In a controversial decision the High Court has held 5-2 that advocate’s immunity does not apply where a lawyer gives negligent advice that leads to settlement of litigation by agreement between the parties, whether or not the settlement is recorded in a consent order. The case is Atwells v Jackson Lalic Lawyers Pty Limited  HCA 16 (4 May 2016), an appeal from the NSW Court of Appeal – the subject of an earlier post: NSW Court of Appeal on whether advocates’ immunity covers negligent advice to settle given at mediation.
Facts (at -)
The first appellant (and another guarantor, not a party to the present litigation) guaranteed payment of the liabilities of a company to a bank. The company defaulted on its obligations to the bank, following which the bank commenced proceedings against the company and the guarantors. The guarantors and the company retained the respondent law firm to advise and act for them in the guarantee proceedings.
When the matter came on for trial the company’s indebtedness was almost $3.4 million. The guarantors’ liability under the guarantee was limited to $1.5 million. On the opening day of the trial the bank certified that the total amount owing under the guarantee, including interest and enforcement costs was $1.85 million.
Later on the first day of trial, counsel for the guarantors informed the Court that the proceedings had been settled on terms to the effect that judgment would be entered against the guarantors and the company for the full amount of the company’s indebtedness to the bank ($3.4 million), and the bank would not seek to enforce the order for payment of that amount if the guarantors paid to the bank $1.75 million on or before 19 November 2010, a date approximately 5 months after the settlement.
These terms were reflected in a consent order for judgment in the amount of $3.4 million made by the Court. The Court noted the conditional non-enforcement agreement between the parties, but this was not reflected in the order of the Court.
The guarantors failed to meet their initial payment obligation. An attempt to set aside the settlement as an unenforceable penalty was dismissed.
The appellants (the first appellant and the first appellant’s trustee in bankruptcy) commenced proceedings against the respondent alleging it was negligent in advising the guarantors to consent to judgment being entered against them in the terms of the consent orders, and in failing to advise them as to the effect of the consent orders.
The respondent accepted for the purposes of the appeal that it was negligent in advising its guarantor clients to sign the consent order and consent to judgment against them in the amount of $3.4 million, and that a verdict and judgment be made or given, and entered for the bank against them and the company for $3.4 million, when at most their liability to the bank was $1.85 million (at ). However the respondent contended that it was immune from suit by virtue of advocate’s immunity.
The majority’s decision (French CJ, Kiefel, Bell, Gageler and Keane JJ)
The majority allowed the appeal and held that the test for the scope of advocate’s immunity, as stated in D’Orta-Ekenaike v Victoria Legal Aid (2005) 223 CLR 1 and Giannarelli v Wraith (1988) 165 CLR 543 is not satisfied where the work of the advocate leads to an agreement between parties to litigation to settle their dispute (at -):
“No doubt an advice to cease litigating which leads to a settlement is connected in a general sense to the litigation which is compromised by the agreement. But the intimate connection required to attract the immunity is a functional connection between the advocate’s work and the judge’s decision. As Mason CJ said in Giannarelli, the required connection is between the work in question and the manner in which the case is conducted in Court … [Upon consideration of the reasoning in D’Orta] the public policy, protective of [the finality of litigation], which justifies the immunity at the same time limits its scope so that its protection can only be invoked where the advocate’s work has contributed to the judicial determination of the litigation.
In short, in order to attract the immunity, advice given out of Court must affect the conduct of the case in Court and the resolution of the case by that Court. The immunity does not extend to preclude the possibility of a successful claim against a lawyer in respect of negligent advice which contributes to the making of a voluntary agreement between the parties merely because litigation is on foot at the time the agreement is made. That conclusion is not altered by the circumstance that, in the present case, the parties’ agreement was embodied in consent orders.”
The majority held that the consent order and associated notation by the Court reflected an agreement of the parties where no exercise of judicial power determined the terms of that agreement or gave it effect as resolving the dispute:
“The consent order may have facilitated the enforcement of the compromise, but it was the agreement of the parties that settled its terms.” (at )
The minority’s decision (Nettle and Gordon JJ)
In separate judgments Nettle and Gordon JJ would have dismissed the appeal.
Nettle J agreed with the reasons given by Gordon J, and added some reasons concerning the majority’s decision.
Whilst Nettle J agreed with the majority’s view that advocate’s immunity from suit does not extend to advice unless it is advice which “moves the case in Court toward a judicial determination”, he did not accept the majority’s reasoning that it followed that the immunity may not apply to advice to settle, or not to settle a proceeding:
“The purpose of the advocate’s immunity is to avoid the re-litigation in collateral proceedings for negligence, or other civil cause of action, of issues determined in the principal proceedings. As Gordon J explains, it is based in policy that a controversy should not be re-opened by a collateral attack which seeks to demonstrate that a judicial determination was wrong. Where, therefore, a final order has been made resolving litigation, a claim that, but for an advocate’s conduct, there would have been a different result is necessarily objectionable.
