AI Mclean Pty Ltd v Hayson - [2008] NSWSC 927

No judgment structure available for this case.

CITATION: A. I. McLean Pty Ltd v Hayson [2008] NSWSC 927
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S): 28, 29 and 30 April 2008, and 1, 5, 6, 7, 8, 12, 13, 14 and 15 May 2008

JUDGMENT DATE :
11 September 2008

JURISDICTION: Equity Division - Commercial List

JUDGMENT OF: Bergin J

DECISION: Plaintiffs' claims dismissed.
Cross-claims dismissed.

CATCHWORDS: [OPTIONS] - whether plaintiffs' pleaded method would have amounted to valid exercise of option - whether method would have been achievable in the circumstances - [COMMERCIAL AGREEMENTS] - whether agreement to enter into "similar" agreement in context of a suite of complex arrangements and agreements would have been achieved and/or enforceable/enforced - [NEGLIGENCE] - breadth of lawyers' retainers/duty of care - whether lawyers breached retainers/duty of care - [EVIDENCE] - expert evidence in professional negligence suits against lawyers - reasons therefor - scope of duty/standard of care

LEGISLATION CITED: Civil Liability Act 2002
Civil Liability Amendment (Personal Responsibility) Act 2002
Corporations Law 1999 (Cth)
Legal Profession Act 1987

CATEGORY: Principal judgment

CASES CITED: Banque Commerciale SA (in Liq) v Akhil Holdings Ltd (1990) 169 CLR 279
Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1
Bell v Peter Browne & Co (1990) 2 QB 495
Booksan Pty Ltd v Wehbe [2006] NSWCA 3
Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209
BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Brand v Digi-Tech (Australia) Ltd [2002] NSWSC 416
Chappel v Hart (1998) 195 CLR 232
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1
Daniels v Anderson (1995) 37 NSWLR 438
Dean v Allin [2001] 2 Lloyd’s Law Reports 249
Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184; [2004] NSWCA 58
Dunlop v Woollahra Municipal Council [1982] AC 158
F & D Normoyle Pty Limited v Transfield Pty Limited (2005) 63 NSWLR 502
Gore v Montague Mining Pty Ltd [2000] FCA 1214
Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540
Heydon v NRMA Ltd (2000) 51 NSWLR 1
Hicks v Roberts (1977) 16 ALR 466
Hill v van Erp (1997) 188 CLR 159
Imbrahim v Pham [2007] NSWCA 215
Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430
Macidone v Parbery (1994) Aust Torts Rep 81-290
McLean Tecnic v Digi-Tech [2005] NSWSC 386
Midland Bank Trust v Hett Stubbs & Kemp (1979) 1 Ch 384
Notaras v Sly and Weigall (2005) 12 BPR 23,765
Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Rosenberg v Percival (2001) 205 CLR 434
Tepko Pty Ltd v Water Board (2000) 206 CLR 1
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
Tonitto v Bassal (1992) 28 NSWLR 564
Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 636
Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642
WCW Pty Ltd v Bolster & Co, unreported, FCFCA, 6 January 1993

PARTIES: A. I. McLean Pty Ltd (First Plaintiff)
McLean Tecnic Pty Ltd (Second Plaintiff)
Paul Thomas Hayson & Ors trading as Harris & Co (First Defendant)
Mark Coolican Paul & Ors trading as Bartier Perry (Second Defendant)
John Hugh Clifford Colvin & Ors trading as Freehill Hollingdale & Page (Third Defendant)
Anthony Geoffrey Hartnell & Ors trading as Atanaskovic Hartnell (Fourth Defendant)
Peter William Cornelius trading as Peter Cornelius (Cross Defendant)

FILE NUMBER(S): SC 50141 of 2005

COUNSEL: B McClintock SC/B Katekar/CH Withers (Plaintiffs)
DL Davies SC/MS White (First Defendant)
JC Kelly SC/WV McManus/P Arblaster (Second Defendant)
MJ Slattery QC/R Pepper (Third Defendant)
TF Bathurst QC/AJ Payne (Fourth Defendant)
SD Robb QC/JAN Hogan-Doran (Cross Defendant)

SOLICITORS: Blake Dawson (Plaintiffs)
Yeldham Price O'Brien Lusk (First Defendant)
Colin Biggers & Paisley Laywers (Second Defendant)
Malleson Stephen Jaques (Third Defendant)
Ebsworth & Ebsworth then HWL Ebsworth Lawyers (Fourth Defendant)
Middletons (Cross Defendant)

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BERGIN J

11 SEPTEMBER 2008

50141 of 2005 A I MCLEAN PTY LIMITED & ANOR v PAUL THOMAS HAYSON AND THE PARTNERS OF HARRIS & COMPANY & ORS

Introduction

1 This litigation arises out of the exercise of options by the first plaintiff, A I McLean Pty Limited (AI McLean), pursuant to Investor Option Agreements between it, as Investor, McLean Tecnic Pty Ltd (McLean Tecnic), the second plaintiff, as Covenantor, and companies within the New Zealand Digi-Tech Group of companies, Digi-Tech Equities Limited (DTEL) and Digi-Tech Communications Limited (DTCL). This Court held that the options were not exercised validly: Graham Leonard Brand & Ors v Digi-Tech (Australia) Limited & Ors; Christopher Gerard Kelliher & Ors v Digi-Tech (Australia) Limited & Ors [2002] NSWSC 416 (Einstein J); Digi-Tech (Australia) Ltd v Brand & Five Ors; Digi-Tech (Australia) Ltd v Kelliher & 3 Ors; Kalifair Pty Ltd & 3 Ors v Digi-Tech (Australia) Ltd & 3 Ors; McLean Tecnic Pty Ltd & 1 Or v Digi-Tech (Australia) Ltd & 3 Ors (2004) 62 IPR 184; [2004] NSWCA 58 (the CA Judgment). The plaintiffs were subsequently held liable to pay Digi-Tech (Australia) Limited (DTAL) approximately $30 million: McLean Tecnic & Anor v Digi-Tech & Ors [2005] NSWSC 386 (McDougall J).

2 The investment involved investors purchasing rights to exploit the intellectual property in two products, known as ‘Freerider’ and ‘Terminal Adapter’, in Australia under Sale and Purchase Agreements with DTAL (Sale Agreements). Those products were promoted as enabling simultaneous transactions on the Internet. The investment was promoted as tax effective, with tax deductions available for instalments of the purchase price paid over five years. The proposed arrangement was that the investors would license the purchased rights to an Australian-registered company Digi-Tech Software Pty Limited (DTSPL), established by the investors. The investors had the capacity to exit the investment by exercising an option and obtaining financial “assistance” to make the final “balloon” payment by DTEL paying the Covenantor subscription monies for shares in the Covenantor.

3 The original plan was that the investors would enter into one agreement that would encompass both the Terminal Adapter and Freerider intellectual property. It was envisaged that prior to 30 June 1997 the partnership of investors would contain something in the order of forty people, utilising a number of sub-partnerships to accommodate the law that restricted the number of partners to twenty. Late in the afternoon of 30 June 1997 advice was received from a Queens Counsel that the partnership should preferably contain no more than twenty partners. It was this advice that apparently caused the establishment of two partnerships and the division of the intellectual property into two separate licences. The investors then joined in one of two partnerships, the Freerider Partnership or the Terminal Adapter Partnership according to the products in which they had purchased rights. However there were some investors that joined both partnerships. Those investors that joined both partnerships accordingly entered two Option Agreements; one in the Freerider Partnership and one in the Terminal Adaptor Partnership.

4 In this litigation the plaintiffs claim damages from a number of solicitors allegedly retained to exercise the options and in relation to the exercise the options. The plaintiffs allege, inter alia, that each of the solicitors in breach of their retainers and negligently failed to cause the options to be exercised validly. It is claimed that each of the solicitors knew that McLean Tecnic was a member of both partnerships and that they should have recognised that by reason of that membership there would be a breach of the warranties in clause 4.1(a) and 4.1(b) of the Option Agreements at the time of the exercise of the options, rendering the exercise invalid. The plaintiffs allege that all the solicitors failed to recognise this problem and that they failed to comply with their retainers with the plaintiffs and breached their duties of care to the plaintiffs in failing to exercise the options validly. Each of the defendants cross-claims against each of the other defendants and against PCP for contribution and/or indemnity.

5 It is not suggested by any of the solicitors that at the time of the exercise of the options, they recognised that McLean Tecnic’s membership of both partnerships would have, or even may have, amounted to a breach of the warranties in clause 4.1(a) and clause 4.1(b) of the relevant Option Agreement. However notwithstanding previous findings by this Court to the contrary there is a claim that the options were exercised validly. It was submitted that this claim is available, because it is based on arguments not previously raised or brought to the Court’s attention.

The parties

6 AI McLean holds all the issued capital in McLean Tecnic. The sole director of both plaintiffs is Alan Ian McLean (known as Ian McLean). On 19 September 2005 Mr McLean appointed Neil Singleton and Scott Pascoe as Voluntary Administrators of the plaintiffs under Part 5.3A of the Corporations Act 2001 (Cth) (the Act). On 14 October 2005, the creditors of the plaintiffs resolved under s 439C of the Act that the plaintiffs execute Deeds of Company Arrangement under Part 5.3A of the Act. As at 14 October 2005 DTAL claimed to be a creditor of the plaintiffs in the amount of $31,949,347.10.

7 The firms of solicitors sued by the plaintiffs are Harris & Company, the first defendant (Harris & Co), Bartier Perry Lawyers, the second defendant (Bartier Perry), Freehill Hollingdale & Page, the third defendant (Freehills), and Atanskovic Hartnell, the fourth defendant (ANH). Those defendants have cross-claimed against each other and also against Peter Cornelius & Partners, the cross defendant, (PCP) for contribution and/or indemnity. The individual solicitors within the respective defendant firms who allegedly provided the relevant legal services to the plaintiffs are: Ian Smith from Harris & Co; Oliver Shtein from Bartier Perry; Kevin Broadley, Rebecca Davies, the late Mr Chris Tappere and Catherine Rowe from Freehills; and Diana Chang from ANH. The plaintiffs do not sue the cross defendant PCP, albeit that PCP was obviously instructed by the plaintiffs to provide, and did provide, legal services to them in respect of the transactions the subject of this litigation. The solicitor at PCP who provided those legal services was the late Peter Simms.

8 The matter was heard on 28, 29 and 30 April 2008, and 1, 5, 6, 7, 8, 12, 13, 14 and 15 May 2008. Mr B McClintock SC leading Mr B Katekar, of counsel, and (on 13 and 14 May) Mr CH Withers, of counsel, appeared for the plaintiffs; Mr DL Davies SC leading Mr MS White appeared for Harris & Co, Mr JC Kelly SC leading Mr WV McManus, of counsel, and Mr P Arblaster, of counsel, appeared for Bartier Perry; Mr MJ Slattery QC leading Ms R Pepper, of counsel, appeared for Freehills; Mr TF Bathurst QC leading Mr AJ Payne, of counsel, appeared for ANH; and Mr SD Robb QC leading Mr JAN Hogan-Doran, of counsel, appeared for PCP.

