Ashbrooke Institute Pty Ltd v Holding Redlich
[2010] VSC 579
•13 December 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 4985 of 2008
| ASHBROOKE INSTITUTE PTY LTD ACN 065 612 768 | Plaintiff |
| v | |
| BARTONE BIOMEDICAL PTY LTD ACN 120 018 153 (In Liquidation) | First Defendant |
| and | |
| HOLDING REDLICH | Second Defendant |
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JUDGE: | HARGRAVE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 15, 16, 17, 18 and 23 November 2010 | |
DATE OF JUDGMENT: | 13 December 2010 | |
CASE MAY BE CITED AS: | Ashbrooke Institute Pty Ltd v Holding Redlich | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 579 | |
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SOLICITORS – Professional negligence claim – Sale of assets of medical practice – Corporate purchaser – Balance of price payable on terms after purchaser took possession – Default by purchaser – Purchaser unable to pay price and placed in liquidation – Whether solicitor should have advised vendor to seek guarantees to secure balance of price.
DAMAGES – Loss of opportunity to obtain guarantee as security for purchase price – Whether valuable opportunity – Whether potential guarantors could have paid if sued.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr G McEwen | Russell Kennedy |
| For the Second Defendant | Mr J Tsalanidis | Monahan + Rowell |
| For the First Defendant | No appearance |
TABLE OF CONTENTS
Parties and introduction.................................................................................................................. 2
Factual narrative................................................................................................................................ 4
Did Holding Redlich exercise reasonable skill and care?........................................................ 19
Would a guarantee have been given if requested?................................................................... 22
Would any guarantee have been enforceable?.......................................................................... 28
Would the guarantors have had the capacity to pay?.............................................................. 31
What is the value of the lost opportunity to request a guarantee?...................................... 35
Did Ashbrooke unreasonably fail to mitigate its loss?........................................................... 36
Is the purchaser a concurrent wrongdoer?................................................................................ 37
Conclusion and orders.................................................................................................................... 38
HIS HONOUR:
Parties and introduction
Until January 2006, Dr Warwick Greville conducted a successful cosmetic surgery practice under the name ‘Ashbrooke Medical Institute’ (‘the practice’). The practice was owned by the plaintiff, Ashbrook Institute Pty Ltd (‘Ashbrooke’). It operated from premises in Chapel Street, South Yarra (‘the premises’).
On 10 January 2006, Dr Greville died in a bus accident while holidaying in Egypt. ANZ Trustees Limited was appointed executor of his deceased estate. David Ward, the General Manager of ANZ Trustees, was appointed as the sole director of Ashbrooke. Mr Ward decided that Ashbrooke should sell the assets of the practice, comprised of the medical equipment and other physical assets employed in the practice and the goodwill associated with the ‘Ashbrooke Medical Institute’ name (the ‘practice assets’). The goodwill associated with the skill and reputation of Dr Greville could not, of course, be sold.
In April 2006, Dr Anthony Bartone and his wife Louise Bartone orally agreed to purchase the practice assets for $300,000 on certain terms and conditions, including them obtaining a lease of the premises and a transfer of the licence issued by the Department of Human Services to operate the surgical aspects of the practice from the premises (‘the DHS licence’).
In early May 2006, the second defendant, Holding Redlich, was engaged by Ashbrooke to represent it in the proposed sale to Dr and Mrs Bartone. Holding Redlich prepared draft heads of agreement, and later draft contracts of sale, specifying Dr and Mrs Bartone as the purchasers. However, the solicitors acting for Dr and Mrs Bartone later nominated the first defendant, Bartone Biomedical Pty Ltd, as purchaser in lieu of Dr and Mrs Bartone (‘the purchaser’). Mrs Bartone was the sole director and shareholder of the purchaser.
The draft contract of sale was later amended to permit the purchaser to pay by instalments, with possession of the practice assets being given upon payment of a $30,000 deposit. This amendment raised the issue of security for the balance of the purchase price, in the event of default in payment. Dr Greville’s daughter, Fiona Greville, was at this time the sole shareholder of the plaintiff. She expressly raised this issue with Holding Redlich. As a result, some amendments were made to the draft contract of sale, providing that title to the practice assets would remain with Ashbrooke until payment in full of the purchase price. However, Holding Redlich did not advise Ashbrooke that it should consider obtaining the personal guarantee of Dr Bartone and/or his wife Louise Bartone.
The sale then proceeded. A contract of sale was signed (‘the contract’); the $30,000 deposit was paid; the purchaser entered into a lease of the premises; and the DHS licence was transferred to the purchaser. In these circumstances, the contract became unconditional and the balance of the purchase price ($270,000) became due. The balance was not paid.
In this proceeding, Ashbrooke sued the purchaser for the unpaid balance of the price. It also sued Holding Redlich for breach of its duty to exercise reasonable skill and care, by failing to advise it that it should seek the personal guarantees of Dr and Mrs Bartone to secure payment of the balance. The purchaser defended the proceeding for some time, alleging misrepresentation and other defences. However, a default judgment was subsequently entered against it and the purchaser is now in liquidation. The trial proceeded against Holding Redlich only.
The following issues arise for determination:
(1) Did Holding Redlich exercise reasonable skill and care?
(2) Would a guarantee have been given if requested?
(3) Would any guarantee have been enforceable?
(4) Would the guarantors have had the capacity to pay?
(5) What is the value of the lost opportunity to request a guarantee?
(6) Did Ashbrooke unreasonably fail to mitigate its loss?
(7) Is the purchaser a concurrent wrongdoer?
In order to determine these questions, it is necessary to consider the facts in more detail.
Factual narrative
The overwhelming majority of the income of the practice related to liposuction procedures performed by Dr Greville. There were also some other cosmetic procedures performed from time to time, including Botex injections and skin treatments using items of laser equipment included in the practice assets. Dr Bartone had no experience in performing liposuction, and acknowledged that the purchaser would have to pay a qualified surgeon to perform these procedures after acquisition of the practice.
Following Dr Greville’s death, Mr Ward of ANZ Trustees considered Ashbrooke’s options concerning the practice. He engaged Neil Cathels of BDO Partners Pty Ltd, Chartered Accountants and Advisors, to advise him. Mr Cathels has considerable experience in the sale and purchase of medical practices. Further, in performing his role as a director of Ashbrooke and in other aspects of Dr Greville’s estate, Mr Ward was assisted by Alistair Manley, a consultant in the Estate Services Division of ANZ Trustees. Mr Manley had the day to day conduct of the relevant events.
The practice was initially kept open by Dr Greville’s wife Sheila and his daughter Fiona. However, following advice from Mr Cathels, the practice was closed in late February 2006; although a licence was given to a doctor previously employed by Ashbrooke to conduct some cosmetic procedures at the premises.
The practice was conducted from leased premises. The lease was due to expire on 30 June 2006. There was no option for renewal. Accordingly, any purchaser of the practice assets would need to secure a fresh lease from the landlord, or be prepared to move the practice assets to another location. It was in the interests of all parties for a fresh lease to be negotiated with a purchaser. From Ashbrooke’s perspective, the lease contained ‘make good’ obligations which would have been expensive if a new tenant could not be found to lease the premises with the existing fit-out and fixtures. From the purchaser’s perspective, a fresh lease was paramount because the premises had an existing DHS licence which was capable of being transferred. It was common ground that it is easier to obtain a transfer of an existing licence than to apply for a fresh licence in respect of unlicensed premises. Further, a director of the landlord company, Hans Henkell, gave evidence that he believed it was more desirable from the landlord’s perspective to continue an existing use, rather than deal with the substantial cost and delay of making good the premises.
Against this background, Ashbrooke called for expressions of interest to purchase the practice assets. The asking price was $450,000, calculated as follows:
Plant and equipment
$250,000
DHS licence
$100,000
Ashbrooke Medical Institute name (goodwill)
$100,000
$450,000
There was some early interest in purchasing the practice assets. In late February 2006, Dr Tom Zeglinas offered $50,000, subject to a new lease of the premises being negotiated. In early March, Dr Josef Goldbaum expressed interest in purchasing the practice assets for a price in the range of $100,000 to $150,000. However, when he discovered the level of rent being sought by the landlord for a new lease, his interest evaporated.
