RICHARD ZHAO LAWYERS LTD v FAMILY COURT AT AUCKLAND [2015] NZHC 983

RICHARD ZHAO LAWYERS LTD v FAMILY COURT AT AUCKLAND [2015] NZHC 983 [8 May 2015]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2015-404-000316[2015] NZHC 983BETWEEN RICHARD ZHAO LAWYERS LIMITEDPlaintiffAND FAMILY COURT AT AUCKLANDFirst DefendantJIE PING CHENSecond DefendantHearing: 28 April 2015Counsel: FC Deliu for PlaintiffPF Chambers for Second DefendantJudgment: 8 May 2015JUDGMENT OF ASHER JThis judgment was delivered by me on Friday, 8 May 2015 at 4.45pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:FC Deliu, Auckland.PF Chambers, Auckland.Introduction[1] Richard Zhao is a lawyer practising in Auckland and controls Richard Zhao Lawyers Ltd, a law firm in Auckland. He seeks judicial review of four decisions ofthe Family Court at Auckland. Ms Chen opposes the application. The firstdefendant has not sought to take any steps and has not appeared.[2] The first decision was a direction by Judge D Burns on 23 December 2014that Richard Zhao Lawyers Ltd transfer funds it was holding to another lawyer. Thesecond is a decision of 20 February 2015 emailing the 23 December 2014 direction.The third is a decision on 5 March 2015 arising from the 23 December 2014 decisionto set a District Court proceeding down for an urgent hearing. The fourth is adecision of 10 March 2015 confirming the fixture and directing Mr Zhao to attend asan officer of the Court.[3] It is said that the decisions were made contrary to law, and were:(a) a breach of legitimate expectation;(b) a fraud upon the Court, or the seeking of relief without evidence;(c) ultra vires (due to a lack of jurisdiction);(d) an error of law;(e) a breach of natural justice/statutory duty;(f) unreasonable in a Wednesbury sense; and(g) there was a failure to take into account relevant considerations.A brief history[4] The second defendant Jie Ping Chen married Gang Wang on 24 December2004. They separated in May 2010. Ms Chen owned two properties, one of whichwas at 48 Te Koa Road, Panmure. Mr Wang was not on the title. The property wassold on 27 November 2013 for $653,000 leaving net sale proceeds of $212,370.14 after the deduction of all expenses.[5] Mr Wang claimed that the house at Te Koa Road and the net proceeds wererelationship property, and claimed a half interest in the $212,370.14. Ms Chenmaintained that the house and the net proceeds were never relationship property andthat the proceeds are her separate property.[6] In April 2014 Ms Chen instructed Mr Zhao to bring relationship propertyproceedings on her behalf against Mr Wang. On 4 April 2014 Mr Wang's solicitors,East Law Ltd, wrote to Mr Zhao seeking an undertaking that his firm would hold thesale proceeds undisbursed until resolution of the division of relationship propertydispute. On Ms Chen's instructions Mr Zhao provided the following undertaking:I Richard Zhao of Amicus Law hereby undertake that our firm will retain the sale proceeds of 48 Te Koa Road, being the amount of $212,370.40 which was received from East Law Ltd undisbursed, until resolving of division ofrelationship property between Gang Wang and Jieping Chen.[7] By 5 September 2014 Ms Chen no longer wished Mr Zhao to act for her, and had instructed Paul Chambers, barrister. Mr Chambers wrote to Justicia Chambers(for the attention of a barrister Bianca Fanene) and Amicus Law (for the attention toMr Zhao) advising of his instruction and seeking to uplift Ms Chen's files. He alsoraised the question of the funds being held in trust and whether there was anundertaking.[8] Francisc Deliu, barrister, responded on 8 September 2014 stating that therewas a lien in place over non-payment of legal fees and stating that Mr Zhao hadgiven an undertaking to hold the funds.[9] On 11 September 2014 Mr Chambers on Ms Chen's behalf lodged acomplaint with the New Zealand Law Society against Mr Zhao. There was a complaint that Mr Zhao was taking the position that he had a lien over fees and would not release the files until the fees were paid. I will return to this question laterin the judgment. There was also a complaint about the level of fees.