COMPLAINTS COMMITTEE OF THE CANTERBURY DISTRICT LAW SOCIETY V W HC WN CIV-2007-485-2648

COMPLAINTS COMMITTEE OF THE CANTERBURY DISTRICT LAW SOCIETY V W HC WN CIV-2007- 485-2648 13 October 2008ORDER PROHIBITING PUBLICATION OF NAMES OR IDENTIFYING PARTICULARS OF PRACTITIONER, OR CLIENTS NAMED IN THIS JUDGMENT. IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2007-485-2648IN THE MATTER OF THE LAW PRACTITIONERS ACT 1982 AND IN THE MATTER OF AN APPEAL FROM A DECISION OF THE NEW ZEALAND LAW PRACTITIONERS DISCIPLINARY TRIBUNAL DATED 2 NOVEMBER 2007 BETWEEN COMPLAINTS COMMITTEE OF THE CANTERBURY DISTRICT LAW SOCIETY Appellant AND W Respondent Hearing: 9 and 10 July 2008 Court: Gendall J MacKenzie J Mallon J Counsel: C A McVeigh QC for Appellant L J Taylor for Respondent Judgment: 13 October 2008 In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 10.30 am on the 13 th day of October 2008.JUDGMENT OF THE COURT[1] The respondent is a law practitioner. Two disciplinary charges were brought against him by the Complaints Committee of his District Society (the Committee), alleging negligence in his professional capacity, of such a degree as to tend to bring the profession into disrepute. These charges concerned the practitioner's failure: (a) To obtain a valuation; and (b) To take the appropriate steps when a likely conflict of interest existed, when recommending to the contributors of a solicitors nominee company that a new borrower replace a mortgage and supporting guarantee in respect of borrowings made by a long standing client of the practitioner who had fallen into financial difficulties. [2] The Canterbury Law Practitioners Disciplinary Tribunal (the District Tribunal) found the practitioner guilty of each of the two charges. He was fined $250 on each, censured and ordered to pay costs to the District Law Society of $36,029, and costs for the Tribunal hearing of $2,010. [3] He appealed to the New Zealand Law Practitioners Disciplinary Tribunal (the New Zealand Tribunal). It allowed the appeal, set aside the findings of guilt, fines and orders as to costs, and directed that the practitioner's name not be published. [4] The Committee now appeals against the decision of the New Zealand Tribunal. The Committee contends that the New Zealand Tribunal erred by requiring that the negligence be reprehensible or conduct of that degree of seriousness (which in the New Zealand Tribunal's view it was not) before there could be a finding that the negligence was of such degree as to tend to bring the profession into disrepute. The practitioner contends that reprehensibility or conduct of that level of seriousness is required and the New Zealand Tribunal was correct not to find that the practitioner's conduct was of that level. He also contends that his conduct was not negligent, let alone reprehensible.The charges[5] The charges as framed followed the provisions in s 106(3)(c) of the Law Practitioners Act 1982. They alleged that the practitioner: has been guilty of negligence or incompetence in his professional capacity, and that negligence or incompetence has been of such a degree or so frequent as to the reflect upon his fitness to practise as a barrister or solicitor or as to tend to bring the profession into disrepute in that: (1) On or about the 7th day of October 1998 he did fail to give to the investors in a solicitors nominee company mortgage, advanced in respect of a property situated at the corner of Victoria Avenue and Guyton Street, Wanganui for a total loan of $865,000.00, a copy of a valuation report in respect of the land, in accordance with R 7.1(a) and Appendix F paragraph 9(a) Solicitors Nominee Company Rules 1996; (2) That on or about the 7th day of October 1998, where a conflict or likely conflict of interest had arisen between the investors in the said nominee company mortgage on the one hand and the mortgagor/guarantor on the other hand, he did fail forthwith to take the following steps: (i) To advise all contributors in the said mortgage of the areas of conflict or potential conflict; and/or (ii) To advise those contributors that they should take independent advice and arrange such advice if required; and/or (iii) To decline to act further for any of the contributors in the matters where so acting would, or would be likely to, disadvantage any of the clients involved. contrary to R 1.07 New Zealand Law Society Rules of Professional Conduct.[6] The District Tribunal's findings of guilt did not relate to the "incompetence" or "fitness to practise" limbs of s 106(3)(c) but related to the "negligence" and "bringing the profession into disrepute" limbs.Factual background[7] Since 1990 the practitioner had acted for RWM and companies controlled by him. He was involved in a number of commercial business dealings. One of those operations was a shopping mall, with entertainment areas, in Wanganui. MH Ltd, a company controlled by RWM, owned the premises. Tenants included other companies, all controlled by RWM, which operated nightclub, cafe/bar and pool hall businesses. Those companies generated about three-quarters of the rental income from the building. [8] The practitioner operated a sizeable solicitors nominee company. In June 1994 he advanced through that company $600,000 to MH Ltd on first mortgage security over the property. As the director of the company, RWM was guarantor for the loan. At that time a valuation of $920,000 of the property had been provided to the practitioner by a Christchurch valuer. [9] One of the contributors was JHS, who also made a subsequent loan which appears to have been dealt with by a priority agreement with other contributors. By October 1997 loan advances had increased to a total of $1.415 million on a single first mortgage. Arrangements within the nominee company were that $865,000 was secured as the first priority, with $550,000 effectively as the second advance by JHS. [10] A later valuation was obtained in 1997 from a firm of Wanganui valuers. It provided a gross value of $1.3 million, with a first mortgage recommendation of $866,600, assessed on the basis of the rental stream. Most of this came from the businesses operated by MH Ltd or RWM. [11] During 1998, RWM, for various reasons, fell on hard times. MH Ltd and the allied operations failed. Those operations had underpinned the valuation of the property in October 1997. The practitioner's evidence was that RWM said he was quitting New Zealand and left it to him to sell up all his assets and pay off creditors. The practitioner proceeded to sell RWM's home, yacht and other business interests in Palmerston North and Christchurch, and endeavoured to find a buyer for the Wanganui property and businesses. It seems that JHS or his company assumed theseparate debt of the Wanganui business by taking an assignment of securities held by others. [12] The mortgage repayments fell into arrears, although only by a few months. In early October 1998, the practitioner received an offer from a MSO to purchase the land and buildings from MH Ltd, as well as to acquire the bar and entertainment businesses at the premises. But the purchaser was to put in no money. Essentially the proposal was to be funded entirely by borrowing from the nominee company and JHS. The practitioner met with MSO, made enquiries of his solicitor and accountant and received a statement of MSO's position. The practitioner formed the view that the offer from the investors should be recommended to the contributors. MSO also met with JHS, who was to provide some additional funding. [13] The practitioner remained in contact with RWM. The practitioner was appointed an alternate director of MH Ltd and was able to execute documents associated with the sale. [14] On 6 October 1998 the practitioner received the sale agreement and loan terms (the agent said "as discussed"). The agent asked that the sale "become unconditional by 5pm, 8th October 1998)" with settlement 14 days later. [15] On 7 October 1998 the practitioner wrote to the contributors advising of the offers to purchase the land and buildings for $1.125 million and the entertainment businesses for $225,000. A first mortgage of $865,000 and a second mortgage of $550,000 was to be made available. The first mortgage essentially was to be that which the nominee company had advanced to MH Ltd, with the second mortgage being the existing contribution of JHS. The practitioner advised contributors that the sale price was fixed at the valuation of the Wanganui valuer 12 months earlier, plus $50,000. In his letter to the contributors, the practitioner said:It is not possible because of the situation of the property in its present state to obtain a further registered valuation. The advance is being made because of the prospect that if a mortgagee sale eventuated under the existing security to [MH Ltd], that there would be a significant shortfall of as much as $400,000 in realising the security.