A Victorian Supreme Court judge has ordered a law firm be restrained from acting in a lending dispute, finding that allegations the firm fraudulently amended a mortgage securing the loan had created a conflict of interest.
In her 20 October decision in Melbourne, Associate Justice Caroline Goulden ordered that ERA Legal be restrained from continuing to act on behalf of the lender, who is seeking to take possession of the mortgaged property.
During an earlier application for summary judgment, Associate Justice Goulden found that the mortgage registered by ERA Legal in October 2022, on behalf of the plaintiff, had a replacement front page, which had not been seen, signed or initialled by the mortgagor defendant.
The defendant alleged that the plaintiff presented for registration “a manufactured document which carried with it an implicit representation that it had been executed by the defendant in circumstances where the plaintiff knew that the document had not been executed by the defendant”.
Associate Justice Goulden said the fact a lawyer had “a personal stake in the outcome of the proceeding, beyond the recovery of their own fees, including because their reputation or integrity may come under attack, will be a strong indication that the interests of justice will require the lawyer to be restrained from continuing to act”.
“Put another way, where the acts or omissions of a law firm are at the heart of the questions in issue, the firm is effectively ‘defending’ its own professional conduct or advice, with the attendant danger that this will undermine the objectivity and independence with which it represents its client and appears before the Court,” she said.
She said the fraud allegations had not yet been tested or proven, but were serious.
“ERA Legal continues to appear as solicitors on the record for the plaintiff in the proceeding, notwithstanding that its conduct has become central to that case and will, accordingly, be subject to scrutiny,” she said.
“Therefore, the firm is being forced to defend its own actions and, in my opinion, the solicitors do have a conflict.
“Their desire, in common with their client, to succeed in enforcing the registered mortgage goes beyond a mere desire to see their client succeed in this litigation; they seek to vindicate their conduct and professional reputation in the face of allegations of fraud.”
Associate Justice Goulden said if ERA Legal’s client lost on this ground of the claim, the firm could be liable to the client for damages.
“But more pertinently, if the defendant’s allegations are made out, given their seriousness, the solicitors’ and the firm’s professional reputations will be adversely affected, and they may be the subject of further professional sanction,” she said.
“The understandable desire to avoid any possible consequences of their involvement places them in a different and difficult position to that usually assumed by a solicitor in the conduct of litigation for their client.”
She said a fair-minded observer would recognise the seriousness of the allegations.
“Whilst the plaintiff may well establish at trial either that the amendment was authorised by the defendant or was sufficiently immaterial that it did not invalidate the document, thereby vindicating ERA Legal and the practitioners concerned, for so long as the plaintiff seeks to enforce the mortgage as registered, the conduct of ERA Legal by its then employee in registering the altered mortgage is in issue, and implicates that firm’s professional reputation directly in the proceeding,” she said.
“A fair‑minded observer would recognise the conflict and have reservations about ERA Legal’s ability to remain independent and objective in their representation of the plaintiff and in their conduct before the Court.
“They would also apprehend, therefore, the danger the conflict poses to the integrity of the judicial process and the due administration of justice, such that it requires a restraint. “
The plaintiff submitted that it had given its fully informed consent to ERA continuing to act, and so it should not be deprived of its choice of solicitor.
“I accept the defendant’s submission that the plaintiff’s consent does not overcome the potential mischief of the conflict and its potential to undermine, or to be seen to undermine, the integrity of the judicial process,” Associate Justice Goulden said.
“As has been observed in the relevant authorities, the concern is about the impact of the loss of a solicitor’s independence and objectivity not only on the client, but upon the Court and the justice system.
“In other words, the interests affected are wider than the interests of the client alone, extending to the public interest in the due administration of justice.
“It is this wider public interest to which the interests of the client must yield in the circumstances of this case.”
Associate Justice Goulden said the independence of counsel briefed in the proceedings “was no panacea or protection either”, because counsel was briefed by solicitors, received instructions through solicitors and could be replaced by them.
The inconvenience for the plaintiff in them having to brief new solicitors was also not a persuasive factor, she said.
This was because ERA Legal had been advised twice about the prospect of its staff being material witnesses to the issues in dispute, and because the proceedings were in an early stage.
“I take into account that the exercise of the discretion to restrain is exceptional, and it should only be done with caution and cognisant of the public interest in a litigant not being deprived of the lawyer of their choice without due cause,” Associate Justice Goulden said.
“However, for the reasons I have addressed above, I am satisfied that the integrity of the judicial process and the due administration of justice require its exercise in the circumstances presented by this case.”
Read the decision here.
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