Australian Executor Trustees (SA) Limited v Kerr

Case •

[2021] NSWCA 5

•

04 February 2021

Court of Appeal


Supreme Court


New South Wales

Medium Neutral Citation: Australian Executor Trustees (SA) Limited v Kerr [2021] NSWCA 5
Hearing dates: 2 and 3 April 2020
Date of orders: 4 February 2021
Decision date: 04 February 2021
Before: Gleeson JA at [1]
Leeming JA at [336]
Emmett AJA at [337]
Decision:

(1)   Appeal against the first respondent (Mr Kerr) dismissed.

(2)   Appeal against the second to sixty-first respondents (Sparke Helmore) dismissed.

(3)   Cross-appeal by Mr Kerr dismissed with no order as to costs.

(4)   The appellant is to pay the first respondent’s costs of the appeal.

(5)   The appellant is to pay the second to sixty-first respondents’ costs of the appeal.

Catchwords:

EQUITY – trusts and trustees – professional trustee company trustee – where beneficiary “covenantholders” invested money in forestry scheme – where covenantholders entitled to share in proceeds of sale of timber – where scheme land subject to encumbrances securing covenantholders’ interests – where encumbrances trust property – where scheme land and standing timber sold to third party – where trustee acted in breach of trust by releasing encumbrances

CONTRACTS – solicitors – where law firm retained to advise trustee concerning release of encumbrances over scheme land – where advice found to be negligent – whether advice causative of loss to covenantholders occasioned by trustee’s breach of trust

EQUITY – equitable remedies – equitable compensation – causation – whether award of equitable compensation should be limited to the value of the scheme land – where challenge to factual findings relating to Payout counterfactual – whether award of equitable compensation should be reduced by certain adjustments and deductions

EQUITY – equitable remedies – equitable compensation – whether defaulting trustee entitled to apportion loss to law firm – whether South Australian or New South Wales proportionate liability legislation applied – where South Australian law lex loci delicti – whether apportionment provisions procedural in nature or substantive

Legislation Cited:

Civil Liability Act 2002 (NSW), ss 5A, 5D(3), 5R, 34, Pt 4

Civil Procedure Act 2005 (NSW), s 100

Competition and Consumer Act 2010 (Cth), Pt VA, Sch 2 (Australian Consumer Law, ss 18, 236)

Corporations Act 2001 (Cth), s 180, Ch 5C

Judiciary Act 1903 (Cth), ss 39(2), 79, 80

Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA), ss 3, 4, 8

Law Reform (Miscellaneous Provisions) Act 1946 (NSW)

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

Real Property Act 1886 (SA), Sch 10

Transfer of Land Act 1958 (Vic)

Uniform Civil Procedure Rules 2005 (NSW), rr 51.36(2), 42.1

Cases Cited:

Aboody v Ryan (2012) 17 BPR 32,359; [2012] NSWCA 395

Addenbroke Pty Ltd v Duncan (No 2) [2017] FCAFC 76; (2017) ALR 1

Adrenaline Pty Ltd v Bathurst Regional Council (2015) 97 NSWLR 207; [2015] NSWCA 123

Agtrack (NT) Pty Ltd v Hatfield (2005) 223 CLR 251; [2005] HCA 38

Ahrkalimpa Pty Ltd v Schmit (No 3) [2019] VSC 197

Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43

Application of David Kerr [2017] NSWSC 358

Artahs Pty Ltd v Gall Standfield & Smith (a firm) [2013] 2 Qd R 202

AS Bannister v Sirrom Enterprises Pty Ltd [2016] SASCFC 153

Australian Executor Trustees (SA) Ltd v Korda [2013] VSC 7

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

Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd [2015] NSWCA 225; (2015) 323 ALR 570

AVWest Aircraft Pty Ltd as trustee for AVWest Aircraft Trust v Clayton Utz (a firm) (No 2) [2019] WASC 306

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

Bank of Tokyo Ltd v Karoon [1987] AC 45

Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd [2019] SASCFC 151

Boensch v Pascoe [2019] HCA 49; (2019) 94 ALJR 112

Boyce v Mouat [1994] 1 AC 428

Caffrey v Darby (1801) 6 Ves Jun 488; 31 ER 1159

Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129

Chappel v Hart (1998) 195 CLR 232; [1998] HCA 55

Cherney v Neuman [2011] EWHC 2156

Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398

Commercial Union Insurance Co of Australia Limited v Ferrcom Pty Ltd (1991) 22 NSWLR 389

Coulton v Holcombe (1986) 162 CLR 1; [1986] HCA 33

David v David [2009] NSWCA 8

Dominic v Riz [2009] NSWCA 216

Felton v Mulligan (1971) 124 CLR 376

G M & A M Pearce & Co Pty Ltd v Australian Tallow Producers [2005] VSCA 113

Harding v Coburn [1976] 2 NZLR 577

Hawes v Dean [2014] NSWCA 380

Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46

Howe v Earl of Dartmouth (1802) 7 Ves 137; 32 ER 56

Jackson v Lithgow City Council [2008] NSWCA 312

Jadwan Pty Ltd v Rae & Partners (A Firm) [2020] FACFA 62

John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503; [2000] HCA 36

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

Kerr v Australian Executor Trustees (SA) Ltd; Australian Executor Trustees (SA) Ltd v Fuller and others trading as Sparke Helmore Lawyers [2019] NSWSC 1279

Kerr v Australian Executor Trustees (SA) Ltd; Australian Executor Trustees (SA) Ltd v Fuller and others trading as Sparke Helmore Lawyers (No 2) [2019] NSWSC 1438

Korda v Australian Executor Trustees (SA) Ltd [2014] VSCA 65

Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62; [2015] HCA 6

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

Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26

Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681; [2013] HKCFA 93

LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499

Maguire v Makaronis (1996) 188 CLR 449; [1996] HCA 23

Moore v Scenic Tours Pty Ltd [2020] HCA 17; (2020) 94 ALJR 481

Neal v Ambulance Service (NSW) [2008] NSWCA 346

O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262

Newcrest Mining (WA) Ltd v Commonwealth of Australia (1997) 190 CLR 513; [1997] HCA 38

Ormerod v The Todmodern Joint-Stock Mill Company (1882) 8 QBD 664

Paul v Cooke (2013) 85 NSWLR 167; [2013] NSWCA 311

Provident Capital Ltd v Papa (2013) 84 NSWLR 231; [2013] NSWCA 36

Rahme v Benjamin & Khoury Pty Ltd (2019) 100 NSWLR 550; [2019] NSWCA 211

Redbro Investments Pty Ltd v Ceva Logistics (Australia) Pty Ltd (2015) 89 NSWLR 104; [2015] NSWCA 73

Reinhold v New South Wales Lotteries Corporation (No 2) (2008) 82 NSWLR 762; [2008] NSWSC 187

Rizeq v The State of Western Australia (2017) 262 CLR 1; [2017] HCA 23

Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18

SEAS Safor Ltd v Commissioner of Stamps (1997) 36 ATR 272

Swindle v Harrison [1997] 4 All ER 705

Target Holdings Ltd v Redferns [1996] AC 421

The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd [2015] NSWCA 225; (2015) 323 ALR 570

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

Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12

Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15

Texts Cited:

Benjamin on Sale of Goods (8th ed, 2010, Sweet & Maxwell)

E Sykes and S Walker, The Law of Securities (5th Ed, 1993, Law Book Co)

J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths)