[16] The separate letter to JHS contained the same statement but also said:I am unable to include a registered valuer's valuation at this stage but [MSO] informs me that he will endeavour to provide one to me within about a month after he has commenced his improvements to the businesses. He has also agreed to provide a further registered valuation for nominee company purposes within 12 months for use for my lenders if they wish to do so.[17] The transaction was recommended by the practitioner to the contributors. The practitioner's advice was that "this seems to be an excellent solution to a difficult problem". He said the offer had to be accepted by 5pm, 8 October 1998. He said that a decision had to be made quickly ("by tomorrow afternoon"). [18] The evidence is unclear about the extent to which the practitioner had discussions with each of the contributors as there are differences in what the practitioner said about this at different times. In any event the contributors accepted the practitioner's advice and so the transaction proceeded. The loan was made to PH Ltd, a company associated with MSO and guaranteed by MSO. MSO defaulted within a short time. Nothing was paid. The contributors to the nominee company mortgage were no better off. Indeed they had released RWM from his personal guarantee of MH Ltd's obligations. [19] The practitioner took steps, including obtaining summary judgment, to pursue recovery from MSO but no recovery was made. The practitioner also took steps, at his cost, to operate the property and find tenants. The position now is that all but two contributors (JHS and one other) have received repayment of their contributions together with a return on their investment of just under 22%. The practitioner hopes that with further efforts the two remaining unpaid contributors will receive a return on their investment. [20] Meanwhile, following an audit of the practitioner's trust accounts, the District Law Society carried out enquiries. These enquiries ultimately led to the charges being laid by the Committee against the practitioner on 5 December 2005. The Committee contended that at the time of recommending the MSO advance to the contributors the practitioner was negligent in failing to obtain a valuation as required by the Solicitor's Nominee Company Rules, and also in failing to recognise a conflict of interest existed as between the interests of RWM and the contributors. Itcontended he had to refer all contributors to independent advice, and failing to do so comprised negligence tending to bring the profession into disrepute. [21] In the early stages of the District Law Society's enquiries the practitioner's view of the conflict of interest as between RWM and the contributors is set out in a letter he wrote to the contributors on 11 May 2000. In this letter he stated:During the course of my reviewing my files as I prepared my affidavit in the recent [MSO] proceedings, I was reminded that there is a gap in my written reporting to you at the time of the sale from the [RWM] interests to the [MSO] interests. This took place at the beginning of October 1998. [MSO ]came on the scene in late September. I met him in Wanganui and an offer was made which required acceptance of the request for a loan within four days of the sale contract being signed. At that point, I was still nominally acting for [RWM] and his companies. I did so at [RWM's] request on the basis that it was perceived to be the best way that all my lending clients' interests could be protected. What I omitted to do was to inform you that you were entitled to take independent legal advice at that point. I now wish to put on record that you have that right.[22] The practitioner retained a Queen's Counsel to assist him in relation to the District Law Society's enquiries and, consistent with the 11 May 2000 letter to contributors, an acknowledgement was made that the contributors should have been advised to obtain independent legal advice. Since then, the position has been taken that there was no actual or likely conflict of interest because the practitioner was acting only "nominally" to RWM and was instructed by him to take all appropriate steps to protect the contributors' interests. In discharging RWM's personal covenant the practitioner's view was that it was worthless. [23] In respect of the failure to obtain a valuation, the practitioner felt that this would have been pointless as he had informal advice that the property had substantially decreased in value because the underpinning rental payments had ceased. He said his view was that a mortgagee sale would have been disastrous for the contributors.The decision of the Canterbury Law Practitioners Disciplinary Tribunal[24] The District Tribunal said that "negligence" for the purpose of s 106(3)(c) of the Act must go beyond more carelessness. It said it must be serious and in a rangewhich might be "disgraceful" or "deplorable" through to "reprehensible" conduct. These epithets came from a decision by the New Zealand Law Practitioners Disciplinary Tribunal dated 15 August 1990 in Atkinson v Auckland District Law Society, New Zealand Law Practitioners Disciplinary Tribunal, 15 August 1990. We return later to discuss whether these epithets appropriately cover what is required for a finding of guilt based on negligence under the second limb of s 106(3)(c). [25] The District Tribunal noted that the practitioner accepted that not obtaining a valuation was a technical breach of the Rule but contended he was not negligent or incompetent, and he denied any conflict of interest existed. [26] The District Tribunal considered that the failure to obtain a valuation was negligent, but not incompetent. It said that while there was identity of lenders as contributors, the lending to MSO interests was a different transaction, with a different borrower and a very different security, in comparison with the earlier security. It was also a further advance. The District Tribunal regarded it not simply as a readily explicable error of judgment, but a fundamental breach of a very clear obligation. It said that the explanation given by the practitioner, and the particulars of investment submitted to the contributors, were wholly inadequate and the practitioner's obligation could not be dismissed or overridden on the basis of expediency or urgency. It said the rule simply "went out the window" with the briefest and most imprecise explanation as to why that occurred. The District Tribunal concluded that the negligence in failing to obtain a valuation tended to bring the profession into disrepute in the sense that it was deserving of criticism and reprehensible. [27] On the charge relating to conflict of interest, the District Tribunal said that it had to be concerned to identify a real conflict, noting the practitioner's claim that he was acting only "nominally" for the MH Ltd/RWM interests in respect of six separate transactions. The District Tribunal concluded that there was "no doubt" that the practitioner acted for MH Ltd/RWM, having seen the fees rendered by him to those interests (these being produced at the hearing only after the District Tribunal requested them from the practitioner).