On 17 March 2006, Dr and Mrs Bartone inspected the premises in the presence of Sheila and Fiona Greville. In early April, Dr Bartone expressed interest in purchasing the practice assets, and sought a further inspection of the premises and a copy of the plans for the fit-out. Shortly afterwards, by email sent 7 April 2006, Dr Bartone enquired of Mr Manley as to whether the practice could be re-opened before settlement of any purchase. This was in the context of Dr Bartone’s statement that he would need between five and six weeks to organise finance for a purchase, and his concern that the closure of the practice was affecting its value.
On 13 April 2006, Dr Bartone made a formal offer to purchase the practice assets on four conditions:
(1) transfer of the DHS licence;
(2) a fresh lease of the premises;
(3) the right to use the name ‘Ashbrooke Medical Institute’; and
(4) the right to immediately commence operations at the premises under a sub‑licence agreement.
In his formal offer, Dr Bartone again stressed his view that the value of the practice assets was being damaged by the closure of the practice:
The clinic has been closed for a damagingly long period already. Any further delay to nurturing the business and communicating to the market that the clinic is re-opening will be highly detrimental.
…
This offer is crucially dependent on an appropriately expedient timeframe. The clinic has now been shut and is obviously in need of immediate injection of people, time and skills …
Furthermore, I would look to have input into various operational issues decisions that might arise during the acceptance period to decrease the risk that the value of the current business be further eroded.
On 18 April 2006, Alison Gray, a former practice nurse and girlfriend of Dr Greville, offered $55,000 for the practice assets. This offer was not given any serious consideration.
On 21 April 2006 Dr and Mrs Bartone met with Sheila and Fiona Greville at the premises. They orally agreed a purchase price of $300,000.
Mr Cathels then instructed Holding Redlich to act on behalf of Ashbrooke in connection with the proposed sale. The responsible partner was Daniel Pearce. However, the principal conduct of the matter on behalf of Ashbrooke was by an employee solicitor, Marilyn Awad.
It was initially proposed that the parties to the sale would execute heads of agreement prior to preparation and execution of a formal contract of sale. The draft heads of agreement specified Dr and Mrs Bartone as the purchasers, with the purchase price being payable in full upon settlement of the proposed transaction. The price was to be allocated in the following manner:
Medical equipment, DHS licence and business name
$270,000
Goodwill
$30,000
$300,000
The draft heads of agreement were provided to Dr Bartone in early May. He raised no objection to the form of the draft. At this time, he again emphasised that there was urgency attending the proposed sale, noting in an email that ‘the business premises remain closed and the value of any goodwill is rapidly disintegrating. The success of the new venture is time critical …’.
At this time, Dr Bartone was becoming increasingly frustrated at the delays. In particular, he was most concerned at the delay by the landlord in dealing with his offer to lease the premises. In an email to his solicitor dated 9 May 2006, Dr Bartone expressed his frustration and canvassed withdrawal of his offer to purchase, or altering its terms to reflect the delay. However, in this email, Dr Bartone stated that he viewed the premises and the practice assets as being ‘extremely valuable’.
Dr Bartone continued to proceed towards finalisation of the purchase transaction. He instructed his solicitor to abandon negotiation of heads of agreement and to inform Holding Redlich that he wished to proceed directly to a formal contract of sale.
On 19 May 2006, Dr Bartone was interviewed by the landlord’s representative. The interview went well and the landlord had no objection to leasing the premises to Dr Bartone or an entity nominated by him.
Following Dr Bartone’s solicitor’s request to proceed directly to a contract of sale, Ms Awad drafted a contract of sale and forwarded it to Dr Bartone’s solicitor on 25 May 2006. Consistently with the draft heads of agreement, the nominated purchasers were Dr and Mrs Bartone, and the purchase price was payable in full at completion of the transaction.
Dr Bartone’s solicitor reviewed this draft contract of sale. He then sought instructions from Dr Bartone on a number of issues, including the identity of the purchaser. In a letter dated 31 May 2006 to Dr and Mrs Bartone, the solicitor stated:
The two of you are shown as purchaser. I understood that Idorou Pty Ltd, in its capacity as trustee of a unit trust, is to be the purchaser. I await your instructions on this point.
Idorou Pty Ltd was at all relevant times a company owned by Mrs Bartone as sole shareholder. It owned one of the two adjoining properties constituting the Bartones’ family home. The other property was owned by Mrs Bartone. The properties are situate at 34 and 34A Wallace Avenue, Toorak (the ‘Wallace Avenue properties’).
Following this letter, the purchaser was incorporated on 2 June 2006. Mrs Bartone was the sole director and shareholder.
In the first two weeks of June 2006, there was no communication between Dr Bartone’s solicitor and Holding Redlich concerning the draft contract of sale. However, during this period, Dr Bartone informed Mr Manley, in connection with the proposed transfer of the DHS licence, that the transferee was to be the purchaser and not him and his wife.
On 16 June 2006, Dr Bartone’s solicitor informed Ms Awad that the purchaser had been incorporated ‘and will be the purchaser’. The solicitor apologised for taking so long to respond to the draft contract of sale, and said that he would provide comments on the following Monday. As appears below, this was not done. The comments were not provided until 7 July 2006. Ms Awad raised no objection and gave no advice to Ashbrooke as to whether the change in the identity of the purchaser affected their position.
In the meantime, notwithstanding his frustration concerning the delays, Dr Bartone continued with his efforts to obtain a lease of the premises and an assignment of the DHS licence. In an email dated 26 June 2006 to his solicitor, he proposed entering into a lease prior to the transfer of the DHS licence, thus taking the risk that the DHS licence might not be transferred, and altering the terms of the proposed contract of sale. He stated to his solicitor:
I remain concerned that at the 11th hour I may lose the right to acquire/occupy the site. I believe that the site has some value irrespective of the DHS bed licence; a value which has been already incorporated into the price being offered for the business. A value which justifies leasing the site irrespective of the DHS licence in the absence of a contract of sale.[1]
[1]Emphasis added.
Two days later, on 28 June 2006, Dr Bartone was in a different mood. In an email to his solicitor, he said that he had considered ‘walking away from the deal’ on numerous occasions, because he did not believe that ‘the practice is worth today anything like the price I negotiated in early April’. Notwithstanding this expression of his sentiments on that day, Dr Bartone continued to work towards completing the purchase of the practice assets. In either that week or the following week, his wife resigned her position as a bookkeeper. At some stage during July, he resigned his position as a locum GP.
On 29 June 2006, the Department of Human Services indicated in principle approval to a transfer of the DHS licence, subject to some conditions subsequent to be imposed on the purchaser.
On 2 July 2006, Louise Bartone spoke with Fiona Greville. They agreed that the lawyers should finalise the contract of sale in light of the ‘in principle’ indication from the Department that the DHS licence would be transferred. They also discussed the terms of payment. In an email sent by Fiona Greville to Neil Cathels on 2 July 2006, Ms Greville recorded her understanding that the price was to be paid in instalments.
In early July 2006, Fiona Greville gave Mrs Bartone a set of keys to the premises. From that time, Mrs Bartone attended the premises on a regular basis. In late June and during July, Dr Bartone attended the premises for some consultation work on an irregular basis, perhaps once a week. Sheila and Fiona Greville continued to attend the premises in connection with works necessary to secure the transfer of the DHS licence, and to answer the telephone. Patients were referred to Dr Bartone for Botox injections and other treatments within his expertise. The parties were working together towards satisfaction of the proposed conditions attaching to the sale and the smooth handover of the practice assets at completion.
