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- Unreported Judgment
Legal Services Commissioner v Reid (No 3) QCAT 471
Legal Services Commissioner v Reid (No 3)  QCAT 471
Legal Services Commissioner
Shara Louise Reid
Occupational regulation matters
20, 24, 25 and 27 July 2017
Mr Scott Anderson, Legal Panel Member
Dr Susan Dann, Lay Panel Member
22 December 2017
THE APPEAL TRIBUNAL ORDERS THAT:
PROFESSIONS AND TRADES – LAWYERS – COMPLAINTS AND DISCIPLINE – PROFESSIONAL MISCONDUCT AND UNSATISFACTORY CONDUCT – GENERALLY – where the practitioner involved in renegotiating more generous employment terms for key executive contracts including her own – where the practitioner was also instructing independent legal firms on related matters – whether the practitioner owed a duty of undivided loyalty and candour to the employer in the circumstances – whether there is sufficient evidence to demonstrate a breach of fiduciary or professional duty
Legal Profession Act 2007 (Qld) s 6(1), 217(a), 222, 418, 419, 420(1)(a), 456
Adventure Golf Systems Australia Pty Ltd v Belgravia Health and Leisure Group Pty Ltd  VSCA 326
Apple Computer Australia Pty Ltd v Wily  NSWSC 855
AWA Ltd v Daniels (t/as Deloitte Haskins & Sells) (1992) 7 ASCR 759
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (1997) AC 191
Beach Petroleum NL v Abbott Tout Russell Kennedy (1997) 26 ACSR 114
Beach Petroleum NL v Kennedy & Ors (1999) 48 NSWLR 1
Breen v Williams (1996) 186 CLR 71
Briginshaw v Briginshaw (1938) 60 CLR 336
Bristol and West Building Society v Mothew  Ch 1;  4 All ER 698
Chan v Zacharia (1984) 154 CLR 178
Citicorp Australia Limited v O'Brien (1996) 40 NSWLR 398
Clark Boyce v Mouat  1 AC 428
C-Shirt Pty Ltd v Barnett Marketing and Management Pty Ltd (1996) 37 IPR 315
DPC Estates Pty Limited v Grey and Consul Development Pty Limited  1 NSWLR 443
Farrington v Rowe McBride and Partners  1 NZLR 83
He Kaw Teh v The Queen (1985) 157 CLR 523
Hilton v Barker Booth and Eastwood  1 WLR 567
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
Ibrahim v Pham  NSWCA 215
Law Society of NSW v Foreman (1994) 34 NSWLR 408
Law Society of NSW v Harvey  2 NSWLR 154
Legal Services Commissioner v Baker  LPT 002
Legal Services Commissioner v Jackson  QCAT 207
Lim Chin Aik v R  AC 160
Maguire v Makaronis (1997) 188 CLR 449
McDonald v Grench  NSWSC 717
New Zealand Netherlands Society ‘Oranje’ Inc v Kuys  2 NZLR 163
O'Reilly v Law Society of NSW (1988) 24 NSWLR 204
Our Lady’s Mount Pty Ltd (as trustee) v Magnificat Meal Movement International Inc (1999) 33 ACSR 163
Parker v McKenna (1874) Lr 10 Ch App 96
Pegrum v Fatharly (1996) 14 WAR 92
Pepper v Litton 308 US 295 (1939)
Pillai v Messiter (No 2) (1989) 16 NSWLR 197
Re Moage Limited (in Liq); Moage Limited (in liq) v Jagelman (1998) 153 ALR 711
Securities and Exchange Commission v Chenery Corporation 318 US 80 (1943)
Sharp v Counsel of Law Society of Scotland (1984) Rep 313
Solicitors Regulation Authority v Anderson Solicitors  EWHC 4021
Stoelwinder v Southern Health  FCA 115
Stringer v Flehr & Walker (a firm) (2003) Aust Torts Reports 81-718
Victorian University of Technology v Wilson (2004) 60 IPR 392
APPEARANCES and REPRESENTATION (if any):
APPLICANT/APPELLANT Mr G Rice of Queen’s Counsel instructed by Legal Services Commissioner
RESPONDENT Mr M Hodge of Counsel instructed by Cooper Grace Ward Lawyers
REASONS FOR DECISION
- The applicant is the regulatory authority for the legal profession in Queensland.
- The practitioner is a local legal practitioner within the Legal Profession Act 2007 (Qld) (Act). From 1 July 2010 to 26 March 2012 she was company secretary and in-house corporate legal counsel for Racing Queensland Limited (RQL) which then controlled all codes of racing within the State under the management of a six member board of directors (Board).
- The practitioner was not a member of the Board but, as company secretary, answered to the Chair, Mr Bentley, and reported to the CEO, Mr Tuttle, in her capacity as a key RQL executive.
- Under clauses 9.1 and 9.3 of her employment contract she was required to act in good faith and obliged to avoid a situation where a conflict of interest could be reasonably perceived and to resolve any actual conflict in the company’s favour.
- The total remuneration value (TRV) of her employment package as a key company executive was $123,600. Her tenure with RQL was secure until 30 June 2013. She was entitled to $157,489 or 15 months’ pay plus leave and superannuation but no severance payment if she was dismissed or resigned before then.
- In 2011 the RQL Board ratified new employment conditions for its executives after speculation in the media that they would all be sacked if, as widely expected, the Liberal National Party (LNP) won the next state election due to be held later in the year or early in 2012.
- This had the practical effect of increasing RQL’s total liability for post-election early terminations by more than $500,000 for “redundancy” and $317,145 for resignations.
- When the practitioner resigned (on the first working day after the new LNP government took office) her payout based on the increased TRV including 30% CPI for 14 months and $30,000 severance pay was $216,051, compared with the $157,489 she was entitled to under the old contract if RQL terminated her employment on change of government or the $2,994 (long leave) if she had resigned for that reason.
- The commissioner contends that as a solicitor negotiating with the client for her own employment contract, the practitioner was bound not to improve her terms and conditions to the company’s detriment and the only professionally acceptable thing to do was inform RQL that the retention terms were overly generous and negotiate downward.
- The sole issue is whether the practitioner breached fiduciary or equivalent duties when she was instructing external legal firms in 2011 about the terms of executive employment contracts including her own.
The disciplinary regime
- A practitioner found to have engaged in prescribed conduct; that is, either unsatisfactory professional conduct or professional misconduct in connection with the practice of law is liable to a disciplinary order the tribunal thinks fit including any one or more of those listed in ss 456(2), (3) and (4) of the Act plus costs.
- While they closely resemble criminal punishment in their effect disciplinary penalties are intended for a conceptually different and distinctly non-punitive purpose; that is, public protection and the maintenance of standards within the profession.
- Unsatisfactory professional conduct falls short of the standard of professionalism (including when providing “in house” services to corporations) that a member of the public is entitled to expect of a reasonably competent Australian legal practitioner.
- Professional misconduct includes:
- (a)substantial or consistent unsatisfactory professional conduct; and
- (b)other conduct justifying a finding that the practitioner is not a fit and proper person to engage in legal practice.
- Generally speaking, a professional misconduct, as opposed to an unsatisfactory conduct, finding should only be made where it is necessary to protect the public from “delinquents and wrong doers … [or] seriously incompetent professional people who are ignorant of basic rules or indifferent as to rudimentary professional requirements”.
- As the alleging party the commissioner carries the onus of proof to the degree of reasonable satisfaction. This is not a state of mind produced by inexact proof, indefinite testimony or indirect inferences. The seriousness of the allegation made, the inherent unlikelihood of an occurrence, and the gravity of the consequences are all considerations affecting the answer to the question whether the issue has been adequately proved. Because a finding of misconduct is a matter of grave consequence the tribunal must genuinely feel an actual persuasion of the occurrence or existence of an adverse fact or state of affairs before it can be legally sustained. There must be a genuine belief in its reality and no saving or ameliorating features.
- The commissioner’s case is predominantly based on inferences derived from the facts stated in - of the application for charges 1 and 3 and - for charge 2 as well as others found to be supported by the evidence.
- The practitioner defends the discipline application in toto and generally puts the commissioner to proof of the allegations but some major incriminatory facts relied on are challenged by sworn or affirmed testimony from the former RQL chairman and other executives.
The grounds of the application
- The first charge is that between 25 May and 5 August 2011 the practitioner fell well short of professional standards when doing legal work for RQL as the client in a financial dealing between them. The alleged legal service provided was instructing two outside firms, Clayton Utz (CU) and Norton Rose (NR), about proposed variations to employment contracts including salary increases and resignation benefits.
