In case anyone has missed it, the past 24 hours have seen some dramatic developments in the Centro class action currently being heard in the Federal Court by Justice Gordon. (For a brief summary of what this case is about, see the first paragraphs of my previous post about the Centro class action here.)

It has been reported in the Age and the Australian that yesterday, counsel for PwC made some significant, limited admissions as to negligence, although not as to liability. The Australian reports that PwC, through counsel Richard McHugh SC, now concedes that it should have identified the $3.1billion in short-term debts that had been incorrectly classified as non-current in the company accounts for 2007. It is reported that Mr McHugh said –

“My client accepts for the purposes of the proceeding that audit staff were provided with information at a particular date which means more should have been done in relation to the classification….And that amounts to a breach of retainer and a breach of duty.”

However PwC has argued that the accounting errors did not cause the loss alleged to have been suffered by shareholders. Mr McHugh reportedly argued that the cause of the loss was, rather, the refinancing problems Centro was experiencing and not revealing, “and everything that went with it”, as well as shareholders investing based upon Centro’s history of paying considerable distributions. (I note in passing that the Full Federal Court recently handed down its decision on causation and shareholder losses claimed to be caused by misleading and deceptive conduct in De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) & Ors [2012] FCAFC 28.)

Somewhat curious is the argument advanced for PwC yesterday, as reported by the Age, that it was not PwC but rather its individual audit partner, Stephen Cougle, who made inaccurate representations about the quality of Centro’s flawed 2006/2007 audit. According to the Australian, PwC’s counsel Mr McHugh also argued that Mr Cougle was not directly responsible for the errors in the accounts, because when the first $1bn-plus error was discovered by PwC staff, Mr Cougle asked his staff if there were further issues in the accounts and was assured there were not.

Both papers report that Justice Gordon pressed Mr Hugh on these arguments, described by the Age as a “blistering exchange”, and that Justice Gordon warned PwC that if it persisted in holding a position that she ultimately found had no basis, the court could order costs against PwC’s counsel and lawyers personally. It appears that Mr Hugh took umbrage at this, remarking that her Honour’s reference to the issue of costs was “grossly inappropriate”.

It is not the first time Justice Gordon has warned parties in the expensive Centro class action that provisions of the Federal Court Act allow courts to award costs against lawyers personally if they have not acted to resolve disputes quickly, efficiently and inexpensively. Indeed her Honour has good cause to remind parties of this. Historically such orders have been unusual, but it may be that we can now expect to see more of them. Just a month ago, Gray J of the Federal Court ordered costs to be paid by a solicitor personally under s 43(3)(f) of the Federal Court Act, in Modra v State of Victoria [2012] FCA 240. In that case, there had been a history of deficient pleadings and several hearings concerning them, culiminating in an order for a further amended statement of claim to be filed and for the costs thrown away and of the last hearing to be borne by the applicant’s solicitor. In holding that the applicant’s solicitor should bear the costs personally, Gray J examined ss 37M and 37N of the Federal Court Act. His Honour held at [31] that since 1 January 2010, the duty of a legal practitioner in a proceeding in the Federal Court has been changed significantly: he or she must now conduct a proceeding in a way that is consistent with the overarching purpose referred to in s 37M, which has objectives that include efficiency, timeliness and economy, as well as justice. Whilst he accepted that the question of whether a lawyer should be ordered to pay costs personally should be determined by the principles found in the decided cases, his Honour observed that his so accepting was subject to the significant qualification of the changes to a legal practitioner’s duty effected by the introduction of ss 37M and 37N. (Note that the overarching purpose introduced in the Federal jurisdiction is of course broadly echoed in Victoria in the Civil Procedure Act 2010 (Vic) – see in particular Chapter 2 as to the overarching purpose and overarching obligations).

There have been further developments on this costs warning issued by the judge in Centro, this morning. The Age has reported that PwC’s counsel Mr McHugh informed her Honour in Court that her comments about possibly awarding costs against PwC’s counsel and lawyers  personally had put them in a difficult position. Mr McHugh said that her Honour’s comments may give rise to a conflict of interest between the lawyers’ own concerns and those of their client PwC. He reportedly said the “making of the threat” may interfere with the proper conduct of the defence by PwC, although he said the members of the legal team needed to make it clear that the defence they were putting to the court was “not without foundation”. It is reported that twice Mr McHugh asked Justice Gordon to withdraw her comments about costs. On the first occasion, her Honour declined to withdraw them but agreed to stand the case down while PwC and its lawyers considered their position.  Subsequently, another barrister representing PwC, Cameron Moore SC briefly returned to Court and asked for five more minutes. Mr Moore reportedly informed the Court that when he returned PwC would have “something to announce to the Court.”

When the hearing resumed at noon, counsel for PwC reportedly again asked Justice Gordon to withdraw the costs comments. Her Honour replied that she would consider the matter. Curiously, Mr McHugh reportedly then said that members of the legal team might have to withdraw, but immediately stopped himself, withdrew the comment, and said PwC’s defence would continue.

PwC’s auditing partner Stephen Cougle has since taken the stand.