By letter dated 7 July 2006, Dr Bartone’s solicitor provided the promised comments on the draft contract of sale. In that letter, Ms Awad was informed for the first time that the purchase price was to be paid on terms, as follows:
Deposit
$30,000
First instalment
$50,000
Within 14 days of both a lease of the premises and a transfer of the DHS licence to the purchaser
Balance
$220,000
On 1 December 2006
Ms Awad sought instructions. Both Mr Cathels and Mr Manley were on leave at this time. Following a family discussion, Fiona Greville sent an email to Mr Cathels on 11 July 2006, expressing concern that the draft contract of sale did not contain ‘any clause relating to default of payment’. In that regard, Ms Greville noted that Mrs Bartone was the ‘only purchaser’ for the purchaser company. By this, she meant that Mrs Bartone was the only director of the purchaser company. In these circumstances, Fiona Greville proposed that the contract of sale be amended to provide that title to the practice assets would revert to Ashbrooke in the event of default in payment of the balance of the purchase price.
The following day, 12 July 2006, Fiona Greville sent an email directly to Ms Awad about this issue. In that email, she expressed her concern that Ashbrooke be protected in the event of default in payment of the balance of the price:
Hi Marilyn,
I have been told that Neil is out of the office.
We really need to get this sale document sorted out … You will see the issues I have concern with.
1.Some sort of clause to cover non payment issues, I’m sure you have some standard format for this.[2]
[2]Emphasis added.
Neither Ms Awad nor Mr Pearce gave any consideration to suggesting that the personal guarantees of Dr and Mrs Bartone be sought, in order to provide security in the event of default in payment of the balance of the price. On the following day, Ms Awad spoke with Ms Greville on the telephone. She advised her that, to protect Ashbrooke against the risk of default, the contract of sale should provide for a licence of the practice assets until payment in full of the purchase price. Ms Awad confirmed this advice by email the same day:
I would advise against legal title in the [practice assets] being passed to the purchaser on the payment of the $50,000. Instead, [Ashbrooke] should provide the purchaser with a licence to use the [practice assets] … Legal title can pass once full payment is made in December.
Next, a contract of sale was prepared by Ms Awad to reflect this issue and other amendments. It was forwarded to Dr Bartone’s lawyer, who in turn forwarded it to Dr and Mrs Bartone for instructions on 21 July 2006.
The final draft of the contract of sale was emailed to Dr Bartone’s solicitor by Ms Awad on 31 July 2006.
Also on 31 July 2006, at 8:17 pm, Dr Bartone sent an email to Fiona and Sheila Greville. Once again, Dr Bartone expressed his frustration at the delays in completing the sale. In the email, Dr Bartone referred to the risk that the DHS licence transfer may not be approved, and stated his concern at the amount of time and the risks taken by him and his wife in pursuing the transaction. He continued:
Meanwhile:
·Louise and I are re-arranging our entire lives at present to take on Ashbrooke operation.
·We are entering into deals with professionals to man/operate from the [premises].
·We are committing to industry suppliers about ordering supplies and medications needed for the procedures.
·We are making commitments to patients as we speak.
To put it succinctly we are taking on significant personal and financial risk to operate the business at the moment till the DHS licence is granted. If not granted we will have invested enormous amounts of time and money and may still be forced to leave from the site because all we will have is a first right of refusal to a business which intrinsically will have no connection with its previous guise.
My word as a professional and a doctor is extremely precious to me and I do not take it for granted nor give it lightly. I do not wish to enter into a venture which I might at the end of August need to hand back.
However, having expressed his frustration, Dr Bartone proceeded to express his firm intention to proceed with the purchase, even if the DHS licence was not transferred:
Let’s face it, the only reason I am in there before settlement is to ensure the ongoing viability of the business. Imagine if there was no doctor at [Ashbrooke Medical Institute] with the promise of taking it on, the value of the business before settlement would otherwise be close to nothing.
I feel that my goodwill in all this is being taken for granted and that I am sharing the financial burden of the risk of the licence not being approved.
All I ask is that I have security in my future. I want to know that whatever happens I can start planning to occupy the [premises] long term and run some sort of business from there irrespective of the outcome of the DHS [licence transfer]. There are two distinct type of businesses operating there, one which requires a licence and one which does not.
[Ashbrooke Medical Institute] (with the theatre licence) had a value nearly 4 months ago which we agreed upon. Now I am forced to work at maintaining the value of a business which I have no guarantee in owning in the long term.
I respectfully request a watertight, realistic arrangement to be agreed to as part of the condition of sale. Such an agreement will allow me to immediately start planning for the future, irrespective of the outcome of the DHS licence review.[3]
[3]Emphasis added.
The letter contains inconsistencies, as noted. However, one thing is clear. Dr Bartone had proceeded so far down the track of completing the purchase that he wished to proceed, even if the DHS licence was not transferred. Without a transfer of the DHS licence, liposuction procedures could not be performed. As appears above, liposuction procedures had been the focus of the practice conducted by Dr Greville.
Dr Bartone obviously continued to think about the issue that evening. Shortly after midnight, he sent an email to his solicitor, who had been copied in on the email to Fiona and Sheila Greville. In that email, he stated:
Notwithstanding my previous correspondence to Fiona Greville, this evening I wish to propose the following
(1) we sign the agreement and the lease tomorrow.
The next day, on 1 August 2006, the parties executed and exchanged the sale of business agreement.
On 14 August 2006, the Department of Human Services conducted its final inspection for the purposes of the transfer of the DHS licence. On the same day, Mrs Bartone executed a lease of the premises on behalf of the purchaser. The effective date of the lease was 1 July 2006, with a rent-free period of four calendar months.
On 21 August 2006, the Department of Human Services approved the transfer of the DHS licence to the purchaser. As a result, the contract became unconditional. Accordingly, the second instalment of $50,000 was payable within 14 days, and the balance of the price, $220,000, was payable on 1 December 2006. The purchaser did not pay either amount.
Dr Bartone made the decision to withhold payment of the balance of the purchase price. He called a meeting on 29 August at the premises to voice his complaints, in an endeavour to justify a substantial reduction in the price. The meeting was attended by Dr Bartone and his wife on behalf of the purchaser, and Mr Cathels and Mr Manley on behalf of Ashbrooke. Both Mr Cathels and Mr Manley made detailed notes of the meeting. The notes form the best evidence of what was said. There was no discussion. Mr Cathels and Mr Manley simply listened to Dr Bartone’s complaints and proposals, and made notes. In summary, the notes record Dr Bartone complaining that he believed that he had purchased ‘a bit of a lemon’, as the business which he purchased bore little resemblance to the business he agreed to purchase in April 2006. He repeated his complaints about the delay in obtaining a lease and the transfer of the DHS licence. As a result, Dr Bartone contended that the goodwill which he purchased was valueless, requiring him to spend $89,000 for advertising in the Yellow Pages, and to employ the services of a market communications company to provide planning and advice. He also made complaints about the finality of the transfer of the DHS licence, referring to the conditions subsequent imposed by the DHS on the continued operation of the practice.
For the purposes of this proceeding, the key issue raised by Dr Bartone in this meeting was his contention that the medical equipment which formed part of the practice assets had been overvalued in the equipment list attached to the contract, and those values had accordingly been misrepresented. He said that it was widespread knowledge within the cosmetic surgery profession that the equipment had been purchased for an overvalue. Mr Manley concluded his notes with a summary, in the following terms:
Summary
Tony is ‘aggrieved’, ‘bitter’ and ‘depressed’.
Tony said that the profitability and viability of the business is very questionable. The period from September to December is the most profitable time of the year, but because of the delay in transferring the [DHS licence], the marketing is just commencing, which is too late.
He is upset at the amount of work required from Louise to have the [DHS licence] transferred. Particularly, when the contract could have been voided if the DHS licence had not been transferred by the end of August.
The contract overvalued the business and it was not a going concern at the time of taking over. He will seek out a new, lower level (financially) clientele and implement new medical procedures, rather than offer liposuction, etc. In his own words ‘salon work’.[4]
[4]Emphasis added.