J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (8th ed, 2016, LexisNexis Butterworth)

Nygh’s Conflict of Laws in Australia (9th ed, 2013, LexisNexis Butterworths)

Nygh’s Conflict of Laws in Australia (10th ed, 2020, LexisNexis Butterworths)

Category:Principal judgment
Parties: Australian Executor Trustee (SA) Limited (Appellant)
David Kerr (First respondent / Cross-appellant)
Adam John Fuller and Others t/as Sparke Helmore Lawyers (as named in the schedule to the Notice of Appeal and Notice of Cross-Appeal) (Second to sixty-first respondents / Cross respondents)
Representation:

Counsel:
J Lockhart SC / C McMeniman (Appellant)
A Sullivan QC / D Sulan/ S Hartford-Davis (First respondent / Cross-appellant)
S Donaldson SC / A Zahra (Second to sixty-first respondents / Cross-respondents)

Solicitors:
Gilchrist Connell (Appellant)
Piper Alderman (First respondent / Cross-appellant)
Yeldham Price O’Brien Lusk (Second to sixty-first respondents / Cross-respondents)
File Number(s): 2019/333199
 Decision under appeal 
Court or tribunal:
Supreme Court of New South Wales
Jurisdiction:
Equity – Commercial List
Citation:

[2019] NSWSC 1279

[2019] NSWSC 1438

Date of Decision:
22 October 2019
Before:
Stevenson J
File Number(s):
2017/164674

HEADNOTE

[This headnote is not to be read as part of the judgment]

The appellant, Australian Executor Trustees (SA) Limited (AET), was the trustee of a number of forestry schemes pursuant to a deed of trust entered into in 1964 with S.E.A.S. Sapfor Forest Pty Ltd (the Forest Company). Under those schemes, investors who were referred to as “Covenantholders”, invested money in forestry plantations and were entitled to receive a share of the proceeds of sales of timber from the lands. Some investors holding covenants in the years 1980 - 1983 were also entitled to share in the proceeds of sale of the land on which the timber was grown.

Pursuant to a tripartite agreement between AET, the Forest Company and S.E.A.S. Sapfor Harvesting Pty Ltd (the Milling Company), the Milling Company undertook to provide tree felling and milling services to the Forest Company and had the sole and exclusive right to sell the standing timber or timber felled and sold in log or chip form. Each of the Milling Company and the Forest Company was entitled to charge for its services. The tripartite agreement provided for the application of the proceeds of sales of trees by the Milling Company, after deduction of certain amounts, to the Forest Company. The trust deed provided for the application of the amounts received by the Forest Company to AET for distribution to Covenantholders entitled thereto.

AET held the certificates of title to the land on which trees were grown and, following amendments to the trust deed in 1988, encumbrances were registered on the title to the land in the name of AET to secure the interests of investors with respect to amounts owing to them by the Forest Company, including from the proceeds of sales of trees.

In 2008, the Forest Company and the Milling Company became subsidiaries of Gunns Limited (Gunns). In 2010, the Forest Company and the Milling Company granted a fixed and floating charge to ANZ Capel Court Limited (the ANZ Charge) to secure repayment of monies lent to the Gunns Group. The ANZ Charge did not take priority over the encumbrances and the grant of that security by the Forest Company was a breach of trust. In 2011, Gunns decided to sell the scheme land and scheme trees as part of a broader asset sale designed to raise cash to pay its debts.

In March 2012, AET consented to the sale of the scheme land and scheme trees and discharged the encumbrances. Except for a nominal amount of $1.00, AET did not receive any part of the proceeds of sale for the benefit of investors. In September 2012, administrators were appointed to Gunns and its subsidiaries, including the Forest Company and the Milling Company.

In April 2017, the first respondent, Mr David Kerr, was appointed as an additional trustee of the trust by order of a judge of the Equity Division for the purpose of commencing and prosecuting claims against AET of breach of trust. In September 2017, Mr Kerr’s appointment was expanded to include commencing and prosecuting claims against Sparke Helmore who had provided legal advice to AET in relation to the transaction in March 2012.

In proceedings commenced against AET and Sparke Helmore, Mr Kerr claimed equitable compensation against AET for alleged breach of duty as trustee by releasing the encumbrances over the scheme land without first procuring that it received payment of the amounts that were owed or would become due to Covenantholders from the Forest Company, or substitute security for such amounts. Mr Kerr claimed damages against Sparke Helmore on the grounds that the advice it provided to AET concerning the release of the encumbrances was negligent and misleading and deceptive in contravention of s 18 of the Australian Consumer Law, being Sch 2 to the Australian Competition and Consumer Act 2010 (Cth). The defences raised by AET included that the claims by Mr Kerr against AET and Sparke Helmore were apportionable claims under Pt 4 of the Civil Liability Act 2002 (NSW) or ss 3 and 8 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA).

AET cross-claimed against Sparke Helmore claiming damages for alleged negligent advice and for misleading and deceptive conduct. Alternatively, AET sought contribution pursuant to the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), or the equivalent provision under the South Australian legislation. The defences raised by Sparke Helmore to AET’s cross-claim included contributory negligence and that AET’s claim was an apportionable claim under Pt 4 of the Civil Liability Act.

The primary judge (Stevenson J) found that the encumbrances were trust property and the release of the encumbrances in March 2012 was a breach of trust by AET. He assessed AET’s liability for equitable compensation as comprising the tree sale proceeds of $34 million, the land sale proceeds of $4.88 million, the 2011 harvest proceeds of $11.051 million and the 2012 harvest proceeds of $5.148 million (less the completion adjustment on the tree sale contract of $3.281 million), the Receiver costs of $1.664 million, the appointment costs of $371,979 and the judicial advice costs of $270,757, before pre-judgment interest. He found that the advice provided by Sparke Helmore to AET was negligent, but causation of loss had not been established. He also found that the applicable law to Mr Kerr’s claim against AET was the law of South Australia and that a liability for breach of trust was not an “apportionable liability” under the South Australian apportionment legislation: Kerr v Australian Executor Trustees (SA) Limited; Australian Executor Trustees (SA) Limited v Fuller and Others trading as Sparke Helmore Lawyers [2019] NSWSC 1279. The primary judge entered judgment for Mr Kerr against AET in the sum of $76,619,978.42 inclusive of interest under s 100 of the Civil Procedure Act 2005 (NSW), and dismissed Mr Kerr’s claim and AET’s cross-claim against Sparke Helmore: Kerr v Australian Executor Trustees (SA) Limited; Australian Executor Trustees (SA) Limited v Fuller and Others trading as Sparke Helmore Lawyers (No 2) [2019] NSWSC 1438.

AET appealed and Mr Kerr cross-appealed. AET challenged the quantum of equitable compensation awarded by the primary judge and the dismissal of its cross-claim against Sparke Helmore. There was no challenge by AET to the finding of breach of trust. Mr Kerr’s cross-appeal against Sparke Helmore was only pressed if, contrary to Mr Kerr’s primary position and the finding of the primary judge, Mr Kerr’s claims against AET and Sparke Helmore are “apportionable claims” to which Part 4 of the Civil Liability Act applied.

