant resisting such an order. The general rule should apply with the result that the defendant/cross-claimant will be required to pay the costs of the third and fourth cross-defendants.

2. [24]

   The Nicholson interests also seek costs against Mr Muriniti, the solicitor for the defendant/cross-claimant in reliance on cl 5(1) of Schedule 2 to the Legal Profession Uniform Law Application Act 2014 (NSW), in the alternative, on the basis that his costs of defending the cross-claim were incurred by the "serious misconduct" of Mr Muriniti or "improperly", within the meaning of s 99(1)(a) and (b) of the Civil Procedure Act 2005 (NSW).

3. [25]

   Schedule 2 to the Uniform Law relevantly provides:

4. [26]

   Section 99 of the Civil Procedure Act relevantly provides:

5. [27]

   Mr Lloyd of Counsel for the Nicholson interests submitted that three claims were made against the Nicholson interests in the further amended cross-claim being:

6. [28]

   Mr Lloyd submitted that there were no reasonable prospects of success with respect to the claims in (b) and (c). Mr Lloyd submitted that there were no provable facts and there was no reasonably arguable view of the law to support the allegations. He relied on various findings in my judgment. Mr Lloyd submitted that those findings amounted to a presumption within the meaning of cl 6 of Sch 2, and that Mr Muriniti had not rebutted the presumption.

7. [29]

   Mr Lloyd submitted that Mr Muriniti had not in written or oral submissions identified the evidence in support of the pleaded allegations and to the extent that there were provable facts, they did not provide any basis on a reasonably arguable view of the law to support the fraud or conspiracy claims.

8. [30]

   Mr Lloyd drew attention to what was said to be the dramatic shift in the cross-claimant’s case with respect to the alleged purpose of the fraud and conspiracy. He submitted that every way in which the case was put in that regard was fanciful and could not amount to a tenable case.

9. [31]

   In relation to the claim under s 99, Mr Lloyd submitted that the fraud and conspiracy allegations were made and pursued in breach of Mr Muriniti’s ethical obligations, and he made reference to rules 21.3 and 21.4 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW). Mr Lloyd submitted that the making and prosecution of the unfounded allegations of fraud, conspiracy and illegality without any foundation was serious misconduct within s 99(1)(a), and it caused costs to be improperly incurred.

10. [32]

    Mr Lloyd submitted that it would be reasonable to apportion 75% of the Nicholson's interests costs to the claims in fraud and conspiracy.

11. [33]

    Mr Newell for the defendant/cross-claimant referred to cases which urge caution and say that the power to order costs against a solicitor is only to be exercised with care and discretion, and only in clear cases. Reference was made to Fowler, Corbett and Jessop trading as Haydon Fowler Corbett Jessop v Toro Constructions Pty Ltd [2008] NSWCA 178 and Levick v Deputy Commissioner of Taxation (2000) 102 FCR 155; [2000] FCA 674.

12. [34]

    Mr Newell drew attention to the matters set out by Mr Muriniti in his affidavit sworn 12 June 2020, and submitted that there was more than abundant material to justify the commencement and maintenance of proceedings by Mr Muriniti. In particular, Mr Newell submitted that the fact that the loan was a sham itself strongly suggested that Mr Nicholson, as the broker with hands-on involvement in the transaction, would most probably know that it was a sham. He submitted that the combined weight of the evidence took the matter further.

13. [35]

    Mr Newell submitted that rather than Mr Nicholson addressing the fact that the loan was a sham, he sought to construct a confusing distraction by reference to a claimed uncertainty in the submissions made at trial on the part of the defendant as to what precise benefit Mr Nicholson was to achieve from the conspiracy. Mr Newell submitted that the purpose of the conspiracy was plainly pleaded at paragraph [32] of the cross-claim, and that the defendant was not called upon to plead the specific benefit to Mr Nicholson that was in contemplation. He submitted that the allegation in paragraph [32] was an agreement to injure him by subjecting him to what amounted to asset lending. Mr Newell said that the development of the complaint about the benefit that Mr Nicholson was to receive was calculated to distract from the "elephant in the room" which was that the St George loan was a sham with a direct common-sense connection to Mr Nicholson.

14. [36]

    In relation to the claim under s 99, Mr Newell submitted that on the basis of the evidence deposed by Mr Muriniti, the defendant’s case could not be said to have been hopeless.

