About Life Pty Ltd v Maddocks Lawyers

Case [2021] NSWSC 1370

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: About Life Pty Ltd v Maddocks Lawyers [2021] NSWSC 1370
Hearing dates: 2 – 5 March 2021; 8 – 12 March 2021; 15 – 19 March 2021; 24 – 26 March 2021; last submissions received 19 April 2021
Date of orders: 28 October 2021
Decision date: 28 October 2021
Jurisdiction: Equity - Real Property List
Before: Rees J
Decision:

Judgment for damages for professional negligence, being $13 million payable to the client company and $344,000 payable to the company’s directors.

Catchwords:

PROFESSIONAL NEGLIGENCE – solicitors – retained to act for company on sale of business including assignment of lease – company had granted a right of first refusal to Woolworths – sophisticated client – urgent transaction – client in financial distress – solicitor gave ‘high level comments’ – comprehensive instructions not sought until shortly before exchange – enquired by email on number of matters including whether there were any “side deeds” – client’s instructions non-responsive – contracts exchanged – Woolworths injuncts sale – proceeds of sale received 6 months later – company goes into administration.

WORDS AND PHRASES – ‘side deed’ – see [67].

DAMAGES – loss of chance at [505]-[512] – time at which damages should be assessed at [624] – non-binding indicative offers as evidence of value at [632] – costs as damages at [643] – whether onus on plaintiff to show reasonableness of settlement – whether necessary for law firm to plead failure to mitigate.

CONTRIBUTORY NEGLIGENCE – corporate memory and document storage – client failed to take reasonable care by checking records in respect of an asset before, or while, instructing solicitors on sale of the asset – damages reduced by 20%.

CONCURRENT WRONGDOERS – whether breach of director’s duties in expanding the company – principles at [681] – no breach of director’s duties.

DUTY OF CARE TO THIRD PARTIES – whether solicitor also owed duty of care to client’s directors – principles and case law review at [702]-[711] – client and directors’ interests coincident – client and directors’ liability to disappointed purchaser was the same – directors entitled to be reimbursed by company had it not gone into external administration – directors’ liability alone arose from company going into external administration

MISLEADING AND DECEPTIVE – whether law firm liable to directors in misleading and deceptive conduct – principles at [727]-[731] – whether incomplete advice is “conduct”.

Legislation Cited:

Australian Consumer Law, ss 18, 236, 237

Civil Liability Act 2002 (NSW), ss 5A, 5B, 5C, 5D, 5R, 5S, 35, Pt 4

Competition and Consumer Act 2010 (Cth), s 4

Conveyancing Act 1919 (NSW), s 52A

Conveyancing (Sale of Land) Regulation 2010 (NSW), reg 16; sch 3, cl 8, pt 1

Corporations Act 2001 (Cth), s 180

Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 9

Cases Cited:

ACN 092 675 164 Pty Ltd v Suckling (2018) 56 VR 448; [2018] VSC 620

Argy v Blunts (1990) 26 FCR 112

Argyropoulos v Layton [2002] NSWCA 183; (2002) 36 MVR 432

Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6

Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17

AVWest Aircraft Pty Ltd v Clayton Utz (A Firm) (No 2) [2019] WASC 306

AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705

Badenach v Calvert (2016) 257 CLR 440; [2016] HCA 18

Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158

Berry v British Transport Commission [1962] 1 QB 306

Berry v CCL Secure Pty Ltd [2020] HCA 27; (2020) 381 ALR 427

Blatch v Archer (1774) 1 Cowp 63; 98 ER 969

Brownie Wills v Shrimpton [1998] 2 NZLR 320

Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187

Cadoks Pty Ltd v Wallace Westley & Vigar Pty Ltd [2000] VSC 167

Caltabiano v Electoral Commission of Queensland (No 1) [2010] 1 Qd R 100; [2009] QCA 182

Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258

Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110

Carey v Freehills [2013] FCA 954; (2013) 303 ALR 445

Coles Supermarket Australia v Bridge [2018] NSWCA 183

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 119; [1991] HCA 54

Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; [1990] HCA 17

Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88

Daniels v Anderson (1995) 37 NSWLR 438

Delaney v Short [2001] NSWCA 138

Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31

Doolan v Renkon Pty Ltd (2011) 21 Tas R 156; [2011] TASFC 4

Dual Homes Victoria Pty Ltd v Moores Legal Pty Ltd (2016) 50 VR 129; [2016] VSC 86

Golledge Pty Ltd v Ballard (2012) 82 NSWLR 231; [2012] NSWCA 376

Gray v Sirtex Medical Ltd (2011) 193 FCR 1; [2011] FCAFC 40

Groom v Crocker [1939] 1 KB 194

Hill v van Erp (1997) 188 CLR 159; [1997] HCA 9

In the matters of Earth Civil Australia Pty Ltd, RCG CBD Pty Ltd, Bluemine Pty Ltd, Diamondwish Pty Ltd and Rackforce Pty Ltd (all in liq) [2021] NSWSC 966

Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) [2007] NSWSC 124; (2007) 63 ACSR 1

Johnson v Gore Wood & Co [1999] PNLR 426

Johnson v Mackinnon [2021] NSWCA 152

Johnson v Perez (1988) 166 CLR 351; [1988] HCA 64

Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8

Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; [1995] HCA 68

Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11

Lucantonio v Kleinert [2011] NSWSC 753

Lucantonio v Stichter [2014] NSWCA 5

Macquarie Bank Ltd v Myer [1994] 1 VR 350

Malec v JC Hutton Pty Ltd (1990) 169 CLR 638; [1990] HCA 20

March v E & M H Stramare Pty Ltd (1991) 171 CLR 506; [1991] HCA 12

Masters Home Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88; (2017) 372 ALR 440

Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384

Minkin v Landsberg [2016] 1 WLR 1489

MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167; [2004] NSWCA 451

Morley v Australian Securities and Investments Commission [2010] NSWCA 331; (2010) 274 ALR 205

Ng v Filmlock Pty Ltd (2014) 88 NSWLR 146; [2014] NSWCA 389

Nikolaou v Papasavas, Phillips & Co (1989) 166 CLR 394; [1989] HCA 11

Olympic Holdings Pty Ltd v Lochel [2004] WASC 61

Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd [2011] WASCA 76; (2011) 248 FLR 193

Paltos v Bartier Perry Pty Ltd [2020] NSWSC 705

Payne v Parker [1976] 1 NSWLR 191

Podrebersek v Australian Iron & Steel Pty Ltd [1985] HCA 34; (1985) 59 ALJR 492

Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Ltd [2018] 2 Qd R 584; [2017] QCA 254

Rail Corp of New South Wales v Fluor Australia Pty Ltd [2009] NSWCA 344

RHG Mortgage Ltd v Rosario Ianni [2015] NSWCA 56

Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWCA 308

Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWSC 438

Scottsdale Homes Pty Ltd v Gemkip Pty Ltd [2008] QSC 326

Sellars v Adelaide Petroleum (1994) 179 CLR 332; [1994] HCA 4

Sharif v Garrett & Co [2002] 1 WLR 3118

Short v Delaney [1999] NSWSC 1293

South Western Sydney Local Health District v Gould (2018) 97 NSWLR 513; [2018] NSWCA 69

Talacko v Talacko [2021] HCA 15; (2021) 389 ALR 178

Thompson v Schacht [2014] NSWCA 247; (2014) 53 Fam LR 133

Trentelman v The Owners - Strata Plan 76700 [2021] NSWSC 155

Trentelman v The Owners – Strata Plan No 76700 [2021] NSWCA 242

Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; [1998] HCA 38

Verryt v Schoupp [2015] NSWCA 128

Vieira v O’Shea [2012] NSWCA 21

Visbord v Federal Commissioner of Taxation (1943) 68 CLR 354; [1943] HCA 4

Vrisakis v Australian Securities Commission (1993) 9 WAR 395

Wallace v Kam (2013) 250 CLR 375; [2013] HCA 19

Wilson v Rigg [2002] NSWCA 246; (2002) 36 MVR 451

Woolworths Limited v About Life Pty Limited [2017] NSWSC 1117

Yager v Fishman & Co [1944] 1 All ER 552

Yakiti Pty Ltd v MacDonald [2019] NSWSC 1772

Yokogawa Australia Pty Ltd v Alstom Power Ltd [2009] SASC 377; (2009) 262 ALR 738

Texts Cited:

Christopher Rossiter, Principles of Land Contracts and Options in Australia (2003, LexisNexis)

Rupert Jackson and John Powell, Jackson & Powell on Professional Negligence (3rd ed, 1992, Sweet & Maxwell)

William Duncan and Sharon Christensen, Commercial Leases in Australia (9th ed, 2020, Lawbook Co)

Category:Principal judgment
Parties: About Life Pty Limited (First Cross-Claimant)
Tammie Phillips (Second Cross-Claimant)
Michael Green (Third Cross-Claimant)
Thomas Beecroft (Fourth Cross-Claimant)
Maddocks Lawyers (Cross-Defendants)
Representation:

Counsel:
Mr T Faulkner SC / Mr D Lloyd SC / Mr M Kalyk (Cross-Claimants)
Mr A Leopold SC / Ms A Horvath / Ms K Lindeman (Cross-Defendants)

Solicitors:
Gilchrist Connell Legal (Cross-Claimants)
Moray & Agnew Lawyers (Cross-Defendants)
File Number(s): 2017/162590

TABLE OF CONTENTS

WITNESSES AND DOCUMENTARY EVIDENCE

Jones v Dunkel

Documentary evidence

Expert evidence

GETTING INTO FINANCIAL TROUBLE

Early corporate history

A relationship with the bank

Mr Green joins the business

Corporate governance

Bank review and covenants

Woolworths’ right of first refusal

Finding new sites and ‘cannibalisation’

Side Deed for Surry Hills store

What is a side deed?

Annual bank review

Acquisition of three Thomas Dux stores

More side deeds

Bank review and increased debt

New stores and kitchen

Problems with IT

“Stop & Think”

Covenant breach

Revised 2017 forecast

Bank adjusts covenants

Lack of cashflow and stock

A capital raise?

Working with Maddocks

Bank review and covenant breach

Further revised 2017 forecast

First meeting with Harris Farm

Ms Phillips takes the blame

Pressure mounts

Retail Oasis recommendations

Meetings with Harris Farm

Offer from David Jones

RETAINER AND PERFORMANCE

13 April 2017

Board meeting

Contract and lease delivered to Maddocks

High level comments

Easter

18 April 2017

Telling the bank – 19 April 2017

Proposed debt reduction

Proposed timeline

Bank’s response

20 April 2017

Exchange of contracts

Equipment list

Deed of Agreement for Lease

Seeking instructions before exchange

CONTRACT AND TORT CLAIM

Scope of retainer

Solicitor’s obligations

The expert witnesses

Obtaining background from the client

Identifying issues and obtaining instructions

Asking about side deeds

Plant and equipment list

A conference?

