Hills v Raunio & Ors [2004] ACTSC 98 (1 October 2004)

Last Updated: 29 October 2004

JAMES HILLS v SAM RAUNIO and NRMA INSURANCE

LTD and SILVICULTURAL SERVICES AUSTRALIA PTY LTD

t/a RL NEWMAN & ASSOCIATES

[2004] ACTSC 98 (1 October 2004)

PRACTICE AND PROCEDURE - costs - indemnity costs - costs application against firm of solicitors - unreasonably continuing with proceedings.

Raunio v Hills [2001] FCA 1831; (2002) 188 ALR 409

Myers v Elman [1940] AC 282

Edwards v Edwards [1958] P 235

De Sousa v Minister for Immigration, Local Government and Ethnic Affairs (1993) 41 FCR 544

Re Bendeich (No 2) [1994] FCA 1504; (1994) 53 FCR 422

Orchard v South Eastern Electricity Board [1987] QB 565

White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169

Ridehalgh v Horsefield [1994] Ch 205

Levick v Deputy Commissioner of Taxation [2000] FCA 674; (2000) 102 FCR 155

GE Dalpont, Lawyers Professional Responsibility in Australia and New Zealand

No SC 751 of 1996

Judge: Connolly J

Supreme Court of the ACT

Date: 1 October 2004

IN THE SUPREME COURT OF THE )

) No SC 751 of 1996

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: JAMES HILLS

Plaintiff

AND: SAM RAUNIO

First Defendant

AND: NRMA INSURANCE LTD

Second Defendant

AND: SILVICULTURAL SERVICES

AUSTRALIA PTY LTD trading as

RL NEWMAN & ASSOCIATES

Third Defendant

ORDER

Judge: Connolly J

Date: 1 October 2004

Place: Canberra

THE COURT ORDERS THAT:

1. The costs in the matter of Hills v Raunio [2003] ACTSC 5 be ordered against the plaintiff's solicitors on an indemnity basis for two days of the hearing.

2. The parties have leave to be heard on the question of costs of this application and the balance of the costs order for the hearing.

1. This is an application for costs against a firm of solicitors flowing from an unsuccessful personal injuries claim. Mr James Hills, the unsuccessful plaintiff, was severely injured in a motorbike accident that occurred on 9 June 1995 at a forestry settlement near Burraga in central western New South Wales. The plaintiff had borrowed a motorbike from Mr Sam Raunio, a fellow employee at the forestry camp, and was riding on a dirt road back towards the accommodation facilities at the camp. The motorbike collided with a fence post, and the plaintiff sustained profound injuries which rendered him a paraplegic. At the hearing of the claim counsel were in agreement that, if liability was established, damages should be assessed at $1.55 million.

2. It was the plaintiff's case that he sustained his injuries as a consequence of faulty brakes on the motorbike, and that both Mr Raunio and his employer were aware of the faulty brakes and breached their duty of care by failing to warn him of the faulty brakes. The substantive issue at the hearing was, accordingly, whether or not the brakes were faulty and whether the defendants knew of any fault. The hearing of the substantive claim extended over four days in August 2002 and two days in December 2002 before me as Master. Judgment was delivered by me on 21 February 2003. In that judgment I found at [53] -

On all of the evidence I am not satisfied that the accident occurred due to any failure of the braking system on the bike. It follows from this that there should be judgment for the defendants. The case against both Mr Raunio and the employer depends upon the establishment as a fact that the accident was caused by a defect in the brakes, such defect being known to Mr Raunio, who, it is said, breached a duty of care by failing to warn the plaintiff of the defect in the brakes when lending him the bike. It is pleaded against the employer that it breached its duty in allowing the plaintiff, an employee, to ride a bike with brakes that it knew to be defective. Both breaches of duty depend upon there being established a brake defect, and this has not been established.

