Recent decisions such as Amir Ashrafinia v Mohammad Reza Ashrafinia [2012] NSWSC 500 (“Ashrafinia”) and Cranes ‘R’ Us Pty Ltd v Busselton Mini Crane Hire Pty Ltd [2012] WADC 24 (“Cranes”) illustrate the importance of solicitors ensuring that they have been validly retained before accepting instructions to act in litigious matters for a company.

The Ashrafinia Case

A challenge to the solicitor’s retainer arose in the recent decision of Ashrafinia. In Ashrafinia, one of the defendants brought a claim against the solicitor alleging that the solicitor brought proceedings without authority. The defendants contended that, first, the notice period of the directors’ meeting which purported to authorise the solicitor was not reasonable and, second, that a quorum was not present at the directors’ meeting which purported to authorise the solicitor to initiate the proceedings on behalf of the company.

Slattery J found that the lack of notice was not grounds to impugn the solicitor’s authority as a short time period for notice was reasonable for a company which had at most, three directors. The defendant had not adduced sufficient evidence to show the practice of the board of directors in relation to the giving of notice for directors’ meetings and the nature of the business at the directors’ meeting was urgent.

The court upheld the second contention, that the resolution was invalid for the lack of quorum. The Court considered previous authorities such as Hillig v Darkinjung (No. 2) [2008] NSWCA 147 and Zimmermann v Wales [2002] NSWSC 447 in exercising its discretion not to order costs against the solicitor.  According to Slattery J, the following factors guide the exercise of discretion not to order costs against the solicitor:

• First, there were resolutions presented to the solicitor which showed that the solicitor was authorised to act in the proceedings – the solicitor did not act recklessly;
• Second, the invalidity of the resolutions was not apparent on the face of the resolutions presented to the solicitor;
• Third, because there was urgency in obtaining instructions and commencing the proceedings, the Court found that the solicitor was “not to be judged by a standard that might apply to a more extended decision-making process”;
• Fourth, the solicitor did not press on to act for the company when his retainer was queried;
• Fifth, the solicitor’s involvement did not cause the defendant to incur a substantial burden of costs; and
• Finally, the solicitor’s involvement was not a significant cause of vacation of hearing dates in the matter, which was relevant to the issue of costs.

Previously, courts in New South Wales have ordered solicitors to pay costs when the solicitor had taken unauthorised steps in litigation.  Where a solicitor acted without authority for one of several parties, the solicitor, subject to discretionary considerations, may be ordered to pay the other party’s costs as were attributable to the parties for which the solicitor purported to act being joined as parties.

In Zimmermann v Wales, a solicitor was instructed to commence proceedings by two out of three directors of the company. There were doubts as to whether the one of the directors who instructed the solicitors was validly appointed as the “appointment” took place at a meeting which lacked a quorum.  Bryson J concluded that the purported meeting was not a general meeting of the company and disagreed with the authority that the court’s jurisdiction to order costs was founded on the premise that

a solicitor who did not have authority to represent a plaintiff is liable to other parties on an implied contract that he had authority.

Despite the consideration that an order of costs against solicitors whose retainer is challenged is a discretionary exercise, Bryson J ordered the solicitors in Zimmermann v Wales to pay the legal costs of the defendants on two grounds.  First, the solicitors were aware of unresolved issues concerning the capacity of the two directors to properly retain solicitors but they

did not take any steps to review and establish on a proper basis whether or not [the directors] were in a position to give instructions and commence proceedings on behalf of the company.

Second, the solicitors were in a better position than the defendants to determine whether they had been retained with authority. Bryson J stated that the solicitors should have directed their attention to the question of whether two directors were able to make the decision to bring proceedings, instruct solicitors, and whether there were irregularities with the decision before the solicitor accepted the instructions.

The Court of Appeal in Hillig v Darkinjung confirmed Bryson J’s approach in Zimmermann v Wales noting that the power to make costs orders is a matter for the court’s discretion.  The efficacy of certain company resolutions were part of related proceedings in Hillig and the court considered whether these resolutions effectively authorised the solicitor to act. It was found that the solicitor was not able to determine, by reference to objective facts, whether or not the relevant company resolutions were effective and whether or not the company and its directors had the authority to retain him. McColl J also noted that where a solicitor is placed on notice of a challenge to authority to act, the solicitor should attempt to determine whether the client’s authority to retain the solicitor can be objectively determined.

As there was an arguable case in the related proceedings as to whether the resolutions were ineffective, the court held that the solicitor was entitled to proceed on the basis that the respondents had authority to retain him to act for the company and declined to order costs against him.

The Cranes Case: a recent Western Australian decision

However, Cranes, a decision handed down by the District Court of Western Australia illustrates a situation when an order for costs will be made against a solicitor where a company did not have authority to instruct the solicitor to commence proceedings on behalf of the company.

The plaintiff / claimant company had lodged a claim in the Magistrates Court of Western Australia for unpaid crane hire, labour, wages and other sums against the defendant.  The claimant company obtained default judgment and the defendant made an unsuccessful application to set aside the default judgment.

The director of the claimant company, Mr. Demarte, was also a director of the defendant company. Mr. Demarte filed a notice of discontinuance purportedly on behalf of the claimant company to discontinue the whole of the judgment (and presumably, the proceedings).

The Magistrates Court ordered the removal of the notice of discontinuance and dismissed the application to set aside the default judgment.  The court found that while the issue of the lack of authority to commence proceedings amounted to an arguable defence, it was not in the interests of justice for judgment to be set aside.  The defendant appealed to the District Court of Western Australia.

The District Court ‘[s]omewhat reluctantly’ upheld the appeal, saying:

there having been no resolution of the company (with or without a meeting) in which the board authorised [the director of Cranes R Us] to retain a solicitor to institute these proceedings, and there being no express delegation of that power to him and no material tending to establish any implied delegated power to institute proceedings on behalf of the claimant, he lacked authority to do so. The company has not concurred in his institution of the proceedings. His assertion, taken at its highest, that he exclusively manages the company still does not give him the authority to institute proceedings on its behalf.

It may well have the effect of estopping the claimant from asserting that any contract [the director] has entered into on behalf of the company is unauthorised, but it does not give him authority to institute proceedings on behalf of the company without a formal or informal resolution of the directors.

The director of the claimant company claimed that his power to institute proceedings on behalf of the company arose from a delegation of power by the directors. Section 198D of the Corporations Act 2001 (Cth) (“the Act”) enables directors of a company to delegate their powers to a single director who must exercise his or her powers in accordance with any directions of the directors.

However, there was no evidence of any resolution delegating the necessary authority to the director to commence proceedings. Sweeney DCJ found that the director did not have the authority to instruct a solicitor to commence proceedings on behalf of the company and as result, the proceedings were a nullity.  Accordingly the proceedings were ordered to be struck out with orders that the solicitor for the claimant company pay the defendant’s costs.

Putting it in practice  

In light of the recent decisions in Ashrafinia and Cranes, prudent solicitors should ensure that their retainer has been properly approved by the directors with a valid resolution and that the directors have authority to approve their retainer. It would be reckless to rely on the court’s discretion to award costs when the issue should be able to be properly settled at the commencement of the retainer.

Since authority suggests that a solicitor bears the onus of establishing his or her authority if the retainer is challenged, best practice calls for a current company search to be undertaken prior to execution of a retainer, a retainer (which authorises the commencement of proceedings and delegates the authority to give instructions to a nominated contact of the company) to be executed in accordance with s. 127 of the Act and, if there is any question at all about the circumstances in which the retainer was executed or the position of any directors of the company who have not executed the retainer, that a board resolution be obtained with appropriate resolutions.