In these circumstances, Dr Bartone contended that the price should be reduced, to reflect his view that there was no goodwill, and the other practice assets should be discounted by at least 50 per cent.
Mr Cathels and Mr Manley gave a report of the meeting to Mr Ward and the Greville family. Dr Bartone’s complaints were rejected. By letter dated 1 September 2006, Holding Redlich demanded payment of the $50,000 instalment of the price which was due on 4 September 2006. The letter of demand referred to the 29 August meeting and stated:
In relation to your client’s claims that much of the equipment your client purchased is outdated or superseded and that there has been a reduction in goodwill, your clients should have conducted their own due diligence prior to signing the Agreement.
At this time, Dr Bartone was purchasing another cosmetic surgery or anti-aging practice in Collins Street, Melbourne, which he intended to combine with his practice at the premises. It was a terms purchase for between $50,000 and $100,000. This practice was re-located to the premises in January 2007.
Over the next month, Dr Bartone corresponded with his solicitor about the terms of an offer to be made to Ashbrooke, requesting a significant price reduction. In the meantime, Dr Bartone made applications for finance from the National Australia Bank (‘NAB’). In an NAB credit memorandum dated 27 September 2006, NAB recorded that the purpose of Dr Bartone’s loan application included ‘Business funding of $440,480 for [the purchaser] to assist with the purchase of the Ashbrooke Medical Institute business.’
The credit memorandum described the $440,480 as being required ‘to fund the purchase of the business, provide working capital for the first six months (until the owner has established cash flow) and rental bond on the clinic in South Yarra.’
Another NAB document demonstrates that the $440,480 was comprised of $300,000 to assist with purchase of the business, $100,000 for working capital and $40,480 for the rental bond. Dr Bartone acknowledged that was the case. However, he contended that the finance was sought principally for working capital purposes ‘to rescue a lemon’, and to fund only the reduced amount which he hoped to negotiate for the purchase of the practice assets.
On 13 October 2006, in the course of instructing his solicitor as to the amount and form of the offer to be made to Ashbrooke justifying a reduction in the purchase price, Dr Bartone prepared a summary of his complaints. Relevantly, that summary includes the repetitious complaint that the sale process was drawn out over a four month period, with consequent adverse effect on the goodwill of the Ashbrooke business. These matters were all well known and appreciated by Dr Bartone, and recorded by him in correspondence, before he committed to the purchase by instructing his wife to sign the contract on behalf of the purchaser. Until that time, he could have walked away, as he considered doing on a number of occasions.
Importantly, Dr Bartone instructed his solicitor further, as follows:
Furthermore we entered into a series of binding arrangements outside the centre upon completion of the original deal in April (including that Louise resigned her position, Tony resigned his position and locum sessions) which would have been difficult to unwind during these complicating events … walking away would not be easy during the completion of contracts. By August already 4 months into the process and previous employments terminated it was not an option to walk away.[5]
[5]Emphasis added.
On the topic of over-valuation of certain medical equipment, Dr Bartone instructed his solicitor that:
Despite requests for same, we were not given access to the valuer’s full report, full value assessment, nor even details of the valuer, so that we were forced to rely on the document at face value. There was no opportunity to quiz anyone about the equipment because no-one had any idea of the operations of the business, although that was not the impression we were left with at the time. Indeed, as little as a week ago Fiona Greville insisted that all four machines were used regularly, whereas staff who have since re-joined the practice have indicated that this was not the case at all and computer reports reflect that there was no billing activity for 3 of the 4 machines and very little for the photoderm which is not in working order. The indignity of this situation is compounded by the fact that it has now been revealed that previous staff, tenants and practitioners had access to the full report and were given opportunity to buy equipment at the reduced rate.
There was substance in this complaint. The list of equipment and other physical assets annexed to the contract of sale was an incomplete document. The name of the valuer is not included. It states on each page that it is ‘To be read in conjunction with the report’, which was not provided to Dr Bartone. It contains a column for ‘Market Value For The Existing Use’ and space to the right of that column for another column to have been included.
On 16 October 2006, the solicitors for the purchaser sent two letters to Holding Redlich. The first letter contained allegations of misrepresentation. The second letter contained an offer to pay a total price of $135,000 for the practice assets. However, it was alleged that certain reductions should be made beyond the $30,000 deposit, with the effect that only $80,285.25 was offered in respect of the unpaid balance of $270,000. If this offer had been accepted, a total of $110,285 would have been paid in respect of an agreed price of $300,000. The offer was to pay this amount on terms by 30 September 2007.
In addition, the offer contained a term that four items of equipment would be returned to the purchaser. It was contended in the first letter that these items were overvalued in the equipment list, had little or no commercial value and were not being used in the practice prior to the death of Dr Greville. I will refer to these items as ‘the four machines’.
The offer was rejected. Ashbrooke determined to hold the purchaser to the contract, rather than accept the purchaser’s conduct as a repudiation and sue for damages.
On 1 December 2006, the date for payment of the final instalment of the price passed without payment.
On 22 December 2006, the finance application was approved by NAB. From that time, the purchaser had the capacity to pay the purchase price in full if it chose to do so.
On 15 December 2006, Ashbrooke engaged its current solicitors. In January 2007, they responded to the purchaser’s complaints and made demand for payment of the balance of the price. That demand was refused. There was then a significant period of negotiations between them and the solicitors for the purchaser. When no settlement was reached by July 2007, they put Holding Redlich on notice that a claim would be made against it unless it undertook to compensate Ashbrooke for any amount which it could not recover from the purchaser in a foreshadowed proceeding. In October 2007, the Legal Practitioners Liability Committee denied liability on behalf of Holding Redlich. There was then an unexplained delay of some months, until this proceeding was commenced in March 2008.
In August 2008, Mrs Bartone was made bankrupt on the application of Yellow Pages, as a result of a personal liability for $89,000 undertaken by her for advertising the practice.
Notwithstanding his refusal to pay the balance of the price, Dr Bartone caused the purchaser to continue using the business name ‘Ashbrooke Medical Institute’ and to conduct practice from the premises until 1 July 2008. Dr Bartone arranged for a ‘phoenix transaction’ on that day. Another company owned by Mrs Bartone commenced conducting the practice at the premises from that date. The purchaser did not pay its debts, and was placed in liquidation. Ultimately, the successor company fell behind in the rent and was locked out by the landlord. It was also placed in liquidation.
Following the cessation of his practice at the premises, Dr Bartone now works as a locum GP at a number of locations.
Dr and Mrs Bartone separated about 18 months ago. There is no evidence of any property settlement between them, or of their current financial position. No evidence was put before the Court as to the state of Mrs Bartone’s bankrupt affairs. It may be that her estate has significant assets following the sale of the Wallace Avenue properties in February 2010 for $2.3 million. Mrs Bartone was the sole owner of 34A Wallace Avenue, and the sole shareholder in Idorou Pty Ltd, which was the registered proprietor of 34 Wallace Avenue. It appears from the evidence that Idorou Pty Ltd was the trustee of a unit trust. The evidence did not disclose who owns the units. Nor did the evidence disclose the amount owing to the NAB, or any other financier, which was secured by the Wallace Avenue properties at the time of their sale. The effect of the sale of the Wallace Avenue properties upon Mrs Bartone’s bankrupt estate was not explored in the evidence. This issue is considered further below.
Did Holding Redlich exercise reasonable skill and care?
Prior to the commencement of evidence, counsel for Holding Redlich acknowledged that the scope of the duty owed by Holding Redlich to Ashbrooke included an obligation to advise Ashbrooke to consider whether a guarantee should be obtained from Mrs Bartone as the director of the purchaser. No concession was made at this time that Holding Redlich should have advised Ashbrooke to consider obtaining a guarantee from Dr Bartone. In final written submissions, counsel for Holding Redlich acknowledged that it was open to the Court to find that Holding Redlich ought to have advised Ashbrooke about the prospect of obtaining a personal guarantee from Dr Bartone.[6] In oral submissions, counsel for Holding Redlich accepted that, as a matter of logic and common sense, any consideration of obtaining a guarantee for the obligations of the purchaser to pay the balance of the price would include consideration of whether a guarantee should be obtained from both Mrs Bartone and Dr Bartone.