The principal issues on the appeal and cross-appeal were:

  1. whether the primary judge erred in accepting the Payout counterfactual advanced by Mr Kerr that Gunns would have agreed to pay AET on completion of the transaction in March 2012 the tree sale proceeds, the land sale proceeds, the 2011 harvest proceeds and the 2012 harvest proceeds (less the completion adjustment on the tree sale contract), or provided alternative security for those amounts;

  2. whether the primary judge instead should have found that Gunns would have only agreed to pay AET the value of the encumbered land (of $18.32 million) or provide substitute security to the value of the land (the “land-value” scenario), or Gunns would have excised the encumbered land from the sale (the “excision” scenario), or Gunns would have sold the encumbered land for a discounted price (the “discounted price” scenario);

  3. whether the component of equitable compensation relating to the tree sale proceeds of $34 million which the primary judge found Gunns would have agreed to pay AET on completion should be reduced by certain adjustments and deductions;

  4. whether Mr Kerr’s claims against AET and Sparke Helmore were “apportionable claims” to which Pt 4 of the Civil Liability Act 2005 (NSW) applied;

  5. whether the primary judge should have made additional findings as to other breaches of duty by Sparke Helmore with respect to the legal advice provided to AET;

  6. whether the primary judge erred in finding that AET had not established causation of loss against Sparke Helmore;

  7. assuming AET established causation of loss against Sparke Helmore, the extent to which AET’s cross-claim against Sparke Helmore should be reduced for contributory negligence, or as an apportionable claim to which Pt 4 of the Civil Liability Act applied.

Held, dismissing the appeal and cross-appeal (per Gleeson JA; Leeming JA and Emmett AJA agreeing):

As to issues (i) and (ii):

  1. AET had an evidentiary onus to establish any alternative counterfactual to the Payout counterfactual because its breach of duty created difficulties of proof as to what would have occurred but for its breach, which would not exist if the duty had been performed: at [128].

Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46; Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd [2019] SASCFC 151; Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681; [2013] HKCFA 93 applied.

  1. AET’s “land-value” counterfactual should be rejected because, among others, it was inconsistent with findings by the primary judge in relation to the Payout counterfactual which were not challenged on appeal, it was not supported by contemporaneous evidence that anyone ever suggested that the Covenantholders should receive only the value of the scheme land (excluding the trees) or that the value of the land should be the benchmark for any negotiations with Gunns / ANZ, and it ignored that the context of the hypothetical negotiations was a transaction that involved AET consenting to the winding up of Covenantholders’ interests in the scheme land and trees: at [120]-[140].

  2. Mr Kerr should not be permitted to rely upon a new point on appeal that the value of the scheme land included the standing timber, as this was contrary to what was common ground at trial, and raised evidentiary issues as to how this matter would have been brought to bear by AET in the hypothetical negotiation with Gunns / ANZ, if AET had not breached its duty: at [141]-[144].

Coulton v Holcombe (1986) 162 CLR 1; [1986] HCA 33; Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12 applied.

  1. AET’s “excision” counterfactual should be rejected because, as the primary judge correctly found, it was unlikely that Gunns would have proceeded by the excision of the scheme land from the transaction: at [154].

  2. AET’s alternative “discounted price” counterfactual should be rejected because Gunns stood to receive a greater price with the inclusion of the scheme land in the transaction, and this scenario was otherwise pure speculation with no evidentiary basis: at [155].

As to issue (iii):

  1. The primary judge did not err in concluding that Gunns would have agreed to pay to AET on completion the tree sale proceeds of $34 million without deduction for (a) covenants held by Gunns’ subsidiaries, (b) commissions said to be payable to the Forest Company and the Milling Company under the tripartite agreement and (c) the 2011 and 2012 harvest proceeds: at [162]-[170], [178]-[201].

  2. The post-completion adjustment required by the tree sale agreement for the difference between the harvesting areas referred to in the agreement and those in fact transferred to the purchaser on completion was reflected in the amount of the judgment agreed by the parties: at [174].

  3. There was no error by the primary judge in including the Receiver costs incurred in pursuing certain litigation in the award of equitable compensation: at [214]-[215].

As to issue (iv):

  1. The primary judge correctly concluded that the proportionate liability provisions of Pt 4 of the Civil Liability Act 2002 (NSW) did not apply to Mr Kerr’s claims against AET because the apportionment legislation is concerned with matters of substance and not merely matters of procedure, and the lex loci deliciti was the laws of South Australia. The South Australian Law Reform (Contributory Negligence and Apportionment of Liability) Act did not provide for the apportionment of liabilities for breach of trust: at [229]-[230].

John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503; [2000] HCA 36; Redbro Investments Pty Ltd v Ceva Logistics (Australia) Pty Ltd (2015) 89 NSWLR 104; [2015] NSWCA 73 applied.

As to issue (v):

  1. AET’s contention that the primary judge should have made additional findings as to other breaches of duty by Sparke Helmore, including breach of a “penumbral duty”, should be rejected: at [267], [272]-[275], [279].

David v David [2009] NSWCA 8; Dominic v Riz [2009] NSWCA 216; Badenach v Calvert (2016) 257 CLR 440; [2016] HCA 18; Jadwan Pty Ltd v Rae & Partners (A Firm) [2020] FCAFC 62 applied.

As to issue (vi):

  1. The primary judge’s finding that AET had not demonstrated causation of loss against Sparke Helmore was correct: at [284]-[313].

As to issue (vii):

  1. It was not appropriate for the Court to resolve the non-dispositive issues raised by Sparke Helmore’s notice of contention which the primary judge did not address, namely its defences of contributory negligence and that AET’s cross-claim was an apportionable claim to which Pt 4 of the Civil Liability Act applied: at [329]-[332].

Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26 and Boensch v Pascoe [2019] HCA 49; (2019) 94 ALJR 112 considered.

Judgment

  1. GLEESON JA: This appeal concerns a challenge to an award of equitable compensation. These reasons are organised in accordance with the following table of contents:

Introduction

[2]-[12]

Overview of the appeal and cross-appeal

[13]-[15]

Outline of the basic facts

[18]-[67]

A. Appeal against Mr Kerr: the primary judge’s reasons

[68]-[93]

Equitable compensation – relevant principles

[94]-[104]

Grounds 2-4 – the “land value” counterfactual

[110]-[144]

Ground 5(a) – the “excision” counterfactual

[145]-[155]

Grounds 5(b)-(f) – AET’s suggested deductions/ adjustments

[156]-[209]

Ground 7 – Receiver costs

[210]-[216]

Grounds 6-8

[217]-[219]

Grounds 17 and 18 – defence of proportionate liability

[220]-[230]

B. Appeal against Sparke Helmore: the primary judge’s reasons

[233]-[250]

Additional breaches of duty:

• Ground 9(a) – penumbral duty

• Ground 9(b) – unusual or onerous provisions

• Ground 9(c) – advice as to reduction in protections

[256]-[267]

[268]-[275]

[276]-[279]

Causation:

• Grounds 10-14

[280]-[326]

Sparke Helmore’s notice of contention

[327]-[332]

C. Mr Kerr’s cross-appeal

[334]

Orders

[335]

Introduction

  1. The appellant, Australian Executor Trustees (SA) Limited (AET), is a professional trustee company. In 1964, AET agreed to be appointed as trustee of a number of forestry schemes pursuant to a deed of trust dated 6 March 1964 between S.E.A.S. Sapfor Forest Pty Ltd (the Forest Company) and AET. Under those schemes, investors who were referred to as “Covenantholders”, invested money in forestry plantations and were entitled to receive a share of the proceeds of sales of timber from the lands. Some investors holding covenants in the years 1980-1983 were also entitled to share in the proceeds of sale of the land on which the timber was grown.

