The Judicial Committee of the Privy Council Decisions

Harley v. McDonald (New Zealand) [2001] UKPC 18 (10 April 2001)

Privy Council Appeal No. 9 of 2000 and 50 of 2000

Raylee Patricia Harley Appellant

v.

Robert McDonald Respondent

and

Privy Council Appeal No. 50 of 2000

Glasgow Harley Appellant

v.

Robert McDonald Respondent

FROM

THE COURT OF APPEAL OF NEW ZEALAND

JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL

DELIVERED the 10th April 2001

- - - - - - - - - - - - - - - - - - - - - - - - - - -

Present at the hearing:-

Lord Hope of Craighead

Lord Clyde

Lord Hobhouse of Woodborough

Lord Scott of Foscote

Dame Sian Elias

[Delivered by Lord Hope of Craighead]

1. This is an appeal from an order made by the Court of Appeal of New Zealand (Gault, Henry, Thomas, Keith and Tipping JJ) on 11 August 1999 ([1999] 3 NZLR 545) dismissing the appellants' appeals against an order for costs which was made against them jointly and severally in the High Court by Giles J on 24 September 1998 ([1999] 1 NZLR 583). The respondent has applied for special leave to cross-appeal against an order of the Court of Appeal which was made in same proceedings dismissing his cross-appeal against the order made by Giles J on quantum.

2. The first appellant, Raylee Patricia Harley (Mrs Harley), was admitted to the bar in 1985. She worked in private practice as a solicitor until 1 January 1992, since when she has been in practice as a barrister sole. These proceedings arise from the fact that she acted as counsel for the respondent, Robert McDonald (otherwise known as Robert John Erwood), in proceedings by Mr McDonald in the High Court. They had been brought against FAI (NZ) General Insurance Co Ltd (FAI) and the New Zealand Law Society to recover money which Mr McDonald had lost following the collapse of Renshaw Edwards, a New Zealand law firm, in January 1992. The second appellant, Glasgow Harley, is a firm of solicitors practising in Nelson. Glasgow Harley acted in those proceedings as Mr McDonald's solicitors.

3. In May 1992, following the collapse of Renshaw Edwards, Mr McDonald obtained summary judgment against the former partners of the firm for NZ$423,488.26 with interest at 21% compounded monthly to the date of payment. But all the former partners were declared bankrupt and the sum for which he had obtained judgment was not paid. Mr McDonald then sued FAI, the professional indemnity insurer of Renshaw Edwards, under section 9 of the Law Reform Act 1936. That section enables a plaintiff in certain circumstances to claim against a defendant's insurer, with the leave of the Court under section 9(4) of that Act. In February 1993 he also made a claim against the Solicitors' Fidelity Guarantee Fund which is administered by the Law Society. Section 169 of the Law Practitioners Act 1982 provides that the Fund is to be held and applied for the purpose of reimbursing clients of a solicitor who have suffered pecuniary loss by reason of theft by the solicitor or his employee or agent. In May 1993 the Law Society informed Mr McDonald that his claim against the Fund was admitted to the extent only of $34,710.59 as he had not established that the money which made up the balance of his claim had been stolen. Mr McDonald then filed a claim against the Law Society which he added to the proceedings which he had brought against FAI.

4. The case came before Giles J for trial in October 1997. At the end of the trial, for the reasons given in a judgment which he delivered on 11 December 1997, the judge dismissed Mr McDonald's claim against FAI. But he held that he was entitled to succeed against the Law Society and he awarded him the sum of $212,843.67 with interest at 10% from 6 May 1995 until the date of judgment. Mr McDonald did not appeal against the judge's dismissal of the claim against FAI, but he appealed against the amount of the award in his favour against the Law Society. On 7 December 1999 the amount which Giles J awarded to him was increased on appeal. The Court of Appeal ordered interest to be paid at the rate of 9% on a quarterly compounding basis from 1 November 1992 to the date of judgment: McDonald v New Zealand Law Society (unreported) (CA 33/98, 7 December 1999). The judgment sum has yet to be agreed, but it is likely to exceed $388,000.

5. In a judgment which he delivered on 19 February 1998 Giles J awarded FAI costs of $115,606.46 against Mr McDonald. As the amount which Mr McDonald had recovered from the Law Society including interest and costs was less than an amount which the Law Society had offered to him before the trial by way of settlement, he awarded the Law Society costs against Mr McDonald of $30,000. In his judgment of 24 September 1998 he ordered the appellants jointly and severally to pay personally to Mr McDonald the sum of $65,000 as a contribution to the costs which Mr McDonald had to pay to FAI. It is that order, which was upheld by the Court of Appeal on 11 August 1999, that is the subject of this appeal.

6. Mr Farmer QC for Mrs Harley advanced three grounds in support of her appeal. These were: that there had been a breach of natural justice by the trial judge; that the High Court had no power to order a barrister sole to pay or contribute to her client's costs personally; and that in any event Mrs Harley's conduct was not such as to amount to a serious dereliction of her duty to the Court. Mr Wilson QC and Mr Findlayson for the New Zealand Bar Association, interveners, made submissions in support of Mr Farmer's argument on the second ground. Mr Taylor for Glasgow Harley did not dispute the jurisdiction of the High Court to make an order for payment of costs against a solicitor. But he submitted on their behalf that in their case too there had been a breach of natural justice, and that their conduct also was not such as to amount to a serious dereliction of duty to the Court. Mr McDonald did not enter appearance to oppose the appeal and he was not represented. But their Lordships heard submissions from Mr McCoy, who had appeared briefly on Mr McDonald's behalf at an earlier stage in these proceedings and had been appointed by the Solicitor General to appear before the Board as amicus curiae. The appellants opposed Mr McDonald's application for special leave to cross-appeal against the judgment of the Court of Appeal on quantum.

Factual background

7. The arguments which were presented to the Board raise important points of principle with regard to the jurisdiction of the High Court to order counsel and solicitors to pay the costs of a litigation personally. But it is first necessary, in order to put these arguments into their proper context, to describe the complex history of these proceedings in more detail. The appellant's first argument, which is directed to the issue of natural justice, cannot be fully understood without a complete understanding of the facts.

8. The history can be divided up into two distinct chapters. The first relates to the substantive proceedings in the High Court in the action which Mr McDonald brought against FAI and the Law Society. The second relates to the subsequent proceedings as to costs which led to the order by Giles J that the appellants pay part of Mr McDonald's costs personally. Part of this narrative is based on an affidavit by Mrs Harley sworn on 29 March 1999 which was before the Court of Appeal when it heard the appeal against Giles J's order. For reasons that will be mentioned later, Giles J made his order without having had the benefit of the account of events which is contained in that affidavit.

9. Mr McDonald had invested various sums of money with Renshaw Edwards between June 1988 and October 1989. He lost all his money when the firm collapsed in January 1992. His proceedings for summary judgment were based upon pleadings which alleged a breach of a personal guarantee by Mr Renshaw and a failure by the firm to account as trustees. The summary judgment which he obtained against the firm on 5 May 1992 awarded him compound interest at the rate of 21% as provided for in the guarantee. The appellants did not act for him in those proceedings. By February 1993 it had become clear that the judgment would not be paid as all the former partners of the firm had been declared bankrupt. So Mr McDonald lodged a claim against the Solicitors' Fidelity Guarantee Fund alleging that his money had been misappropriated by theft and that he was entitled to be reimbursed by the fund under section 169 of the 1982 Act.