[28] The District Tribunal accepted that the practitioner believed what he was doing was in the investors' or contributors' best interests, but held that this did not remove the need to address a conflict. The District Tribunal expressed this in the following terms:We have no difficulty in concluding that [the practitioner] acted for [MH Ltd/RWM] interests and that there was a conflict of interest, even though [the practitioner] did not recognise this at the hearing. In correspondence carefully examined by Mr McVeigh there are acknowledgements of sorts. We need not rely on these but they show some limited recognition of conflict, always in [the practitioner's] view the result of his acting "nominally". We can accept that [the practitioner] was told by [RWM] to look after the investors, but there was a very real interest of [RWM] in this process because even though he was "parting [sic] his hands up" he was in a parlous financial position. By the sale [RWM] was being discharged from all his liabilities despite the slumped value of the property and the failing or failed businesses, and his other debts including those of Macros. . We had evidence from [the practitioner] about [RWM's] inability to meet his obligation under the personal covenant, but that is the sort of information when checked out, together with information about a realisation of the security by forced sale, which was highly relevant to the investors.[29] Regarding counsel's argument that there was a honest belief, and an "error of judgment on the part of the practitioner", the District Tribunal said: this conduct, like the failure to obtain a valuation must, be measured objectively against the problem which arose at the time. It is a clear and reprehensible failure, but not at the very serious end of the spectrum for this sort of charge. . We record again our recognition that [the practitioner] has done his best to resolve a very bad situation for the investors, but the final result is not yet known. Perhaps of most concern to the Tribunal is the inability of [the practitioner] to truly recognise the existence of the conflict, notwithstanding his reference to having acted for [MH Ltd/RWM] "nominally", and his stance that this was not a new investment. Time to reflect and expert legal advice does not seem to have led to recognition of his errors. . That inability to recognise the obligation is as of much concern to the Tribunal as the breaches themselves.[30] In concluding there was a conflict of interest, and that the practitioner was negligent in that he failed to appreciate or address that conflict, the District Tribunaldid not regard this as incompetence. But the District Tribunal considered the negligence was serious enough as to tend to bring the profession into disrepute in the sense that it was "deserving of criticism and reprehensible". [31] The District Tribunal found both charges proved to the requisite high standard. The separate defaults were negligent and those particulars comprised negligence of the kind which fell within s 106(3)(c).The decision of the New Zealand Law Practitioners Disciplinary Tribunal[32] On appeal to the New Zealand Tribunal a different view was reached. After setting out the charges and facts the New Zealand Tribunal noted that:The practitioner was a senior practitioner with considerable conveyancing experience and with a significant mortgage lending practice as a sole practitioner [who] had over many years attracted a following of lending clients and borrowing clients.[33] The New Zealand Tribunal said that where only one transaction is the subject of charges, it could not be said that the frequency of negligence was such as to reflect upon a practitioner's fitness to practise. (That is consistent with the findings and conclusions of the District Tribunal.) The New Zealand Tribunal recorded the degree of negligence required, in the following way at (para 35): acts of negligence should only become the subject of professional charges and professional sanctions when they are at the serious end of the scale which is what we believe is provided for in the Act.[34] And further (at paras 37, 38 and 39):For the charges against the practitioner to be sustained in the present case there had to have been negligence at such a level as to tend to bring the profession into disrepute. It is, of course, not necessary for it to be proven that as a result of the actions of the practitioner, the profession did in fact suffer a reputation loss. All that needs to be proven is that the actions of the practitioner would have a tendency to damage the reputation of the profession. . Wrongheaded or irrational reactions against the reputation of the profession could never be enough.We find it difficult to see how narrow acts of negligence in circumstances where the practitioner is said to have made a misjudgment in good faith can have the effect of tending to bring the profession into disrepute. . A human weakness is the capacity to make mistakes.[35] It then went on to discuss where the threshold should lie before there can be disciplinary sanctions for negligent actions. It referred to a passage from Corpus Juris Secundum (1948) at 818 which discusses "misconduct" as conveying the idea of intentional wrongdoing and something beyond a "mere error of judgment". It also referred to the decision of the Tribunal in re A (Barrister and Solicitor of Auckland)[2002] NZAR 452 where the Court observed, in relation to a charge of professional misconduct, that there must be an evaluation of the gravity of the breach to determine whether it was sufficiently reprehensible or indifferent to amount to abuse of professional privileges justifying a finding of serious misconduct in the interests of protecting the public. The New Zealand Tribunal also said:[40] . Charges of negligence or incompetence lie within the Act alongside unsavoury bedfellows. In statute, as in life, one is often judged by the company which one keeps. Here we believe that there is intended to be a consistency in terms of the height of the threshold that must be passed over before exposure to a charge arises.[36] The New Zealand Tribunal also referred to Atkinson v Auckland District Law Society, which also concerned "professional misconduct", and said:The words used (reprehensible, inexcusable, disgraceful, deplorable, dishonourable) are strong words befitting seriously unacceptable conduct. The tone and timbre of language may have changed since Atkinson but the levels at which a professional sanction should be applied have not. . Putting the test into a more contemporary setting it is our view that the behaviour in question must be at a sufficient level of seriousness, measured objectively, to justify the serious findings of professional misconduct or serious negligence or incompetence.[37] The New Zealand Tribunal findings, as they related to the practitioner, were: (a) He acted in good faith and made an error of judgement, being anxious to effect the recovery. He glossed over the reality that this was a new advance and needed a new valuation, and gave a spurious reason for not obtaining such, but he thought that what he was doing was in the best interests of the contributors;(b) It had "no difficulty in finding that the practitioner was, in October 1998, subject to various conflicts of interests which required him to take steps and that he took no such steps". The situation in which the practitioner found himself was one which was "riddled with conflicts". There were conflicts between MH Ltd/RWM and the lenders and there was a need to clinically address the respective positions of the various lenders and the other parties. The practitioner either failed to recognise these conflicts or, having recognised some of them, decided to push on anyway with a determination to solve the wider problem of the MH Ltd/RWM financial collapse; (c) As an element of conflict, it was alleged against the practitioner that while acting for RWM and for his lender clients, he organised and facilitated the reconstruction with MSO in such a way that RWM's personal covenant was lost to the lenders. By this stage the practitioner had convinced himself that RWM's personal covenant was worthless. He said that he knew all about RWM's affairs and was satisfied that there was nothing left. The Tribunal said:This position does sound hollow bearing in mind that the practitioner had been taken completely by surprise when [RWM] suffered financial collapse and turned out to be a different person to the person the practitioner thought he was. The practitioner said he did not address the issue of [RWM's] personal covenant when he ought to have done. We do see this as a professional misjudgment made in good faith and the Society has not contended otherwise.