15. [37]

    Mr Newell submitted that the principles governing the jurisdiction to make personal costs orders against legal practitioners were set out in the judgment of Wigney J in Mitry Lawyers v Barnden [2014] FCA 918 at [42]. He submitted that the test is not met by describing the case as "hopeless. An element of unreasonable conduct over and above the assumed fact of a hopeless case must be established.

16. [38]

    Mr Newell submitted, on the basis of what was said in Mitry, that there were then two distinct limbs or matters to be established to support a conclusion of unreasonable conduct. He submitted that the first limb called for proof of "some deliberate or conscious decision taken by reference to circumstances unrelated to the prospects of success", and that the second limb required that the decision be taken with "either a recognition that there is no chance of success, or an intention to use the proceedings for an ulterior purpose or to abuse the processes of the Court, or with a disregard of any proper consideration of the prospects of success”. Mr Newell submitted that there is no suggestion in the principal judgment of a deliberate or conscious decision unrelated to the prospects of success. He submitted further that the second limb was not made out.

Determination

1. [39]

   In Tombling v Universal Bulb Company, Limited [1951] TLR 291, Denning LJ (as his Lordship then was) spoke about the duty of counsel in a civil case. The remarks are equally applicable to a solicitor. His Lordship said (at 297):

2. [40]

   In Degiorgio v Dunn (No 2) 62 NSWLR 284; [2005] NSWSC 3, Barrett J (as his Honour then was) considered the meaning of "without reasonable prospects of success" in s 198M of the Legal Profession Act 1987 (NSW) (the same phrase appears in cl 5 of Sch 2 of the Uniform Law). His Honour said:

3. [41]

   This approach was approved in Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300; [2005] NSWCA 153 by McColl JA (Hodgson and Ipp JJA agreeing) at [132]:

4. [42]

   Her Honour went on to say:

5. [43]

   The principles to be applied when considering costs orders under s 99 of the Civil Procedure Act were set out in Kelly v Jowett (2009) 76 NSWLR 405; [2009] NSWCA 278 by McColl JA (Beazley JA and Barrett J agreeing) at [60]-[61]:

6. [44]

   Assistance in understanding the meaning of terms used in s 99 is provided in the decision of Ridehalgh v Horsfield [1994] Ch 205 (a decision referred to with approval in a number of decisions of the Court of Appeal of New South Wales). The United Kingdom Court of Appeal was considering the equivalent provision to s 99 which provided:

7. [45]

   I am not persuaded that the test set out in Mitry Lawyers v Bamden is the correct test for determining costs applications against lawyers under either Sch 2 of the Uniform Law or under s 99 of the Civil Procedure Act. The decision is not referred to in any of the authorities I have set out about, nor in other decisions of the Court of Appeal dealing with such costs.

8. [46]

   A significant issue which arose at the present hearing concerned the use that could be made of findings which I made in my principal judgment. Mr Newell submitted, following evidence given to the same effect by Mr Muriniti, that Mr Muriniti could not be bound by those findings because he was not a party to the proceedings. This was a surprising submission in the face of the decision of the Court of Appeal in King v Muriniti [2018] NSWCA 98, a case involving the same firm of solicitors.

9. [47]

   In that case, the winning party in litigation sought that the losing party’s solicitor pay the costs which the losing party (then a bankrupt) had been ordered to pay. One of the significant bases upon which the solicitors resisted the payment of costs was that since the solicitors had not been a party to the original appeal they were not bound by the findings made by the Court in the proceedings that gave rise to the costs orders (see at [12]). The claim for costs in that case relied on the provisions of s 99 of the Civil Procedure Act. One basis upon which it was suggested that the solicitors were not bound by the findings in the principal proceedings was a reliance on s 91 of the Evidence Act 1995 (NSW) which provided:

10. [48]

    The Court of Appeal concluded that a court may have regard to findings in the court’s principal judgment when costs are sought against a solicitor. Basten JA (with whom Gleeson JA and Emmett AJA agreed with additional reasons) said:

11. [49]

    Acting Justice Emmett said at [97]:

12. [50]

    Mr Newell submitted that the statement in King v Muriniti at [46], that it would be an abuse of process for the solicitor to be allowed to challenge the findings made in the substantive proceedings, was a determination made without any authority. In response to a question that I asked of Mr Newell, he accepted that I was bound by that principle from the Court of Appeal, but he said that he made the submission to preserve his rights to argue on appeal from this judgment that the decision of the Court of Appeal in King v Muriniti was wrong.

