Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Keddie & Ors v Stacks/Goudkamp Pty Ltd [2012] NSWCA 254
• Hearing dates: 10 February and 12 April 2012
• Decision date: 17 August 2012
• Before: Beazley JA at [1]; Barrett JA at [197]; Sackville AJA at [198]

Decision

1. Appeal dismissed;

2. Cross-appeal allowed;

3. Set aside order (2) made by the trial judge;

4. Order that the appellants pay the respondent's costs of the notice of motion, those costs to be on an indemnity basis as and from 4 August 2010;

5. Order that the appellants pay the respondent's costs of the appeal and the cross-appeal.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: COSTS - Costs order against law practice - Whether professional negligence claim had reasonable prospects of success - Whether solicitor entitled to rely on expert opinion and counsel advice - Solicitor must turn an independent mind to the matter - Legal Profession Act 2004, ss 345 and 348; COSTS - Costs order against legal practitioner - Unnecessary costs - Costs incurred without reasonable cause in circumstances where legal practitioner responsible for costs unnecessarily incurred - Civil Procedure Act 2005, s 99; LEGAL PRACTITIONERS - Provision of legal services - Requirement to have reasonable belief in reasonable prospects of success - Reliance on counsel's advices - Reliance on expert's reports - Expert's reports wrong; TORTS - Negligence - Solicitor's duty of care - Solicitor retained to advise on nervous shock claim - Whether solicitor under obligation to take additional or positive step - Whether solicitor owed duty to obtain psychiatric evidence - Solicitor settled claim pursuant to client's instructions - Solicitor entitled to follow instructions of client - No evidence of client's mental or emotional incapacity to give instructions; WORDS AND PHRASES - "without reasonable prospects of success"
• Legislation Cited: Civil Liability Act 2002; Civil Procedure Act 2005; Legal Profession Act 2004; Motor Accidents Compensation Act 1999; Revised Professional Conduct and Practice Rules 1995; Uniform Civil Procedure Rules 2005
• Cases Cited: Astley v Austrust Ltd [1999] HCA 6; 197 CLR 1; Calderbank v Calderbank [1975] 3 All ER 333; [1975] 3 WLR 586; Curnuck v Nitschke [2001] NSWCA 176; David v David [2009] NSWCA 8; Degiorgio v Dunn (No 2) [2005] NSWSC 3; 62 NSWLR 284; Dominic v Riz [2009] NSWCA 216; Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322; Fowler v Toro Constructions Pty Ltd [2008] NSWCA 178; Hawkins v Clayton [1988] HCA 15; (1988) 164 CLR 539; Henderson v Merrett Syndicates Ltd [1995] 2 AC 145; Heydon v NRMA [2000] NSWCA 374; 51 NSWLR 1; House v The King [1936] HCA 40; 55 CLR 499; Kowalczuk v Accom Finance [2008] NSWCA 343; 77 NSWLR 205; Leichhardt Municipal Council v Green [2004] NSWCA 341; Lemoto v Able Technical Pty Ltd & Ors [2005] NSWCA 153; 63 NSWLR 300; Mulligan v Coffs Harbour City Council [2005] HCA 63; 223 CLR 486; Old v McInnes and Hodgkinson [2011] NSWCA 410; R v Camden London Borough Council; Ex parte Martin [1997] 1 WLR 359; Roads and Traffic Authority of NSW v Dederer [2007] HCA 42; 234 CLR 330; Rogers v Whitaker [1992] HCA 58; 175 CLR 479; South Eastern Sydney Area Health Service v King [2006] NSWCA 2; Studer v Boettcher [2000] NSWCA 263; Tame v New South Wales [2002] HCA 35; 211 CLR 317; Tolstoy-Miloslavsky v Aldington [1996] 1 WLR 736; Vairy v Wyong Shire Council [2005] HCA 62; 223 CLR 422; Waimond Pty Ltd & Anor v Byrne (1989) 18 NSWLR 642; Water Board v Moustakas [1988] HCA 12; 180 CLR 491; Whisprun Pty Ltd v Dixon [2003] HCA 48; 77 ALJR 1598; White Industries (Qld) Pty Ltd v Flower & Hart (a firm) [1998] FCA 806; 156 ALR 169
• Category: Principal judgment
• Parties: Russell Keddie (First Appellant); Scott Roulstone (Second Appellant); Tony Barakat (Third Appellant); Stacks/Goudkamp Pty Ltd (Respondent)
• Representation: Counsel: D Pritchard SC; I Griscti (Appellants); B Toomey QC; A McInerney (Respondent); Solicitors: Middletons (Appellants); Stacks Business (Respondent)
• File Number(s): CA 2011/139045
• Publication restriction: No

Decision under appeal

• Citation: Andrew Marshall v Stacks/Goudkamp Pty Ltd
• Date of Decision: 2011-02-04 00:00:00
• Before: Colefax DCJ
• File Number(s): 2007/295654

HEADNOTE

[This headnote is not to be read as part of the judgment]

The respondent law firm was sued by a former client for negligence. The client's allegation was that the respondent had been negligent in failing to require him to attend upon a psychiatrist prior to settling his nervous shock claim in respect of which the respondent was acting for the client. The client retained the appellants to act in the professional negligence proceedings against the respondent.

The professional negligence claim was dismissed in circumstances where counsel briefed in the matter withdrew his services on the adjourned date of the hearing because he was of the belief that the claim had no reasonable prospects of success. At that stage there had been three days of hearing, with the client still being under cross-examination. The appellants consequently sought and were granted leave to cease acting in the matter. On a further adjourned hearing date the professional negligence claim was dismissed and the client was ordered to pay the respondent's costs.

By notice of motion the respondent sought orders pursuant to the Legal Profession Act 2004, s 348 that the appellants indemnify the respondent for the costs the client had been ordered to pay. In the alternative, the respondent sought an order that the appellants pay those costs pursuant to the Civil Procedure Act 2005, s 99.

Held per Beazley JA (Barrett JA and Sackville AJA agreeing) dismissing the appeal:

(1) Pursuant to the Legal Profession Act 2004 s 345 a legal practitioner is not to provide legal services in respect of a claim in legal proceedings unless the practitioner has a reasonable belief based on provable facts and a reasonably arguable view of the law that the claim has reasonable prospects of success: [56]-[57]; [59].

(2) The Legal Profession Act, s 348 empowers the court to make a costs indemnity order against a practitioner where a claim brought in legal proceedings does not have reasonable prospects of success: [56].

(3) The phrase "without reasonable prospects of success" in the Legal Profession Act 2004, ss 345 and 348 means "not fairly arguable": [58].

Applied: Degiorgio v Dunn (No 2) [2005] NSWSC 3; 62 NSWLR 284

(4) The responsibility of a solicitor to apply an independent professional mind to the claim and to the advice of counsel was never abrogated under the general law. That obligation is now placed upon a legal practitioner by the express terms of s 345: [135].

Considered: White Industries (Qld) Pty Ltd v Flower & Hart (a firm) [1998] FCA 806; 156 ALR 169; Tolstoy-Miloslavsky v Aldington [1996] 1 WLR 736; R v Camden London Borough Council; Ex parte Martin [1997] 1 WLR 359

(5) Section 345 does not protect a practitioner where a professed reasonable belief is based upon an inadequate examination of relevant material: [158].

(6) A solicitor acting for a client on a personal injury claim plainly owes a duty of care to advise a client that steps have to be taken to obtain the evidence necessary to prove the client's case. Those steps include obtaining existing medical files and reports, advising the client of appropriate medico-legal evidence that ought to be obtained and obtaining the necessary materials to prove loss of income: [149].

(7) A solicitor has no right to compel a client to undergo a psychiatric assessment: [152].

(8) Assuming that there is no negligence by the practitioner, the practitioner is entitled to act upon a client's instructions: [100]; [146].

Followed: Studer v Boettcher [2000] NSWCA 263

(9) A legal practitioner is entitled to rely upon the expert views expressed by witnesses with expertise in a relevant field of inquiry unless the expert provides an opinion based upon patently incorrect facts or engages in a patently erroneous assessment of the question in respect of which the opinion is given: [153].

(10) There was a reasonably arguable view of the law that a practitioner may owe a duty of care to a client to take some additional step or steps to avoid economic loss to the client: [104].

Considered: Hawkins v Clayton [1988] HCA 15; (1988) 164 CLR 539; Waimond Pty Ltd & Anor v Byrne (1989) 18 NSWLR 642; Heydon v NRMA [2000] NSWCA 374; 51 NSWLR 1; Curnuck v Nitschke [2001] NSWCA 176; Kowalczuk v Accom Finance [2008] NSWCA 343; David v David [2009] NSWCA 8; Dominic v Riz [2009] NSWCA 216

(11) The trial judge erred in finding that this case had not been raised in the client's professional negligence proceedings: [80].

(12) The appellants had not established that there were provable facts such that the client's professional negligence claim had reasonable prospects of success: [154].

Held (allowing the cross-appeal):

(13) Section 99 applies where it appears to the court that costs have been incurred by the serious neglect or serious incompetence of a legal practitioner or improperly or without reasonable cause, in circumstances for which a legal practitioner is responsible: [180].

(14) The trial judge erred in his conclusion that the manner in which the appellants conducted the litigation did not fall within the Civil Procedure Act 2005, s 99: [180].

(15) In the case of a Calderbank offer, it is for the party seeking the order to satisfy the court that it is appropriate for an order to be made in its favour: [194].

(16) The trial judge did not err in failing to give full credit to the Calderbank offer: [194].

(17) Given the outcome of the appeal, the respondent should have an award of the whole of the costs of the notice of motion on an indemnity basis pursuant to the Civil Procedure Act 2005, s 99: [195].

INDEX
INTRODUCTION					2
THE ISSUES					5
THE FACTUAL BACKGROUND					8
	(1)	History of the nervous shock claim			9
	(2)	History of the professional negligence proceedings			25
LEGISLATIVE AND LEGAL FRAMEWORK					53
THE SECTION 348 ISSUE					60
	(1)	Was the informed instructions case advanced by Mr Marshall in his professional negligence proceedings?			65
	(2)	At the time the statement of claim was filed, did Keddies have a reasonable belief that the professional negligence claim had reasonable prospects of success?			81
		(i)	The case law		82
		(ii)	The solicitors' evidence		107
		(iii)	Dr Durrell's report		118
		(iv)	Mr Cameron's expert report		125
		(v)	Counsel's advices		129
		(vi)	Other factors
			(a)	Existence of provable facts	140
			(b)	Senior counsel's advice	141
		(vii)	Conclusion on whether Keddies had a reasonable belief at the time of filing the statement of claim		142
	(3)	As at 2 July 2009, did Keddies have a reasonable belief that Mr Marshall's professional negligence proceedings did not have reasonable prospects of success?			156
THE LEGAL PROFESSION ACT: SECTION 348 DISCRETION ISSUE					164
THE SECTION 99 COSTS ISSUE					174
THE CROSS-APPEAL ISSUE					181
ORDERS					196

JUDGMENT

1 BEAZLEY JA:

INTRODUCTION

2 On 4 February 2011, Colefax DCJ ordered the appellants, Keddies Solicitors (Keddies), to indemnify the respondent, the law firm Stacks/Goudkamp Pty Limited (Stacks), for costs that Keddies' former client, Mr Andrew Marshall, had been ordered to pay to Stacks in respect of professional negligence proceedings he had brought against them. The professional negligence proceedings arose out of the settlement of a nervous shock claim brought by Mr Marshall against Allianz, the third party insurer of the vehicle involved in a collision in which Mr Marshall's son was killed. The professional negligence proceedings were dismissed when Mr Marshall failed to appear on the adjourned date of the hearing.

3 Following the dismissal of the proceedings, Stacks applied by way of notice of motion for a costs indemnity order against Keddies pursuant to either the Legal Profession Act 2004, s 348 or the Civil Procedure Act 2005, s 99 (Stacks' costs' notice of motion). His Honour made an order in favour of the Stacks pursuant to s 348, but rejected the alternative application for an order under s 99 (the s 348 costs order). His Honour also ordered that Keddies pay two thirds of Stacks' costs of the notice of motion.

4 Keddies appealed against the s 348 costs order. The appeal was subject to a notice of contention by Stacks. Stacks cross-appealed against his Honour's refusal of a costs order under s 99.

THE ISSUES

5 The central issue on the appeal was whether Mr Marshall's professional negligence claim against Stacks had reasonable prospects of success within the meaning of the Legal Profession Act, ss 345 and 348 (the s 348 issue). Keddies also argued that the trial judge erred in the exercise of his discretion in making an order against them under s 348 (the s 348 discretion issue).

6 In its notice of contention, Stacks argued that his Honour ought, alternatively, to have made an order in their favour pursuant to the Civil Procedure Act, s 99 (the s 99 costs issue).

7 The central issue on the cross-appeal was whether his Honour erred in failing to order that Keddies pay the entire costs of the notice of motion on an indemnity basis in circumstances where Stacks had made a Calderbank offer to Keddies (the cross-appeal issue): see Calderbank v Calderbank [1975] 3 All ER 333; [1975] 3 WLR 586.

THE FACTUAL BACKGROUND

8 The factual background to the issues raised on the appeal was lengthy and involved consideration of Stacks' file on Mr Marshall's nervous shock claim against Allianz, pleadings, correspondence, legal advices, the transcript of Mr Marshall's professional negligence proceedings against Stacks and the affidavit and oral evidence on the hearing of the notice of motion, which itself proceeded over five days.