[6]Written submissions of the second defendant, [24].
The acknowledgments and concessions made by counsel for Holding Redlich were properly and responsibly made. When Holding Redlich was instructed, the nominated purchasers were both Dr Bartone and his wife. The draft heads of agreement and early drafts of the contract reflected this position. When the purchaser was nominated in their place and, in addition, the terms of the proposed sale were altered so as to allow the purchaser to have possession of the practice assets prior to paying the price in full, the issue of security for payment of the balance of the price arose. Given the history of the transaction, it should have been obvious to Holding Redlich that guarantees should be sought from the originally nominated purchasers, Dr and Mrs Bartone. This is especially so in circumstances where Fiona Greville was seeking advice from Ms Awad as to the appropriate way to secure payment of the balance of the price. The failure to advise Ashbrooke to consider requesting personal guarantees from Dr and Mrs Bartone was a breach of Holding Redlich’s duty to exercise reasonable skill and care in and about its retainer.
Holding Redlich did give some advice about security, to the effect that the contract of sale should ensure that title to the practice assets remained with Ashbrooke until payment in full of the price. However, that security was insufficient. Some of the practice assets were affixed to the premises, and in any event it would have required a right of entry to the premises to re-take possession. Further, it should have been obvious to Holding Redlich that, in circumstances where the purchaser had obtained a lease of the premises, the assets may be difficult to sell for the ‘existing use’ values attributed to them in the equipment list annexed to the contract. These difficulties were not considered by Holding Redlich. Nor was the commercial pressure which a personal guarantee would place upon Dr and Mrs Bartone in the event of default.
The breach of duty had the effect of depriving Ashbrooke of the opportunity to seek personal guarantees from Dr and Mrs Bartone. The issue for determination is whether that commercial opportunity had sufficient value to constitute compensable loss.
The relevant legal principles were not in contest. Where a breach of contract or negligent breach of duty causes a plaintiff to lose an opportunity which has ‘some value (not being a negligible value)’,[7] the value of the opportunity constitutes a recoverable loss. The Court ascertains the value of the lost opportunity by reference to ‘the degree of probabilities or possibilities’ as to what would have occurred if the opportunity had been pursued.[8] Although the opportunity must be substantial, and not merely speculative,[9] the Court may nevertheless engage in a degree of speculation as to the degree of likelihood that the opportunity would yield some or all of the desired results.[10]
[7]Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 355.
[8]Ibid.
[9]Ibid, 364.
[10]Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 104.
Causation is an essential element of a claim for loss of opportunity. In a solicitor’s negligence case, the plaintiff must establish by evidence or inference that he, she or it would have acted to secure the benefit offered by the opportunity if the true position had been disclosed.[11] Accordingly, the first factual issue for determination in this case is whether Ashbrooke would have taken the opportunity to request a guarantee from Dr and Mrs Bartone if Holding Redlich had advised them to consider that opportunity. I find that Ashbrooke would have taken the opportunity, and instructed Holding Redlich to seek a guarantee from Dr and Mrs Bartone. Although Mr Ward was not directly asked whether he would have given such an instruction, reading his evidence as a whole it is obvious that he would have done so. There is no rational basis in the evidence as to why such an instruction would not be given. Fiona Greville agreed with the logic of this proposition, without directly stating that she would have instructed Mr Ward to seek personal guarantees.
[11]Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 353; Price Higgins & Fidge v Drysdale [1996] 1 VR 346, 354-5, per Winneke P.
Taking the evidence as a whole, I am satisfied that the opportunity to seek a guarantee from Dr and Mrs Bartone was of sufficient value to be compensable. In reaching that conclusion, I have considered the prospect that a guarantee would have been given; the prospect that the guarantee would have been enforceable; and the prospect that Dr and Mrs Bartone have, or would at relevant times have had, the capacity to pay all or part of the amount due. I turn to consider these issues.
Would a guarantee have been given if requested?
Dr Bartone gave definite and consistent evidence that he would have refused to give a personal guarantee if requested to do so, and would have advised Mrs Bartone to also refuse. He gave the following reasons to support his evidence:
(1) On accountant’s advice, since 1992 he and Mrs Bartone had used a company or trust structure as the trading entity for each of the clinics conducted by him.
(2) He had never given a personal guarantee since receiving that advice.
(3) He and Mrs Bartone always intended to use ‘a company or some vehicle’ to acquire the practice assets, lease the premises and conduct a clinic at the premises. They commenced the purchase negotiations in their own name ‘because we didn’t know what vehicle we would use’.
(4) He and Mrs Bartone could not complete the purchase without borrowing money, and finance had not yet been obtained at the time the contract of sale was negotiated and signed.
(5) At the time, the only substantial asset owned by him and Mrs Bartone which could be available to satisfy any guarantee obligations was the equity in the Wallace Avenue properties, in which they lived. In these circumstances, he said:
There was no point instituting a company, incorporating a company and putting everything at arm’s length from your personal assets if you were then going to go give a personal guarantee.
Mrs Bartone also said that, had personal guarantees been requested, neither she nor Dr Bartone would have given a guarantee. She said that they had decided ‘years previously that we should never leave ourselves exposed’. The following exchange then occurred:
What was there about a transaction which was going to be settled in a few months for a specific sum which would leave you exposed? --- I don't know. It was just – Tony and I – Tony had made some dodgy business decisions in the past and had lost a lot of money, and we had just decided at that point that we wouldn't do personal guarantees ever again, and we'd spoken to other people about it, and that's what we were advised really, and I mean, Tony is the one who did the MBA, he did all the due diligence, I went with the flow.
So if he had said, "Don't give a guarantee" you wouldn't have, if he'd said, "It's all right to guarantee in this case," you would have; is that a fair summary? --- I think so, yeah.[12]
[12]Emphasis added.
I accept Mrs Bartone’s evidence on this issue. If a guarantee had been requested of her, she would have acted in accordance with Dr Bartone’s wishes at the time. Accordingly, resolution of this issue depends upon the Court’s assessment of Dr Bartone’s evidence that he would have refused to give a guarantee, and would have instructed Mrs Bartone to also refuse.
It was submitted on behalf of Holding Redlich that Dr Bartone’s evidence should be accepted on this issue, because it was definite, unshaken by cross-examination, and supported by cogent reasons given by him. For the following reasons, I do not accept that submission. If asked, Dr and Mrs Bartone would have given a guarantee.
First, taking the evidence as a whole, Dr Bartone was determined to proceed with the purchase of the practice assets. He and Mrs Bartone committed substantial time and resources towards this end, resigned their positions of employment and entered into a series of commitments related to the practice to be operated by Dr Bartone at the premises. In these circumstances, the proposed purchase had gathered such momentum that Dr Bartone believed there was no option for him and his wife but to proceed. He said so in his instructions to his solicitor in October 2006, while events were still fresh in his mind:
Furthermore we entered into a series of binding arrangements outside the centre upon completion of the original deal in April (including that Louise resigned her position, Tony resigned his position and locum sessions) which would have been difficult to unwind during these complicating events … walking away would not be easy during the completion of contracts. By August already four months into the process and previous employments terminated it was not an option to walk away.[13]
[13]Emphasis added.
I find that Dr Bartone’s own words are an accurate reflection of his state of mind in the period when a guarantee is likely to have been requested, after Holding Redlich learned on 7 July 2006 that the balance of the purchase price was to be paid over a number of months. By that time, Dr Bartone was committed to proceeding.
Dr Bartone’s own summary of his state of mind is borne out by the contemporaneous documents and events. Although Dr Bartone frequently expressed his concern and frustration about the delays in obtaining a lease of the premises and a transfer of the DHS licence, he nevertheless believed that a lease of the premises, transfer of the DHS licence and acquisition of the practice assets were, when taken together, ‘extremely valuable’. In particular, Dr Bartone believed that there was significant value in a lease of the premises and the purchase of the practice assets, even if a transfer of the DHS licence could not be secured.