- The particularised conduct is, in effect, acting self-interestedly in the transaction, in breach of both the fiduciary duty of loyalty and the strict no conflict rule of equity – restated in Rule 9.1.1. of the Legal Profession (Solicitors) Rules 2007 – forbidding solicitors from transacting with the client in a situation of even perceived conflict, for the protection of vulnerable principals from “exploitation and manipulation.”
- A deliberate breach of the rule is capable of amounting to prescribed conduct but not every rule violation warrants disciplinary response.
- The commissioner contends that the tribunal should find that there has been, at least, unsatisfactory conduct even if no more than a breach of Rule 9 is substantiated.
- The second and third charges allege a related lack of candour in performing her professional obligations by not fully informing the RQL Board of matters material to its affairs. The omitted matters for the 20 July 2011 meeting were:
- a preliminary advice from CU given on 2 June 2011; and
- a draft memorandum from NR dated 15 July 2011; and
as well as these legal opinions, for the meeting held on 5 August 2011, included information that:
- between 3 – 5 August 2011 she had instructed NR on its behalf to favourably alter the proposed terms of the new employment contracts to increase the TRV by 30%, add a severance bonus capped at 14 months, reduce the notice requirements in the escape clause from a month to a week and confer a discretion on the chairman to waive notice altogether.
- The breach of the duty alleged in charges 2-3, if proved, according to the commissioner, amounts to a category of prescribed conduct.
- In the first official discussion about staff retention on 14 April 2011 the two-member remuneration committee (which Mr Bentley chaired) noted the heavy workload of the executive and administrative staff between then and 2014 and recognised their need for “security of tenure … so as not to be distracted by innuendo and rumour”. This triggered a series of events which the commissioner says cumulated in the practitioner’s liability to disciplinary action. Chronologically, they are:
- the Board’s unanimous resolution at its 6 May 2011 meeting was to extend the existing employment contracts of all senior executives and five other employees to 30 June 2014 (as Mr Bentley had suggested and the remuneration committee recommended) on terms to be drafted by the practitioner and approved by Mr Bentley;
- the stated objective of the proposed extension was “… to reinforce the stability of the executive workforce during the period between now and 2014 by which time RQL must negotiate and achieve some fundamentally important milestones … critical to the continuation of the racing industry in Queensland”;
- the Board also agreed to retain CU to advise on the implications of a change in government for executives and other staff;
- the practitioner briefed CU on 26 May 2011. Mr Dunphy was instructed to consider and review draft amendments to the employment agreements;
- the practitioner told Mr Dunphy that although it made no mention of redundancy policy changes that the intention of the 6 May 2011 resolution was for the amendments to be “in favour of the RQL employee”;
- RQL had not in fact minuted a resolution seeking legal advice from CU or authorising instructions about “enhanced redundancy entitlements to compensate staff for any post-election unilateral termination of their employment” but it reflected Mr Dunphy’s understanding of what Mr Bentley had told him in a meeting the day before and is generally consistent with the Board’s evolving conduct;
- Mr Dunphy told the tribunal he interpreted his retainer as involving a search for the most generous incentive within reason for RQL to offer the four senior executives consistent with its legal obligations. He was left with the impression that RQL wanted to facilitate the four executives being able to end the extended contract if they found themselves in an impossible situation post-election instead of being forced out with inadequate severance pay. He saw no point giving the Board any opinion that was not based on terms acceptable to the executives;
- CU emailed its draft advice about the proposed amendments on 2 June 2011. It confirmed that RQL was fully justified in seeking to structure its employment and remuneration policy to gain the maximum advantage for the company and to “preserve its business continuity and corporate knowledge throughout this critical period”;
- The fact that the period happens to coincide with a looming election and the predicable prospect of some political “argy bargy” was seen as only adding to the merit and logic of the Board’s strategy. It also stressed however that the Board pursue its objective in a sustainable manner “… that will not inadvertently damage the company”;
- In addition to the legality issues CU also raised some collateral “good faith” risks around the suggested variations and other options for achieving the objectives of the 6 May 2011 resolution. These concerns which strictly speaking were beyond scope included:
- extending the contract term to mid-2014 increased RQL’s total redundancy payment liability;
- the notion of entitlement “triggers” was inconsistent with the concept of redundancy;
- the primary objective of the Board retaining its employees did not seem consistent with “immediately” providing them an opportunity to take redundancy when their services were likely to be needed most;
- the quantum of the proposed redundancy measures was out of line by comparison with commercial practice;
- the advice ended with suggested alternative incentives and a related benefits framework including a termination without cause payment of between six to nine months’ salary, redundancy in accordance with the Fair Work Act 2009 (Cth), a retention bonus paid in instalments and short term performance payments;
- the practitioner sent the advice to Mr Tuttle and ‘funnelled’ it to Mr Bentley on 3 June 2011. She informed them that when “we are happy” CU will issue the advice in final form;
- it is uncertain whether the draft advice was tabled or mentioned at the next RQL Board meeting. Mr Bentley’s oral evidence is that it may well have been but there is no direct evidence of any other Board members ever receiving a copy;
- on 14 June 2011 in the practitioner’s presence Mr Tuttle raised with Mr Dunphy the prospect of having a “poison pill” provision allowing the executives to unilaterally take “redundancy” on a change of government. Around this time the focus of the CU advice had narrowed to the four executives (Mr Tuttle, Mr Orchard, Mr Brennan and the practitioner);
- CU advised the RQL Board on 1 July 2011 that there was no obvious way it could be peremptorily ‘retrenched’ or ‘restructured’ by a hostile incoming government;
- prompted by a Courier Mail report that they would all be sacked on the election of the LNP Mr Bentley, Mr Tuttle and the practitioner met with Mr Dunphy again on 4 July 2011. Mr Dunphy was given new proposals to urgently consider including an immediate 50% salary rise to 31 January 2012 and a redundancy package for the balance to the end of June 2013 on the tacit understanding that in the event of the ALP winning at the polls the executives would all be re-employed;
- the next day a joint letter from all four key executives was sent to Mr Bentley (at his instigation) and copied to Mr Dunphy (and later Mr Procter) complaining that the company was unreasonably expecting them to take a gamble on a reformed company or new RQL Board retaining their services beyond the state election despite the odds against that happening. They were overtly looking for “a sense of security” and reassurance in the lead up to and following the election;
- in what could be interpreted as an implicit recognition of a conflict of interests between the executives and RQL in connection with the escalation of entitlements Mr Dunphy was told on the morning of 7 July 2011 via internal email that Mr Bentley had earlier advised that the retention issue was “… no longer (urgent or) going to be considered by the Board tomorrow. As such no written advice is required from us today … Instead, the four key employees are going to obtain their own legal advice (paid for by RQL up to an appropriate limit) to assist them to formulate a new proposal. RQL will then ask CU to advise the Board on the proposal”. Mr Dunphy agreed that it would be alright for the executives’ lawyer to consult CU in the course of formulating a new proposal “on instructions from the four”;
- the minutes of the RQL Board meeting on 8 July 2011 record that Mr Bentley updated the Board on proposed changes to the RQL Board and notes his announcement “[a]s Chairman, I have engaged the services of (NR) to act on behalf of RQL in respect of providing advice to the four (4) four key executives. … I have approved a budget of $15,000. Scope of advice – in relation to their rights and entitlements”;
- Mr Orchard (director of RQL integrity operations) had, in fact, already approached a partner of NR, Mr Procter, to act for the executives;
- Mr Procter’s file note of their initial phone conversation of 7 July 2011 relevantly records:
we would be acting for the 4 individuals
Racing Qld will do what they can
RQL → advised by Clutz
→ kicking into fees for Exec to get legal advice about
Barry Dunphy is Clutz guy
Shara Murray (the practitioner)
Initial advice for org to offer these 3
Directors concerned not to breach their duties
Cost →$10,000 (emphasis added)
- The practitioner later sent Mr Procter a briefing paper about developments to that point and with Mr Tuttle and Mr Orchard met Mr Procter and his legal associate, Ms Gamble, at 3pm on 7 July 2011. Mr Brennan attended by phone. In short, the executive group were looking to NR for a legally acceptable proposal that they could put to the Board;
- Ms Gamble took a detailed eight page file note of the meeting. The first page reads:
LNP indicated Board & senior exec will go
Provide advice to senior executive
Board using Clutz
1. Why do they stay for the next 12 months;
2. What benefits do they get on termination
Looking for: financial benefits up front + on termination BUT provided board is not exposed to ASIC investigation
On the last page there is a concluding note to the effect that RQL was to be the client “at this stage” (emphasis added);
- Mr Procter says he did not want to represent the executives against RQL (or be seen to be) because NR had been acting for the company. He considered it preferable to advise RQL on the practitioner’s instructions rather than the executives as to their termination entitlements. He conceded, however, that RQL and the executives’ interests substantially, if not exactly, coincided but was adamant that NR was not ever formally or definitively engaged by the executives. However, Mr Bentley and the executives insisted Mr Procter was, or at least was supposed to be, advising them about their entitlements if they decided to stay on but were then sacked within 12 months;
- about 11:23am on 12 July 2011 Mr Procter emailed the practitioner “to set out the terms which we offer to govern the future business relationship between … (NR) … and Racing Queensland Limited …”
- he clearly identifies RQL as the client and describes the scope of its retainer as: “advice on a strategy for the remuneration of Racing Queensland Limited’s executives, as required by you”, where “you” means “Racing Queensland Limited”;
- the fee was quoted at $10,000 and invoices were subsequently directed to RQL despite requests from the practitioner to address them to the executive;
- the practitioner signed the engagement letter as company secretary;
- on 15 July 2011 a first draft of NR’s advice was sent to Mr Bentley via the practitioner to “gauge (his) views on the approach of the Board”;
- the draft reiterated the Board’s instructions to advise on options available to it to address the ongoing need to retain and reward high performing executives in an environment of uncertainty, taking into account the legal obligations imposed on the Board in determining the appropriate level of remuneration and benefits before going on to suggest a new 5 year term from August 2011 with a 10%-20% uplift in the TRV, a no cause termination notice by either party, and a retention bonus of 12 months TRV if terminated early or if RQL ceased to be the control body or was restructured.