Obtaining documents and information

Registered lease

Deed of Agreement for Lease

Asking Mr de Fontgalland

Seeking instructions before exchange

Submissions

Conclusion

MOVING TOWARDS THE FUTURE

Seeking Council consent

Offer from The Natural Grocery Co

Post-sale forecast

Bank review

Inventory write-down

Disaster

CAUSATION

Did Mr Beecroft know?

Would the directors have remembered anyway?

THE FALLOUT

These proceedings

Effect on The Natural Grocery Co

Effect on suppliers

Effect on the bank

Assistance from Woolworths?

Post-disaster forecast

Move to the “bad bank”

Founders advance funds

Judgment

Paying Woolworths’ costs

External administration

LOSS OF A CHANCE

Principles

The lost chance

THE COUNTER FACTUAL

When would Woolworths have exercised its right of first refusal?

When would Council have given consent?

When would the proceeds of sale have been received?

How much would the bank have taken?

What other monies had to be paid from the proceeds of sale?

How much was needed to pay suppliers?

How much was needed to restock the stores?

Future equity raise?

Future performance

Analysis of post-sale forecast

Reliability of forecasts

General financial health

VALUE OF LOST CHANCE

Experts’ models

Submissions

Conclusion

Value based on post-sale forecast

Value based on The Natural Grocery Co offer

Net loss

WOOLWORTHS’ COSTS

Consideration

CONTRIBUTORY NEGLIGENCE

Consideration

CONCURRENT WRONGDOERS

Breach of directors’ duties

Misleading and deceptive conduct

EQUITABLE SET-OFF

DIRECTORS’ CROSS CLAIMS

Negligence

Misleading and deceptive conduct

ORDERS

Judgment

  1. HER HONOUR: This is a professional negligence claim against a law firm. About Life Pty Ltd operated a chain of wholefoods grocery stores, including a store in Double Bay close to a Woolworths store. About Life leased the store from the Council of the Municipality of Woollahra. In April 2017, Maddocks solicitors acted for About Life on the sale of the Double Bay store to Harris Farm for $10 million. The sale to Harris Farm was expected to complete by 30 June 2017. The transaction was critical to About Life’s survival, as it was then in financial extremis.

  2. The deal with Harris Farm was done quickly. Lost in the rush was the fact that Woolworths had a right of first refusal to the premises under a Deed of Agreement with About Life, entered into three years earlier about which About Life’s directors had forgotten. Woolworths came to learn that Harris Farm had agreed to buy the Double Bay store and promptly commenced these proceedings to enforce its contractual rights. About Life did not resist Woolworths’ claim; Harris Farm did. The proceedings were hard fought. Woolworths won: Woolworths Limited v About Life Pty Limited [2017] NSWSC 1117.

  3. About Life then assigned the lease to Woolworths, for which it received $10 million less Woolworths’ $350,000 costs of the proceedings. The funds were received just before Christmas 2017. By then, the money was ‘too little, too late’. A sustained cashflow crisis had wreaked havoc on About Life’s suppliers, inventory and customers. Despite further financial support from About Life’s founders and the progressive sale of its remaining stores, About Life went into external administration in December 2018, owing $11.8 million. About Life and its directors were also sued by Harris Farm for damages; About Life’s directors settled the claim for $430,000, About Life then being in external administration.

  4. About Life contends that, had Maddocks performed its retainer with reasonable care and skill, the solicitors would have sought instructions and made enquiries of their client, which would have revealed the existence of the right of first refusal, including by prompting the directors to recall it. About Life seeks damages for loss of the opportunity to use the proceeds of an orderly and uneventful sale to Woolworths at the outset – to pay down debt, recapitalise and move forward as a viable and prosperous business or else to sell the remaining stores – as opposed to the expense, uncertainty and delays which ensued, leading to About Life receiving the proceeds of sale, depleted and six months’ later than it would have. The directors also alleged that Maddocks owed them a duty of care. The directors seek damages, being the $430,000 paid to Harris Farm.

  5. Maddocks defended the claim on all bases, including that any negligence on its part led to no loss as, given the parlous state of About Life’s business, it was doomed. For the reasons which follow, I have concluded that About Life and its directors are entitled to succeed.

WITNESSES AND DOCUMENTARY EVIDENCE

  1. About Life relied on the evidence of chairman Michael Green, chief executive officer Tammie Phillips, chief financial officer Robert Ross-Edwards and solicitor Gaurav de Fontgalland. All were cross-examined.

  2. Mr Green hails from the United States. Whilst it is apparent from the contemporaneous documents that Mr Green was the central character in critical events, he spent relatively little time in the witness box. Mr Green was the chairman of the board and not ‘across the detail’ of aspects of the transaction. Mr Green did not have good recall beyond the documents and did not pretend to. He gave evidence in a precise, fair and calm manner. He was an articulate, careful witness who made reasonable concessions and corrected his evidence where necessary. He appeared honest. I accept his evidence.

  3. Ms Phillips was cross-examined for five days. Ms Phillips was attentive, alert, smart, thoughtful, careful and precise. On occasion, Ms Phillips made an emotive remark and, on occasion, became distressed, “You have got no idea what it is like to lose a company after you have built it up after 22 years”. I accept that her distress was genuine and the events about which she was speaking were likely traumatic at the time. Ms Phillips’ performance in the witness box deteriorated somewhat on the fourth day, but this was understandable given the prolonged and intense cross-examination.

  4. It was repeatedly put to Ms Phillips that she was lying. Her affidavits were, in parts, expressed at a high level of generality. Some of the cross-examination turned on subtleties and nuance of language used in her affidavits which was unlikely appreciated by Ms Phillips when she affirmed her affidavits. When compared with the documentary material available at trial, some of what Ms Phillips had said in her affidavits was not accurate; this is more likely referable to incomplete documentation to hand when earlier affidavits were sworn than falsity. Some of Ms Phillips’ affidavit and oral evidence put events in a favourable light which, having regard to the contemporaneous documents, could not be sustained. I expect that Ms Phillips genuinely believed that About Life would have survived and prospered had the sale of the Double Bay store proceeded smoothly having regard to Woolworths’ right of first refusal. Perhaps she was naïve, but I do not consider that Ms Phillips was dishonest or that the challenged portions of her affidavits were “completely false”.

  5. Ms Phillips appeared commercially astute but obviously relied on solicitors to attend to the legal side of transactions, for example, she did not have a good understanding of the mechanics for exchanging contracts. Ms Phillips struck me as a capable and efficient businesswoman who was straight forward in her dealings with others. Ms Phillips made reasonable concessions and appeared honest and authentic. She generally appeared to understand sophisticated concepts and was overall an impressive witness.

  6. Mr Ross-Edwards is a chartered accountant. He was perfectly honest and straightforward. He gave evidence in a fair and reasonable manner.
    Mr Ross-Edwards was obviously unhappy about what had happened to About Life and its business. He appeared to be an ethical, honest and decent person whose evidence I accept without hesitation.

  7. Mr de Fontgalland was a young, local solicitor who did not profess to have Maddocks’ level of expertise. His approach appeared to be more ‘broad brush’. I do not accept Maddocks’ submissions that his evidence was unreliable, although he may have over-stated the frequency which he had encountered a ‘side deed’ like the one with Woolworths: see [325].

  8. Maddocks relied on the evidence of a number of witnesses associated with Harris Farm including chief executive officer Angus Harris, chief financial officer James Williamson and Harris Farm’s solicitors on the transaction, Anthony Herro and Vanessa Scrivener of Herro Solicitors. Only Mr Harris was required for cross-examination. No issue of credit arose.

  9. In addition, Maddocks relied on the evidence of its partners Bronwyn Badcock and Timothy Atkin, of whom Ms Badcock was required for cross-examination. By and large, Ms Badcock did not recall conversations and refreshed her memory from emails and file notes. Ms Badcock was a very nervous witness who gave evidence in an extremely careful, guarded and somewhat defensive manner. Ms Badcock was obviously concerned to ensure that she did not, by her answers, cause difficulties for Maddocks. Ms Badcock was reluctant to make reasonable concessions and, on occasion, gave non-responsive answers to questions which she was apprehensive would not assist Maddocks’ defence of the claim. Ms Badcock volunteered observations she thought would help her and understated her potential failings in performing the retainer. Some of her explanations were difficult to reconcile with the documentary evidence. Given Ms Badcock’s lack of actual recall in any event, I have relied on what the contemporaneous documents reveal in preference to what she said.

Jones v Dunkel

  1. About Life’s director, Thomas Beecroft, filed affidavits in these proceedings but was not called. Maddocks submitted that the Court should draw an adverse inference from his failure to give evidence, and I readily do so: Jones v Dunkel (1959) 101 CLR 298 at 320-321; [1959] HCA 8 per Windeyer J. As explained in Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11 at [63]: (emphasis added)

The rule in Jones v Dunkel is that the unexplained failure by a party to call a witness may in appropriate circumstances support an inference that the uncalled evidence would not have assisted the party’s case. That is particularly so where it is the party which is the uncalled witness. The failure to call a witness may also permit the court to draw, with greater confidence, any inference unfavourable to the party that failed to call the witness, if that uncalled witness appears to be in a position to cast light on whether the inference should be drawn. …

See likewise RHG Mortgage Ltd v Rosario Ianni [2015] NSWCA 56 per McColl JA (Emmett JA and Sackville AJA agreeing) at [78], citing Payne v Parker [1976] 1 NSWLR 191 at 201-202 per Glass JA.

  1. Mr Beecroft’s senior counsel submitted that there was no topic on which Mr Beecroft could give evidence about which there was not already a significant body of evidence. Ms Phillips had already given evidence over a number of days, followed by Mr Green, who was not challenged on the proposition that he had forgotten about Woolworths’ right of first refusal. Mr Beecroft’s evidence would have been ‘more of the same’. Where his affidavits were short but Mr Beecroft had been requested for half a day’s cross-examination, there was a question as to whether the further time involved in his evidence was in proportion to the issues in the case.

  2. As Parker J recently explained in Trentelman v The Owners - Strata Plan 76700 [2021] NSWSC 155, the Jones v Dunkel inference does not arise from a failure to call merely cumulative evidence; if the party has more than one witness of equal significance, then it is sufficient to call one of them: at [194]-[195]. In that case, Parker J considered that the failure to call a witness appeared “to have been nothing more than a commendable attempt to save time”, there being no reason to think that the witness would have damaged the plaintiff’s case: at [196]. Parker J’s decision was relevantly affirmed on appeal: Trentelman v The Owners – Strata Plan No 76700 [2021] NSWCA 242 at [210]-[214] per Leeming JA (Bell P agreeing at [170]).