In July 2006, Dr and Mrs Bartone each resigned from their employment and commenced attending the premises on a reasonably regular basis. This was prior to agreement with the landlord for a new lease and prior to any approval to a transfer of the DHS licence. That conduct shows that they were committed to working towards completion of the proposed purchase, in circumstances where they did not have alternative employment if it did not proceed.
Second, I reject Dr Bartone’s attempt to support his evidence that no guarantees would have been provided, by stating ‘there was no point … incorporating a company and putting everything at arm’s length from your personal assets if you were then going to give a personal guarantee’. It is one thing to trade through a company, without personal guarantees for trading debts, and thus protect your personal assets from exposure to the continuing liabilities of trading. However, the proposed purchase was a single transaction which was due to be settled within a few months. It did not expose the purchaser, or any guarantor, to a continuing risk of uncertain amount. It is logical that a purchaser such as Dr Bartone and his wife would be prepared to expose their personal assets by guarantees in order to acquire the business in the name of a company. The company could then trade without them giving continuing guarantees to trade creditors or otherwise exposing their personal assets to any liabilities incurred during the course of the business. This is especially so in circumstances where, at the time the contract of sale was signed, Dr Bartone was confident that he could raise the necessary finance in time to honour the purchaser’s obligations to pay the two remaining instalments of the purchase price. It matters not that, as events transpired, Dr Bartone found it more difficult than expected to raise the necessary finance, which was not obtained until 22 December 2006.
Third, Dr Bartone volunteered in evidence that he made a poor commercial decision to proceed with the purchase of the practice assets and the lease of the premises. He acknowledged that he did not conduct appropriate due diligence investigations prior to committing the purchaser to the contract. Notwithstanding a full opportunity to do so in May, June and July 2006, he conducted no inquiries to ascertain the proportions in which the various treatments performed by the practice contributed to its income, and thus failed to appreciate that the majority of the income came from liposuction performed by Dr Greville – which he was unable to perform. Further, he did not conduct any assessment of the suitability of the equipment used in the practice for the treatments he proposed to offer. If they occurred to him at all, he left these important issues to be considered after he took possession of the premises and the practice assets.
He also acknowledged that a sensible businessman in his position, having seen the adverse effects which the delays in obtaining a lease and a transfer of the DHS licence were having on the value of the practice, would have walked away from the transaction. In his own words, ‘anyone with half a brain should have walked away from the deal except this mug in this chair here today.’ In other words, although he knew of the delays and the likely adverse effect which they would have on the value of the practice, Dr Bartone nevertheless proceeded with the transaction. He did so because, in his own words, he believed ‘it was not an option to walk away’. He may have been wrong in that belief, but that was his state of mind.
Fourth, Dr Bartone acknowledged in cross-examination that he was desperate to proceed at the soonest possible time. In his view, both at the time and now, the cosmetic surgery industry has a peak earning period between September and December in any given year. He described the increased business during this period as ‘reaching a crescendo’ and, in this context, said that it was in his interest ‘to get in there and run some sort of facility ASAP’. Once again, this is another indication that Dr Bartone was determined to conclude the proposed transaction, and is likely to have given a guarantee if requested of him and his wife.
Fifth, the evidence disclosed that Mrs Bartone gave two guarantees in connection with the acquisition of the practice. She signed an application in her name to obtain continuing advertising of the practice in the Yellow Pages, at a cost of $89,000. This was clearly a trading debt in the ordinary course of business. Although Mrs Bartone gave evidence that she did not understand she was incurring personal liability by signing the application, her defence to the claim by Yellow Pages was rejected in the Magistrates’ Court and judgment was entered against her. It was that judgment debt which led to her bankruptcy in August 2008.
Further, in December 2006 Mrs Bartone signed a guarantee of finance in the sum of $440,480 provided by the NAB to the purchaser, for the purpose of acquiring and conducting the practice. It was submitted on behalf of Holding Redlich that there was no evidence that Mrs Bartone gave this guarantee. Reliance was placed upon the fact that subpoenaed documents provided by NAB included a guarantee given by Mrs Bartone of Idorou’s indebtedness in respect of the refinancing of the Wallace Avenue properties, but did not include a copy of any guarantee by Mrs Bartone of the finance provided to the purchaser in connection with the acquisition and conduct of the practice. That is so. However, it is unlikely that the NAB would require a personal guarantee from Mrs Bartone of Idorou’s debt, which was secured by a mortgage over one of the Wallace Avenue properties, and not require her guarantee of the purchaser’s substantial debt in connection with the practice. This is especially so when Mrs Bartone owned the other Wallace Avenue property in her own name.
The evidence of Mrs Bartone is consistent with her having given such a guarantee, as evidenced by the following exchange in cross-examination:
It's the case, isn't it, Mrs Bartone, that you and the company Idouro … gave a guarantee and indemnity to the NAB in December 2006 to secure a borrowing of some $440,000? --- I can't remember the dates, but I know everything was cross guaranteed. Idouro owned ---
Next door, is that correct? --- We had two units, and ---
Yes, 34 and 34A, and Idouro owned one of them? --- Yes.
And the other unit was in your name, was it not? --- Yes.
That $440,000 borrowing in summary was $40,000 for the bank guarantee for the landlord of the premises at 627 Chapel Street. Do you remember that? --- M'mm.
You have to say yes? --- I'm sorry, yes, I do.
And there's $100,000 for working capital? --- Yes.
And there was $300,000 to assist with the purchase price? --- Commercial bill.
- - - of the business. --- All right.
Notwithstanding the commencement of an objection by counsel for Holding Redlich, which was not pursued, the issue was not taken up in re-examination. Indeed, the cross-examination concluded on the next page of the transcript and there was no re‑examination on any issue.
I find that Mrs Bartone guaranteed the $440,480 loan facility granted by NAB to the purchaser for the purpose of acquiring and conducting the practice. The fact that she did so is inconsistent with her evidence, and that of Dr Bartone, that they adopted a blanket practice of refusing all requests for guarantees, so as to protect their personal assets.
Sixth, I found Dr Bartone to be a most unimpressive witness. His evidence was clearly motivated by a deep-seated animosity towards the plaintiff and those associated with it. He appears to blame them for his financial downfall, relating his downfall to his poor financial decision to purchase the practice assets and lease the premises. Given that he only paid $30,000 of a $300,000 purchase price, his animosity appears misplaced. A more likely cause of his financial collapse is his lack of any effective due diligence before he acquired the practice, his inability to perform liposuction procedures, and his poor management of the business once he acquired it.
Further, Dr Bartone’s demeanour as a witness was argumentative, evasive, at times flippant and disrespectful of counsel and the Court, and contained gratuitous comment. These criticisms were rightfully acknowledged by counsel for Holding Redlich in his final submission.
For the above reasons, notwithstanding the force with which Dr Bartone gave his evidence on this issue, I find that it is more probable than not that Dr and Mrs Bartone would have given their guarantee if requested by Ashbrooke.
Would any guarantee have been enforceable?
If a guarantee had been given, it would have been sued upon. The proceeding would have been defended by the guarantors. The issue for consideration at this stage of the inquiry is whether the guarantors would have had a good defence to all or part of the claim.
In the defence filed on behalf of the purchaser in this proceeding, the purchaser alleged that it entered into the contract of sale in reliance upon representations that the equipment listed in the schedule to the contract of sale had a market value of $251,725, and that the equipment was in good working condition, fit for the purpose of a medical cosmetic surgery and had a commercial value for use in a medical cosmetic surgery. Other defences were also pleaded. In final submissions, counsel for Holding Redlich rightly acknowledged that the only evidence before the Court to support any of the defences raised by the purchaser related to the value of four machines. The effect of that evidence, which was unchallenged, is that three of the four machines were significantly overvalued.