10. On 6 May 1993 he was advised by the Law Society that, while his claim was admitted in part, he would have to prove that the money which made up the balance of his claim had been stolen and that in any event it was not accepted that the Fund was liable to meet loss by theft of interest. The total amount of capitalised interest was therefore deducted from his claim. The Law Society also told him that the Fund was insolvent and that it would be four years or more before any payment of his claim could be made. In McDonald v. New Zealand Law Society (7 December 1999) Blanchard J. observed at paras [35] – [37] that the position of the Law Society when a claim was made on the Fund was that of a trustee and not that of an ordinary defendant who could simply leave the progress of the claim to the plaintiff. He said that in this case a proper assessment by the Society should have led it towards a substantially greater admission. But no further admission was made, and section 171(2) of the 1982 Act provides that no person shall be entitled, without leave of the Council of the Law Society, to commence any action in relation to the Fund until he has exhausted all relevant rights of action and other legal remedies against the defaulting solicitor or any other person in respect of the loss suffered by him. So Mr McDonald, relying on section 9 of the 1936 Act, turned his attention to the possibility of making a claim against FAI.

11. FAI had undertaken to provide professional indemnity insurance to Renshaw Edwards under two policies. These differed in their wording and exceptions, as there were different partnership arrangements between two of the Renshaw Edwards partners, Mr Renshaw and Mr Edwards, on the one hand, and a third partner, Mr Basil-Jones, on the other. On 5 October 1992 FAI disclaimed liability under the Renshaw Edwards policy on the ground that it had avoided the policy for material non-disclosure. The Law Society nevertheless issued proceedings against FAI in the High Court on 21 April 1993, claiming that it was entitled to be subrogated to the rights and remedies of those claimants whose claims had been admitted and paid by the Fund.

12. On 10 June 1993 Mr McDonald's then solicitors Richardson Chapman & McCardle asked Mrs Harley to accept instructions from them to act as counsel on his behalf. She was asked to do this on the basis that, as they had been having difficulties with Mr McDonald about fees, her fees would be met from funds recovered from either FAI or the Law Society. She was sent copies of the statement of claim, judgment and affidavit by Mr McDonald under which Mr McDonald had been granted summary judgment against Renshaw Edwards on 5 May 1992. She was told that Mr McDonald wanted her to prepare proceedings for issue against FAI under section 9 of the 1936 Act. She understood from her communications with Mr Richardson that Mr McDonald's former counsel and other barristers and solicitors had advised that such proceedings were appropriate.

13. On 6 October 1993 Mr McDonald delivered his personal file on the case to Mrs Harley's chambers to provide her with further information so that she could decide whether to accept these instructions. He was an unusually difficult client. It was at his choice that no meeting took place between them on that or any other occasion. He insisted that his counsel and solicitors communicate with him only by letter. He provided a PO Box address, but this was held by a third party. He refused to give information as to how he could be contacted directly by telephone or by fax.

14. In a letter to Mrs Harley dated 31 October 1993 Mr McDonald told her that he was anxious that she issue proceedings against FAI as, the sooner proceedings were issued, the sooner they would be able to negotiate with them. He also asked her to apply to the court for a waiver of all disbursements as she was acting for him on a delayed payment basis. On 25 November 1993 Mrs Harley wrote to Mr McDonald advising him to await the outcome of proceedings which had been brought against FAI in relation to another law firm and then to assess the possibilities. Mr McDonald replied by letter dated 29 November 1993 in which he rejected that advice. He said that the merits of the case were very strong, and he insisted that he wanted her to issue proceedings under section 9 of the Law Reform Act 1936 against FAI immediately. She later received a telephone message and two further letters from him to the same effect.

15. On 13 February 1994 Mrs Harley wrote to Mr McDonald advising him that she was unable to accept instructions to act for him because of other work commitments and she returned his files. But Mr McDonald prevailed upon her to reconsider her refusal, and she did so. She was provided by the Law Society's counsel with a copy of the Society's claim against FAI under section 9 of the 1936 Act in reliance on the Renshaw Edwards policy. She used that document as a precedent for the drafting of Mr McDonald's statement of claim against FAI. In an exchange of letters dated 22 and 29 April 1994 Mr McDonald agreed to meet Mrs Harley's fees on the day any settlement of his claim was effected. She issued the proceedings against FAI on his behalf on 19 July 1994.

16. Their Lordships think it right to observe that, although they have not been shown any evidence that Mrs Harley gave detailed consideration at this stage to the strength of Mr McDonald's case, there were a number of reasons for thinking that she cannot reasonably be criticised for issuing these proceedings against FAI. She had advised her client that it would be better to await the outcome of other proceedings and then to assess the possibilities, but he had firmly rejected that advice. The Law Society was giving no encouragement to the idea that progress would be made with his claim against the Fund so long as the position regarding his claim against FAI remained unresolved. So it was clear that something had to be done on Mr McDonald's behalf to resolve this difficulty. Furthermore, despite the fact that FAI had disclaimed liability under the Renshaw Edwards policy, the Law Society had issued proceedings against FAI under the same policy in respect of those claims which had been admitted and paid by the Fund. The proceedings which Mrs Harley issued on behalf of Mr McDonald followed the precedent which had been set by those proceedings.

17. On 2 November 1994 FAI applied to strike out Mr McDonald's claim on the ground, inter alia, that no reasonable cause of action was disclosed. But on 1 February 1995 their strike out application was dismissed by consent. On the same date leave to proceed against FAI in respect of the Renshaw Edwards policy was given, also by consent, under section 9(4) of the 1936 Act. Up until this stage Richardson Chapman & McCardle had continued to act as Mr McDonald's solicitors, but in March 1995 Mr McDonald terminated their instructions. At Mrs Harley's suggestion Glasgow Harley were retained by him in their place as his solicitors. She explained to them that they were only likely to receive payment of their fees if the claims against either FAI or the Law Society were successful. On 14 March 1995 a notice of change of solicitor was filed in the High Court.

18. On 6 June 1996 a Directions Conference was held by Barker J in the High Court. In his minute of the conference he noted that, after discussion, Mrs Harley considered that the Law Society should be joined as defendant in these proceedings on the basis that Mr McDonald's money may have been stolen by Renshaw Edwards and the Fund should pay him for his loss. On 13 June 1995 Mrs Harley added a claim against the Law Society. She also filed an amended statement of claim against FAI adding a further cause of action based on the Basil-Jones policy. Giles J was later to observe (judgment of 11 December 1997, p. 8):

"…the Society was not formally brought into this proceeding as a defendant until June 1996 and then only at the very sensible urgings of Barker J who perceived, in the course of a Directions Conference, that there was real potential for the plaintiff to 'fall between the cracks' in the event that the very specific pleading, which relied upon the summary judgment, might not prevail in favour of the plaintiff."

19. These steps were followed by applications by both FAI and the Law Society to strike out. On 8 July 1996 FAI filed an application to strike out the claim based on the Basil-Jones policy. On 15 August 1996 the Law Society filed an application to strike out the claim against it on the ground that leave of the Council of the Law Society had not been obtained and that the statement of claim did not disclose any grounds of claim against either the Fund or the Society. Reliance was placed on section 171 of the 1982 Act and the fact that Mr McDonald had not exhausted his remedies against FAI.