[10] On 17 September 2014 Judge L de Jong issued a directions minute on theFamily Court file (the first Judge de Jong minute). He recorded the background andfour obstacles that were in the way of a hearing proceeding. He said at [17]–[19]:In my view, the quality of documentation before this Court is poor and nodoubt explains why the wife has now engaged a new lawyer. The wife's newlawyer has filed a comprehensive memorandum which highlights a range ofissues for the wife being able to advance the proceedings. Her first difficultyinvolves trying to get information currently held on her behalf by her formerlawyer. In my view, that information needs to be released immediately andurgently. I am not in a position to make any orders with respect to that issuebut it is hard to understand how the wife's former lawyer feels able towithhold this information particularly having regard to the Privacy Actprovisions. All of this raises concern about whether it is appropriate thatRichard Zhao Lawyers Limited continue to hold the sale proceeds of theparties' property.What I intend to do is to adjourn these proceedings to a registrar's list inabout six weeks. That is to allow the wife's new lawyer an opportunity tofollow up with the former lawyers, and the Law Society, in an effort toadvance the proceedings in a meaningful way.I will also make a direction that the registrar forward a copy of this minute toRichard Zhao Lawyers Limited and Justitia Chambers. The purpose of thisis to ensure they have adequate notice that this Court is very likely to makean order which will require the parties' sale proceeds to be held in asolicitor's trust account other than where they are held at present.[11] On 16 October 2014 Mr Deliu sent an email to the "case management team, Auckland" at the District Court protesting at comments being made about Mr Zhao'sconduct when he was not a party to the proceedings and had been given noopportunity to comment.[12] On 5 December 2014 Judge de Jong issued another minute (the second Judgede Jong minute). He noted Mr Deliu's email to the Registrar and commented that the Registrar was left confused by Mr Deliu's informal approach to the Court, andwas uncertain whether the email required a response. I interpolate to observe thatthis concern was properly expressed, and counsel should not send any document to acourt which is intended to be read by a Judge, which is not in the form of amemorandum or other formal court document and is intituled and dated.Judge de Jong observed at (e):My 17 September 2014 minute was issued because I was the Judge whopresided over a "formal proof hearing" on 17 September. It was not possiblefor me to make any orders and, in my minute, I set out four obstacles to making orders. My minute also sets out some of the background so any Judge or lawyer dealing with the file in the future will know what issues arise and what needs to be addressed. Perhaps Mr Deliu did not read myminute because I did not actually make any orders. If the applicant wants toapply for orders in the future, including orders against third parties, this is amatter for the applicant. My minute deals with the fact the applicant iscontemplating further steps and I was merely alerting Mr Zhao andMs Fanene of this prospect as a matter of courtesy. I am sorry my courtesyhas been misplaced or misunderstood. Similarly, I did not make anydirections regarding the release of Ms Fanene's file to the applicant's newlawyer. Whether the applicant relies on the Privacy Act to obtain aphotocopy of Ms Fanene's file is entirely a matter for the applicant.(emphasis added)[13] At about the same time, Mr Chambers on behalf of Ms Chen filed an on notice application for orders dividing the relationship property and an interim orderfor distribution of part of the net proceeds of sale in the amount of $100,000 and anyancillary order or orders that the Court deemed just. The accompanyingmemorandum relevantly sought the following direction:8.2 In terms of paragraph 19 of de Jong DCJ's minute of 17 September 2014, an order from the Court requiring the parties' sale proceeds tobe held in the applicant's current solicitor's trust account, details ofwhich accompany this memorandum.[14] There was also a request for consideration of an award of indemnity costsagainst Mr Zhao.[15] On 23 December 2014 the matter came before Judge Burns who issued an oral judgment. It is this judgment that is the first decision for which judicial reviewis sought. He noted that there had been an urgent application brought for interimdistribution and that:1[6] Today Mr Chambers seeks to have a direction that the funds betransferred from that law firm to his instructing solicitors, in order to protectthe funds and also to involve lawyers who are actively involved in theproceedings as opposed to a law firm that is no longer involved.