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The costs of driving together

Feature Articles

Cite as: April 2012 86 (04) LIJ, p.34

Solicitors who act for multiple clients who conduct business "together" need to be aware of conflicts of interest, associated fiduciary duties and the scope of retainers.

By Chris Tam

The judgment of the Victorian Court of Appeal, Watson and Ors v Ebsworth and Ebsworth (A Firm) and anor,1 highlights potential pitfalls for solicitors acting for multiple clients who conduct business “together”.

The primary judge held that the respondent firm of solicitors and a principal of that firm were not liable to their client for economic losses suffered as a result of alleged breaches of fiduciary duties.

The case illustrates the importance for practitioners of explaining first, the scope of their retainers to clients and second, the significance of conflicts materialising in the future, even after the parties purport to end the retainer.

The case also illustrates the circumstances where a retainer is likely to be implied, and where such retainers may be breached.

KEY POINTS

Contractual retainers will be construed at the date they are entered into. Evidence of subsequent conduct can only support whether there was a contractual retainer already in place.

The court will construe contractual retainers objectively, but the parties’ subjective belief is still relevant.

The scope of retainers can expand. Care should be taken in explaining the scope of a retainer to clients.

If the scope of the retainer expands, so too does the potential for breach.

Once a retainer ends, a solicitor’s duty may continue if they are working in respect of the “same matter”. Risks can be minimised if the nature of the ongoing retainer is disclosed.

THE PARTIES

The respondent firm of solicitors and a partner of that firm were acting for V8 Supercar driver Craig Lowndes and for Robert Forbes and his related entity, RPM.

The appellants (Frederick Gibson and Robert Watson) were entrepreneurs interested in forming a new racing team with Forbes and Lowndes in late 2001. They alleged that during the period that Forbes and Lowndes retained the solicitor, he was also implicitly retained by them.

The entrepreneurs alleged that the solicitor breached his fiduciary duties of loyalty and good faith and, in particular, his duty to avoid a conflict between their interests and those of Lowndes and Forbes.

Forbes (RPM) was to provide finance for the venture. Gibson would manage the new team and his associated entity (GMM) would hold the required franchise which allowed the team to participate in the Championship Series. Watson and his associated entity (FCG) would undertake merchandising activities. Lowndes would be team driver.

BACKGROUND

In May 2000 Lowndes sought Watson’s help to move on from his then team. Watson contacted the solicitor who ultimately agreed to act for Lowndes.

Thereafter, Watson entered into discussions with Gibson and later Forbes in relation to the new venture.

On 2 February 2001 Watson contacted the solicitor to inquire whether he would be prepared to act for “the [new] team”. At this stage the solicitor was concerned about the possibility of a conflict of interest as he was already Lowndes’ lawyer.

On 9 February 2001 the solicitor agreed to accept a retainer. The circumstances surrounding his acceptance of that retainer, the terms and the identity of the parties to the retainer were disputed.

The entrepreneurs alleged at trial that the retainer was a retainer to act for each of them. The solicitor contended that the retainer was limited to a retainer for RPM (i.e. Forbes), being the entity with whom Lowndes had entered into a driving agreement on 4 January 2001.

By early March 2001, Gibson and Forbes’ relationship was deteriorating. In October 2001, the entrepreneurs were excluded from the “team”. They commenced proceedings in the Federal Court against Forbes, RPM and another Forbes entity. They were largely unsuccessful.

The entrepreneurs then issued proceedings against the firm and solicitor in the Supreme Court of Victoria.

The entrepreneurs’ pleaded case was complex. On appeal, Neave, Mandie and Hansen JJA observed in a joint judgment that the “resolution of this appeal has been made particularly difficult because of imprecision in the pleadings, the changes which were made to the appellants’ case during the trial and the overlapping nature of the grounds of appeal” (at [107]).

At trial, the entrepreneurs abandoned their heads of claim for damages for breach of contract and negligence and relied solely on their claim of breach of fiduciary duty.

In their defence, the firm and the solicitor denied that they owed fiduciary duties to any or all of the entrepreneurs. They also contended that even if they owed such duties, they had not been breached.