20. On 11 October 1996, after a contested hearing, Salmon J granted Mr McDonald leave to proceed against FAI in respect of the Basil-Jones policy, and he dismissed FAI's application for the claim based on that policy to be struck out: McDonald v FAI (NZ) General Insurance Co Ltd (1997) 9 ANZ Insurance Cases 77,011. On 29 October 1996 the Law Society's application to strike out the claim against it was dismissed by consent. On 16 December 1996 FAI filed an application to set aside Mr McDonald's summary judgment of 5 May 1992 against Renshaw Edwards on the grounds that FAI was a non-party to that judgment who was prejudiced by it because Mr McDonald was relying on that judgment in his proceedings against FAI. It was not until 17 September 1997, a month before the commencement of the trial in those proceedings, that FAI filed a notice of discontinuance of that application.

21. Here again their Lordships think it right to observe that there are a number of reasons for thinking that Mrs Harley could not reasonably be criticised for maintaining the proceedings against FAI up to this stage. The position of the Law Society remained unchanged. It appeared still to be necessary, if progress was to be made with the claim on the Fund, to establish whether a remedy was available against FAI. Mr McDonald had been given leave to proceed with that claim, and it had survived two applications for strike out. In addition FAI's application to set aside the summary judgment on the ground that it was prejudiced by it was an indication that their advisers thought that there might be some substance in Mr McDonald's claim. There is no reason to think that, if he had been advised to do so at this stage, Mr McDonald would have been willing to discontinue his claim against FAI.

22. On 8 October 1997, a few days before the commencement of the trial, the Law Society offered to settle Mr McDonald's claim for $450,000 including interest and costs. A previous offer of possible settlement of his claim which the Law Society had received from FAI in July 1995 had been rejected by Mr McDonald, but Mrs Harley had written to the Law Society's counsel on 6 October 1997 saying that Mr McDonald remained willing to settle the proceedings and would consider any reasonable offer that the Society or FAI would make. Mrs Harley responded immediately to the offer of 8 October 1997 by posting a letter to Mr McDonald's post box address that day. Mr McDonald left a telephone message the next day to the effect that he wanted the full amount owing to him, and he confirmed this instruction in a message which he sent by post. Mrs Harley discussed the offer with Glasgow Harley in the light of Mr McDonald's instructions. They were agreed that it could not be accepted as the offer fell well short of his requirements.

23. The trial began before Giles J in the High Court at Auckland on 13 October 1997. That night at about midnight Mrs Harley was awakened from sleep by the telephone. She did not take the call. She heard later that the caller was Mr McDonald. On the second day, after the conclusion of the case for Mr McDonald, FAI applied for dismissal of the claim against it on the ground that no reasonable cause of action had been disclosed. It was submitted that the summary judgment on which Mr McDonald's claim had been based was not directed to allegations of misconduct which were covered by the Renshaw Edwards policy and that, in any event, both policies had been legitimately avoided for material non-disclosure.

24. On 15 October 1997 Giles J dismissed this application. In the course of his oral ruling he made these observations:

"I do not accept … that the statement of claim in the summary judgment proceeding is sufficiently broad to encompass an allegation of misconduct by the solicitors to which the policy responds. However, it has to be acknowledged that, at the time of the summary judgment, the chaotic circumstances which surrounded the Renshaw Edwards' collapse were not known to the plaintiff, nor could they have been. There is now evidence before the Court in the form of the interrogatories, and on the pleadings, which give rise to a situation in which the plaintiff can, in my view, contend that the summary judgment figure, and the claim against the partners of Renshaw Edwards, could be sustained on an alternative basis, which is central to the action in this case against the Law Society, namely, that there was misappropriation by theft or breach of fiduciary obligations or negligence which would fall squarely within the professional indemnity policy and would be within the ambit of section 9…"

He said that he would allow Mrs Harley to make an amendment to that effect because he was satisfied that the evidence was sufficient to take the plaintiff's case to the point where FAI should respond to that issue. He also said that he was not prepared to hold at that stage of the trial that the plaintiff had no reasonable cause of action or prospect of success. These remarks are important, because they indicated to Mrs Harley that the judge's opinion was that her conduct of the case up to that point could not reasonably be criticised.

25. In the course of the same ruling however Giles J repeated a warning which he had given both in the course of opening and at the time of hearing argument on FAI's application for dismissal of the claim. He indicated to Mrs Harley that she needed to reflect carefully on the wisdom of continuing the claim against FAI:

"When I adjourned the matter last evening I indicated to counsel for the plaintiff that she needed to reflect carefully on behalf of her client on two issues. First, whether or not the summary judgment was sufficient for the purposes of section 9 and, secondly, whether the plaintiff was willing and sensibly advised to maintain the claim against FAI, having regard to the acknowledgment that common law principles relating to avoidance remain open, notwithstanding the provision of section 9 of the Law Reform Act 1936.

… in the event that FAI prevails, the plaintiff can expect little sympathy in relation to the issue of costs because counsel for FAI have fairly and squarely put their stake in the ground as to the right of FAI to avoid, and Mrs Harley recognised that that is an obstacle which the plaintiff will need to overcome."

Mrs Harley did not apply for an adjournment, and the trial proceeded to its conclusion on 20 October 1997. On 11 December 1997 Giles J issued a judgment which extended to 100 pages in which he dismissed the claim against FAI but awarded Mr McDonald the sum of $212, 843.67 with interest at 10% from 6 May 1995 to the date of judgment. This was considerably less than the sum at which the Law Society had offered to settle his claim on 8 October 1997.

26. At the end of his judgment Giles J held that FAI was entitled to costs against Mr McDonald and that Mr McDonald was entitled to costs against the Law Society. In regard to FAI's costs he raised for the first time the question whether any award of costs to FAI should be paid in whole or in part by Mr McDonald's solicitors and counsel. Indicating that Mrs Harley should address this issue also, he said

"I require this aspect to be addressed because both in the course of opening and at the time of hearing argument (on 15 October 1997) on FAI's application for dismissal of the claim against it I indicated to counsel for the plaintiff that she needed to reflect carefully on the wisdom of continuing the claim against FAI. I forewarned Mrs Harley that in the event of FAI succeeding the plaintiff could expect little sympathy in relation to costs. FAI has prevailed on grounds fully articulated by [FAI's counsel] two days into the trial and in circumstances where counsel acknowledged the existence of a right to avoid. It is my view that the case against FAI was always weak and it may be that the circumstances are such that Mr McDonald should not have his judgment against the Society eroded by costs which his counsel could and, in my view, should have avoided by more realistically assessing the wisdom of proceeding …

I acknowledge that this is a jurisdiction to be used sparingly and that an error of judgment is generally not sufficient. But where, as here, the basis of the claim against FAI was weak and where an opportunity was provided to counsel to reflect on the appropriateness of continuing, I believe the Court is entitled, in the interests of justice, to closely examine the issue."

27. In a minute of 3 February 1998 Giles J noted that Mr McDonald had instructed new solicitors and counsel. His new counsel was Mr McCoy, who sought to widen the issues which should be taken into account by the judge as to whether Mr McDonald's former solicitors and counsel should be found liable to pay his costs personally. Giles J allowed the new solicitors and counsel to file any further memorandum they might wish on the issue of costs. But he pointed out that he did not have jurisdiction to deal with any dispute between Mr McDonald and the solicitors and counsel who conducted the trial other than the issue as to who should bear any incidence in costs.