[7] I am satisfied it is appropriate to make such a direction and I direct,therefore, that Richard Zhao Lawyers Limited transfer the entire funds heldon trust on behalf of both parties to Mark Henley-Smith, lawyers, to be heldby Mark Henley-Smith undisbursed without any further payments beingmade, unless there is a written agreement entered into between the parties1 Chen v Wang [2014] NZFC 10786.pursuant to s 21 of the Act or alternatively a Court order, whichever occursfirst.[16] His order was in due course sealed and sent out on 20 February 2015 to Mr Zhao. This is the second "decision" that is challenged in the judicial review.[17] On 24 February 2015 Mr Chambers filed a memorandum for Judge Burns seeking orders that Mr Zhao be directed to attend the Court to explain his wilfulrefusal to comply with the direction of the Court and for an order against RichardZhao Lawyers Ltd in the following terms:An Order against Richard Zhao Lawyers Limited for contempt of Court, whereby seizing the funds held in that solicitor's trust account and deliveringsame to Henley-Smith Law and awarding damages and indemnity costsagainst Richard Zhao Lawyers Limited (see above citations and, inparticular, sections 2 and 19(1)(a) District Courts Act 1947).[18] On 5 March 2015 Judge Burns issued a minute setting the matter down before him for 30 minutes, directing that Richard Zhao Lawyers Ltd and Mr Zhaoattend the hearing. It stated: Set the case down urgently before me (30 minutes). I direct the directors of Richard Zhao Limited and Mr Richard Zhaoto attend the hearing. The issue for determination at the hearing is whether the company ofMr Richard Zhao is held in contempt and if so, what steps the Courtshould take. The Law Society should be informed of this hearing and has leave tointervene.This is the third decision that is challenged in the judicial review proceedings.[19] On 10 March 2015 Judge Burns issued a further minute: The memorandum of Mr Chambers dated 9/3/15 has been read. I direct a copy of the memorandum be served on Ms Carrie Gage,Senior Solicitor Office of Legal Counsel, Ministry of Justice. I direct the hearing on 30/3 to proceed. Mr Richard Zhao as an officer of the Court has been directed toattend. If he fails to do so, then the Court will hear any applicationsas to what steps (if any) should be ordered.This is the fourth decision in respect of which review is sought.[20] Since the filing of the amended statement of claim there was a hearing on30 March 2015, being the hearing that is referred to in the minute of 10 March 2015.Following that hearing on 23 April 2015, Judge Burns delivered a judgment in whichhe held Mr Zhao to be in contempt of Court and referred his conduct to the NewZealand Law Society. However, he declined to make the orders sought in respect ofthe funds, in particular a contempt ruling in relation to the non-payment of funds, aseizure of the funds and damages and a direction to the bailiff. He did so on thebasis that he had no jurisdiction to make such orders.[21] The first defendant has stated that it will abide the decision of the Court, andhas not appeared.[22] I record that Mr Deliu asked me to debar Ms Chen from appearing, given thatthere had been no statement of defence filed to the amended statement of claim, andvarious procedural failings. However, Mr Zhao had never formally filed thatamended document. There have been procedural failings on both sides, but theyhave not given rise to serious prejudice. I will not debar Ms Chen from defendingthe claim.Approach[23] I am prepared to consider the application for judicial review, even though theparties have a right of appeal from the Family Court. Mr Zhao was not a party to theFamily Court proceedings. As a non-party he claims to have been affected by thedecision. Judicial review is a procedure that is available for him to challengedecisions of the Court that affect him.The decision of 23 December 2014The right to be heard[24] The amended statement of claim contains the usual heads of claim forjudicial review. I do not propose to address each one. It seems to me that in relationto the decision of 23 December 2014, the natural heading for Mr Zhao's complaintscomes under "breach of natural justice".[25] The right to natural justice is set out in s 27(1) of the New Zealand Bill ofRights Act 1990. Section 37 of the Property (Relationships) Act 1976 provides:37 Persons entitled to be heard(1) Before any order is made under this Act, such notice as the Court directs shall be given to any person having an interest in the property which would be affected by the order, and any such person shall be entitled to appear and to be heard in the matter as a party to the application.