  2. Pursuant to a tripartite agreement also dated 6 March 1964 between AET, the Forest Company and S.E.A.S. Sapfor Harvesting Pty Ltd (the Milling Company), the Milling Company undertook to provide tree felling and milling services to the Forest Company and had the sole and exclusive right to sell the standing timber or timber felled and sold in log or chip form. Each of the Milling Company and the Forest Company was entitled to charge for its services. The tripartite agreement provided for the application of the proceeds of sales of trees by the Milling Company, after deduction of certain amounts, to the Forest Company. The trust deed provided for the application of the amounts received by the Forest Company to AET for distribution to Covenantholders entitled thereto.

  3. The schemes were conducted on land owned by the Forest Company in an area of Victoria and South Australia known as the “Green Triangle” region. AET held the certificates of title to the land on which trees were grown and, following amendments to the trust deed in 1988, encumbrances were registered on the title to the land in the name of AET to secure the interests of investors with respect to amounts owing to them by the Forest Company, including from the proceeds of sales of trees.

  4. The Forest Company and the Milling Company were initially subsidiaries of Auspine Limited (Auspine). In 2008 Auspine was taken over by Gunns Limited (Gunns). In 2010, the Forest Company and the Milling Company granted a fixed and floating charge to ANZ Capel Court Limited (the ANZ charge) to secure repayment of monies lent to the Gunns Group. The ANZ charge did not take priority over the encumbrances in favour of the Covenantholders. In 2011, Gunns decided to sell the scheme land and scheme trees as part of a broader asset sale designed to raise cash to pay its debts.

  5. In March 2012, AET consented to the sale of the scheme land and scheme trees and discharged the encumbrances. Except for a nominal amount of $1.00, AET did not receive any part of the proceeds of sale for the benefit of investors. In September 2012, administrators were appointed to Gunns and its subsidiaries, including the Forest Company and the Milling Company.

  6. In April 2017, the first respondent, Mr David Kerr, was appointed as an additional trustee of the trust by order of a judge of the Equity Division of the Court for the purpose of commencing and prosecuting claims against AET: Application of David Kerr [2017] NSWSC 358. In September 2017 his appointment was expanded to include commencing and prosecuting claims against Sparke Helmore who had provided legal advice to AET in relation to the transaction in March 2012.

  7. Mr Kerr’s case was that AET breached its duty as trustee by releasing the encumbrances over the scheme land without first procuring that it received payment of the amounts that were owed or would become due to Covenantholders from the Forest Company, or substitute security for such amounts. Mr Kerr claimed equitable compensation in the order of $57 million and interest thereon. Mr Kerr’s case against Sparke Helmore was that the advice it provided to AET concerning the release of the encumbrances was negligent and misleading and deceptive in contravention of s 18 of the Australian Consumer Law, being Sch 2 to the Competition and Consumer Act 2010 (Cth). Mr Kerr claimed damages against Sparke Helmore at common law and pursuant to s 236 of the Australian Consumer Law.

  8. The defences raised by AET included that the claims by Mr Kerr against AET and Sparke Helmore were apportionable claims under Pt 4 of the Civil Liability Act 2002 (NSW) or ss 3 and 8 of the Law Reform (Contributory Negligence and Apportionment of Liability) 2001 (SA).

  9. AET cross-claimed against Sparke Helmore claiming damages in contract or in tort for alleged negligent advice and for misleading and deceptive conduct. Alternatively, AET sought contribution pursuant to the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), or the equivalent provision under the South Australian legislation. The defences raised by Sparke Helmore to AET’s cross-claim included contributory negligence and that AET’s claim was an apportionable claim under Pt 4 of the Civil Liability Act.

  10. In his first judgment delivered on 26 September 2019, Stevenson J found that the encumbrances were trust property and the release of the encumbrances in March 2012 was a breach of trust by AET. He assessed AET’s liability for equitable compensation in the amount of $51,081,972.38, before pre-judgment interest. He found that the advice provided by Sparke Helmore to AET was negligent, but causation of loss had not been established. He also found that the New South Wales apportionment legislation did not apply to Mr Kerr’s claim against AET because the applicable law to Mr Kerr’s claim was the South Australian apportionment legislation and a claim for breach of trust was not an “apportionable liability” under the South Australian legislation: Kerr v Australian Executor Trustees (SA) Limited; Australian Executor Trustees (SA) Limited v Fuller and Others trading as Sparke Helmore Lawyers [2019] NSWSC 1279 (the principal judgment or PJ).

  11. In his second judgment given on 22 October 2019, the primary judge dealt with final orders and costs. He entered judgment for Mr Kerr against AET in the sum of $76,619,978.42 inclusive of interest under s 100 of the Civil Procedure Act 2005 (NSW). He dismissed Mr Kerr’s claim and AET’s cross-claim against Sparke Helmore: Kerr v Australian Executor Trustees (SA) Limited; Australian Executor Trustees (SA) Limited v Fuller and Others trading as Sparke Helmore Lawyers (No 2) [2019] NSWSC 1438 (the second judgment or SJ).

Overview of the appeal and cross-appeal

  1. By its appeal AET challenges the quantum of equitable compensation awarded by the primary judge and the dismissal of its cross-claim against Sparke Helmore. There is no challenge to the finding of breach of trust. AET’s primary submission is that the amount of equitable compensation should be reduced to $18,962,734.84 before pre-judgment interest: see [111] below. AET says that Sparke Helmore should bear 50 per cent of its liability to Mr Kerr, either because Mr Kerr’s claims against AET and Sparke Helmore are “apportionable claims” to which Pt 4 of the Civil Liability Act applies, or AET’s cross-claim against Sparke Helmore for damages is reduced on account of AET’s acknowledged contributory negligence.

  2. The cross-appeal by Mr Kerr against Sparke Helmore is defensive only. It is only pressed if, contrary to Mr Kerr’s primary position and the finding of the primary judge, Mr Kerr’s claims against AET and Sparke Helmore are “apportionable claims” to which Part 4 of the Civil Liability Act applies. In that event, Mr Kerr challenges the dismissal of his claim against Sparke Helmore, relying upon the same grounds and contentions as advanced by AET against Sparke Helmore.

  3. Sparke Helmore seeks by notice of contention to maintain its contributory negligence and proportionate liability defences relied upon at trial, but not determined by the primary judge. If it is liable to AET, Sparke Helmore says that its liability should be reduced to no more than 10 per cent of AET’s liability to Mr Kerr by reason of either contributory negligence of AET, or if AET’s claim against Sparke Helmore is apportionable under Pt 4 of the Civil Liability Act. Sparke Helmore did not press its notice of contention insofar as it was asserted that the primary judge erred in finding that its advice to AET was negligent.

The character of the jurisdiction

  1. One preliminary matter should be noted. Because Mr Kerr’s claim and AET’s cross-claim both invoked a federal law, namely, ss 18 and 236 of the Australian Consumer Law, the whole of the proceedings was an exercise of federal jurisdiction: Felton v Mulligan (1971) 124 CLR 376 at 373 (Barwick CJ) at 411-412 (Walsh J). The Supreme Court was exercising federal jurisdiction conferred by s 39(2) of the Judiciary Act 1903 (Cth) and the law which governed the exercise of that jurisdiction is to be identified in accordance with ss 79 and 80 of the Judiciary Act: Agtrack (NT) Pty Ltd v Hatfield (2005) 223 CLR 251; [2005] HCA 38 at [8].