- Mr Tuttle considered a 10%-20% increase inadequate and the new 5 year contract proposal to be unsatisfactory. It is unlikely that either the advice or Mr Tuttle’s response were circulated to the Board;
- on 18 July 2011 the practitioner forwarded an email generated by Mr Tuttle to Mr Procter setting out the expected “key outcomes” as:
- 30% TRV increase form July 1 2011;
- contract until June 30 2013;
- renegotiation before December 31 2012;
- in the event of a change of government and implementation of LNP policy (to revert back to 3 codes) or alteration of the structure or composition of the Board triggers material change and redundancy payment in favour of employee for balance of term and entitlements;
- according to a diary note recorded by Ms Gamble later that day:
- Mr Procter met with Chairman this morning
- trigger → election result – available to resign on the next morning i.e. Sunday
- transition period – would like to avoid this if possible
- no performance bonus
- no extended term
- no deferred payments
- trim current advice to deliver their outcomes;
- NR sent the practitioner an amended draft of its advice the next day “as instructed” to provide the executives “...with the protection they are seeking”. In substance the new advice:
- increased the TRV;
- the notice period was deleted;
- the reasons for the implementation of a redundancy policy were given as being to “increase the defensibility of a severance payment made to the executive on termination of employment”;
- incentive bonuses were omitted;
- a “change of State government” was included as a trigger event;
- any reference to a 12 month cap or other limits on the termination payment was deleted;
- the general effect was summarised to be that in circumstances of a termination or cessation due to a material adverse change, an executive would become entitled to resign and trigger a payment equivalent to the amount each executive would have received to the end of the term and a redundancy payment;
- the particulars allege that the practitioner gave instructions to NR to alter the 15 July 2011 advice so it was more favourable to the executives, but as Mr Procter was giving independent advice to a client his opinion as to the lawfulness of the executives’ proposal was not negotiable and could not be improperly influenced;
- the amended NR advice was later incorporated into an agenda paper partly prepared and signed by Mr Bentley clearly identifying what the executives wanted as:
- a 30% increase in each executive’s TRV effective from 1 July 2011;
- the inclusion in the material adverse change clause of a change in State government as a resignation trigger, RQL ceasing to be a control body, a change to either the make-up of the RQL Board, entitling executives, on giving a month’s notice, to:
- (i)a payment equivalent to the amount of each executive’s TRV that they would have received had the executive remained employed by RQL to the completion of the term, plus an amount of severance pay equivalent to the RQL-wide redundancy pay payment, as a material adverse change severance payment; and
- (ii)all other legal entitlements;
- retention of the current 3 year contract term with an obligation on RQL to renegotiate before 31 December 2012;
- the practitioner did not disclose (a) NR’s 15 July draft advice; (b) that it had been materially amended in executives’ favour; (c) any conflict of interests; or (d) the CU draft advice of 2 June 2011;
- the Board “unanimously” resolved to support the intent of the NR advice as amended and requested the practitioner to send it to CU for “review and opinion”. The minutes noted that Mr Bentley would resolve the matter with both firms. On his recommendation the Board also rescinded the resolution of 6 May 2011;
- on 27 July 2011 NR was instructed by the practitioner to redraft the employment contracts in line with the amended advice and Board resolution;
- on 1 August 2011 CU provided its opinion on the amended NR advice. It regarded most of the suggestions as being “not unreasonable to adopt”, expressed concerns about “a mere change in the State government” as a valid trigger point for a termination payout and the potential for a very large “windfall” termination payment based on the proposed uplift rate in the event of a snap election if it was not capped;
- Mr Dunphy reminded Mr Bentley of the earlier discussions and advice about the Board’s legal obligations in relation to the remuneration of the executives particularly pursuant to ss 181 and 182 of the Corporations Act and added:
The value of the capped amount is for the Board to determine but we would suggest that a range of between 12 and 14 months might be considered. Our reason for raising this point is that the timing of the next State general election is really quite flexible and uncertain. In our opinion the next State general election could be as early as September 2011 or as late as June 2012. Our concern is that if the election is held very early, e.g. October 2011 and this then led to an activation of one of the clause 15.3 triggers, that the four executives would then become entitled to a termination payment of 20 months (at the increased 30% level) which, in terms of their current salary would be the equivalent of a 26 month payment. As that trigger would occur in circumstances where the employees were only effectively retained for 3 months from the date of incentive, it is our opinion that such a windfall outcome may be difficult for the Board to justify;
- in a letter to Mr Bentley on 3 August 2011 Mr Procter defended the termination payment under the proposed material adverse change clause (with or without a cap) based on RQL’s own commercial interest in retaining the executives “in the current industry environment” and noting a change of government as a trigger was “necessary to adequately address the current concerns of the executives”;
- the practitioner replied confirming that “the Chairman is happy with your advice” and that the 14 month cap was agreed and asked NR to draft necessary resolutions including the 30% salary increase from 1 July 2011 and revised redundancy triggers entitling the executives to resign with a payout up to a 2013 expiry date capped at 14 months in the event of an early election.
- NR was instructed to draft a board resolution and resignation packages for approval at the 5 August Board meeting.
- the practitioner later informed NR that the executives wanted to delete the one month’s resignation notice provided. The notice period was subsequently reduced to seven days on a change in government. She also said that she had received instructions from the Board to change the material adverse change definition to delete the reference to government policy altering the structure of RQL or the removal of one or more of the directors of RQL;
- the day before the 5 August 2011 meeting the respondent informed NR that the executives wanted to make further amendments to the employment agreements to allow for the reduced resignation notice period to be waived by the chairman;
- a resolution the practitioner drafted on 4 August 2011 (with tracked amendments) made no mention of the reduced notice or the waiver provision. The evidence about whether the chairman or Board were told is inconclusive. The employment contracts themselves were not tabled. There is uncertainty about whether at least one marked up draft of the contract was circulated;
- the minutes of the 5 August 2011 RQL Board meeting record the practitioner’s attendance but no disclosure of the CU and NR draft advices of 2 June and 15 July respectively, or that, on her instructions, (a) NR materially amended its opinion in favour of the executives and (b) the employment contracts were changed by NR to include a reduced notice period and a waiver provision.
The commissioner’s case
- The commissioner’s case was presented as one involving an alleged conflict of two incompatible interests. A conflict of interest and duty, interest and interest or duty and duty are not substantially different categories of fiduciary breaches. All dishonour the overarching equitable obligation of undivided loyalty.
- A conflicting interest is “some personal concern of possible significant pecuniary value in a decision taken, or transaction effected by a fiduciary”.
- According to the particulars the practitioner offended the no conflict rule by allowing a rival financial interest (identified as having the Board consider and (hopefully) approve employment (and termination) terms most favourable to her) with RQL’s incompatible commercial interest “to retain the executives but at a price that was no more than necessary”.
- The commissioner argues that Rule 9 is “concerned with transparency and manifest integrity of process in performance of a solicitor’s duty” and serves a “prophylactic function” by avoiding even the appearance of a lawyer being seen to be in a position of being tempted to favour self-interest.
- It strikes at the potential for a secret benefit not its achievement. What really counts, therefore, is the perception not the reality of a fiduciary being swayed by interest rather than duty and prejudicing those whom they are bound to protect.
- Hence, liability arises when there is even the perception of self-bias or a positon of temptation without the client’s informed consent.
- Any potential conflict must be disclosed so that the client can decide whether to retain the lawyer despite it.