Others

9 There were a number of other entities and individuals who were involved in the events that give rise to the allegations made by the plaintiffs against the defendants in these proceedings. The accountants for the plaintiffs were Rost & Kitchener, Chartered Accountants. It appears that the accountant within that firm who provided advice to the plaintiffs was Werner Bali. Gary Urwin became the managing director of DTSPL. John Reid was the director of DTAL and other companies in the Digi-Tech Group.

10 Graham Leonard Brand, a director of Morgan & Banks Investments Pty Ltd (then known as Toltex Human Resources Pty Limited (Toltex)) was also a director of Divome Properties Pty Limited (Divome). Toltex and Divome were major investors in the Freerider Partnership and DTSPL and were referred to at times as the “Morgan & Banks interests”. Companies associated with Divome and Toltex were Kalifair Pty Limited (Kalifair) and Kalinick Pty Limited (Kalinick). Christopher Gerard Kelliher was also a major investor in both Partnerships in his own right. Counsel briefed from time to time, were Mr BW Walker SC and Mr I Jackman. Dr John Carter provided consultancy services to Freehills.

THE FACTS

11 It will be necessary to deal with specific aspects of the transaction documents later, however at this stage the CA Judgment provides a summary of the documents that were executed by the investors in June 1997:

The Partnership Agreements

28 The partners (Investors) in each Partnership agreed to enter into and carry on the business of manufacturing, importing, marketing, distributing and selling the product concerned in Australia (cl 2.1). The Partnership had the right to use the intellectual property rights under the Sale Agreement (cl 2.2). Each partner agreed to maintain their shareholding interest in DTSPL, which was the licensee company, for as long as the partner retained its capital interest (cl 2.4(a)(i)). Each partner agreed to pay all future calls made on the shareholding interest in DTSPL for as long as the partnership interest was retained (cl 2.4(a)).

The Sale Agreements

29 DTAL, as the owner of the intellectual property rights to the Products, assigned to each relevant Partnership for five years all its right, title and interest in those rights in respect of Australia, including an exclusive right to use and exploit those rights in Australia in accordance with each Sale Agreement (cl 2.1).

30 "Intellectual Property Rights" were defined to mean all intangible property rights of DTAL relating to the Products including (among others) know-how and trade secrets, whether or not capable of protection by a patent, and the copyright to the relevant software.

31 DTAL was entitled to terminate each Sale Agreement without prejudice to its other rights if the Partnership concerned either committed a material breach which was incapable of being rectified or committed a material breach which was not rectified within a reasonable time after written notice of the breach had been given (cl 4.1).

32 On termination or expiry of each Sale Agreement, each Investor (partner) was required to pay the balloon payment - if it was outstanding (cl 5.3(b)).

33 Each Investor (partner) was required each quarter to make payment of an instalment in respect of the purchase price and a contribution to the capital of DTSPL. The total amount payable by the Investors each quarter was approximately $347,000.

34 The steps required for an Investor (partner) to exercise an option varied depending upon whether the Investor was a corporate body or a natural person. If the Investor was a corporation, generally speaking the option was granted to its holding company. When the option was exercised, the holding company would sell or put the shares in the corporate investor to DTAL. If the Investor was a natural person, it was first necessary for the natural person to transfer his or her interests in the Partnership and shares in DTSPL to a corporate nominee so that the option operated with respect to the shares in that corporate nominee.

The Licence Agreement

36 The Licence Agreement ran in tandem with the term of the Sale Agreement. Pursuant to the Licence Agreement, the parties to the Investor Partnerships licensed to DTSPL the exclusive right to use and exploit the Intellectual Property Rights in Australia.

The Individual Option Agreements

37 The Option Agreements required any natural person wishing to exercise an option first to assign his or her interests in the Partnership in question and shares in DTSPL to a corporate nominee. Under the option, DTEL agreed to acquire the shares in the corporate nominee. This structure was adopted to enable the transfer of the interests in each Partnership and the shareholding in DTSPL to occur through a conduit company that had no liabilities. Thus, cl 2.2 provided:

"Subject to:

(a) the payment of instalments of the Option Fee from

time to time as set out in the Schedule;

(b) the Investor transferring all of its equity interests (including the Investor Debt and any Instalment Debt) in each of the Investor Partnership and DTSPL in accordance with the Investor Partnership Agreement to the Company; and

(c) provided that there is no outstanding breach of the warranties and undertakings in clause 4 of this agreement.

the Investor Option may be exercised by the Investor at any time during the Investor Option Period ... "

And, in terms of cl 4(b), the investor warranted that, on the date on which the option was exercised, the "Company" would have no indebtedness other than the "Investor Debt" to any person.

Plaintiffs make the Investment – May 1998

12 Mr Simms’ file note of 26 March 1998 was in terms that included the following:

13 As early as March 1998 Mr Simms was instructed to provide detailed advice on the transaction documents. On 31 March 1998 PCP requested copies of the relevant agreements from DTAL’s lawyers, Mallesons, advising that they needed them before they were “able to advise our client in relation to the transaction as a whole”. On the same day Mr Simms’ file note records:

14 On 2 April 1998 PCP wrote to the solicitors for the parties exiting the partnership who were assigning or transferring their rights to the plaintiffs in terms that included the following:

We wish to advise that we act for McLean Tecnic Pty Limited.

We have received various draft agreements from Mallesons Stephen Jaques in relation to the assignment of certain partnership interests to our client.

We are instructed that our client wants to proceed with this matter on an urgent basis and we look forward to your assistance.

15 On 4 April 1998 Mr Simms’ file note recorded as follows:

*outgoing has to release its option

…

- outgoing parties will release of option – Mallesons will not be producing it. We have to cover this.

- if exercise option don’t pay balloon payt comes from “Company Debt”. Instalment Debt means instalments 2.3 – get benefit of tax.

16 On 1 May 1998 PCP wrote to Mallesons advising that they had met with Mr Urwin and agreement had been reached in relation to the various agreements and settlement was proposed to take place in Canberra the following week.

17 The Digi-Tech parties and the outgoing partners recognised that the Partnership Agreements prohibited Partners from assigning their Partnership Interests to unrelated third parties. They also recognised that the Partnership Agreements prohibited unrelated third parties being admitted as new Partners to the Partnerships. Accordingly the Digi-Tech parties and the outgoing Partners entered into Deeds of Variation to the Partnership Agreements which inserted a new clause 14.4A as follows:

Each of [the outgoing partners] may assign its Partnership Interest together with its corresponding shareholdings in DTSPL, its rights and obligations under the Sale Agreement and under the licence agreement with DTSPL, and any receivable owed by the Partnership or DTSPL to that Partner for the time being held byu that Partner to McLean Tecnic Pty Limited.

18 The plaintiffs executed the requisite transaction documents on 4 May 1998 in Canberra pursuant to which McLean Tecnic became a partner of both the Terminal Adapter and the Freerider Partnerships.

Commercial disagreement – late 1998/early 1999

19 In late 1998 and early 1999 there was disagreement between the investors and DTAL as to who was responsible for the research and development costs of one of the products. That disagreement was not resolved and relationships began to sour.

Terminal Adapter Notices of default – 29 January 1999

20 On 29 January 1999 DTAL issued Notices of Default to the members of the Terminal Adapter Partnership alleging breaches of obligations under the Sale and Purchase Agreements. Those alleged breaches included a failure to make payments pursuant to the Licence Agreement and a failure to provide DTAL with audited financial statements. DTAL required the breaches to be remedied within 30 days of the date of service of the Notice.

DTSPL retains Harris & Co

21 In February 1999 Mr Urwin informed Mr Smith that DTAL was alleging that the Terminal Adapter Partnership was in default of its obligations under the Sale Agreement. Mr Urwin advised Mr Smith that the Notices of Default had been served by DTAL and requested Mr Smith to provide some advice to DTSPL in relation to the default notice.

22 On 23 February 1999 Harris & Company provided a letter to DTSPL in relation to the work it was requested to provide and the estimate of the costs of that work. That letter described the work as:

23 Mr Smith had some discussions with Mr Urwin in relation to how DTSPL should respond to the Notice, however in early March 1999 Mr Urwin advised Mr Smith that the Terminal Adapter Partnership had contacted Mr Kevin Broadley a Partner of Freehills.

Freehills Retained

24 On 12 March 1999 Mr Broadley met with Mr Urwin and Mr Smith. In a memorandum to Ms Davies, Mr Broadley wrote:

There is a current dispute between the company/partnership and the New Zealand company from whom assets (mainly software) were purchased on 30 June 1997.

…

The company/partnership are prepared to negotiate as it may be in their best interest that the product be improved. They have an outlet in Sydney and have some commitments from Optus and are looking for more business.

25 On 19 March 1999 Rebecca Davies another partner of Freehills wrote to Mr Urwin thanking him for instructing Freehills “on behalf of the Partnership, to advise you in relation to its involvement in arrangements with Digi-Tech Australia”. Ms Davies advised that the solicitors at Freehills who would work on the matter included herself, Mr Broadley and Ms Rowe.

Conference with Mr Walker SC – 22 March 1999

26 On 19 March 1999 Mr Smith a partner of Harris & Co had a telephone conference with Ms Davies who advised that Freehills would obtain a QC’s advice on releasing the covenantors and assigning the investor’s interests to a third party. On 22 March 1999 Ms Davies, Ms Rowe, Mr Smith and Mr Urwin met in conference with Mr BW Walker SC. Mr Walker gave advice in relation to the assignment of the investors’ interest under clause 20.4 of the Sale and Purchase Agreement (the Sale Agreement). That clause was in the following terms:

Transfer of Investors: In the event that an Investor transfers its interest in the Investor Partnership and DTSPL in accordance with clause 14 of the Investor Partnership Agreement and provided that the transfer is not in breach of the Security given by that Investor and that Investor has paid all amounts under clause 6.2 of this Agreement which at the date of the transfer were due and payable (but unpaid) that Investor may transfer its interest and obligations under this Agreement to such transferee by delivering to DTAL:

(a) a deed pursuant to which the transferee is bound by this Agreement to perform the obligations of the Investor; and

(b) at the option of DTAL, a Security or an effective novation of the existing Security granted by the Investor to DTAL or evidence satisfactory to DTAL that the existing Security granted by the Investor will continue to apply,

thereafter

27 Mr Walker advised that assuming that the prerequisites (compliance with clause 14 of the Partnership Agreement and payments being made pursuant to clause 6.2) were met, there was no difficulty in transferring the investors’ interests to a third party. Mr Walker emphasised the word “thereafter” in the clause and advised that it was only after clause 20.4(a) and (b) were satisfied that the transferor investor was released from liability. Mr Walker also advised that if the investors presented DTAL with a Security and a Novation, DTAL would probably be obliged to reply within approximately 10 working days and could not act unreasonably in refusing to accept a Security or Novation.