[38] The New Zealand Tribunal concluded that the investor clients were entitled to a fresh valuation and that conflicts of interests existed. But it came to the view that the threshold of seriousness that it considered was required, had not arisen. It said that it did not think that the conduct, whilst deserving of criticism, was serious enough to bring the profession into disrepute, and that:We do not think that it is correct in situations where the conduct does not appear to be serious misconduct, to endeavour to find within the epithets used at Atkinson, meanings which encompass conduct short of serious misconduct. We do not therefore think that the word reprehensible used inAtkinson can be interpreted to encompass misjudgments made in good faith on a single occasion as in this case.[39] The New Zealand Tribunal referred to the submission from the Committee that in assessing the conduct it should set aside how things ultimately turned out and the positive contributions of the practitioner. The New Zealand Tribunal said that it was inappropriate to measure the impact of acts of negligence on the reputation of the profession without having regard to what actually happened. It said to that extent it must have regard to the linkage in the Act between acts of negligence and their effects on the reputation of the profession. [40] The convictions and fines were set aside. The New Zealand Tribunal said it found the issue of costs to be difficult because of the provision of s 129(1)(b) that even when a practitioner has been found not guilty of charges an award of costs may be made if the Society was justified in bringing the charges. The New Zealand Tribunal found that the District Society was justified in bringing the charges because:There had been conduct of a kind which troubled the Society. When we came to judge the practitioner's conduct we did not see him as having acted correctly in relation to the valuation and the conflicts of interest. We came to the conclusion that while the practitioner's conduct had been negligent and incorrect, it had not reached the requisite standard of seriousness to justify the charges laid against him. In these circumstances, but with some misgivings, we are driven to the conclusion that the costs order made by the Canterbury Tribunal should be set aside.[41] The New Zealand Tribunal ordered that the names of the practitioner, MSO, and MH Ltd, not be published.Issues[42] Although this was not a practitioner's appeal, his counsel nevertheless argued that the practitioner's acts or omissions were not negligent. Accordingly, a preliminary issue is whether both Tribunals were justified in finding that the practitioner was negligent because he: (a) Failed to obtain an independent valuation report before making the new advance to MH Ltd.(b) Did not advise the contributors of a conflict of interest and refer them for independent advice before proceeding with the transaction which discharged the original mortgage, and the related personal guarantee from RWM. [43] If so, the issue is whether the New Zealand Tribunal was correct in concluding that such negligence was not of such degree as to tend to bring the profession into disrepute. Conversely, was the District Tribunal correct in concluding that such negligence was of such a degree as to tend to bring the profession into disrepute? To answer this issue, it is necessary to determine whether negligence must be "reprehensible" (as per the Atkinson test, which applies to charges of professional misconduct) to be of such degree as to tend to bring the profession into disrepute.Approach to be adopted on the appeal[44] Appeals under s 118(3) of the Law Practitioners Act 1982 from decisions of the New Zealand Tribunal are by way of rehearing, and the Court may confirm, reverse, or modify the order or decision appealed against. The decision of the New Zealand Tribunal was itself given on an appeal from the District Tribunal under s 107, which was similarly by way of rehearing. In terms of Austin, Nichols & Co Inc v Stichting Lodestar [2008] 2 NZLR 141, on a general appeal such as this, the Court is entitled to take a different view from the New Zealand Tribunal. An appellant carries the onus of satisfying the Court that it should differ from the decision under appeal, but the extent of deference or consideration the appeal court gives to the decision appealed from is a matter of judgment. No deference is required beyond the customary caution appropriate when a tribunal has a particular advantage, such as technical expertise or the opportunity to assess the credibility of witnesses. [45] Whilst there may be no area of technical expertise where the New Zealand Tribunal holds an advantage over the District Tribunal, or for that matter the Court, where, as here, a crucial element is whether the practitioner's acts were such "as to tend to bring the profession into disrepute" the presence of two lay members on eachTribunal – representing the public – is relevant. The New Zealand Tribunal did not hear evidence but the District Tribunal heard the practitioner, who was cross- examined. The appellant says some issues of credibility arise. If so, the District Tribunal had that advantage.As to the first issue – was there negligence?Failure to obtain a valuation[46] The District Tribunal considered that the failure to obtain a new valuation and provide it to the contributors was negligent, whereas the New Zealand Tribunal described it as an error of judgment. [47] Rule 7 of the Solicitors Nominee Company Rules 1996 requires that before "any investment is made" the responsible practitioner must ensure that an investor is given certain specified information, including a valuation report from a registered valuer. (There are some alternatives to this, but they are not relevant for present purposes.) [48] The submission made for the practitioner is that rule 7 is directed at decisions to make an investment, not decisions about how best to recover an investment already made, as was the position here. It is said that it is not clear that rule 7 applies. It is said that rule 12, which requires the responsible practitioner to determine the appropriate action in respect of any default, does apply. Even if rule 7 does apply it is said that there was no negligence because the failure to obtain the valuation was explicable and explained by the practitioner at the time and there is no evidence to suggest that it was in any way prejudicial to the contributors. [49] There is no doubt that rule 7 applied. The advance of MSO's interests was a new mortgage. The advance could not have been effected under rule 12, which is concerned with taking action under an existing security. The contributors could not be compelled by the exercise of the power in rule 12 to participate in the new advance.