  2. The characterisation of the proceedings as involving the exercise of federal jurisdiction has the consequence that any aspect of state law, in particular, the operation of Pt 4 of the Civil Liability Act which was relied on by AET, or the defence of contributory negligence which was relied upon by Sparke Helmore, could have effect only through the agency of a federal law: Rizeq v The State of Western Australia (2017) 262 CLR 1; [2017] HCA 23; Moore v Scenic Tours Pty Ltd [2020] HCA 17; (2020) 94 ALJR 481 at [3]. The issue of federal jurisdiction was not referred to by the parties in this Court, nor below. No party suggested that the federal nature of the Court’s jurisdiction affected the outcome of the appeal in anyway. It is appropriate to proceed on that basis.

Outline of the basic facts

  1. The factual circumstances giving rise to these proceedings are described in detail in the principal judgment at [2]-[199]. The following outline is largely taken from the principal judgment.

  2. The trust deed contemplated that each forestry scheme for trees planted yearly up to 1974 would be for a period of 25 years and for plantings thereafter for a period of 20 years. The Forest Company undertook to plant the land with pine trees and to tend and supervise the trees for those periods: cl 12(a).

  3. Each investor was entitled under the trust deed to payment of a rateable share of the net proceeds of the sale of timber harvested from the planting referable to the relevant planting year in respect of which their “covenants” had been issued: cl 12(b). In addition, investors holding covenants issued for the 1982 and 1983 planting years were entitled to a share of the value of the land upon which the timber was planted, determined by reference to any appreciation in the value of the land between the time of the planting and the time at which the timber was felled or the land ceased to be the subject of the covenant: cll 13(iv) and 27.

  4. The Forest Company was entitled under cl 12(d) of the trust deed to retain 5 per cent of the balance of the proceeds from the sale of timber for its commission and remuneration for its services, as provided by cl 9(d) of the tripartite agreement, and required within 30 days of receipt of such monies from the Milling Company to pay the balance, after deductions of certain expenses, to AET as the trustee for distribution among Covenantholders entitled thereto.

  5. The tripartite agreement provided that the proceeds of sale of the timber were to be applied by the Milling Company: (a) retaining a commission of 20 per cent of the gross proceeds, (b) paying a commission of 5 per cent of the balance immediately to the Forest Company and (c) retaining the balance for payment to the Forest Company “by five instalments on the last days of the months of April, May, June, July, August then next following” the September by which the Milling Company received the monies (that is, in the next year): cl 9. The primary judge described this “waterfall” distribution provision as the Proceeds Distribution Process.

  6. Clauses 14 and 14A of the tripartite agreement, as amended in October 1999, provided that the Milling Company had the sole and exclusive rights to mill and process the trees and sell the products therefrom in these terms:

  1. The Milling Company shall during the currency of this Agreement:

    (a)   have the sole and exclusive right to sell Log Products (which hereinafter means standing timber or timber felled and sold in log (peeled or unpeeled) or chip form from plantations subject to covenant);

    (b)   use its best endeavours to sell all the timber felled as soon as possible after it has been cut;

    (c)   have the right to sell Log Products to a related body corporate, as defined by the “Corporations Law, without the need to attempt to sell or otherwise market those Log Products to any other person."

14A.   (a)   Any sale of Log Products to a related body corporate shall be at the price fixed by the Second Schedule hereto;

(b)   where Log Products are not sold to a related body corporate, the Milling Company shall use its best endeavours to secure the best market price reasonably obtainable at the time of the sale of those Log Products;

(c)   other than when pulplog is supplied to Forestry SA and delivered to Kimberly Clark Australia (SA) Pty Ltd (which shall be a sale governed by Clause 14A(a), where Log Products are delivered to a party which is not a related body corporate, directly from plantations subject to covenant, without any processing by a related body corporate, it shall be a sale governed by clause 14A(b).

  1. Although the Covenantholders had no security from the Milling Company, their interests as investors were the subject of a number of protections in the trust deed. First, the trust deed prohibited the sale or encumbrance of the scheme land by the Forest Company without the consent of AET, “until the timber growing [on the scheme land] is … cut and milled and disposed of and the proper proceeds paid to [AET]”: cl 2(d)(i). This provision was amended in April 2011 as part of the events leading to the transaction the subject of the proceedings. Following the amendment, AET’s consent was subject to it being reasonably satisfied that the Forest Company “is able to continue to observe and perform its obligations pursuant to the [trust deed]”, and that there was “no material prejudice to the interests of the Covenantholders or any reduction in the protected [sic] afford [sic] to them pursuant to the [trust deed]”: cl 2(d)(i). The full terms of the amended provision are set out at [33] below.

  2. Second, the trust deed prohibited the encumbering of the timber planted on the scheme land, without the consent of the trustee: cl 2(d)(iv).

  3. Third, AET held the certificates of title and registered encumbrances in the name of AET on the title to the scheme land to secure the interests of investors: cl 2(d)(v). The terms of the trust deed (cl 2(d)(v), as amended in December 1988) and the encumbrances contained a covenant by the Forest Company as the encumbrancer for itself and its successors in title in favour of AET relevantly, “[t]o observe and perform all and singular the terms, conditions, covenants and provisions contained and comprised in” the trust deed.

  4. The encumbrances were statutory instruments under the Real Property Act 1886 (SA) and the Transfer of Land Act 1958 (Vic). Addressing the legal nature of such encumbrances, the primary judge adopted the description given in E Sykes and S Walker, The Law of Securities (5th ed, 1993, Law Book Co) at p 327:

The statutes confer on the chargee much the same rights and remedies as in the case of the mortgage.

  1. The encumbrances provided security for the performance of the Forest Company’s obligations under the trust deed, including payment to AET for distribution to the Covenantholders of the net proceeds of the timber under the tripartite agreement, less its 5 per cent commission and certain other expenses: see [21] above. Registration of the encumbrances prevented the Forest Company from dealing with the land without the consent of AET.

  2. The primary judge found that the grant of the ANZ charge over the scheme land by the Forest Company in 2010 was in breach of trust, being contrary to the express requirement of the trust deed that the Forest Company not encumber the scheme land without AET’s consent: PJ [11]. He also found that AET knew of the existence of the ANZ charge at all relevant times in 2011 and early 2012: PJ [226].

  3. In 2011 Gunns decided to sell the scheme land and trees as part of “the entire estate” in the Green Triangle region, including 3,200 hectares of trees owned by Covenantholders, which was about 10 per cent of the trees the subject of the proposed sale. Initially, Gunns intended to sell the scheme land and its trees, and proposed that Covenantholders’ interests, including the encumbrances would continue after the sale: Information Memorandum, par 3.1. As Gunns explained in its letter to AET on 4 March 2011 when formally requesting consent to the proposed sale, “covenant holders’ interests remain protected under the trust deeds and the various registered encumbrances and whoever takes the land will take it subject to those interests”. The Gunns letter also foreshadowed the possibility of the sale of “all Covenantholder interests as well” and thus, in effect, the winding up of the scheme: PJ [67].

  1. Gunns had retained ANZ Corporate Advisory as its financial advisor on this proposed transaction, and ANZ Corporate Advisory gave this mandate the code name “Project Saturn”.