13. [51]

    King v Muriniti was concerned with a claim made under s 99 of the Civil Procedure Act. To the extent that reliance is placed in the present application on s 99, the solicitors are bound by the findings in my principal judgment and by the findings in the judgment of the Court of Appeal.

14. [52]

    As far as the claim is made under Sch 2 of the Uniform Law, cl 6 necessarily means that the solicitors are bound by any findings of the kind referred to in cl 6 of Sch 2 by the trial judge, to lead to the rebuttable presumption that the legal services were provided without reasonable prospects of success. To the extent that findings were not made precisely in the terms referred to in cl 6(1), I consider that King v Muriniti is authority for the principle that the solicitors are bound by findings I made in my principal judgment. The issue is then whether that leads to the conclusion that the legal services were provided without a reasonable belief by the solicitors that the claim had reasonable prospects of success.

15. [53]

    In the course of my principal judgment I made a number of findings relevant to the costs issue under consideration. Those findings were these:

16. [54]

    In its judgment the Court of Appeal set out at [30] the summary of my reasons for rejecting the allegations of fraud and conspiracy made against Mr Nicholson. Those were paragraphs [251]-[261] and [270] in my principal judgment. The Court at [31] set out my conclusions for rejecting the conspiracy claim against Mr Shields. Finally, at [32] the Court of Appeal set out my findings at [289]-[291] in relation to the fraud and conspiracy allegations against both Mr Nicholson and Mr Shields.

17. [55]

    In dismissing the appeal, the Court of Appeal said:

18. [56]

    When dealing with particular matters relied upon by Mr Glover in relation to Mr Nicholson, the Court of Appeal said:

19. [57]

    The findings I made, and the acceptance of those findings by the Court of Appeal, clearly identify the absence of evidence to justify the particular claims that were made. In that way those findings give rise to a presumption for the purposes of cl 6 of Sch 2 of the Uniform Law. There is, therefore, an onus on Mr Muriniti to establish that there were provable facts that provided a basis for a reasonable belief that the claim had reasonable prospects of success.

20. [58]

    Mr Muriniti swore and relied on an affidavit of 12 June 2020 setting out the investigations he made, and explaining his reasoning for certifying the cross-claim filed on 8 June 2018.

21. [59]

    So that I do justice to Mr Muriniti’s reasoning put forward to justify the pleading of fraud and conspiracy against the cross-defendants including the Nicholson interests, I set out in full the matters upon which he relies from his affidavit of 12 June 2020 as follows:

22. [60]

    The principal difficulty with this explanation is that it largely repeats the arguments put forward both at the hearing before me at first instance and in the Court of Appeal in relation to why the defendant asserted that Mr Nicholson, Mr Shields and the plaintiffs were part of a conspiracy, and why the Nicholson interests engaged in fraud. Mr Muriniti accepted in cross-examination that there was no evidence in his affidavit from his file that was not put before the Court as evidence at the trial. He accepted that the arguments put forward in his affidavit were the same as those put forward at the trial.

23. [61]

    In oral evidence given at the hearing of the costs application, when cross-examined about the timing of the agreement that constituted the conspiracy, Mr Muriniti gave evidence about a further matter he said that he took into account. The evidence was this:

24. [62]

    Mr Muriniti provided no basis for his belief that the cross-defendants had an “established modus operandi”, other than the inference he said he drew from the “unusual proceedings…the irregular proceedings were brought for the obtaining the order for possession” (that is, seeking a District Court judgment for the amount owing), for the assertion that Mr Shields, Mr Webster and Mr Nicholson had used the modus operandi he described either in the present case and previously. It was significant that, although this established modus operandi was said to be part of Mr Muriniti’s inference drawing exercise, this matter was never put to Mr Shields in cross-examination at the trial. There was not even any evidence identifying particular prior transactions where this modus operandi was said to have been employed. All of this serves to highlight the utter baselessness of Mr Muriniti’s reasoning.