[26] It is an element of the principles of natural justice that there is a duty to hear both sides of a dispute before making a decision.2 No matter how obvious a pointmay seem, or how unreasonable on its face the actions of a person may have been, aperson who will be materially affected by a decision should have the opportunity tobe heard.[27] Mr Zhao was not heard when the decision of 23 December 2014 was made.However, that was not the end of it. It must be discerned whether he had a materialinterest in the outcome of that decision. The right to be heard, sometimes called theaudi alteram partem rule, does not operate blindly without regard to the practicalrealities of the situation.2 Board of Education v Rice [1911] AC 179 (HL) at 182; Commissioner of Police v District Courtat Manukau [2007] NZAR 370 at [11]. See generally Philip Joseph Constitutional andAdministrative Law in New Zealand (4th ed, Brookers, Wellington, 2014) at 1023, 1046-1048.Effect on Mr Zhao[28] Judge Burns in the decision of 23 December 2014 does not refer to anypossible adverse effect on Mr Zhao that might result from the decision. He makes noreference to Mr Zhao having given an undertaking to hold the money. He makes noreference to the possibility of Mr Zhao having a lien over the money. However, thiswas understandable. On the material that I have had made available to me, it seemsthat this has arisen because Judge Burns was not in fact made aware of either ofthese matters. To explain this it is necessary to go back into the history in a littlemore detail.[29] On or about 26 March 2014 Ms Chen signed a general contract of retainerwith Mr Zhao in respect of "family matters – relationship property". It was stated inthe contract that:In the course of completing this matter, we estimate that our fee, excluding GST and disbursements, will be not less than $5,000, to negotiate. We are not guaranteeing that we can accomplish the work for that sum, but are representing to you that in our judgment that amount appears reasonable under the circumstances. [30] The retainer went on to reserve Mr Zhao's right to revise the estimate andcharge further legal fees.[31] The contract then went on to provide that given Ms Chen's lack of liquid cashto pay fees, payment of fees was deferred until such time as the $212,370.14 held in trust by Mr Zhao for her was released. Paragraph 6 provided:In consideration you agree that we are a priority secured creditor and exceptas otherwise provided by law we are in a prime position to be paidimmediately to avoid doubt above all other creditors, upon disbursement ofsaid funds. You also agree to allow us to place a caveat or charging order orthe like on any or all of your property to secure our position at any time onour discretion.[32] It would seem that this contract gave Mr Zhao the right to claim a lien over the funds held for at least $5,000 plus GST and disbursements, and quite possibly more. In fact Mr Zhao has charged $13,402.25.[33] There were some references to a lien in Mr Deliu's correspondence with theFamily Court prior to 23 December 2014. Because they were emails and notmemoranda, they may not have been seen by the Judge. However, in thememorandum of counsel of 4 December 2014 that Judge Burns is likely to have hadin front of him when he considered the request for an order directing Mr Zhao to payout the money, at paragraph 4 it was stated:One of the reasons for those complaints is the continued refusal of theapplicant's former lawyers to release funds held in the former solicitor's trustaccount, to the applicant's new solicitor's trust account, absent any evidenceof a lien against both files and funds they had previously advised relianceupon.(emphasis added)[34] In fact, there was good evidence of the existence of a lien over the funds inthe form of the contract of retainer (which I record Mr Chambers may not have beenaware of). There was no reference in the memorandum to the existence of anundertaking.[35] Unsurprisingly, therefore, in the 23 December 2014 judgment there is noreference to the existence of any lien, and no reference to an undertaking that hadbeen given by Mr Zhao in respect of the funds. There is no provision for thatundertaking to be discharged.