When a matter is settled wholly out of court, the settlement does not move the litigation toward a determination by the court. Consequently, advice to enter into such a settlement does not attract the immunity. But where a matter is settled out of court on terms providing for the court to make an order by consent that determines the rights and liabilities of the parties, the settlement plainly does move the litigation toward a determination by the court.
It is true that, in the latter class of case, the determination will largely be the result of agreement as opposed to a working out by the court of the parties’ rights and liabilities. But even where the parties are agreed on the orders which should be made for the determination of their rights and liabilities, it remains for the court to be satisfied that it is appropriate so to order. Thus, for one party later to contend that it was negligent of an advocate to advise in favour of such a settlement will involve calling into question the rectitude of the court’s order.” (at -)
Nettle J gave the following examples, which indirectly illustrate the risk of re-litigation now faced by lawyers in consequence of the majority’s decision:
“To take a simple case for example, suppose that a plaintiff’s claim is for $200,000 and that the proceeding is settled on terms that the defendant pay the plaintiff $150,000 and that the parties consent to an order that the plaintiff’s claim be struck out or dismissed without an adjudication upon the merits. In such a case, the order to strike out or dismiss the proceeding without any adjudication on the merits would not, in any sense, determine the rights and liabilities of the parties. Hence, a claim that an advocate was negligent in advising the defendant to settle on those terms would not involve any attack on the order. The attack would be confined to the defendant’s contractual obligation under the terms of settlement to pay the plaintiff $150,000. In those circumstances the immunity would not apply.
By contrast, if the plaintiff’s claim were settled on terms that the parties consent to an order that the defendant pay the plaintiff $150,000, and such an order were made, the order would determine the rights and liabilities of the parties. It would determine that the extent of the defendant’s liability to the plaintiff was $150,000. And, in such a case, a claim that the advocate was negligent in advising the defendant to consent to the order would involve a collateral attack on the order. It would require the defendant to establish that, but for the advocate’s negligence in advising the defendant to consent to the order, the court would have determined that the defendant’s liability to the plaintiff was less than $150,000, and thus that the order that the defendant pay the plaintiff $150,000 was, in that sense, wrong.
It would be similar if the plaintiff’s claim were settled on terms that the defendant pay the plaintiff $150,000, the proceeding be struck out and, in default of timeous payment, the defendant consent to judgment for $200,000; and if, following default by the defendant, the plaintiff successfully moved for judgment for $200,000 on the terms of settlement. The court’s order that the defendant pay the plaintiff $200,000 would determine the rights and liabilities of the parties, namely, that the defendant was liable to the plaintiff for $200,000. In those circumstances, a claim that the defendant’s advocate was negligent in advising the defendant to enter into the terms of settlement would also involve a collateral attack on the order. It would require the defendant to establish that, but for the advocate’s negligence in advising the defendant to enter into the terms of settlement, the court would have determined that the defendant’s liability to the plaintiff was less than $200,000, and thus that the order that the defendant pay the plaintiff $200,000 was, in that sense, wrong.
By further contrast, however, advice to reject an offer of settlement will, if accepted, invariably affect the conduct of the case in court. To persist with the example of the claim for $200,000, if an advocate advised the defendant against accepting an offer to settle for $150,000 and at the conclusion of the trial the court gave judgment for the plaintiff for $190,000, a subsequent claim by the defendant that the advocate was negligent in advising against settlement would call into question whether the advocate had a reasonable basis for so advising. As the majority observe, in principle that might not necessitate establishing that the judgment was wrong. But it would necessitate re-litigation of issues determined at trial, including: the strength of the plaintiff’s case; probably, the appropriate weight to be given to the evidence, taking into account considerations of credibility and reliability of witnesses; and the correct application of legal principle and authority. That is the kind of exercise which D’Orta was calculated to avoid and, in my view, it is not one which should now be sanctioned.” (at -)
Nettle J concluded that the determination of the appellants’ claim would require the re-opening of the controversy between them and the bank by way of an impermissible collateral attack that would seek to demonstrate that the judicial determination embodied in the consent order that there be judgment for $3.4 million was not a just determination of the first appellant’s liability to the bank (at ). Nettle J would therefore have dismissed the appeal.
Gordon J would have dismissed the appeal on the basis of the principle of finality:
- the impugned work of the respondent law firm was done directly for the final quelling of the controversy by the exercise of judicial power, that is, it was work “intimately connected with” work in Court (D’Orta);
- the appellants’ central claim that they were not indebted to the bank in the amount recorded in the judgment involved a direct, and impermissible challenge to finality.
It would appear that as a result of this judgment one can expect to see a rise in litigation against practitioners who allegedly give negligent advice to settle or not to settle litigation, and a corresponding rise in professional indemnity premiums.