History of the nervous shock claim

9 Mr Marshall lodged a claim for damages for nervous shock with Allianz on 6 June 2002. As the claim arose out of a motor vehicle accident, it was governed by the Motor Accidents Compensation Act 1999. Part 3.4 of that Act provides for a medical assessment (an MAS assessment) if there is a disagreement as to the degree of permanent impairment of the injured person as a result of the accident.

10 On 2 July 2002, Mrs Marshall made a telephone enquiry of Stacks indicating that Allianz had retracted the acceptance of liability they had previously given in respect of the claims that she and Mr Marshall had made for nervous shock arising out of the death of their son. Ms Michelle Martin, an employed solicitor, undertook carriage of the matter.

11 Ms Martin wrote to the Marshalls on 11 July 2002, noting their instructions that they would like to make an offer of settlement to Allianz to see whether their cases could be "resolved now". She said it was "entirely up to [them]" as to when they decided to finalise their cases. She then stated: "[a]s your lawyer however I consider that it is premature to finalise" the claims. She pointed out that they did not have medical evidence; they had not yet returned to work; they had not been through the medical assessment process; and that she had not received the documents she had requested from Allianz. She added:

"I started to prepare an assessment of damages but it became immediately apparent that it is way too premature and even dangerous to do so with the limited information I have on file."

12 On 12 July 2002, Ms Martin again wrote to the Marshalls, in response to their facsimile letter of 11 July 2002, noting their instructions to "submit offers of settlement immediately". She pointed out that it was "impossible ... without the benefit of reports from a psychiatrist" to know whether either had suffered a psychiatric illness by way of nervous shock. Nonetheless, she stated that she had prepared a draft and "very preliminary assessments of damages", which she set out in her letter. She expressed the view that it was "highly unlikely" that Allianz would "offer anything for pain and suffering" because there was no evidence, at that time, to support that claim.

13 By facsimile dated 7 August 2002, the Marshalls wrote to Ms Martin asking that she set up a "conciliation meeting early next week" with Allianz. They apologised for being "persistent", but said that the matter had "had a great impact" on them and that they wanted it "over and done with as soon as possible". They requested that Ms Martin contact Allianz that morning to set up a time and day for the meeting. Ms Martin acted on those instructions and contacted Allianz for the purpose of arranging a settlement conference.

14 A settlement conference was held on 9 August 2002. Mrs Marshall's claim settled shortly thereafter in the sum of $21,000 plus costs. Allianz' settlement officer indicated, however, that it was not possible to make an offer to settle Mr Marshall's claim as it was "way too early". In particular, the settlement officer at Allianz had not received a report from Dr Richardson in respect of Mr Marshall's condition, although they had in their possession a medical certificate from Dr Richardson. There was also an issue in respect of economic loss, as Allianz was aware that Mr Marshall had received a redundancy payment from his previous employer, Channel 7.

15 Following the conference Ms Martin sought particulars from Mr Marshall of his economic loss claim, including particulars of the contract under which he was then working, Mr Marshall having by then returned to work, as well as details of the redundancy payment that he had received from Channel 7.

16 Subsequently, Allianz received a report from Dr Richardson dated 20 September 2002, in which he stated:

"Examination

Clinical findings initially were flat affect, poor eye contact, intermittent agitation, occasional tears ... His progress was initially slow but his symptoms of depression and PTSD gradually improved over time. By June 13th 2002 he had voluntary redundancy and was considering freelance video editing. By August he had achieved this goal was working night shifts and his acute depression had largely resolved.

...

Incapacity

Mr Marshall was totally precluded from working in any capacity from the date of his sons death til mid July 2002.

Opinion

Stabilisation has occurred since July 2002.

Prognosis for [Mr Marshall] is that he will make a substantially full recovery from his PTSD and reactive depression but will be likely to suffer exacerbations at critical times such as anniversaries of [his son's] birth and death and relating to court appearances and trial of the driver charged with causing [his son's] death."

17 Stacks had also received Dr Richardson's report.

18 On 21 October 2002, Mr Marshall wrote to Ms Martin enclosing documents relating to his economic loss claim but adding:

"I am instructing you to finalise this claim immediately, as I don't want this matter to prolong.

I am under great pressure and stress to continue a long drawn out procedure in this matter."

19 On 25 October 2002, Ms Martin made an assessment of Mr Marshall's claim in the sum of $31,430. In her letter to Mr Marshall of that date, Ms Martin advised him that she did not anticipate that Allianz would accept that assessment and would argue that he was in fact better off as a result of having accepted the redundancy package. She anticipated that Allianz would contend that the redundancy cancelled out any claim for future loss of income. Ms Martin confirmed Mr Marshall's instructions that he did not wish to apply for a medical assessment to determine whether he was entitled to compensation for non-economic loss. She advised that any settlement would extinguish his rights in relation to the claim. She sought instructions as to submitting an offer of settlement to Allianz.

20 Mr Marshall responded by letter of the same date, instructing Ms Martin to "put forward a strong argument ... that this amount [$31,430] is very reasonable and that I am not claiming for pain and suffering". Mr Marshall wrote that his instructions were "to put the offer ... through immediately to Allianz".

21 Ms Martin then had a telephone conference with the settlement officer from Allianz, in which Allianz indicated they would make no allowance for future economic loss and made an offer of "$7,455.00 incl[usive] of everything". This offer was confirmed by Allianz in an email of the same date. On 28 October 2010 Ms Martin, on Mr Marshall's instructions, made a counter offer of $28,000 inclusive.

22 The following day, Ms Martin received instructions from Mr Marshall that he would not accept Allianz' offer and that he wanted an MAS assessment to determine permanent impairment and impairment of earning capacity. The Marshalls advised they had also made contact with a Dr Henderson for the purpose of making an appointment to obtain a medical report.

23 Ms Martin accordingly informed Allianz that Mr Marshall wanted an MAS assessment and stated that Stacks would complete the necessary forms.

24 On 31 October 2002, Mrs Marshall informed Ms Martin that an appointment had been made with Dr Henderson for 8 November 2002. However, on 11 November 2002, Mr Marshall telephoned Ms Martin stating that he did not "want to go further" and asked her "to make counter-offer of $10,000, but if we can't get them up he'll take the $7,445". Ms Martin then made an offer to Allianz of $10,000 plus costs. Allianz rejected this offer, but made a "final" counter offer of "$10,000 inclusive inclusive". Mr Marshall accepted that offer and the matter settled on that basis.

History of the professional negligence proceedings

25 Keddies first commenced acting for Mr Marshall in respect of a proposed professional negligence claim against Stacks in April 2005. They had previously been retained by Mr and Mrs Marshall in 2004 to pursue a claim against Burnside Home, in whose care their son had been at the time of his death. That claim did not proceed Mr Andrews of counsel was briefed in May 2005 to advise on the likelihood of success of commencing a professional negligence claim against Stacks and the quantum of such claim. Following a conference with Mr Andrews and the clients in September 2005, Mr Roulstone, the second appellant, wrote to the Marshalls stating Mr Andrews had indicated to them that "he believed that you certainly [have] a reasonable case". There was no file note made of this conference.

26 In 2006, Mr Marshall provided Keddies with a statement in which he gave details of his employment history including the redundancy payment he had received from Channel 7, the fact that he had then commenced to work for SBS, that he was continuing to work for SBS in a freelance role and that he had also worked for Fox Sports and the Australian Caption Centre in a freelance capacity and was continuing to do so.

27 In July 2007, Dr Thornton, a solicitor employed by Keddies, was given carriage of Mr Marshall's professional negligence proceedings. He had a conference with Mr Andrews on 22 October 2007.

28 By letter dated 29 October 2007, Dr Thornton wrote to Mr Andrews, as follows:

"We refer to the conference with yourself and the writer on 22 October 2007.

Andrew Marshall has now instructed us to 'urgently settle' his claim against [Stacks]. Apparently he requires urgent income support.

Would you kindly draft the pleadings against [Stacks] as a matter of urgency. The plaintiff is to be examined by Dr Anthony Durrell, psychiatrist, on 24 October 2007.

[Stacks] may attempt to settle the matter at an early stage or similarly [Stacks] may instruct solicitors to serve an early Offer of Compromise.

We now look forward to receipt of the pleadings."

29 On 29 November 2007, Dr Thornton wrote two letters to Mr Andrews. In one he enclosed Dr Durrell's report of 7 November 2007. In the second he referred to Dr Durrell's report, noting his assessment of Mr Marshall as having a 24 per cent whole person impairment. Dr Thornton requested Mr Andrews to "draft the Statement of Claim so that proceedings may be commenced forthwith".

30 On 11 December 2007, a conference was held with Mr Andrews and Mr Marshall. Dr Thornton was in attendance. Following the conference, Mr Andrews wrote to Keddies by letter of the same date. This letter is a key piece of evidence in the proceedings. It is sufficient to set out the following portions:

"It is my opinion, however, that [Mr Marshall] will have severe difficulty in proving his claim in this matter. It is my understanding, based on the client's instructions, that the only reason he settled his claim was because of the undue pressure which was being placed upon him which consisted of a combination of his own mental condition and the criminal trial.

[Mr Marshall's] claim is that he ought not have been permitted to settle his claim while he was in that type of emotional condition.

Having perused [Stacks'] file in this matter I note that by a letter from [Mr Marshall] to [Stacks] confirming a telephone call of 6 August 2002 which confirmed [Mr Marshall's] wish to resolve the matter. Subsequent correspondence of 21 October 2002 and 11 November 2002, with earlier correspondence of 11 July 2002 and 12 July 2002, all confirm that it was [Mr Marshall's] decision to resolve these matters, and such decision was made contrary to the advice he was receiving from his then Solicitors.

While the Solicitors advice was that he should not settle his claim, at least until after non-economic loss assessments had taken place [Mr Marshall's] unequivocal instructions were to resolve the matter.

I also note that [Mr Marshall], by way of correspondence, indicated to [Stacks] that he was undergoing back surgery, which could not have been related to the incident, and also that he had taken redundancy from work.

Having regard to all these matters, together with an enormous amount of other correspondence which I have not referred to for the purpose of this advice, it is my opinion [Mr Marshall] will not succeed in these proceedings.

I note however that based on [Mr Marshall's] current instructions, my instructing Solicitors can proceed, as on his instructions undue pressure was placed upon him to settle because the Solicitors did not stand the proceedings over and ensured that he obtained independent legal advice.

This is not a matter however that I would recommend should ever be allowed to go to Court and it should be settled at the first available time.

I have accordingly drafted the Statement of Claim in very wide terms." (emphases added)

31 The statement of claim was filed on 20 December 2007 and served on Stacks on the same date.

32 On 21 December 2007 Keddies wrote to Mr Marshall. The letter included the following:

"5.1 Mr Andrews advised that you will have severe difficulty in proving your claim in this matter.

...

5.4 Having regard to all the above matters together with the other correspondence contained within [Stacks'] file, it is Mr Andrews' opinion that you will not succeed in these proceedings.

...

5.6 Mr Andrews and the writer concur that this matter should never proceed to hearing and should be settled at the first available time." (emphases added)

33 Stacks filed its defence on 14 February 2008 in which it pleaded, inter alia, that Mr Marshall had signed an "Authority to Settle" authorising and directing Stacks to settle his claim.

34 Keddies, under the hand of Dr Thornton, wrote to Mr Marshall on 19 February 2008, addressing the question of the reasonable prospects of success of the professional negligence proceedings. They pointed out that legal practitioners were not able to commence proceedings unless a claim had reasonable prospects of success. They drew Mr Marshall's attention to Stacks' assertion that the claim did not have reasonable prospects of success and to the Legal Profession Act, ss 347 and 348, concerning the liability of legal practitioners for costs in proceedings instituted without reasonable prospects of success. This part of the letter stated:

"You have been provided with a copy of the court pleadings. You will note that we have certified pursuant to Section 347 of the Legal Profession Act that your matter does have reasonable prospects of success."

35 Senior counsel was briefed in September 2008. On 10 September 2008, he advised, according to a note written by Dr Thornton: "agree with [Mr Andrews'] advice proving claim and very limited prospects of success". Mr Roulstone gave evidence that he was advised by senior counsel in conference at this time that the case "will lose": see below at [111].

36 During the course of the continued conduct of the matter, offers of settlement were made by Stacks and by Keddies on behalf of Mr Marshall. All offers were rejected and a mediation failed.

37 The matter was set down for hearing to commence on 29 June 2009. On 24 June 2009, Mr Andrews wrote to Keddies, again referring to the difficulties in the case, given Mr Marshall's clear instructions to Stacks to settle over a period of some months. He assessed that the risk of a verdict in favour of Stacks was "as high as 50%, and could be greater". Mr Andrews said that he agreed "with [the] sentiment" expressed by Mr Cameron in his expert legal report that a solicitor had a duty to ensure that a client's interests were properly protected. However, he also said that it was arguable that Stacks was required to follow Mr Marshall's instructions. He considered that there was a risk of at least 50 per cent, if not higher, that the court would find a verdict for Stacks on the basis that it was obliged to follow Mr Marshall's instructions.

38 Mr Andrews also addressed the question of damages noting that on the reports of Dr Durrell and Dr Richardson, Mr Marshall was likely to be found to have a greater than 10 per cent whole person impairment, with damages likely to be assessed in the sum of $60,000-$80,000, but that it was likely that economic loss would be assessed on the basis of a diminution in earning capacity.