  3. My view of the failure to call Mr Beecroft is not so benign. It is apparent from the contemporaneous documents that, as About Life’s financial troubles deepened, Mr Beecroft became increasingly concerned and critical about the way the company was being run. It is thus appropriate to draw the usual Jones v Dunkel inference. Whilst I infer that Mr Beecroft’s evidence would not have assisted his, or About Life’s case, I do not infer that his evidence would have been damaging: Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 at [232]. Failure to call Mr Beecroft does not detract from findings of fact otherwise established by the evidence: Morley v Australian Securities and Investments Commission [2010] NSWCA 331; (2010) 274 ALR 205 at [634]. Maddocks submitted the inference supported a finding that Mr Beecroft, and thus About Life, was aware of Woolworths’ right of first refusal before exchange of contracts with Harris Farm, to which I will return at [412].

  4. Maddocks filed affidavits in these proceedings by partner Andrew McNee, who was not called. About Life submitted that I should draw an adverse inference from the failure to call Mr McNee; I readily do so. Aside from the Jones v Dunkel inference, I infer from the contemporaneous documents that Mr McNee was not particularly enamoured with how Ms Badcock had serviced the client, where Mr Green and his company Green Capital Partners Pty Ltd were initially Mr McNee’s clients: see [407], [425]-[426]. Mr McNee’s view, of course, is not well documented nor dispositive.

Documentary evidence

  1. There was a vast amount of documentary evidence, comprising more than 10,000 pages and innumerable soft copy spreadsheets and financial accounts. Notwithstanding this, there were some problems with the completeness of About Life’s records at trial.

  2. When About Life went into administration, the directors lost access to the accounting data and shared drive. About Life was in arrears with the providers of its web-based data; the administrator did not maintain those contracts and the information was no longer available. Ms Phillips had made copies of documents which she thought might be relevant to these proceedings, but further documents became relevant. Ms Phillips did not think to ask the administrator for such information when the company came out of administration, “In fact I was happy to never speak to that man again.” Ms Phillips had in fact sent a copy of About Life’s shared drive to the administrator on his appointment, but had forgotten doing so. Ultimately, the administrator produced a copy of the shared drive during the course of the trial, as a consequence of which some of the allegations made by Maddocks against Ms Phillips were withdrawn.

Expert evidence

  1. Two legal experts gave evidence: Peter Rosier for About Life and Edward Boyce for Maddocks. Both were impressive practitioners. Their experience differed somewhat in terms of the types of transactions on which they had frequently acted: Mr Rosier’s experience roughly correlated to Mr de Fontgalland (albeit with many additional years of experience) whilst Mr Boyce’s experience was closer to that of Ms Badcock. With no disrespect to Mr Rosier, I have generally preferred the views expressed by Mr Boyce as more closely representing the practices of a competent solicitor working on a transaction of this size.

  2. Finally, two accounting experts gave evidence: Brian Morris for About Life and Tony Samuel for Maddocks. Both were experienced experts who gave evidence in a fair and intelligent manner. Mr Samuel held strong views about the veracity of About Life’s revenue forecasting which, when viewed against all of the evidence, were too harsh. Given the findings of fact which I have made, the financial models prepared by the experts were, to some extent, otiose. I have nonetheless had regard to each model when assessing the value of About Life’s lost chance.

GETTING INTO FINANCIAL TROUBLE

  1. Maddocks’ performance of its retainer occurred over nine days in April 2017, to which I will return at [193]. The bulk of the evidence, however, concerned the three years leading up to that moment, in part, because that is when About Life gave Woolworths the right of first refusal but, more importantly, because that is when About Life got into financial trouble.

  2. There is no dispute that About Live got into serious financial difficulty; that is why it decided to sell its “best performing” store. The precise nature and extent of these difficulties were relied upon by Maddocks as supporting a finding that, even if About Life had sold the Double Bay store to Woolworths at the outset, it would have made no difference to About Life’s fate.

  3. Events before the retainer also reveal the specific attributes of this client, which may not have been fully appreciated by Maddocks when performing their retainer. In particular, as About Life’s financial troubles became acute, it is apparent from the contemporaneous documents that the directors and management were under enormous pressure to deal with a wide range of problems. Their ability to give complete focus and attention to matters of detail was likely significantly compromised. Ms Phillips, in particular, was under huge pressure.

Early corporate history

  1. In 1996, Ms Phillips and her sister Jodie Stewart opened an organic café, juice bar and grocery store in Rozelle called “About Life”. Ms Phillips and Ms Stewart were both university educated; Ms Phillips had a Bachelor of Commerce. Both had useful career experience before starting the business. In 1998, a catering arm of the business was also established. In 2005, the business moved into larger premises across the street.

  2. In 2008, About Life opened a second store in Bondi Junction. This was funded by debt and $2 million of private equity. Mr Beecroft and David Thevenon joined the board on behalf of equity investors; both had substantial business experience.

A relationship with the bank

  1. In 2011, when seeking finance to set up a third store in Cammeray, About Life moved its business to the Commonwealth Bank of Australia. The bank’s Relationship Executive was Joel Morales. The bank’s review of About Life’s financial performance and quality of management was glowing: About Life was considered to have sound growth with robust, experienced and conservative management. Ms Phillips and Ms Stewart were regarded as having deep experience, understanding the critical requirements of operating retail businesses with perishable inventory and possessing enthusiasm for the organic food industry. The skill level of management was assessed as “[v]ery good”, with financial accounts being audited; “forecasts appear well constructed based on sound assumptions especially for a business of this size”.

  2. The bank noted that the Rozelle and Bondi Junction stores then had a combined revenue of almost $20 million in the 2011 financial year, served over 100,000 customers each month and employed over 100 staff. About Life then planned to open another three to six stores over the next five years across Sydney, in locations strategically located to service customers in the optimal socio-economic demographic who seek out high quality organic produce. Once established, each store was forecast to generate revenue of $10 million per year.

  3. In December 2012, the Cammeray store opened. The bank adjusted its facilities accordingly, reviewing the business and its management in favourable terms. The bank considered that About Life had the potential to grow diligently and successfully over the short-medium term; “Management have a conservative view on leverage and are proactive in repaying debt facilities with appropriate equity capital from experienced investors who have the expertise to drive business growth.” Ms Phillips was described as “extrem[e]ly knowledg[e]able across her whole business”. About Life had “a history of repaying debt quickly”. In the competitive supermarket industry, two strategies employed by About Life were noted by the bank: offering staple grocery line branded “THE ORGANIC GOOD STUFF FOR LESS”; and offering private label lines, produced by About Life’s kitchen or produced under external contract.

  4. In the 2013 financial year, the Rozelle catering kitchen was upgraded and expanded. The Rozelle, Bondi Junction and Cammeray stores had combined revenue of over $27 million, with over 150,000 transactions per month and 200 staff.

Mr Green joins the business

  1. In January 2013, Mr Green moved to Australia with his family. Mr Green was a private equity investor in the United States and a member of the Investment Committee of Oak Hill Capital Partners, of which he was also a partner and where he was responsible for equity investments in excess of $1 billion including an organic food chain with more than 30 stores, a chain of pharmacies with over 250 stores, and a chain of some 60 restaurants, bars and arcades. He has a Masters of Business Administration from Stanford University.

  2. In March 2013, Mr Green approached Mr Thevenon about investing in About Life and, over the coming months, negotiated the acquisition of some of the private equity investors’ interest. In October 2013, Mr Green circulated an investor presentation, seeking to raise $11 million to acquire a majority interest in About Life. Mr Green’s presentation reviewed the strong growth and profitability of About Life’s three stores and outlined plans to expand the number of stores by potentially 40 more stores across Australian and New Zealand.

  3. Mr Green raised some $12 million from private investors, which was used to purchase all of About Life’s shares. In November 2013, About Life Investors Holdings Pty Ltd was incorporated to acquire the shares. About Life Investors Holdings became trustee of the About Life Investors Unit Trust. In the result, in December 2013, About Life Investors Holdings entered into a Shareholders Agreement with its shareholders, being now the unit trust (67%), the founders Ms Phillips and Ms Stewart (22%), Mr Thevenon and Mr Beecroft (7%) and others. About Life became the trading company and About Life Investors Holdings the holding company. Mr Green became a director of About Life.

Corporate governance

  1. In early 2014, About Life established a new board and management structure. It is convenient to describe About Life’s corporate governance arrangements. As mentioned, the directors were now Mr Green, Ms Phillips, Mr Beecroft and Mr Thevenon. Ms Phillips was employed as chief executive officer.
    Mr Ross-Edwards began working for About Life as chief financial officer and company secretary. Ms Phillips, Ms Stewart and Mr Ross-Edwards managed the business on a day to day basis.

  2. As chief financial officer, Mr Ross-Edwards worked closely with the company’s directors, managed the accounts and prepared financial reports, including monthly profit and loss statements and budgets for each store.
    Mr Ross-Edwards was supported by an accounting department which did accounts at the end of each month. He knew trading results within ten working days after the end of the month, “it was normally quicker but … up to ten working days”.

  3. Mr Green was chairman of the board. The board met every month, generally the third week of the month, when the figures for the previous month were to hand. Prior to board meetings, directors were provided with a board pack which included management accounts for the previous month, prepared by
    Mr Ross-Edwards. The management accounts included detailed financial information for About Life as a whole, then broken down for each store and the catering business, then the results for each month in the financial year to date with growth separately indicated, followed by a balance sheet, profit and loss statement and charts depicting customer numbers. At each board meeting, the first item of business was the financial results of the preceding month, presented by Mr Ross-Edwards. Attention to this aspect appears to have been thorough. Ms Phillips then gave an operations report. Mr Ross-Edwards took the minutes.

  4. A forecast was prepared each year and revised from time to time, particularly during the period of financial turbulence with which this case is concerned. When revising budgets, Mr Ross-Edwards replaced the forecast monthly figures with actual results where available, “if I had have known the actual I would have put the actual in.” I will return to the preparation and reliability of these forecasts at [586].

  5. Documents were stored on a shared drive, so that everyone in the company could access the material. Each employee had access to the shared drive, with different levels of security, and could access the shared drive from their computers or remotely. This subject is relevant to contributory negligence, to which I will return at [557].

Bank review and covenants

  1. Following the shareholder restructure in December 2013, the bank conducted a detailed annual review of About Life’s financial performance. It is apparent from the review that the bank was impressed with its customer. The bank saw Mr Green’s inclusion on the board as positive, given his experience with large chain stores including an organic grocery chain with 30 stores. Dealings with the borrower were described as “excellent”. All loan facilities and accounts were being conducted “impeccably”. The customer’s diligence with cash flow management was considered evident from its non-drawing of a $1 million facility.

  2. According to the bank’s review, the 2013 financial year represented a record performance for the business. Management accounts for the first quarter of the 2014 financial year were very promising. Based on these results, “they are on target to achieve and exceed projected revenue growth of 20.6%.” The bank reviewed About Life’s historical financial statements for financial years 2011 to 2013 and its forecast profit and loss models for financial years 2014 to 2016: About Life enjoyed net sales growth of some 30% and a relatively stable gross margin of 41%, considered to illustrate “managements’ ability to control input costs … through strategic alliance with their core suppliers”. The bank noted, “We can take some comfort that such projections are reliable from historic projections and results. Clients have provided the Bank with projections for the last 2 years and they have proven to be reliable when normalised.”