28 Ms Rowe made a file note of the conference which included the following:

29 Mr Walker was also asked to provide advice in relation to clause 11.1 of the Sale Agreement. That clause was in the following terms:

11 COVENANTOR’S LIABILITY

Guarantee:

30 Mr Walker advised that the term “Relevant Investor” included the replacement/transferee investor. He also advised that the existence of clause 20.5 suggested that there were different methods for releasing the Investor and the Covenantors and transfer of the interest under clause 20.4 did not automatically mean that the Covenantor was “off the hook”. Clause 20.5 was in the following terms:

Substitution of Covenantor:

(a) The Relevant Investor is not in default under the terms of this Agreement; and

(b) The Covenantor procures that another person whom DTAL deems in its reasonable opinion to be suitable and capable of meeting the obligations of the Covenantor under this Agreement enters into a deed pursuant to which that person assumes the obligations of the Covenantor pursuant to this Agreement.

31 Mr Walker also advised that the words in parentheses in clause 11.1 meant that the money due and payable under clause 6.5(b) were “undoubtedly excluded” from the Covenantor’s guarantee, meaning that the “balloon payment” which may be payable under clause 6.5(b) was not guaranteed by the Covenantor. Clause 6.5(b) was in the following terms:

Negotiations

32 During March 1999 there were a number of meetings between the Partners and representatives of DTAL, some of which were attended by Mr Smith, at which attempts were made to settle the dispute with DTAL. Mr Smith was asked by Mr Urwin to speak to John Reid of DTAL on behalf of DTSPL and the Partnerships. A committee had been set up to operate the business of the Partnerships consisting of Mr Urwin, Mr Brand, Mr Andrew Cleland, (both of whom were directors of DTSPL), and Mr Kelliher. During the negotiations Mr Smith consulted with members of the Committee but mainly with Mr Brand.

33 On 24 March 1999 Ms Davies sent to Mr Smith a draft letter from Freehills to DTAL “for your comments”. The letter to Mr Reid at DTAL advised:

We act for the members of the Terminal Adapter Investor Partnership, and Digi-Tech Software Pty Limited. Our clients have entered into various agreements with Digi-Tech (Australia) Limited.

…

Our clients’ position is that there are no subsisting breaches of any of their contractual obligations to Digi-Tech (Australia) Limited. Despite that, we are instructed that yesterday you indicated to our clients’ representative, Mr Ian Smith, that you intended to issue “determination” notices to our clients.

34 It would appear from a note written on a copy of that letter that Mr Smith telephoned Messrs Urwin and Kelliher in relation to the letter and they advised him that it was “O.K.”.

Terminal Adapter Termination Notices – 25 March 1999

35 DTAL served Notices on the Terminal Adaptor Investor Partnership dated 25 March 1999 terminating the Sale Agreements effective 10 working days from the date the Notices were served. The Notices included the following:

36 The Notices set out the background to the dispute between DTAL, DTSPL and the Partnership, mainly in relation to the provision of accounts and information in relation to the operation of the business of the Partnership.

Freehills Meetings

37 On 26 March 1999 a further meeting at Freehills occurred attended by Mr Smith, Mr Urwin, Mr Brand, Mr McLean and his solicitor Mr Simms, Mr Broadley, Ms Davies and Ms Rowe. The discussion at that meeting included reference to reviewing the Default Notice and a claim for misleading or deceptive conduct. At a further meeting at Freehills on 30 March 1999 with the same attendees, consideration was given to a document prepared by Freehills setting out the alternatives available to terminate the relationship with DTAL and to avoid making the “balloon payment”. The options were: (1) to treat the contract as remaining on foot and exercise the option; (2) to treat the termination notice as a repudiatory breach; and (3) to negotiate. At this meeting Ms Davies advised that Freehills saw option (1) as the preferred course. Ultimately Mr Smith was asked to attempt to negotiate further with Mr Reid of DTAL concerning the Termination Notice.

38 At a further meeting on 7 April 1999 at Freehills attended by Mr Broadley, Ms Davies, Ms Rowe, Mr Smith, Mr Urwin, Mr Kelliher and Mr Brand, various alternatives were discussed, including continuation of the relationship with DTAL but under a new agreement. Mr Smith’s evidence was that at this meeting he was asked to prepare documents for the assignment of the investors’ interests in the Partnerships. Mr Smith’s note of the meeting includes a reference to “IMS to prepare assignment docs”. Ms Rowe’s note of the meeting does not make any reference to that request, rather it states that: “Ian to draft option letters to exercise options on 15th”. It does not seem that Mr Smith was asked to proceed further with either assignment or exercising the options because further settlement negotiations were pursued.

Freerider Partnership Notices of Default – 8 April 1999

39 On 8 April 1999 DTAL served Notices of Default under the Freerider Sale Agreement. That Notice alleged that the Freerider Partnership was in breach of the Sale and Purchase Agreement in that, inter alia, it had failed to provide audited financial statements of the partnership and DTSPL as required under clause 8.10 of the Sale and Purchase Agreement. There were other alleged breaches including a failure to promote the products and a failure to strictly enforce the Licence Agreement between the Partnership and DTSPL. The Notice required the breaches to be remedied within 30 days from 8 April 1999.

DTAL’s offer

40 On 5 May 1999 Mr Kelliher wrote to Freehills (Ms Rowe, Ms Davies and Mr Broadley) in relation to a “proposal” from DTAL. That communication included the following:

I have just faxed over a 7 page letter from DTAL regarding what they consider to be a commercial settlement. They propose two options neither of which is acceptable to us and not consistent with the meetings to date however it is at least a proposal we can counter.

…

(sic)

41 On 7 May 1999 Paul King and Chris Colley of Greenwoods & Freehills provided advice to Ms Davies and Ms Rowe referring to the proposals put forward by DTAL. That memorandum recorded that they had been asked to advise on the withholding tax implication of the proposal “in relation to a dispute with the ‘Investor Partners’, whom we are advising”. The advice was that the withholding tax clause suggested by DTAL was far from clear. On 7 May 1999 a meeting was held attended by Ms Davies, Ms Rowe, Mr Brand, Mr Urwin, Mr McLean and Mr Kelliher at which the DTAL proposal and the withholding tax issue was discussed.

Possible Commercial Resolution

42 On 26 May 1999 Blake Dawson Waldron (Blakes) as solicitors for the Digi-Tech parties wrote two letters to Freehills. An open letter advised that their client DTAL relied on its Notice of Termination dated 24 March 1999 as effective termination of the Terminal Adapter Agreement. It further advised that they were instructed that DTAL had not waived any of the breaches of the Freerider Agreement specified in the Notice of Breach dated 8 April 1999 and that it would rely on any failure to comply with that notice if it became necessary. In answer to the allegation of misleading and deceptive conduct, Blakes advised that they were instructed that the allegation was disputed and that DTAL would vigorously defend any action brought for breach of the trade practices legislation. The other letter was on a without prejudice basis and recorded that negotiations were ongoing and appeared to be approaching an “in principle agreement”.

Further meeting with Freehills

43 On 16 June 1999 Mr Broadley and Ms Rowe met with Mr Urwin at which meeting Mr Urwin advised that the preferred timetable was along the following lines:

1. continue negotiations – get the other side’s best offer, (by 30 June)

2. get Brett Walker’s advice on prospects, (by 30 June)

3. prepare a notice – settle with us and Brett Walker, (by early July)

4. get advice from us and Brett Walker on possible litigation strategy, (by early July)

5. call a partners’ meeting to consider settlement versus litigation, (early to mid July)

44 On 22 June 1999 a meeting took place at Freehills attended by, inter alia, Mr Brand and Mr Kelliher. That meeting also included solicitors within Greenwoods & Freehills who were to provide advice in relation to a “withholding tax issue”. Although it is apparent that the main purpose of the meeting was to deal with that issue the note of the conference made by Ms Rowe also included the following:

Greenwoods/Freehills has also been asked to advise on whether there are any circumstances by which “John Reid” (ie: DTAL/DTEL/DTCL) can get out of performing their obligations under the Option Agreement. Specifically, they want advice on whether any of the above companies can legitimately refuse to perform their obligations under the Option Agreement if the nominee Company has a withholding tax liability. Greenwoods will advise on this in regard to the above, however, Freehills will be required to agree to their legal interpretation. Freehills are to provide advice on whether there are any other avenues under the Option Agreement by which the above companies can refuse to perform their obligations.

45 On 30 June 1999 Mr Kelliher telephoned Freehills and “confirmed his instructions” of 22 June 1999 that he wanted Freehills to “do a very detailed review of the Option Agreement”. In a file note of the telephone conversation (probably with Ms Davies) the following appears:

Negotiations fail

46 During the period May to August 1999 the Partnerships and DTSPL, with the assistance of Freehills and Mr Smith, attempted to negotiate a commercial resolution of the disputes. Those negotiations broke down in early August 1999. At a meeting at Freehills on 11 August 1999 attended by Mr Broadley, Ms Rowe, Mr Brand, Mr McLean, Mr Kelliher, Mr Urwin and Mr Simms it was noted that the negotiations had “terminated”. Various strategies were discussed at this meeting including whether to exercise the options and “see how DTAL react”. It was noted that Freehills were to “do option paper”. Other alternatives that were considered included continuing with the Terminal Adapter and walk away from Freerider.

Possible Assignments

47 When the negotiations broke down, Mr Urwin telephoned Mr Smith and advised him that the investors were looking to assign their interests and that there was concern that DTAL could “stop” the assignment. Mr Urwin asked Mr Smith to set out for him the relevant provisions of the various agreements. On 17 August 1999 Mr Smith wrote to Mr Urwin in the following terms:

RE: DIGITECH ASSIGNMENTS

I refer to our telephone conversations on Tuesday relating to the assignment by investors in the Terminal Adaptor Partnership and the Freerider Partnership.

The relevant provisions of the differing documents are as follows:

Sale Agreement

Documents pursuant to the Sale Agreement

(a) A deed as described in clause 20.4(a) binding the Assignee;
(b) Security or assignment as required by clause 20.4(b).

Covenantor

The covenantor’s obligations expire on the Guarantee Expiry Date. The Guarantee Expiry Date is a defined term and means that if the investor exercises the option before 30 September 1999 the Guarantee Expiry Date will be 30 September 1999

Partnership Agreement

Natural Persons

Clause 14.3 permits a partner to transfer without the consent of the other partners or DTAL all its partnership interest, shareholding in DTSPL and its rights and obligations under the Sale Agreement to a transferee which is a body corporate nominated by that partner (see clause 14.3(b)).

Corporate Partners

Corporate partners may transfer their partnership interest together with shareholding in DTSPL and rights and obligations under the Sale Agreement to a transferee which is a wholly owned subsidiary of that partner.

Documents

Prior to transfer the transferee must execute a deed to which the transferee agrees to be bound by the Partnership Agreement (see clause 14.6).

Under the Sale Agreement (the final paragraph in clause 20.4) the transferor investor has no further rights or obligations once the transfer has been completed. Clause 24.4 makes no reference to successful or satisfactory exercise of the option and clause 14 of the Partnership Agreement (in sub-clause (b) as opposed to sub-clause (c)) permits assignment for any reason (sub-clause (a) refers to assignment for the purpose of the option).

Fixed Equitable Mortgage

Pursuant to clause 5(a) of the Charge the investor covenants not to dispose of the property except as permitted by the Sale Agreement.