39 The hearing commenced before Colefax DCJ on 29 June 2009 and continued until 2 July 2009. In his evidence in chief, Mr Marshall said that he decided against undergoing an MAS assessment or court proceedings because of the time they would take. He said he was under stress given that the criminal proceedings against the driver of the vehicle that killed his son were coming on for hearing and he "just wanted the matter over and done with and you know out of the way and move on". He also said that he was working at the time, that is, in November 2002 when his nervous shock claim against Allianz settled.

40 In cross-examination, Mr Marshall agreed that he knew at the time he signed the authority to settle on 11 November 2002 that there was no psychiatric evidence available to Stacks to support his nervous shock claim. He also agreed it was Stacks' view at that time that due to the absence of psychiatric evidence, it was premature to resolve his claim. He further agreed that if he had wanted to prosecute his claim by obtaining an MAS assessment, it would have been necessary for him to have obtained psychiatric evidence.

41 The cross-examination continued:

"Q. And as at 11 November 2002 you did not want to obtain any psychiatric evidence in respect of your claim, did you?

A. That's correct.

Q. Mr Marshall, it's clear to you, isn't it, through the documents which have passed between Ms Martin by facsimile to your home and from you and your wife by facsimile back to Ms Martin, that at all times you expected Ms Martin to follow your instructions in respect of your claim against Allianz Insurance?

A. Yes.

Q. And at all times in your dealings with Ms Martin from when you first instructed her in early July 2002 through until you settled your claim with Allianz Insurance, it was your requirement that she follow your instructions, correct?

A. Yes."

42 Mr Marshall agreed that he made a conscious decision to sign the settlement document and understood that any claim he had against Allianz was thereby extinguished. Mr Marshall was cross-examined about the claim against Burnside and agreed that at the time he was seeking to pursue that claim, he did not want to see a psychiatrist. He also agreed that other than seeing a psychiatrist for the purposes of the professional negligence proceedings against Stacks, he had not been prepared to undergo any medical examination by a psychiatrist for the purposes of litigation.

43 The matter was adjourned part heard on 2 July 2009. Hearing dates were allocated for the further hearing of the matter commencing 2 November 2009.

44 On 3 July 2009, following the adjournment of the matter the previous day, Mr Andrews wrote to Keddies, pointing out that Mr Marshall's professional negligence proceedings against Stacks were totally dependent upon Mr Marshall's claim that it was due to the stress of the upcoming criminal trial of the driver of the vehicle which killed his son that he settled his nervous shock claim against Allianz. Mr Andrews said that the effect of Mr Marshall's evidence in the previous few days was that he would not have consented to being examined by a psychiatrist prior to the notional trial date of the nervous shock claim.

45 Mr Andrews advised that in the absence of psychiatric evidence, Mr Marshall would not have been entitled to non-economic loss. He noted that the only medical evidence that would have been available to support his nervous shock claim was Dr Richardson's report. However, Dr Richardson had indicated that Mr Marshall was improving and that he expected a total resolution of his symptoms, apart from some minor exacerbations at anniversary times in the future.

46 Mr Andrews next drew attention to the fact that Dr Durrell's assessment of whole person impairment was erroneously based on the WorkCover Guidelines, rather than the Motor Accidents Compensation Act Guidelines and that Dr Durrell's assessment of Mr Marshall's earning capacity was based on an erroneous history.

47 Mr Andrews continued:

"In relation to [Mr Marshall's] evidence, it should be noted that it is my opinion that [Mr Marshall] will not succeed in this claim.

...

In relation to the question of liability, the evidence is clear that [Mr Marshall] would not have followed the advice, even if he had not had the strain of the criminal proceedings, as clearly after those proceedings he still refused to follow the advice of his solicitors.

...

Accordingly, it is my opinion that [Mr Marshall] should not pursue this claim any further."

48 Following receipt of this letter, Keddies made a further unsuccessful attempt to settle the matter.

49 Mr Andrews appeared on 2 November 2009 before Colefax DCJ on the adjourned hearing. As Mr Marshall did not appear, the matter was adjourned to 4 November 2009. Mr Andrews immediately wrote to Keddies, by letter dated 2 November 2009, informing them that his view was that the claim did not have reasonable prospects of success. He also stated that even if liability could be established, there would be no real verdict in Mr Marshall's favour after costs were taken into account. He stated that he was not in a position to provide legal services, having regard to the provisions of the Legal Profession Act, s 345.

50 Keddies wrote to Mr Marshall on the same date informing him of Mr Andrews' opinion and stating that they and Mr Andrews were accordingly precluded from continuing to act in the matter. Keddies filed a notice of ceasing to act on 5 November 2009.

51 Mr Marshall was thereafter self-represented and eventually attempted to discontinue the proceedings. His notice of discontinuance was ineffective and the proceedings were dismissed when he did not appear on the further adjourned hearing date on 17 May 2010. The court ordered that Mr Marshall pay Stacks' costs of the proceedings.

52 On 12 August 2010, Stacks filed a notice of motion seeking orders that Keddies indemnify it in respect of the costs order made against Mr Marshall, pursuant to the Civil Procedure Act, ss 98(1) and 99(1)(a) and the Legal Profession Act, s 348(1). The notice of motion was heard over five days and each of Keddies and Stacks made extensive written submissions to the trial judge.

LEGISLATIVE AND LEGAL FRAMEWORK

53 The legislation governing the s 348 costs order is as follows.

54 The Legal Profession Act, s 348 provides:

"348 Costs order against law practice acting without reasonable prospects of success

(1) If it appears to a court in which proceedings are taken on a claim for damages that a law practice has provided legal services to a party without reasonable prospects of success, the court may of its own motion or on the application of any party to the proceedings make either or both of the following orders in respect of the practice or of a legal practitioner associate of the practice responsible for providing the services:

(a) an order directing the practice or associate to repay to the party to whom the services were provided the whole or any part of the costs that the party has been ordered to pay to any other party,

(b) an order directing the practice or associate to indemnify any party other than the party to whom the services were provided against the whole or any part of the costs payable by the party indemnified.

(2) The Supreme Court may on the application of any party to proceedings on a claim for damages make any order that the court in which proceedings on the claim are taken could make under this section ..."

55 The obligation of a law practice not to provide legal services unless the claim has reasonable prospects of success is required by s 345 of the Act. It provides:

"345 Law practice not to act unless there are reasonable prospects of success

(1) A law practice must not provide legal services on a claim or defence of a claim for damages unless a legal practitioner associate responsible for the provision of the services concerned reasonably believes on the basis of provable facts and a reasonably arguable view of the law that the claim or the defence (as appropriate) has reasonable prospects of success.

(2) A fact is provable only if the associate reasonably believes that the material then available to him or her provides a proper basis for alleging that fact.

(3) This Division applies despite any obligation that a law practice or a legal practitioner associate of the practice may have to act in accordance with the instructions or wishes of the client.

(4) A claim has reasonable prospects of success if there are reasonable prospects of damages being recovered on the claim ..."

56 Section 348 thus empowers the court to make a costs indemnity order against a practitioner where a client's claim in legal proceedings does not have reasonable prospects of success. A claim with reasonable prospects of success for the purposes of s 348 is one which satisfies the criteria in s 345. Section 345(1) requires that a legal practitioner have a reasonable belief that a claim has reasonable prospects of success. The belief must be based on provable facts and on a reasonably arguable view of the law.

57 Section 345(4) declares that a claim has reasonable prospects of success if there are reasonable prospects of damages being recovered on the claim. Section 345(4) is not a freestanding provision. Unless the prerequisites specified in subs (1) are satisfied, it could not be established that there are reasonable prospects of damages being recovered.

58 The phrase "reasonable prospects of success" is not defined in the Legal Profession Act. Its meaning was considered by Barrett J (as his Honour then was) in Degiorgio v Dunn (No 2) [2005] NSWSC 3; 62 NSWLR 284 (his Honour's judgment was in respect of the former s 198M(1), however, its terms were the same as the present s 348). Barrett J concluded, at [28] 293, that:

"... 'without reasonable prospects of success' ... equates its meaning with 'so lacking in merit or substance as to be not fairly arguable'. The concept is one that falls appreciably short of 'likely to succeed'."

His Honour's reasons were approved by this Court in Lemoto v Able Technical Pty Ltd & Ors [2005] NSWCA 153; 63 NSWLR 300. See also Fowler v Toro Constructions Pty Ltd [2008] NSWCA 178.

59 His Honour's analysis, at [16]-[27] 290-293, of s 198J (the predecessor provision to s 345) leading to that conclusion was as follows. First, subs (1) was concerned with the reasonable belief as subjectively held by the practitioner. Secondly, that reasonable belief had to have an objective foundation in material available to the practitioner at the relevant time. That material did not have to comprise only admissible evidence. Credible material that was not strictly admissible could also be considered. The next requirement was that such material constitute a proper basis for alleging each relevant fact. I would understand this to mean that insofar as material was relevant, but not admissible in evidence, the material would be sufficient to satisfy the legal practitioner that the facts to which such material related could be proved in due course. Finally, the requirement that there be a reasonably arguable view of the law was "not to be approached narrowly: arguably available extension and innovation may be contemplated". As to an arguable case that damages were recoverable, his Honour explained that this meant some damages, not necessarily those claimed, and could include nominal or even token damages.

THE SECTION 348 ISSUE

60 In order to understand the s 348 issue, it is necessary to understand the claim made by Mr Marshall in his professional negligence proceedings against Stacks. The claim was framed in negligence only. No claim was made based on the terms of Stacks' contractual retainer.

61 Mr Marshall's claim was said to have involved two distinct allegations of negligence. The first was that Stacks was negligent in proceeding to settle his nervous shock claim against Allianz in circumstances where psychiatric evidence had not been obtained. Psychiatric evidence was said to be necessary so that Mr Marshall could know what his proper entitlements were in making any decision to settle his claim. I will refer to that as 'the primary negligence allegation'. The second allegation was that Stacks was negligent in allowing Mr Marshall's nervous shock claim against Allianz to proceed to settlement when Mr Marshall's emotional and mental state was such that he was not able to give informed instructions to settle. In the argument on the appeal this was referred to as the 'informed instructions case' and I will adopt that terminology.

62 Although I have identified the two allegations in quite distinct terms, there were times in the argument before the trial judge and on the appeal where the two allegations merged. This was mainly due to Keddies' reliance upon the same factors to establish duty and breach in respect of each allegation. Those factors included that there was an obligation on Stacks not to act upon Mr Marshall's instructions without taking a positive step such as requiring him to obtain a psychiatric report or independent legal advice or in refusing to act should Mr Marshall fail to do so. This resulted in some lack of clarity in the analysis of the respective duties of care and breach arising from each allegation. Nonetheless, to the extent necessary and possible, I have dealt with the two allegations separately.

63 I have identified the central s 348 issue at [5]. In support of their challenge to the trial judge's s 348 costs order, Keddies contended that:

(1) The trial judge erred in finding that, save for a reference in final written submissions, Mr Marshall had not advanced the informed instructions case at trial;

(2) The trial judge erred in finding that Keddies did not have a reasonable belief that Mr Marshall's professional negligence claim had reasonable prospects of success within the meaning of the Legal Profession Act, ss 345 and 348;

(3) Alternatively, any such finding, if available at all, should only have been made in respect of the period after Mr Marshall gave evidence that he would not have attended a psychiatric medical consultation for the purposes of obtaining evidence to support his nervous shock claim.

64 In its notice of contention, Stacks contended that his Honour erred in finding that had the informed instructions case been run, it had reasonable prospects of success.

(1) Was the informed instructions case advanced by Mr Marshall in his professional negligence proceedings?

65 On the appeal, Keddies identified the informed instructions case in the following terms:

"... to the effect that Stacks were negligent by failing to take steps to ensure that Mr Marshall's decision to settle his underlying claim was made in circumstances where he was properly and fully informed and not acting under great pressure and stress ('informed instructions case')"

66 Keddies contended that the trial judge erred in finding that Mr Marshall had not advanced this case at trial.

67 The trial judge dealt with the informed instructions case at [52]-[55] of his judgment. At [52], his Honour noted that Keddies in argument had resisted a s 348 costs order by asserting that Mr Marshall's claim was not hopeless if he proved that he had not given informed instructions, in circumstances where Stacks knew or ought to have known that he was not giving informed instructions. His Honour stated, at [53], that if that had been Mr Marshall's case, it would have been "a difficult case" but "fairly arguable". This was a reference to the test stated in Degiorgio: see [58] above.

68 His Honour, at [54], concluded that the issue as to whether Mr Marshall had given informed instructions was not raised until Keddies' final written submissions on Stacks' notice of motion for a costs indemnity order. His Honour stated that the issue was not expressly pleaded in the statement of claim in the professional negligence proceedings nor articulated in the opening of those proceedings. His Honour also said this allegation was not adverted to by any of the three solicitors who gave evidence for Keddies on the hearing of Stacks' notice of motion and was not expressly raised by Keddies in their points of defence to the notice of motion.

69 The written submissions to which his Honour referred were Keddies' final written submissions dated 13 December 2010, at para 61, in which the following submission was advanced:

"Stacks were acutely aware of Mr Marshall's mental state and there was no attempt to advise him after his sudden about face of instructions on 11 November. There had been no attempt to obtain any psychiatric evidence. Stacks having just advised in an apparently glib manner Mr Marshall that nervous shock cases were notoriously difficult, simply acted without question on his change of instructions. Against the background of Mr Marshall's fragile mental state, being aware that he had an appointment with a psychiatrist scheduled for 8 November 2002, and having recently focused on the negative aspects of a case such as this, citing a case where a plaintiff witnessed horrifying trauma yet received minimal damages, Stacks blandly acted on Mr Marshall's change of instructions without advising him further and without taking any steps to protect his interests."