25. [63]

    As noted above, the Court of Appeal also said (at [34]) that, since the case against Mr Nicholson involved serious allegations of dishonesty on his part, the Court had to have regard to the principle in Briginshaw v Briginshaw (1938) 60 CLR 336 and s 140(2) of the Evidence Act 1995. In a similar manner the solicitor, in determining whether to make a claim that involved dishonesty and criminality had to consider the heavy onus on the part of the client to make out such a case.

26. [64]

    In relation to that heavy onus, Mr Muriniti was bound to have regard to his obligations found in the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015, which relevantly provide:

27. [65]

    I am not here concerned with the solicitor’s obligation under cl 21.4.2 because I accept that client legal privilege may operate with respect to it. (It is not clear if privilege has been claimed in relation to this application, but I have assumed in the solicitors’ favour that it has been.) However, nothing in Mr Muriniti’s affidavit or his oral evidence identifies any available material, as cl 21.4.1 requires, which supports the allegations. In that way, there were no reasonable grounds for any belief that Mr Muriniti claims to have had. As the Court of Appeal said in Fowler, Corbett and Jessop at [25]:

28. [66]

    The significant matter that emerges from Mr Muriniti's affidavit is that at an early time he appears to have made an assumption that, because the St George loan application was a sham, Mr Nicholson must have known that it was a sham and must have been involved in its falsity. His assumption in that regard appears to have come about because he failed entirely to consider alternatives to that assumption. The most obvious one, as I found and as the Court of Appeal found (at [35]-[37), was that it was Mr Lippits who was the person involved with that sham arrangement.

29. [67]

    It may be accepted that there were erroneous facts stated in the St George application, but Mr Muriniti did not consider that there might be an alternative explanation for that, namely, negligence on Mr Nicholson's part in submitting it with that erroneous information, and negligence or oversight on Mr Shields' part in not noticing it. The erroneous information provided in the St George application would not, without something more, cause a reasonable person to consider that the application was a sham. The information about Mr Glover's earnings derived from the Boston Traders letter. The solicitors knew by the time of Mr Glover's affidavit of 12 December 2018 that the letter was fraudulent and that Mr Lippits and Mr Glover fraudulently used the letter to persuade Mr Shields to give them the loan. It would not be a reasonable inference to conclude that Mr Nicholson knew, in those circumstances, that the letter was false when he reproduced the earnings said to have been paid to Mr Glover in that letter in the St George loan application. Indeed, the knowledge of Mr Lippits and Mr Glover's fraud on Mr Shields and the plaintiffs ought to have alerted the solicitors that any consideration they had that Mr Nicholson was involved in a sham application was unlikely to be true, and should have caused them to give attention to the possibility that Mr Lippits may have been behind the St George loan application: see also the judgment of the Court of Appeal at [35] and [49].

30. [68]

    Mr Muriniti went on to assume knowledge in Mr Nicholson about what Mr Prestia and Mr Lippits had done in relation to the Bank West application. The assumption was based entirely on conjecture arising from the email Mr Nicholson sent to Mr Lippits on 23 December 2010. In this regard, the Court of Appeal said (at [46]):

31. [69]

    Further, Mr Muriniti never accepted the explanation of Mr Nicholson for the disappearance of his records, despite my having accepted his explanation, and holding that he had complied with his discovery obligations in Kaji Australia Pty Ltd v Glover (No 2) [2018] NSWSC 414 at [42]-[44]. That judgment was given on 9 April 2018. Despite that judgment, Mr Muriniti filed the Further Amended First Cross-Claim on 8 June 2018 which pleaded (inter alia) at paragraph 19(zz):

32. [70]

    Mr Muriniti persisted with the claim against Mr Nicholson and persisted with the assertion that Mr Nicholson lied about the disappearance of his records despite my ruling and determination. The Court of Appeal said at [45] that there was no inherent improbability in Mr Nicholson’s explanation, and made express reference to my judgment about that matter. It was not only unreasonable of the solicitors to rely on the disappearance of Mr Nicholson's files in the face of that judgment, it was in breach of their ethical duties to do so.