Option

Meeting at Freehills - 16 August 1999

48 On 16 August 1999 a meeting took place at Freehills present at which were Mr Broadley, Ms Rowe, Mr Simms, Mr McLean, Mr Urwin, Mr Brand and Mr Kelliher (by telephone). It was decided that advice should be taken from Mr Walker SC in relation to the “prospects generally in relation to the alleged breaches of the Terminal Adapter and Freerider Agreements”. The note of the conference made by Ms Rowe included the following:

This advice was wanted before the exercise of the Investor Option, currently scheduled to take place on Friday 20 August. Gary Urwin to supply additional documents to Freehills in order to prepare Brief and to update statements. A conference has now been arranged with Brett Walker SC at 3.00 pm on Thursday 19 August. We should also ask Brett Walker how he considers we should deal with the issue of invalidity of the Termination Notice to the Terminal Adapter partnership.

3 Exercise of the Investor Options

I pointed out that there may be a problem in the exercise of the options by individual investors due to the possible requirement to comply with s.20.4 of the Sale and Purchase Agreement to effectively transfer the individual investors’ interests to a nominee company. (See comments in attached “Report on Investor Option Agreements”). Clause 20.4 states that DTAL may require “a Security or an effective novation of the existing Security granted by the Investor to DTAL or evidence satisfactory to DTAL that the existing Security granted by the Investor will continue to apply, …”. Graham Brand and Gary Urwin were of the opinion that this was not a problem because the existing securities are a Fixed Equitable Mortgage over the investor’s interest in DTSPL and therefore the individual investors would be quite happy to give evidence to DTAL that the existing Security will continue to apply, and that DTAL could not be unreasonable in its refusal to accept that evidence. [we consider it may be wise to obtain further advice from Senior Counsel regarding the effective exercise of the options] .

Graham Brand also stated that those investor partners who are companies also wished to transfer their interests to a nominee company (rather than as originally envisaged, simply requiring DTEL to subscribe for shares in the investor partner company). This may raise a problem as the Investor Option Agreements for investor partners who are companies currently provide for DTEL subscribing for shares in the investor partner company. Graham Brand said that he was going to get Ian Smith to look into this [however, we may wish to recommend that Senior Counsel’s opinion is obtained on this issue also, particularly as Freehills has not as yet reviewed in detail the Option Agreements relating to Investor Partners who are a Company].

49 The note also referred to the reasons why it was considered important to exercise the options sooner rather than later including the fact that a Termination Notice had not yet been served on the Freerider Partnership. The “Report on Investor Option Agreements” referred to in Ms Rowe’s note, was a document that Ms Rowe created at the time that she first became involved in the matter and was amended by her from time to time. The version of that document that was probably attached to the note of the meeting of 16 August 1999 included the following:

2.3 Clause 2 Requirements: Exercise of the Option is subject to the following:

must

(a) The Option can only be exercised during the Investor Option Period [cl 2.2]. The Investor Option Period is defined in the interpretation clause [cl 1.1].

(b) The Company must be used solely as the holder of equity interests in the Investor Partnership and DTSPL [cl 1.1].

(c) The Investor must not deal with or encumber any of the Company Shares except as contemplated by the Option Agreement [cl 2.2].

(d) The instalments of the Option Fee as set out in the Schedule must have been paid to DTEL [2.2(a)].

Note “Option Fee” as defined in clause 1.1 defines the total option fee instalments which must be paid, determined by when the Option is exercised.

(e) There must be no outstanding breach of the warranties and undertakings in clause 4 of the Option Agreement [cl 2.2(c)].

Clause 4 warranties are:-

· the nominee company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL;

· the Company will not undertake any activity not expressly provided for or contemplated in the Investor Partnership Agreement prior to the expiry of the Investor Option Period. Certain fees etc are excepted;

Note: The Investor Option Period currently expires on 31 July 2000, this will require changing.

· the Company must have no debt to any person other than the Investor Debt (balloon payment) on the date on which the Option is exercised;

· all payments of the Instalment Debt or any other indetedness arising under the Option Agreement must be met by the Company (or guarantor of the Instalment debt as per the Sale and Purchase Agreement) prior to the exercise of the Option;

· the Company must not alter its constituent documents or agree to vary terms of the Investor Partnership Agreement without prior written consent of DTCL; and

· the Company must comply with all laws relating to administration of the company, including the Corporations Law.

50 Ms Rowe also noted that DTAL appeared to have the right to ask for a security in respect of the nominee company to which individual investors had novated the Sale Agreement and the Investor Partnership Agreement. Ms Rowe observed that it did not seem to pose the same problem for corporate investors because “they do not need to transfer their interest to a nominee company”. In respect of this last observation Ms Rowe included the note “see comments below at 3”. Paragraph 3 was not completed at that time.

Telephone Conversation – 18 August 1999

51 On 18 August 1999 Mr Smith and Ms Rowe had a telephone conversation in which Mr Smith advised Ms Rowe that he wished to enable the exercise of the options without the involvement of DTAL and asked Ms Rowe to include the following question in the Brief to Mr Walker SC:

52 Ms Rowe advised Mr Smith that she had raised the issue of clause 20.4(b) at the meeting on 16 August 1999 because she was concerned that it may be an area in which DTAL may not accept or hold up the exercise of the options. Ms Rowe’s note of the conversation with Mr Smith included the following:

Ian Smith said he understood that Freehills were taking care of the litigation side of things whereas he was undertaking the documentation and other things associated with the exercise of the Investor Options. I confirmed that this was what had been decided at the meeting on Monday 16th.

53 The Observations of the Brief to Mr Walker SC from Freehills referred to “our clients” as “members of the Terminal Adapter Investment Partnership, the FreeRider Investment Partnership (the Partnerships) and Digi-Tech Software Pty Limited (DTSPL)”. The Observations included the background in relation to the negotiations to settle the dispute with DTAL and the fact that those negotiations had broken down. They also included the following:

As negotiations have broken down the investors in both Partnerships are intending to exercise their Investor Option as set out in the relevant Investor Option Agreement (there are two Option Agreements, one for investors who are individuals and the other for investors who are body corporates).

It is envisaged that this exercise of the Investor Options will result in litigation between DTAL and the Partnerships, either by DTAL alleging breach of contract or by our clients bringing some of the various actions outlined below.

Advice sought

…

5. May the investors in the Freerider and/or Terminal Adapter Partnerships lawfully exercise their Investor Options?

By way of summary, under the Option Agreement for investor partners who are individuals the investor sets up a nominee company into which the investor transfers all of its equity interests in the Investor Partnership and shareholding in DTSPL in accordance with the Investor Partnership Agreement. These interests include the investor’s rights and obligations under the Sale and Purchase Agreement and the Licence Agreement. The Investor Option is the investor’s right to require DTEL to subscribe for a number of shares at par in the nominee company equivalent by value to the remaining Investor Debt (ie: the outstanding instalment payments of the purchase price, including the balloon payment). The nominee company and DTEL must then procure that all of the subscription monies are paid to DTAL in payment of the Investor Debt due to DTAL.

We seek your advice as to whether, when assigning under clause 20.4(b) of the Sale and Purchase Agreement, it would be better to give a new security or to novate the existing security (or both). In addition, whether Senior Counsel considers that “evidence satisfactory to DTAL that the existing Security granted by the Investor will continue to apply”, is a viable third option. The existing Security is by way of Equitable Charge or Mortgage, with the secured property being the investor’s equity interests in DTSPL and the Investor Partnership.

Under the Option Agreement for investors partners who are body corporates the Investor Option is the investor’s right to require DTEL to subscribe for a number of shares at par in that body corporate partner. Mr Ian Smith of Harris and Company, who has been briefed to advise our clients in relation to the exercise of the options, may have some points on which he would like to obtain Senior Counsel’s advice in this respect, and which he will address in conference with you tomorrow.

…

Conference Attendees

Mr Walker’s Advice – 19 August 1999

54 Ms Rowe prepared a file note of the conference with Mr Walker SC on 19 August 1999 which included the following:

1. Exercise of Option and Clause 20.4 of the Sale and Purchase Agreement

Senior Counsel was of the view that if the Options were to be exercised then the interests to be transferred to the nominee companies should be assigned in accordance with the relevant Agreements and the Investor Option Notice delivered to DTAL.

The Investor Option Notice should be accompanied by a covering letter asking DTAL to elect what form of security they would like to be given as per clause 20.4(b) of the Sale and Purchase Agreement. In an ideal world DTAL will elect what security they want and all will be well.

If DTAL reply by saying that our clients cannot validly assign due to the termination of the Terminal Adapter Sale and Purchase Agreement (or the Freerider Agreement) then we should supply one of the securities mentioned in of clause 20.4 (b) accompanied by a letter stating:-

· given DTAL’s failure to elect their preferred security they have been provided with a security of the investor's choice;

· that DTAL cannot refuse to perform the cooperative acts necessary under clause 20.4 (b); and

· if DTAL continue to fail to cooperate the Investor Partners will take them as being in breach of contract.

This course of action must be rapid.

55 Litigation strategies were also discussed, in respect of which Ms Rowe made the following note:

DTSPL Letter – 19 August 1999

56 On 19 August 1999 DTSPL wrote (by letter wrongly dated 18 August 1999) to each of the investors referring to the recent negotiations and advising that advice had been given by Mr Walker SC and Freehills that the most appropriate course of action was to exercise the options and exit from the Partnerships. That letter included the following:

In the case of corporate enterprises

Harris & Co, Mr Ian Smith, has been briefed by this office and is liaising with each of Freehill Hollingdale & Page and Mr Brett Walker QC, in relation to the final form of documentation required to complete the processes described.

It is proposed that a single corporate entity will be utilised as the assignee of the interests of individual partners in each of the Terminal Adapter and Free Rider Investor Partnerships.

57 That letter also reminded investors to sign a Power of Attorney in favour of Mr Urwin authorising him to sign the documentation that was required to effect the processes outlined in the letter. The letter enclosed a copy of a Power of Attorney, drafted by Mr Smith, for those investors who had not already provided a Power of Attorney.

The Mauritius proposal

58 Mr Smith was advised by Mr Urwin or Mr Andrew Sneddon, a tax accountant who was advising the Partnerships, of a proposal to transfer the investors’ interests to companies known as “Suntech” and “Transpacific” based in Mauritius. Mr Smith understood that this proposal had a dual purpose: the first was to effect a release of the investors from their obligations by an assignment of their interests to the Mauritius companies; the second was to ensure that if the Investor Option Agreements were ultimately exercised and DTAL did not accept the exercise of the options, the Corporations Law would not apply to the directors of the assignee companies.

59 Mr Smith accepted in cross-examination that Mr Urwin had sought his advice in relation to the proposal to assign the Partnerships members’ interests to the Mauritius companies (tr 233). On 20 August 1999 Mr Smith wrote to Mr Urwin in the following terms:

each

The difficulty with this is that pursuant to the Partnership Agreement it would not be possible for the wholly owned subsidiaries to transfer directly to Suntech or Transpacific without the consent of DTAL.

Under clause 14.4 of the Partnership Agreement a corporate partner may transfer without consent to:

(a) a Wholly Owned Subsidiary of that Partner;

(b) a natural person who is the sole shareholder of that Partner;

(c) a relative (as defined in s. 9 of the Corporations Law) of the person referred to in (b) above; or

(d) a body corporate nominated by a relative referred to in (c) above.