70 Keddies argued that contrary to his Honour's findings, the informed instructions case had been pleaded in paras 15 and 16 of the statement of claim and, in particular in paras 16(a) and 16(e). Reference should also be made to para 16(c). The pleading was, relevantly, in the following terms:

"15. [Stacks] advised [Mr Marshall] and/or allowed [Mr Marshall] to accept [Allianz'] offer of settlement, and in doing so acted negligently and/or in breach of its duty of care.

16. Particulars of Negligence and/or Breach of Duty of Care

(a) Failure to have regard to [Mr Marshall's] emotional state at the time the offer of settlement was made and/or accepted by [Mr Marshall].

...

(c) Failure to ensure that [Mr Marshall] was not suffering from any disease or impairment of the mind when taking instructions to accept [Allianz'] offer of settlement.

(d) Failure to fully investigate [Mr Marshall's] entitlements and advise [Mr Marshall] of his entitlements so that he could make an informed decision as to whether or not to accept [Allianz'] offer of settlement.

(e) Failure to delay any offer of settlement in the proceedings until after [Mr Marshall] was in a mentally capable state of mind to understand and/or comprehend his entitlement to damages."

71 It is not immediately apparent that paras 15 or 16 raised the informed instructions case. Paragraph 15 was a general allegation of negligence. Although para 16(a) made reference to Mr Marshall's emotional state, it did not link his emotional state with any inability to give informed instructions. Similarly, para 16(c) did not link the alleged "disease or impairment of the mind" to any inability by Mr Marshall to give Stacks informed instructions to settle the case. Paragraph 16(e) particularised a case that Stacks was negligent in failing to delay settlement until Mr Marshall was in a "mentally capable" state to understand his entitlement to damages. However, there is a question as to what this meant, given that Mr Andrews disavowed in his opening to the trial judge that Mr Marshall was incapable of giving instructions such as to require a tutor to be appointed.

72 Keddies also relied upon the answers to particulars requested by Stacks in respect of these paragraphs of the statement of claim. In those particulars, Keddies alleged that Stacks should have ascertained whether Mr Marshall was able to provide instructions "due to his perilous medical state"; that Stacks should have referred Mr Marshall to a psychiatrist to determine whether or not he was able to provide instructions; that Mr Marshall was unable to provide instructions due to his emotional state; that his impairment of mind manifested itself in a way that he was unable to provide appropriate instructions; and that Stacks should have advised him to seek independent legal advice.

73 Keddies also argued that the informed instructions case was sufficiently raised by Mr Andrews in his opening to the trial judge at the commencement of the professional negligence proceedings. They relied upon the following statements by counsel and exchanges with the trial judge.

74 Mr Andrews, in his opening address, stated to his Honour that:

"[Mr Marshall] signed an authority to settle [in the sum of $10,000]. What is in dispute is whether or not [Stacks] ought to have allowed that to occur because [Stacks] was on notice that [Mr Marshall] was suffering from a psychiatric based injury."

Mr Andrews continued that Mr Marshall, throughout the whole of this period "was constantly advising [Stacks] of the stress and burden that he was under".

75 The trial judge asked, "Is it your case that Mr Marshall was incapable of giving instructions and ought to have a tutor appointed?". Mr Andrews responded:

"[ANDREWS]: It doesn't go that far. Our case is what the defendant has an obligation to do when it has a plaintiff who clearly has a psychiatric based injury, who is clearly under, what they are aware of, of extreme stress and who gives inconsistent instructions from time to time; is to step back and say what is our obligation as a solicitor. Our obligation is to protect the plaintiff and ensure the plaintiff does not suffer a loss by taking steps - -

HIS HONOUR: To protect the plaintiff from himself.

[ANDREWS]: From himself and not suffer a loss by taking appropriate steps. And if the plaintiff won't consent to those appropriate steps, to then either get him to obtain independent legal advice or cease to act. And in fact [Stacks'] retainer specifically provided for the fact that if he did not follow reasonable advice, they could cease to act.

HIS HONOUR: And then he could negotiate directly with Allianz.

[ANDREWS]: That's his decision or he could go elsewhere."

76 Mr Andrews contended to his Honour that in those circumstances and where the client refused to follow the solicitor's advice, a solicitor had a number of options including to cease to act, to advise the client to obtain a second opinion, or to consider taking other options. He added that a solicitor's obligation was not "simply to follow instructions" and referred to Hawkins v Clayton [1988] HCA 15; (1988) 164 CLR 539. Mr Andrews continued that "built into that framework" was the fundamental problem to which he had already referred, namely, that this was a case of a solicitor advising a client solely on the basis of a general practitioner's report. Mr Andrews then posed the rhetorical question to his Honour:

"If you know and suspect the problem, but you don't get any expert evidence to determine the extent of the injury or the extent of the condition, how can you properly advise the plaintiff about their entitlements."

(This appears to be a reference to the primary negligence case.)

77 The next relevant exchange was as follows:

"HIS HONOUR: But isn't it part of your cause of action that [Mr Marshall] couldn't give informed instructions to [Stacks] ... by reason of the psychiatric condition you say he suffered from?

[ANDREWS]: No our position is [Mr Marshall] gave ... instructions but they were not informed instructions."

78 Mr Andrews accepted that Mr Marshall bore the onus of proof to establish that his instructions were not informed instructions. Mr Andrews also agreed, in the same exchange, that to discharge that onus, a psychiatrist would be a proper person to give an opinion as to whether a person was capable of giving informed instructions. However, he contended that in a case where the solicitors were aware of a psychiatric condition and the client was continually telling the solicitors that "he [was] under stress, he cannot make decisions that's as far as we have to go". He added that raised "the question of the solicitor's duty to take steps".

79 It will be seen from the foregoing that there was some imprecision in the informed instructions case that Mr Andrews was outlining. He expressly disavowed any case that Mr Marshall was incapable of giving instructions in the legal sense. Rather, he was contending that a solicitor owed a duty of care where a client was under stress. That case seems to accord with the case to which reference was made in final submissions.

80 I am prepared to proceed, therefore, on the basis that his Honour erred in finding that the informed instructions case in Mr Marshall's professional negligence proceedings had not been raised for consideration: see Water Board v Moustakas [1988] HCA 12; 180 CLR 491; Whisprun Pty Ltd v Dixon [2003] HCA 48; 77 ALJR 1598. Paragraphs 16(c) and (e) of the statement of claim and the particulars bear some relationship to that case, although the allegations were made in more embellished terms than the case explained by Mr Andrews in his opening. However, given those allegations, coupled with the exchanges between Mr Andrews and his Honour to which I have referred, it appears that the informed instructions case was sufficiently adverted to for it to be in issue in the professional negligence proceedings. It is a different question as to whether Keddies believed such a case had reasonable prospects of success for the purposes of s 348. That depended upon whether the solicitors who had conduct of the matter had the necessary belief within the meaning of s 345.

(2) At the time the statement of claim was filed, did Keddies have a reasonable belief that the professional negligence claim had reasonable prospects of success?

81 Within the framework of the Civil Liability Act 2002, a negligence claim requires the following matters to be established: that the defendant owes the plaintiff a duty of care; that there has been a breach of that duty; that damage has been suffered and that the damage was caused by the breach of the duty. Difficult questions can arise in determining the relevant content of the duty of care in a given case. Difficult factual questions may also arise as to whether there has been a breach of duty and whether any breach has been causative of loss. In the present case, there was a contest as to whether there was an arguable case that a solicitor owed a duty of care with the content of the kind described in the informed instructions case.

(i) The case law

82 In Vairy v Wyong Shire Council [2005] HCA 62; 223 CLR 422, McHugh J stated, at [25] 432, that the duty of care in negligence was "generally described as a duty to take reasonable care". His Honour further observed that in some areas of the law of negligence the duty was expressed in more limited and specific terms. Gummow J noted, at [62] 443, that the question:

"Whether in the given circumstances there exists a duty of care in negligence is a question of law ... the existence of some or all of those 'given circumstances' may depend upon issues of fact ..."

83 Hayne J, at [118] 459, also noting that in negligence the duty was to take reasonable care, stated:

"Beyond that, however, it is not possible to amplify the content of the duty without reference to particular facts and circumstances. In each case, the content of the duty will turn critically upon the particular facts and circumstances."

84 In Roads and Traffic Authority of NSW v Dederer [2007] HCA 42; 234 CLR 330, Gummow J, in referring with approval to the statement of McHugh J in Vairy (albeit that McHugh J was in dissent in the result in Vairy), stated, at [49] 347:

"In simple and complicated cases alike, one thing is fundamental: while duties of care may vary in content or scope, they are all to be discharged by the exercise of reasonable care." (original emphasis)

85 Although these principles apply to a case of professional negligence, such a claim will usually require a more specific identification of the duty of care having regard to the facts and circumstances of the particular case. In this case, it was argued that the content of the duty of care included the allegation advanced as the informed instructions case.

86 In his opening of Mr Marshall's professional negligence proceedings against Stacks, Mr Andrews indicated to the trial judge that he proposed to rely upon the statement of Deane J in Hawkins v Clayton at 579, that the duty of care of a solicitor:

"... may, in some special categories of case, extend to require the taking of positive steps to avoid ... economic loss being sustained by the person ... to whom the duty is owed."

Whether this proposition is correct is central to the question whether there was an arguable case on the law in respect of the informed instructions case.

87 There has been some departure from Deane J's reasons in Hawkins v Clayton: see Astley v Austrust Ltd [1999] HCA 6; 197 CLR 1 where the High Court, following the decision of the House of Lords in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, held that an action may be brought for professional negligence in both contract and tort and that the obligations thereunder were not necessarily co-extensive. However, that is not the issue in the present case and the High Court made no express reference to Deane J's statement, at 579, to which I have referred.

88 In the year following the decision in Hawkins v Clayton, this Court, in Waimond Pty Ltd & Anor v Byrne (1989) 18 NSWLR 642 expressly adopted and applied Deane J's statement. The facts in Waimond were complicated, but in brief, concerned a solicitor's liability to a client who suffered loss as a result of a fraudulent property transaction by another of the solicitor's clients. Kirby P, at 652, expressly applied Deane J's comment, at 579, holding that, in the circumstances, the solicitor was required to take "positive steps" to ensure that the client's interests were protected. The positive step required in that case was no more, but no less, than to obtain instructions from the client. Hope AJA agreed with Kirby P's conclusion, but without reference to Hawkins v Clayton.

89 However, doubt was cast upon the correctness of Deane J's statement by this Court in Heydon v NRMA [2000] NSWCA 374; 51 NSWLR 1. In that case, the Court was concerned with the question of the duty of care owed by a legal practitioner, a leading Queen's Counsel, in the giving of advice in his relevant area of skill and expertise.

90 McPherson AJA, at [364] 118, Ormiston AJA agreeing, stated that Deane J's statement in Hawkins v Clayton, that a solicitor may have a duty to take positive steps beyond the express terms of the solicitor's retainer, was no longer good law. His Honour considered that this followed from the High Court's rejection in Astley v Austrust Ltd of Deane J's reasoning in Hawkins v Clayton. Likewise, his Honour also said that Waimond should no longer be followed.

91 It is appropriate to set out this aspect of his Honour's reasons in full:

"Finally, reference must be made to the limits of the duty to advise. At one time a solicitor's duty was considered to be limited by the terms of the retainer from the client, there being no affirmative legal obligation to give advice going 'beyond the specifically agreed task or function'. Then, in Hawkins v Clayton (1988) 164 CLR 539 at 585, it was held that there was no justification for imposing a contractual duty of care that was co-extensive with the parallel duty independently imposed in the law of negligence. It followed that an obligation might arise requiring a solicitor to take positive steps, beyond the specifically agreed professional task or function, to avoid a real and foreseeable risk of economic loss being sustained by the client, or even by others who were not the clients who had retained the solicitor. The result was that in Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 at 652, a majority of this Court held that an affirmative duty to advise might exist in relation to matters that were not directly within the ambit of the retainer from the client. The decision on this point in Waimond Pty Ltd v Byrne has since been followed on several occasions. More recently, however, in Henderson v Merrett Syndicates Limited [1995] 2 AC 145 at 193-194, the House of Lords rejected the reasoning of Deane J in Hawkins v Clayton, holding instead that there was 'no sound basis for a rule which automatically restricts a claimant to either a tortious or a contractual remedy', and that it was the contract that defines the relationship of the parties, so that ordinarily 'the parties must be taken to have agreed that the tortious remedy is to be limited or excluded'. In Astley v Austrust Ltd (1999) 197 CLR 1, the High Court decided to follow the reasoning in Henderson v Merrett Syndicates Ltd, in preference to that of Deane J in Hawkins v Clayton. The result, in my respectful opinion, is that what was said by Deane J in Hawkins v Clayton has ceased to be good law in Australia. Because it formed the or a pivotal point in the reasoning in Waimond Pty Ltd v Byrne, it is no longer possible to say that there is a 'penumbral' duty in tort requiring a solicitor to advise on matters going beyond the limits of his or her retainer. On that aspect, the decision in Waimond Pty Ltd v Bryne is inconsistent with the reasoning in Astley v Austrust Ltd, and should, in my opinion, no longer be followed. It had the effect of enlarging or extending the range of matters on which a solicitor, and possibly also a barrister, might be required by the law of tort to advise a client or other persons."