28. On 19 February 1998 Giles J delivered his judgment on costs inter partes. He awarded costs to FAI against Mr McDonald amounting to $115,606.46. As the amount of the Law Society's settlement offer was greater than the amount which Mr McDonald had recovered from the Law Society including costs, he awarded costs to the Law Society against Mr McDonald in the sum of $30,000. He went on in his judgment to say this:

"…it would be quite improper for the Court to take jurisdiction in this proceeding over that issue. It will need to be resolved in proceedings between the plaintiff and his former solicitors and counsel. The latest memorandum foreshadows a broad dispute, not only as to the authority to conduct these proceedings, but also as to any obligation on the part of the plaintiff to meet costs rendered by former solicitors and counsel, and as to whether the settlement offer was communicated; if not, as to the legal consequences which flow. Those are all matters which, in my view, will need to be the subject of a particularised statement of claim to be progressed with the advantage of discovery, etc. I do not accept that the inherent jurisdiction to discipline solicitors/counsel would be properly invoked to resolve a dispute of this dimension, and I decline the invitation to do so."

Giles J reiterated his view to this effect in a minute of 10 March 1998, in which he said that the jurisdiction that existed within the framework of the present action was one to consider whether costs should be borne in part by properly instructed counsel. He said that, if Mr McDonald wished to contend that Mrs Harley and Glasgow Harley never had authority to conduct the litigation on his behalf, that would have to be litigated in a separate proceeding.

29. On 22 April 1998 Glasgow Harley made an interlocutory application for an order declaring that Mr T B Harley of Glasgow Harley was entitled to a lien over any proceeds of the judgment against the Law Society for the firm's costs and disbursements, and for an order directing the Law Society to pay the amount of those costs direct to Glasgow Harley from the moneys payable under the judgment. On 1 May 1998 FAI responded by applying for a charging order nisi for payment to it by the Law Society of monies to satisfy the judgment for costs in its favour to be made absolute. The competing lien and charging order applications were opposed. A number of affidavits were filed in respect of them which contained allegations relating to the issues of lack of authority, the pre-settlement offer and the terms of Mrs Harley's retainer which the judge had already ruled were beyond the scope of the costs hearing.

30. On 1 May 1998 Mr McCoy filed a memorandum on Mr McDonald's behalf in which he set out the grounds of his argument that Mr McDonald's former solicitors and counsel should be found personally liable for costs. Despite the judge's previous ruling this memorandum included allegations that the initiation and continuation of the proceedings against FAI were misconceived, that there had been a failure to take any steps to protect Mr McDonald against costs in failing against FAI, in an action where the proceedings against the two defendants were mutually exclusive, that there had been a failure to advise Mr McDonald properly in relation to the Law Society's offer of settlement, that there had been a failure by the solicitors to communicate with Mr McDonald throughout the several years of litigation and that counsel had improperly negotiated and contracted for a contingency fee with Mr McDonald, who was said to be a person under disability.

31. A judicial conference was held on 27 May 1998 at which counsel for Mrs Harley submitted that the points in this memorandum involved factual determinations ranging far outside the conduct of the trial. Giles J upheld this submission, on the ground that the reservation which he had granted was only intended to embrace the incidence of costs of properly instructed counsel arising from the conduct of the trial. In response to this ruling Mr McCoy filed a further memorandum on 5 June 1998 in which he stated that he had now been instructed to pursue the narrow issue on Mr McDonald's behalf.

32. The hearing of the costs issue was then fixed for 7 August 1998. At the outset the question whether the appellants should be held personally liable in costs had been raised by the trial judge as an exercise of his inherent jurisdiction. But it had now become an application by Mr McDonald for an order that the costs payable by him to FAI and the Law Society should be indemnified in whole or part by his former solicitors and counsel. The competing charging order/lien applications were heard by Giles J later on the same day. Mrs Harley was not a party to the charging order/lien applications. But her counsel took the opportunity in the course of the hearing on the costs issue to remind the judge that the affidavits that had been filed in respect of them contained allegations which raised collateral issues which he had previously ruled to be outside the scope of the costs hearing. In reliance on the judge's ruling that the scope of the costs hearing was to be confined to the conduct of the trial Mrs Harley elected not to give evidence. Her understanding was that the facts of what had happened at the trial were known to the judge and that they were not in dispute.

Giles J's judgment

33. Giles J delivered a single judgment dealing with both the costs issue and the charging order/lien applications on 24 September 1998: [1999] 1 NZLR 583. On the question whether Mr McDonald was entitled to an indemnity from his former solicitors and counsel, he ordered that Mr McDonald be indemnified as to the sum of $65,000 by Glasgow Harley and Mrs Harley jointly and severally in respect of the costs which he had been directed to pay to FAI. He dismissed Glasgow Harley's application for a lien over the judgment sum for the amount of its costs and disbursements including Mrs Harley's fee, and he granted FAI's application for the charging order nisi to be made absolute.

34. He summarised his reasons for deciding that Mr McDonald was entitled to an indemnity from his former solicitors and counsel at [1999] 1NZLR 583, pp 593-594:

"Having presided over the trial and having heard the evidence and reviewed the answers to the interrogatories and the material submitted in the bundles of documents, I am forced to conclude that former counsel became single-mindedly obsessed with the notion that the summary judgment procured on the guarantee was all that was necessary to bring this claim within the ambit of section 9 of the Law Reform Act 1936. No consideration or advice appears to have been given to the plaintiff as to the need to establish an insured peril which could bring the policy into play. Moreover, the action was pursued to trial in circumstances where it was acknowledged by counsel that the common law doctrine of avoidance for non-disclosure would apply. And, an objective analysis of the non-disclosure and lack of good faith defence would have demonstrated their inevitable success. On at least two stages in the course of the trial counsel was provided with an opportunity to review the position with the plaintiff. For whatever reason that was not done. There is the added ignominy, from the plaintiff's point of view, that he was completely unaware that a R46A offer of settlement had been made. A 'hopeless' case was pursued without the plaintiff receiving the degree of objective and independent advice he was entitled to as to the risks of so doing. This, in a situation where issues as to authority to act had arisen at the outset of the trial.

I accept Mr Farmer QC's point that often litigation having a degree of novelty about it, is issued and pursued through interlocutory stages with a view to extracting a settlement offer. In my view, that was a naïve expectation is this case for the reasons discussed at the outset of this judgment. However, the plaintiff was obviously aware that the litigation had been issued and that interlocutories were being pursued. To that extent the award of costs to FAI reflects some recovery in respect of those aspects, the plaintiff must bear those costs himself. But the whole position should have been carefully reviewed prior to forcing FAI to embark upon the preparation for trial, and then in pursuing FAI through a fully defended hearing. That was not done. Indeed there was evidence through Mr Harley that counsel refused to take a late night telephone call from the plaintiff in the course of the hearing. If that is so, it was most unwise.