Whilst the concept of a relative of a sole shareholder in nominating a company appears devoid of logic, that is what the clause says. The only way I can see it working is for each corporate partner to assign their interest to a Wholly Owned Subsidiary in consideration of the issue of shares in that subsidiary. The corporate partner that assigned would then transfer the shares in the subsidiary to a natural person and a relative of that new shareholder would then nominate pursuant to clause 14.4 (d) either Suntech or Transpacific. The Wholly Owned Subsidiary would then assign to Suntech or Transpacific at the same time as each of the natural investors transferred to Suntech or Transpacific.

I have no idea what the tax consequences of the transfer of shares from the corporate partner to the natural person in the Wholly Owned Subsidiary would be. I suggest Andrew Sneddon be asked for his advice about the whole proposal as soon as possible.

Please ring me to discuss.

Orthoptic Pty Ltd

60 On 20 August 1999 Mr Smith wrote to Mr Werner Bali, an accountant with the firm Rost & Kitchener, who acted as the plaintiffs’ accountants. That letter was in the following terms:

I have spoken to Ian McLean last night and he said he was coming to see you at some stage this morning.

I enclose a Power of Attorney for McLean Technic Pty Limited appointing Gary Urwin as that company’s attorney to execute documents in relation to the transfer of that company’s interests in Digitech.

I also enclose a Power of Attorney for Orthoptic Pty Limited, being the wholly owned subsidiary of McLean Technic Pty Limited appointing Gary Urwin.

61 On the same day Mr Bali sent to Mr Smith copies of Powers of Attorney signed by McLean Tecnic and Orthoptic Pty Limited (Orthoptic) in favour of Mr Urwin. Mr Bali also sent a copy of the Certificate of Registration of Orthoptic and details of that company’s officeholders, registered office and shareholder. Orthoptic had been registered on 10 August 1999.

Freerider Notices of Termination – 7 September 1999

62 On 7 September 1999, DTAL issued a Notice of Termination to each of the partners in the Freerider Partnership. That Notice claimed that the investors had not rectified the alleged breaches specified in the Notice dated 8 April 1999. It stated that in accordance with the terms of the Sale Agreement termination was effective after ten working days from 7 September 1999. Each investor was advised that pursuant to clause 5.3(b) of the Sale Agreement they must pay the balloon payment on termination.

63 On 8 September 1999 Mr Urwin telephoned Ms Rowe and discussed whether it was necessary for the Sale Agreements to be on foot for the options to be exercised validly. Although Ms Rowe agreed with Mr Urwin that the Option Agreement did not expressly state that the Sale Agreement had to be on foot, she expressed the view that if the Sale Agreement had been validly terminated there was no longer any interest for the investor partner to transfer pursuant to the Option Agreement. Ms Rowe advised her colleagues within Freehills (Mr Broadley, Mr Tappere and Paul Harris) that she would like to discuss this issue further because it was very complex. On the same day Ms Rowe asked Dr John Carter whether he was able to assist in advising on this issue, and on the same day Dr Carter agreed that he would meet with Ms Rowe that week.

Bartier Perry advice to Mr Brand – 8 September 1999

64 On 30 August 1999 Mr Brand approached Mr Shtein and informed him of the general background of the investment and the dispute that had arisen with DTAL. He advised him of Freehills’ involvement and the decision that had been made to exercise the options to “exit the scheme”. Mr Brand asked Mr Shtein to act “only in relation to the exercise of the options”. It appears that at this time Mr Brand’s two companies, Toltex and Divome, had not signed the Sale and Purchase Agreement. The Option Agreements were with the wholly owned subsidiaries, Kalifair and Kalinick. At this stage the plan was to assign Kalifair’s and Kalinick’s interests to the companies in Mauritius, Suntech and Transpacific.

65 During the time that Mr Shtein was reviewing the documents provided to him by Mr Brand he was informed that Mr Smith had been advising various other Partners in the Partnerships and was himself an Investor Partner. Mr Brand also advised Mr Shtein of a proposal that was being considered by the Partners being advised by Harris & Co to transfer their rights and obligations to a single Mauritius company. Mr Brand asked Mr Shtein to attend a meeting with Mr Smith to "discuss the merits" of that proposal.

66 On 7 September 1999, Mr Smith, Mr Shtein, Mr Kelliher and Mr Brand met at Mr Smith’s offices at Harris & Co. Mr Shtein's draft advice to Mr Brand consequent upon that meeting advised Mr Brand that Bartier Perry was not persuaded that Kalifair or Kalinick should transfer their rights as proposed to the companies in Mauritius. Mr Shtein set out the reasons for that advice as:

· the last sentence in clause 2.2 of the Option Agreement which forbids dealings in shares in a corporate partner in a way fatal to the exercise of the option;

· it amounts to a fresh transaction (with the incurrence of new liabilities) by the assignee;

· the possible adverse perception if the transferee is a Mauritius company, as this may be seen as an attempt to avoid liabilities in Australia;

· it will reduce flexibility of Kalifair and Kalinick to act independently in any proceedings and to control outcomes;

· it entails stamp duty and other expense;

· it complicates what is already an extremely complicated situation.

67 The draft advice included the following in relation to the Sale Agreement:

This indicates an intention to insulate guarantors from liability to pay the balloon. However this exclusion/insulation may not extend to money becoming payable on termination under clause 5.3(b).

68 Mr Shtein also advised that the exercise of the option was subject to “there being no outstanding breach of the warranties and undertakings in clause 4” which provided relevantly:

(a) the Company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL and the Company will not prior to the expiry of the Investor Option Period undertake any activity not expressly provided for or contemplated by the Investor Partnership Agreement;

(b) on the date on which the Investor Option is exercised, the Company will have no indebtedness to any person other than the Company Debt;

69 Mr Shtein advised that he was not sure whether the termination of the Sale Agreement prevented the option from being exercised and gave the following further advice:

General issues on exercising the option

The greatest care must be taken to ensure the option is validly and formally exercised. We can give a more detailed advice later but it is appropriate to address the requirement in clause 2.2 of the Option Agreement that when the option is exercised there must be no outstanding breach of the warranties and undertakings in clause 4 of the Option Agreement.

We address that clause now with reference to the paragraphs in clause 4:

(a) sole purpose/sole activity. We assume this can be satisfied.

(b) no indebtedness. This obviously requires great care. If the partner entities have engaged in any transaction it could have given rise to indebtedness. There is a tax issue in relation to withholding tax possibly payable in respect of the payments made to DTAL to date.

payment of Instalment Debt

70 A copy of this advice was obviously provided to Mr Urwin and Mr Simms because on 8 September 1999 Mr Urwin sent Mr Smith a copy of Mr Shtein’s advice to Mr Brand and Mr Simms sent a copy of Mr Shtein’s advice to Mr Smith.

71 On 9 September 1999 Ms Rowe wrote to her colleagues at Freehills by e-mail in the following terms:

Subject: TA and FreeRider

I just spoke with Peter Simms (Solicitor for Ian McLean).

Ian McLean was not one of the original investors. He acquired his interest in the FreeRider and TA Partnerships in May 1998 after some of the original investors defaulted.

Peter has the assignment documents by which the interests were assigned to Ian. The documents contain certain representations and warranties by DTAL. Peter is not sure how relevant these will be to the litigation but asked if we would like copies of them. I said I would get back to him.

Peter has also spoken with Ian Smith and had ascertained that he has been retained by Gary Urwin to exercise the options rather than by the Investor Partnerships. In light of this Peter has decided to get Oliver Stein (sic) (the same lawyer who provided the advice to the Morgan and Banks interests) to advise Ian McLean as well.

72 On 9 September 1999 DTAL served a Notice of Demand on McLean Tecnic in respect of the Terminal Adapter Partnership. DTAL demanded the outstanding purchase price of NZ$19,993,362.09 and A$263,136.31.

Additional Advice – 10 September 1999

73 On 10 September 1999 Freehills obtained “additional advice” from Ian Jackman, a member of the Outer Bar at that time, and Dr John Carter on “various matters”. There were differing views expressed as to whether the Sale Agreement had to be on foot in order to exercise the options, however, the advice of all who were consulted was that in respect of the Freerider Partnership, the interests of the investors were best served by exercising the options prior to the expiry of the 10 working days referred to in the Notice of Termination. On 10 September 1999 Ms Rowe sent an email to Mr Urwin, Mr Smith, Mr Kelliher, Mr Brand and her colleagues at Freehills providing this information. That email concluded as follows:

74 Ms Rowe also enclosed a draft letter to DTAL’s solicitors in relation to the Freerider Notice of Termination, and sought instructions in respect of its contents. That letter advised that Freehills was acting for the “members of” the Freerider Partnership and DTSPL. It denied any breaches and reserved the members of the Partnership and DTSPL’s rights, without limitation, in relation to the Notice.

75 On 12 September 1999 in an email to Ms Rowe, Dr Carter raised the following:

Rowe/Smith Discussion – 14 September 1999

76 On 14 September 1999 Ms Rowe, Mr Smith and Mr Urwin had a conversation in relation to the exercise of options. Ms Rowe recorded her recollection of that conversation in an email she sent on that day to her colleagues within Freehills. Mr Smith could not recall the details of the conversation but said that the contents of Ms Rowe’s email to her colleagues accorded with his general recollection of events. That email included the following:

Exercise of the Options – and repudiation

Ian Smith told me that the individual investors in FreeRider are assigning their interests to a nominee company today. The exercise of the options is expected to take place on Thursday. The Terminal Adapter individual investors are expected to assign to a nominee company tomorrow.

…

Does the Sale and Purchase Agreement have to be on foot for exercise of the option?

I briefly outlined the differing views between Ian Jackman and John Carter, and that it gives us another avenue to explore and argue.

Exercise of the Options – other issues discussed with Ian Smith

77 On 14 and 15 September 1999 Mr Smith arranged for the assignment of investor interests for most of the Freerider partners. This included the execution of: (a) a Deed of Assignment by the assigning investor; and (b) a Deed by the assignee agreeing to take over the assignor’s obligation to DTAL in relation to clause 20.4 of the Sale Agreement. Mr Smith’s affidavit evidence was that he did not “carry out an assignment for the McLean entities because at that time I had no instructions to act for them” (par 54).

Meeting at Freehills – 15 September 1999

78 On 15 September 1999, there was a meeting at Freehills attended by Mr Broadley, Mr Tappere and Ms Rowe, Mr Smith, Mr Shtein, and Mr Simms. Mr Simms’ file note records the following:

Need to exercise option – perhaps avoids argument can’t exercise if agt terminated.

…

Ian Smith – exercise FR for all partners – individuals & coys.

Who is doing exercise of TA option – needs to be close coordination – Oliver.

Oliver and Smith to liaise re exercise & run past FHP.

Holds P/A for McLean coy re FR & TA – Urwin.

FHP acting for – Gary will call meeting partners to instruct FHP
Thurs next wk 3.00 pm. FHP.
FHP acting for each individual partner separately (severally liable under S&P agt.).

FHP won’t advise against a/cs and advisors.

Covenantors – who represent?

…

79 Ms Rowe’s note of the meeting was less detailed, however it records that the options were being done by Mr Smith, Mr Shtein and Adelaide (a general reference to a firm of solicitors in that city) and were “to be run by us/Brett Walker“.