  3. The bank approved increased funding totalling $7.35 million, including a $2 million loan to fit-out two new stores. About Life was then in negotiations with Woolworths to take over the lease of two Thomas Dux sites in Surry Hills and Double Bay, which the bank described as “highly desirable locations.” The bank considered that financial covenants should be applied to the facility to provide the bank with adequate warning should a credit deterioration occur. The covenants would be set “with ample headroom” and tested quarterly. There were two bank covenants.

  1. The leverage ratio is the net debt of the business at the end of the quarter divided by earnings before interest, tax, depreciation and amortisation (EBITDA) calculated on a 12 month rolling basis, that is, the quarter being monitored and the immediately preceding three quarters. The business was required to report the leverage ratio to the bank within 45 days of the end of the quarter being monitored. The leverage ratio was set at 2.0.

  2. The interest cover ratio (ICR) was EBITDA for the quarter being monitored divided by the interest incurred for that quarter. The ICR was set at 5.0.

  1. Part of Mr Ross-Edwards’ role was to ensure that bank covenants were adhered to; he dealt closely with the bank, attending all meetings. Each quarter, the bank required a Compliance Certificate to be completed by About Life, confirming that the covenants had been observed. Ms Phillips signed the certificate, which Mr Ross-Edwards forwarded to the bank together with financial reports.

Woolworths’ right of first refusal

  1. The Deed of Agreement with Woolworths came about because About Life agreed to take over two Thomas Dux stores – Double Bay and Surry Hills – of which the Double Bay store was considered to be the ‘pick of the bunch’. It was initially expected that the Surry Hills store would be assigned first but Woolworths had difficulty assigning the lease (a problem which About Life later encountered itself). The Double Bay store was ready to complete first. The primary purpose of the deed was to make the acquisition of Double Bay conditional upon About Life also taking the Surry Hills store.

  2. This was Ms Phillips’ first dealings with Woolworths. Mr de Fontgalland acted for About Life on the transaction. On 30 January 2014, Woolworths’ solicitor enquired whether About Life would be willing to grant a right of first and last refusal to Woolworths to take over the lease of the Double Bay premises, should About Life decide at any time in the future to vacate the premises by way of assignment, sublease or otherwise. Mr de Fontgalland sought instructions from Ms Phillips, who enquired “if we were to sell our company (to Coles, ha!) – would [this] be a problem”. Mr de Fontgalland replied, “yes, the right would … be triggered on a change of control (such as a sale to Coles).” Later that day, Ms Phillips sent a further email to Mr de Fontgalland:

I had board meeting today so discussed this and [Woolworths] just called me.

In short [Woolworths] want protection from another operator coming in, aka coles. The board wants the flexibility to be able to have change to major shareholder/ownership without affect to the lease.

Maybe major shareholder/ownership change of control subject to their consent!??

  1. On 4 March 2014, Woolworths’ solicitor circulated a draft document in preparation for a meeting to finalise the document. The document was a Deed of Agreement between Woolworths and About Life in respect of the Double Bay and Surry Hills leases. Clause 2.5 of the proposed Deed of Agreement provided:

2.5   Right of first refusal to lease Double Bay Premises

On Completion the Assignee irrevocably grants the Assignor a first right of refusal to lease the Double Bay Premises if at any time during the lease the Assignee:

(a)   wishes to assign its lease of the Double Bay Premises to a third party; …

  1. On 5 March 2014, Ms Phillips and Mr de Fontgalland agreed that Mr de Fontgalland would review the documents to discuss; it was not thought necessary to meet with Woolworths and its solicitors. Ms Phillips approved Mr de Fontgalland’s fees for the work of $1,500. Ms Phillips then emailed Mr de Fontgalland:

I think let’s just cancel [the meeting] … because at this point it is unlikely we are going to need many changes. Where possible (and obviously within legal reasoning) I would like to see as little mark up as you can manage.

Commercially I want to act reasonably because 1) Legal stuff aside they have been so reasonable to work with on the Double Bay fitout – to the extent we are operating under their [Construction Certificate], they are paying for our variation works etc and 2) Commercially I do think that the more reasonable we are to deal with the greater the chance there is of potentially getting future sites from them … whilst any of those discussions have been off the record and read between the lines it is a very important commercial consideration for me (I think the chances are likely..)

  1. It will be observed that Ms Phillips did not perceive any significant issues with Woolworths’ proposed deed, nor wish to engage in extensive negotiations or amendments to the document. Commercial and relationship considerations were paramount. A meeting with Woolworths was not considered necessary. About Life’s solicitor was charging a small fee for, presumably, a small scope of work. It seems unlikely in these circumstances that Ms Phillips spent much time poring over the document. She was interested in doing the deal with a view to doing more deals with Woolworths in the future. It was then thought that Woolworths was thinking of closing down its Thomas Dux operations and there was potential for About Life to take over more stores. Ms Phillips said, “I did see … that this was a very important relationship for our future.”

  2. Mr de Fontgalland informed Woolworths’ solicitors that a meeting was not necessary; “There do not appear to be any contentious issues, so we shall simply forward you an amended version of the draft Deed of Agreement shortly”. Soon afterwards, Ms Phillips asked Mr de Fontgalland to confirm whether an explanation which she had prepared for her fellow directors was correct, being: (emphasis added)

The deed covers [Woolworths’] requirement for first right of refusal in the case of assignment of Double Bay lease. It relates only to the case of assignment to a third party which means that any change of control in our company or sale of our business to a company that will trade as About Life Pty Ltd – the first right of refusal per the deed would not affect. It is in the case of us assigning the lease to a business that will not trade as ABOUT LIFE that they would have first right of refusal. Our exposures here are if we want to sell or assign to a Third Party like eg. Harris Farms to trade as Harris Farms.

As Ms Phillips observed in cross examination, “It was like I was seeing into the future.”

  1. Further emails ensued with Mr de Fontgalland, largely focussing on whether Woolworths had a right of first refusal in the event that About Life was sold or had a change of control, as opposed to disposing of the Double Bay store. Mr de Fontgalland confirmed to Ms Phillips, “The only risks are … as you said, if you decide to sell a store to a third party …” Mr de Fontgalland suspected this was a drafting error on Woolworths’ part but, if About Life sought clarification as to whether a change of control triggered Woolworths’ rights, then Woolworths’ solicitors may amend the deed to cover that situation.

  2. Ms Phillips sent her directors a detailed email explaining changes to the transaction documents which called for their decision. Ms Phillips explained Woolworths’ right of first refusal in similar terms to those approved by Mr de Fontgalland. Ms Phillips reproduced Mr de Fontgalland’s advice on the scope of Woolworths’ rights and the risks inherent in seeking clarification of the clause due to the perceived drafting error. Ms Phillips continued:

For the record I don’t believe it to be a drafting error – they are trying to behave reasonably and want to be protected from us assigning that lease to FIRST CHOICE, COLES EXPRESS etc.

  1. The directors spoke. The directors’ discussion was obviously brief. Some ten minutes later, Ms Phillips gave instructions to Mr de Fontgalland that the directors “agree with the minor change requests”. (About Life requested minor changes to clause 2.5, which are not presently relevant.)

  2. According to Mr Green, the board concluded that, because it was a right of first refusal relating to the sale or assignment of a specific asset – while they were planning on selling the entire company down the track – it was something that would most likely not come into ‘play’ and therefore was not a significant risk going forward. Likewise, Ms Phillips said that, in 2014, she was not contemplating selling one store but growing the company to 30 stores. Ms Phillips did not consider Woolworths’ request for a right of first refusal to be a contentious issue in the context of the whole transaction, “that negotiation commercially was huge … the first right of refusal, I understand today it seems very amplified. … But if you put context around … that transaction … I would stand by that. It was … low key for me.” That does appear to have been the case.

  3. Precisely when the deed was executed, or by whom, is not known. On 2 May 2014, Mr de Fontgalland sent Ms Phillips the executed Deed of Agreement for her records. The document was stored on the shared drive with the file name “About Life – Woolworths Deed of Agreement”. Ms Phillips could not recall if it was she who stored the Deed of Agreement on the shared drive; from time to time she stored agreements in a “Company agreements–Contracts–Lease” folder, which is where the Woolworths’ Deed of Agreement was stored, albeit nestled within three further sub-folders.

  4. On 16 May 2014, About Life entered into a Deed of Agreement for Lease with the Council in respect of the Double Bay site, executed by Ms Phillips and Mr Beecroft. I will return to this document at [280]. Ms Phillips and
    Mr Ross-Edwards later signed the Double Bay lease, which had a term of 30 years with five options to renew, each for a period of 10 years.

  5. On 5 June 2014, About Life’s Double Bay store opened “on time and within budget. Sales in the first month were way ahead of target.” About Life’s sales for June 2014 “were the largest month ever, with the opening of Double Bay store”.

Finding new sites and ‘cannibalisation’

  1. Part of Mr Green’s investor presentation, to raise funds to acquire About Life, proposed to develop a rigorous new store development process and establish more than three new stores each year. To this end, consultants Deep End Services were retained to target potential attractive locations. On 14 February 2014, Deep End produced a Sydney network plan for About Life. In addition to existing stores and the two committed sites at Double Bay and Surry Hills, it was suggested that Pymble and Enmore were suitable locations to establish stores in the short term. The significance of the Sydney network plan is that Maddocks relies on the directors’ non-adherence to the plan as founding a concurrent wrongdoer defence against the directors: see [680].

  2. Deep End also predicted that the Double Bay store would reduce Bondi Junction’s sales by 20%, while the Surry Hills store would reduce Bondi Junction’s sales by 7% and Rozelle’s sales by 3%. This is referred to as “cannibalisation”, where a new store reduces the sales of existing stores nearby.

  3. Deep End’s report was given to a property consultant, Hector Abbott, to use as a guide for areas to look into. It is apparent from board packs that the board devoted considerable time and resources to expanding the network of About Life stores. Mr Abbott inspected potential sites, meet with developers and regularly reported to Ms Phillips and Mr Ross-Edwards. Woolworths was regarded as a potential source of sites, both in developments that Woolworths was constructing and for Thomas Dux stores which Woolworths did not wish to pursue. At each board meeting, Mr Abbott’s report was presented and discussed. The board papers now included a spreadsheet, “New Site Review”, containing details of each site then under consideration and the stage of consideration. Soon added was a spreadsheet containing financial metrics in respect of sites under consideration. Ultimately, a “Property” section was added to the board papers.

  4. In August 2014, the board met. The company was then exploring the possibility of new stores in Mosman and Lindfield. Revenue for the Bondi Junction store had, in July 2014, dropped 12% from July 2013, presumably as a consequence of the opening of the Double Bay store.

  5. In September 2014, the board meeting noted that net sales for the month were the largest ever, with all stores performing above budget except Bondi Junction (where revenue had fallen by 17% from the previous year) and catering. The board continued to look at potential new stores in Mosman and Lindfield, and to review the site selection process. To some extent, the availability of new sites obviously depended on commercial opportunities which emerged.