Be that as it may, I am of the view that counsel did not discharge her obligations either to the plaintiff or to the Court in the context of the claim against FAI and its pursuit through preparation for hearing and the stages of the trial. There was no thorough review. There was no discussion with the plaintiff. There was no written advice to the plaintiff. He did not know how forlorn the case was and what the attendant risks were. He had no opportunity to bail out of a hopeless case. The basis of the claim against FAI could not withstand scrutiny. The R 447 application survived only because the Court itself suggested an amendment and because the proposal for the policy was in evidence. But there was a clear warning which was given to counsel which was not heeded. I find arguments addressed by [counsel for Glasgow Harley] that solicitors and counsel considered that there was still a prospect of success and that the matter should be pursued for the purposes of preserving appeal rights rather shallow. Especially when these decisions were made without involving the plaintiff. They cannot be justified solely on the basis of difficulties of contacting him and as to his health."

35. Recalling that the award of costs made to FAI was a total of $115,000 including disbursements and witness expenses, he said that a judgment had to be made as to what part of those costs Mr McDonald should have indemnified by his solicitors and counsel. He said that it was clear that FAI were put to significant costs in preparation and the conduct of the trial. With regard to Mr McDonald's position he said this at p 594:

"The plaintiff was put at risk without being given the kind of objective appraisal required before counsel exposed him to significant financial exposure. To do so was unreasonable, improper and negligent. It is just that the plaintiff make some recovery."

He concluded that, doing the best he could, Mr McDonald should be indemnified to the extent of $65,000 in respect of those costs. He said that he was clear in his own mind that a significant proportion of the costs should be borne by counsel but that the solicitors had elected to accept what he referred to as "this reverse brief" and that they had the conduct of the litigation. He ordered that the solicitors and counsel indemnify Mr McDonald jointly and severally, leaving it to them to reach a sensible accommodation between themselves. Their Lordships note in passing that the judge was wrong to describe Glasgow Harley's entry into the case as a reverse brief. Mrs Harley had previously been instructed by another firm of solicitors. It was only when their instructions had been terminated by Mr McDonald that, at Mrs Harley's suggestion, Glasgow Harley were brought into the case.

36. It is clear from the passages which their Lordships have quoted from this judgment that Giles J did not confine his attention to the narrow issue as to the conduct of the trial which he had previously identified. He made a number of assumptions about the conduct of the case before the trial began as to matters about which Mrs Harley did not think that it was necessary for her to give evidence. It is also clear that much of his reasoning was based on what he saw as breaches of duty by Mrs Harley and Glasgow Harley to their client. Nor did he confine his attention to the question whether they were in breach of their duty to the court. He rejected the arguments advanced by Glasgow Harley's counsel that the jurisdiction of the court should only ever be invoked where there was a serious dereliction on the part of the solicitor of his or her duty to the court and that pursuing a hopeless case was not of itself enough. He said at p 593 that what was required was "conduct which amounts to a serious dereliction on the part of the practitioner". He said that pursing a hopeless case upon instructions would not necessarily attract the liability, that mere mistake or error of judgment would not be enough and that each case would need to be considered on its own facts. But he added that there would be cases where the cumulative effect of those factors were present and that in his view this was one such case.

The Court of Appeal's judgment

37. The judgment of the Court of Appeal [1999] 3NZLR 545 was delivered by Tipping J. In para [21] he noted that Mrs Harley's counsel had made three principal submissions. These were that the judge had no jurisdiction to make the order against her, as she was a barrister not a solicitor; that he had wrongly made factual findings and entertained issues beyond the scope of the issues properly before him; and that, even if the judge had jurisdiction to award costs against Mrs Harley, he was wrong to do so in the circumstances of this case. Much of the judgment was devoted to a careful examination of the first issue as to the jurisdiction of the court make an order for costs against counsel. On this matter he said in para [46] that in the Court's view it was desirable in the public interest for the High Court in appropriate cases to have power to award costs against a barrister personally. As to the basis for the exercise of the jurisdiction, he said in para [55] that it was well established that such liability arises in the case of solicitors upon a serious dereliction of duty to the court, and that the Court considered that they should adhere to the serious dereliction of duty test for both barristers and solicitors.

38. As regards the question whether the judge had wrongly made factual findings on issues which were not properly before him, the Court of Appeal were addressed by Mr McCoy who had now assumed the mantle of amicus curiae. Tipping J noted in para [21] of the judgment that he had been appointed in that capacity having represented Mr McDonald after Mrs Harley but having had his instructions recently withdrawn. Mr McCoy conceded that Giles J had taken into account certain matters of fact which were not properly before him and that he ought not have done so. He acknowledged that the judge had transported evidence from the lien application to the application which he had heard earlier the same day about costs. In particular he accepted that Giles J had erred in making findings of fact about the rejection of the Law Society's offer of settlement in the absence of Mrs Harley and her counsel.

39. This left the question whether the judge was wrong to make the costs order against Mrs Harley in the circumstances of this case. Tipping J devoted much of his discussion of this question to an analysis of the case against FAI, which he considered all along to have been hopeless. In para [63] he said that the position, as it seemed to the Court, was not that she prosecuted a hopeless case knowing it to be hopeless, but rather that she did not appreciate how hopeless it was and that she did not therefore advise her client to that effect. After further discussion he concluded in para [79] that her presentation of the case gave the clear impression that she had no grasp of the essential issues. He summed the matter up in para [80] in these words:

"We will now relate the foregoing discussion to the criteria identified earlier for an award of costs against a barrister. Mindful of the seriousness of the matter from Mrs Harley's point of view, we are driven to the conclusion that she displayed in her handling of the case against FAI incompetence of such a degree that she was in serious dereliction of her duty to the Court. She fell well below the level of competence which the Court is entitled to expect of those who practise before it and are its officers. We are therefore of the view that although Giles J did consider matters and issues which were not properly part of his costs consideration, it was open to him, on the basis of the matters properly before him, to order Mrs Harley to indemnify Mr McDonald for the costs he had to pay FAI to the extent of $65,000."

40. As for the position of Glasgow Harley, Tipping J said in para [87] that the Court considered that their breach of duty to the Court was at the same level as that of counsel and that their incompetence, in failing to identify the difficulties in the case as insuperable, was a serious dereliction of their duty to the court. He added that the consequences for Mr McDonald needed no emphasis, as by suing FAI in hopeless circumstances he had exhausted most, if not all, of the money he recovered from the Law Society.

The jurisdiction to make a costs order

41. Their Lordships will need to consider these judgments in more detail later. But they must first examine the jurisdiction which Giles J was seeking to exercise when he made the costs order in Mr McDonald's favour against his former counsel and solicitors. The criticisms which were made of his approach and of that taken by the Court of Appeal cannot be properly understood without a clear understanding of the nature of that jurisdiction and the basis upon which it falls to be exercised.

42. The first question is whether the High Court has jurisdiction to make a costs order against a barrister. It was accepted by counsel for Glasgow Harley that the judge had jurisdiction under R 46 of the High Court Rules to award costs against Mr McDonald's former solicitors: see McGechan on Procedure HR 46.11. But Giles J held that a barrister also could be held personally liable in costs on the ground that barristers, like solicitors, are officers of the Court: [1999] 1 NZLR 583, 590. The Court of Appeal held that the policy considerations underpinning the rule that barristers are immune from civil liability at the suit of their clients did not apply to the making of costs orders against barristers, and that the policy considerations which supported the jurisdiction of the court to make costs orders against solicitors applied also to barristers as a sanction for a breach of their duty to the court: [1999] 3 NZLR 545, para [39]. In its view the inherent jurisdiction of the court and R 46 of the High Court Rules were appropriate vehicles for the implementation of that policy: para [22].