80 Mr Broadley and Mr Tappere signed two letters dated 14 September 1999 from Freehills directed to the partners of each of the Partnerships and the shareholders of DTSPL. It would appear that these letters were handed out at the meeting on 15 September 1999. One letter was to “update” the partners and the shareholders in relation to “significant issues” said to have arisen as the result of developments the previous week, subsequent instructions and a conference with Mr Jackman on 10 September 1999. That letter explored whether the Sale Agreement had to be on foot for the exercise of the options. It outlined the differences of opinion between Mr Jackman, who was of the view that it had to be on foot and Dr Carter whose opinion was that it did not have to be on foot. The letter included:

2. Execution of the Documents

We understand that there are issues for some of the investor partners or covenantors concerning the correct execution of the agreements. We note that Bartier Perry have provided advice to Toltex Human Resources Pty Limited, Divome Property Pty Limited and their wholly owned subsidiaries Kalifair Pty Limited and Kalinick Pty Limited on this issue.

Although we are not in a position to advise any of the partners individually, you should be aware that if the agreements have not been signed, or if there is an issue as to whether any of the investors or covenators are a party to the agreements, the exercise of their option would, in all likelihood, affirm that they are a party to the agreement.

81 The other letter dated 14 September 1999 was headed: “Nature and scope of instructions in relation to the Terminal Adaptor and Free Rider Investor Partnerships and Digi-Tech Software Pty Limited”. Under the heading “Nature of instructions” the letter recorded that “to date” Freehills had been receiving “preliminary instructions” about potential proceedings involving the Partnerships and DTSPL “from Gary Urwin, Chris Kelliher, Graham Brand and Ian McClean (sic)”. The letter continued:

We are aware that there are approximately 18-20 individual partners (either natural or corporate) in each of the Partnerships (with some overlapping partners), and that these partners together own all the shares in DTSPL.

82 The letter advised that Freehills did not see any actual or potential conflict in acting for both the Partnerships and for DTSPL, however because of the “diverse constitution” of the Partnerships and the shareholding in DTSPL, there was concern to formalise the nature of their instructions. The letter suggested the creation of a committee consisting of three people that could provide formal, authoritative instructions on behalf of the two Partnerships and DTSPL. The letter then continued:

Scope of instructions

On our present understanding:

1. we are instructed to consider the various materials provided, with a view to commencing (alternatively, defending) potential proceedings, on behalf of the Partnerships and/or DTSPL against the Digi-Tech companies based in New Zealand;

341 Freehills submitted that at all relevant times the plaintiffs retained and were advised by Peter Simms from PCP in relation to the transactions. It was submitted that commercial advice as to the exercise of the options was provided to the plaintiffs not by Freehills, but by Harris & Co and Bartier Perry. It was submitted that Freehills did not receive instructions from individual investors, specifically the plaintiffs, as to how they should take the steps necessary for each investor to exercise the options. It was submitted that Freehills was entitled to assume that the individuals had received full and proper advice at the time of their investment. Freehills relied upon the communications between PCP and Freehills, in particular the telephone conversation between Mr Simms and Ms Rowe on 9 September 1999, in which Mr Simms advised that the plaintiffs were obtaining independent legal advice concerning the exercise of the options.

342 Freehills submitted that the claims against it rest on a number of misconceptions about its role in the transaction giving rise to the proceedings. The first misconception is that Freehills was retained to act for either of the plaintiffs about their particular circumstances or affairs in relation to the exercise of the options. The second misconception is that Freehills was retained to advise on effecting the exercise of the options. The third misconception is that Freehills was retained to supervise and co-ordinate the exercise of the option agreements.

343 Freehills was retained in the period March to October 1999. It is Freehills’ case that its retainer was limited to advising the Partnerships and not the individual Partners. It was submitted that a number of factors support this claim. Firstly, selected representatives of the Partnerships attended conferences with Freehills and Counsel and they were invited to do so as representatives of the Partnerships. Secondly, the advice given, for example in relation to withholding tax, was given to the Partnerships as a whole as an issue of common concern to all Partners and not to individual Partners. Thirdly, reports on conferences were given to the Partnerships as a whole through the selected Partnership representatives. Fourthly, no individual Partner’s separate circumstances became the subject of an opinion from counsel during the whole of the retainer period. Fifthly, when asked on occasions to provide advice in relation to and for the benefit of specific partners, for example Mr Brand and Mr Cussens, Freehills declined to do so. It was submitted that Freehills was rightly conscious that to act for an individual on their separate affairs in relation to the Partnerships could lead to a conflict of interest which would require it to cease to act.

344 Freehills emphasised the terms of the telephone conversation between Ms Rowe and Mr Cussens recorded in Ms Rowe’s file note as follows:

345 Freehills emphasised the content of the file note made by Ms Rowe of the meeting on 16 August 1999 which included the following:

346 The fact that Freehills offered to bring specific questions to the attention of Mr Walker required the solicitors executing other retainers to specifically draw to the attention of Freehills and Mr Walker matters upon which they wanted advice. The following portion of Ms Rowe’s file note of her conversation with Mr Smith on 18 August 1999 was emphasised:

347 Freehills claimed that Ms Rowe’s response to Mr Smith as recorded in this file note was an “affirmation” that Freehills understood the division of functions and further that the division of functions was what had been defined by the clients to Freehills on 16 August 1999 at the meeting involving Mr Urwin and others.

348 Freehills submitted that the discussion of the scope of Freehills’ retainer at the meeting of 15 September 1999, and the contents of the letters of 14 September 1999, were nothing more than a formalisation of the scope of retainer that had been agreed and understood since March 1999. It was submitted that the lack of controversy about the contents of the letter of 14 September 1999, in which Freehills refers to the scope of its retainer, suggests that both Harris & Co (Mr Smith) and Bartier Perry (Mr Shtein) accepted that the letter objectively defined the limits of Freehills’ retainer and that they were prepared to continue to pursue their own areas of responsibility.

349 I have already found that the suggestion for the notices of exercise of option being “run past Freehills” was for the limited purpose of checking whether there was an adequate explanation in relation to the calculation. The letter of 14 September 1999 made very clear that Freehills did not act for individual parties in considering their particular separate interests and circumstances. Another matter that supports a finding that the Freehills retainer was limited to acting for the Partnerships was the fact that it was not involved in the detail of the preparation of or actual exercise of the option. Indeed at the meeting on 15 September 1999 Mr Urwin reported to the meeting that the Freerider assignments had already been completed and there was an intention to exercise the options the following day.

350 Freehills also points to the discussion between Bartier Perry and Mr Simms when Bartier Perry was retained to exercise the options for the plaintiffs. There is no mention of any role that Freehills were to supervise or co-ordinate any of the work that was done by Bartier Perry. It was Mr Simms who was acting on behalf of the plaintiffs who decided to “sub-contract” the work of the exercise of the option to Bartier Perry. Freehills took no part in that retainer.

351 On 17 September 1999 Mr Smith sent the letter to Freehills that is referred to earlier in this judgment together with Investor Option Notices for ten investors, eight of whom were individual investors and two of whom were corporate investors. No Notices in relation to the plaintiffs were attached to that letter; indeed there was no reference to the plaintiffs or the name McLean in the draft letter that was attached to it. As I have already said the process of sending the Notices to Freehills was for the limited purpose of Ms Rowe looking to see whether they included an adequate explanation of the calculation.

352 The other important aspect of the content of the letter of 17 September 1999 is that nothing was put before Freehills on that occasion which identified assignment or the lack thereof by McLean Tecnic to an assignee company. The complete absence of any mention of the plaintiffs in this letter is significant. The plaintiffs claim that Freehills ought to have known that there would be a breach of clause 4.1(b) of the Option Agreement, alternatively Freehills ought to have known and advised of the risks of indebtedness and the risks of a Court finding the exercise invalid. There was nothing in this correspondence that would have alerted Freehills to the matters pleaded against it. For all Freehills knew the plaintiffs may have been receiving other advice about the exercise of options, in addition to whatever assistance they were receiving from Harris & Co and Mr Simms. Mr Smith accepted in his evidence that he could draw no comfort whatsoever from any advice from Ms Rowe about the selection or otherwise of assignees of the McLean parties (tr 282); Freehills could not advise him about the McLean entities (tr 281); and Ms Rowe was never going to comment upon nominee companies to which the McLean entities may assign or the way in which the plaintiffs were going to exercise their options (tr 282).

353 The letter from Bartier Perry to Freehills on 22 September 1999 suggested that if there was any aspect of the documents that were enclosed that concerned Freehills or they thought affected the anticipated litigation they should contact Bartier Perry. That letter confirmed that Bartier Perry was acting for the plaintiffs. Mr Broadley was absent from the office at the time the letter was received; Ms Rowe had limited recollection of receiving the letter; the late Mr Tappere dealt with the letter on its receipt on 23 September 1999. Mr Tappere left a message for Mr Shtein that there were issues in relation to Freehills’ capacity to respond to the letter of 22 September 1999. Mr Tappere’s note records that when Mr Shtein returned his call, he advised that Freehills was considering its position and in consequence could not respond in substance to the letter. Mr Shtein’s note confirmed that Freehills could not consider the documents until it considered its position in the matter. Freehills did not consider those documents prior to the exercise of the option and no follow up was sought by Bartier Perry. Freehills’ retainer ceased on 24 September 1999. Any work performed by Freehills after that was performed in the context of ensuring an efficient transfer of the retainer to ANH.

354 I am satisfied that Freehills were not retained to give individual advice to the plaintiffs. Freehills’ retainer was to advise the Partnerships. Its duty of care owed to the plaintiffs was co-extensive with its obligations under its retainer. It did not include a duty to advise the plaintiffs individually; or a duty to supervise and co-ordinate the exercise of the options by Harris & Co and Bartier Perry.

355 It was submitted that the limited nature of Freehills’ retainer is significant insofar as the general principle is to be applied that a solicitor when acting for a client does not owe a duty to third parties or to another party to the transaction. In this regard Freehills relied upon the following portion of Gummow J’s judgment in Hill v Van Erp (1997) 188 CLR 159 at 236-237 (footnotes omitted):

White v Jones

Sutherland v Public Trustee

356 Freehills conceded that while a solicitor may be liable for advice or information given to a non-client where the solicitor is aware that the advice or information will be relied upon by the third party, it must be nevertheless reasonable in the circumstances for that person to so rely: Tepko Pty Ltd v Water Board (2000) 206 CLR 1 at 16-18 par [47]-[49], 23-24 par [75]-[79] and 46 par [139]; Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1. It was submitted that in the present case it was not reasonable for the plaintiffs to rely on advice emanating from Freehills as to the correct exercise of the options, particularly in circumstances where: (a) Freehills did not possess the requisite material personal to the plaintiffs to so advise; (b) Freehills was not being kept informed as to what steps the plaintiffs were taking in attempting to effect the exercise of the options; and (c) other specialists were advising the plaintiffs on the exercise of the options. There is a further important matter upon which Freehills rely. It was submitted that Mr McLean was an experienced businessman who was represented by his own solicitor, Mr Simms, thus further circumscribing Freehills’ duty. In this regard reliance was placed on the following passage of the judgment of McPherson A-JA in Heydon v NRMA Ltd at 118 par [363]:

357 It was submitted that the plaintiffs have not sufficiently demonstrated any known reliance by them on Freehills to provide the advice asserted to justify the somewhat ambulatory scope of the duty of care Freehills is said to have owed them. Unless Freehills was furnished with all of the plaintiffs’ material, thereby allowing it to advise upon and co-ordinate the correct exercise of the plaintiffs’ options, it was submitted it could not be seriously contended that Freehills had assumed such a duty: Notaras v Sly and Weigall (2005) 12 BPR 23,765 at 23,787 par [121]-[122].