33. [71]

    It is not without significance that nowhere in his affidavit setting out his reasoning process does Mr Muriniti say anything about the way he viewed Mr Lippits in the events. At the end of his cross-examination I asked him about this matter, and he gave the following evidence:

34. [72]

    These answers also highlight the problem with Mr Muriniti’s reasoning. He concluded at an early stage that, because he considered that the St George Loan was a sham, Mr Nicholson must have been behind that sham. The fact that Mr Nicholson spoke to Mr Lippits about the loan application says nothing about Mr Nicholson’s knowledge concerning whether or not the loan was a sham. Mr Muriniti failed to give consideration to the fact that almost all of the information his client had about the St George application came from Mr Lippits without Mr Muriniti having any evidence that such information had been provided to Mr Lippits from Mr Nicholson. Even if he had some basis for excluding Mr Lippits as the source of the wrongdoing, he did not have anything beyond conjecture to make the serious allegations of fraud and conspiracy that were pleaded and pursued not only against the Nicholson interests but also against Mr Shields and the plaintiffs.

35. [73]

    The material which the solicitors had to consider whether a cross-claim alleging fraud and conspiracy should be brought consisted of the St George loan application, the Bank West loan approval, the employment letter from Boston Traders, the St George loan approval, the affidavit evidence of Mr Nicholson and Mr Shields, and the affidavit they obtained from Mr Valentino. What they did not have was any evidence from Mr Glover to support a claim of fraud or conspiracy. In those circumstances, there was no question of the solicitors being entitled to rely on matters told to them by their client which might later be found by a court not to be correct, as referred to in Tombling v Universal Bulb Company, Limited (see above at [39]).

36. [74]

    There was nothing in the affidavits of Mr Nicholson and Mr Shields to provide a basis for the claim made. The fact that they had had a prior business relationship was not even a circumstance that could be relied upon to support such a claim.

37. [75]

    To the extent that Mr Muriniti relied on Mr Valentino’s opinion, a significant difficulty is that there was no evidence of what information was provided to Mr Valentino nor what assumptions he was asked to make. The reason for that is that he was not provided with a letter of instructions. Mr Newell informed me at the substantive hearing that Mr Valentino went into Mr Muriniti’s office “and was asked his opinions”. I can put aside for present purposes the fact that instructing an expert in that fashion is entirely inappropriate: Ralston and Collins v Chaffey [2018] NSWSC 1994 at [67]. However, the end result of such a methodology is that Mr Muriniti’s reliance on Mr Valentino’s opinions cannot be shown to be reasonable when the assumptions and instructions he was given are unknown. Mr Valentino’s unwarranted conclusion that Mr Nicholson falsified the loan approval letter (referred to at [267]-[269] of my principal judgment) highlights the difficulty.

38. [76]

    There is no additional information contained in Mr Muriniti's evidence which identifies evidence that he had that causes me to alter the conclusion that I reached in my judgment at [288] as follows:

39. [77]

    A significant matter in considering the reasonableness of the solicitors approach concerns the various motivations put forward by them for Mr Nicholson's participation in fraud and conspiracy. The motivation was variously said to be for Mr Nicholson to obtain an opportunity through a mortgagee sale of Mr Glover's house, to get "a slice of the equity of the house", to obtain a secret commission, and subsequently to ensure the obtaining of further work through his relationship with Mr Shields.

40. [78]

    In my principal judgment at [143] I discussed this matter and said that the submission that Mr Nicholson was doing it to take a slice of the equity or to take a secret commission was improperly made, "not only was it made without any evidence to support, it is impossible to see how Mr Nicholson could take any equity in the defendants property". I note that in the Court of Appeal, White JA said at [62]:

41. [79]

    This issue of motive was not, as Mr Newell submitted, a distraction. As the Court of Appeal noted, the case made against the cross-defendants in fraud and conspiracy was entirely circumstantial. In those circumstances, a reasonable solicitor would need to ask himself or herself why it might be that the cross-defendants would be acting in a fraudulent, improper or illegal way. Mr Muriniti had clearly given that aspect of the matter some thought because of the various motivations put forward by him in answer to the request for particulars and by Mr Newell at the hearing.

42. [80]

    In my opinion, the solicitors have failed to rebut the presumption that arose from the findings in my principal judgment. Even if no presumption arose, there is nothing in the evidence of Mr Muriniti which demonstrates that he had provable facts to justify the claims, nor a reasonably arguable view of the law to form a reasonable belief that the fraud and conspiracy claims had reasonable prospects of success. In my opinion, the legal services, insofar as the claim was made against Mr Nicholson, Mr Shields and the plaintiffs for fraud and conspiracy were provided without reasonable prospects of success.