- Mr Rice QC submits that the practitioner’s fiduciary duty of undivided loyalty to RQL and the no conflict rule were both irrevocably compromised here because she was unable to use “her best efforts to obtain the advice that served only the company’s interest … manifestly free of temptation to do less than that”. In breach of that duty, he says, she secretly allowed a situation to arise where she was tempted to give only those instructions that favoured her in negotiating new employment conditions with RQL without disclosing her interest in securing the terms most favourable to her, if necessary, at the company’s expense.
- Mr Rice QC suggests that as company solicitor the practitioner was also under a strict duty of candour requiring her to disclose anything she knew about why a proposed term favourable to her was not in RQL’s best interest including a duty to give (the legal advisers) “… any instructions known to her contrary to her interest”. The commissioner envisages, for example, the possibility that the practitioner may have had “… some inside knowledge that she and/or others would in fact accept lesser terms than those sought, if offered”.
- The implied counter factual proposition is that if the respondent had not acted as intermediary or fully disclosed the situation of conflict she was in, the Board might have been able to better protect the company’s economic interests by retaining her services for less in dollar terms than the generous incentives and redundancy arrangements it did.
- The information particularised at  above should have been disclosed by the practitioner to the Board before the 5 August resolution given her knowledge and responsibilities because of its potential adverse effect on the company’s operations. It was a serious failure of frankness on the practitioner’s part not to highlight the change at least to the chairman.
- The 15 July proposal remained material to the company’s consideration and the practitioner should have given the Board the benefit of it but there is no evidence that she ever did. According to the commissioner the NR retention proposal of 15 July did not feature in subsequent iterations because of the “…instructions conveyed to (Mr Procter) by the executives on 18 July was to limit his consideration to the package of terms requested by them”.
- The Board should have been alerted to the “instructions” she had given on 4 August 2011 to NR to reduce the notice period and include a waiver provision, because, according to the commissioner, if activated they could have seen all four executives resign with immediate effect, to the company’s disadvantage.
The practitioner’s response
- As to the first charge the practitioner says that merely having an interest in the subject matter of independent legal advice based on her instructions as the company’s agent does not breach either the letter or the spirit of the no conflict rule in the current circumstances because it did not give rise to a real possibility of any conflict.
- She asserts that all she did was faithfully pass on limited instructions on behalf of a sophisticated client about what questions it wanted answered, explaining the context and any underlying assumptions in circumstances where she was not in a positon to dictate, manipulate, alter or censor the advice.
- A fanciful possibility of conflict between interests and duties according to the practitioner’s counsel, Mr Hodge, is neither a fiduciary nor professional breach. This is because a conflict situation does no more than create a dilemma or a choice between two or more imperfect alternatives. The law only finds fault in lawyers making the demonstrably wrong one.
- The practitioner also argues that as any violation of Rule 9 was not deliberate it should not be treated as a disciplinary breach.
- Finally, she relies on the full disclosure defence. It was self-evident that her own employment terms were at stake and there was nothing more she needed to raise with the Board to ensure that it was fully appraised of pertinent matters.
- As to the breach of fiduciary duty alleged in charges 2 and 3 by not providing the Board with relevant information or materials at the meeting on 20 July 2011 (charge 2) and 5 August 2011 (charge 3) the practitioner says firstly that the chairman had a copy of CU’s 2 June 2011 draft advice and if the Board should have been told about the advice it was Mr Bentley’s responsibility to inform it. Instead he personally suspended instructions to CU to provide a final advice for Board consideration ahead of the 8 July meeting. From about that point onward the Board was solely concerned with the legality of the amendments proposed by the executives and CU’s advice was redundant as to that.
- As to the NR retainer the practitioner points out that the executives approached NR to act for them not for RQL and the Board had resolved to fund the executives’ legal advice up to $15,000.
- She says while NR could have refused to act for them, or decided to act for both parties concurrently if there was no conflict of interest and interest (or duty) the one thing it could not do after 7 July 2011 was act for RQL against them.
- NR’s internal billing procedures or how it sought to protect its future commercial interests in not appearing to act “against” RQL do not alter the fact that in reality it was acting on instructions from the executives and in their best interests in connection with the variations to the employment contracts in which RQL was interested in achieving the same or closely aligned objectives.
- Alternatively, she argues, even if she misconstrued the nature of her professional relationship with NR she did not breach any professional rules or duties because she was not giving “instructions” to NR for RQL as the client and there was no reasonable ground for believing that she was.
- Of the NR 15 July 2011 advice the practitioner says it was overtaken by rapidly changing circumstances in the following week and the Board was given the relevant opinion by NR in the 20 July 2011 advice based on the latest version of the executives’ demands.
- The practitioner denies any duty to draw the Board’s attention to the undisclosed matters particularised in the charges because they were either already sufficiently known or immaterial to the Board’s consideration. The chairman (and the Board) had the tracked changes versions of the contracts when they made their final decision on 5 August 2011.
- A clause by clause explanation was not required in the circumstances having regard to the nature and knowledge of the client and CU’s advice.
- She maintains the Board clearly understood the implications of the NR amendments and willingly signed off on them with the benefit of CU’s input.
- A fiduciary (as the party perceived to be solely in service of the interests of another) is obligated to show undivided loyalty in any matter within the scope of the service they provide, and must not use their position, knowledge or opportunity to serve other, possibly inconsistent interests without fully informed consent.
- As the law understands it, a fiduciary acts for the client in a representative capacity and is a trusted agent with the power to represent and the authority to bind someone else.
- In discerning the existence of fiduciary relations, a fundamental question to ask is “… for what purpose, and for the promotion of whose interest, are powers held?”
- While there is no simple test for differentiating a fiduciary from other categories of legal relationships there is indicia.
- A characteristic feature of a fiduciary position is the acceptance of an undertaking involving the exercise of power and discretion capable of practically or legally affecting the interests of the person on whose behalf the fiduciary acts.
- Fiduciary relationships are marked by an imbalance of power between the parties, with dependence and reliance on one hand, and ascendency and influence on the other. In the context of a relationship where it is clear the fiduciary has assumed responsibility for and control of a vulnerable client’s interests, the client is justified in relaxing their independent judgment and assuming the fiduciary will act solely for their benefit.
- Put another way the trust and confidence reposed by the client gives a solicitor a special opportunity to misuse his or her position to take unfair advantage and act to the detriment of a client at risk of abuse.
- The orthodox position is that the solicitor-client relationship invariably does because of a lawyers’ position of influence, arising from their specialised knowledge and skill, over their clients. Expertise is both the reason clients repose trust in lawyers to handle their affairs and the basis of a lawyer’s capacity to take advantage of vulnerable clients. The imposition of an obligation to “serve and protect” the client’s interests at all times acts as a counterbalance to the risk of exploitation.
- Law Society of New South Wales v Harvey involved unsophisticated clients losing money when they provided financial support for property investment companies controlled by their solicitor on his recommendation. The solicitor was disbarred for breaching the no-conflict rule. Street CJ warned that a solicitor’s obligation entailed full disclosure of all facts and details capable of influencing his client’s conduct in the proposed transactions.
- All relevant interests should be precisely identified to enable the client to make a fully informed decision about whether the solicitor can continue to act for them. It may be that to avoid an actual conflict the solicitor must withdraw. At the very least, the client should be advised to seek independent legal advice. Street CJ also noted, however, that while all reasonable steps should be taken to avoid conflict, “(t)here are of course exceptional cases where the transaction may be in the special interest of a particular client”.
- The fiduciary duties owed to the client by solicitors are to:
- not to make (or attempt to make) a personal profit from their position (apart from fees) where the solicitor’s duty to the client is in conflict with the solicitor’s own personal interest;
- avoid concurrent conflicts where the solicitor is acting for two clients with conflicting interests. The solicitor must take care not to find himself or herself in a position where there is an actual conflict of interest so that an obligation to one principal can only be fulfilled by failing in an obligation to the other;
- ensure against successive conflicts where there is a conflict between the duty of loyalty owed to an existing client and an obligation of confidentiality owed to a former client;
- not to mislead; and
- act in the utmost good faith by disclosing everything which the solicitor knows may be of assistance to the client in relation to the retainer and not to withhold information from the client.
- Thus, if a fiduciary wishes to enter into a transaction which would ordinarily be a breach of duty, there should be full disclosure to the person to whom the duty is owed and that person must consent to the proposal.
- In determining whether disclosure is sufficient to justify the conclusion that informed consent has been obtained it is essential to determine what services are required of a fiduciarywhich depends on the subject matter of any agreement between the parties and what the client actually wants or is willing to accept.
- As clients dictate the objectives of their representation and what their best interests are it is open to them to authorise or consent – even by implication – to conduct that would otherwise substantiate a breach of fiduciary duty.