358 The suggestion that Freehills negligently or in breach of its retainer failed to advise the plaintiffs as to the correct method of exercising their Option Agreements, or failed to supervise or co-ordinate those who were advising on the valid exercise of the Option Agreements, is submitted to involve litigation conducted “impermissibly” through the “prism of hindsight”: Rosenberg v Percival (2001) 205 CLR 434 at 441-442 par [16] per Gleeson CJ. It was submitted that Freehills properly performed its retainer and did not breach any duty of care owed to the plaintiffs. It was submitted there was no failure on Freehills’ behalf with respect to any advice given by it once the factual circumstances of the role in the events leading up to the handover to ANH are properly analysed.

359 It was submitted that prior to the exercise of the options, the plaintiffs had been expressly warned that they could not have any indebtedness. This was advice given by Mr Shtein, firstly through the copy of the letter to Mr Brand and secondly through the direct advice to the plaintiffs. Indeed the plaintiffs’ solicitor Mr Simms advised Mr Shtein that there was no indebtedness. It is also the case that advice had been given by Mr Shtein in respect of the clause 4.1(a) warranty. It is very difficult in those circumstances to understand what more Freehills should have done with the material that they had been given prior to the exercise of the options.

360 Freehills correctly identified that the plaintiffs’ cases proceed on the assumption that Freehills failed to perform a duty to provide advice to each investor, specifically the plaintiffs, as to whether the options had been validly exercised bearing in mind the warranties in clause 4.1 of the Option Agreement. Freehills submitted that such advice was never sought from Freehills by either of the plaintiffs. Emphasis was also placed on the fact that Freehills took no active part in drawing up or settling the Notices to Exercise the options or in supervising or co-ordinating that exercise. Further Freehills had no knowledge of the quantum of debts that may have been payable by individual investors in respect of the Partnerships at the time of the exercise of the options. It had no knowledge of the financial affairs or the corporate history of either of the plaintiffs. It had not been furnished with documents permitting it to reliably undertake tasks for which such knowledge would be a prerequisite. To the extent that from time to time Freehills responded to issues raised by individual investors, they were raised as common concerns to all of the investor partners in the partnership and therefore it was appropriate for Freehills to advise on them within its retainer. Additionally Freehills submitted that the plaintiffs did not lose their opportunity to exercise the options by reason of any conduct of Freehills. Freehills’ retainer ceased on 24 September 1999 and the option exercise period did not expire until 31 July 2000.

361 Freehills were not retained by the plaintiffs. Freehills’ retainer by DTSPL was carried out with care and diligence. Freehills did not agree to supervise the work of Harris & Co or Bartier Perry. Freehills were not instructed to advise the plaintiffs how to ensure the option was exercised validly. The plaintiffs’ claim against Freehills will be dismissed.

Atanaskovic Hartnell (ANH)

362 ANH’s retainer commenced on about 29 September 1999 after the exercise of the plaintiffs’ options. The plaintiffs conceded in opening their cases that ANH was not retained in relation to the actual exercise of the option, “to actually do it or advise about it” (tr 107). Mr McClintock submitted that ANH was liable in three ways: (1) ANH specifically agreed to advise in relation to the validity of the exercise of the options (tr 6,92-93); (2) there was an “explicit and oral retainer” to provide advice in relation to the validity of the exercise of the options arising from a disputed conversation between Ms Chang and Mr Shtein on 12 October 1999 (tr 6,94); and (3) it was (tr 6,94):

…implicit in any litigation solicitor’s retainer that that solicitor will make an assessment of the strength of his or her client’s case – and in this case become familiar with the documents and with the potential risks to the client and advise the client of those matters.

363 ANH submitted that this last proposition amounts to no more than a contention that if ANH happened to notice that there was a risk that a client could be unsuccessful in litigation, which risk could be avoided, ANH should have told the client about that risk. It was submitted that that was the effect of the cross-examination recorded at paragraph 5.7 of the plaintiffs’ closing submission which was in the following terms:

(a) if she had come to the conclusion prior to 31 July 2000 that there was an issue with the validity of the exercise of the options by A I McLean, she would have informed the client of that issue (tr 763).

(b) Ms Chang was retained to conduct the litigation, and in that capacity she was required to advise the client as to what the prospects of the litigation were (if asked). To that end, it was part of her obligation to form an assessment of the strength of her client’s case, and if she formed the view that the case was hopeless, she was bound not to proceed with it, and to inform the client of those difficulties (tr 764).

364 It was submitted that it appears that the plaintiffs’ central claim against ANH is that there was an implied term to review the exercise of the option rights under each of the option agreements to determine whether the attempted exercises of those option rights were valid.

365 It is not disputed that ANH did not notice the relevant risk, that is the breaches of 4.1(a) and/or 4.1(b). ANH relied upon the following passage from Malcolm A-JA’s judgment in Heydon v NRMA at 103 par [309]:

366 It was submitted that this passage is a complete answer to the plaintiffs’ claim in respect of ANH’s retainer. The express terms of ANH’s retainer was set out in letters dated 29 September 1999, 14 October 1999 and 17 December 1999. As those letters make clear ANH was retained by 23 plaintiffs in matter 50169 of 1999 (the Terminal Adapter proceedings) and 33 plaintiffs in matter 50087 of 2000 (the Freerider proceedings) to conduct litigation. It was submitted that ANH was not retained to provide advice about the exercise of the options held by the various investors as that advice had already been given by other solicitors. None of the Investors who retained ANH ever asked Ms Chang to review or add to the work and advice that had been provided by Bartier Perry and Harris & Co on the exercise of the options.

367 It was also submitted that neither Mr McLean nor Mr Simms, who were the only people who ever gave ANH instructions directly on behalf of the plaintiffs, ever asked Ms Chang to review or add to the work and advice provided by Bartier Perry and Harris & Co on the exercise of the options. The fact that ANH was retained by a number of Investors is important when considering the scope of its retainer and what was required to satisfy that retainer. Although the various Investors that retained ANH had some commonality, there were many differences. A litigation committee was formed to instruct ANH and the plaintiffs gave a written authorisation to ANH to accept instructions from that committee.

368 ANH submitted that the underlying transactions the subject of the litigation involved highly commercially sophisticated clients who had each previously obtained separate legal advice in respect of the very matter about which it was then said ANH should advise upon. As with any other commercial contract when construing the terms of ANH’s retainer, it is necessary to consider not only the text, but also the surrounding circumstances known to the parties and the purpose and objective of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 par [40]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462 par [22]. The plaintiffs do not contend that they ever instructed ANH to consider whether or not the options had been validly exercised. No express term to that effect is alleged. The plaintiffs attempted to rely upon the words within the retainer letters, “advise you generally”, for the purpose of submitting that ANH was retained to consider whether or not the options had been validly exercised and to provide advice thereon.

369 It is appropriate to say something about the practice of solicitors in 1999 and 2000 who were practising as commercial litigators These observations are not based on any evidence that was before me (because, at the risk of repetition, the plaintiff did not call any such evidence), but on matters of practice able to be gleaned from statutes, Practice Notes and the authorities. The conduct of solicitors at that time was regulated by the Legal Profession Act 1987. Under that Act Ms Chang had an obligation not to commence any proceedings in which there was a "claim for damages" unless she had reasonable grounds for believing, on the basis of provable facts and a "reasonably arguable view of the law” that the claim had reasonable prospects of success: s 198L(2). It seems to me that, although strictly speaking, the claim for a declaration in relation to the validity of the exercise of the options did not fall within the definition of "claim for damages" in that section, Ms Chang had a professional obligation not to commence proceedings that had no reasonable prospects of success.

370 In 1999/2000 the practice of the Courts, and thus the practice of the profession, was heavily affected by the need to ensure that commercial litigation was conducted in a cost-effective manner, obviously guided by the dictates of justice. It was during this period that the courts made clear that litigation was to be conducted on the real issues between the parties and that such issues needed to be identified at an early stage. The commercial litigator was required to establish at an early stage, by the process of the pleadings and particulars, what the real issues were between the parties and respond to those issues by the gathering of evidence to prove the cases on the real issues as established. There was a clear obligation on solicitors to expose their clients' cases avoiding any prospect of an "ambush". Practice Note 100 governing commercial litigation in the court in which the Digi-Tech litigation occurred, made this very clear. Later authorities recognized that the “culture” had changed to reflect such a practice: Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116, in particular, per Young CJ in Eq at [45] – [46].

371 Ms Chang's obligation was to ensure that her clients, the plaintiffs, as well as all the other plaintiffs for whom she acted, were provided with careful and competent advice in the context of the commercial litigious environment in which she was providing legal services.

372 It is accepted by ANH that its retainer required it to consider the defences filed by the defendants (the Digi-Tech parties) in the Digi-Tech litigation. A most important aspect of that matter is that the Digi-Tech parties had asserted that the options had not been validly exercised and had provided reasons for that assertion. None of the reasons referred to the clause 4.1(b) indebtedness point prior to 31 July 2000. It was only when the defence was filed in September 2000, after the Option Period had expired, that the point was identified. As I have already said the claim of invalidity based on a breach of clause 4.1(a) was not raised and was eschewed by Senior Counsel for the Dig-Tech parties in the Court of Appeal in that litigation.

373 It was conceded, appropriately so, that it was an implied term of ANH’s retainer that it would exercise reasonable skill and care as solicitors in relation to the matters covered by the retainer. However the plaintiffs allege that it was an implied term of ANH’s retainer that it would review the exercise of the option rights under each of the plaintiffs’ Option Agreements to determine whether the attempted exercise of those option rights were valid (par 160(c)). The plaintiffs bear the onus of establishing that the term should be implied by meeting the well-known test articulated in BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-283: that it must be reasonable and equitable; it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; it must be so obvious that it goes without saying; it must be capable of clear expression; and it must not contradict any express term of the contract.

374 It was submitted that the proposed term is not necessary to give business efficacy to the contract; the contract is clearly effective without it. It was also submitted that on no view is the proposed implied term so obvious that it goes without saying. If the content of the proposed implied term had been raised with the other fifty Investors who had retained ANH, it is far from obvious that other Investors would have been prepared to pay ANH to conduct specific enquiries into the plaintiffs’ position. It was submitted that this is particularly so in circumstances where the plaintiffs now allege that the implied term for which it contends is to investigate matters outside the pleaded and particularised case that was then being conducted in the Digi-Tech litigation.