43. Much of the discussion in the Court of Appeal was taken up with a consideration of the basis for the immunity rule relating to barristers and with Mrs Harley's argument that the same reasons justified a similar immunity from, or lack of jurisdiction in the court to make, costs orders. The Court of Appeal delivered its judgment on the assumption that the immunity rule continued to apply in England as well as in New Zealand. One year later the House of Lords held in Arthur J S Hall & Co v Simons [2000] 3 WLR 543 that the public interest in the administration of justice no longer required the continuation of the immunity rule in England and Wales.

44. Counsel for Mrs Harley went to some lengths to submit in their written case that, although it had now been removed in England, the immunity rule was still part of the law of New Zealand. But Mr Farmer did not develop this point in any detail during his oral argument, and their Lordships do not find it necessary to reach a decision on it for the purposes of this appeal. The question whether the immunity rule can still be justified on public policy grounds in New Zealand has yet to be tested. It is one on which the Board would wish to have had the advantage of judgments of the courts in New Zealand before expressing any opinion. Moreover the issues relating to barristers' immunity from suit from their lay clients on the one hand and the jurisdiction of the court to make a costs order against the client's counsel and solicitors on the other hand are not the same. In the one case the issue arises from the barrister's duty to his client. In the other it arises from his duty to the court.

45. The undoubted inherent jurisdiction of the courts in New Zealand to make a costs order against a client's solicitor rests upon the principle that, as officers of the court, solicitors owe a duty to the court, while the court for its part has a duty to ensure that its officers achieve and maintain an appropriate level of competence and do not abuse the court's process. The court's duty is founded in the public interest that the procedures of the court to which litigants and others are subjected are conducted by its officers as economically and efficiently as possible. In New Zealand barristers also are officers of the High Court. This being so, there would seem to be no reason in principle why the court should not exercise the same jurisdiction over them as it does over solicitors.

46. Their Lordships do not need to dwell on the respects in which the legal profession in New Zealand differs from that in all three jurisdictions in the United Kingdom. It is sufficient for the purposes of this case to note that in New Zealand all practitioners, whether or not they choose to practise solely as barristers or solely as solicitors, are qualified and admitted as both. Admission is by order of the High Court upon the judge being satisfied that the applicant is qualified under the Law Practitioners Act 1982 and is a fit and proper person to be admitted: Law Practitioners Act 1982, section 46. No person can be admitted by the court as a barrister only or as a solicitor only. The Act provides that all those admitted by the court are to be admitted as barristers and solicitors of the court: section 43(1). Barristers and solicitors enter the profession by the same route, and they may not practise unless they are the holders of a current practising certificate issued by their District Law Society: section 56. The practising certificates may be for practice as a barrister only or for practice as a barrister and solicitor. But the same rights of audience before any court or tribunal apply to all such practitioners, irrespective of the type of practising certificate which they have: section 43(4). The expression "practitioner" is defined in section 2 of the Act as meaning "a person enrolled as a barrister or solicitor of the court." Similarly, for the purposes of the Law Society's rules of professional conduct the expression "practitioner" includes both barristers and solicitors: New Zealand Law Society Rules of Professional conduct for Barristers and Solicitors (5^th ed, 1998). Barristers owe the same duties to the court as solicitors.

47. For all these reasons, both from the court's point of view and that of the public, it is hard to find a sufficiently clear dividing line between the style of practice of barristers on the one hand and that of solicitors on the other to justify giving an immunity from costs orders to barristers which is not enjoyed by solicitors. Recognition that barristers are subject to the same jurisdiction in this respect as solicitors is not inconsistent with any statutory provision or any rule of practice. In both cases there is the same public interest that a serious dereliction of duty to the court by one of its officers should be dealt with by the court. Their Lordships agree with the Court of Appeal that it is desirable in the public interest that the High Court should have power in appropriate cases to award costs against a barrister personally.

The principles on which the jurisdiction is to be exercised

48. The next question is, what are the proper limits of that jurisdiction? The Court of Appeal held that the inherent jurisdiction can be invoked only in cases where there has been a serious dereliction of the solicitor's duty to the court, and that it can be invoked only while the costs remain a live issue before the court which conducted the proceedings:[1999] 3NZLR 545 at paras [39] and [42]. Their Lordships agree, but for the purposes of their judgment the question as to its proper limits requires to be examined more closely.

49. A costs order against one of its officers is a sanction imposed by the court. The inherent jurisdiction enables the court to design its sanction for breach of duty in a way that will enable it to provide compensation for the disadvantaged litigant. But a costs order is also punitive. Although it may be expressed in terms which are compensatory, its purpose is to punish the offending practitioner for a failure to fulfil his duty to the court. In Myers v. Elman [1940] AC 282 Lord Wright described the court's inherent jurisdiction as to costs in this way at p 319:

"The underlying principle is that the court has a right and a duty to supervise the conduct of its solicitors, and visit with penalties any conduct of a solicitor which is of such a nature as to tend to defeat justice in the very cause in which he is engaged professionally…The jurisdiction is not merely punitive but compensatory. The order is for payment of costs thrown away or lost because of the conduct complained of. It is frequently, as in this case, exercised in order to compensate the opposite party in the action."

The jurisdiction is compensatory in that the court directs its attention to costs that would not have been incurred but for the failure in duty. It is punitive in that the order is directed against the practitioner personally, not the party to the litigation who would otherwise have had to pay the costs.

50. As a general rule allegations of breach of duty relating to the conduct of the case by a barrister or solicitor with a view to the making of a costs order should be confined strictly to questions which are apt for summary disposal by the court. Failures to appear, conduct which leads to an otherwise avoidable step in the proceedings or the prolongation of a hearing by gross repetition or extreme slowness in the presentation of evidence or argument are typical examples. The factual basis for the exercise of the jurisdiction in such circumstances is likely to be found in facts which are within judicial knowledge because the relevant events took place in court or are facts that can easily be verified. Wasting the time of the court or an abuse of its processes which results in excessive or unnecessary cost to litigants can thus be dealt with summarily on agreed facts or after a brief inquiry if the facts are not all agreed. Scope for the making of a costs order that will compensate as well as penalise is then likely to be found in making an order against the practitioner that will indemnify the opposing litigant against costs incurred as a result of the breach of duty that would otherwise not be recoverable.

51. Circumstances which involve serious breaches of the practitioner's duty to the court may however raise questions about his duty to the client which involve allegations of professional misconduct. They may also raise questions as to whether the practitioner is liable in damages to the client for negligence. But it is not appropriate when considering whether or not to make a costs order for the court to rule upon whether, in addition to a breach of the duty to the court, there has been a breach of the rules of professional conduct. This is a matter which will ordinarily be dealt with by way of complaint under the disciplinary procedures of the 1982 Act. Nor is it appropriate for the court in exercising its summary jurisdiction to make a costs order to say whether the client has a cause of action against his barrister or solicitor for negligence. This is a matter which ought to be dealt with in separate proceedings, in which the issues of fact and law between the client and the practitioner are clearly focused and the practitioner is given a full and fair opportunity to respond to the client's claim.