3. The claim for costs against the plaintiff's solicitors is brought on the basis that I made findings in my judgment critical of certain aspects of the conduct of the litigation. These concerned the conduct of an employed solicitor in the plaintiff's solicitors' firm who directly approached the defendant Raunio, and obtained from him a signed statement admitting liability which was contrary to the telephone notes of the conversation that solicitor had with Mr Raunio. The statement signed by Mr Raunio on 28 December 1995 said -

I admit that, prior to the accident, the brakes on the motorcycle were in need of readjustment. Whilst I had knowledge of this fact prior to James' accident, I was yet to make the necessary adjustments. I had not told James of this.

4. As I observed in the judgment, on its face this statement lent considerable support to the plaintiff's claim. However, Mr Raunio at the trial denied ever making such a statement. He said that he had been approached by a solicitor for the plaintiff, but had told her that there was nothing wrong with the brakes. He said that he was subsequently asked by the solicitor, Ms Pearsall, to sign a statement, which he did without reading its contents.

5. A file note of the telephone conversations Ms Pearsall had with Mr Raunio, on 27 and 30 November 1995 was tendered. The disclosure of this document was vigorously resisted by the plaintiff, and was only released following a ruling of the Full Court of the Federal Court in Raunio v Hills [2001] FCA 1831; 188 ALR 409. The full file note of 27 November 1995 is set out at [38] of my substantive judgment, but it relevantly states that the motorbike was inspected by police after the accident and there were no apparent problems with the brakes, and that Mr Raunio, expressly denied that there were any problems with the brakes. It said that Mr Raunio said -

that the brakes were in working order both prior to and following the accident. Furthermore, it would have been necessary for our client to brake on numerous occasions prior to the accident taking place.

In short, Sam believes that the accident took place as a result of our client's negligence and not because of the defective condition of his motorcycle.

6. It also emerged during the trial that in the letter Ms Pearsall sent to Mr Raunio on 12 December 1995 asking him to sign the statement admitting liability she said -

In the event that negligence on your part is established and such negligence is found to have caused or contributed to James' accident, a damages award will be made in James' favour. There is compulsory third party insurance which will cover you against your liability.

In order to ensure that James receives some compensation for his injuries, we require your assistance and cooperation.

7. It is appropriate that I set out in full my remarks in the substantive judgment concerning these communications. I said, commencing from [41] -

41. Mr Morris, for the defendant, was most critical in his cross- examination of Ms Pearsall of her decision to communicate directly with Mr Raunio when it was, as she conceded, apparent that his interests were adverse to the interests of the plaintiff, and indeed when it was apparent that the plaintiff would be bringing a claim for damages against Mr Raunio. Ms Pearsall was unable to provide any satisfactory explanation for the very significant differences between the version of events contained in her telephone attendance record, which, on its face, could not support any negligence claim against Mr Raunio, and the version of events contained in the statement sent to Mr Raunio. She suggested that her principal solicitor, Mr Lucas, may have had a conversation with Mr Raunio which gave rise to a different version of events. Mr Lucas was involved in the litigation, and was present in court throughout instructing, and Mr Morris, properly, made the submission that I could draw an adverse inference from his not giving any evidence to support the assertion that Mr Raunio had made admissions to him. Mr Raunio said that he did not, and I am not satisfied that Ms Pearsall had any basis for varying the statement.

42. Mr Morris was very critical of Ms Pearsall for writing to Mr Raunio in the terms of the letter of 12 December 1995 and seeking to obtain a statement of admissions which would form the basis of an action against him. She conceded that this was her purpose, as is apparent from the covering letter.

43. It is clearly inappropriate for a solicitor acting for a person bringing a personal injuries claim to directly approach the alleged tortfeasor to obtain a statement. In Jamison v The Government Insurance Office of New South Wales [1988] Aust Tort Reports 80-214, Carruthers J said:

... it should be stated in unequivocal terms that it is not appropriate, in my view, for a solicitor acting for a person making a claim for damages against the Government Insurance Office pursuant to sec 14(1) of the Act to confer with the owner or driver of the relevant vehicle in relation to the accident alleged to have given rise to the litigation. It was suggested during the course of argument that a practice is developing to this effect. If so it should cease immediately.

44. With respect, I fully endorse these remarks, and, it seems to me, that this case well illustrates the hazards of a solicitor dealing directly with an adverse party in litigation.