92 Malcolm AJA took a different approach. His Honour, at [146] 53, first described the duty and standard of care of a solicitor:

"... solicitors owe a duty of care to those whom they advise or for whom they act. In the present context, their duty is to exercise reasonable care and skill in the provision of professional advice. The standard of care and skill is that which may be reasonably expected of practitioners. In the case of practitioners professing to have a special skill in a particular area of the law, the standard of care required is that of the ordinary skilled person exercising and professing to have that special skill."

93 His Honour continued, at [147] 53:

"... the duty is to apply the relevant degree of skill and exercise reasonable care to carrying out the task. There is no implied undertaking that the advice is correct, but only that the requisite degree of professional skill and care has been exercised in the giving of the advice."

94 Malcolm AJA next referred to circumstances that may give rise to an additional duty to advise: see Rogers v Whitaker [1992] HCA 58; 175 CLR 479. That case involved the negligence of an ophthalmic surgeon in failing to warn a patient of a material risk of an operation. The plurality (Mason CJ, Brennan, Dawson, Toohey and McHugh JJ) held, at 490, that "[t]he law should recognize that a doctor has a duty to warn a patient of a material risk inherent in the proposed treatment".

95 It is apparent that Malcolm AJA understood the duty to which Deane J had referred in Hawkins v Clayton to be of the kind referred to in Rogers v Whitaker. His Honour, at [147] 54, explained his reasoning as follows:

"Of course, where there is reason for doubt or there are risks which a person possessing the relevant degree of skill and competence should perceive, it follows from the above that there may be a duty to warn of the kind recognised by their Honours in Rogers v Whitaker. Thus, in Hawkins v Clayton (1988) 164 CLR 539 at 583-585, it was held by Deane J that, in the case of a solicitor, the circumstances may give rise to a duty to do more than simply perform the task defined by his instructions, if circumstances arose giving rise to a real and forseeable risk of economic loss by the client, or, in particular circumstances, even a person who was not a client but who may be adversely [a]ffected. See also Waimond Pty Ltd & Anor v Byrne (1989) 18 NSWLR 642 in which the judgment of Deane J was followed. In Henderson v Merrett Syndicate Limited [1995] 2 AC 145 the House of Lords declined to follow Hawkins v Clayton insofar as it suggested that in the case of a solicitor liability lay only in contract rather than concurrently in contract and tort. In Astley v [Aus]trust Ltd [1999] HCA 6; (1999) 73 ALJR 403 the High Court decided to follow the decision in Henderson v Merrett Syndicate Limited in preference to the judgment of Deane J so that in the case of solicitors, the liability remains a concurrent liability in contract and in tort."

96 In Curnuck v Nitschke [2001] NSWCA 176, Davies AJA (Meagher JA agreeing) doubted the correctness of McPherson AJA's statement in Heydon v NRMA that Waimond v Byrne was no longer good law. His Honour said, at [6]-[9]:

"6 ... I do not read the decisions in Henderson v Merrett Syndicates Ltd and Astley v Austrust Ltd as leading to that conclusion. The fact that the causes of action in tort and contract may be concurrent does not mean that their incidents are necessarily the same. Under contract law, duty turns upon the terms, scope and context of the contract. Under torts law, issues of proximity and foreseeability are crucial to liability. Public policy may play a part. And there are many other differences. The respective laws on damages are different. The principles of contributory negligence and contribution differ as between the causes of action. The limitation periods may be different. A plaintiff is entitled to sue in both contract and in tort or in either, and may choose the best result.

7 Waimond Pty Ltd v Byrne seems to me to be well based upon the principle enunciated in Henderson v Merrett Syndicates Ltd and Astley v Austrust Ltd. In that case, the duty of a solicitor to speak with his client with respect to a certain transaction did not arise from his contractual retainer. It arose out of the relationship of proximity which existed between the solicitor and his client. The solicitor knew that a transaction, which he had been instructed to carry out for another client, affected the interests of his client. The majority of the Court considered that the circumstances were such that the solicitor had a duty to check with his client or to advise him to seek independent advice.

8 It is one thing to say, where a solicitor has a contractual relationship with a client and where the matter in issue arises within the scope of the retainer, that there will be no difference between the duty of care imposed by the contract and that imposed by the law of negligence. It is another thing to say that, in respect of a matter which is beyond the scope of the contract, a tortious duty of care may not arise from the relationship between the parties.

9 In Australia, there have been several cases where a duty of care has been imposed upon solicitors notwithstanding that the solicitor's retainer did not impose that duty. (See Hawkins v Clayton; Hill v Van Erp (1997) 188 CLR 159; and Waimond Pty Ltd v Byrne.)"

97 In Kowalczuk v Accom Finance [2008] NSWCA 343; 77 NSWLR 205, Campbell JA (Hodgson and McColl JJA agreeing) undertook a review of the cases which had dealt with the question of the content of a solicitor's duty of care, including Waimond v Byrne, Heydon v NRMA and Curnuck v Nitschke, to which I have referred. His Honour concluded, without expressing a final view on the question of principle, that the relationship between the solicitor and client in Kowalczuk did not give rise to an obligation on the solicitor to act beyond the scope of the contractual duty.

98 The next relevant decision in point of time is David v David [2009] NSWCA 8. In that case, the Court was concerned with the scope of the duty of care of a solicitor retained to give advice on a refinancing transaction. Allsop P (Hodgson JA and Handley AJA agreeing) stated, at [76]:

"Some reliance was placed on Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 in argument. In Kowalczuk v Accom Finance Pty Limited [2008] NSWCA 343 at [267]-[294] Campbell JA undertook a detailed analysis of the precedential status of Waimond in particular after Heydon v NRMA Ltd [2000] NSWCA 374; 51 NSWLR 1 and Astley v Austrust Ltd [1999] HCA 6; 197 CLR 1. It is unnecessary to repeat that analysis. It is sufficient to say that the notion that a solicitor may owe a client a 'penumbral' duty that extends beyond scope of the retainer is doubtful. If, however, the solicitor during the execution of his or her retainer learns of facts which put him or her on notice that the client's interests are endangered or at risk unless further steps beyond the limits of the retainer are carried out, depending on the circumstances, the solicitor may be obliged to speak in order to bring to the attention of the client the aspect of concern and to advise of the need for further advice either from the solicitor or from a third party."

99 In Dominic v Riz [2009] NSWCA 216, Allsop P again turned his attention to the scope of a solicitor's duty of care and the role of the solicitor's retainer in identifying that scope, but did so in terms that were only necessary for the determination of the matter in issue on the appeal. Insofar as is presently relevant, his Honour referred to his earlier statement in David v David at [76]. His Honour then noted, at [91]:

"Neither party submitted that this expression of the matter either involved error or was inappropriate for application here. The passage in David at [76] was not meant, however, to be an operative legal principle. It was intended to do no more than posit the possibility that the performance of the retainer, and what is learnt during it, may affect how the retainer is properly discharged."

100 There is a further authority which is relevant to a solicitor's duty where a client gives specific instructions as to what is to be done in a matter. In Studer v Boettcher [2000] NSWCA 263, the appellant, on the advice of his solicitor during the course of a mediation, settled his claim. The appellant later sued his solicitors in negligence. The allegations of negligence included that the appellant was induced to enter into the settlement due to the respondent's improper pressure. He also contended that the respondent's advice was negligent. Handley JA held that the respondent had properly prepared the case for mediation and that his legal advice to the appellant given in the course of the mediation was sound.

101 Fitzgerald JA agreed and further observed, at [75], that a client was entitled to make the final decision in determining whether to settle a matter. His Honour noted that a lawyer:

"... should assist a client to make an informed and free choice between compromise and litigation, and, for that purpose, to assess what is in [the client's] best interests."

102 Fitzgerald JA observed that the lawyer was "entitled to seek to persuade, but not to coerce, the client to accept and act on that opinion in the clients interests".

103 Sheller JA agreed with Handley JA's assessment that the respondent's legal advice was correct. He also agreed with Fitzgerald JA's observations at [75]. As Sheller JA explained, at [58]:

"I agree with Fitzgerald JA that it is never the function of the legal adviser to coerce the client into settlement; see Harvey v Phillips (1956) 95 CLR 235 at 242. The degree to which the legal adviser may seek to persuade the client to compromise the claim and the way in which that may be done can, I believe, only be resolved having regard to the circumstances of the case in question. A great deal will turn upon the capacity of the client. Moreover, the client's refusal to accept sound advice from the legal adviser may compromise their relationship. The legal adviser may feel that the client has lost faith in the legal adviser's competence and may be concerned by ethical restraints in pursuing what the legal adviser regards as a hopeless cause. I mention these matters only to explain the importance of the circumstances of the case."

104 Keddies contended that the law dealing with the scope of a solicitor's duty of care was in an evolving state and that David v David and Dominic v Riz supported the existence of a duty of care based upon the informed instructions case. For my part, I consider that there is force in the views expressed by Davies AJA in Curnuck v Nitschke, to which I have referred above, subject only to noting that his Honour's references to "proximity" no longer represent the approach to the question whether a duty of care is owed in a particular case: see Tame v New South Wales [2002] HCA 35; 211 CLR 317 at [106]-[107] 355-356; Vairy v Wyong Shire Council; Mulligan v Coffs Harbour City Council [2005] HCA 63; 223 CLR 486; and RTA (NSW) v Dederer. I would also endorse the observations of Allsop P in David v David and Dominic v Riz.

105 In any event, it is not necessary to determine the correctness of these decisions, given the question under consideration. All that is required by s 345 is that there be a reasonably arguable view of the law. In my opinion, on this line of authority, it was reasonably arguable that the content of a duty of care in a particular case may include an obligation to provide additional advice or to take some additional or positive step. Accordingly, to the extent that the trial judge in this case said that the informed instructions case was reasonably arguable, I would agree insofar as his Honour's comment related to the general question whether the content of a solicitor's duty of care in a particular case may include an obligation to provide additional advice or to take some positive step. However, that is not the question in issue. Sections 345 and 348 are directed to particular proceedings. The question is whether Stacks owed a duty of that type to Mr Marshall in the conduct of the nervous shock claim against Allianz.

106 In support of their argument that this aspect of Mr Marshall's professional negligence proceedings had reasonable prospects of success, Keddies relied upon the following matters: first, that each of the solicitors involved in the matter had made an independent assessment that the proceedings had reasonable prospects of success (the solicitors' evidence); secondly, that Dr Durrell, in his report, had advised that Mr Marshall had a 24 per cent whole person impairment; thirdly, that Mr Cameron's expert report supported the case that there were reasonable prospects of success; and finally that they had relied on counsel's advice.

(ii) The solicitors' evidence

107 Dr Thornton had carriage of the matter from July 2007 until June 2009. Accordingly, subject only to Mr Roulstone's belief in 2005, it is Dr Thornton's belief that was the relevant belief for the purposes of determining whether the claim had reasonable prospects of success at its inception. The belief of Mr Creed is relevant after 26 June 2009, when Dr Thornton left Keddies' employ. Mr Roulstone's belief at that time is also relevant.

108 Dr Thornton stated in his affidavit sworn 21 September 2010, para 14, that at the time of filing the statement of claim and at all times, he genuinely and honestly believed that Mr Marshall had reasonable prospects of success in the professional negligence proceedings against Stacks. He said that after reviewing Stacks' file he formed the view that Mr Marshall's nervous shock claim had been settled prematurely for a low amount, given that Mr Marshall's mental state had not been properly investigated. He said that he considered Stacks may have been negligent in proceeding to settle the case and that they could have advised Mr Marshall that the proposed settlement was against their advice. He said that if Mr Marshall would not accept their advice, Stacks could have ceased to act or could have advised or arranged for Mr Marshall to obtain a second legal opinion. Dr Thornton also referred to Dr Durrell's report and said that it supported a claim for negligence against Stacks.

109 Dr Thornton said that he was satisfied, from Mr Andrews' advice of 11 December 2007 and the fact that Mr Andrews had drafted a statement of claim, that Mr Andrews was of the opinion that Mr Marshall's claim had reasonable prospects of success. However, in cross-examination, Dr Thornton agreed he understood Mr Andrews' advice was that proceedings should not be commenced and that Mr Andrews had only drafted the statement of claim "for the purpose of settlement discussions before commencement". In re-examination, Dr Thornton said that Mr Andrews had never made any adverse comment about the statement of claim having been filed.

110 In his affidavit sworn 1 October 2010, Mr Roulstone stated that he did not have day-to-day conduct of the matters in which Keddies acted for Mr Marshall, although he had attended a conference with Mr Andrews in respect of the (then) proposed professional negligence proceedings against Stacks. He said that it was his opinion that the solicitors, who had carriage of the matter, were competent practitioners and accredited specialists in personal injury law.

111 Mr Roulstone said in his affidavit that he was of the opinion, prior to commencing proceedings, that Mr Marshall had reasonable prospects of success in his professional negligence proceedings against Stacks. He said he had attended a conference with Dr Thornton and senior counsel on 11 September 2008 in which he recalled senior counsel saying words to the effect, "I agree with [Mr Andrews'] advice" and "I think it's a difficult case". Mr Roulstone said that he understood the reference to Mr Andrews' advice as being a reference to the letter of 11 December 2007. In cross-examination he said, "[Senior counsel] said 'I would not be willing to take on this case, because it will lose'. (It appears that senior counsel may have been asked to accept the brief on a contingency fee basis.) However, Mr Roulstone also said that Dr Thornton told him that Mr Andrews had a view that the matter had reasonable prospects of success and was willing to run the case. He added that Mr Andrews had been in the case for some time.

