B and A LT v HF [2019] NZLCRO 30 (28 March 2019)

Last Updated: 1 April 2019

	LCRO 235/2017
CONCERNING	an application for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006
AND
CONCERNING	a determination of the [Area] Standards Committee [X]
BETWEEN	B and A LT Applicants
AND	HF Respondent

DECISION

The names and identifying details of the parties in this decision have been changed.

Introduction

[1] Mr and Mrs LT have applied for a review of a decision by the [Area]Standards Committee [X] (the Committee) to take no further action in respect of their complaint concerning the conduct of the respondent, Mr HF.

Background

[2] Mr and Mrs LT were directors in the company [DEF]Insurance Limited ([DEF]). In that capacity, they effectively controlled 80 per cent of the company shareholding.

[3] For some years they were the preferred supplier of insurance products to the [XYZ] Association ([XYZ]). An element of this commercial relationship involved [DEF] paying a commission to [XYZ] on products sold. As part of an earlier agreement between the parties, [XYZ] was permitted to appoint a director to the board of [DEF].

[4] At the time engaged by this complaint, the appointed director, Mr RR, was also the Chief Executive Officer of [XYZ] which held a 20 per cent shareholding in [DEF].

[5] The longstanding business relationship between the parties ended when [XYZ] elected not to continue with [DEF] as its preferred supplier and contracted with another party for this purpose.

[6] The parties became embroiled in a dispute. Issues in contention included disagreement as to the extent to which there had been compliance with previous agreements entered into by the parties.

[7] Mr and Mrs LT believed that Mr RR was not acting in the best interests of [DEF] and signalled their intention to remove him from the [DEF] board.

[8] Lawyers became involved.

[9] Mr HF, acting for [XYZ], provided response to [DEF]’s signalling of their intention to remove Mr RR, and in correspondence to [DEF] dated 30 August 2017:

• (a) questioned whether Mr and Mrs LT’s lawyer was acting in a conflict of interest situation in purporting to act against [XYZ] when a large proportion of [DEF] customers belong to [XYZ], in light of the relative shareholdings of the parties;
  
• (b) raised issues over the status of the agreement and relationship between the parties;
  
• (c) corrected what he considered had been a misrepresentation of various governance matters; and
  
• (d) questioned whether there had been a failure to comply with company law formalities.
  

[10] In the course of his correspondence, Mr HF states:

...Under s138A a director commits an offence for which he or she can be prosecuted if the director exercises powers or performs duties in bad faith towards the company and believing that the conduct is not in the best interests of the company, and knowing that the conduct will cause serious loss to the company. A person convicted of an offence against that section is liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding

$200,000. It would be advisable to inform your clients and Mr NT of their potential exposure under this section should they do anything calculated to prejudice [[DEF]]’s ongoing business, diminish the value of [BA]’s shareholding, or prefer their interests over those of the company.

[11] Later, Mr HF notes:

...However a 20 [per cent] shareholder is not entirely powerless. [BA] hereby gives notice that among other things, the following steps are required to be taken:

...(3) If instead your clients continue to maintain that the 11 May 2006 agreement is at an end and [BA] has lost its entitlement to a seat on the board, then without prejudice to its other remedies [BA] will be holding the directors to account under s131-138A of the Companies Act and will be reporting to the Companies Office on every breach of those duties and/or conduct likely to justify a prosecution under s138A...

[12] It was those paragraphs which provided the focus for the complaint that followed.

The complaint and the Standards Committee decision

[13] Mr and Mrs LT lodged their complaint with the New Zealand Law Society Complaints Service (NZLS) on 27 October 2017. The substance of the complaint was that:

• (a) they considered that Mr HF had made a number of threats against them in his letter of 30 August 2017;
  
• (b) in making the statements detailed at paragraphs [10] and [11] above, Mr HF was signalling that if they did not respond in the manner Mr HF required, a criminal complaint would be made against them; and
  
• (c) they considered Mr HF’s correspondence to constitute a breach of r 2.7 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (the Rules).
  

[14] The complaint was referred to the Early Resolution Service. That process involves a Standards Committee conducting an initial assessment of a complaint and forming a preliminary view.

[15] If the Committee’s preliminary view is that the complaint lacks substance, a Legal Standards Officer (LSO) will contact the respondent lawyer and inform the lawyer of the Committee’s initial assessment, but nevertheless inviting response from the lawyer.

[16] If a response is received, that is provided to the Committee which then completes its inquiry.

[17] Mr HF elected not to respond to the complaint.

[18] The Committee addressed the single issue as to whether Mr HF had made a threat for an improper purpose, and in doing so breached r 2.7 of the Rules.