45. The letter covering the statement that Mr Raunio was invited to sign, a statement with in no way reflected the conversation recorded in the file note of the 27 November 1995 conversation, in effect advised Mr Raunio that the plaintiff, who was a friend of Mr Raunio, and who Mr Raunio well knew had been rendered a paraplegic by the accident, would only be able to receive a sum of damages if Mr Raunio assisted him, and advised Mr Raunio that he would not be financially exposed because he would be covered by the third party insurance. Ms Pearsall was cross-examined about this statement, and resisted the suggestion that the letter had this effect, until eventually admitting that it could bear that interpretation.

46. Mr Raunio, in his sworn evidence, says that he did not read the statement before signing it because he assumed that the solicitor would have included in the statement the contents of their conversation. I accept this evidence. Mr Raunio was criticised by counsel for the plaintiff as not being a credible witness, but I accept his evidence that, as a forestry labourer, he simply singed the statement without reading it, although it does appear that he did correct the spelling of his name.

47. On all the evidence I do not accept that the statements signed by Mr Raunio and dated 28 December 1995 and 1 July 1996 are true, and I prefer the oral evidence of Mr Raunio, which confirms the truth of the original record of the conversation between Mr Raunio and Ms Pearsall of 27 November 1995. Ms Pearsall was unable to provide a satisfactory explanation as to how the December statement, which contains assertions contrary to the facts reflected in the 27 November record of conversation, came to be drafted.

8. The defendants' claim for indemnity costs against the plaintiff's solicitors is brought on the basis of the above findings, and it is said that their liability for costs should flow from both the inappropriate contact with Mr Raunio and, more significantly, from the unexplained discrepancy between the version of events that is recorded in the telephone attendance record, and the version that was in the statement which was sent to Mr Raunio and signed by him.

9. At the opening of these proceedings I had to deal with the question of what evidence could appropriately be brought by the solicitors defending the claim. Counsel were in agreement that it would not be appropriate to in any way challenge the findings in the substantive judgment, and on that basis I ruled that no evidence could be brought that questioned my finding that Ms Pearsall prepared the admission statement contrary to the version of events contained in the telephone record of conversation, and that I could draw from the failure of Mr Lucas to give evidence, and the failure to cross- examine Mr Raunio to the contrary, the inference that there was no other version of events provided by Mr Raunio to the plaintiff's solicitors.

10. I ruled however that evidence going to the solicitors' conduct which did not contradict my previous findings, and which went to explaining their decision to continue with the proceedings when it was known that the admissions were contrary to the telephone record of attendance, could be provided.

11. Counsel for the defendants acknowledge that there is a high threshold that must be met by a party seeking costs from another party's solicitors. The authorities on this point make this clear. The starting point is generally taken to be the decision of the House of Lords in Myers v Elman [1940] AC 282. Viscount Maugham there set out the circumstances where costs could be awarded against solicitors, saying at 289 -

Misconduct or default or negligence in the course of the proceedings is in some cases sufficient to justify an order. The primary object of the Court is not to punish the solicitor, but to protect the client who has suffered and to indemnify the party who has been injured ... It is not limited to misconduct or default, but expressly extends to costs incurred improperly or without reasonable cause, or which have proved fruitless by reason of undue delay in proceeding under a judgment or order.

12. In that same case Lord Atkin said at 302 that -

If the Court is deceived or the litigant is improperly delayed or put to unnecessary expense, the solicitor on the record will be held responsible and will be admonished or visited with such pecuniary penalty as the Court thinks necessary in the circumstances of the case.

13. The question was further considered in Edwards v Edwards [1958] P 235 where Sachs J said at 248 -

It is, of course, axiomatic, but none the less something which in the present case should be mentioned, that the mere fact that the litigation fails is no reason for invoking the jurisdiction; nor is an error of judgment; nor even is the mere fact that an error is of an order which constitutes or is equivalent of negligence. There must be something that amounts, in the words of Lord Maugham, to "a serious dereliction of duty", something which justifies, according to other speeches in that case, the use of the word "gross".