  6. Similar topics were canvassed at the October 2014 board meeting. Bondi Junction’s revenue was about 15% down “due to faster than expected cannibalisation”, and expected to be 20% down by year end. The site selection process was discussed at length and changes made to the site selection criteria which had been developed by Mr Green.

  7. By the November 2014 board meeting, the Surry Hills store had opened and was “off to a good start, performing above expectations.” Bondi Junction was running “about 20% down, which is faster than anticipated at this stage and has taken another 2-3% hit from Surry Hills.”

  8. The December 2014 board meeting noted that Surry Hills was continuing to perform above expectation whilst Bondi Junction was running about 18% down. Overall, the company was performing in line with budget and enjoying significantly increased results from the previous year, with EBITDA up 18% from the previous year.

Side Deed for Surry Hills store

  1. In September 2014, negotiations were underway between Woolworths and About Life’s solicitors regarding assignment of the Surry Hills lease. Amongst the documentation for the transaction was a Side Deed executed by Ms Phillips and Mr Ross-Edwards, likely in September or October 2014. By the Side Deed, Woolworths agreed to pay $50,000 to About Life in consideration for taking the lease.

What is a side deed?

  1. It is timely to consider what a side deed is, it being a term which will gain greater prominence in what follows. Whilst a definition is not easy to find in texts or case law, side agreements are usually entered into contemporaneously with a lease and may be employed to contain terms which the parties wish to keep confidential, where the lease is to be registered. Side agreements operate to vary a lease: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 577; [1995] HCA 68.

  2. Side agreements are usually between lessor and lessee. A common example is a side agreement between the lessor and lessee in respect of incentive benefits. The lease will contain the ‘face rent’ but not the ‘effective rent’, being the rent actually paid taking account of the incentives offered: William Duncan and Sharon Christensen, Commercial Leases in Australia (9th ed, 2020, Lawbook Co) at p 75.

  3. Mr Rosier said that side deeds began to be used in leasing after the 1987 stockmarket crash, when there was a lot of property for lease in the heart of Sydney and landlords did not wish the incentives offered to tenants, such as significant rent reductions or fit-out, to become known. “[T]his was a matter of common knowledge amongst … property legal professionals and the presence of a side deed or agreement in a leasing transaction was at least from that time something that one would always consider as a possibility.” Mr Rosier said that side deals typically relate to fit-out allowances or rent rebate or occasionally a right of first refusal for the lessee to purchase the premises. Mr Boyce largely agreed with this description, adding that side deeds with third parties (that is, someone other than the lessor or lessee) are not usual.

  4. Mr de Fontgalland had acted on the sale of retail businesses and the assignment of leases within shopping centres on many occasions. In his experience, it was very common in connection with the sale of a retail business for the landlord to require the tenant to enter into a side agreement that was not registered on the public record.

  5. The Side Deed between Woolworths and About Life in respect of the Surry Hills lease was not between the lessor and lessee, but between the outgoing and incoming lessee. Whilst it was entitled, “Side Deed”, it was not ‘usual’ as I understand the evidence of these solicitors.

  6. The Deed of Agreement between Woolworths and About Life in respect of the Double Bay and Surry Hills leases (see [45]) was neither entitled “Side Deed” nor between lessor and lessee. Rather, it was between the incoming lessee and the former proposed lessee (Woolworths had earlier entered into a Development Deed with the Council under which it was proposed that Woolworths would lease the site). The lessor (the Council) was not a party and was, indeed, unaware of the side agreement. It was not ‘usual’ either.

  7. As will become apparent, Maddocks later asked About Life whether there were any “side deeds” in respect of the Double Bay lease. Whether this would or should have called to mind the Woolworths’ Deed of Agreement is something to be considered in due course: see [374].

Annual bank review

  1. In January 2015, the bank conducted its annual review of About Life which was, again, positive. Management was considered to have a very good skill level. Cashflow was well managed, with About Life generally maintaining more than $1 million in its bank accounts. The bank had been asked to cancel a $300,000 overdraft, as it had never been used. Of the facilities approved to the company, $2 million had been earmarked for the fit-out of the Surry Hills and Double Bay stores but, instead, About Life had funded this from cashflow.

  2. The bank remained of the view that the financial accounts and forecasts appeared well constructed based on sound assumptions and generally prepared on a conservative basis. Turnover for the 2014 financial year reached $36.3 million, up from $27.6 million in the previous year. Sales had grown by more than the budget provided to the bank in October 2013. Double Bay and Surry Hills having now opened, the five stores employed more than 300 staff. EBITDA had improved by 21% but, as interest costs had also increased, there was a slight deterioration in the ICR, which was overall still considered very strong. The value of the business was recorded at $6.63 million, which the bank considered to be underestimated.

  3. In February 2015, the board met and decided to move the kitchen facility from Rozelle to a new kitchen and warehouse facility in Hillsdale. This would allow the business to expand into new stores and warehouse more stock, increasing its gross margin on product lines. The board continued to consider potential new sites, with the assistance of property consultant, Mr Abbott and Deep End. Further network plans were obtained from Deep End for Melbourne and South-East Queensland.

Acquisition of three Thomas Dux stores

  1. In March 2015, Mr Abbott reported to Ms Phillips and Mr Ross-Edwards that the Director of Property at Woolworths had asked whether About Life would be interested in purchasing the whole Thomas Dux business, while another Woolworths executive said “they are looking to exit a few stores and he would contact me in a few weeks for another discussion.”

  2. By the April 2015 board meeting, the Bondi Junction store had been refurbished and refurbishment of the Rozelle store was underway. Plans for the new kitchen site in Alexandria were being finalised. It is apparent from the board minutes that this was a busy board undertaking a number of substantive tasks directed towards improving the profitability of existing assets and expanding the business in a considered manner. Work was being commissioned on marketing and improving the margin on product lines, including by improving its supply chain.

  3. At the May 2015 board meeting, Ms Phillips reported that a new IT systems would be going ‘live’ in June 2015. The proposed new kitchen site in Alexandria had been lost. Searches were underway for a new site. Mr Abbott’s report was tabled, noting that there were extensive discussions underway to potentially take over five to six Thomas Dux stores in Sydney and Melbourne. By June 2015, the Rozelle store had been refurbished but the new IT system was delayed. The board considered Mr Abbott’s report on site selection, noting that discussions were now underway for the possibility of taking over seven stores from Thomas Dux in Sydney and Melbourne.

  4. In June 2015, About Life approached the bank for bank guarantees for leases for a new store at Balgowlah due to open in August 2015 and a warehouse for the new kitchen. The bank’s review, on 23 June 2015, noted that it had recently completed the March quarterly reporting and confirmed an improving financial profile for the group with sales growth up to 9.8%. “Clients continue to demonstrate well conducted accounts with financial covenants continuing to be met.” In addition, it was noted that the bank would be looking at restructuring the group in the coming months, as the client was reviewing an acquisition of all Woolworths Thomas Dux stores in Sydney and Melbourne:

They are still in high level talks but wanted to bring CBA in early. About Life have already completed preliminary budgets & projected growth for the locations including cannibalizing of their current stores. They have used the current Thomas Dux figures and reduced those by 20%. …. They have projected they will need approximately $6-10 Mil for the takeover of the stores and working capital for preliminary set-up. The takeover will be staggered over 14 months with one every 2 months. They are still in very early stages, and have advised they have no issue raising capital from equity partners.

  1. By the end of the 2015 financial year, About Life’s five stores generated gross annual revenue of some $51 million and EBITDA of some $4 million. Mr Ross-Edwards said that bank debt was being used to provide working capital when necessary, but the business was generating a substantial cash flow and able to trade with a commercial bill facility of $2.27 million and credit card facilities.

  2. At the board meeting on 21 July 2015, the new IT system was in the process of being installed, with associated costs and delays. The budget for the 2016 financial year had EBITDA in line with the 2015 year, with additional expenditure on marketing and promotion and additional staff to grow the business. The opening of the Balgowlah store had been delayed.

  3. On 5 August 2015, Ms Phillips reported to her fellow directors on negotiations for Thomas Dux stores noting, “We have now progressed to a point where we need to make an offer on the deal.” Woolworths was now only prepared to sell three stores, being Lane Cove, Crows Nest and Port Melbourne. Annexed to the email was the site location template, completed for the three stores. Mr Abbott joined the meeting “and gave a thorough update”, including that Woolworths had agreed to accept $3 million for the Crows Nest, Lane Cove and Port Melbourne stores subject to the assignment of leases on the sites. The board decided to prepare heads of agreement and move forward. In addition, the board noted that the opening of a Balgowlah store continued to be delayed, while a site had been secured for the new kitchen in Wetherill Park.

  1. On 2 September 2015, Woolworths issued an offer to About Life to assign the Thomas Dux premises at Lane Cove and Port Melbourne and facilitate a new lease for the site at Crows Nest for $3 million. On 3 September 2015, Mr Ross-Edwards met with the bank, which was (according to Mr Morales) “more than happy to consider [About Life’s] request to assist with the growth strategy of the business”. It appears that the acquisitions were proposed to be funded by drawing down About Life’s existing facilities, together with additional funding of $4.8 million. On 4 September 2015, About Life accepted Woolworths’ offer to acquire the three Thomas Dux sites for $3 million.

More side deeds

  1. On 8 September 2015, the board met. The financial position of About Life’s existing business was generally favourable to budget. A lease had been signed for the new kitchen site in Wetherill Park. Ms Phillips informed the board that heads of agreement had been signed with Woolworths. The minutes record:

David Thevenon to draft email to Brad Banducci from Woolworths, giving our assurances that we have no intention of selling to a trade player in the near term, nor would we release any press releases without seeking approval from Woolworths.

According to Ms Phillips, Woolworths was concerned that About Life would on-
sell the Thomas Dux stores quickly and wished to avoid bad publicity.

  1. On 2 October 2015, Mr de Fontgalland issued a fee proposal to About Life to act on the acquisition of the Crows Nest, Lane Cove and Port Melbourne sites from Woolworths. Mr de Fontgalland’s fee proposal, addressed to Ms Phillips and Mr Ross-Edwards, advised:

We will obtain your instructions, then advise you in relation to and review and amend the following documents, provided to us on 2 October 2015:

●   Deed of Agreement;

●   Side Deed (Lane Cove);

●   Side Deed (Crows Nest); and

●   Side Deed (Port Melbourne).

  1. The three side deeds referred to in Mr de Fontgalland’s fee proposal are not in evidence and appear to have fallen by the wayside as transaction documentation progressed. The significance of the reference to multiple side deeds in the fee proposal is, as I understand it, that About Life and, more particularly, Ms Phillips knew about side deeds. I am not sure it made much difference to her state of knowledge on this subject as she did not handle the negotiations with Woolworths for these stores, although was aware that Woolworths requested rights of first refusal. Mr Ross-Edwards was responsible for documenting this transaction; he did not remember the content of the Side Deeds.