52. All this may seem to be elementary. But the distinction which must always be observed between these different processes is fundamental to a proper understanding of the limits of the inherent summary jurisdiction of the court. The court's only concern when it is exercising this jurisdiction is to serve the public interest in the administration of justice.

53. Their Lordships do not say that the court has no jurisdiction to make a costs order in favour of the client against his own barrister or solicitor. But in cases where an order to that effect is contemplated the court must take great care to confine its attention to the facts which are clearly before it or to facts relating to the conduct of the case that are immediately and easily verifiable. Allegations that may raise questions about duties owed to the client by the barrister or solicitor and the conduct of the case outside the courtroom are unlikely to be of that character. They are likely therefore to fall outside the proper scope of that inquiry. The court must bear in mind that it is not its function, in the exercise of this jurisdiction, to adjudicate on the position as between the client and his barrister or solicitor.

54. The court must have particular regard in cases of this kind to the factual basis upon which the jurisdiction is to be exercised. It cannot rely on its own knowledge when it is faced with issues about the nature or scope of the instructions which the client has given about the conduct of the litigation or the advice that may or may not have been tendered to the client by his barrister or solicitor. Fairness to the barrister or solicitor requires that notice should be given of allegations about breaches of duty which raise these issues and that an opportunity should be given to them to challenge the allegations, if so advised, by cross-examining witnesses and leading evidence. These procedures are inconsistent with the summary nature of the jurisdiction. Bearing in mind the extra cost which an investigation of that kind may involve, and the overriding requirement of fairness to those who are at risk of being penalised, the court may well conclude that further investigation under this procedure is not appropriate. This need not be seen as a surrender by the court of its responsibility. The client may have other remedies. A complaint may be made to the Law Society leading to disciplinary sanctions against the barrister or solicitor, or a claim may be made by the client against the solicitor in damages for negligence.

55. Then there is the question as to the kind of conduct that can be regarded as involving a serious breach of duty to the court. Their Lordships agree with the Court of Appeal that the test for the exercise of the common law jurisdiction in New Zealand is that which was applied in England before the wasted costs jurisdiction under section 51 of the Supreme Courts Act 1981 came into effect: [1999] 3NZLR 545 at para [55]. A simple mistake or oversight or a mere error of judgment will not, of itself, be sufficiently serious to fall into that category. Something more is required. In Myers v. Elman [1940] AC 282 at pp 291-292 Viscount Maugham indicated that the test was whether the conduct amounted to a serious dereliction of duty, and that negligence could be so described if it was at a sufficiently high level. At p 304 Lord Atkin described the kind of negligence that could lead to an exercise of the jurisdiction as gross negligence. At p 319 Lord Wright said that, while a mere mistake or error of judgment is not generally sufficient, a gross neglect or inaccuracy in a matter which it was a solicitor's duty to ascertain with accuracy, such as whether he had a retainer to act, might suffice. A more precise definition of the level of seriousness is not appropriate. But where negligence or incompetence is alleged the conduct must be put into its proper context.

56. The Court of Appeal held that serious incompetence resulting in a failure to appreciate that a claim is untenable is capable of amounting to a serious dereliction of duty to the court: para [58]. They relied for this proposition on Davy-Chiesman v Davy-Chiesman [1984] Fam 48. In that case the Court of Appeal found that the court was entitled to exercise its inherent jurisdiction against a solicitor who had failed to inform the Legal Aid Committee of the Law Society of a change in circumstances, as he had a duty to do under the regulations, when it appeared or ought to have appeared to a reasonable solicitor that the assisted person no longer had any reasonable prospect of success. The solicitor's position was that he had relied on the advice of counsel who had said that the case should continue, and that account should be taken of the forcefulness of counsel's personality and his experience. May LJ rejected this argument at p 66A-B:

"… making all allowances for that I cannot avoid the conclusion, differing respectfully from the judge, that this solicitor did abdicate responsibility for his proper part and role in the relevant litigation. I think that he relied blindly and with no mind of his own on counsel's views upon which, it must or ought to have been apparent to him, some question should have been raised. In my judgment this failure by the solicitor to question counsel's advice, let alone to report the situation on his own to the legal aid committee, as in any event I think he should have done, was a substantial failure on his part to fulfil his duty to the court to promote in his particular sphere the cause and proper administration of justice."

57. Their Lordships agree with the Court of Appeal's conclusion in [1999] 3NZLR 545 at para [59] that a duty rests on officers of the court to achieve and maintain appropriate levels of competence and care and that, if he is in serious dereliction of such duty, the officer is properly amenable to the costs jurisdiction of the court. But care must be taken not to assume that just because it appears to the court that the case was hopeless there was a failure by the barrister or solicitor to achieve the appropriate level of competence and care. As Sir Thomas Bingham MR said in Ridehalgh v Horsefield [1994] Ch 205, 234C-E:

"Legal representatives will, of course, whether barristers or solicitors, advise clients of the perceived weakness of their case and of the risk of failure. But clients are free to reject advice and insist that cases be litigated. It is rarely if ever safe for a court to assume that a hopeless case is being litigated on the advice of the lawyers involved. They are there to present the case; it is… for the judge and not the lawyers to judge it.

It is, however, one thing for a legal representative to present, on instructions, a case which he regards as bound to fail; it is quite another to lend his assistance to proceedings which are an abuse of the process of the court. … It is not entirely easy to distinguish by definition between the hopeless case and the case which amounts to an abuse of the process, but in practice it is not hard to say which is which and if there is doubt the legal representative is entitled to the benefit of it."

The essential point is that it is not errors of judgment that attract the exercise of the jurisdiction, but errors of a duty owed to the court.

Application of these principles to this case

58. Both Mr Farmer for Mrs Harley and Mr Taylor for Glasgow Harley submitted that the decisions of the trial judge and the Court of Appeal were so tainted by unfair process that neither could stand and that they should be set aside. They also submitted that the Court of Appeal did not apply the correct test of misconduct and that, even if it did, it was not justified in finding that the appellants' conduct met that test. Their Lordships have concluded, despite Mr McCoy's helpful observations, that there is much force in these criticisms.

59. Their Lordships take first the judgment of Giles J. As they pointed out in their narrative of the factual background, the judge was careful both in his judgments of 11 December 1997 and 19 February 1998, his minute of 10 March 1998 and his ruling at the judicial conference on 27 May 1998 to define the limits of the inquiry which he proposed to conduct. He said that this was intended only to embrace the incidence of costs of properly instructed counsel arising from the conduct of the trial. The events which he had identified in his judgment of 11 December 1997 as giving rise to the need for this inquiry were his indication to counsel at the trial in the course of opening and at the time of hearing argument on FAI's application for dismissal of the claim against it that she needed to reflect carefully on the wisdom of continuing the claim against FAI. Both Mrs Harley and Glasgow Harley were entitled to assume from this that he would confine his attention to these issues, as they were the only issues that they were put on notice that they had to address. As the judge had expressly ruled that he did not regard it as proper for him to resolve a dispute as to whether the settlement offer by the Law Society was communicated to Mr McDonald and, if not, what consequences might flow from that, they were entitled to assume that this matter was beyond the scope of his inquiry.

