Your undertaking is your word

Council of the Law Society of NSW v Hunter [2021] NSWCATOD 22
Carr v Council of the Law Society of New South Wales [2020] NSWCA 276

“The reliance which can be placed on a solicitor’s undertaking is of fundamental importance to the proper functioning of the legal system and the obligation of any solicitor to perform his or her undertaking is a most serious professional obligation, which will be strictly enforced.”1

These were the words of the Civil and Administrative Tribunal (the tribunal) in its recent decision in Council of the Law Society of NSW v Hunter [2021] NSWCATOD 22 (Hunter).

In that case, the respondent, Mr Hunter, was retained by a client (the vendor) to sell a unit in a neighbourhood plan. The respondent gave a written undertaking to the purchasers’ solicitor not to disburse funds in his trust account to his client until the issue of “payment to community” was resolved.

The purchasers’ solicitor understood the words “payment to community” to reflect an agreement by the respondent to retain $60,000 in trust to cover the purchasers’ liability to the neighbourhood association for strata levies. However, the respondent submitted that he intended those words to refer only to a community contribution fee of $2000, and on that basis, disbursed funds held in his trust account to various parties, leaving a balance of $2000.40 in the vendor’s trust account ledger.

The purchasers’ solicitor subsequently filed a complaint, prompting the applicant to institute proceedings against the respondent.

Issues in Hunter

The respondent admitted that his undertaking had been “poorly drawn and insufficient attention had been given to that important task”.2 He submitted that, although he had breached his undertaking by reason of the payments from his trust account, his actions did not constitute professional misconduct and were “at worst” an isolated act of negligence.3

Issues considered

The tribunal found the respondent guilty of professional misconduct. The tribunal considered that the terms of the respondent’s undertaking were “clear and unequivocal”, despite the fact that they did not have the effect intended by the respondent.4

The tribunal noted that, although the respondent did not act dishonestly, nor did he intend to breach the undertaking, neither dishonesty nor intention are prerequisites to a finding of professional misconduct.5 Ultimately, the respondent’s breach resulted in an inequitable result for the purchasers,6 and the respondent’s conduct constituted a “substantial failure to reach or maintain a reasonable standard of competence and diligence”.7

The tribunal ordered that the respondent be reprimanded, fined $6000, and required to pay the costs of the applicant. The tribunal highlighted that the seriousness of a breach of undertaking will not be sufficiently marked out in most cases by the imposition of a fine which is minimal or nominal.8

Is client authority required to comply with an undertaking?

In reaching its conclusions in Hunter, the tribunal had regard to the recent binding decision of the NSW Court of Appeal in Carr v Council of the Law Society of New South Wales [2020] NSWCA 276 (Carr), in which the court reached different conclusions about an alleged breach of an undertaking by a solicitor to transfer trust money.

Carr was an appeal from a finding by the tribunal that:

  1. The appellant was guilty of unsatisfactory professional conduct for attempting to mislead another solicitor by representing that he held no funds on trust for a previous client.
  2. The appellant was guilty of professional misconduct for failing to comply with an unconditional undertaking to transfer $2900 held in trust.
  3. The appellant was guilty of professional misconduct for misappropriating trust money by utilising trust money held in his office account for transactions.

Background

The appellant, Mr Carr, was acting pro bono for a client at the relevant time. The client deposited $7900 into the appellant’s office account for payment of outside counsel. The appellant paid $5000 to counsel in advance (with the intention of transferring the rest once the work was completed) leaving $2900 in the account.

The client then deposited a further $3127 by way of filing fees into the appellant’s office account without the appellant’s knowledge. It was common ground that the deposits were trust money, however the appellant did not transfer the funds to a separate trust account. Consequently, the funds were utilised on transactions from the office account.

A few months later, the client terminated the appellant’s retainer and instructed a new solicitor, Mr Maait, leading to discussions between the appellant and Mr Maait about the client’s files and trust monies. It was alleged that the appellant attempted to mislead Mr Maait by informing him that he held no funds in trust to meet costs and/or counsel fees when in fact such monies were held.

Mr Maait furnished receipts of the client’s prior deposits to the appellant’s office account. In a subsequent telephone conversation, the appellant told Mr Maait he would transfer the $2900 if Mr Maait provided his trust account details in writing and a signed transfer authorisation from the client. Subsequently, the appellant gave written confirmation that he would transfer the $2900 without specifying the requirement for the transfer authorisation; Mr Maait’s file note of the conversation also omitted this. Mr Maait did not provide the written authority as requested and the appellant did not transfer the $2900. It was alleged that the appellant’s undertaking was unconditional, and he had failed to comply with it.