  2. On 24 November 2015, a final draft of the Deed of Agreement between Woolworths and About Life in respect of the Crows Nest, Lane Cove and Port Melbourne stores was circulated to the directors for comment. Mr Thevenon observed:

The Right of First Refusal clauses are slightly broader than initially contemplated (where the restriction was limited to 3 named competitors), however I am fine with those given the short period of 12 months, and the fact that we would not seek to sell or get out of those leases in the first 12 months.

Mr Green recalled that the board discussed Woolworths’ request for rights of first refusal and was comfortable with such rights being given to Woolworths.

  1. In January 2016, Ms Phillips and Mr Ross-Edwards signed a Deed of Agreement with Woolworths in respect of the Crows Nest, Lane Cove and Port Melbourne stores. Amongst the provisions, About Life gave Woolworths a right of first refusal in respect of the three premises, such right to be exercised within 12 months of About Life becoming the lessee.

Bank review and increased debt

  1. On 14 September 2015, Mr Ross-Edwards supplied the bank with information to support funding for the acquisition of three new stores. Mr Ross-Edwards advised the bank that he expected About Life would breach the leverage ratio from February to June 2016, due to $800,000 which would be spent on start-up and marketing costs for the new stores. He requested that the bank allow About Life a less restrictive covenant from January to September 2016.

  2. On 7 October 2015, the bank presented its internal credit paper, recommending approval of additional facilities “[b]ased on the company’s sound growth and their robust, experienced and conservative management”. The bank’s view of About Life’s board remained positive; the addition of Mr Ross-Edwards as chief financial officer was considered to have “further strengthened the group in terms of internal governance and financial reporting”. The bank noted, “The quality of the management team is impressive, and the provision of financials and the broader strategy of the business have been well presented to the Bank on a number of occasions.” Management was said to be “relishing independence from their previous key competitor, Thomas Dux, who is now being wound down by Woolworths Ltd. Independence is providing opportunities to pursue growth opportunities, both local and nationwide”. The overall transaction was considered to be “modestly leveraged”. The bank noted that shareholders were not proposing to inject further capital “as they believe the business operation is sound and under leveraged”.

  3. The bank’s analysis of About Life’s financial information appears detailed: the business was performing well and forecasts were considered reliable as prior year projections had proven to be thus far. Forecasts for the 2017 and 2018 years “appear challenging but not outside the capability of the business given historic performance.” The bank noted that a mild covenant breach may occur in the September 2016 quarter before returning to covenant levels by December 2016. Internal bank approval for About Life’s request for further funding was not immediately forthcoming. Various issues were raised, a meeting held and further information obtained from the customer. Throughout this process, Mr Morales repeatedly expressed “great confidence in the management team” and confidence in About Life’s business model.

  4. On 20 October 2015, the board met. Fit-out of the new kitchen in Wetherill Park was underway and the new warehouse was expected to be open for business in November 2015. The bank had approved additional facilities to allow completion of the three Thomas Dux stores and the Freshwater store. The board minutes record:

Further additional stores may require additional equity, over the next 18 months. This was discussed and the conclusion was that existing shareholders more than willing to contribute additional capital if required and that we would wait until actual projects were firmed up.

  1. On 12 November 2015, the bank increased About Life’s loan facilities from some $4 million to $9.7 million. A particular concern for the bank was perfecting its security, as problems had been encountered documenting the bank’s right of entry over leased premises. After meeting with Ms Phillips and Mr Ross-Edwards to discuss this problem, the bank agreed to accept a caveat to protect the bank’s interest, which Mr Morales considered a reasonable compromise given About Life’s “proven reliability, robust business and financial profile”.

  2. On 17 November 2015, About Life’s auditors, Deloitte, completed their audit for 2015. About Life’s revenue was some $51 million, with profit before tax of some $2.9 million. The company had net assets of some $10 million. The audit report was unremarkable.

New stores and kitchen

  1. In January 2016, About Life established a 2,400 square metre warehouse and kitchen facility at Wetherill Park, being much larger than the Rozelle kitchen of only 200 square metres. The total cost of the fit-out and plant and equipment was some $2 million. Some 70 staff were employed. The industrial scale of the new facility was intended to support About Life’s plans to expand to 30 stores along the east coast of Australia from Melbourne to Brisbane. Problems were experienced, however, with over-ordering and over-production. The extent of these problems was not appreciated for some time, but resulted in millions of dollars of inventory, and thus, cash being wasted: see further at [400]. This was the first significant problem which impacted About Life’s cashflow.

  2. In February 2016, Ms Phillips reported to the board on progress with the new sites. The Lane Cove and Port Melbourne sites would be taken over in March 2016, with fit-out to commence. The new kitchen was running well, as was the warehouse, and producing efficiencies. Progress with selecting other sites, and completing documentation on existing sites, was also reported. Ms Phillips reported again to the board in March 2016, with “[a]ll attention … on new store openings.” Fit-out of Lane Cove and Port Melbourne were then underway.

  3. The Lane Cove store opened on 31 March 2016. The Port Melbourne store opened on 21 April 2016. In May 2016, Mr Ross-Edwards presented the financial report to the board. Cammeray’s revenue was then down by 3.3%, noting “Lane Cove is can[niba]lising Cammeray”. In addition, Ms Phillips presented an update on store openings, advising that Port Melbourne had launched on 21 April 2016, with response to the store being very encouraging. Lane Cove sales had “come off considerably” as senior staff had to be moved to Port Melbourne. The Crows Nest fit-out was progressing on time and expected to open in June 2016. Additional staff had been recruited to purchasing, which had been understaffed as a result of the additional stores. The Crows Nest store opened on 9 June 2016.

  4. Mr Ross-Edwards said that the same operational formula used by About Life in its existing stores was applied in the new stores. But there were some differences in the demographics and purchasing patterns in the new areas; it took some months for management to develop a proper understanding of those matters. Managers appointed to the new stores were inexperienced in the operation of About Life stores and required considerable assistance and supervision in the early months. One of the issues arising was over-ordering, particularly with fresh food, and this resulted in significant amounts of wastage in the early phase of operation of the new stores. This compounded the wastage of inventory by the new kitchen.

Problems with IT

  1. Perhaps the biggest problem encountered at this time – in terms of financial impact – was a new IT system. About Life invested $500,000 in a new computer and point of sale scanning system (Bepoz), which was introduced at the Lane Cove store in March 2016 and ‘rolled out’ to all other stores over the next six months. The new IT system was to provide a more sophisticated version of automated replenishment of inventory. However, there were significant issues from the outset such that, for a period of time, the business was not able to operate the system to replenish stock at all. The business had to rely on management, who had not been formally trained in purchasing, to manually place orders. As many of the staff were new to the business, excessive over-ordering and wastage resulted, particularly for the kitchen.

  2. In addition, the scanning software did not recognise the barcodes used under the old computer system. This problem was not identified by the supplier and did not become apparent for some months. As a result, some 25% of stock was not properly recorded when scanned at the point of sale, resulting in significant inventory problems for all stores. The customer was charged for the item but the system recorded the item as still being in stock when it had been sold. Staff could not rely on the system to indicate inventory on hand. The problem was eventually identified and rectified in the latter part of 2016. The extent of lost and wasted stock was not quantified until May 2017: see [400].

“Stop & Think”

  1. On 15 June 2016, in advance of a board meeting, Ms Phillips circulated a document entitled “Stop & Think” for discussion. The document consolidated Ms Phillips’ views with those of Ms Stewart and Mr Ross-Edwards, “largely driven by analysis but also some honest reflecting. I entitled it STOP AND THINK – I don’t think we’ve done a lot of that lately!!”. The six page document contained a frank assessment of all aspects of About Life’s business as it had weathered significant change from the implementation of new IT, opening the new kitchen in Wetherill Park and three new stores. Senior staff were stretched in supporting new stores while other staff struggled to maintain the quality of food services in existing stores. With Port Melbourne being the only store in Victoria, the logistics of ensuring inventory and managing the store were presenting challenges. Ms Phillips expressed concern that customers were declining generally, perhaps due to food service and products being available one week but not the next. New store openings were cannibalising existing stores, with Cammeray down 20%, Rozelle down 10%, and Lane Cove taking 5% from the opening of Crows Nest. Ms Phillips queried whether there was a risk that About Life may breach bank covenants. Ms Phillips posed the general problem of optimising the business for its new size.

  2. Whilst Ms Phillips was criticised at length during cross-examination for the content of her “Stop & Think” paper, I consider this to have been misplaced. At a period of significant change in the life of the business, a director was raising an alarm – at an early stage – for the board to consider a wide range of issues and concerns. As Ms Phillips put it, “Look Mr Leopold when you sit in a position like mine it is … necessary to admit your mistakes and [to own] them. I mean the only way that you are going to fix the company is to admit the things that have gone wrong. So yes, this paper was a true reflection of what had gone wrong during the growth phase.” Mr Green generally agreed with the concerns identified by Ms Phillips. He did not think there was a quick fix to these problems, which would take months to turn around.

  3. The board meeting on 16 June 2016 proved a sober affair. For the first time, the sales for all stores were less than that achieved the previous year. Wages were up due to the opening of three new stores. Cashflow was down due to capital expenditure on Port Melbourne and Crows Nest. Ms Phillips presented her “Stop & Think” document. The minutes record:

The opening of 3 stores in 3 months has paid a toll on the existing stores with support staff concentrating on new stores, has seen a decline and blowout in wages. Discussion was open and frank and robust, with the following outcomes as a result of the discussion:

●   Tom and Rob to meet CBA bank as soon as possible to discuss the performance and possible breach of covenants at the end of June and a plan will be presented as to what the business is doing to rectify and the timeframe.

  1. Mr Ross-Edwards said the directors shared his concern that About Life might find itself in breach of its bank covenants by the end of June 2016. There was lengthy discussion on the topic. The board agreed to slow immediate expansion plans, make organisational changes and take steps to improve the food service offer. This strategy was expected to reverse the decline in sales, bring wages back into line with historic levels and restore bank covenants.

  2. Mr Ross-Edwards said About Life’s acquisition of Lane Cove, Port Melbourne and Crows Nest stores, establishment of a new kitchen and warehouse at Wetherill Park and investment in a new IT system for all stores increased bank debt to $12 million. Servicing this debt, together with additional wages and overheads, began to have an impact on cashflow. The impact of these exceptional expenses was compounded by human resources issues related to increasing staff by some 200 staff and the employment of new managers unfamiliar with the business. Management were also concentrating on new, rather than existing, sites. Mr Ross-Edwards said there was no doubt that business struggled with the rapid growth that occurred in 2016.

Covenant breach

  1. As foreshadowed at the 16 June 2016 board meeting, About Life breached the leverage ratio for the quarter ending June 2016. Mr Ross-Edwards considered that the breach arose because of the additional funds drawn down in the previous three months to fund expansion, with only a limited period of earnings from the new businesses. As soon as he recognised the breach, Mr Ross-Edwards contacted the bank in advance of the formal report date on 15 August 2016 and organised a meeting.