The primary judge (Beach J) described the central issues in the case as follows:

  • Whether on or about 9 February 2001, the firm was retained to act generally on behalf of GMM and FCG;
  • Whether on 7 September 2001, the firm was retained to act on behalf of Watson and Gibson in connection with the dispute between them, Forbes and RPM;
  • From March to October 2001, whether the firm knew or ought to have known that the plaintiffs were relying and would rely on advice given to them and their legal expertise generally so as to give rise to tortuous duties of care; and
  • From March to October 2001, whether the firm was in a fiduciary relationship with the plaintiffs and owed them fiduciary duties.

A CONTRACTUAL RETAINER?

First, their Honours addressed whether the 9 February 2001 letter constituted a contractual retainer. The entrepreneurs contended that the alleged retainer was partly written, partly oral and partly implied by conduct.

Their Honours stated (at [38]) “[that] conduct occurring after 9 February 2001 cannot support the implication of a contractual retainer on that earlier date. Subsequent conduct could, however, be relied on as evidence supporting the appellants’ claim that there was already a contractual retainer in existence” [emphasis added].

Their Honours observed that after Watson’s contact with the solicitor in February 2001 to ask him if he would be prepared to act for the “team”, the solicitor sought Lowndes’ approval to do so and subsequently informed Watson on 5 February 2001 that he would only act for the “team” if he was not precluded from acting for Lowndes if a conflict of interest arose.

The solicitor then sent a letter accepting the retainer to act for “Gibson Motor Sport” on 9 February 2001. Gibson countersigned the letter acknowledging that he agreed to its terms and to the “waiver of solicitor/client privilege” and “the conflict issues in respect of the firm’s retainer by [Lowndes] and his entities”.

The letter relevantly provided:

“We confirm our retainer by Gibson Motorsport to act generally on its behalf for which we thank you.

“As you are aware we also act as solicitors on behalf of Craig Lowndes and his various corporate entities. Whilst this currently presents no actual conflict of interest, we advise that our retainer by Mr Lowndes and his entities may potentially give rise to a conflict of interest in the future. The most obvious potential source of conflict arises in the context of the driving contract entered into between Craig Lowndes Pty Ltd and Mr Lowndes with Gibson Motorsports. Conceivably there could also be potential conflict in respect of sponsorship arrangements between third parties, the team and Mr Lowndes and his entities.

Notwithstanding the potential conflict, including those detailed above as illustrations, we confirm our retainer by you. We advise that we are prepared to accept your retainer on condition that in the event of any actual conflict between Mr Lowndes and his entities and Gibson Motorsports we will be free to cease our retainer by you in respect of the particular matter which gives rise to the conflict. In so doing, you agree that we are able to continue acting on behalf of Mr Lowndes and his entities in that particular matter notwithstanding any information, documents or otherwise with which we may have been instructed by you in the course of our retainer by you. You also agree to waive any solicitor/client privilege in respect of any such documents and/or communications or instructions.” [emphasis added]

Their Honours rejected the entrepreneurs’ contention that the 9 February 2001 letter, viewed objectively, was the basis of the solicitors’ retainer.

The entrepreneurs contended at trial that an implied retainer arose through conversations and meetings in 2000 and 2001 (at [88]-[89]).

Their Honours concluded that Beach J’s findings of fact warranted the conclusion that there was an implied retainer between GMM and the respondents from the time that the solicitor accepted instructions to do legal work for GMM.

APPLICABLE PRINCIPLES

Their Honours stated that a solicitor and client relationship arises if, on the balance of probabilities, the conduct of the parties shows that such a relationship has come into existence.2

Their Honours considered that the effect of the relationship that developed between the solicitor and GMM after the 9 February 2001 letter expanded the original retainer with RPM.