14. These authorities have been applied in Australia. In De Sousa v Minister for Immigration, Local Government and Ethnic Affairs (1993) 41 FCR 544 French J said at 547-8 -

I accept the proposition that the jurisdiction is to be exercised with care and discretion and only in clear cases. The mere fact that litigation fails is plainly no ground for its exercise. There has to be something which amounts to a serious dereliction of duty.

15. In Re Bendeich (No 2) [1994] FCA 1504; (1994) 53 FCR 422 Drummond J said at 426 -

The cases show that this jurisdiction must be exercised with caution. There is good reason for caution. Too ready an exposure of the lawyer for a party to personal liability for the costs of his client or of the other party is likely to inhibit the way the lawyer acts in conducting the litigation. It frequently happens that a lawyer will have to make judgments as to which of a number of courses is the optimum one to follow, bearing in mind his duty to advance his client's interests by all proper means and his duty to the Court to conduct the litigation in proper fashion. The introduction of a third consideration into everyday litigation that requires a solicitor to keep in mind the need to minimise the chances of a costs order being made against him personally, would raise a conflict between the lawyers duties to his client and to the Court, on the one hand, and his own interests, on the other. As is understandable, such a conflict would likely be resolved by the solicitor concentrating on identifying and adopting the course most likely to minimise his own personal exposure at the expense of following courses best fitted to advantage his client and to bring the action to an expeditious end. Moreover, practitioners should not be encouraged to see the threat to seek a costs order against their opposing solicitor as a tactic available to be employed in the course of litigation to put pressure on their opponent. ...

16. This rationale for caution in exercising the jurisdiction echoes a similar approach in England set out in Orchard v South Eastern Electricity Board [1987] QB 565.

17. In White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169 Goldberg J said at 236 that -

The authorities do not support the proposition that simply instituting or maintaining a proceeding on behalf of a client which has no or substantially no prospect of success will invoke the jurisdiction. There must be something more namely, carrying on that conduct unreasonable. It is not clear what is encompassed by "unreasonably" initiating or continuing proceedings if they have no or substantially no chance of success. It seems to me that it involves some deliberate or conscious decision taken by reference to circumstances unrelated to the prospects of success with either a recognition that there is no chance of success but an intention to use the proceeding for an ulterior purpose or with a disregard of any proper consideration of the prospects of success.

18. His Honour in that case referred to the decision of the English Court of Appeal in Ridehalgh v Horsefield [1994] Ch 205 where it was said at 234, per Bingham MR -

... clients are free to reject advice and insist that cases be litigated. It is rarely if ever safe for a court to assume that a hopeless case is being litigated on the advice of the lawyers involved. There are there to present the case; it is (as Samuel Johnson unforgettably pointed out) for the judge and not the lawyers to judge it.

It is, however, one thing for a legal representative to present, on instructions, a case which he regards as bound to fail; it is quite another to lend his assistance to proceedings which are an abuse of the process of the court.

19. All of these authorities were reviewed by the Full Court of the Federal Court in Levick v Deputy Commissioner of Taxation [2000] FCA 674; (2000) 102 FCR 155 where the Court (Wilcox, Burchett and Tamberlin JJ) said -

We accept the statements of principle made in the cases we have cited. We endorse the emphasis on caution in making orders against solicitors, particularly as it will often be difficult for a court to know all the details and circumstances of the solicitors' instructions. We share the concern expressed by Donaldson MR and Dillon LJ in Orchard about the risk of a practice developing whereby solicitors endeavour to browbeat their opponents into abandoning clients, or particular issues or arguments, for fear of a personal costs order being made against them. We agree that such conduct might amount to contempt of court.

Having said that, it is equally important to uphold the right of a court to order a solicitor to pay costs wasted by the solicitor's unreasonable conduct of a case. What constitutes unreasonable conduct must depend upon the circumstances of the case; no comprehensive definition is possible.