  2. Mr Beecroft prepared discussion points for the bank. A detailed presentation was prepared, including financial results for the 2016 financial year and the 2017 forecast. Total sales of $81.4 million were forecast for 2017, with a gross profit of $33.9 million and EBITDA of $5 million. Mr Green reviewed the projected sales figures, which he considered reasonable having regard to the “Stop & Think” document; the budget reflected the information then available to About Life, including the problems that had been experienced with opening stores.

  3. The presentation noted that EBITDA had been below budget that year, with the June quarter being very disappointing largely due to increased costs associated with the opening of three stores. The new stores were performing but below forecast. The budgets for the new stores were optimistic, however, About Life continued to believe that all three new stores would operate profitably and be strong contributors to EBITDA, albeit it may take a bit longer than forecast. Organisational changes and other board initiatives to redress the position were explained. About Life was expected to breach its leverage covenant and sought relief from this covenant for 12 months to give About Life time to implement its plans and grow the new stores. About Life expected to be back within the leverage covenant on a trailing 12 month basis, being 3.5 by September 2016, 3.0 by December 2016, 2.5 by March 2017 and 2.0 by June 2017.

  4. On 8 July 2016, Mr Green, Mr Beecroft and Mr Ross-Edwards met with bank officers at the Crows Nest store. Mr Morale’s note of the meeting does not suggest that the bank was overly concerned: the client expected to breach the leverage ratio but the issues had been addressed and a request to amend the covenants would be forwarded in due course.

  5. At the board meeting on 21 July 2016, financial results for the stores for June 2016 were reported to be below budget. Mr Green agreed that every store was then struggling, for reasons which differed for each store. Cammeray was down by 8.3%, with the sales being cannibalised by Crows Nest and Lane Cove. Lane Cove and Port Melbourne sales “seemed to have bottomed”. Mr Thevenon expressed concerns at “out of stocks” and a lack of range in Cammeray and Crows Nest. (Ms Phillips said that ‘out of stocks’ was partly a supply chain issue, as many of About Life’s suppliers were smaller businesses who were unable to keep up with About Life’s growth.) It was reported that the bank had accepted the proposal for covenant relief, subject to final June 2016 numbers and the 2017 budget.

  6. On 4 August 2016, About Life provided its Compliance Certificate and accompanying financial statements to the bank, reporting that the leverage and ICR had been breached for the June 2016 quarter. On 18 August 2016, the board met. The results for most stores were unfavourable, with Cammeray down 27%, being cannibalised by Crows Nest and Lane Cove. The sales for Lane Cove and Port Melbourne, though, were “starting to grow”. Ms Phillips reported that all new stores had “levelled out and should start growing from here.” Deep End was to “do all new stores including cannibalisation of existing stores.” A revised proposal and budget had been sent to the bank, awaiting its review; the proposal was aimed at giving the business breathing space whilst bringing covenants into line within 12 months.

Revised 2017 forecast

  1. On 19 August 2016, Mr Ross-Edwards sent Mr Morales a revised presentation and forecast. As a result of the presentation and conversations with the bank, Mr Ross-Edwards said “we revised it down to a more hopefully realistic number”. The revised 2017 forecast now predicted $80 million sales with a gross profit of $33.3 million and EBITDA of $4.7 million. Mr Ross-Edwards agreed that the adjustments proved insufficient.

  1. Finally, in Dual Homes Victoria Pty Ltd v Moores Legal Pty Ltd, a company was served with a statutory demand. On the advice of a solicitor, the company applied to set it aside but outside the statutory time limit. The application was withdrawn on the condition that the company pay the creditor’s costs. The creditor served a further statutory demand for the same debt. The company failed to comply with the demand and the presumption of insolvency arose. The creditor then applied to have the company wound up. The solicitor did not appear at the hearing and the company was wound up in insolvency, despite the fact that the solicitor was aware that the company had more than $3 million in assets and could have proven the company’s solvency at the hearing.

  2. The company and shareholders sued the solicitor for the expenses incurred on the company’s behalf while the company was in liquidation. Dixon J held it was unnecessary to determine whether the duty of care owed by the solicitor extended to the shareholders as well, as the company was entitled to recover the losses with which it could reimburse the shareholders: at [131]. Obiter, Dixon J held that the solicitor owed a duty of care to the shareholders at [135]: (footnotes omitted)

Reasonable foreseeability is not enough to impose a duty in the present case. However, as with the beneficiary in Hill v Van Erp, [the shareholders] were vulnerable in the sense that they were unable to protect themselves from the consequences of [the solicitor]’s want of reasonable care. [The solicitor] was in control of the risk. He assumed responsibility for it. Neither [shareholder] was challenged in cross-examination about their reliance on [the solicitor] to manage, or fix, the demands that were being made against [the company] by the [creditor].

  1. Having regard to the case law, the following matters are relevant to whether Maddocks owed a duty of care to About Life’s directors in the circumstances of this case.

  2. First, Maddocks did not have an intimate, detailed and long-running knowledge of the directors’ financial affairs, unlike in Johnson v Gore Wood. Mr McNee had acted for Mr Green and his companies in the past, but the extent of their dealings is not clear. Mr McNee had also worked with Mr Beecroft before on a transaction involving Navis Capital. However, when considering whether the circumstances giving rise to a duty of care, I consider that the focus must be on what Ms Badcock knew about these gentlemen rather than another partner of her firm; Ms Badcock had never dealt with them before. Ms Phillips had not dealt with Maddocks before. A duty of care would not arise by reason of Maddocks’ previous dealings with the directors.

  3. Second, Maddocks’ conduct did not demonstrate an assumption of responsibility, with known reliance, by the directors.

  4. Third, the client’s interests – which Maddocks was retained to protect and advance – were the same as the client’s directors. About Life’s interests required that the Contract for Sale of Business be completed, and that the risks to completion be identified and either eliminated or reduced. About Life’s interests were receiving the proceeds of sale as soon as possible, undiluted by the effects of delay or expenses caused by unidentified or unmanaged risks to completion. The interests of the company and its directors in the solicitor’s instructions being carried into effect were relevantly the same.

  5. To the extent that directors may have been negligent by failing to examine the company’s records before or during the course of giving instructions to the company’s solicitors, both About Life and its directors shared a common interest in expunging such negligence by investigating About Life’s right to assign the lease and providing proper instructions before contracts were exchanged. As such, recognising a duty to the directors would not involve any conflict with the duties owed by the solicitor to the company: Badenach v Calvert at [18]. The interests of the company and its directors in the solicitor discharging her obligations by obtaining proper instructions were coincident.

  6. True it is that the directors could also have asked Maddocks to act for them on the transaction, although it is not clear why the directors would have thought it necessary to have legal representation. Indeed, if it had occurred to the directors that they may need to retain a solicitor, for example, because the directors may be exposed to a claim for a breach of their duties for failing to ascertain About Life’s ability to sell the Double Bay store, then that thought-process would probably itself have elicited Woolworths’ Deed of Agreement. The same sequence of events would likely have occurred if Maddocks had suggested that the directors may wish to consider retaining a solicitor to act for them on the transaction in the circumstances.

  7. Fourth, as to potential indeterminacy of liability, the directors’ potential liability to Harris Farm was the same as the company’s potential liability. By its cross claim, Harris Farm sued About Life for breach of contract and representations made by Mr Green and Ms Phillips in the meetings with Mr Harris and in the contract. As against the directors, Harris Farm contended that the directors were knowingly involved in About Life’s representations.

  8. Harris Farm contended that the directors were liable for representations constituted by the Contract for Sale of Business. Harris Farm pointed to the fact that the contract was signed by Ms Phillips and Mr Beecroft. Further, each of Mr Green, Mr Beecroft and Ms Phillips read and approved the final version of the contract. All knew and intended that the final version of the contract would be provided to Harris Farm for execution. By clause 10 of the contract, About Life was to promise at completion that the business and the lease were not subject to any charge, encumbrance, lease, mortgage, security interest or other liability or security. In those circumstances, Harris Farm contended that Ms Phillips, Mr Green and Mr Beecroft each represented that the lease was able to be assigned, subject to the consent of the Council, and no person had or would have an interest in the lease that would prevent or inhibit the assignment to Harris Farm. Obviously enough, any representations said to have been made by the directors by signing the contract or endorsing its provision to Harris Farm had also squarely been made by About Life.

  9. Harris Farm’s damages claim was the same against the company and directors. If About Life had paid damages to Harris Farm, then the directors would not have had to pay additional damages; About Life would have been entitled to recover such damages from Maddocks.

  10. The fact that the directors settled Harris Farm’s claim and could not look to the company to reimburse them is referable to timing issues. About Life went into external administration. Harris Farm could not press its claim against the company and was limited to recovering damages from the directors. But for the fact that About Life was in external administration – a state of affairs to which Maddocks contributed in no small way by its performance of the retainer – the directors could have looked to the company to reimburse them for the settlement monies paid to Harris Farm, and the company could have sued Maddocks for the monies. Recognising a duty of care by Maddocks to the directors does not expose Maddocks to greater or unlimited liability.

  11. Having regard to the multi-factorial approach described in CaltexRefineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258, it was foreseeable that About Life’s directors may be exposed to a claim by the purchaser if the Contract for Sale of Business made representations which proved incorrect and should not have been made. The directors were vulnerable in the sense that they were unable to protect themselves from the consequences of Maddocks’ want of reasonable care in acting for About Life on the transaction. Ms Badcock undertook the task of protecting About Life’s interests, including by identifying and managing the risks to completion and thus had control of managing the risks posed by giving warranties which should not have been given, including obtaining proper instructions from About Life’s officers (the directors) as to whether About Life could give such warranties. The directors could not choose whether to take on the liability to which they were exposed by the warranties in the contract, unlike Brownie Wills v Shrimpton where the directors could have declined to provide guarantees to the company’s bank.

  12. As such, I find that Maddocks owed a duty of care to About Life’s directors in the circumstances of this case, which duty was breached and led to a claim being made against the directors by Harris Farm. It was not suggested by Maddocks that the directors’ settlement of that claim was unreasonable and thus this component of the directors’ cross claim against Maddocks succeeds. Any damages payable by Maddocks to the directors must also be reduced by 20% by reason of directors’ contributory negligence. Thus, Maddocks is only obliged to pay $344,000.

Misleading and deceptive conduct

  1. The directors claim that Maddocks engaged in misleading or deceptive conduct by omitting to advise them directly or via About Life of various matters including what should have been apparent from the Deed of Agreement of Lease, the importance of ensuring that there was no other document which may limit or encumber About Life’s capacity or authority to assign the lease, and suggesting lines of enquiry which might be pursued to ascertain the existence of any such impediment.

  2. I did not have the benefit of written or oral submissions from the directors on this claim, and am tempted to treat it as not pressed. As Mr Beecroft did not give evidence, I will regard his claim as abandoned, there being no evidence that he relied on any such conduct. Nor is it strictly necessary for me to consider this claim as the directors are already entitled to these damages in negligence.