60. In the event, the trial judge was presented with further information about the case in connection with the charging order/lien applications which he heard the same day as the application for the costs order. There is no doubt that he should have left that information out of account when he was dealing with the costs order. Mrs Harley was not a party to the charging order/lien applications. She was not given notice that they might be relevant to the decision on costs, and she had no opportunity to present her account of the facts for consideration by the trial judge. Unfortunately it is plain from the reasons given in his judgment of 24 September 1998 [1999] 1NZLR 583 for making the costs order that the trial judge went well beyond the limits which he had previously set for his inquiry, and that he took into account matters of fact on which Mrs Harley had not had an opportunity to address him or give evidence.

61. At pp 593-594 Giles J said that no consideration or advice seemed to have been given to Mr McDonald as to the need to establish an insured peril which could bring FAI's policy into play. He referred to what he described as "the added ignominy" from Mr McDonald's point of view that he was completely unaware that an offer of settlement had been made by the Law Society. He said that a "hopeless" case was being pursued without his receiving the degree of objective and independent advice he was entitled to as to the risks. He said that the whole position should have been carefully reviewed prior to forcing FAI to embark upon the preparation for the trial and then in pursuing FAI through a fully defended hearing, and he referred to Mrs Harley's refusal to take Mr McDonald's late-night telephone call. He then said that a judgment had to be made as to what part of the costs relating to the conduct of the proceedings generally leading up to trial preparation and trial Mr McDonald ought to have indemnified by his counsel and solicitors.

62. In the result he ordered that more than half of the award of costs ($65,000 out of a total of $115,000) should be the subject of the indemnity. This far exceeded the proportion of the costs that could reasonably be attributed to the decision to continue with the trial after the warnings which he gave to Mrs Harley that she should consider her position very carefully. Moreover the order was made in ignorance of the facts as to Mr McDonald's insistence that proceedings should be taken against FAI, the Law Society's insistence until a few days before the trial was due to start that it would not consider any settlement until Mr McDonald had resolved the position with FAI and the steps which Mrs Harley took to tell Mr McDonald about the Law Society's offer of settlement and obtain his instructions. The entire substratum of his decision was based upon a series of mistaken assumptions, all of which were due to the unfair way in which he decided to broaden the scope of his inquiry.

63. In the Court of Appeal Mr McCoy, in his capacity as amicus curiae, accepted that Giles J had gone into certain matters which were not properly before him. But he argued that the judge had nevertheless come to the correct conclusion on the facts: [1999] 3 NZLR 545 at para [21]. The Court was of the same view. As Tipping J put it, although Giles J did consider matters and issues that were not properly part of his costs consideration, it was open to him, on the basis of the matters properly before him, to order Mrs Harley to indemnify Mr McDonald for the costs he had to pay FAI to the extent of $65,000: para [80]. He said that the solicitors' breach of duty to the court was at the same level as counsel: para [87].

64. Their Lordships respectfully disagree with this assessment. Much of the court's judgment is taken up with an examination of the question whether or not Mr McDonald's case against FAI was hopeless. Their Lordships do not need to re-examine this issue. They are content to proceed upon the basis that the case against FAI was indeed a hopeless one, for the reasons given by Tipping J: paras [64]-[68]. Their reasons for differing from the Court of Appeal rest upon more fundamental points regarding the manner in which and the grounds upon which this jurisdiction was being exercised.

65. In the first place, the matters and issues which were not properly before Giles J but which he nevertheless did consider played a much greater role in his decision than the Court of Appeal appear to have been willing to recognise. As their Lordships have explained when discussing his judgment, he took into account matters relating to the conduct of the proceedings which took place prior to the events which he had observed at the trial. The order which he then made indicates that he had decided to penalise the conduct of the proceedings generally leading up to trial preparation as well as at the trial: [1999] 1 NZLR 583, 594. The Court of Appeal for its part said that it was open to the judge to make the order that he did: para [80]. Here too it is plain that, when it decided simply to endorse Giles J's conclusion, the Court took into account matters which fell outside the limits of the inquiry which the judge had previously identified. Although Mrs Harley had by now had an opportunity to give her own account of what happened, the appeal was decided on a basis which, on grounds of fairness, would not have been open to the judge by whom the jurisdiction to make the costs order was being exercised. The Court's failure to appreciate that, as the substratum for the judge's decision had gone, it had to exercise its own judgment on the facts reveals a fundamental defect in its reasoning.

66. In the second place, the serious dereliction of duty to the court which the Court of Appeal found to have been established was that Mrs Harley prosecuted a hopeless case, not appreciating how hopeless the case was. They said that, as she did not advise her client to that effect, she could not claim to have been pursuing a case known to be hopeless but in accordance with fully informed instructions: para [63]. Their conclusion was that she displayed incompetence in her handling of the case against FAI of such a degree that she was in serious dereliction of her duty to the court: para [80]. Having analysed the history of the case more fully, their Lordships do not think that Mrs Harley's conduct of the case deserves that description. Up to the date of the trial at least she was conducting the case in accordance with her instructions. The claim against FAI had not been struck out, and Mr McDonald had still been unable to reach a settlement with the Law Society. It has not been suggested that her conduct was malicious or dishonest or that she deliberately persisted in an action which was an abuse of the court's process. In Ridehalgh v Horsefield [1994] Ch 204, 234C-D Sir Thomas Bingham said in the passage already quoted that it is rarely, if ever, safe for a court to assume that a hopeless case is being litigated on the advice of the lawyers involved, as they are there to present the case, not to judge it. In the present case the Court's conclusion that Mr McDonald had not given fully informed instructions was based upon assumptions which were not fully tested in the evidence.

67. Then there is the proposition that a barrister who pursues a hopeless case not appreciating it to be hopeless displays such a degree of incompetence as to amount to a serious dereliction of her duty to the court. Their Lordships consider this proposition, without more, to be unsound. Without attempting to provide a precise definition of what amounts to a serious dereliction of duty, they are of the opinion that it is open to the court to penalise incompetence which leads to a waste of the court's time or some other abuse of its process resulting in avoidable cost to litigants. But it will almost always be unwise for the court, in the exercise of this jurisdiction, to treat the pursuit of hopeless cases as a demonstration of incompetence. As a general rule litigants have a right to have their case presented to the court and to instruct legal practitioners to present them on their behalf. Although exceptional steps may have to be taken to deal with vexatious litigants, the public interest requires that the doors of the court remain open. And on the whole it is in the public interest that litigants who insist on bringing their cases to court should be represented by legal practitioners, however hopeless their cases may appear. For these reasons something more than the mere fact that the case is hopeless is required. The absence of anything more than that in this case for which Mrs Harley can reasonably be criticised is striking. Their Lordships have concluded that the Court of Appeal were wrong to hold that she was in serious breach of her duty to the court. It follows that they were also wrong to make the same finding against Glasgow Harley with regard to their conduct of the case as Mr McDonald's solicitors.

Conclusion

68. For these reasons their Lordships will humbly advise Her Majesty that the appeal should be allowed, that the orders of Giles J and the Court of Appeal should be set aside and that leave to cross-appeal should be refused. Mr McDonald must pay each of the appellants' costs in the Court of Appeal in the sum of $5000 plus disbursements, to be fixed if necessary by the Registrar in New Zealand. As Mr McDonald did not enter appearance to oppose the appeal before their Lordships, there will be no order as to costs before their Lordships' Board.