[50] Rule 7 was not complied with. In our view this was negligence. The rules set out what is required. The rules are for the protection of the contributors and it is not for the practitioner to decide that the rules need not be complied with. In failing to comply with the rules the practitioner did not act with the care reasonably expected of a practitioner in these circumstances. That does not necessarily mean that the charge is established. The negligence must be of such a degree as to tend to bring the profession into disrepute. We consider this issue below in paragraphs [72] to [82].Conflict or perceived conflict of interest[51] A practitioner must not act if a conflict or likely conflict of interest arises. Here it is alleged that the practitioner placed himself in a position of conflict as between the RWM/MH Ltd interests and the contributors' interests. Both Tribunals reached the view that this occurred. [52] Mr Taylor submitted on behalf of the practitioner, as he had before the Tribunals, that there was no conflict. He submitted that, for there to be a conflict, it must be proved that, because of his ongoing obligations of loyalty and confidence owed to RWM/MH Ltd, the practitioner could not discharge his obligations of loyalty and confidence to the contributors because to do so would conflict with his obligations to RWM/MH Ltd. He submitted in addition that it must be established that the conflict, if it existed, is real. [53] Paragraph 1 of rule 1.07 of the Rules of Professional Conduct for Barristers and Solicitors (7 ed, 2004) provides as follows:1. In the event of a conflict or likely conflict of interest among clients, a practitioner shall forthwith take the following steps: (i) advise all clients involved of the areas of conflict or potential conflict; (ii) advise the clients involved that they should take independent advice, and arrange such advice if required;(iii) decline to act further for any party in the matter where so acting would or would be likely to disadvantage any of the clients involved.[54] The rule refers to a conflict or likely conflict of interest among clients. It is however more appropriate to describe the conflict not from the point of view of the clients but from the point of view of the practitioner. The relevant question is not whether the interests of the clients are in conflict, but rather whether the separate duties which the practitioner owes to each of the clients are in conflict. The position is described in these terms in Webb Ethics, Professional Responsibility and the Lawyer (2 ed, 2006) at para 7.1 in these terms:It has been stated that a central aspect of the duty of loyalty is the obligation of a lawyer not to act for two clients whose interests conflict. However, this obligation is better expressed as an obligation of the lawyer to avoid any situation in which the duties of the lawyer owed to different clients conflict. The foundation of the obligation to avoid a conflict of duties is the fiduciary duty owed by the lawyer to each client independently. (footnote excluded)[55] The distinction can be important. In this case it is clear that the interests of the contributors and of the RWM/MH Ltd interests with respect to the MSO transaction were not identical. The contributors faced what was, in essence, a decision between enforcing the rights which they had against the RWM/MH Ltd interests under the existing security (including the guarantee by RWM), or agreeing to the new advance to MSO's interests, the effect of which would be to allow the existing advance to be repaid and the practitioner's security to be released. (A further option may have been to look for another investor.) Both the contributors and the RWM/MH Ltd interests were clients of the practitioner. There was a potential conflict between their interests. Both tribunals recognised that conflict. [56] It does not however necessarily follow that rule 1.07 applied. The duties which the practitioner owed to the respective clients must be considered, to determine whether in respect of those duties there was an actual or likely conflict between the interests of the clients that might impinge upon the ability of the practitioner properly to fulfil his respective duties to both clients. It is therefore necessary to examine the retainer (or instructions) which he had from each of those clients.[57] So far as the contributors are concerned, the nature of the relationship was such that the practitioner had a complete and unrestricted duty to ensure that their best interests in the transaction were advanced and preserved. There was no limitation in his instructions on that unqualified duty. [58] So far as the RWM/MH Ltd interests are concerned, the practitioner's evidence was that, when RWM abandoned his responsibilities and left New Zealand, he instructed the practitioner to realise his remaining assets in New Zealand and to apply the proceeds of realisation for the benefit of his creditors. The District Tribunal discussed the practitioner's evidence as to the nature and extent of the instructions in these terms:48. He said this in his affidavit: "I acted for [RWM/MH Ltd] and three other associated operating companies up until the time that [RWM] abandoned the property on 24/25 May 1998. From the time of abandonment onwards I did not regard myself as acting for [RWM] or any of those entities ([the District Tribunal's] emphasis). At no stage was there a conflict between my lending clients and [RWM] and/or his businesses. I, at no time, took a position for the benefit of [RWM] and contrary to the contributors. In fact the opposite occurred – when he left, [RWM] admitted he was totally at fault and that I was entitled to take all appropriate measures to protect those interests. He said that he realised that he was leaving major problems behind and that all he could do was assist me with information about the property and the businesses." He says he was not instructed by [RWM] or any of his businesses after he left New Zealand, "nor could I have accepted instructions". He says he never reported to [RWM] and no inquires were made of him. "He was not, in any way, treated as a client following his abandonment of the property".49. At the same time [the practitioner] acknowledged he did "clean up" matters in [RWM's/MH Ltd's] name, and said he did so "in a similar manner to a receiver". "At all times, I considered myself to be acting solely in the interests of the contributors."[59] Mr McVeigh for the Committee accepts that there is no evidence to contradict that evidence. His cross-examination was directed to the correspondence from the practitioner in which a conflict was acknowledged. [60] The practitioner adopted the position that he was acting only nominally for the RWM/MH Ltd interests. That is not an accurate way of characterising the position. A solicitor/client relationship continued to exist between the practitionerand RWM throughout the relevant period. The relationship was not a nominal one. The practitioner's evidence that he was not instructed by RWM, nor could be have accepted instructions, is similarly not an accurate description of the position. He did have instructions from RWM, and RWM remained a client. The critical issue is the extent of those instructions. The relevant question is whether the terms of the instructions which the practitioner had from RWM were such as to place him under a duty to protect and advance RWM's interests. Any such duty would necessarily have conflicted with the duty to the contributors. [61] For the practitioner it is submitted that the instructions were consistent with his acting solely in the interests of the contributors when undertaking actions on behalf of RWM. Mr McVeigh submitted that the limited nature of the instructions from RWM did not remove an obligation to act in RWM's interests. He submitted that those instructions carried with them a deeper obligation to protect RWM's interests. [62] It is clear, indeed trite, law that the solicitor/client relationship gives rise to a fiduciary duty on the part of the solicitor. But the extent of the obligations pursuant to that fiduciary duty is to be determined having regard to the terms of the retainer or