  3. Maddocks denied this claim, submitting that the conduct was not “conduct” for the purposes of section 18 of the Australian Consumer Law. Section 4(2) of the Competition and Consumer Act 2010 (Cth) provides that a reference to “engaging in conduct shall be read as a reference to doing or refusing to do any act”, and further that “a reference to refusing to do an act includes a reference to: (i) refraining (otherwise than inadvertently) from doing that act.” Mere inadvertence did not invoke section 18 of the Australian Consumer Law. Where Maddocks was ignorant of Woolworths’ right of first refusal, the failures relied upon by the directors were not “conduct” in the sense of Maddocks advertently refrained from taking the particular steps. A representation by silence could not succeed unless there was a duty to speak: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. There was no duty to speak to the directors. Even if the directors’ claims had substance, they would be subject to a very significant reduction for contributory negligence.

  4. Essentially two questions arise for decision. First, the identification of the relevant “conduct”. Second, whether that conduct was misleading and deceptive. In Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd [2011] WASCA 76; (2011) 248 FLR 193, McLure P explained at [65]-[66];

[65] A defendant’s non-disclosure can, because of common assumptions or established practices or other relevant surrounding circumstances, give rise to an implied representation by the defendant that an undisclosed fact did (or did not, as the case may be) exist. The making of such an implied representation by the defendant is the doing of an act and is thus within s 4(2). The satisfaction of the “reasonable expectation” test can result in the defendant doing an act.

[66]   The need to establish a deliberate omission will only arise if the defendant’s actual conduct together with all the relevant surrounding circumstances are (objectively) incapable of giving rise to the misleading or deceptive contextual conduct complained of. In that event, the circumstances in which deliberate non-disclosure may be misleading or deceptive conduct will be limited; perhaps where the defendant is aware of another’s misapprehension in the type of situations where relief is available for unilateral mistake (Taylor v Johnson (1983) 151 CLR 422) or where the plaintiff’s misapprehension is caused by, but is not objectively attributable to, the defendant’s conduct.

  1. This was followed in Johnson v Mackinnon [2021] NSWCA 152, where Brereton JA (Macfarlan JA and Simpson AJA relevantly agreeing) observed at [254]:

[N]otwithstanding that to “refrain otherwise than inadvertently” requires a deliberate decision to withhold information, it is necessary to establish a deliberate omission only where the actual conduct together with all the relevant surrounding circumstances are (objectively) incapable of giving rise to the misleading or deceptive contextual conduct complained of. This is because, where the actual conduct in its surrounding circumstances gives rise to the misleading or deceptive contextual conduct, there is an “act” within the definition and it is unnecessary to resort to “refraining otherwise than inadvertently” from acting. However, where the actual conduct in its surrounding circumstances is objectively incapable of giving rise to the misleading or deceptive contextual conduct, there is no “act”. In those circumstances, there may nonetheless be misleading or deceptive conduct, by a deliberate non-disclosure — for example, where the person is aware that the other party is under a misapprehension…

  1. In the context of a solicitor’s advice, in Paltos v Bartier Perry Pty Ltd [2020] NSWSC 705, Rothman J observed, “the Court looks at the whole of the conduct said to be provided purportedly in satisfaction of duties established by the Retainer and determines whether that advice was misleading or deceptive, because, on the claim of the plaintiff, it omitted advice”: at [59]. In that case, Mr Paltos, a partner of a law firm, suffered two strokes which impaired his ability to work. The partnership agreement included a put option, entitling a partner to require the other partner to purchase their share of the partnership in limited circumstances relating to ill-heath. Given Mr Paltos’ health, he may have been entitled to exercise the put option if, due to his illness, he was unable to work for at least six months.

  2. Mr Paltos became involved a dispute with his partner. Mr Paltos engaged solicitors to advise with regard to the partnership and the demands made by his partner. The firm advised Mr Paltos that “the put options do not help [you, Mr Paltos]”. When this advice was given, the time for Mr Paltos to be entitled to exercise the put option had not arisen. The partnership was dissolved and receivers appointed without Mr Paltos having exercised the put option.

  3. On appeal in Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158, the Court of Appeal affirmed the primary judge’s finding that the advice was misleading and deceptive. Payne JA (with whom White and McCallum JA agreed) explained at [90]-[91]: (emphasis added)

90    … Bartier Perry had all of the documents and was being asked to provide advice to Mr Paltos about the appropriate and possible means available to him to transfer on the best terms possible his interest in the Partnership to Mr Milevski, whether immediately, upon termination of the Partnership, or after its dissolution. In that context, it was a dangerously incomplete statement of the rights Mr Paltos enjoyed to advise him that “the Put Options do not help [you, Mr Paltos]” yet or at this time. Whilst literally true, this advice was misleading and deceptive, in that it was apt to mislead Mr Paltos about the nature of his legal rights.

91    The true position was that Mr Paltos arguably enjoyed valuable rights under the Put and Call Option Agreement. If Mr Paltos remained unable to work in the Partnership for a period of six months he would at that time, but for a limited period only, be able to exercise the put option granted by the Put and Call Option Agreement. Non-misleading advice would have been that the exercise of the put option may be financially advantageous to Mr Paltos and that he should seek accounting advice about that question. Acting in a non-misleading way, Bartier Perry should have advised Mr Paltos that the put option arguably survived the dissolution of the Partnership. Bartier Perry failed to give that advice.

  1. Here, the relevant conduct was the provision of legal advice, which may have been incomplete as to the rights and obligations of About Life. It was not mere inadvertence. It is only necessary to establish a deliberate omission “where the actual conduct together with all the relevant surrounding circumstances are (objectively) incapable of giving rise to the misleading or deceptive contextual conduct complained of”: Johnson v MacKinnon at [254]. Legal advice which is literally correct may be misleading and deceptive if it is apt to mislead the client as to the nature of the client’s legal rights.

  2. Although Bartier Perry concerned a claim brought by a client against his solicitor, a solicitor may be liable to persons other than the client for misleading and deceptive conduct. For example, in Argy v Blunts (1990) 26 FCR 112, the vendor’s solicitors prepared a contract for the sale of land. They omitted to include a page of the planning certificate which would have revealed that a portion of the land was zoned so as to prohibit building within it. Hill J held that the vendor’s solicitor was liable to the purchasers in misleading and deceptive conduct. His Honour explained at 132:

… the annexation of a certificate to a contract by the person preparing it can be seen to be a representation by that person not only that the certificate is the certificate issued by the council but that it is the whole of that certificate so that where, as here, the certificate is incomplete in that it omits to contain a full description of the significance of the Regional Open Space Reservation, there is a misrepresentation made by the person preparing the contract carrying with it the capacity to deceive.

  1. His Honour relevantly concluded at 133:

… Gadens were similarly engaged in misleading and deceptive conduct but only in the sense that the contract prepared by Gadens can be seen to be a statement or representation made by them as the persons responsible for the preparation of the contract that the s 149 certificate annexed thereto was, so far as relevant to the land the subject of it, a copy of the complete certificate as issued by the council.

  1. Thus, the fact that the directors were not clients of Maddocks does not preclude Maddocks from being liable to the directors in misleading and deceptive conduct.

  2. Ms Badcock gave no advice to About Life on the Deed of Agreement for Lease. Ms Badcock did give advice, by her email sent shortly before exchange, including on the warranty in clause 10.1.12 and the matter of side deeds. The problem with Ms Badcock’s email advice was not what was said – which was strictly correct – but, given the circumstances in which it was sent, being shortly before exchange, the lack of information about what was being asked (including elaborating on what was meant by a ‘side deed’), why it was important, and the need (to borrow a phrase) to “STOP AND THINK”. Thus, were it necessary to decide, I would find that Maddocks were liable to Mr Green and Ms Phillips for misleading and deceptive conduct.

ORDERS

  1. For these reasons, I make the following orders:

Second cross-claim

  1. Judgment in favour of the cross-claimant, About Life Pty Ltd, against the cross-defendants in the sum of $12,716,800 together with interest from 1 July 2017.

  2. Judgment in favour of About Life Pty Ltd against the cross-defendants in the sum of $280,000, together with interest from 13 December 2017.

  1. Cross-defendants to pay the cross-claimants’ costs of the second cross-claim.

Third to fifth cross-claims

  1. Judgment in favour of the cross-claimants, Tammie Phillips, Michael Green and Thomas Beecroft, in the sum of $344,000, together with interest.

  2. Cross-defendants to pay the cross-claimants’ costs of the third, fourth and fifth cross-claims.

  3. Grant liberty to the parties within 14 days to notify any errors or omissions.

  4. In the event that any party seeks a variation of costs orders, direct:

  1. the parties seeking a variation to file and serve any affidavits and submissions within 28 days;

  2. the parties affected by the proposed variation to file any affidavits and submissions in reply within 14 days thereafter;

  3. such application to be determined on the papers.

**********

Amendments

23 December 2021 - - Cross-referencing amended


- amendment to cases on coversheet

Details
AGLC
About Life Pty Ltd v Maddocks Lawyers [2021] NSWSC 1370
Case
[2021] NSWSC 1370
Decision Date

CaseChat Overview and Summary

In the case of About Life Pty Ltd v Maddocks Lawyers, the plaintiff, a company in financial distress, retained the defendant law firm to act in the sale of their business, including the assignment of a lease that contained a right of first refusal in favour of Woolworths. The company had not sought comprehensive instructions from the law firm until shortly before the exchange of contracts, and the law firm had provided only high-level comments in response to the client’s enquiries. After the exchange of contracts, Woolworths sought an injunction to prevent the sale, and the plaintiff received the proceeds of sale six months later, only for the company to go into administration. The plaintiff sued the law firm for professional negligence, seeking damages for the loss of the chance to sell the business to Woolworths.

The legal issues before the court included whether the law firm breached their duty of care, whether the plaintiff's failure to provide comprehensive instructions constituted contributory negligence, and whether the law firm owed a duty of care to the directors of the plaintiff company. Additionally, the court had to determine whether the law firm was liable for misleading and deceptive conduct due to incomplete advice.

The court found that the law firm had breached their duty of care by not seeking comprehensive instructions from the plaintiff and failing to provide sufficient advice. The plaintiff's failure to provide comprehensive instructions and check records was considered contributory negligence, reducing the damages by 20%. The court held that the law firm did not owe a duty of care to the directors of the plaintiff company as their interests were coincident with those of the company. The court also found that the law firm was not liable for misleading and deceptive conduct as incomplete advice did not constitute "conduct" within the meaning of the law.

The court assessed the damages for the loss of the chance to sell the business to Woolworths and found that the law firm should be liable for costs as damages. The court held that the plaintiff did not need to show the reasonableness of their settlement, and it was not necessary for the law firm to plead failure to mitigate. The court ordered the law firm to pay damages to the plaintiff.

Orders

Orders of the court

Full text does not contain this section.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

Full text does not contain this section.