Issues in Carr considered

The court held that while “aspects of the appellant’s conduct left much to be desired”, the appeal should be allowed.9

With respect to the breach of undertaking to transfer $2900, there was debate as to whether the appellant had provided an unconditional undertaking, due to the absence of written evidence of the conditions that the appellant relayed to Mr Maait over the phone.

Notwithstanding this issue, the court noted section 255(1)(a) of NSW’s Legal Profession Act 2004, which provided that a law practice must disburse trust monies only in accordance with a direction given by the person on whose behalf they have been received by the solicitor. Therefore, this provision “necessarily qualified” the appellant’s undertaking, and as the qualification had not been fulfilled, the undertaking was not capable of being complied with lawfully and for that reason failure to comply with the undertaking could not have constituted a breach of it.10

With respect to the issue of whether the appellant attempted to mislead Mr Maait by representing that he held no funds on trust for the client, the court observed that an attempt to mislead must involve an element of deliberate conduct. The tribunal erred in finding that the appellant “ought to have known his statement was misleading and that Mr Maait was misled, neither of which established the requisite element of intention”.11

With respect to the misappropriation of trust funds, the court similarly observed that ‘dishonesty’ must be proved in an allegation of misappropriation.12 The court stated that “while it may well have been a breach of the practice requirements for him not to have transferred the funds to the trust account immediately upon becoming aware that they had been paid in cash to his office account, he did not dishonestly appropriate the funds for the benefit of his practice or for personal benefit”.13

In this case, there was no evidence that the appellant was aware of the deposit of $3127 until after the alleged misappropriation occurred. Likewise, there was no evidence he knew that the credit balance of the account fell below $2900 when he made the transactions.

Comparing Carr and Hunter

The tribunal in Hunter concluded that the Court of Appeal’s decision in Carr would not alter their findings. In Carr, the appellant could not have possibly complied with an undertaking to transfer trust money to a third party, until his client gave instructions to authorise him to do so.

This should be distinguished from Hunter, where Mr Hunter’s ability to comply with his undertaking was not hindered by any condition precedent. His undertaking was prohibitive rather than mandatory. The tribunal observed “the very effect of an undertaking not to disburse money is that another party can rely on that undertaking regardless any instructions which client concerned may (or may not) give to the solicitor holding the money. The reliability such an undertaking would be substantially undermined if was in every case qualified by the possibility of the client changing its mind”.14

The tribunal was not persuaded that the principles enunciated in Carr were intended to have the effect or to “make the enforceability of a solicitor’s undertaking to forbear from disbursing trust moneys conditional upon the existence of an authorising direction from the person on whose behalf the moneys had been received”.15

When giving an undertaking, solicitors should have regard to the following:

  1. Think twice before giving a personal undertaking.
  2. Undertakings, when given, should be reduced to writing.
  3. An undertaking should be expressed clearly and concisely. In addition, it needs to be capable of being performed.
  4. An undertaking should be recorded on the client file and in a central register so that other members of the law practice may be aware that a practitioner has provided an undertaking to a third party. The registry should have details as to reviews of undertakings given and the date of performance.
  5. An undertaking can only be released by the recipient or a court of competent jurisdiction.
  6. An undertaking needs to be able to be interpreted on its face, and if there is ambiguity, a court will need to interpret it.
  7. Solicitors should not seek from another solicitor or an employee of a solicitor an undertaking in respect of a matter that would require the cooperation of a third party who is not party to the undertaking.
  8. If an undertaking is conditional, the conditions need to be expressly stated.
  9. Undertakings should be able to be complied with in a reasonable timeframe.

For more information, solicitors are referred to The Australian Solicitors Conduct Rules 2012 in Practice: a Commentary for Australian Legal Practitioners, Queensland Law Society, June 2014, 21-23, and Guidance Statement No.1 – Undertakings.

Meagan Liu is a law graduate in the QLS Ethics and Practice Centre. This article has been approved by Ethics Special Counsel Shane Budden and Principal Ethics and Practice Counsel Stafford Shepherd.

Footnotes
1 Council of the Law Society of NSW v Hunter [2021] NSWCATOD 22 (Hunter) [46].
2 Ibid [12].
3 Ibid [27].
4 Ibid [59].
5 Ibid [58].
6 Ibid [59].
7 Ibid [64].
8 Ibid [72].
9 Carr v Council of the Law Society of New South Wales [2020] NSWCA 276 (Carr) [43].
10 Ibid [113]-[119].
11 Ibid [120]-[123].
12 Ibid [21], citing Brereton v Legal Services Commissioner [2010] VSC 378, [50]-[51].
13 Carr (n9) [125].
14 Hunter (n1) [103].
15 Ibid [104].

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