112 Mr Roulstone said that at the time of the commencement of the hearing before Colefax DCJ on 29 June 2009, he continued to hold the view that Mr Marshall's claim had reasonable prospects of success. He said this view was based upon his understanding of the instructions provided by Mr Marshall, the evidence as a whole and the advice from Mr Andrews immediately before the hearing, which was more optimistic. It is not apparent from the evidence that Mr Roulstone turned his mind to Mr Marshall's instructions, or to the content of Stacks' file, or to Mr Andrews' advice of 11 December 2007 prior to the commencement of the hearing. He also said that even after Mr Andrews' letter of 3 July 2009, he believed that the case had reasonable prospects of success and he did not understand Mr Andrews' letter to have stated otherwise. This evidence is difficult, if not impossible, to reconcile with the content of that letter.

113 Mr Roulstone said that after he received Mr Andrews' letter of 3 July 2009, he thought that Mr Marshall might still redeem himself in further cross-examination or re-examination. He agreed with the cross-examiner that he appreciated at that time that there was a fatal defect in Mr Marshall's claim. However, he quickly retreated from that concession. He said "fatal" might be too severe, but that he understood the prospects of success were very low. These views were expressed in circumstances where he had not been in court during Mr Marshall's evidence and had not reviewed the transcript of the part heard proceedings. He agreed that he had directed Mr Creed, who then had the conduct of the matter, to try and get instructions to settle.

114 Mr Roulstone also placed reliance on the fact that prior to his letter of 2 November 2009, Mr Andrews had not expressly used the words, that Mr Marshall's professional negligence proceedings "did not have reasonable prospects of success".

115 Mr Creed took over carriage of the matter on 26 June 2009. He said that at a conference that day, Mr Andrews had said there was a basis for a finding of liability against Stacks. Mr Creed stated that upon reviewing the pleadings, the expert report of Mr Cameron, the advice of Mr Andrews and attending the conference of 26 June 2009 with Mr Andrews, he formed the view that "Mr Marshall had reasonable prospects of success against Stacks". In cross-examination he was asked about Mr Andrews' advice of 3 July:

Q. The advice as you read it from Mr Andrews of 3 July 2009 was that the plaintiff should not pursue his claim any further, correct?

A. Well that was what was written in the advice - in the memorandum of advice from [Mr Andrews], but there are other things written in that advice as well.

Q. Two very significant things were, first that the plaintiff should not pursue his claim and further, and second, he should resolve his matter at all costs, correct?

A. Yes."

116 However, in further cross-examination, he said that he took the view that Mr Andrews was taking an unnecessarily bleak view of the matter.

117 It should be observed at this stage that Mr Andrews did not give evidence on the hearing of the notice of motion. His absence was not explained.

(iii) Dr Durrell's report

118 Dr Durrell, in his report dated 7 November 2007, assessed Mr Marshall's whole person impairment pursuant to the WorkCover Guidelines at 24 per cent and diagnosed post-traumatic stress disorder and Major Depressive Disorder. Dr Durrell stated that the chronicity and severity of those conditions was such that Mr Marshall's prognosis was poor. He also stated that he anticipated a decline in Mr Marshall's mental illness. Dr Durrell expressed the opinion that Mr Marshall's occupational functioning had deteriorated over the previous few years and assessed his capacity as limited to inconsistently working 2-4 hours per day at tasks well below his premorbid level of functioning.

119 Dr Durrell's report was of some importance in Dr Thornton's assessment that Mr Marshall's claim had reasonable prospects of success. However, Dr Durrell's report was flawed in a number of important respects. First, it provided an assessment pursuant to the WorkCover Guidelines, whereas Mr Marshall's claim was under the Motor Accidents Compensation Act. Medical assessments under that Act are made under the quite different MAS guidelines. This was apparent on the face of the report.

120 Secondly, the assessment was made as at 2007, whereas the questions relevant to the professional negligence claim were as to Mr Marshall's condition in November 2002 and his mental or emotional capacity to give instructions and his condition at the time the MAS assessment would have been made, which was likely to have been in 2003 or 2004. Dr Durrell did not proffer any opinion as to Mr Marshall's condition at either of those times.

121 Thirdly, Dr Durrell's assessment of Mr Marshall's economic capacity was contradicted by the facts. Rather than his medical condition being such as to permit him to work 2-4 hours per day, Mr Marshall was, as at the date of Dr Durrell's report, working full-time, as Keddies were aware prior to the filing of the statement of claim. Keddies' file note of the conference with Mr Andrews on 11 December 2007 expressly referred to Mr Marshall's employment history from 2006 onwards. Keddies and Mr Andrews were also aware from Dr Richardson's report of 20 September 2002 that Mr Marshall had commenced full-time employment in August 2002.

122 It was thus apparent on the face of the report that Dr Durrell's assessment of 24 per cent whole person impairment was based upon the wrong legislative scheme and was also based upon Dr Durrell's grim but factually wrong view of Mr Marshall's "employability".

123 Keddies were specialists in personal injury matters and Mr Roulstone made a point in his evidence of relying upon the fact that the solicitors in Keddies' employ, who had the carriage of Mr Marshall's professional negligence proceedings, were accredited personal injury specialists. The errors in Dr Durrell's report were patent. If Keddies appreciated the deficiencies in the report at the time that they filed the statement of claim, they could not rely upon it to establish their reasonable belief for the purposes of ss 345 and 348. Indeed, it proved the contrary. If Keddies did not appreciate the deficiencies in Dr Durrell's report at the time that they filed a statement of claim, that could only have been due to significantly inadequate attention to the matter. In my opinion, a reasonable belief cannot be based upon such inadequacy.

124 Although it is not necessary to make a finding in this regard, the flaws in Dr Durrell's report ought also to have been obvious to Mr Andrews. It is relevant to note that Mr Andrews made no reference to Dr Durrell's report in his advice of 11 December 2007. If Mr Andrews considered that Dr Durrell's report supported the claim, he (Mr Andrews) would not have recommended that the matter "should [not] ever be allowed to go to Court".

(iv) Mr Cameron's expert report

125 Keddies also relied upon the expert legal report of the solicitor Mr Cameron to support their reasonable belief. Mr Cameron reviewed the factual background, the medical evidence and the legal framework. In dealing with the medical evidence, Mr Cameron referred to Dr Richardson's report, noting that it had been available to Stacks at the time they settled Mr Marshall's nervous shock claim against Allianz. Mr Cameron quoted part of Dr Richardson's report. Significantly, Mr Cameron did not refer to that part where Dr Richardson stated that "Stabilisation has occurred since July 2002".

126 Mr Cameron also referred to Dr Durrell's report of 7 November 2007, commenting that if the report was accepted either by the insurer or a medical assessor, "[Mr Marshall's] claim would be very much greater than the amount for which it was settled". He referred to an amount of "at least $150,000.00" being added to the settlement amount should Dr Durrell's opinion be accepted. Mr Cameron then expressed the view:

"... most experienced lawyers engaged in personal injury litigation would consider it professionally dangerous and inappropriate to settle any case where they could not be entirely satisfied that the injuries had resolved without the possibility of ongoing effects without specialist medical opinion to guide their decision making process."

127 In his "Summary", Mr Cameron stated:

"It is certainly the case that [Mr Marshall] was persistent in his request that the matter be settled.

It is also the case that he was under a handicap imposed by his psychological state and this was evident from the medical report available to [Stacks]. I do not consider that there is evidence upon which I can conclude [Mr Marshall] lacked capacity.

In the circumstance it would have been prudent and good practice to obtain a report from an appropriately qualified medical expert. It is my opinion that most experienced lawyers in [Stacks'] position would have insisted upon this prior to proceeding to settlement."

128 Just as there were flaws in Dr Durrell's report, Mr Cameron's report could have been of limited, if any, assistance to Keddies in the professional negligence proceedings. First, Mr Cameron failed to factor into his assessment that Dr Richardson had reported that Mr Marshall's condition had stabilised since July 2002 and that he had substantially recovered. Secondly, Mr Cameron did not appear to have an accurate history as to Mr Marshall's employment and, in particular, that he had returned to work in August 2002. Thirdly, Mr Cameron failed to appreciate that Dr Durrell had made his assessment contrary to Mr Marshall's actual employment circumstances and under the wrong legislation. Next, the date to which Mr Cameron's assessment was directed was also erroneous, having regard to the matter in issue in the professional negligence proceedings. Finally, Keddies would appear to have failed to inform Mr Cameron that they had no instructions as to whether Mr Marshall would have attended upon such a psychiatrist. In any event, Mr Cameron's advice was no more than an expression of his opinion that "it would have been prudent and good practice to obtain a report from an appropriately qualified medical expert".

(v) Counsel's advices

129 Keddies' argument that Mr Marshall's professional negligence proceedings against Stacks had reasonable prospects of success was based, in large measure, upon the content of Mr Andrews' advice of 11 December 2007 and the fact that notwithstanding the pessimism expressed in that advice, he had drafted pleadings, had accepted the brief on hearing and had appeared on the hearing. In particular, Keddies relied, as indicated above in respect of Mr Roulstone's evidence, upon the fact that Mr Andrews had not stated in his advice of 11 December 2007 that the claim did not have reasonable prospects of success. This was to be contrasted to his advice of 2 November 2009, in which Mr Andrews gave that express advice. In this regard, Keddies argued that they were entitled to rely upon counsel's advice: see White Industries (Qld) Pty Ltd v Flower & Hart (a firm) [1998] FCA 806; 156 ALR 169.

130 In White Industries v Flower & Hart, the Federal Court was concerned with the general law power to award costs against a solicitor where proceedings were adjudged to be an abuse of the process of the court. In the course of considering that question, Goldberg J reviewed the authorities relating to the vulnerability of a solicitor to a costs order where the solicitor had relied upon counsel's advice. Goldberg J observed, at 242, that whilst reliance on counsel was an important consideration, the retainer of counsel did not of itself absolve a solicitor from conduct which was an abuse of the processes of the court. His Honour summarised the case law. It is sufficient to refer to two of the authorities to which his Honour referred.

131 In Tolstoy-Miloslavsky v Aldington [1996] 1 WLR 736, Rose LJ noted that the statement of claim, which had been settled by counsel, had been struck out as being "utterly hopeless". His Honour said, at 747:

"Counsel's role, however, did not exonerate the solicitors from their obligation to exercise their own independent judgment to consider whether the claim could properly be pursued; they were not entitled to follow counsel blindly: see Davy-Chiesman v Davy-Chiesman and Locke v Camberwell Health Authority [1991] 2 Med LR 249 at 254. They had to apply their 'own expert professional mind to the substance of the advice received': Ridehalgh v Horsefield [1994] Ch 205 at 228F."

132 Ward LJ, at 751, said:

"[T]his does not absolve the solicitors exercising their independent judgment, nor allow them to close their eyes to the blindingly obvious. Their eyes ought to have been opened by the judgment of the Court of Appeal when they were put fully on their guard and were made alive to the difficulties in reopening this case, whatever the fresh evidence might be."

133 In R v Camden London Borough Council; Ex parte Martin [1997] 1 WLR 359 at 363, Sedley J stated:

"Part of a solicitor's duty is to exercise at least a measure of independent judgment in relation to advice received from counsel: Davy-Chiesman v Davy- Chiesman [1984] Fam 48."

134 In White Industries, Goldberg J concluded, at 249, that it was unreasonable for the solicitor to commence proceedings notwithstanding that he had relied upon advice of experienced senior counsel. The solicitor was required to apply his own independent judgment to the question of whether it was appropriate to commence proceedings.

135 Thus, even without having regard to the solicitor's particular obligations under s 345, the responsibility of a solicitor to apply his or her independent professional mind both to the claim and to the advice given by counsel was never abrogated under the general law. That independent obligation is now placed upon a legal practitioner, in this case a solicitor, by the express terms of s 345. Whilst it can be accepted that in a difficult case a solicitor may be entitled to rely upon the advice of counsel as to whether there is an arguable view of the law, or whether the facts support the claim made or proposed to be made, the solicitor is still required to give those matters independent consideration.

136 Against that background, it is necessary to consider what Mr Andrews in fact advised. His advices are summarised at [30] ff. Mr Andrews' letter of 11 December 2007 was written following a conference that day with Mr Marshall and Dr Thornton and another person with initials "TCM". At that time, Mr Andrews had had access to the whole of Stacks' file. This included Dr Richardson's report of 20 September 2002. In Keddies' file note of the conference, it was recorded that between May and October 2006, Mr Marshall was working full-time in a video store in Artarmon and that he was "currently freelancing" for Fox Sports. Mr Andrews expressly referred to Mr Marshall's economic circumstances in his letter.

137 The significant statements in Mr Andrews' letter were: "[Mr Marshall] will have severe difficulty in proving his claim"; "it is my opinion [Mr Marshall] will not succeed in these proceedings"; "[t]his is not a matter however that I would recommend should ever be allowed to go to Court"; and that the matter "should be settled at the first available time".

138 Depending upon the particular circumstances, a statement that a client will have "severe difficulty in proving [a] claim" may not involve any offence to s 345, although it must be said that the language of "severe difficulty" does not sit comfortably with the requirement that a case must be fairly arguable. However, Mr Andrews' advice of 11 December 2007 said much more than that and did so unambiguously. Mr Andrews said that Mr Marshall "will not succeed". It is not unimportant that Mr Andrews found himself only able to draft a statement of claim "in very wide terms". It is apparent from his advice that he did so in order to provide Keddies with a bargaining tool for the settlement of the claim. Dr Thornton understood that this was the case: see above at [109].

