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Costs, conflicts of interest, and undertakings

In Atanaskovic Hartnell v Birketu Pty Ltd [2021] NSWCA 201, the New South Wales Supreme Court dismissed an appeal by a law firm seeking to recover costs incurred while in a position of a conflict of interest, enforced the practitioner’s undertaking not to charge for certain work, and ordered the law firm to pay the costs of the other party.

Background

Mr Clarke, a solicitor in the employ of Atanaskovic Hartnell (AH) committed several frauds on two clients of the firm – Birketu Pty Ltd (Birketu) and WIN Corporation Pty Ltd (WIN). Birketu and WIN commenced proceedings against Mr Clarke and were represented by AH.

One of the frauds involved Mr Clarke deceiving Deutsche Bank to transfer funds from Birketu’s account to Mr Clarke’s personal bank account. Birketu retained AH in relation to its dispute with Deutsche Bank.

AH’s retainer letter described the conflict in acting for Birketu as a potential one, or one that may arise in the future. After most of the work had been done, Mr Atanaskovic (a partner of AH) gave an oral undertaking that AH would not charge for any work done in investigating the Deutsche Bank frauds. However, after Birketu retained new solicitors to represent them in the proceedings against Mr Clarke, AH issued an invoice to Birketu relating to that work (investigation invoice).

Birketu subsequently joined AH and Deutsche Bank as defendants. In separate proceedings, AH sought to recover its fees.

The primary judge held that the supervisory jurisdiction of the court should be exercised to preclude recovery by AH of the fees owed under the investigation invoice, because:

  • AH did not obtain the fully informed consent of Birketu to act.
  • Birketu should not have to pay for work done in AH’s own interests and for its own benefit.
  • AH ought to be held to its undertaking, which was given by Mr Atanaskovic in a professional capacity.

Issues

The main issues on appeal were:

  1. whether AH obtained the fully informed consent of Birketu to act and advise in relation to the dispute with Deutsche Bank
  2. alternatively, whether the conflict of interest and duty was so profound that AH could not act for or advise Birketu, even with fully informed consent
  3. whether the work performed by AH was “infected by the conflict of interest” and whether Birketu obtained no benefit from the work performed by AH, only detriment, and
  4. whether AH could not, or ought not, be permitted to resile from the undertaking.

Issues considered

With respect to the conflict issue, AH was found to be in a position of actual and potential conflict of interest at the time of entering the investigation retainer.

AH submitted it had obtained Birketu’s fully informed consent to act. AH pointed to two passages in the retainer letter, which contained statements such as “this firm may suffer from a conflict of interests and/or duties in relation to this matter…” and “it may be argued by DB and/or possibly by Birketu that this firm may have a liability to Birketu for any liabilities which Birketu would have incurred to Deutsche Bank for the moneys so advanced…”1

However, the court held that AH failed to make full disclosure to Birketu of all “material facts and circumstances” concerning the conflict of interest,2 including the benefit that the retainer would provide to AH by way of access to information which AH might use against Birketu in subsequent litigation,3 and the opposition of interests between Birketu and AH regarding the issue of AH’s vicarious liability for Mr Clarke’s conduct.4

The court noted that, even with fully informed consent, the conflict was so profound that it was not proper or even possible for AH to act for Birketu.5

With respect to whether the work performed by AH was “infected by the conflict of interest”, the court found AH could not investigate the facts for one issue without it affecting the other, and commonality of interest on one issue did not mean that the parties’ interests were aligned.6 It was not in Birketu’s interest to incur costs for retaining AH as some of those costs would be duplicated upon retaining new solicitors.7

Finally, with respect to Mr Atanaskovic’s undertaking not to charge for the work, the court held that the undertaking was given in his professional capacity and needed to be honoured. The words of the undertaking were “clear and unambiguous”,8 and the fact that the undertaking was given over lunch, in an ‘informal setting’ did not detract from the context.9

Resiling from the undertaking was dishonourable conduct by AH which warranted the exercise of the court’s supervisory jurisdiction (which is both disciplinary and compensatory) to preclude AH from recovering its fees on the investigation invoice.10

QLS Ethics and Practice Centre note: Practitioners are reminded that they should maintain an undertakings register.

At the time of writing, Meagan Liu was a law graduate in the QLS Ethics and Practice Centre. She is a participant in the Queensland Law Society 2021 Graduate Program. This casenote was prepared under the supervision of Special Counsel Judy Hayward.

Footnotes
1 Atanaskovic Hartnell v Birketu Pty Ltd [2021] NSWCA 201, [72] (emphasis in original) (AH v Birketu).
2 Ibid [49] citing Rahme v Benjamin & Khoury Pty Ltd [2019] NSWCA 211.
3 AH v Birketu (n1) [64].
4 Ibid [73].
5 Ibid [108].
6 Ibid [111]-[116].
7 Ibid.
8 Ibid [125].
9 Ibid [140].
10 Ibid [131], [139].

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