[19] In its decision delivered on 9 November 2017, the Committee determined, pursuant to s 138(2) of the Lawyers and Conveyancers Act 2006 (the Act), that no further action on the complaint was necessary or appropriate.

[20] In reaching its conclusion the Committee determined that:

• (a) it was not persuaded that the manner in which Mr HF raised the issue of Mr and Mrs LT’s potential breach of the Companies Act 1993 could reasonably be described as having been advanced for an improper purpose;
  
• (b) an improper purpose will arise when a lawyer makes a connection between a threat and an unrelated strategic advantage that the lawyer is trying to accomplish...there was no suggestion that Mr HF was endeavouring to gain a strategic advantage for his client;
  
• (c) referral to legislation [in the way Mr HF had done] was a common feature of a civil dispute;
  
• (d) Mr HF’s statement did no more than put Mr and Mrs LT on notice; and
  
• (e) Mr and Mrs LT were able to take their own legal advice on the relevance and application of the legislation referenced by Mr HF.
  

Application for review

[21] Mr and Mrs LT filed an application for review on 8 December 2017. They submitted that:

• (a) there had been a breach of r 2.7 of the Rules;
  
• (b) Mr HF had demanded internal management and auditing procedures for the company and referenced the possibility of laying of a criminal complaint if those requests were not complied with;
  
• (c) matters of internal management are completely unrelated to any allegation of bad faith, and are outside the parameters of s 138A of the Companies Act 1993; and

• (d) Mr HF had referenced the possibility of imposition of criminal penalties, including the threat of imprisonment, earlier in the correspondence.
  

[22] In further correspondence to the Review Office on 13 February 2018, Mrs LT clarified the focus of her and her husband’s complaint in providing explanation that:

To be clear we are not complaining about a “potential consequence of an allegedly unlawful action”. Rather, we are complaining that Mr HF wrote to us and stated that if we did not comply with his client’s position then we would face criminal consequences – there was no language that implied it was “potential” or “alleged” possibility at all.

[23] The outcome sought is that Mr HF “is made to withdraw these threats in writing and act in a manner expected of his profession”, and that financial reimbursement is made for the legal costs incurred in advancing the complaint.

[24] Mr HF was invited to comment on Mr and Mrs LT’s review application. In correspondence of 25 January 2018 he submitted that:

• (a) the application for review “misconstrues and to some extent distorts” what was said in his letter of 30 August 2017;
  
• (b) solicitors would be in an impossible position if they were not permitted to point out the potential consequences of allegedly unlawful action on the part of their clients’ opponents; and
  
• (c) the Committee’s reasoning was sound.
  

Review on the papers

[25] The parties have agreed to the review being dealt with on the papers. This review has been undertaken on the papers pursuant to s 206(2) of the Act, which allows a Legal Complaints Review Officer (LCRO) to conduct the review on the basis of all information available if the LCRO considers that the review can be adequately determined in the absence of the parties.

[26] I record that having carefully read the complaint, the response to the complaint, the Committee’s decision and the submissions filed in support of and in opposition to the application for review, there are no additional issues or questions in my mind that necessitate any further submission from either party. On the basis of the information available I have concluded that the review can be adequately determined in the absence of the parties.

Nature and scope of review

[27] The nature and scope of a review have been discussed by the High Court, which said of the process of review under the Act:1

... the power of review conferred upon Review Officers is not appropriately equated with a general appeal. The obligations and powers of the Review Officer as described in the Act create a very particular statutory process.

The Review Officer has broad powers to conduct his or her own investigations including the power to exercise for that purpose all the powers of a Standards Committee or an investigator and seek and receive evidence. These powers extend to “any review” ...

... the power of review is much broader than an appeal. It gives the Review Officer discretion as to the approach to be taken on any particular review as to the extent of the investigations necessary to conduct that review, and therefore clearly contemplates the Review Officer reaching his or her own view on the evidence before her. Nevertheless, as the Guidelines properly recognise, where the review is of the exercise of a discretion, it is appropriate for the Review Officer to exercise some particular caution before substituting his or her own judgment without good reason.

[28] More recently, the High Court has described a review by this Office in the following way:2

A review by the LCRO is neither a judicial review nor an appeal. Those seeking a review of a Committee determination are entitled to a review based on the LCRO’s own opinion rather than on deference to the view of the Committee. A review by the LCRO is informal, inquisitorial and robust. It involves the LCRO coming to his or her own view of the fairness of the substance and process of a Committee’s determination.

[29] Given those directions, the approach on this review, based on my own view of the fairness of the substance and process of the Committee’s determination, has been to:

• (a) consider all of the available material afresh, including the Committee’s decision; and
  
• (b) provide an independent opinion based on those materials.
  