139 In my opinion, there was nothing in Mr Andrews' advice of 11 December upon which Dr Thornton could rely for the purpose of basing a belief that Mr Marshall's professional negligence proceedings had reasonable prospects of success. Rather, on that first advice, Keddies, in order to comply with their obligations under s 345, should have advised Mr Marshall, that they could not continue to provide legal services to him in respect of his professional negligence proceedings.

Other factors

(a) Existence of provable facts

140 One of the essential underpinnings of the professional negligence proceedings was that Stacks was negligent in failing to obtain a psychiatric report or to require Mr Marshall to attend upon a psychiatrist. As Mr Andrews recognised in his advice of 3 July 2009, that was one of the "provable facts" that needed to be established if Keddies were to succeed in its argument that it had a reasonable belief as to the reasonable prospects of success of Mr Marshall's professional negligence proceedings. Neither Dr Thornton nor Mr Roulstone gave evidence that, prior to filing the statement of claim, they had even asked Mr Marshall whether he would have done so. Nor did they or Mr Creed suggest that Mr Marshall gave evidence in the professional negligence proceedings that was contrary to the instructions they had obtained from him. It is one thing to contend that a witness does not "come up to proof" in the witness box or is otherwise found wanting. It is another to fail to ask a client a fundamental question upon which the claim is based.

(b) Senior counsel's advice

141 In September 2008 senior counsel was briefed. There was a telephone conference with Dr Thornton, and it would appear a conference with Mr Roulstone. According to Dr Thornton, senior counsel stated that the claim had "very limited prospects of success". According to Mr Roulstone, the advice was that the case "will lose". This advice was given after the filing of the statement of claim. However, it is convenient to deal with it at this point as senior counsel expressed his opinion well before the commencement of the hearing of the matter. His advice undermined, if it did not destroy, any available argument that, at least from September 2008, any of the solicitors involved in Mr Marshall's professional negligence proceedings could have had a reasonable belief that the claim had reasonable prospects of success.

(vii) Conclusion on whether Keddies had a reasonable belief at the time of filing the statement of claim

142 Keddies submitted that Mr Marshall did not bear any burden of establishing in the professional negligence proceedings that he was incapable of giving instructions by reason of his then mental state. Rather, Keddies argued that once Mr Marshall's mental distress was apparent to Stacks, they were:

"... on enquiry or notice or concern in relation to what then happened in relation to the obtaining of instructions and accepting instructions to settle at the amount they did."

143 Keddies argument assumed that those circumstances, without more, could give rise to the duty of care alleged in the informed instructions case and that Stacks' failure to take such steps could constitute a breach of that duty. Keddies denied that the effect of this argument was to place the onus on Stacks to prove that there was no such duty of care in the circumstances or that they had not breached such duty of care. For my part, I would reject that submission. A plaintiff bears the onus of establishing each element of the cause of action sued upon. In this case, notwithstanding my conclusion that there may be circumstances in which a solicitor has a duty of care of the kind propounded in the informed instructions case, Keddies have not established that such a duty was owed in the present case.

144 Whilst the evidence established that Stacks was on notice of Mr Marshall's mental stress: see in particular, Mr Marshall's various faxes set out above at [12] ff, his instructions from the outset were to settle his claim against Allianz. Stacks advised him against doing so, as it was "premature", given the absence of a psychiatric report and in circumstances where, at the time he first instructed them, he had not returned to work. This was proper and adequate advice and was given in circumstances where there was nothing to indicate that Mr Marshall did not understand what he was doing or was not in an appropriate mental frame of mind to give instructions. There was nothing in Mr Marshall's communications that would cause Stacks to be concerned that he was not able to give instructions in his case. Mr Marshall was persistent in his instructions to settle. Indeed, he apologised for his persistence and explained his reasons for wishing to settle, namely, because of the impact that the upcoming criminal trial had and was having on him.

145 Stacks were also in possession of Dr Richardson's report of 20 September 2002. There was nothing in that report to indicate that Stacks ought not to act upon Mr Marshall's instructions, without taking some other step, such as requiring Mr Marshall to undergo a psychiatric examination or to obtain independent advice or that they ought to cease to act if he did not do so. Dr Richardson's report was evidence that Mr Marshall was in an appropriate mental state to be able to give instructions.

146 In summary, the relevant factual matrix against which the content of Stacks' duty of care was to be determined was that Mr Marshall had suffered post traumatic stress disorder and reactive depression; that his condition had stabilised by July 2002; that his acute depression had largely resolved and that, at the time that the matter settled, he had returned to full-time employment. The evidence also established that Mr Marshall would not have attended upon a psychiatrist even had Stacks insisted that he do so. There is nothing in that evidence that would raise a question as to Mr Marshall's ability to give instructions or which suggested that Stacks had a duty to take some positive step, such as was posited in argument, before acting upon his instructions. On the material available to Stacks, Mr Marshall was well able to understand the consequences of settling his claim against Allianz. In those circumstances, Stacks were entitled to act upon Mr Marshall's clear and firm instructions in accordance with the principles discussed in Studer v Boettcher.

147 It follows, in my opinion, that although as a matter of general principle there was an arguable case that there may be circumstances in which a solicitor owes a duty of care to a client as was alleged by Keddies in the informed instructions case, on the material available to Keddies at the time that they filed the statement of claim there was no reasonable prospect of making out such a case against Stacks. That case was not reasonably arguable on the facts.

148 The other aspect of the claim, the primary negligence allegation also needs to be considered. Keddies relied upon the same factors it had raised in the informed instructions case to support its contention that there were reasonable prospects of success in respect of Mr Marshall's professional negligence claim based upon the primary negligence allegation. In particular, Keddies submitted that there was an arguable case of professional negligence, in that Stacks failed to require or urge Mr Marshall to undertake a medical assessment for the purposes of determining the true quantum of the claim.

149 A solicitor acting for a client on a personal injury claim plainly owes a duty of care to advise a client that steps have to be taken to obtain the evidence necessary to prove the client's case. Those steps include obtaining existing medical files and reports, advising the client of appropriate medico-legal evidence that ought to be obtained and obtaining the necessary materials to prove loss of income. In this case, Stacks undertook each of those steps. They also advised Mr Marshall that Allianz had taken the position that his redundancy payment negated any claim for past loss of income.

150 In my opinion, Keddies failed to establish that Stacks had not taken steps that ought reasonably to have been taken, or had negligently performed any of the above steps to which I have referred. As Gummow J observed in RTA (NSW) v Dederer, at [50] 348, "the exercise of reasonable care is always sufficient to exculpate a defendant in an action in negligence".

151 Before leaving this issue, reference should be made to Keddies' argument in respect of the primary negligence allegation that Stacks had an obligation to require Mr Marshall to undertake, inter alia, a psychiatric consultation or of at least obtaining independent legal advice, notwithstanding the client's explicit instructions to settle his claim. This is largely repetitious of the arguments Keddies advanced in the informed instructions case, the essential difference being the argument that Stacks ought not to have proceeded to settle the claim until psychiatric evidence had been obtained, so that the extent of Mr Marshall's psychiatric injury could be properly assessed.

152 In my opinion, this argument failed to grapple with the fact that a solicitor has no right to compel a client to undergo a psychiatric assessment. Indeed, there is no right to compel a person to undergo a psychiatric assessment other than in prescribed statutory circumstances. Presumably, that is why Keddies formulated the content of the duty of care in terms that if the client did not follow the solicitor's advice, the solicitor should cease to act. However, I do not know of any legal principle that requires a solicitor to cease to act merely because a client has failed to follow advice. Keddies did not assert that Stacks had any conflict of interest. Nor did they assert that Mr Marshall did not have the mental capacity to give instructions. As explained by this Court in Studer v Boettcher, a solicitor is required, subject to exceptions which do not apply here, to act upon the client's instructions. There was no evidence that Stacks failed to exercise reasonable care in acting upon Mr Marshall's instructions or in the manner in which they otherwise acted for him.

153 I would make two final comments. A solicitor, in the preparation of a claim, is entitled to rely upon the expert views expressed by witnesses with expertise in a relevant field of inquiry. However, where there are specific statutory regimes that regulate particular types of claims, an expert's opinion must comply with the requirements of the legislation governing the claim. Further, an expert's opinion is only reliable to the extent that the opinions expressed are based upon correct facts and histories. As I have explained, the expert reports of Dr Durrell and Mr Cameron failed these fundamental requirements.

154 Further, although the Keddies solicitors each swore an affidavit that he had a reasonable belief as to the reasonable prospects of success of Mr Marshall's professional negligence proceedings against Stacks, the mere incantation of a reasonable belief is not sufficient for the purposes of s 345. A reasonable belief must be based upon a reasonably arguable view of the law and upon provable facts. As I have sought to demonstrate, Keddies failed to establish that there were provable facts such as to establish that Mr Marshall's professional negligence claim against Stacks had reasonable prospects of success.

155 It follows that grounds 2, 3 and 7 of the appeal fail.

(3) As at 2 July 2009, did Keddies have a reasonable belief that Mr Marshall's professional negligence proceedings did not have reasonable prospects of success?

156 Keddies argued that his Honour erred in not making a finding that it was only when Mr Marshall had given his evidence in the professional negligence proceedings that Keddies could have had a reasonable belief that his claim had reasonable prospects of success. Given my conclusion that Keddies did not have a reasonable belief at the time of filing the statement of claim that Mr Marshall's professional negligence proceeding did not have reasonable prospects of success, this issue does not strictly arise. Accordingly I will deal with it briefly.

157 Mr Andrews, in his advice of 24 June 2009 (referred to more fully at [37]-[38]) appeared to express a more optimistic view of the case than he had expressed in his initial advice of 11 December 2007. If that advice had been given prior to filing the statement of claim and if there were provable facts to support it, it may have possibly provided a basis for Dr Thornton to have formed the necessary belief as to the prospects of success of Mr Marshall's professional negligence proceedings.

158 However, this advice can only be described as curious, given that nothing had changed, in terms of the available evidence, since Mr Andrews' advice of 11 December 2007. In particular, to the extent that Mr Andrews' opinion was based upon Dr Durrell's report, it was unsustainable for the reasons I have given. Further, Dr Richardson's report could not have provided a basis for the view that Mr Marshall had suffered a greater than 10 per cent permanent impairment. Mr Andrews recognised this in his next advice of 3 July 2009. What needs to be emphasised again is that s 345 requires a legal practitioner to have a reasonable belief. A belief based upon a failure properly to examine the material upon which the belief is based is not, in my opinion, a reasonable belief. For that reason, notwithstanding the advice given on 24 June 2009, I am not satisfied that it provides any real support for Keddies' argument.

159 Keddies extended its argument to contend that, in any event, as at 2 July 2009, the matter had not concluded and a further report could have been obtained from Dr Durrell or evidence could have been obtained from him in oral evidence if there were matters that required elaboration. It is not immediately apparent whether this submission was directed to the deficiencies in Dr Durrell's report that they would have had him correct.

160 However, there was no evidence as to what further evidence Dr Durrell would have given. In particular, it is not known what opinion he would, or indeed could, have expressed if properly briefed as to Mr Marshall's mental state as at mid-2002. Nor was any attention given to the requirements of the rules of court in relation to the service of medical reports: see the Uniform Civil Procedure Rules 2005 (UCPR), r 31.40. Further, there was no evidence that Mr Marshall would have attended upon another expert to obtain further evidence. In any event, there was no getting away from Mr Marshall's circumstances in 2002 as reported by Dr Richardson.

161 In any event, Mr Andrews' advice of 3 July 2009 was given almost immediately after the proceedings were adjourned on 2 July. The advice of 3 July 2009 is as important for what it does not say, as it is for what it does say. Mr Andrews did not say that Mr Marshall's evidence that he would have refused to have seen a psychiatrist in November 2002 was contrary to instructions that he had given either to Keddies or to Mr Andrews. Mr Andrews also made no reference to the fact that at the conference on 11 December 2007, Mr Marshall gave a history of his employment from 2006 onwards. Indeed, the facts disclosed that Keddies had obtained a history as early as 2006 of Mr Marshall's then employment. No mention was made that Dr Richardson's report had recorded that Mr Marshall had returned to work in August 2002. In any event, Keddies did not cease providing legal services after the provision of this advice, as they clearly should have.

162 Keddies also placed reliance upon the fact that Mr Andrews accepted the brief to appear and acted on the hearing. However, that does not assist Keddies in circumstances where at the point of filing the statement of claim, Dr Thornton could not have had a reasonable belief, based on Mr Andrews' advice of 11 December 2007, that the claim had reasonable prospects of success.

163 Accordingly, I would reject Keddies' argument that any finding as to its lack of reasonable belief could only have been made from after the time that Mr Marshall had given evidence.

THE LEGAL PROFESSION ACT: SECTION 348 DISCRETION ISSUE

164 Keddies submitted that even if his Honour's finding on the s 348 issue was upheld, he erred in the exercise of his discretion in making the s 348 costs order.

165 Keddies contended that his Honour erred in finding that they had made no submissions as to why an order pursuant to s 348 should not be made against them and, accordingly, erred in failing to take their submissions into account in determining whether to make a costs order (grounds 4 and 5). Keddies referred to their written submissions to his Honour dated 13 December 2010 para (91) ff, and especially paras (98)-(101).