Their Honours considered the objective facts in addition to evidence of the solicitor’s subjective belief during the period.3

The Court also referred to comments by Professor Dal Pont in Lawyers’ Professional Responsibility thus: “A lawyer invited by multiple parties to perform non-contentious (say, transactional) work must determine whether the proposed retainer carries with it the likelihood of a conflict of interest. In so doing, the lawyer should enquire into the nature and scope of the retainer and clearly ascertain what he or she had been retained to advise upon” [emphasis added].

Their Honours observed: “This dispute reinforces the importance of solicitors explaining any conflict of interests to their clients” (at [122]).

The Court concluded that Beach J erred in finding that no implied retainer came into existence after the 9 February letter was sent.

In consequence, their Honours only summarily dealt with the grounds of appeal concerning whether a fiduciary relationship arose independently of the implied retainer. Their Honours found that those grounds of appeal were not made out primarily because no relationship of dependence or reliance existed between the respondents and appellants at the relevant time (at [131]).

DID THE SOLICITORS BREACH THEIR DUTIES?

Their Honours then addressed whether the respondents had breached any duty of loyalty they owed to GMM, which they acknowledged depended on the scope of the retainer.

This ground of appeal centred on a meeting between the solicitor and Watson when he told Watson that a conflict of interest had arisen with the firm acting for Lowndes and the “team” and that he could not advise the entrepreneurs in relation to a proposed buyout of certain team entities.

Their Honours concluded that at this meeting it was apparent that the solicitor, while saying that he was unable to advise the entrepreneurs on the issues relating to the buyout, was making it clear that he was thereafter acting solely for Lowndes.

On appeal, the entrepreneurs contended that the solicitor breached his fiduciary duties to GMM by continuing to act for Lowndes after the meeting instead of ceasing to act for all relevant parties (see [141]).

DOES A SOLICITOR’S DUTY OF LOYALTY CONTINUE?

Their Honours considered that the “principal question” was “whether or in what circumstances a solicitor’s duty of loyalty to a particular client continues to apply after the retainer has ended so as to prevent the solicitor from acting for some either new or continuing client and against the interests of the former client” (at [145]).

Their Honours considered English and Australian authority, observing that there was a “divergence” (discussed in Spincode Pty Ltd v Look Software Pty Ltd)4 but did not consider it appropriate to resolve the disparity in the lines of authority.

Their Honours concluded that by deciding to continue to act for Lowndes after 31 August 2001, the solicitor did not act for him in a matter or matters that could in any way be described as the same matter as any of the matters in respect of which the respondents had acted for GMM (at [150]). Accordingly, “if the respondents had a duty of loyalty to GMM which continued [after the retainer had ended], it was not in breach of that obligation for the [the solicitors] to continue to act for [Lowndes]” (at [151]).

Moreover, even though the solicitor continued to act for GMM in certain specific matters after the retainer ended to the extent that GMM remained a current client of the respondents, this did not affect the conclusion that there were no breaches of fiduciary duty for two reasons. First, those matters in respect of which the respondents gave GMM advice were not “relevantly related” to the matters in respect of which the solicitor was representing and advising Lowndes and second, GMM was fully aware when receiving advice in those matters that the solicitor was at that stage acting solely for Lowndes in relation to the buyout.

Their Honours finally considered whether, had they concluded that the solicitors had breached their fiduciary obligations, such a breach was causative of any loss suffered by GMM. Their Honours noted that “[the entrepreneurs] bore the onus of showing, on the balance of probabilities, that [they] had suffered a loss as the result of [the failure of the respondents to cease acting for Lowndes]” (at [166]). Their Honours rejected the appellants’ contentions.

The appeal was therefore dismissed.




CHRIS TAM is a barrister at the Queensland Bar. In 2009 he was the associate to a judge of the Victorian Court of Appeal. Numbers in square brackets in the text refer to the paragraph numbers in the judgment.

1. (2010) 278 ALR 487; [2010] VSCA 335 (Neave, Mandie and Hansen JJA). Special leave refused [2011] HCATrans 246.

2. Referring to Meerkin and Apel v Rossett Pty Ltd [1998] 4 VR 54, 62.

3. Beach Petroleum v Kennedy (1999) 48 NSWLR 1.

4. (2001) 4 VR 501.

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