43. [81]

    Even, however, if there was some basis for the solicitors to consider on 8 June 2018 when pleading and filing the cross-claim that alleged fraud and conspiracy against Mr Nicholson and others (a proposition I do not accept), the information which ultimately found its way into the defendant’s affidavit of 18 December 2018 ought to have led the solicitors to re-assess the claims they had made. They knew that Mr Lippits had prepared a false letter to assist in obtaining the loan from the plaintiffs, and that their client was admitting to being a party to that fraud. They also knew from that admission that their client had lied in prior affidavits in a number of respects as I set out in my principal judgment. The information would have told them that Mr Lippits continued to be an active player in relation to the loan applications, and was someone who was prepared to engage in fraud to achieve his purposes.

44. [82]

    Part of Mr Muritini’s reasoning (subpara 10(f) of his affidavit) concerned Mr Nicholson’s knowledge of, and reliance on, the employment letter. The discovery that the letter was prepared by Mr Lippits and its contents were false meant either that Mr Lippits must have been part of the conspiracy (which was never alleged), or that Mr Nicholson was duped in the same way that Mr Shields and the plaintiffs were. Yet there is no indication that Mr Muriniti ever reconsidered the seriousness of the allegations he had made against the Nicholson interests.

45. [83]

    Mr Muriniti says nothing in his affidavit about what he did when he became aware of this information. There is no evidence from Mr Muriniti about any reassessment he made at that time about Mr Nicholson’s involvement with the loan. As I said earlier, I have assumed in Mr Muriniti’s favour that client legal privilege has not been waived for the purposes of this costs application, so I do not draw any inference from any failure of Mr Muriniti to identify what instructions he might have been given after the defendant made the admission. Nevertheless, this disclosure by the defendant must be seen from an objective point of view as extremely significant, when assessing the matter of reasonable prospects of success on the fraud and conspiracy claims.

46. [84]

    Schedule 2 to the Uniform Law is not confined to the time of commencement of proceedings. It sanctions the “provision of legal services”. That includes the pursuit of proceedings already commenced and the conduct of the hearing of those proceedings. Notwithstanding the significant disclosure made by the defendant to his solicitors in or about December 2018, the solicitors continued to pursue the fraud and conspiracy claims against the various parties including the Nicholson interests.

47. [85]

    In relation to the claim under s 99 of the Civil Procedure Act, for the same reasons, the costs associated with the claims in fraud and conspiracy were incurred, improperly, without reasonable cause and by the serious misconduct of the solicitor. For present purposes, the finding that the costs were incurred without reasonable cause follows from the finding that the solicitor provided the legal services without a reasonable belief that the claims had reasonable prospects of success.

48. [86]

    Similarly, providing legal services without a reasonable belief that the claims had reasonable prospects of success is capable of being unsatisfactory professional conduct or professional misconduct: cl 4 of Sch 2. In that way, and because cl 2 of Sch 2 prohibits such provision of legal services, the costs were incurred improperly.

49. [87]

    In the present case, the claims that were made without the reasonable belief were claims involving fraud, criminality and serious misconduct. Rule 21.4 is the present iteration of a longstanding rule of legal professional behaviour designed to protect persons from claims of fraud, criminality and serious misconduct which do not have an appropriate basis. The claims included that the Nicholson interests were involved in a sham loan from St George Bank, that Mr Nicholson, Mr Shields and the plaintiffs were engaged in a conspiracy to persuade the defendant to mortgage his house so that the conspirators could deprive him of it entirely and share the proceeds of sale amongst themselves, that those parties co-operated to prepare misleading (at least) or false (at worst) affidavits to mislead the Court, the allegation that Mr Nicholson destroyed or concealed his electronic files in the face of my judgment determining that he had complied with his discovery obligations, and the various allegations of the benefits Mr Nicholson was to receive from the entry by the defendant into the loan agreement with the plaintiffs.

50. [88]

    Those claims were made in breach of r 21.4. They were improperly made. In that way, the costs incurred by the Nicholson interests were incurred by the serious misconduct of the solicitors, and they were incurred without reasonable cause. The Nicholson interests are entitled to be indemnified for the costs they are obliged to pay to their solicitors in respect of those claims, pursuant to either or both of r 5 of Sch 2 of the Uniform Law and s 99 of the Civil Procedure Act.