In these circumstances, it was submitted on behalf of Holding Redlich that the defence raised by the purchaser as to overvaluation of the three machines would likely have succeeded, and that the guarantors would have taken such a defence also. I accept that submission. Had there been a contested trial against the guarantors, it is probable that they would have had a partial success based on expert evidence of value to the same broad effect as that adduced by Holding Redlich.
Expert evidence as to the value of the four machines was given by Trevor Neale. His credentials to give expert evidence were not challenged. Mr Neale’s evidence as to the four disputed items of equipment was as follows:
(1) Photo Derm ESC Optical Treatment System: This item was valued at $25,000 in the contract of sale. In Mr Neale’s opinion, it had a value of $20,000. In cross-examination, he acknowledged that the difference in value was in a tolerable range, on which minds might legitimately differ. The defence based on over-valuation of this machine would have failed.
(2) Renaissance HGM Er: YAG Laser: This item was valued at $30,000 in the contract of sale. In his report, Mr Neale said that this value was well above market value at the time, and it had a value of only $4,000. Accordingly, in his opinion, this item was over-valued by $26,000.
(3) Naturalase Er: YAG Laser: This item was valued at $25,000 in the contract of sale. In his report, Mr Neale said that this value was well above market value at the time, and it had a value of only $8,000. Accordingly, in his opinion, this item was over-valued by $17,000.
(4) Topaz ESC Laser: This item was valued at $30,000 in the contract of sale. In his report, Mr Neale said that this value was well above market value at the time, and it had a value of only $2,000. Accordingly, in his opinion, this item was over-valued by $28,000.
The differences in value of the three items total $71,000. The market values stated in the list annexed to the contract of sale were not within the range on which valuers could legitimately differ. Accordingly, doing the best I can on the information available, I find that it is probable that the guarantors would have been able to set-off approximately $70,000 against the plaintiff’s claim for the balance of the purchase price of $270,000. This would have resulted in a net judgment in favour of the plaintiff against the guarantors for $200,000 plus interest and costs.
It was submitted on behalf of Holding Redlich that the Court should further take account of the possibility that other defences raised by the purchaser, which would have been adopted by the guarantors, would also have been successful. In the absence of evidence, I do not accept that submission. It would amount to pure speculation without any factual basis.
Finally, it was submitted on behalf of Holding Redlich that, in assessing the likely amount for which judgment would have been recovered against the guarantors, the Court should take account of the likelihood of only party-party costs being recovered. Accordingly, there would be a gap between those costs and the solicitor-client costs which Ashbrooke would have incurred. I accept that submission. However, there was no evidence before the Court as to the likely amount of any gap between the two methods of calculating costs.
As appears below, I find that a judgment would have been obtained against the guarantors by approximately 1 March 2008, a period of about 15 months from the time that the final instalment of the price was due by the purchaser. Penalty interest would probably have run during this period. Interest at 12 per cent on $200,000 for 15 months would have been $30,000 making a total judgment sum of $230,000.
Doing the best I can in the absence of evidence, I estimate that Ashbrooke’s solicitor-client costs would have been approximately $35,000 and its party-party costs would have been approximately $25,000, leaving a gap of about $10,000.
Accordingly, the probable result of a defended enforcement proceeding against the guarantors would have yielded a judgment with a commercial value of approximately $220,000. I will refer to this amount as the ‘net judgment sum’.
Would the guarantors have had the capacity to pay?
It was submitted on behalf of the plaintiff that a proceeding against Dr and Mrs Bartone as guarantors would have been concluded and a judgment executed upon, with full recovery, by 31 December 2007. It was submitted that this result was not attended with risks but was a ‘100 per cent certainty’.
This submission was based upon the following hypothetical set of events:
(1) As Holding Redlich would have advised about the giving of a guarantee, there would have been no need to delay the commencement of proceedings while considering whether to sue for professional negligence. Ashbrooke would have been in the position of an unpaid vendor, seeking to recover a debt supported by guarantees.
(2) In these circumstances, the debt recovery proceeding would have been commenced in the County Court promptly after the default in payment of the final instalment of the price, on 1 December 2006. It was submitted that proceedings would have been issued promptly, because the dispute had already crystallised in the correspondence prior to that date.
(3) The debt recovery proceedings were not complex, and would have been concluded and a judgment executed upon in full by the end of 2007.
(4) At the end of 2007, the purchaser, Dr Bartone and Mrs Bartone together had sufficient assets or access to funds to pay the whole of the judgment sum and Ashbrooke’s legal costs. In particular, reliance was placed upon the fact that the purchaser obtained finance facilities totalling $400,000 from the NAB in December 2006, for the purpose of acquisition of the business ($300,000) and working capital by way of overdraft ($100,000). Further, reliance was placed upon the evidence of Dr Bartone that this facility was not fully drawn for ‘maybe two years’ after it was obtained, on 22 December 2006.
For the following reasons, I do not accept Ashbrooke’s submissions. There were many contingencies which stood in the way of those hypothetical events occurring.
First, the evidence demonstrates that Ashbrooke’s current solicitors engaged in negotiations with the purchaser’s solicitor for a significant period prior to making a claim on Holding Redlich. In a letter dated 18 July 2007, Ashbrooke’s solicitors first made demand upon Holding Redlich. They stated that they had been engaged since 15 December 2006 and, since that time, had ‘conducted extensive negotiations’ with the solicitors for the purchaser in an endeavour to resolve the plaintiff’s claim for the balance of the purchase price. The letter recorded that they had then been instructed to commence proceedings. Allowing a period of six weeks for advice to be obtained and the letter of demand written to Holding Redlich, it would nevertheless appear that negotiations seeking to achieve a settlement with the purchaser were continuing until about 1 June 2007.
It was submitted on behalf of Ashbrooke that proceedings would have been issued much earlier if it had rights against Dr and Mrs Bartone as guarantors, and not merely against the purchaser company. It was argued that with ‘the extra card in the pack’ of personal guarantees, it is likely that Ashbrooke would have been more aggressive in negotiations, and would have commenced proceedings promptly. There is some force in this submission, but the matter is so hypothetical that no certain conclusion could be reached. There was no evidence before the Court as to the course of negotiations after October 2006.
Second, although not complex proceedings, any proceeding seeking to recover the unpaid purchase price in the County Court would have taken some time to conclude. The County Court requires pleadings and discovery before trial. It is unlikely that contested proceedings raising the issues pleaded by the purchaser in defence of this case would have been concluded in the County Court in less that nine months from the date of issue. On this basis, allowing some time for negotiations prior to issue, it is unlikely that the proceeding would have been concluded until about 1 March 2008.
Third, the evidence does not permit any finding to be made as to the capacity of the purchaser, Dr Bartone and Mrs Bartone to pay the net judgment sum plus costs at that time. The following matters cast doubt upon their ability to satisfy such a judgment:
(1) On 17 May 2006, Dr and Mrs Bartone completed a statement of personal financial position for finance purposes. Excluding the value of life insurances, their net assets were stated at $677,000. Dr Bartone said in cross-examination that the only significant assets were comprised by the equity in the Wallace Avenue properties, a sum on my calculations of about $300,000,[14] and the remainder of the assets were of little value: ‘pretty much close to zero.’
[14]The Wallace Avenue properties were stated at $1.75 million in total value, with loans of between $1.435 and $1.485 million secured on the properties. The uncertainty arises because the handwriting is unclear as to whether the home loan stood at $630,000 or $680,000.
(2) The purchaser, Mrs Bartone and Idorou obtained finance of approximately $1.7 million from the NAB in late December 2006. As appears above, $440,480 of this funding was obtained to assist with the acquisition of the practice and for working capital of the practice. The balance was required to refinance the Wallace Avenue properties, owned by Idorou and Mrs Bartone respectively. According to Mrs Bartone, all of the finance was cross-collateralised.