20. In this application, counsel for the successful defendants argue that the conduct of the plaintiff's solicitors in approaching Mr Raunio, and then sending to him for his signature an admission that was contrary to the version of events that they had recorded in their conversation with him justifies an adverse costs order. In their written submissions it is said -

An essential element in the plaintiff's cause of action was proof of knowledge by the first defendant that the front brake of the motorcycle was defective. The only evidence of such knowledge was a falsehood generated by a solicitor in the employ of the firm of solicitors representing the plaintiff. In such circumstances, clearly the plaintiff ought to be protected from any costs order and the solicitors who were informed of the true state of the facts by the first defendant, on 27 November 1995 before the proceedings were commenced, should pay the defendants' costs on an indemnity basis.

21. In my judgment I was highly critical of the conduct of the plaintiff's solicitor in approaching the likely defendant, Mr Raunio. Although I cited the remarks of Carruthers J in Jamison v The Government Insurance Office of New South Wales, it is apparent that that decision has not been universally adopted. Mr Lucas states that before he instructed Ms Pearsall to contact Mr Raunio he consulted Riley's NSW Solicitors Manual to check whether this was appropriate, and he found no reference in that text to Jamison's case. Indeed, it appears that in Victoria a contrary view is taken. In Lawyers Professional Responsibility in Australia and New Zealand by GE Dalpont, it is said at 464 that -

The Victorian Law Institute Ethics Committee has issued guidelines for plaintiff's lawyers who interview prospective defendants. These guidelines include requiring the lawyer to inform the interviewee about the matter in which the lawyer is acting, ensuring that the interviewee is aware that the lawyer is not acting or giving advice on the person's behalf, and advising of the interviewee's right to decline to discuss the matter.

22. I note also that the Full Federal Court in the application to provide access to the telephone notes in this matter (Raunio v Hills [2001] FCA 1831; (2002) 188 ALR 409) made the observation (at 414) that Jamison's case had not been cited either before the Master or the primary judge on appeal in that application. It seems to me that it can be said that, at the time Mr Lucas decided to instruct Ms Pearsall to contact Mr Raunio, it was not clear, at least in the Australian Capital Territory, that such conduct was inappropriate. I should add that, since then, Jamison has been endorsed by the Full Federal Court, and by me, and that there should be no question that, whatever view the Victorian Law Institute may take, in the Australian Capital Territory it will be regarded as quite inappropriate conduct for a plaintiff's solicitor to contact a prospective defendant, at least in a motor vehicle accident where that defendant will be covered by third party insurance.

23. It seems to me that the decision to contact Mr Raunio, when taken in 1995, is not conduct which itself would justify an adverse costs order.

24. The false admission document, however, is another matter, and it seems to me that the conduct, as I have found it to be, of the employed solicitor in preparing for Mr Raunio's signature an admission that is quite contrary to the version of events that the telephone attendance records show was given by him to Ms Pearsall, was conduct deserving of some sanction. This was, on any view, improper and unreasonable conduct, and it seems to me that a costs sanction is appropriate.

25. The nature of that costs sanction is a matter of some complexity. It is clearly the law that the costs sanction is "not to punish the solicitor, but to protect the client who has suffered and to indemnify the party who has been injured" (per Viscount Maugham in Myers v Elman at 289). The costs order should therefore be limited to the extent that the improper conduct has put the defendants to unreasonable costs.

26. Although Mr Morris argued that the false document containing the admission was the only evidence to support the plaintiff's claim, Mr Burnside, for the firm of solicitors, made the submission that, even apart from this, the plaintiff still maintained, and maintained in his evidence on oath, that the brakes had failed. He maintained this despite vigorous cross-examination. Another worker present at the accident, Mr Salonen, gave evidence that when he visited the plaintiff immediately after the accident in hospital, in the presence of Sam Raunio, the plaintiff said that the accident occurred because "the brakes were stuffed". There was also a statement from a supervisor of the employer, which at the trial was admitted only against the employer, to the effect that -

Sam's bike has always had a defective front brake, it was down to about 10 percent capacity.