  2. On 16 March 2011, Mr Stuart Howard, Senior Relationship Manager, Corporate Trust, at AET indicated to Gunns that AET agreed in principle to Gunns’ proposal, subject to the interests of Covenantholders not being materially prejudiced or diminished and to the possibility of obtaining independent advice. Such advice was first sought several months later from Sparke Helmore in late June 2011: see [36] below.

  3. As indicated, on 14 April 2011 AET, the Forest Company and the Milling Company agreed to amend cl 2(d)(i) of the trust deed by deleting that provision and replacing it with the following:

2(d)(i)   The Forest Company will not:

1.   sell land of which it is the registered proprietor; or

2.   encumber such land

without the consent of the Trustee, which consent shall not be unreasonably withheld subject always to the Trustee being reasonably satisfied that the Forest Company is able to continue to observe and perform its obligations pursuant to the Deed and that there being no material prejudice to the interests of the Covenantholders or any reduction in the protected [sic] afford [sic] to them pursuant to the Deed.

  1. On 1 June 2011, Gunns informed the ASX that it was “managing the exit from a number of businesses deemed ‘non-core’ and that its Board had agreed to achieve ‘the sale of the Green Triangle softwood plantation estate in SE Australia’”. By this time, Gunns had revised its proposal. A document styled the “Green Triangle Softwood Opportunity, $190 Million softwood Estate Investment Trust”, stated that Gunns was now proposing to establish an investment vehicle in the form of a softwood estate investment trust (SEIT) which would own the entire Green Triangle and the associated timber rights, including trees owned by GMO, pursuant to a sale of standing timber on land owned by Gunns in 2009, and trees owned Covenantholders on 3,880 ha, “to be bought back from the Covenantholders”. The document valued the Covenantholder timber at $73.7 million by applying an 8 per cent discount rate to the forecast cashflow from harvesting of the Covenantholder trees, and stated that Gunns will settle the Covenantholder liability thereby providing the Covenantholder timber on an unencumbered basis, owned 100 per cent by the new investment vehicle.

  2. On 24 June 2011, Gunns advised AET that as a result of a competitive bidding process conducted by it and its financial adviser, ANZ Corporate Advisory, it had reached agreement in principle with a US-based timber investment management organisation to purchase Gunns’ softwood plantation estate in the Green Triangle, including the standing timber and land the subject of the Covenantholder scheme. Gunns stated its expectation of a net return to Covenantholders of approximately $45.7 million.

  3. On 27 June 2011, AET retained Sparke Helmore to provide advice about the Gunns proposal for the sale of standing timber that related to Covenantholder interests, including advice on whether it is detrimental or materially prejudicial to the Covenantholders.

  4. On 28 June 2011, Gunns was asked by Kevin Connors of Nordea Bank ABP to explain why it was only receiving A$107m net return for the Green Triangle Plantation assets, in comparison to “the originally projected $150-170 million realisation value estimated in February 2011”. Gunns responded on 30 June 2011 giving the following explanation:

The sale process did not achieve original estimates of value circa. $150m. The outcome was adversely impacted by the complexity of the transaction and the consequential difficulty in achieving competitive tension in the sale process … The estate sale incorporated the sale of land and equity interests in a proportion of trees planted on the land. A significant portion of the land (circa. 75% was effectively encumbered by an existing tree crop owned by GMO. The remaining tree crop included an area of trees owned fully by Gunns with another proportion (circa. 15% with shared equity interest with covenant holders. The sale process involved engagement with four global timber funds. The indicative values placed by these funds largely reflected a significant discount for the encumbrance of the land by the existing equity interests. (Emphasis added.)

  1. On 14 July 2011, Gunns informed AET that the proposed purchaser was not willing to proceed without assurances from AET that it would not object to the sale of the standing timber and would execute the necessary releases so that the legal and beneficial interest in both the land and the trees passed to the purchaser free of any interest of the Covenantholders.

  2. On 15 July 2011, Mr Howard of AET sent an email to his superior, Mr Phillip Joseph, AET’s CEO Corporate Trust, informing him that Mr Adam Fuller from Sparke Helmore had completed most of their review of the proposal for the sale of the standing timber and the trust documentation and that subject to receiving some more information in a couple of areas, the proposal looked to be in line with the terms of the trust documents. Mr Howard noted that Mr Nguyen, the Group General Counsel of Gunns, had telephoned the previous day to gauge AET’s response and commented to Mr Joseph:

On the basis that our legal advice is that the proposal is allowed under the trust documents and we are happy to proceed, we would not object to the sale of the timber and would execute the necessary releases to transfer the interests to the purchaser.

  1. The primary judge observed that this passage in Mr Howard’s email suggested that his state of mind at that stage was that the advice being sought from Sparke Helmore was as to whether Gunns’ proposal was “allowed” under the trust deed and that AET’s consent to the proposal was also contingent on it being “happy to proceed” and this was relevant to the question of the extent to which AET relied on the advice ultimately given by Sparke Helmore: PJ [84].

  2. There were further communications between Mr Howard of AET, Mr Nguyen of Gunns, and Mr Andrew Johnson of Sparke Helmore in late-July / early-August 2011. It is not necessary to refer to the detail other than to note that his Honour found that Mr Howard’s state of mind at this stage was that Sparke Helmore’s advice was being sought as to whether Gunns’ proposal was permissible under the trust deed: PJ [91].

  3. Sparke Helmore gave written advice to AET on 17 August 2011, which was before the creation of any transaction documents. The primary judge noted that, in final submissions, Sparke Helmore eschewed any reliance on the 17 August 2011 advice: PJ [263]. Although it is not necessary to refer to the terms of this Sparke Helmore advice, reference should be made to his Honour’s findings concerning Mr Howard’s thinking at this time: PJ [347]-[350]:

  1. In his affidavit, Mr Howard said that he “decided, on behalf of AET, to consent” to the Proposal based on the 17 August 2011 Certification. However that evidence must be seen in light of Mr Howard’s email to Mr Joseph of 15 July 2011, set out at PJ [83] above, where, to repeat, Mr Howard said:

    On the basis that our legal advice is that the proposal is allowed under the documents and we are happy to proceed, we would not object to the sale of the timber and would execute the necessary releases to transfer the interests to the purchaser.

  2. In effect, as Mr Lockhart accepted in final submissions, the 17 August 2011 Certification conveyed no more than that it was permissible for AET to enter into the Proposal involving, as it did, the winding up of the trust. In effect, to adopt Mr Howard’s words in his 15 July 2011 email, the effect of the 17 August 2011 Certification was that “the proposal is allowed under the documents”.

  3. As Mr Howard’s 15 July 2011 email stated, AET’s consent to the Proposal was also contingent upon it being “happy to proceed”. AET was happy to proceed, as indicated by Mr Howard’s 7 December 2011 statement that he was “not too concerned with the commercials” (see PJ [119] above).

  4. Mr Howard made the same point in his email to Mr Joseph on 3 August 2011, that I have set out at PJ [89] in which, to repeat, he said:

    The purpose of the advice was to ensure that Gunns’ proposal to sell the standing timber was in accordance with the [trust] documents. Assuming it is, the valuation would then be reviewed against [the proposed purchaser’s] offer and if competitive, we would consent to the proposal. (Emphasis added.)

    1. On 4 November 2011, Mr Nguyen provided an update to Mr Howard that Gunns were still negotiating with the proposed purchaser, at that time, GMO Renewable Resources LLC (GMO), as well as a third party, and that the likely structure of the proposed sale was that the proposed purchaser, GMO, would on-sell their trees as part of the transaction with the third party, New Forests Asset Management Pty Ltd (New Forests), being the ultimate purchaser of the “Auspine and Covenant Holder trees”.