instructions. A solicitor may, by the terms of the instructions, limit the extent of the duty owed to the client. There is no general fiduciary duty, in the absence of a general retainer, to protect and advance the interests of the client in respect of matters which are not the subject of the instructions. That is clear from the decision of the Privy Council in Clark Boyce v Mouat [1993] 3 NZLR 641. [63] However the scope of the retainer is not determined only by the express instructions, but may also cover matters which are fairly and reasonably raised in the course of carrying out those instructions (see Gilbert v Shanahan [1998] 3 NZLR 528 at 537). In this case the practitioner was under a duty to take all appropriate measures to protect the interests of the contributors. But what if the practitioner thought he could do so in a way that also best protected RWM? RWM had been a client of long standing. Even if RWM was not expecting the practitioner to consider his interests at all in carrying out the instructions, in view of the longstanding relationship and the practitioner's work for him in realising his assets (for which thepractitioner was receiving fees), there was a real risk that the practitioner would not be able to discharge his duties to both sets of clients without considering RWM's interests. In these circumstances, when the approach from MSO was made, there was a real (and not merely theoretical) conflict of interest. In failing to recognise this conflict the practitioner was negligent. The standard of care expected of a practitioner in these circumstances was to recognise the conflict, to advise the contributors of the conflict, to advise them to take independent advice (and to assist in arranging that if required) and to decline to act further if this would be likely to disadvantage the contributors. (We note that in view of the practitioner's relationship with RWM and his knowledge of RWM's affairs he may not have been able to act for the contributors against RWM if they wished to pursue recovery against him.) [64] For these reasons we consider that the real issue on this appeal is whether the negligence in failing to obtain a valuation and in failing to recognise the conflict and to ensure that the contributors took independent advice was negligence of such a degree as to tend to bring the profession into disrepute, falling within the ambit of s 106(3)(c).What is the test for negligence tending to bring the profession into disrepute?[65] Traditionally errors of judgment, or "simple" negligence or carelessness, did not warrant disciplinary action, in the sense of findings of professional misconduct. They still do not. In the well-known case of Pillai v Messiter [No. 2] (1989) 16 NSWLR 197 the Court said (at p200) that the words used in the statutory test (in that case, "misconduct in a professional respect"): plainly go beyond that negligence which would found a claim against a medical practitioner for damages. On the other hand gross negligence might amount to relevant misconduct, particularly if accompanied by indifference to, or lack of concern for, the welfare of the patient. . Departures from elementary and generally accepted standards, of which a medical practitioner could scarcely be heard to say that he or she was ignorant could amount to such professional misconduct. But the statutory test is not met by mere professional incompetence or by deficiencies in the practice of the profession. Something more is required. It includes a deliberate departure from accepted standards or such seriousnegligence as, although not deliberate, to portray indifference and an abuse of the privileges which accompany registration as a medical practitioner.[66] That theme has been frequently adopted by professional disciplinary tribunals, and the Court, when considering whether a practitioner was guilty of "professional misconduct". As a consequence the New Zealand Law Practitioners Disciplinary Tribunal in its decision in Atkinson v Auckland District Law Societyreviewed an extensive range of authorities and said (at page 15): in short the default must be of sufficient gravity to be termed "reprehensible" (or "inexcusable", "disgraceful" or "deplorable" or "dishonourable") or if the default can be said to arise from negligence such negligence must be either reprehensible or be of such a degree or so frequent as to reflect on his fitness to practise.[67] The Tribunal in Atkinson was concerned with charges of "misconduct" in the practitioner's professional capacity. In cases under s 106(3)(c) the negligence is required to be "of such degree" as to reflect upon fitness to practise or to tend to bring the profession into disrepute. Does that mean conduct must be "reprehensible" to fall within s 106(3)(c)? If negligence reaches a level which reflects upon the practitioner's fitness to practise, ie. his competence, then it is obvious it will be unacceptable or even reprehensible. That is because it is of such a degree as to illustrate the practitioner is unfit to practise and is a danger to the public if he does. But is that the level required for a finding that negligence tends to bring the profession into disrepute? [68] Both the District Tribunal and the New Zealand Tribunal applied the "reprehensible" test although with different results. The District Tribunal said (at para 82):We take "negligence" for the purpose of the Act to be serious, in a range which might be "disgraceful" or "deplorable" through to "reprehensible" conduct. It must in the latter category go beyond mere carelessness.[69] Although this was the test adopted by the District Tribunal, the New Zealand Tribunal viewed the District Tribunal as having downgraded the requisite level of seriousness by its finding that the negligence was reprehensible in the sense of it being "deserving of criticism". The New Zealand Tribunal adopted and applied theAtkinson test saying (at para 44):The words used (reprehensible, inexcusable, disgraceful, deplorable, dishonourable) are strong words befitting seriously unacceptable conduct. The tone and timbre of language may have changed since Atkinson but the levels at which a professional sanction should be applied have not. Atkinsonhas been repeatedly accepted as being authoritative before this Tribunal, the High Court and the Court of Appeal. Putting the test into a more contemporary setting it is our view that the behaviour in question must be at a sufficient level of seriousness, measured objectively, to justify the serious findings of professional misconduct or serious negligence or incompetence.[70] Mr Taylor supported the view taken by the New Zealand Tribunal. He said that to warrant the imposition of disciplinary sanctions the conduct must first be proved to have been truly reprehensible. He submitted that there must be a degree of indifference so as to amount to an abuse of the professional privileges of the practitioner so that a finding of serious misconduct is necessary in the interests of protecting the public. [71] For the following reasons we do not accept that the Atkinson test, nor the test Mr Taylor advanced, is the test for charges under s 106(3)(c).Rationale behind s 106(3)(c) when enacted in 1982[72] Before 1982, the disciplinary grounds in s 106(3)(c) did not exist. [73] Prior to Parliament enacting the Law Practitioners Act 1982, there was extensive consultation by the Public and Administrative Law Reform Committee with the New Zealand Law Society and all District Societies. It reported to Parliament in May 1977 making various recommendations. These included the creation of various disciplinary tribunals, the retention of the right of appeal, the grounds for disciplinary action, and the powers of investigation committees. [74] The report of the Law Reform Committee refers to a Working Paper that it submitted to the New Zealand Law Society suggesting disciplinary action for professional misconduct, conduct unbecoming, conviction of an offence which reflected upon fitness to practise or tended to bring the profession into disrepute and:Professional negligence or incompetence which reflects on the fitness of the practitioner to practise law or tends to bring the profession into disrepute.