(3) Some of the NAB bank statements for the purchaser’s business cheque account were in evidence. By October 2007, it appears that the purchaser was trading close to the $100,000 overdraft limit. In the first week of October 2007, the overdraft balance fluctuated between $90,000 and $99,000. In the three month period between 5 January and 4 April 2008, the overdraft balance fluctuated between $50,000 and $101,000. For most of the period, the overdraft balance exceeded $70,000.
(4) Apart from Dr Bartone’s general recollection that the $300,000 facility obtained for the purpose of acquisition of the practice was not fully drawn for ‘maybe two years’, there was no evidence as to the balance outstanding under this facility from time to time. Having regard to Mrs Bartone’s bankruptcy in August 2008, it is unlikely that there was a substantial undrawn amount by that time. The amount of the debt which gave rise to her bankruptcy was $89,000.
(5) The purchaser ceased trading on 30 June 2008. From 1 July 2008, the practice was conducted by another company controlled by Dr and Mrs Bartone. The purchaser did not pay its outstanding debts, and was placed in liquidation. The liquidator’s attempts to obtain the books of account relating to the conduct of the business by the purchaser were refused by Dr Bartone. His conduct has been referred to the Australian Securities and Investments Commission in this regard. This evidence gives rise to the inference that the purchaser traded at a loss, and was unable to pay its debts arising from the conduct of the practice.
(6) The new company which assumed control of the practice after 1 July 2008 also met financial difficulties. After trading for some time, it fell behind in the payment of its rent and it was locked out of the premises.
(7) In August 2008, Mrs Bartone was made bankrupt for failure to pay a judgment debt of $89,000 to Yellow Pages. No evidence was put before the Court as to the affairs of her bankrupt estate. As appears above, she owned one of the Wallace Avenue properties in her own name and the other was owned by Idorou as trustee. The evidence did not disclose who those beneficiaries are.
(8) As appears above, the Wallace Avenue properties were sold in February 2010 for the total sum of $2.3 million. The evidence does not disclose the circumstances of the sale, the effect of the sale upon the bankrupt estate of Mrs Bartone, or whether Dr Bartone was entitled to receive part of any net sale proceeds.
(8) There is no evidence as to the income earned by Dr Bartone since he was locked out of the premises, and has been working as a locum GP at various locations. Nor is there any evidence as to his net asset position.
When all of the listed factors are taken together, there is real doubt as to the capacity of the purchaser, Dr Bartone and Mrs Bartone to have paid any judgment debt against them. However, I accept that Dr Bartone is unlikely to have accepted liquidation of the purchaser, the consequent loss of his income from the practice, or bankruptcy, if he was able to arrange to pay any judgment debt at this time. Taking the evidence as a whole, and his conduct in the witness box, he is obviously a proud and aggressively entrepreneurial man. He is likely to have taken all reasonable steps available to him to protect his continuing income from the practice and to avoid bankruptcy. Further, at this time, he was not separated from his wife and is likely to have wished to protect her from bankruptcy also.
In all the circumstances, and notwithstanding the paucity of evidence, I am satisfied that there was a real prospect that Dr Bartone would have arranged for any judgment debt against him and his wife to be paid.
What is the value of the lost opportunity to request a guarantee?
In summary, I have found that the plaintiff would have availed itself of the opportunity to seek personal guarantees from Dr and Mrs Bartone if Holding Redlich had advised it to do so. In assessing whether that lost opportunity had some value, I have found that it is probable Dr Bartone and his wife would have given guarantees, it is probable that a proceeding to enforce those guarantees would have resulted in a net judgment sum of approximately $220,000 plus party-party costs against Dr and Mrs Bartone, and that Dr Bartone is likely to have taken all reasonable steps open to him to satisfy that judgment rather than lose his income from the practice and become a bankrupt. The lost opportunity clearly has some value.
There remains for consideration the Court’s assessment of the prospects of the opportunity being successfully pursued. In all the circumstances, I assess the plaintiff’s loss of opportunity at $110,000, calculated as follows:
(1) net judgment sum - $220,000.
(2) 50 per cent reduction to account for the various contingencies associated with recovery of such a judgment sum.
Did Ashbrooke unreasonably fail to mitigate its loss?
It was submitted on behalf of Holding Redlich that the plaintiff acted unreasonably in failing to mitigate its loss. Two alternative grounds were relied upon.
First, it was submitted that it was unreasonable for the plaintiff to elect to affirm the contract of sale and sue the purchaser for the balance of the price, rather than accept the purchaser’s conduct as a repudiation of the contract and then seek to recover the practice assets and sue for damages. For the following reasons, I do not accept that submission.
Where a defendant repudiates a contract, the plaintiff has an option to elect to affirm the contract, and insist upon the defendant performing it, or to accept the repudiation, bring the contract to an end and sue for damages. Where the plaintiff elects to affirm the contract, and sues the defendant for a liquidated amount due under the contract, it is not open to the defendant to contend that the plaintiff has failed to act reasonably in mitigation of its loss.[15]
[15]McGregor on Damages, 17th Edition, [7-020], [7-023]; Carter Peden & Tolhurst, Contract Law in Australia (5th Edition), [35-37].
There was, in any event, nothing unreasonable about the plaintiff’s decision to affirm the contract and sue for the balance of the price. The plaintiff had the benefit of a favourable contract. No other party who had inspected the premises and the practice assets had made an offer which was close to the amount which the purchaser agreed to pay.
Further, there were real difficulties for the plaintiff in regaining possession of the practice assets. Some of them were fixtures at the premises leased by the purchaser, and all of them were in the purchaser’s possession. In the absence of consent from Dr Bartone, which is unlikely to have been forthcoming, the plaintiff would have needed to take expensive steps in the Court to obtain an order for the delivery-up of the physical assets. Even when they were obtained, they could only have been sold on a liquidation basis. The opportunity to sell the equipment as part of a going concern at the premises had been lost.
Second, it was submitted in the alternative that it was unreasonable for the plaintiff to reject Dr Bartone’s offer to pay $135,000 less certain adjustments, and to return the four machines. I do not accept Holding Redlich’s submissions on this issue either. I am not satisfied on the evidence that the plaintiff acted unreasonably in refusing Dr Bartone’s offer. The final offer made by Dr Bartone was for a significantly reduced price and involved the purchaser retaining the ‘Ashbrooke Medical Institute’ name. The offer to return the four machines was of little value to the plaintiff, as it could no longer sell that equipment as part of a going concern.
Is the purchaser a concurrent wrongdoer?
It was submitted by Holding Redlich that the plaintiff’s claim against it is an apportionable claim under Part IVAA of the Wrongs Act 1958 (Vic), because the purchaser is a concurrent wrongdoer within the meaning of s 24AH of that Act. On this basis, it was submitted that the liability of Holding Redlich should be reduced under s 24AI of the Act to reflect the proportion of its responsibility for the plaintiff’s loss. I do not accept that submission. The purchaser is not a concurrent wrongdoer in relation to the plaintiff’s claim against Holding Redlich. The loss or damage caused by the purchaser was its failure to pay the balance of the purchase price due under the contract of sale. Nothing which Holding Redlich did or failed to do caused the purchaser to fail to pay that amount. The damage caused by Holding Redlich was to deprive the plaintiff of the opportunity to obtain security for the purchaser’s obligations under the contract, by requesting a guarantee from Dr and Mrs Bartone. Nothing which the purchaser did or failed to do caused the plaintiff to accept inadequate security for the purchaser’s obligation to pay the price.[16]
[16]St George Bank Limited v Quinerts Pty Ltd [2009] VSCA 245, [56]-[77].
Conclusion and orders
For the above reasons, Holding Redlich breached its duty to exercise reasonable skill and care in acting for the plaintiff in relation to the contract of sale. That breach of duty caused the plaintiff to lose the opportunity to seek the guarantee of Dr and Mrs Bartone as security for the purchaser’s obligation to pay the balance of the purchase price. That opportunity is valued at $110,000. There will accordingly be judgment for Ashbrooke for that amount. I will hear the parties as to interest and costs.
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