- Liability will not arise, for instance, where the fiduciary duty of undivided loyalty has been waived by the client for a particular transaction or where the fiduciary has been “authorised … by agreement … or … the circumstances of his appointment or by the (fully) informed and effective assent of the person to whom the obligation is owed, to act in the manner in which he has acted”.
- Importantly, a solicitor’s fiduciary obligations derive, if at all, not from their professional status but solely from the terms of his or her retainer either generally or for a specific transaction. Even when fiduciary duties do arise they do not necessarily pervade every facet of the professional relationship or for all purposes.
- There is generally not anything intrinsically fiduciary in the commercial context where contracting parties are capable of looking after themselves and are dealing with each other on a mutual understanding that each of them is engaged in conducting his or her own affairs. While parties dealing with each other at “arm’s length and on an equal footing”owe each other a duty of “good faith”, fiduciary duties do not usually arise because the essential elements of reliance, loyalty, vulnerability, ascendancy and so on are not present.
- The same principles of disclosure and consent are generally true in the employment context, because, like solicitors, employees can be agents acting in a representative capacity on behalf of or in the best interests of their principal in the exercise of a power or discretion capable of detrimentally altering the employer’s interests in a legal or practical sense. Of course it all depends on the nature of the employee’s duties and the terms of the employment contract as employers do not always trust or have confidence in all employees all the time or for all purposes but as the Victorian Court of Appeal recently confirmed in a joint-venture case fiduciary duties can arise in commercial situations, without the need for the whole relationship to be characterised as a fiduciary one.
- Some activities (but not others) governed by contractual terms may also be infused with the fiduciary obligation to act with undivided loyalty.
- The answer as to whether one party is entitled to expect a solicitor, employee or party to a commercial transaction to act in his or her interest to the exclusion of all others depends on considerations such as the duties to be performed by the fiduciary; the act or omission said to be in breach of the duty; the relative positions and respective roles of the parties; whose interests the relationship was created to serve; who is responsible for serving them; and the legal functions performed in doing so.
- The question of the scope of a senior executive’s fiduciary duty to an employer company in the context of “arm’s length” contract negotiations arose squarely in Stoelwinder v Southern Health.
- Professor Stoelwinder sued his former employer for the cash value of unused sick leave after resigning as the head of a public hospital. His fiduciary status was accepted because a “critical feature” of the employment relationship was reposed trust and confidence.
- The central issue was whether the professor had breached his fiduciary duties by failing to disclose during hiring negotiations that a clause in the employment contract he had drafted himself conferred un-flagged new benefits entitling him to $450,000 on termination.
- It was argued a that a requirement of the professor’s fiduciary status was to subordinate his own interests to those of the hospital. The only way of satisfying that obligation in the circumstances was to disclose the practical effect of the clause conferring extra entitlements before the contract was concluded.
- In answering the question of whether the professor was required to look after the interests of his employer as well as his own Finkelstein J noted that it was the board’s function to choose a chief executive and that this process (essentially conferring a benefit) did not involve the professor. Emphasis was placed on the fact that in the circumstances an employer must expect an employee to look after their own interests and imposing a duty of disclosure in employment contract negotiations would put the employee in an unacceptable position of disadvantage. His Honour concluded that the process of arm’s length negotiations itself was the basis of the reasonableness and fairness of the contract and in the absence of fraud, the employment agreement was valid.
- It is also important to understand that fiduciary duties are proscriptive not prescriptive. They identify what you cannot do and as yet do not go so far as to impose positive obligations such as the disclosure of personal interests.
- Thus, solicitors have no duty (unless it falls within the ambit of their retainer or an assumed responsibility) to inform their clients of their views about the financial prospects of a transaction even if they feel or ought reasonably to feel that there is a risk of loss. Unless the non-disclosure serves the purpose of advancing an adviser’s position, it is more likely to found a claim in negligence or breach of contract, than a breach of fiduciary duty.
- Consistently with this approach in NMFM Property Pty Ltd v Citibank Ltd Lindgren J held there is no breach of fiduciary duty solely in an agent’s failure to disclose a matter over and above meeting the no conflict and no profit obligations encompassed within the overriding duty of loyalty.
- In summary then, professional liability for breaching general law fiduciary duties depends on all the circumstances of the case including the nature of the client; the parties’ relationship and the legal services given and expected; how integral the act or omission in issue is to the relationship; the extent of the client’s vulnerability; the degree of reliance; the solicitors’ actual ability or intent to influence the client’s decision making; the extent of the client’s likely knowledge of the implications of material matters; and any measures put in place to protect the client’s interests from being compromised or displaced.
- Liability will not be incurred where there is no realistic possibility of a conflict arising or where the acts of a fiduciary in obtaining a right or benefit they are otherwise precluded from receiving is also plainly in the interests of the person to whom the fiduciary duty is owed. In those circumstances, as in the case of Professor Stoelwinder, it would be “unconscientious”, unreasonable and inequitable to assert a misuse of fiduciary position, opportunity or knowledge.
- If the conduct in issue does not involve disloyalty in the relevant sense, it may be a breach of contract or duty of care, but it will not be actionable in either equity or disciplinary proceedings.
The NR relationship
- It is usually clear from the retainer who the client is and the capacity in which advice is sought, however there is a dispute about who “the client” was when the practitioner was instructing NR.
- The practitioner asserts that in remuneration dealings with RQL, NR was acting for her as a member of the executive in dealings with RQL and she was, therefore, freed of any conflict duties and NR was duty bound to act in her interests and respect her confidences not RQL’s.
- She says that she and the other executives met the description of a client within the 2007 solicitors rule because, at least from her perspective, she engaged NR to provide legal services for a matter; that is, providing advice and drafting documents in connection with the renegotiation of her employment contract with RQL. She stood in a relationship of trust and confidence with NR entailing a duty on it to promote her best interests even if, objectively, the same duty was owed to RQL.
- She was telling ‘her’ solicitor what she wanted in the belief that it coincided with what the Board was willing and able to give her to retain her services for as long as possible.
- Mr Procter testified that despite his understanding that the interests of RQL and the executives were practically aligned NR acted for RQL only and he was ‘astute’ that he could not act for both sides where their interests were in competition.
- Based on this the commissioner submitsthat NR was not impliedly retained by the executives on 7 July 2011 because the necessary “mutual assent” was not overly manifested and relies on the following objective facts in support of a finding that NR was representing only RQL:
- each written advice was forwarded to the respondent in her capacity as company secretary and addressed to the chairman of RQL. All were consistent with the retainer, for example: “We have been instructed to advise the Board of Directors of RQL …” and “the Board has instructed us …”;
- none of these descriptors were ever challenged by the respondent or other executives;
- there was no communication from NR styled as advice to the respondent or the other executives in the capacity of client;
- the advices of NR were received and accepted by the Board in the form they were provided at its meeting on 20 July and 5 August;
- all NR file notes record RQL as the client;
- no file was opened by NR in respect of the executives;
- the updated instructions sheet of 29 July on its face states that RQL is “our client”;
- the practitioner had ostensible authority to retain and instruct NR on RQL’s behalf and signed the retainer document in her corporate capacity and either knew or ought to have known that NR was acting for RQL. The belief of the other executives to the contrary may be explained by their lack of knowledge of the written retainer.
- RQL may have “retained” NR in the strict legal sense and it may even have been a “client” in some but not all aspects of the transaction but there are strong indications that when “advising” the Board NR was in fact acting for the executives jointly or concurrently.
- A solicitor cannot serve two clients with competing interests or a client whose interests conflict with the solicitors’ duty.However, there is no general rule against acting for different parties in the one transaction because there may well be instances where separate clients may be willing (and perhaps prefer) to look after their own interests, or there may be no actual conflict between the clients’ interests. There is, of course, a risk involved in acting for both parties because predicting how interests may in fact conflict is fraught with difficulty.
- Where a party is clearly looking to a solicitor for guidance or advice, especially where there is no other legal representative involved, prudence dictates any impression that he or she is in any way taking responsibility for protecting a party’s interest to be unambiguously dispelled to avoid creating a false expectation.
- On this basis Mr Procter was required to either fully discharge his professional responsibilities to both or to make it clear that one of them was not accepted as a client and should not rely on him to advise or protect their interests.
- On the reasonable assumption that Mr Procter was mindful that his ethical obligations and fiduciary duties when serving two masters in the same transaction required him to make full disclosure to both or not act for either to avoid potential liability to both, it is unlikely that he would have mixed their interests if they were inconsistent with each other. It is much more likely that he continued to act for both precisely because he saw no conflict between them. Apart from some initial equivocation Mr Procter never rejected the executives as clients and his conduct amounted to a tacit agreement to provide them with legal services on the standard basis.