[75] The report states (at para 25):The New Zealand Law Society accepted the first three as appropriate but resisted the extension to professional negligence. "Gross negligence" was seen by the Society as likely to amount to professional misconduct. Negligence per se as a ground for disciplinary action is resisted. The Society observed that District Societies should make sure that solicitors are available, on a panel or roster basis, to conduct proceedings against other practitioners for negligence. It also observed that there are degrees of incompetence and degrees of negligence. This was acknowledged by the Committee in its Working Paper which stated in paragraph 9.11: This Committee would also suggest that the Society should consider including negligence on the part of a practitioner within the scope of its disciplinary process. "Gross negligence" is already referred to as a ground for disciplinary action in the statutes governing a number of professions. The Committee appreciates that a practitioner can be the subject of civil proceedings at the suit of the wronged client or who may or may not obtain satisfactory redress. However, the disciplinary body can always take such civil proceedings, or the possibility of proceedings, into account. Moreover, the Committee does not consider that all cases of negligence would or should attract the Law Society's disciplinary jurisdiction. Whether or not this is the case must depend on all the relevant circumstances. .[76] The Committee went on to say in its Working Paper:What the Committee does not accept is that it is permissible to disregard the interest which the general public has in being protected from negligent or incompetent practitioners. Representing a client competently should be accepted as part of a practitioner's professional duty and not just as an aspect of the law of tort or contracts. Furthermore, practitioners are almost invariably insured against claims based on allegations of professional negligence. Where the negligence is clearcut the claim will generally be settled out of Court by the insurance company indemnifying the practitioner. It is only where the issue is arguable that the claim is likely to proceed to court with the consequent possibility of publicity for the practitioner or firm involved. It is ironic that if a practitioner is going to be negligent it is in his interest to be clearly negligent for he then escapes any adverse consequences other than the loss of the client and the humility and inconvenience of dealing with his indemnifier. Such cases of negligence go unchecked. For these reasons, the Committee regards it as important that the Law Society accept responsibility to discipline the lawyer who has been guilty of negligent conduct. We adhere to the view that professional negligence or incompetence should be a ground for disciplinary action – at least where it reflects on the practitioner's fitness to practice, or tends to bring the profession into disrepute. Whether disciplinary action is taken in any case, and whether penalties are imposed will depend upon thecircumstances as they appear to the Investigating Committee or the Tribunal if charges are laid.[77] Hansard does not record any discussion or debate about those recommendations when the Bill was introduced. They were adopted in their entirety in s 106. They illustrate the purpose behind s 106(3)(c). That purpose means that it is inappropriate to apply epithets such as "gross" or "reprehensible" to the standard of negligence which tends to bring the law profession into disrepute. They may guide the interpretation of what is misconduct, but s 106(3)(c) is intended to apply to a different category of conduct. [78] We consider Complaints Committee No. 1 of the Auckland District Law Society v APC HC AK CIV-2007-404-4646 29 April 2008 (Randerson, Williams & Winkelmann JJ), which was decided after the New Zealand Tribunal's decision in this case, is consistent with this. Mr McVeigh QC for the Committee submitted that this case made it clear that a charge of professional misconduct is a different type of charge to a charge under s 106(3)(c). Mr Taylor submitted that this is a misreading of APC, but that if APC does suggest that some lesser standard of conduct is sufficient to justify disciplinary standards then it is wrong in principle and in law. We do not agree with Mr Taylor's submission. [79] The Court's view in APC was that the Pillai test is only descriptive of the degree of conduct required to establish "professional misconduct", and it does not assist in determining what degree of negligence is required under s 106(3)(c) when relating to bringing or tending to bring the profession into disrepute. We agree with that view. [80] In our view each of the sub-paragraphs of s 106 are intended to capture different kinds of conduct which may be more or less serious in a particular case. For example, a charge of incompetence (s 106(3)(c)) may in a particular case be a more serious charge than a charge of misconduct in professional capacity (s 106(3)(a)). A charge that concerns an offence punishable by imprisonment that reflects on fitness to practise (s 106(3)(d)) may in a particular case be more serious than a charge of conduct unbecoming (s 106(3)(b)). There is no hierarchy of seriousness as between the sub-paragraphs such that (a) is more inherently serious than (c) and nor do eachof the sub-paragraphs have to be considered relative to the others. Conduct is to be assessed in respect of the particular charge that has been brought. [81] The use of the epithet reprehensible is appropriate in the case of professional misconduct, but it is not a useful description to assist in deciding the degree of negligence that warrants a disciplinary finding measured by whether it reflects on fitness to practise or tends to bring the profession into disrepute. That means a "tendency" to distract from, or lower, the reputation of the legal profession in New Zealand. Professional misconduct will have this effect, but behaviour which does not necessarily amount to professional misconduct may be in separate category of offending in terms of s 106(3)(c). Reliance on epithets is not helpful in this context. No gloss should be placed on the statutory test. [82] We do not seek to set out every consideration that will be relevant in determining whether negligence is of that nature. We do not accept Mr McVeigh's submission that a practitioner's later failure to recognise his negligence is relevant to whether this conduct at the time (ie. the conduct with which he is charged) tends to bring the profession into disrepute. Nor do we agree with the New Zealand Tribunal (and supported by Mr Taylor) that the ultimate outcome (here, the practitioner working assiduously to pursue and effect a recovery for the contributors) is relevant to whether the conduct with which the practitioner is charged amounts to negligence of such a degree as to tend to bring the profession into disrepute. These matters may be relevant to the practitioner's state of mind at the time of the charged conduct and to penalty, but they do not change the nature of the conduct with which the practitioner is charged. We do think it is relevant to consider whether the conduct falls below what is to be expected of the legal profession and whether the public would think less of the profession if the particular conduct was viewed as acceptable.Applying those considerations to the established facts in this case[83] In respect of the failure to obtain a valuation we consider it relevant that a valuation would have been of limited assistance to the contributors in deciding whether the advance to MSO's interests was preferable to the enforcement of the existing security.