    2. In late November 2011, drafts of the proposed tree sale agreement and put and call option were provided by Mr Nguyen to Mr Howard. Schedule 3 of the draft tree sale agreement contained an “Apportionment between Sellers” of the “Initial Purchase Price” showing AET as one of the “Tree Owners” was $0; whereas, the Forest Company’s portion was $20,216,073 in respect of the South Australian trees, and $13,783,927 in respect of the Victorian trees.

    3. AET retained Sparke Helmore on 5 December 2011 to provide advice about the draft tree sale agreement and the draft put and call option deed, in particular, whether there were “[a]ny unusual or onerous provisions in the document(s)” and “[c]onfirmation that the document is in order for execution”. Sparke Helmore gave advice on 22 December 2011 and again on 14 March 2012. The terms of that advice is referred to in some detail at [235] ff below.

    4. In response to an email from Mr Howard on 7 December 2011 enquiring why the proceeds were not coming directly to AET, Mr Nguyen replied by email that Gunns was adopting a similar process to a harvesting distribution event; in effect, the funds would be paid to the Milling Company which would deal with the funds in accordance with the waterfall distribution specified in the tripartite agreement. Mr Howard on-forwarded Mr Nguyen’s email to Mr Johnston of Sparke Helmore on 7 December 2011.

    5. As to Mr Howard’s attitude to this email, the primary judge found at PJ [115]:

None of this caused any concern to Mr Howard. In his affidavit he said:

My understanding of Mr Nguyen’s above response, at the time of receiving it, was that covenantholders’ share of the proceeds from the Third Proposal would be distributed in accordance with the process for distributions outlined in the Tripartite Agreement... This did not raise any alarm with me at the time because:

(a)    if it was in accordance with the terms of the Trust Deed, I believed it was appropriate, particularly as it was my understanding that there was no other process for distribution of proceeds permitted under the Trust Documents; and

(b)    the Forest Company had never previously defaulted on any of its obligations under the Trust Documents since my involvement with the Trust from 2006.

  1. The primary judge also referred to a note of Mr Johnston of Sparke Helmore dated 7 December 2011 which was in evidence, of an attendance of 20 minutes from 4.20 pm to 4.40 pm between Mr Johnston, Mr Howard and “Annette”; evidently Ms Annette Strickland from AET, who was copied in to the email exchange between Mr Howard and Mr Nguyen earlier in the day. Mr Howard did not refer to this conference in his affidavit and Mr Johnston deposed in his affidavit that he did not have an independent or specific recollection of his discussions with Mr Howard on 9 December 2011.

  2. The primary judge made the following findings at PJ [118]-[123]:

  1. In setting out the terms of that file note, I have expanded some obviously abbreviated terms thus “[ ]” and have emphasised some entries with underlining.

  2. So expanded, the note reads:

    Covenantholder = Gross

    $34 M[illion] – Forest Co distributes to AET

    • when thinnings/harvest – P[ut and] C[all Option] transfers the net proceeds

    • 20% to Milling Co.

    • 5% commission.

    • I just thought we were consenting

    • Purchaser wants us to sign I think. It’s fine though.

    Were also asking for:

    - We get instructions from trust manager. We get them to say all the R[epresentions] + W[arrantie]s from them are correct ----> back to back

    S.E.A.S. gives that to us.

    [AJ or AS]: We’ll look into getting security from Gunns as well.

    - back to back rep[resentations]

    - letter of U[ndertaking]

    - valuation – been updated

    net 33 M[illion]

    = 34 M[illion]. I’m happy w[ith] that.

    • They’ll do an ASX notice once docs signed.

    - Covenantholders will be advised (T[rust]ee will be told). Done by 31 Jan.

    • I’m away tomorrow arvo + Friday

    - take the doc as final

    • I’m reas[onably] comfortable w[ith] the R[epresentations] + W[warranties] + U[ndertaking]s

    • Not too concerned w[ith] the commercials

    • No real constraint to us to pay the $ to covenantholders. Just subject to the Trust docs.” (Emphasis added in PJ.)

  3. I think it likely that Mr Howard made the remarks that I have underlined. It is not clear who said something to the effect “[w]e’ll look into getting security from Gunns as well”. The note could read “AJ” (Mr Johnston of Sparke Helmore) or “AS” (Ms Strickland of AET).

  4. The note shows that:

    (1)   Mr Howard understood that the effect of activation of the Put & Call Option Deed would be that proceeds of the sale of the Scheme Land and the Scheme Trees – that is “$34 M” – would be “transferred to” the Milling Company and then the Forest Company and be subject to deduction of their commissions of 20% and 5%; that is be dealt with in accordance with the Proceeds Distribution Process;

    (2)   Mr Howard knew the Encumbrances were to be discharged on settlement; hence Mr Johnston or Ms Strickland spoke of “getting security from Gunns as well”;

    (3)   Mr Howard was comfortable to give certain representations, warranties and undertakings (evidently those called for in the Tree Sale Agreement) and was not concerned with “the commercials”; that is, I would infer, the potential risk of selling Scheme Land and Scheme Trees and waiting for the Proceeds Distribution Process to be applied to the proceeds of those sales, rather than retaining the Scheme Land and Scheme Trees and continuing the current arrangements, which included Covenantholders having the security from the Forest Company of the Encumbrances;

    (4)   Mr Howard saw there being no “constraint” on AET requiring it to ensure that the Land Sale Proceeds and Tree Sale Proceeds be paid to Covenantholders; and

    (5)   it was satisfactory to Mr Howard that payment of those proceeds be “just subject to the Trust Docs”; that is, in accordance with Proceeds Distribution Process.

  5. Consistently with those conclusions, at 4.47 pm, some three minutes later, Mr Howard forwarded to Mr Johnston his email exchange with Mr Nguyen and said:

    As discussed, here is the email that I sent to [Mr Nguyen] today and his responses. Please disregard his response in relation to the letter of undertaking. [Mr Nguyen] was referring to the letter provided back in March 2011 from the Forest Company that the proposal to sell the timber was a good thing, rather than the August 2011 letter of undertaking.

    Attached is the form of instruction that we will receive from [the Forest Company].

    I’ll send the updated valuation information in a separate email.

    Please let me know if you have any queries.

  6. The only reference in this email to the discussion minutes before about the proposed flow of funds payable under the Tree Sale Agreement is the first sentence. Evidently, Mr Howard was content with what Mr Nguyen had told him, and with his discussion with Mr Johnston and Ms Strickland about that matter. He did not ask Mr Johnston anything further and was, in effect, sending Mr Johnston his email exchange with Mr Nguyen for information and because he had told Mr Johnston about it; hence the words “as discussed”.

    1. On 8 December 2011, Gunns told ANZ as the representative of the lender’s syndicate, in response to the question whether the entire Green Triangle estate was being sold:

The sale comprises land and tree interests owned by the group in the Green Triangle region. Land area is approx. 42,000 ha all of which (apart from some minor equity interests (2,000 ha) held by Investors) is currently owned by the Company. The ownership of the trees is split between the Company (15%), GMO (75%) and Covenant Holders/Investors (10%). As part of the transaction the Company has agreed the purchase of the GMO and Covenant Holder trees from those parties to sell all land and tree [sic] to the purchaser. By doing this the estate could be sold on an unencumbered basis to the new owner and realise a better price. (Emphasis added.)