Analysis

[30] [DEF] had a longstanding and important commercial relationship with [XYZ].

1 Deliu v Hong [2012] NZHC 158, [2012] NZAR 209 at [39]–[41].

2 Deliu v Connell [2016] NZHC 361, [2016] NZAR 475 at [2].

[31] It was a relationship that likely had considerable financial ramifications for [DEF]’s directors, Mr and Mrs LT.

[32] As agreed insurance providers to members of the [XYZ], it would be obvious that Mr and Mrs LT would have been significantly troubled at the breakdown in the relationship with the Association, and apprehensive at contemplating the potentially adverse consequences for their business which would likely follow from the breakdown of what had been an enduring commercial relationship.

[33] At the kernel of this conduct complaint, is an examination as to whether Mr HF, in the course of representing his client, went beyond the parameters of robustly representing, as he was required to do, his clients’ interests, and veered into the unacceptable territory of making accusation against Mr and Mrs LT for an improper purpose.

[34] At the outset it must be noted that:

• (a) it was Mr HF’s job to promote his clients’ interests;
  
• (b) subject to the overriding obligations owed by a lawyer as an officer of the court, a lawyer must be independent and free from compromising influences or loyalties when providing services to his or her clients;3
  
• (c) a lawyer must at all times exercise independent professional judgement on a client’s behalf. A lawyer must give objective advice to the client based on the lawyer’s understanding of the law;4
  
• (d) in acting for a client, a lawyer must, within the bounds of the law and the conduct rules, protect and promote the interests of the client to the exclusion of the interests of third parties;5
  
• (e) it is an improper exercise of the complaints process, to use that process for collateral purpose in an attempt to gain advantage in a commercial dispute, or as means to endeavour to assert pressure on a lawyer by using
  

3 Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008, r 5.

4 Rule 5.3.

5 Rule 6.

threat of lodging a conduct complaint as a means to inhibit or impede the lawyer’s ability to represent their client;

(f) resolution of commercial disputes will on occasions inevitably involve the parties engaged in the dispute in a robust and highly contested exchange of views and positions; and

(g) a lawyer’s duty to represent their client fearlessly, does not provide cover for a lawyer to abdicate their responsibility to uphold their fundamental obligations, of which one is to ensure compliance with the minimum standards and reference point for discipline as set out in the Rules.

[35] The Rule most directly engaged by the complaint, as identified by the Committee, is r 2.7 which provides that:

A lawyer must not threaten, expressly or by implication, to make any accusation against a person or to disclose something about any person for any improper purpose.

[36] Also of relevance, is r 2.3:

A lawyer must use legal processes only for proper purposes. A lawyer must not use, or knowingly assist in using, the law or legal processes for the purpose of causing unnecessary embarrassment, distress, or inconvenience to another person’s reputation, interests or occupation.

[37] Central to Mr and Mrs LT’s complaint, is allegation that Mr HF threatened them with risk of criminal complaint, if they failed to comply with requests made of them.

[38] Having carefully considered the arguments advanced on review, I am satisfied that argument that Mr HF used legal processes for the purpose of causing embarrassment, distress or inconvenience to Mr and Mrs LT, or expressly or by implication threatened to make accusation against them for improper purpose is misconceived.

[39] Mr HF, in what was a comprehensive account of his client’s position, set out, as he was obliged to do, his view of the possible legal consequences for Mr and Mrs LT of failing to meet what his client considered to be were their various obligations as directors of [DEF].

[40] Mr and Mrs LT may, as they clearly did, have disagreed with Mr HF’s legal analysis, and they were entitled to do so. But it is not for this jurisdiction to arbitrate on

the scope and application of various sections of the Companies Act 1993, or to determine the extent to which various statutory provisions may have relevance to the facts of a particular commercial dispute.

[41] Mr and Mrs LT had the benefit of being independently advised. It was indication of their intention to remove Mr RR (advanced understandably through their counsel) that had prompted [XYZ] to provide a formal response through Mr HF.

[42] If Mr and Mrs LT’s lawyer considered that Mr HF had grossly misrepresented the legal position, then it would be expected that Mr HF’s account of his understanding of the respective legal positions of the parties, would have been met with prompt response from Mr and Mrs LT’s lawyer.

[43] If it had been the case that Mr and Mrs LT’s lawyer considered that Mr HF’s analysis of the legal issues was so grossly misconceived as to present as a misguided and coercive threat to intimidate his clients by advancing allegation of potential criminal offending, it could have been expected that there would be evidence of their lawyer having conveyed those concerns to Mr HF. But there is no indication from the file before me of that having occurred.

[44] It is important to examine what was said by Mr HF, and in particular to consider whether the paragraphs in his correspondence which caused offence, were improper, or seemingly advanced with intention to cause unnecessary embarrassment or distress.