166 His Honour, at [57], stated that Keddies had made no submissions as to why an order under s 348 should not be made "if the necessary preconditions were established". His Honour's finding was correct. The written submissions from para (91) ff were confined to the question as to why his Honour ought not to exercise his discretion against them from the period from 2 July 2009 onwards. Keddies were experienced practitioners and had experienced practitioners acting for them on the hearing of Stacks' notice of motion. Their complaint as to his Honour's failure to have regard to submissions that they had directed to another issue was symptomatic of the manner in which the entirety of this litigation had been conducted.

167 Even had his Honour had regard to paras (91) ff, to the extent the submissions could be considered relevant to his determination on the s 348 issue, he would have found submissions made in the most general of terms: viz that such an order should not be made lightly; Keddies had given the case substantial attention; counsel had been briefed; and Keddies had acted in accordance with counsel's recommendations. For the most part, I have dealt with these arguments above, but to the extent they need to be revisited on the question whether his Honour erred in the exercise of his discretion, they are dealt with below.

168 Keddies submitted that such an order was unreasonable or plainly unjust for the following reasons:

(1) Experienced counsel advised Keddies at material times in terms that the case, although difficult, had reasonable prospects;

(2) Counsel provided advice dated 3 July 2009, which although pessimistic, contained recommendations for future conduct. The advice did not state that the case no longer had reasonable prospects;

(3) The first time counsel advised that the case did not have reasonable prospects was on 2 November 2009, and at that time Keddies advised Mr Marshall they could no longer act; and

(4) Keddies were in a particularly difficult position after the matter adjourned part heard, as at that time, they were confronted by competing obligations. In the first place, they were unable to confer with Mr Marshall whilst he was under cross-examination: see Professional Conduct and Practice Rules 1995 (Solicitors' Rules), r 23 A.48. On the other hand, they had a duty as Mr Marshall's solicitors not to take steps prejudicial to his action.

169 In my opinion, none of these arguments can be accepted. Mr Andrews never advised at material times that the case had reasonable prospects of success. The only occasion when Mr Andrews may have given that advice was in 2005 in conference with Mr Roulstone. However, that was not advice given at a "material time" as at that time, Mr Andrews did not have Stacks' file. The relevant time was in late 2007, when Mr Andrews was briefed to draft the statement of claim. Mr Andrews' advice of 11 December 2007 was that Mr Marshall's professional negligence proceedings would not succeed.

170 In his letter of 3 July 2009, Mr Andrews again expressed the opinion that Mr Marshall "will not succeed in this claim" and that Mr Marshall "should not pursue this claim any further". The fact that Mr Andrews included advice as to what further steps should be taken does not convert the clear terms of what he had said into something that could be characterised, on Keddies' submission, as mere pessimism as to the likely outcome. I do not propose to express any views as the appropriateness of Mr Andrews advising as to further preparatory steps that should be taken. It is sufficient for the purposes of the present issue to reiterate that the procedural advice given in the letter of 3 July 2009 does not counteract the advice he gave in that letter as to the prospects of success.

171 Keddies' next submission repeated the argument that it sought to make in respect of the s 348 issue itself. It is a simple argument: Mr Andrews did not use the language of "no reasonable prospects of success" until the letter of 2 November 2009. This argument lacks substance. Mr Andrews' advice from the outset was undeniably to the effect that Mr Marshall's professional negligence proceedings against Stacks did not have reasonable prospects of success.

172 To the extent it is necessary to consider the additional argument referred to above, namely, that this was a case where Keddies had given substantial attention to the case, I would only comment that the "attention" so given was inadequate for reasons I have already expressed. Essentially, the inadequacy lay in not following Mr Andrews' advice that the claim would not succeed and the matter should not be allowed to go to court; in bringing a claim in circumstances where there was no evidence that Keddies obtained instructions as to its essential factual underpinning; and in relying on Dr Durrell's report that was patently flawed.

173 It follows that Keddies have not established any error in the exercise of his Honour's discretion. I would reject Keddies' challenge to his Honour's costs orders.

THE SECTION 99 COSTS ISSUE

174 In its notice of contention, Stacks challenged his Honour's rejection of their application for costs pursuant to the Civil Procedure Act, s 99. Given my conclusion in respect of his Honour's s 348 costs order, it is not strictly necessary to deal with Stacks' contention. Accordingly, I will express my views in brief terms only.

175 Pursuant to s 98, costs are in the discretion of the court and the court may determine by whom and to whom costs are to be paid.

176 In its amended notice of motion, the appellant sought costs orders against Keddies under the Civil Procedure Act, s 98 (1), s 99(1)(a) or s 99(1)(b), as well as an order pursuant to the Legal Profession Act, s 348(1) that it pay Stacks' costs in respect of the primary proceeding on the usual basis or, in the alternative, on an indemnity basis.

177 Section 99 provides, relevantly:

"99 Liability of legal practitioner for unnecessary costs

(1) This section applies if it appears to the court that costs have been incurred:

(a) by the serious neglect, serious incompetence or serious misconduct of a legal practitioner, or

(b) improperly, or without reasonable cause, in circumstances for which a legal practitioner is responsible.

(2) After giving the legal practitioner a reasonable opportunity to be heard, the court may do any one or more of the following:

...

(c) it may, by order, direct the legal practitioner to indemnify any party (other than the client) against costs payable by that party."

178 Given his Honour's conclusion in respect of the Legal Profession Act, s 348 and the orders he made thereunder, his Honour considered that it was not strictly necessary to consider this alternative basis upon which Stacks sought costs orders. Nonetheless, his Honour expressed the view that whilst Keddies' conduct involved "many disturbing departures ... from ... acceptable and proper conduct as a solicitor", the conduct was not of the kind contemplated by s 99. His Honour gave examples of Keddies' unacceptable professional services including failing to advise Mr Marshall at any time of the absence of any legal authority to support his claim and failing to inform him of the reasons why senior counsel had declined to accept a brief to appear.

179 Stacks submitted that given these matters and the following further factors: their offers to settle the matter on the basis of a verdict for the defendant with no order as to costs on four occasions between 13 February 2008 and 2 February 2009; Keddies' advice to Mr Marshall in respect of the first two offers that they were not offers of compromise at all; the fact that Mr Marshall was not informed why senior counsel had refused the brief; and the fact that Mr Marshall was not provided with Mr Andrews' letter of advice of 3 July 2009, the costs of the proceedings were incurred without reasonable cause within the meaning of s 99(1)(b).

180 In my opinion, his Honour erred in his conclusion that the manner in which Keddies conducted the litigation did not fall within s 99. In summary, the section operates where it appears to the court that costs have been incurred by the serious neglect or serious incompetence of a legal practitioner or improperly or without reasonable cause, in circumstances for which a legal practitioner is responsible. In the present case, the costs in the primary proceedings were incurred in circumstances where, on my conclusion, Keddies did not believe that there were reasonable prospects of success. Pursuant to the Legal Profession Act, s 348 the solicitors had an obligation not to commence the proceedings. The costs of the proceedings were therefore incurred without reasonable cause in circumstances where Keddies were responsible.

THE CROSS-APPEAL ISSUE

181 In their cross-appeal, Stacks challenged the order made by his Honour that Keddies indemnify Stacks for two thirds of the costs payable pursuant to the cost orders made against Mr Marshall in the professional negligence proceedings.

182 As the cross-appeal was originally formulated, Stacks contended, first, that his Honour erred in having made the costs order without first having heard from the parties and secondly, in acting upon a wrong principle in not making an order for indemnity costs for the total costs of the notice of motion in circumstances where Stacks had made offers of compromise. One offer of compromise was made on 4 August 2010 and offered to settle the notice of motion in the sum of $150,000 inclusive of costs. Stacks also made two other offers of compromise purportedly pursuant to UCPR, r 20.26.

183 Following a communication from the Court after the hearing, Stacks accepted that to the extent that it had purported to make offers of compromise under the rules, those offers were ineffective as Calderbank offers: see Old v McInnes and Hodgkinson [2011] NSWCA 410.

184 Stacks submitted that his Honour nonetheless erred in refusing to make an indemnity costs order for the total costs of the notice of motion for two reasons. They contended, first, that his Honour erred in the exercise of his discretion in reducing the costs order by one third. Secondly, they contended that his Honour should have accepted that the offer of settlement made in the letter of 4 August 2010 represented a significant compromise of the proceedings such that an order for indemnity costs of the whole of the notice of motion should have been made. It is convenient to first deal with the question of the offers of compromise.

185 At the time of delivering judgment on the notice of motion, his Honour, at [73], gave the following reasons for the costs order he was proposing to make:

"Insofar as the Notice of Motion is concerned, I have earlier noted the length of the interlocutory hearing for costs. It developed into a level of detail which I think ultimately was unnecessary and irrelevant to the issues which I have considered. It would not be reasonable to require Keddies to totally indemnify Stacks for the totality of the Amended Notice of Motion. Accordingly, I shall order that only a proportion of those costs should be paid by Keddies."

186 His Honour directed that any application to vary the costs order be notified to his Honour's associate within seven days. Stacks made an application to do so in which they relied, in particular, on the offer made in the letter of 4 August 2010 and the two offers they purported to make under the rules.

187 On 13 May 2011, his Honour rejected Stacks' application, stating:

"There is, in my view, no doubt that the offers made were reasonable offers, and, subject to the matter which I intend to refer to in a moment, would ordinarily have justified the applicant receiving indemnity costs, pursuant to the principles underpinning Calderbank offers.

...

The qualifying factor to which I have just referred is this. In the reasons for judgment, I pointed out that a considerable part of the hearing and the preparation for it, was taken up with issues which ... were unnecessarily ventilated. In my judgment I did not expressly say so, but it may be taken that that was a reference to the s 99 claim.

... given what occurred at the hearing, I am not minded to depart from the provisional costs order that I made on 4 February 2011."

188 Stacks submitted that the offer of 4 August 2010 represented a significant compromise of the proceedings in circumstances where Mr David Stack had estimated the costs of the professional negligence proceedings to be in excess of $180,000 and the costs of the hearing of the notice of motion as at the date of the offer to be in excess of $30,000.

189 There is a considerable body of case law relating to the award of costs following the making of a Calderbank offer. It is unnecessary to review it all. However, a number of essential legislative and legal principles need to be kept in mind in determining whether to make a favourable costs order when Calderbank offers have been made.

190 The starting point is the Civil Procedure Act, s 98, which provides that costs are in the discretion of the court. Section 98 operated subject, inter alia, to the rules of court. The general rule is that costs follow the event unless the court determines that some other order should be made as to the whole or any part of the costs: UCPR, r 42.1. Costs ordered to be paid are assessed on the ordinary basis unless the court otherwise orders: UCPR, r 42.2. The making of a Calderbank offer is one circumstance in which the court might exercise its discretion under r 42.2 to make an order other than on the ordinary basis.

191 There is both a public policy and a private interest in encouraging offers of compromise. In South Eastern Sydney Area Health Service v King [2006] NSWCA 2 (a case dealing with an offer of compromise under the rules of court), Hunt AJA (Mason P and McColl JA agreeing), at [83], stated the purpose of the rules of court as being:

"... to encourage the proper compromise of litigation, in the private interests of the litigants and in the public interest of the prompt and economical disposal of litigation."

192 The same policy and purpose underlies the making of an advantageous costs order where a Calderbank offer has been made: see Leichhardt Municipal Council v Green [2004] NSWCA 341; Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322. In Leichhardt Municipal Council v Green, Santow JA (Bryson and Stein JJA agreeing) said, at [14]:

"... the practice of Calderbank letters is allowed because it is thought to facilitate the public policy objective of providing an incentive for the disputants to end their litigation as soon as possible. Furthermore, however, it can be seen as also influenced by the related public policy of discouraging wasteful and unreasonable behaviour by litigants."

193 The public policy in encouraging settlement now has statutory underpinning in the Civil Procedure Act, s 56 and the overarching principle of the just, quick and cheap settlement of disputes

194 Notwithstanding the encouragement to settle at the risk of an adverse costs order being made, the court retains its ultimate discretion as to the award of costs. In the case of a Calderbank offer, it is for the party seeking the order to satisfy the court that it is appropriate for an order to be made in its favour. In the present case, his Honour considered that because Stacks had unnecessarily run the s 99 costs issue, he was not prepared to give full credit to Calderbank offer. That was a discretionary judgment requiring House v The King [1936] HCA 40; 55 CLR 499 error for this Court to intervene. In my opinion, there was no such error.

195 However, for the reasons I have given, Stacks have succeeded on the s 99 costs issue. Accordingly the basis for the exercise of the costs discretion falls to be revisited by the Court. The offer, as found by his Honour, was reasonable and it represented a significant compromise by Stacks. In my opinion, Stacks should have an award of the whole of the costs of the notice of motion on an indemnity basis.

ORDERS

196 The orders I propose are:

1. Appeal dismissed;

2. Cross-appeal allowed;

3. Set aside order (2) made by the trial judge;

4. Order that the appellants pay the respondent's costs of the notice of motion, those costs to be on an indemnity basis as and from 4 August 2010;

5. Order that the appellants pay the respondent's costs of the appeal and the cross-appeal.

197 BARRETT JA: I agree with Beazley JA.

198 SACKVILLE AJA: I agree with the orders proposed by Beazley JA. I agree with her Honour's reasons for those orders, except that I prefer to reserve my opinion on the view expressed by her Honour in [104] of the judgment.

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Decision last updated: 17 August 2012