[84] The purpose of rule 7 is to ensure that investors who are undertaking an exposure to a particular property by way of mortgage have an up to date valuation of the property, so that they may assess the exposure which they are undertaking. A decision from each investor was necessary before the option of discharging the existing security through the MSO transaction could be undertaken. It may be that a focus on that transaction in its own right, as separate from the steps on default which could have been taken under rule 12, would have been desirable. Obtaining a valuation might have served to make clearer the distinction between steps to exercise the existing security and the making of a new advance. But the reality is that the making of the new advance was for all practical purposes a means of avoiding a default under the existing security, not the obtaining of a new security. Accordingly, the important rationale which underlies rule 7 was substantially absent. Moreover, the investors were told that if a mortgagee sale eventuated there would be a significant shortfall of as much as $400,000 in realising the security. That at least provided some indication of the present value of the property. [85] In those circumstances, while the valuation ought to have been obtained because rule 7 required that it be obtained and so that contributors had the full information before them, we consider that the practitioner's failure to obtain a valuation does not amount to negligence of a degree such as to reflect on his fitness to practise, or to tend to bring the profession into disrepute. [86] In respect of the conflict, for the reasons we have set out above, we agree with the findings of both Tribunals that the practitioner was negligent. We view it as "sophistry" for the practitioner to contend that, in disposing of all RWM's assets, meeting his liabilities and securing his release from the guarantor, he was not acting for that client. His duties to that client conflicted with his duties to the contributors and he was negligent in failing to recognise this and to take the appropriate steps in light of that conflict. [87] We recognise that a solicitor may act for both lender and borrower, and indeed in terms of the Solicitors Nominee Company Rules he must act for the investors. He, as the "responsible practitioner" who operates the nominee company, is required to ensure the rules are adhered to and must determine the appropriateaction to take if a default arises having regard to the advice or instructions of each investor. The practitioner must continue to act for the benefit of the investing clients in the contributory mortgage. But it does not follow that he should continue to act for both the borrower and the investing clients where a situation arises that the former may obtain some advantage or benefit which may conflict with the interest of the latter. [88] The District Tribunal, comprising of six members (including lay persons), found that the charge reached the necessary level of seriousness whereas the New Zealand Tribunal, also comprising six members (including lay persons), reached the opposite conclusion. But the New Zealand Tribunal did so on the basis that a "mistake made in good faith" or "mere carelessness" was not sufficient to warrant disciplinary action. [89] Neither Tribunal had the advantage of greater qualification to express views on behalf of the profession or the public. The District Tribunal had the advantage of hearing the practitioner give evidence and be cross-examined. The District Tribunal considered the conduct was deserving of criticism. The New Zealand Tribunal considered that was the wrong test, and that negligence under the second limb of s 106(3)(c) needed to meet the same level of seriousness accepted in Atkinson and in other cases as applying to s 106(3)(a) charge. In our view the New Zealand Tribunal was wrong in that respect. [90] Viewed afresh, the established conduct did not comprise a single error nor mere misjudgement. It involved a failure to recognise the conflict of interest that had to exist, and was going to arise, upon discharge of the MH Ltd/RWM mortgage and release of the guarantor, and the failure to advise the contributors to take independent advice in light of that conflict. The contributors were entitled to expect and receive undivided loyalty in the advice they received. The practitioner's failures deprived the contributors of the ability to make an independent assessment, uninfluenced by considerations as to what was in RWM's interests, before agreeing to the new borrower. They were not given full information about RWM's financial position so that they could assess whether they agreed with the practitioner's view that it would be pointless to pursue him. They were told that two of the lenders werehappy to proceed, but they were not told who they were. They were not told why the transaction was urgent. The failure to recognise the conflict, thereby depriving clients of a recommendation uninfluenced by any potential consideration of RWM's interests, was in our view serious. [91] In our view it was negligence of a degree that tends to affect the good reputation and standing of the legal profession generally in the eyes of reasonable and responsible members of the public. Members of the public would regard the actions as below the standards required of a law practitioner, and to be accepted as such by responsible members of the profession. It is behaviour or actions which, if known by the public generally, would lead them to think or conclude that the law profession should not condone it, or find it to be acceptable. Acceptance by the profession that such negligence is acceptable would tend to lower the standing and reputation of the profession in the eyes of the general public. [92] The decision of the Court is to allow the appeal and reinstate the District Tribunal's finding of guilt, but only in respect of the second charge. [93] Given the costs sanctions that were imposed, and as are varied by this judgment (see below), we do not think any further sanction in the form of a fine is required. The fines remain remitted. The Committee is entitled to costs of the hearing before the District Tribunal to reflect one guilty finding, which we fix at $20,000, together with Tribunal costs of $2,010. Costs in the New Zealand Tribunal should lie where they fall, in accordance with the provisional view expressed by that Tribunal. The Committee is also entitled to costs on this appeal. Counsel are to submit memoranda within 30 days of the date of this judgment if they cannot be agreed. [94] Mr Taylor submitted that, because the District Society sat on its hands for so long before it decided to lay charges, all costs should be borne by it. We do not agree. We consider that the decision to bring the charges was warranted in view of the findings of negligence made by the District Tribunal, the New Zealand Tribunal and now by us. The charges were established in the District Tribunal and now, in respect of one of the two charges, before us. The charges were not established in theNew Zealand Tribunal because the wrong test was applied. We see the delay point as more relevant to the final issue, that of name suppression. [95] The practitioner, and the clients, had their names and identifying particulars suppressed by the New Zealand Tribunal. While name suppression of a practitioner found guilty of disciplinary charges does not ordinarily follow, in view of the outcome not being based upon "fitness to practise", that the conduct the subject of the charge occurred nearly 10 years ago and that the judgment is important to make clear to the profession the proper tests to be applied under s 106(3)(c), the suppression orders are to continue. ____________________________J W Gendall J____________________________A D MacKenzie J____________________________Mallon JSolicitors: Young Hunter, Christchurch for Appellant Minter Ellison Rudd Watts, Wellington for Respondent