[45] Having carefully read Mr HF’s correspondence in its entirety, I am quite satisfied that the correspondence either when considered in its totality, or by reference solely to the offending paragraphs, presents as appropriate. My impression is that it presents as typical of a lawyer’s correspondence which sets out to establish their client’s position in the early stages of a civil dispute.

[46] The tone of the correspondence, whilst assertive, is neither abrasive nor unnecessarily aggressive.

[47] It was Mr HF’s client’s view that Mr and Mrs LT, in signalling their likely response to the decision by [XYZ] to terminate the business relationship between the two entities, were putting themselves at risk of compromising duties owed by them. [XYZ] was a shareholder in [DEF]. It was, in the face of threat to the level of representation it had

previously enjoyed as a consequence of the position Mr RR held as a director, understandably seeking to protect its position.

[48] It was not improper for Mr HF to identify the provisions of the Companies Act 1993 he considered Mr and Mrs LT were at risk of breaching, nor was it improper to identify the potential consequences of those breaches, as proscribed by that legislation.

[49] As noted, it was open to Mr and Mrs LT (and their lawyer) to dispute that their conduct fell within the possibility of being captured by the sections of the Companies Act 1993 referenced by Mr HF. They were free to disagree. Mr HF’s exposition of his client’s position does not, as suggested by Mrs LT, state that Mr and Mrs LT “would” face criminal consequences if they refused to do what Mr HF had demanded. Mrs LT overstates the position when she reaches such emphatic conclusion on the back of what was no more than an indication of potential outcome.

[50] Nor is it the case that Mr HF introduces suggestion of possibility of an offence being committed in a heavy-handed fashion. He recommends that it would be advisable for Mr and Mrs LT’s lawyer to inform them of their potential exposure. This is reflective of a quite conventional approach adopted by lawyers when setting out their client’s positions in the early stages of a commercial dispute.

[51] Importantly, suggestion that the conduct of the [DEF] directors could potentially breach the Companies Act 1993, does not arise in isolation. The available sanction that Mr HF references is allowed for under the section of the Companies Act 1993 that Mr HF is referencing.

[52] I am not oblivious to the fact that Mrs and Mrs LT did not consider that their actions remotely fell within the scope of the sections relied on by Mr HF, but that is not the issue. The point has been made that it is the task of a Review Officer to determine conduct issues, not civil disputes. There is no indication that Mr HF’s analysis was so demonstrably misguided and erroneous, as to raise concern that his approach was motivated by a deliberate intention to use the threat of a statutory penalty, to intimidate Mr and Mrs LT.

[53] Accusations of acting in bad faith can embrace a broad range of behaviours on the part of Company Directors. It is accusation that is frequently made in circumstances where it is contended that the power of a single director, or group of directors, has been

improperly exercised most commonly to the detriment of a director whose position in the company is more vulnerable. Arguments as to whether powers have been exercised in bad faith, if incapable of resolution, are frequently resolved by the Court.

[54] I agree with Mr HF that it would place lawyers in an impossible position if they were not permitted to point out the potential consequences of allegedly unlawful action on the part of their client’s opponents.

[55] I do not consider that r 2.3 has relevance for this complaint.

[56] Putting to one side the conclusion reached that there was no element of impropriety in the correspondence, it is difficult to see how the exchange of correspondence such as occurred between the opposing lawyers here, could be said to have allowed opportunity for Mr and Mrs LT to suffer unnecessary embarrassment or inconvenience to their reputation.

[57] Attempts to bring Mr HF’s actions under the umbrella of r 2.7 are also misdirected.

[58] Mr HF was not threatening to make an accusation. He was identifying potential legal consequence of the actions being contemplated by the [DEF] directors.

[59] Nor was he threatening to disclose any information.

[60] Mr HF’s actions in providing explanation of his client’s position, and in the course of doing so, informing Mr and Mrs LT of his understanding of the possible legal consequences of them embarking on the course of action they had indicated they were contemplating, did not amount to a breach of either his broader professional obligations, or any obligations arising under the Rules.

[61] I see no grounds which could persuade me to depart from the Committee’s decision.

Decision

Pursuant to s 211(1)(a) of the Lawyers and Conveyancers Act 2006 the decision of the Standards Committee is confirmed.

DATED this 28th day of March 2019

R Maidment

Legal Complaints Review Officer

In accordance with s 213 of the Lawyers and Conveyancers Act 2006 copies of this decision are to be provided to:

Mr and Mrs LT as the Applicants Mr HF as the Respondent

Mr EL as a Related Person [Area] Standards Committee [X] The New Zealand Law Society