51. [89]

    The issue raised by the fraud and conspiracy claims occupied the majority of the time at the hearing. Some time was spent on the claims under the Contracts Review Act 1980 (NSW) and for unconscionablity. The claims under the Australian Securities and Investments Commission Act 2001 (Cth) for misleading and deceptive conduct, as they were run, were scarcely distinguished from the claim in fraud, although it was necessary for the principal judgment to make a clear distinction between the two. My assessment, for the guidance of any costs assessor, is that 60% of the time in the proceedings from the date of filing the Further Amended First Cross-Claim on 8 June 2018 was concerned with the fraud and conspiracy claims which should not have been commenced or maintained.

52. [90]

    As noted earlier, Mr Lloyd sought an order that 70% of the costs of the Nicholson interests should be indemnified by Mr Muriniti. Mr Newell at fist accepted that 65% would be appropriate, but then submitted that 50% was the appropriate apportionment. I consider that 65% is the appropriate apportionment, and the order that I will make is that Mr Muritini indemnify the third and fourth cross-defendants for 65% of the costs they incurred in the proceedings.

Claim by Mr Shields

1. [91]

   Mr Shields sought an order that the defendant and/or Mr Muritini and/or Mr Newell pay his out-of-pocket expenses pursuant to r 15.6 of the Uniform Civil Procedure Rules 2005 (NSW). Rule 15.6 provides:

2. [92]

   In Preston v Commissioner for Fair Trading (2011) 80 NSWLR 359; [2011] NSWCA 40, the Court of Appeal said:

3. [93]

   In my opinion, Mr Shields is entitled to such out-of-pocket expenses as would have constituted disbursements if he had been legally represented. They would be out-of-pocket expenses actually and reasonably incurred by him. In the first instance, the defendant/cross-claimant must pay those costs. However, for the reasons given above in relation to the Nicholson interests, the claims in fraud and conspiracy should never have been brought against Mr Shields. The claims did not have reasonable prospects of success, and they were brought improperly. Mr Shields incurred the out-of-pocket expenses by reason of the serious misconduct of the solicitors.

4. [94]

   Mr Shields was a significant witness in relation to the claims under the Contracts Review Act and matters associated with whether the loan agreement was unfair or unconscionable, in a way that Mr Nicholson was not. In my opinion, Mr Shields is entitled to 50% of the costs of his out-of pocket expenses.

5. [95]

   Mr Shields sought a further order that my principal judgment be referred to the police pursuant to s 192E of the Crimes Act 1900 (NSW). Section 192E provides:

6. [96]

   The order sought is misconceived. I did not find that the defendant (or anyone else for that matter) was guilty of fraud. What I found was that the defendant and his solicitors should not have alleged fraud, conspiracy or other criminality on the evidence they had available. Mr Shields made no submissions in relation to this matter. Nor did Mr Newell, whether acting for the defendant or Mr Muriniti.

Conclusion

1. [97]

   I make the following orders:

   1. (1)

      The defendant/cross-claimant is to pay the plaintiffs’ costs of the proceedings including the costs of the cross-claim, but excluding costs related to the proceedings in the District Court and the setting aside of the judgment for possession in this Court;

   2. (2)

      The defendant/cross-claimant is to pay the plaintiffs’ costs of the defendant/cross-claimant’s notice of motion filed 3 February 2020 and of the costs hearing;

   3. (3)

      The defendant/cross-claimant is to pay the third and fourth cross-defendants’ costs of the cross-claim;

   4. (4)

      The defendant/cross-claimant is to pay the fifth cross-defendant’s out-of-pocket expenses actually and reasonably incurred by him;

   5. (5)

      Order that Leonardo Carlo Muriniti is to indemnify the third and fourth cross-defendants for 65% of their costs of the proceedings;

   6. (6)

      Order that Leonardo Carlo Muriniti is to indemnify the third and fourth cross-defendants for the costs of the Third and Fourth cross-defendants amended notice of motion filed 14 May 2020;

   7. (7)

      Order that Leonardo Carlo Muriniti is to indemnify the fifth cross-defendant for 65% of the out-of-pocket expenses actually and reasonably incurred by him.

   8. (8)

      Subject to orders (4) and (5), the notice of motion by the fifth cross-defendant filed on 4 March 2020 is dismissed with no order as to costs.