[36] As I have outlined, the facts show that Mr Zhao and his company indeed didhave an interest in any order that was being made about the payment out of the fundheld. There was a lien and an undertaking. It would have been unfair to Mr Zhaoand his company to require him to disgorge funds over which he appeared to havehad a lien without giving him an opportunity to be heard. Further, Mr Zhao wasentitled to expect that if he was directed to pay the monies, that the Court wouldformally record that he was no longer bound by the undertaking, or explicitlydischarge him of his obligation in one way or another. It seems likely that ifMr Zhao had been given an opportunity to be heard that he would have persuadedthe Judge to have made provision for him to remain secured for his fees in one wayor another, and also he would have obtained an explicit discharge of the undertaking.Neither occurred. Although the amount of fees owed to Mr Zhao was limited, theamount for which he was secured was far from de minimis. Further, a solicitor'sundertaking is a serious matter.[37] Thus, I conclude that Mr Zhao should have been given an opportunity to beheard before any judgment was issued requiring him to disgorge the funds he held.Was Mr Zhao given an opportunity to be heard?[38] There is no evidence of service on Mr Zhao or his company of the applicationfor orders or the memorandum in support. Although Judge de Jong's first minuteindicated that an order requiring him to make the payment might well be made bythe Court, his second minute explicitly recorded at [3(e)] that no orders had beenmade in the first minute, and that if Ms Chen wished to apply for orders in the future,including orders against third parties (presumably Mr Zhao), that that would be amatter for her. Judge de Jong stated in the second minute that he was merely alertingMr Zhao to this prospect as a matter of courtesy.[39] Thus on the basis of the second minute Mr Zhao could have fairly expectedthat he would be given notice of an application that he be ordered to transfer themonies, before an order was made.[40] Mr Chambers did not seek to argue that there had been any formal service onMr Zhao. He thought that the application and memorandum might well have beenmailed, but could not attest to having done so himself. He did not know if the Courthad given any informal notification. Mr Zhao has deposed that he did not havenotice, and this has not been challenged. Mr Zhao thus was not given notice of thepending fixture, which would ultimately affect his interests.Conclusion on first decision[41] For the reasons that I have set out, Mr Zhao had an interest in the funds thathe was ordered to pay out, and an interest in being discharged from the undertakingthat he had given to hold the funds. Because he had these interests he should havebeen given notice as a party affected of the application for an order that he pay outall the money. He was given no such notice. There was therefore a breach of the audi alteram partem rule and a breach of natural justice.[42] Further, this analysis shows that the Court proceeded without being madeaware of relevant matters. It was relevant that there appeared to be a lien, and it wasrelevant that there was an undertaking. The passing reference to the lien in thememorandum did not properly inform the Court of the nature of Mr Zhao's claimand the Judge does not appear to have been made aware of the undertaking.[43] This is a significant failure to take into account relevant considerations, and isin itself a ground for review.[44] I conclude that there was a significant breach of natural justice in the 23 December 2014 hearing that proceeded without notice to Mr Zhao of theapplication to obtain an order of payment of the funds held. There was also a failureto take into account relevant considerations which were not brought to the Judge'sattention, being the undertaking and Mr Zhao's lien over the funds in question.Second decision – sending sealed order[45] The emailing of the sealed order as pleaded in the amended statement ofclaim could not in itself be a decision susceptible to judicial review, as it was apurely formal process. However, the actual sealing of the order on or about20 February 2015 could be seen as part of the original 23 December 2014 decisionmade in breach of the rules of natural justice, or a following act directly tainted bythe earlier failure to observe the rules of natural justice.[46] It must follow from the 23 December decision being reviewed, that any ordersealing the decision is also to be reviewed.Third decision – setting down hearing[47] On 5 March 2015 a hearing was set down by the District Court for 30 March2015 as to whether Mr Zhao and his company were in contempt of Court. It wasstated in a minute of 5 March 2015:The issue for determination at the hearing is whether the company or MrRichard Zhao are held in contempt and if so, what steps the Court shouldtake.[48] It was also stated that the Law Society should be informed of the hearing andleave was given to the Law Society to intervene.