- The question of law whether the executives (including the practitioner) and NR had informally come into a relationship despite any retainer or formal engagement is determined by reference to the objective intentions of the parties (not the belief of the solicitor) and can be inferred.
- The one certain thing amid all the confusion is that the executives consulted Mr Procter for their legal advice. They all say that notwithstanding the written retainer and whether Mr Procter knew it or not they relied on his expert professional knowledge and skill consistently with the ordinary relationship between solicitor and client.
- Board meeting minutes describe the scope of the advice NR was providing to the four key executives as “in relation to their rights and entitlements” not RQL’s. Mr Procter’s file note of the phone call from Jamie Orchard before the 7 July meeting tellingly records that “we would be acting for the 4 individuals”, RQL was advised by Clutz (CU) and was “kicking into fees for Exec to get legal advice”.
- The executives informed Mr Procter that they had a budget of $10,000 to obtain their own advice and this was the amount reflected in the engagement letter. While the fees were ultimately paid by RQL it was on the express basis that it would be paying for advice to the executives, and not to pay NR to provide it with the same legal services CU already was, only for its opinion to be vetted by CU.
- NR was told at the very first face to face meeting that the executives wanted a legally acceptable proposal that they could put to the Board. The initial focus was on what it would take for the executives to stay for the next 12 months and not seek alternative employment given the risk of being summarily sacked or forced to resign by an incoming LNP government with little or no termination benefits.
- Over time, remuneration and resignation replaced retention and redundancy as the primary concern (probably by 7 July 2011). Given they and it were both endangered species, the Board undoubtedly accepted the executives’ complaint in the letter of 5 July 2011 that it was unfair for them to stay put without some mutually acceptable incentive. It was apparent that (despite the existence of any collateral motives) the Board wanted to do what it saw as being the right thing for the executives in the right way. Legal advice confirmed that its generosity to the executives was within legal bounds and more than arguably in its own commercial interests.
- The 12 July 2011 engagement letter did not sever the pre-existing solicitor client relationship with the executives or necessarily create an exclusive retainer between NR and RQL. It would not of itself have conveyed to a reasonable person in the same circumstances that NR was not going to act in the interests of the practitioner or other executives. Nor was that the effect Mr Procter intended of the engagement letter because, in our view, he gave the impression of acting in the compatible interests of both and everyone who mattered proceeded on that assumption.
- We are unwilling to infer that the Board intended to retain NR with respect to the same subject matter that CU was also advising on. The proposition that the executives would be left with no solicitor, and that RQL would have two solicitors, notwithstanding that this was not what either RQL or the executives wanted, is an improbable explanation for what happened.
- It seems to us therefore that:
- (a)there was a de facto lawyer-client relationship between the executives (including the practitioner) and NR;
- (b)Mr Procter knew that the executives did not have another solicitor and that they sought a proposal that would protect their interests;
- (c)he understood the risks that the executives faced because they explained them to him as the reason they were there;
- (d)Mr Procter is therefore likely to have known, believed or assumed that the executives had placed their trust and confidence in him;
- (e)NR could not ethically have commenced acting on behalf of RQL after 7 July 2011 (unless there was no conflict) because an implied solicitor-client relationship had already arisen between him and the executives;
- (f)there was never a “very clear statement” that he was not acting for the executives either solely, concurrently or jointly with RQL. He was certainly in no position to act for the company “against” them. There is no indication that Mr Procter was, or believed NR to be conflicted and unable to fully discharge its professional duties to both the executives and the Board;
- (g)the onus was on Mr Procter to take steps to dissuade the executives from a belief that NR was acting for them or renounce the firm’s retainer if he was conflicted. He could not just switch to act for a client with opposing interests after he had already been consulted by the executives.
- Even if he had decided not to act for the executives Mr Procter failed to make that clear to them and his conduct suggested the contrary. If the executives thought for a moment that NR was not acting for them they would surely have engaged another firm funded by RQL or, at the very least, raised the issue with NR and the Board.
- As against the practitioner, RQL’s interests were adequately protected by the ordinary law of contract that ensures “neither party … takes the pursuit of its own interest beyond the acceptable bounds or unduly prejudices the interests of the other”.
- On the basis that the practitioner was one of NR’s clients she did not owe RQL, as another client, with concordant expectations and interests, any fiduciary duty of undivided loyalty and, within the limits of good faith, was entitled to act self-interestedly. She certainly had no duty of candour requiring her to make the particularised disclosure about the instructions given to NR after 8 July 2011.
- In any event, NR’s search for a package that would satisfy the executives and meet the company’s objective of retaining them until 2014 was guided by the chairman, Mr Tuttle and the practitioner. They all favoured an adverse election result as a trigger for termination entitlements over NR’s initial proposal in the 15 July 2011 draft advice of a 12 month TRV retention bonus for loss of employment.
- It was inferentially apparent by 15 July 2011 that “a retention strategy” for the practitioner and other executives had given way to a “resignation” strategy but use of the latter was avoided, no doubt, in case it gave the wrong impression to the regulators. While the executives intended to leave as early with as much as they reasonably could if the LNP won the next general election, this position was understood and supported (if not encouraged) by the Board. This is probably because the Board believed the work it wanted to retain the executives to do would probably not be pursued by a new Board installed by the LNP post-election.
- Mr Procter was told by Mr Tuttle and the practitioner on 18 July 2011 to “trim current advice (15 July 2011) to deliver their (the executives) outcomes” including, presumably, immediate post-election resignation “the next morning i.e. Sunday”.
- Mr Procter complied with the executives’ request with Mr Bentley’s imprimatur by increasing the TRV uplift to 30%, deleting the notice period, omitting incentive bonuses, removing reference to a 12 month cap and including a change of government as a trigger event. The phrase “as instructed” in the amended draft given to the practitioner the following day could have equally been a reference to Mr Tuttle’s email or Mr Bentley’s comments of the previous day.
- Either way, the effect of the changes was to enable executives to resign and be paid their increased TRV for the balance of contract period and a redundancy payment in line with the company wide policy.
- The upshot was an adverse election result triggered generous one-sided resignation benefits equal to the balance of the extended contract as an incentive to stay until the election but hopefully to 2014. The intent of the NR advice was unanimously supported by the Board on 20 July 2011 and it directed the practitioner to send it to CU for assessment.
- Although Mr Procter had himself originally included a 12 month cap on 15 July 2011 he staunchly defended an uncapped termination payment on 3 August 2011 to Mr Bentley against CU’s ‘potential windfall’ criticism as being in RQL’s own commercial interest in retaining the executives “in the current industry climate” and justified the inclusion of a change of government as a termination trigger to address the executives’ concerns.
- Despite the chairman being “happy” with NR’s advice the executives agreed to a 14 month cap. Moreover, as Ms Gamble confirmed in evidence, NR continued to give advice up to March 2012. These facts confirm that NR was looking out for the executives’ interests, as much, if not more, than RQL’s.
- The reduction of the notice period from a month to 7 days and the inclusion of the chairman’s discretion to waive notice altogether in the draft contracts was not inconsistent with the spirit of NR’s 20 July 2011 advice which the Board unanimously approved or with the golden handshake being triggered by the election of an antipathetic government believed to be intent on delaying or denying the executives severance entitlements.
- Viewed in this way the termination arrangements generally were part and parcel of a legitimate, if unorthodox, retention strategy and not merely an unjustified windfall at company expense on resignation simply because there was an unfavourable political party in power.
- Any technical breach of the no conflict rule by the practitioner was with the full knowledge and informed consent of the chairman, and probably the entire Board, which is imputed to the company itself. If there was any conflict, it was of the Board’s own making, as it possessed all the material facts relevant to its choice of solicitor.
- It can also be readily inferred that any theoretical “no conflict” duty the practitioner had in drafting and negotiating amendments, including retention bonuses, termination trigger points and notice provisions, etc. was clearly waived by RQL fully knowing and expecting her to look after her own interests while it took care its own. The Board was not relying on the practitioner in the relevant sense.
- Directors acting within the scope of the actual ostensible authority can still bind the company even if they are in breach of their own fiduciary duties or acting fraudulently. Even if the new contract terms approved by the board were overly generous to the point of questionable legality, RQL, via its directors, was nevertheless capable of giving its informed consent to the solicitor’s technical breach of fiduciary duty.