27. Mr Lucas, in his affidavit filed in this application, says that as well as this material, he was aware that Mr Newman, another worker of the employer, had said in an interrogatory that -

Mr Raunio's motorbike was of a type known to have a deficient front braking system and that Mr Raunio had discussed the deficiency with crew members.

He also said that the registered former owner of the motorbike had indicated that "the brakes wore out and needed constant adjustment".

28. Mr Burnside argued that, even from the point where the Full Court of the Federal Court had ordered the release of the telephone attendance, so that it was apparent that there were two versions of what Mr Raunio might say, it was still not unreasonable for the solicitors, on instructions, to continue with the litigation. The plaintiff had sustained catastrophic injuries, and the potential damages were very significant, being at the time of the trial agreed in the sum of $1.55 million. The plaintiff maintained his version that there was a brake failure. There was some material to potentially support this view, although in the end I did not find that the plaintiff had established his case, either that there had been a brake failure, or that Mr Raunio was in breach of his duty of care in failing to warn of the potential failure.

29. In retrospect it is clear that the plaintiff's case was weak. There were, as I found, a range of versions given over time by him as to the precise nature of the brake failure, and a police officer, who examined the motorbike after the accident, said that there was no apparent problem with the brakes. However, it could have been that the plaintiff would be accepted, and that Mr Raunio would waver in his evidence. It seems to me that there is much force in Mr Burnside's submission that, even if there had never been the false admission, the plaintiff would have proceeded with his claim. It could not be said that any plaintiff who proceeded with a claim despite a denial of liability from a defendant acted unreasonably. Defendants daily deny liability, and courts sometimes find for the plaintiff, and sometimes find for the defendant. The mere fact that there is a judgment for the defendant does not establish personal liability for costs on the part of the solicitors who ran the claim in the face of a denial of liability.

30. It seems to me that in these proceedings the preparation by Ms Pearsall of the admission statement signed by Mr Raunio, despite that statement bearing no relationship to the version of the events recorded by Ms Pearsall in her telephone attendance record, prolonged the hearing of this matter, but I am not satisfied that but for this statement the plaintiff was bound to fail, and that his case was so weak and unsustainable that bringing it amounted to an abuse of process.

31. It seems to me that on this basis the damage done to the defendants by the false admission was limited to the additional time required to expose and then dispose of the value of the admissions. This was reflected in the time taken to examine and cross-examine Ms Pearsall, and the additional time taken to examine Mr Raunio, who of course would have had to appear as a witness in any event. Ms Pearsall was in the witness box for a full afternoon and all but half an hour of the next morning. Mr Raunio was in the box for a bit over half a day. It is apparent from the transcript that there was also some additional time taken in the opening and closing addresses due to the "admissions". All up the matter extended for six sitting days, and it seems to me that of these it could be said that two sitting days were attributable to the misconduct of the employed solicitor in preparing the admission. On the basis that the awarding of costs against a firm of solicitors, (who of course have to accept responsibility for the conduct of their agent the employed solicitor: Myers v Elman) is meant not as a pecuniary punishment but to compensate the party who has incurred additional costs due to the impropriety, it seems to me that the appropriate exercise of the costs discretion on this application, which is solely an application for an order against the firm, is that the costs should be ordered against the firm on an indemnity basis for two days of the hearing.

32. I had originally delivered a judgment for the defendants with costs, but when the decision was handed down the defendants asked that the whole question of costs be reserved, so the original order was vacated. The effect of this decision is that there is an indemnity costs order against the law firm for two hearing days. I will give leave to the parties to be heard on the question of the costs of this application, and the balance of the costs order, that is, to apply for the ordinary costs order against a plaintiff who is unsuccessful on the merits.

I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Connolly.

Associate:

Date: 1 October 2004

Counsel for the plaintiff: No appearance

Counsel for the defendants: Mr LM Morris QC with Mr MA McDonogh

Solicitor for the defendants: Abbott Tout

Counsel for the plaintiff's solicitors: Mr J Burnside QC with Mr G Stretton

Solicitor for the plaintiff's solicitors: Minter Ellison

Dates of hearing: 13 and 14 September 2004

Date of judgment: 1 October 2004