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Court in the Act
26 July, 2004  
Champertous solicitors find a bit of favour with Court of Appeal

Latest round in the fees’ wrestle involving the massive Freehills’ litigation. Court of Appeal drives a coach and four through small law shop’s fee agreement with client and finds the trial hadn’t miscarried because of the judge’s relationship with the chairman of Freehills. More chaotic reporting from Miss Ginger Snatch

Leo Smits and John Leslie, partners in the tiny Sydney law shop of Smits Leslie, have had some success in their ferocious wrestle with former client, thwarted peat deposit developer, Ted Roach and his companies.

After Roach’s comprehensive victory on the fees front in June 2002, courtesy of findings by Justice Peter McClellan, the NSW Court of Appeal has tweaked the outcome by deciding the Roach companies (in liquidation) were bound by a ten point settlement plan to cough-up, but not the Roaches themselves personally.

The Roaches had sunk $2.5 million into the development of the Swan Marsh black sedge peat deposit in Victoria and were being advised by Freehills. The big law firm thought peat was a stone and hadn’t noticed it had been gazetted as a mineral. Consequently, the Roach interests did not apply for a licence under the Mines Act to extract it, another investor jumped in and grabbed the deposit and Ted was gazumped.

To sue Freehills for allegedly giving rotten advice the Roaches engaged John Leslie, a former Registrar of the NSW Supreme Court, who subsequently joined Smits in partnership. The firm had a Parramatta Road address at Camperdown but no longer is registered on the Law Society’s web site.

Smits Leslie came up with a calculation that the damages and lost income amounted to $971 million. Palms got clammy with excitement and the solicitors decided they wanted 10 percent of the outcome of the action against Freehills, conceivably a modest $97 million, plus costs and disbursements.

A revised retainer agreement in June 1998 between Smits Leslie and the Roaches provided not only for a conditional cost agreement with the full 25 percent uplift but also 10 percent of the amount recovered against Freehills should that be less than $10 million and for anything over $10 million an additional five percent, together with costs and disbursements.

In addition, should part of the agreement be void for illegality there was a fall-back hourly rates arrangement which saw Leo Smits on $350 an hour, any other partner on $280 and Mr S.J. Archer of counsel (now lapsed from the Bar & Grill after difficulties with the tax man) on a daily rate of $3,000. The agreement stated that the estimated legal costs were of the order of $10 million.

The champertous provisions were those that attached Smits Leslie to an interest in the outcome of the Freehills’ litigation. For instance, there was a clause that provided that if it became apparent that less than 50 percent of the amount claimed was likely to be recovered in the action, then Smits Leslie’s estimated costs would be reduced: to not more than $6 million should less than $200 million be recovered, $4 million should less than $100 million be recovered, $2 million should less than $30 million be recovered and $1 million if less than $10 million be recovered.

By April 1999 Leo Smits and John Leslie’s relationship with the Roaches had fallen off the track. The solicitors complained of inadequate and slow instructions and for their part the Roaches were angry over the sudden appearance of Smits Leslie’s “up-front” fee of $500,000 which had found its way into the new agreement with litigation funder Justice Corp.

The lawyers repudiated the retainer agreement, but wanted to be paid for work to date ($600,000) plus damages which at one stage they claimed amounted to $10 million.

Things got really ugly. Smits Leslie wouldn’t part with their files, alleging fraud, conspiracy and impropriety against John Sheahan, the liquidator of two Roach companies. They commenced proceedings against almost everyone – the Roaches, their companies, Justice Corporation, Rene Rivkin and his partner in Justice Corp. Andrew Rayment.

Finally Sheahan resigned. New liquidators Shirlaw & Cussen, drafted what became known as the ten-point plan in September 1999. It admitted Smits Leslie as an ordinary unsecured creditor of both Roach companies in the sum of $500,000 and prevented the solicitors from proceeding against Justice Corporation.

However, there was no clause preventing the firm from going after Mr and Mrs Roach’s interests. Which is exactly what they did.

McClellan J found that the retainer agreement with Smits Leslie was champertous and he held the whole arrangement to be “illegal, void and unenforceable”.

The Court of Appeal thought that the champertous bits could be taken out and as long as the rest of the agreement accorded with the Legal Profession Act then it was OK for the firm to recover its costs from the Roaches.

However, there were a couple of snags. Sheller, Ipp and Bryson JJA, pointed out that the retainer made recovery of fees contingent on a successful outcome of the Freehills’ litigation (judgment by Sperling J is reserved in that matter). Furthermore, the parties deliberately made no provision for the appellants to be paid anything if the solicitors decided to stop acting for the Roaches before the outcome was achieved, which is precisely what happened.

Sadly for Smits Leslie there could be no recovery of fees against the Roaches personally under the retainer agreement in contract or quantum meruit. This was despite the devilish drafting of the agreement. Clearly, the lawyers foresaw the possibility that their clients might tumble to the fact that an interest in the outcome of the Freehills’ litigation might offend the law, nonetheless they had the hourly rates in reserve. Sheller put it this way:

“The design was to make possible the recovery of the estimated costs of $10 million if, for example, in the flush of success the clients were prepared to pay this amount, but if clients were not prepared to do this on the grounds of illegality, to have a fallback position in the retainer agreement for recovery of costs on a legitimate basis.”

This left the specific performance sought by the solicitors against the two Roach companies under the ten-point settlement plan. The appeal succeeded on this point because the companies had advanced no answer to the appellants’ claim for specific performance.

This means that for Smits Leslie to recover the Roach companies, which currently have nothing in the till, will have to be successful in the Freehills’ litigation. Smits and Leslie effectively have been dealt back into the liquidation of the companies.

Roach himself says he never agreed to the ten-point plan and never signed it. He regards it as nothing more than a deal done between the liquidator and Smits as part of the arrangements to secure litigation funding from Justice Corporation, now Commercial Litigation Funding Pty Ltd.

McClelland’s costs orders were set aside by the appeal court and instead new orders were made: the appeal was allowed, the proceedings against Mr and Mrs Roach were dismissed, Smits and Leslie are to pay the Roaches’ costs of the proceedings and of the appeal on a party and party basis, the Roach companies are to pay one-half of the appellants’ costs of the proceedings and of the appeal, but for the appeal they can get the money from the suitors’ fund and the appellants have got to bring in short minutes of orders for specific performance of the ten-point plan.

Much of the appeal judgment was consumed by the argument pressed by the appellant that McClellan should have disqualified himself from determining the case because his brother, Geoff, was the chairman of Freehills. Since he hadn’t, Smits Leslie claimed that the trial had miscarried.

The Court of Appeal didnt agree, with Sheller saying:

“As counsel, Mr Lindsay [for Smits Leslie] was bound to disclose to his clients that McClellan J’s brother was a partner of Freehills. Indeed, according to his evidence, Mr Lindsay may well have done so. If the appellants did not act on that information at that time, or if Mr Lindsay did not inform them, they waived their right to seek to have the judge disqualify himself on the ground of his relationship with a partner of Freehills who was also the chairman.”

So there you are. The Roaches say it’s “a massive dog’s breakfast”. They’ve spent close to $700,000 fighting Smits Leslie over its champertous fee agreement. For peat’s sake.