- It would be contrary to reasonable public expectation in our opinion to infuse the practitioner’s relationship with RQL during the 2011 contract re-negotiations with the onerous duty of disclosure the commissioner proposes where:
- NR’s advices to RQL and the amendment to the employment contracts were produced on instructions from the executives who at the very least honestly and reasonably believed they were the clients for that purpose and, therefore, not morally or ethically (or legally) liable to any greater extent than if they really were;
- the negotiations were conducted at arm’s length;
- a positive duty to disclose her own lowest price was not owed by the practitioner. Nor could the Board have reasonably expected the practitioner to act in its sole interest for the purposes of renegotiating her retention and termination rights through NR;
- the interests of the company and the executives, including the practitioner, coincided;
- CU was advising the company not only as to the legality but also (on its own initiative) the wisdom of approving the terms;
- CU was scrutinising and commenting on NR’s opinions on behalf of the Board;
- any amendments or additions to the contracts the practitioner drafted were subject to approval by the chairman on legal advice;
- any benefit to the practitioner was conferred by an adequately apprised and advised Board, not herself;
- NR gave the impression it was partly acting for the executives in the transaction. The work Mr Procter did was intended to be in the interests of the executives;
- there is also no support for the allegation that the salary, retention and termination terms were “unfair” from the company’s point of view. RQL may have had a competing interest in paying the minimum not the maximum, but in the end a compromise was struck, with CU’s tacit approval;
- there is no evidence that the executives were asking for more than they were all prepared to accept and it cannot be assumed that the company wanted to pay them any less, even if it knew that it could, and by how much;
- even if the practitioner’s conduct is tested by asking whether the amended contract was fair from the Board’s perspective and honestly believed, rightly or wrongly, to be in the company’s best interests, the answer (both subjectively and objectively) could reasonably be “yes”;
- the Board’s informed consent is a defence to any breach of duty.
- Accordingly, she is not liable to any disciplinary action insofar as her dealings with the Board via NR are concerned.
- That, however, is not the end of the matter. The commissioner’s allegations of conflict of interest instructing CU and lack of candour in relation to the 2 June 2011 advice still have to be settled.
The CU role
- We reject the commissioner’s submission that her role as company solicitor gave the practitioner the means of promoting her self-interest by colouring or “overegging” CU’s instructions with a view to persuading or influencing ostensibly independent lawyers to recommend the most favourable employment terms and conditions from her perspective, rather than the Board’s or RQL’s, beyond what the Board was willing to accept.
- As Lord Hoffman said in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltda distinction can be drawn between a duty to provide information necessary and relevant to deciding a course of action, and advising what that course of action should be. If a solicitor is relied upon only to provide information, then the duty involves taking reasonable care that the information is correct, and not to consider potential losses resulting from a choice of action founded on the details provided.The outcome sought by the client cannot always assumed, and provided the client clearly appreciates the consequences of each available course, the lawyer must “pursue the matter as the client prescribes”.
- The practitioner was merely a conduit between the Board and CU. She adequately discharged that function concerning the 2 June 2011 draft advice by “funnelling” it straight to Mr Bentley and Mr Tuttle. In any case, the “good will” cautions provided by CU to the Board were not telling it anything the chairman did not already know.
- As to whether they later passed it on to any other Board members was a matter of indifference to the practitioner and she committed no breach in not ensuring its disclosure at the 20 July and 5 August 2011 Board meetings, by which time any redundancy strategy had well and truly been abandoned in favour of a resignation strategy.
- Mr Bentley initiated the external review of executive contracts and obviously spoke authoritatively within and for the Board. He was privy to all the significant oral and written communications with the outside firms. He knew what they were being told and, presumably, what the Board wanted to hear. He was provided with the full text of the draft advice.
- The Board had, by what it did and said in its meetings and via the chairman, impliedly released the practitioner or, at least, effectively relaxed her professional duty as an employed solicitor and company agent to reveal all material information within her knowledge relating to RQL’s affairs including any substantial changes in circumstances, insofar as any of her remuneration, retention, resignation and redundancy interests were concerned.
- Her duty therefore did not entail instructing CU about anything known to her that was contrary to her own interests, nor did it involve not giving any instructions capable of influencing CU towards an advice favouring her and not RQL provided she did not mislead. There is no allegation or evidence that CU was deceived by false or misleading information it was given or denied by the practitioner.
- On our analysis despite her professional and employment status the practitioner did not have the power, discretion, or capacity to detrimentally affect RQL’s interests in the contract transaction nor did she undertake to act for, on behalf of, or in the interest or with the confidence of RQL or to prefer its interests over hers. Nor was she realistically in a positon to manipulate things to her advantage.
- In dealing with CU the practitioner was obviously obliged to faithfully follow her express, implied or inferred instructions from her supervisors, Mr Bentley and Mr Tuttle. As far as we can tell she did so to the letter. She also owed the company a duty of good faith which she is not alleged to have breached.
- She did not therefore owe the fiduciary duty of undivided loyalty reflected in the solicitors no conflict rule under her employment contract or at equity in the negotiations. There was no relationship of ascendancy or influence in the fiduciary sense nor one of dependence, reliance and vulnerability on RQL’s part in relation to the practitioner’s role passing on instructions to CU.
- On the contrary, it is clear that the Board reposed its trust in CU, not the practitioner. CU owed contractual, tortious and fiduciary duties to RQL to ensure that its advice was not tainted – even indirectly – by extraneous considerations making it untrustworthy.
- As early as 6 May the Board was happy to sign off on extended executive contracts to 2014 on terms drafted by the practitioner and approved by the chairman. The Board decided that it was in RQL’s best interest to retain the services of its lay executives for as long as possible and that the best way of achieving this was to provide attractive conditions and security of tenure.
- CU was retained to provide advice about the implications of a change of Government and the instruction on 1 June 2011 was with the intention for the amendments to ‘favour’ the executives by including enhanced compensation for any post-election sacking. This approach has not been disavowed or contradicted, and reflected Mr Dunphy’s understanding of what the chairman had told him previously.
- There was no point in Mr Dunphy advising on the most generous retention incentives within reason the Board could legitimately offer unless those terms were acceptable to the executives. Mr Tuttle had floated the idea of a ‘poison pill’ provision with Mr Dunphy and NR clearly saw redundancy as a way of increasing “the defensibility of a severance payment to the executives”.
- Despite the validity of warnings in the 2 June 2011 advice about the apparent inconsistency between a retention strategy and overly generous resignation benefits without cause, these were gratuitous comments outside the terms of the retainer. We find the Board was alert to but not concerned about the non-legal criticisms of giving the executives an exit strategy as a protection against mass sackings. Mr Bentley certainly was and he raised no complaint about the utility of the 2 June 2011 draft advice.
- As the need for separate representation became more obvious CU’s role changed from advising on retention strategies to protect the company’s interests by ensuring that proposals put by NR on behalf of the executives were legally (if not politically and morally) defensible. Accordingly, it was CU’s ultimate responsibility to advise the Board about the legalities and broader practical implications of the evolving retention strategy in uncertain times.
- Throughout the alleged offence period the conduct of the Board making decisions on behalf of the company clearly indicates implicit acceptance that the executives’ redundancy or termination conditions were the inevitable cost of retaining them. The potential for conflict was self-evident and both Mr Bentley (as chairman of the Board) and Mr Dunphy (a senior partner of CU) were alert to the practitioner’s interest in the outcome.
- The Board must be taken to have allowed, accepted, or acquiesced in it. Any vulnerability was plainly of the Board’s own making by detailing her to instruct CU and agreeing to fund NR to advise it on her remuneration. RQL therefore impliedly authorised the practitioner to protect her own interests and even profit from the transaction but only to the extent NR recommended, CU advised and the Board approved.
- The nature and scope of the practitioner’s functions and the circumstantial matrix weigh heavily against the conclusion that she owed the strict fiduciary duties of individual loyalty and absolute candour to RQL insofar as the amendment of the executive employment contracts in 2011 was concerned.
- Overall, the facts when fully examined are incompatible with the allegation that the professional services the practitioner provided to RQL were substandard in the sense of being short of what the public is reasonably entitled to expect of her in the position she was put in.
- For all these reasons we find that this is an example of what Finn calls “… an unprincipled penetration of the fiduciary principle into ordinary contractual dealing” not a case of a proven unprofessional conduct much less professional misconduct on the practitioner’s part.
- We are not reasonably satisfied on the evidence presented to us that the practitioner instructed CU and NR regarding the employment contracts amendments in breach of any fiduciary duties owed to RQL because:
- RQL consented to the practitioner’s conduct via the Board’s authority and encouragement, the chairman’s approval given on full information and understanding and the CEO’s directions;
- the dealing was conducted on an equal footing at arms’ length;
- the no conflict rule did not apply or had knowingly been waived or relaxed by the Board on behalf of RQL;
- RQL impliedly expected the practitioner to act in her own interests or, at least, did not expect her to act solely in its interest. The favours she showed to herself were offset by what the Board was willing to allow and CU prepared to concur with;
- the practitioner’s role in instructing CU was limited to relaying instructions and advices to and from the chairman or Board for consideration where the joint objectives were clear and the Board was under the overriding independent duty to protect the company’s overall best commercial interests;
- the relevant section of CU’s 2 June 2011 advice was both beyond scope and superseded by subsequent events;
- in any event, if the no conflict rule was breached, the full disclosure defence applies and the practitioner’s conduct did not amount to unprofessional conduct or professional misconduct;
- the practitioner did not instruct NR on behalf of or for RQL and did not owe a duty of candour in relation to the instructions to or advice from NR;
- NR acted for the RQL executives or in the common interest;
- the reduced notice and waiver provisions were purely machinery matters and still consistent with the Board’s declared intention to give the executives a quick and lucrative exit if the ALP lost the election.