[49] This minute was issued under the misapprehension that there had been a fairhearing on 23 December 2014 where the order was made that the monies be paid.The Court worked off an incorrect premise. This can be categorised in judicialreview terms as failing to take into account a relevant matter. The 23 December2014 decision should not have been given, and the order for a hearing to determinewhether Mr Zhao and his company may have been in contempt should not have beenmade.Fourth decision – confirmation of fixture[50] This is an odd head of claim in that it would appear to cover the same ground as the 5 March 2015 decision that has been discussed. However, this fourth decisionunder review is best considered when coupled with the actual decision that was madeon 23 April 2015 following the hearing on 30 March 2015. That decision was madeavailable shortly before the hearing of this case.Conclusion[51] At the conclusion of the hearing I indicated that I was contemplatingquashing the 23 December 2014 judgment and I inquired about what orders shouldfollow if I did that. Mr Chambers accepted that it would follow that the laterjudgment of Judge Burns of 23 April 2015 that relied on that order and made noreference to Mr Zhao's lien and the undertaking should also be quashed. I will treatthe amended statement of claim as further amended to include a pleading that the23 April 2015 decision is the fifth decision that the plaintiff seeks to have quashed onthe same pleaded grounds.33 See r 1.9 of the High Court Rules.[52] Mr Deliu on behalf of Mr Zhao accepted in the course of submissions thatMr Zhao's unwillingness to pay the money to another firm of lawyers stemmed fromthe existence of the undertaking and the existence of his lien. If he retained securityfor the fees that he claimed of $13,402.25 and was released from his undertaking, hewould have no objection to the balance of the funds being paid to Ms Chen's newlawyers.[53] This was discussed during the course of the hearing by both Mr Chambersand Mr Deliu and it was agreed that to enable Ms Chen to get access to funds and formatters to progress without them becoming bogged in other procedural litigationrounds, I should direct that the net balance be paid to Ms Chen's current solicitorsHenley-Smith Law, and that the correct figure should be $94,274.84. This sum wascalculated on the basis that the amount presently held in the trust account is$215,354.19, including interest to the hearing date, and that Ms Chen's half share ofthat is $107,677.09. If from that sum the amount of Mr Zhao's fees of $13,402.25 isdeducted, the net balance that Mr Zhao is content to transfer is $94,274.84, providinghe is released from his undertaking.Result[54] The judgment of 23 December 2014 of Judge Burns, the decision of20 February 2015 to seal the order, the decision of 5 March 2015 to set down anurgent hearing of 30 March 2015, and the decision of 10 March 2015 confirming afixture and requiring Mr Zhao to attend are quashed. In addition, and with theconsent of Mr Chambers, the judgment of 23 April 2015 of Judge Burns is quashed.[55] I substitute for those decisions a direction to Mr Zhao to pay to Ms Chen'scurrent solicitors, Henley-Smith Law, the sum of $94,274.84 from the sum held byhim on behalf of Ms Chen and Mr Wang, the money then to be held byHenley-Smith Law for Ms Chen and Mr Wang. I discharge Mr Zhao of hisundertaking to Ms Chen to hold those monies, although it remains in respect of thebalance until discharged by agreement between Ms Chen, Mr Wang and Mr Zhao, orby order of the Court.[56] In quashing these decisions I do not purport to rule on the disciplinary orcontempt issues raised between the parties. It may be that Ms Chen may seek toargue that Mr Zhao has been shown in any event to have been in contempt of Court,even if these particular decisions are quashed, and may wish to pursue complaintswith the New Zealand Law Society. She may seek a hearing in the Family Court onissues other than the 23 December 2014 decision. That is a matter for her. Mydecision is based solely on procedural failures relating to the 23 December 2014decision and the decisions that followed. I would, however, comment that at the endof the hearing there was a significant practical compromise reached betweenMs Chen and Mr Zhao as to the way forward, which has resulted in a significantpayment out of the funds. That may mean that the parties can move forward.[57] I reserve leave to the parties to seek clarification of these orders should issuesarise.Costs[58] At the request of the parties I reserve the question of costs...Asher J