375 It appears that the plaintiffs allege that, rather than simply accepting that the matter alleged by the Digi-Tech parties in the Digi-Tech litigation was the cause of the invalidity of the exercise of the options, ANH had a brief and a duty to search for any other aspects of the exercise of the option that could conceivably give rise to invalidity. This seems to me to be somewhat absurd in the circumstances of ANH’s retainer. It could hardly be said that the implication of the particular term is necessary for the reasonable or effective operation of the retainer in the circumstances of the case. The alleged implied term fails the BP Refinery test.

376 Even if a term were to be implied into the ANH retainer that it was required to review the exercise of the option having regard to the claims made by the Digi-Tech parties in the Digi-Tech litigation, ANH discharged their obligation in this regard. It carefully considered the matters allegedly invalidating the exercise of the options identified by the Digi-Tech parties and formed reasonable or certainly tenable conclusions about them.

377 It was submitted that even if the Court were to conclude that ANH’s retainer required it to reconsider the legal advice given to the plaintiffs by other firms about the exercise of the options and to advise the plaintiffs, independently of any claim in the litigation, to re-exercise the options in the way now asserted to be the only way the options had been exercised, there is no evidence that a reasonably competent solicitor in the position of ANH who had been asked to advise the plaintiffs in this way should have concluded prior to 31 July 2000 that the only method of properly exercising the options is the one belatedly suggested by the plaintiff in paragraphs 54(a) and 54(b) of its pleading. It was not suggested to Ms Chang in cross-examination that she should have given advice to re-exercise the options in the way the plaintiffs now say was the only way the options should have been exercised. ANH made the following powerful submission:

378 Ms Chang conducted the investigations she considered to be necessary for the purposes for which she had been retained, namely to commence litigation against the Digi-Tech parties. ANH relied heavily on the fact that the basis on which the exercise of the options was found to be invalid did not form part of the claim until after the option period had expired. Emphasis was placed on the function of pleadings stating with sufficient clarity the case that must be met: Banque Commerciale SA (in Liq) v Akhil Holdings Ltd (1990) 169 CLR 279 at 286. It was submitted that pleadings serve to ensure the basic requirements of procedural fairness and to define the issues for decision. By informing the scope of material relevant to both pre-trial preparation and the conduct of the trial itself, particulars are intended to reduce costs by assisting the parties to avoid incurring expense in preparing to meet issues that may never be put. It was submitted, and I accept the submission, that ANH properly considered the pleadings and particulars and responded to the case it had to meet.

379 ANH submitted that it has taken the plaintiffs’ legal representatives many years to determine that there was only one method by which (they say) the options could have been exercised. It was noted that the plaintiffs’ present solicitors also acted for the Digi-Tech parties from a time well prior to when ANH was retained. They did not identify what they now contend should have been obvious to Ms Chang in 1999 until April 2008.

380 It was further submitted that even if the Court were to conclude that ANH’s retainer required it to re-consider the legal advice previously given to the plaintiffs by other firms about the exercise of the option, there is no basis on the pleaded case for finding a breach of that retainer. It was submitted that after many years of litigation about the Option Agreements and associated documents, it was only in April 2008 that the plaintiffs asserted for the first time that there is now only one way in which the options could be validly exercised.

381 The assertion by the plaintiffs in the present proceedings is that it should have been obvious to a reasonably competent solicitor in Ms Chang’s position in 1999 and 2000 that the plaintiffs’ options had not been validly exercised in September 1999 and that advice should have been given to the plaintiffs to engage in the only method now pleaded. ANH submitted that those submissions should be rejected. ANH submitted that no such suggestion was put to Ms Chang in cross-examination. That is true. ANH also submitted that no expert evidence supporting such a conclusion was led by the plaintiffs. That is true. It submitted the Digi-Tech parties never took the position in the Digi-Tech litigation that the option agreements had not been validly exercised for the reasons now advanced by the plaintiffs, ie the only method theory. That is true. It submitted that despite the years that the plaintiffs’ legal representatives have had to consider this issue, it was only three weeks prior to trial that they appreciated for the first time that, in their view at least, there was only one method to exercise the options validly. That is true. ANH also submitted that there is evidence in the proceedings of the matters taken into account by Mr Shtein in advising the plaintiffs in September 1999 against assignment which was not shown in cross-examination or by other evidence to be incorrect, let alone negligent. That is true.

382 It was submitted that Ms Chang’s failure to proffer the suggested advice in relation to the pleaded method was not negligent or in breach of ANH’s retainer. In final written submissions ANH made the following submission, which I regard as a sensible and accurate exposition of the reality of the situation as it pertained in 1999 and 2000:

383 ANH, as all other defendants, submitted that the plaintiffs’ case fails because of the failure to call expert evidence. In the absence of such evidence the plaintiffs effectively asked the Court to conclude that it was plain and obvious on the face of the Option Agreements that they had not been exercised validly, notwithstanding that: the counter-party to the Digi-Tech litigation was not at that time asserting the grounds of invalidity now relied on by the plaintiffs; at least one of the grounds of invalidity (breach of clause 4.1(a)) now relied on was never picked up by the counter-party to the litigation or by the Court in the Digi-Tech litigation; and it apparently took almost a decade of litigation and consideration for the plaintiffs’ legal representatives to conclude that there was but only one means of exercising the options validly.

384 ANH submitted that the Court would not reach the serious conclusion that ANH breached its retainer or failed to act with reasonable care and skill on the basis of an inference that the plaintiffs ask the Court to draw about matters not put to Ms Chang and in the absence of any expert or other evidence supporting such a conclusion.

385 I am of the view that Ms Chang/ANH discharged their duties of care to the plaintiffs appropriately and carefully and acted in accordance with their retainer. Ms Chang carefully reviewed the claims of invalidity made by the Digi-Tech parties and sought appropriate particulars of the claims to enable her to act in this careful and competent manner. It was not part of ANH’s retainer or its duty of care during the period up to 31 July 2000, to search for possible forms of invalidity that were not the subject of the litigation and formed no part of any brief or instructions to advise. To impose such a duty or obligation on a commercial litigator in the position in which ANH was placed would be to impose a counsel of perfection inconsistently with the law of professional negligence: Hicks v Roberts (1977) 16 ALR 466 per Barwick CJ at 469; Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 per McHugh J at 586. It would have been inconsistent with the practice of commercial litigators at that time.

386 The plaintiffs’ claims against ANH will be dismissed.

387 The plaintiffs’ claims having failed against all defendants, there is no occasion to consider the cross-claims. The cross-claims will be dismissed.

Conclusion

388 The plaintiffs’ claims against all defendants will be dismissed. The cross-claims will be dismissed. The parties are to bring in short minutes reflecting this outcome together with agreed orders as to costs. The matter is listed at 9.15 am in the Motions List on 26 September 2008 for that purpose and to hear any argument if the parties are unable to agree on appropriate costs orders.

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11/09/2008 - amendment of counsel's name - Paragraph(s) 8

12/09/2008 - spelling error "gaurantee" to "guarantee" - Paragraph(s) 29

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Citations

AI Mclean Pty Ltd v Hayson [2008] NSWSC 927

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McLean Tecnic v Digi-Tech [2005] NSWSC 386

CITATION:	A. I. McLean Pty Ltd v Hayson [2008] NSWSC 927 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	28, 29 and 30 April 2008, and 1, 5, 6, 7, 8, 12, 13, 14 and 15 May 2008
JUDGMENT DATE :	11 September 2008
JURISDICTION:	Equity Division - Commercial List
JUDGMENT OF:	Bergin J
DECISION:	Plaintiffs' claims dismissed. Cross-claims dismissed.
CATCHWORDS:	[OPTIONS] - whether plaintiffs' pleaded method would have amounted to valid exercise of option - whether method would have been achievable in the circumstances - [COMMERCIAL AGREEMENTS] - whether agreement to enter into "similar" agreement in context of a suite of complex arrangements and agreements would have been achieved and/or enforceable/enforced - [NEGLIGENCE] - breadth of lawyers' retainers/duty of care - whether lawyers breached retainers/duty of care - [EVIDENCE] - expert evidence in professional negligence suits against lawyers - reasons therefor - scope of duty/standard of care
LEGISLATION CITED:	Civil Liability Act 2002 Civil Liability Amendment (Personal Responsibility) Act 2002 Corporations Law 1999 (Cth) Legal Profession Act 1987
CATEGORY:	Principal judgment
CASES CITED:	Banque Commerciale SA (in Liq) v Akhil Holdings Ltd (1990) 169 CLR 279 Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1 Bell v Peter Browne & Co (1990) 2 QB 495 Booksan Pty Ltd v Wehbe [2006] NSWCA 3 Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209 BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Brand v Digi-Tech (Australia) Ltd [2002] NSWSC 416 Chappel v Hart (1998) 195 CLR 232 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Daniels v Anderson (1995) 37 NSWLR 438 Dean v Allin [2001] 2 Lloyd’s Law Reports 249 Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184; [2004] NSWCA 58 Dunlop v Woollahra Municipal Council [1982] AC 158 F & D Normoyle Pty Limited v Transfield Pty Limited (2005) 63 NSWLR 502 Gore v Montague Mining Pty Ltd [2000] FCA 1214 Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 Heydon v NRMA Ltd (2000) 51 NSWLR 1 Hicks v Roberts (1977) 16 ALR 466 Hill v van Erp (1997) 188 CLR 159 Imbrahim v Pham [2007] NSWCA 215 Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430 Macidone v Parbery (1994) Aust Torts Rep 81-290 McLean Tecnic v Digi-Tech [2005] NSWSC 386 Midland Bank Trust v Hett Stubbs & Kemp (1979) 1 Ch 384 Notaras v Sly and Weigall (2005) 12 BPR 23,765 Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 Rosenberg v Percival (2001) 205 CLR 434 Tepko Pty Ltd v Water Board (2000) 206 CLR 1 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 Tonitto v Bassal (1992) 28 NSWLR 564 Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 636 Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 WCW Pty Ltd v Bolster & Co, unreported, FCFCA, 6 January 1993
PARTIES:	A. I. McLean Pty Ltd (First Plaintiff) McLean Tecnic Pty Ltd (Second Plaintiff) Paul Thomas Hayson & Ors trading as Harris & Co (First Defendant) Mark Coolican Paul & Ors trading as Bartier Perry (Second Defendant) John Hugh Clifford Colvin & Ors trading as Freehill Hollingdale & Page (Third Defendant) Anthony Geoffrey Hartnell & Ors trading as Atanaskovic Hartnell (Fourth Defendant) Peter William Cornelius trading as Peter Cornelius (Cross Defendant)
FILE NUMBER(S):	SC 50141 of 2005
COUNSEL:	B McClintock SC/B Katekar/CH Withers (Plaintiffs) DL Davies SC/MS White (First Defendant) JC Kelly SC/WV McManus/P Arblaster (Second Defendant) MJ Slattery QC/R Pepper (Third Defendant) TF Bathurst QC/AJ Payne (Fourth Defendant) SD Robb QC/JAN Hogan-Doran (Cross Defendant)
SOLICITORS:	Blake Dawson (Plaintiffs) Yeldham Price O'Brien Lusk (First Defendant) Colin Biggers & Paisley Laywers (Second Defendant) Malleson Stephen Jaques (Third Defendant) Ebsworth & Ebsworth then HWL Ebsworth Lawyers (Fourth Defendant) Middletons (Cross Defendant)