- The discipline application is dismissed.
LSC or the commissioner.
Legal Profession Act 2007 (Qld) s 6(2).
LPA s 418.
LPA s 419.
Pillai v Messiter (No 2) (1989) 16 NSWLR 197, 201 (Kirby P).
Ibrahim v Pham  NSWCA 215 .
Bristol and West Building Society v Mothew  Ch 1, 19;  4 All ER 698, 713; Re Moage Limited (in Liq); Moage Limited (in liq) v Jagelman (1998) 153 ALR 711, 719; see also Beach Petroleum NL v Abbott Tout Russell Kennedy (1997) 26 ACSR 114, 270-4 (Rolfe J).
cf Legal Services Commissioner v Jackson  QCAT 207 ; Sharp v Counsel of Law Society of Scotland (1984) Rep 313; Solicitors Regulation Authority v Anderson Solicitors  EWHC 4021; He Kaw Teh v The Queen (1985) 157 CLR 523.
Lim Chin Aik v R  AC 160.
Briginshaw v Briginshaw (1938) 60 CLR 336.
Since repealed and replaced by Australian Solicitors Conduct Rules (ASCR) 2012.
PD Finn, ‘Contract and the Fiduciary Principle’ (1989) 12 UNSW Law Journal 76, 80.
LPA s 420(1)(a).
Table of facts at .
Letter CU – RQL 2 June 2011.
Maguire v Makaronis (1997) 188 CLR 449, 465.
PD Finn, Fiduciary Obligations (Law Book Co, 1977) 203.
Law Society of NSW v Harvey  2 NSWLR 154, 171-172 (Street CJ).
For example that the “wish list” represented benefits more than they would be prepared to accept.
Respondent’s submissions .
AWA Ltd v Daniels (t/as Deloitte Haskins & Sells) (1992) 7 ASCR 759, 867 (Rogers CJ).
Hon Justice BH McPherson CBE, ‘Fiduciaries: Who Are They?’ (1988) 72 Australian Law Journal 288, 289.
C-Shirt Pty Ltd v Barnett Marketing and Management Pty Ltd (1996) 37 IPR 315, 335.
Ibid 290; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 (Hospital Products) 96-7 (Mason J).
PD Finn ‘The Fiduciary Principle’ in TG Youdan (ed), Equity, Fiduciaries, and Trusts (Carswell, 1989) 1.
Hospital Products at 96-97 (Mason J); Chan v Zacharia (1984) 154 CLR 178, 198-9. See also Law Society of NSW v Foreman (1994) 34 NSWLR 408, 436-7 (Mahoney JA); Veghelyi v Law Society of New South Wales (unreported, NSW Court of Appeal, Kirby P, Mahoney and Priestley JJA, 6 October 1995) 8-9 (Mahoney JA).
Securities and Exchange Commission v Chenery Corporation 318 US 80 (1943) 85-6 (Frankfurter J).
 1 WLR 567, 575 .
The Hon J Spigelman, “Are Lawyers Lemons? Competition Principles and Professional Regulation” (2003) 77 Australian Law Journal 44, 47.
Legal Services Commissioner v Baker  LPT 002 - (Moynihan J).
 2 NSWLR 154.
Law Society of New South Wales v Harvey  2 NSWLR 154, 170-1.
Hospital Products (1984) 156 CLR 41, -.
Parker v McKenna (1874) Lr 10 Ch App 96; DPC Estates Pty Limited v Grey and Consul Development Pty Limited  1 NSWLR 443; NZ Netherlands Society “Oranje” Inc v Kuys  2 All ER 1222, 1266-7.
Maguire v Makaronis (1997) 188 CLR 449, 463.
Our Lady’s Mount Pty Ltd (as trustee) v Magnificat Meal Movement International Inc (1999) 33 ACSR 163 .
Ibrahim v Pham  NSWCA 215.
G E Dal Pont, Lawyers’ Professional Responsibility (Thomson Reuters, 5th ed, 2013) 113 [6.45].
Chan v Zacharia (1983-84) 154 CLR 178, 204 (Deane J).
Beach Petroleum NL v Kennedy & Ors (1999) 48 NSWLR 1, 45 .
PD Finn, ‘Contract and the Fiduciary Principle’ (1989) 12 UNSW Law Journal 76, 94.
See for instance John Alexander Clubs Pty Ltd v White City Tennis club Ltd (2010) 241 CLR 1.
Hospital Products at 70 (Gibbs CJ).
Adventure Golf Systems Australia Pty Ltd v Belgravia Health and Leisure Group Pty Ltd  VSCA 326 .
Hospital Products at 96-97 (Mason J).
Victorian University of Technology v Wilson (2004) 60 IPR 392, 438.
All acts of an employee.
Adventure Golf Systems Australia Pty Ltd v Belgravia Health and Leisure Group Pty Ltd  VSCA 326 .
Maguire v Makaronis (1997) 188 CLR 449, 463.
 FCA 115.
 FCA 115 .
Breen v Williams (1996) 186 CLR 71, 95 (Dawson and Toohey JJ); Rule 4.1.1 of the current ASCR does explicitly require solicitors to act in the client’s best interests but there is no similar requirement in the former Legal Profession (Solicitors) Rule 2007 (Qld).
Breen v Williams Ibid 108.
Ibid 113 (Gaudron and McHugh JJ). See also Richard Nolan ‘A Fiduciary Duty to Disclose?’ (1997) 113 Law Quarterly Review 220, 224.
Citicorp Australia Limited v O'Brien (1996) 40 NSWLR 398, 412-413. See also Clark Boyce v Mouat  1 AC 428, 437.
PD Finn, ‘The Fiduciary Principle’ in TG Youdan (ed) Equity, Fiduciaries and Trusts (Carswell 1989) 1, 25-6.
NMFM Property Pty Ltd (Formerly Called National Mutual Property Services (Aust) Pty Ltd) v Citibank Ltd (Formerly Called Citibank Savings Ltd) NG 765/1994, FCA 28/05/1998, 23.
Chan v Zacharia (1983-84) 154 CLR 178, 204-205 (Deane J).
Breen v Williams (1996) 186 CLR 71, 95, 113.
Applicant’s submissions, -.
See generally Law Society of NSW v Harvey  2 NSWLR 154, 170-172; O'Reilly v Law Society of NSW (1988) 24 NSWLR 204, 209-210.
Farrington v Rowe McBride and Partners  1 NZLR 83 (Richardson J), cited with approval by the High Court in Maguire v Makaronis (1997) 188 CLR 449, 465.
Stringer v Flehr & Walker (a firm) (2003) Aust Torts Reports 81-718, - (Philippides J); Hospital Products at 96-97 (Mason J).
Pegrum v Fatharly (1996) 14 WAR 92, 102 (Anderson J).
Beach Petroleum NL v Kennedy & Ors (1999) 48 NSWLR 1, 53 ; Apple Computer Australia Pty Ltd v Wily  NSWSC 855, -.
Beach Petroleum NL v Kennedy & Ors (1999) 48 NSWLR 1, 56.
See McDonald v Grench  NSWSC 717.
Adventure Golf Systems Australia Pty Ltd v Belgravia Health and Leisure Group Pty Ltd  VSCA 326  citing PD Finn, “The Fiduciary Principle” in TG Youdan (ed) Equity, Fiduciaries and Trusts (Carswell, 1989).
Beach Petroleum NL v Kennedy & Ors (1999) 48 NSWLR 1, 98 -.
Pepper v Litton 308 US 295 (1939).
(1997) AC 191, 214.
Apple Computer Australia Pty Ltd v Wily  NSWSC 855.
PD Finn, Fiduciary Obligations (Law Book Co, 1977) 2.
PD Finn, ‘Contract and the Fiduciary Principle’ (1989) 12 UNSW Law Journal 76, 83.
PD Finn, ‘Contract and the Fiduciary Principle’ (1989) 12 UNSW Law Journal 76, 82.
- Published Case Name:
Legal Services Commissioner v Shara Louise Reid (No 3)
- Shortened Case Name:
Legal Services Commissioner v Reid (No 3)
 QCAT 471
22 Dec 2017