  1. On 22 December 2011, New Forests, Gunns, the Forest Company, the Milling Company, AET and various other Gunns subsidiaries executed a put and call option giving New Forests, as purchaser, the right to call for and the Gunns’ interests, as vendor, a right to put to the purchaser the obligation to purchase land and trees, which included the scheme land and the scheme trees. On the same day, Gunns announced to the ASX that the transaction was expected to reduce debt by approximately $85 million through cash received and the retirement of securitisation facilities.

  2. On 22 December 2011, Gunns announced to the market:

The company has a heads of agreement with a purchaser for the MIS loan book. The purchaser is currently finalising transaction due diligence with completion scheduled in January 2012. This transaction is expected to reduce debt by approximately $85 million through cash received and the retirement of securitisation facilities: PJ [154].

  1. The primary judge found that AET was aware that Gunns was in financial distress at the time of the transaction: PJ [227].

  2. On 20 February 2012, Gunns wrote to the ANZ, referring to a meeting with lenders on 16 February 2012. The email stated that a “Review Event (Asset Disposal) is subsisting because the sales of … Green Triangle Forest Estate have not yet been finalised”. In justifying a request for consent to continue the facility on the existing terms, the Gunns email stated:

The Company has entered into an agreement to sell the Green Triangle Forest Estate to an investment vehicle (taking the form of two stapled unit trusts). The consideration for the sale will be the issue of units in the trusts comprising no less than 39% of the equity value in those trusts. It is proposed that Gunns will provide a mortgage over its units in the trusts to the Security Trustee in exchange for the release of the Green Triangle Forest Estate from the existing Security. This improves the position of Gunns and the syndicate, and provides us with an ability to receive a much greater sale price, as we are in effect swapping security over encumbered land ie encumbered by growers with interests in the trees for 25 years) with security over an interest in trusts that own the land unencumbered. (Emphasis added.)

  1. On 24 February 2012, Mr Nguyen informed Mr Howard and Mr Johnston by email that one of the purchaser’s investors had withdrawn from the transaction due to their exposure to the European financial situation. In order to proceed with completion and keep the structure of the purchaser in place, Gunns had agreed to take the place of the investor that had withdrawn by becoming a member of the two stapled investment trusts which were established to purchase the assets, and Gunns expected to exit once the purchaser had finalised the arrangement with new investors which was expected to be done by late-May/June. As the primary judge noted, by agreeing temporarily to become a member of the stapled fund that would own and operate the various assets after the purchase, Gunns was in effect providing vendor finance and this was an indication of Gunns’ anxiety to ensure that the transaction completed: PJ [158]-[159].

  1. The primary judge concluded that, had the Trustee insisted on receiving payment or the receipt of alternative security in exchange for discharging the Encumbrances, it is probable that the Covenantholders would have received the Tree Sale Proceeds, the Land Sale Proceeds, the 2011 Harvest Proceeds (to the extent that they had not already been received) and the 2012 Harvest Proceeds. His Honour also concluded that the costs of appointing the Receiver and costs of obtaining judicial advice would not have been incurred. Accordingly, those amounts constituted the measure of the loss suffered by the Covenantholders as a result of breaches by the Trustee.

The claim against the Solicitors

  1. On 5 December 2011, the Trustee asked the Solicitors to provide a quote to review a draft of the Tree Sale Agreement and a proposed put and call option deed and to provide “a legal sign off” to the Trustee in a format that sought the following:

  • details of the proposed contractual documents;

  • confirmation that the documents reflected instructions;

  • any unusual or onerous provisions in the documents;

  • confirmation that the documents included the Trustee’s limitation of liability clause; and

  • confirmation that the documents were in order for execution.

The Solicitors responded on the following day with an estimate of their costs, which appears to have been accepted by the Trustee.

  1. On 22 December 2011, the Solicitors sent two documents to the Trustee. The first document was a “certification” and the second was a “document confirmation advice” (the Advice). It was not suggested that the certification was incorrect since it did no more than advise that the proposal was permissible under the Trust Deed. By the Advice, the Solicitors confirmed that the documents were “in order for execution” on the basis of four matters. The Advice said that it was subject to certain assumptions and qualifications that were set out.

  2. The principal thrust of the complaint against the Solicitors is that they failed to advise the Trustee on the effect of cl 2(d)(i) of the Trust Deed. That provision, as in force at the relevant time, provided as follows:

“… in order to secure due compliance by the Forest Company with the terms and conditions hereof the Forest Company undertakes that until the timber growing thereon is so cut and milled and disposed of and proper proceeds thereof paid to the Trustee … the Forest Company will not:

  1. sell land of which it is the registered proprietor; or

  2. encumber such land;

without the consent of the Trustee, which consent will not be unreasonably withheld subject always to the Trustee being reasonably satisfied that the Forest Company is able to continue to observe and perform its obligations pursuant to the Deed and that there being no material prejudice to the interests of the Covenantholders or any reduction in the protected afford [sic] to them pursuant to the Deed.”

  1. The primary judge found that the Solicitors should have advised that the Trustee could reasonably withhold its consent if the transaction would cause the interests of the Covenantholders to be materially prejudiced or cause any reduction in the protection afforded to the Covenantholders under the Trust Deed. His Honour held that the sign off comprised by the Advice was one that no reasonable trustee could have relied on and that the advice that the Solicitors thereby gave to Trustee fell short of what was called for by their retainer of 5 December 2011. However, his Honour concluded that the inadequate advice provided by the Solicitors did not cause the Trustee’s breach of trust.

  2. Thus, the Trustee’s consent could not be withheld unreasonably. However, before giving its consent, the Trustee must be reasonably satisfied that the Forest Company is able to continue to observe and perform its obligations and must also be reasonably satisfied that there will be no material prejudice to the interests of the Covenantholders or any reduction in the protection afforded to them by the Trust Deed by reason of the sale or encumbrance of the Scheme Land. The primary judge held that the Solicitors failed to provide that advice and that, in so failing, they were in breach of their obligations to the Trustee. His Honour held that the Trustee had failed to establish that, on the balance of probabilities it would have acted differently had the Solicitors provided the advice that the primary judge found should have been provided.

The appeal

  1. In the appeal, the Trustee contends that any negotiation that took place between Gunns and the Trustee would have resulted in an agreement for Gunns to provide, from the proceeds of sale, an amount equal to the value of the Scheme Land of approximately $18 million, as distinct from amounts totalling, before interest, approximately $51 million, which his Honour found the Receiver would have recovered. The Trustee contends that the primary judge erred in concluding that the loss occasioned by its breach of duty exceeded the position in which the Covenantholders would have been had Gunns agreed to pay to the Trustee, on completion of the transactions, an amount representing the value of the Scheme Land in respect of which the Encumbrances were registered or agreed to provide the Trustee with security up to the value of the Scheme Land as a substitute for releasing the Encumbrances. The Trustee asserted that his Honour erred in concluding that, had it not breached its duty to the Covenantholders, Gunns would have agreed to pay to the Trustee on completion the amount of $51,800,490.58 and should have concluded that Gunns would only have agreed to pay to the Trustee on completion an amount of the value of the Scheme Land or provide the Trustee with security up to the value of the Scheme Land.

  2. The Trustee also asserted that the primary judge erred in including in the award of compensation the sum of $4,952,579.60 representing the 2011 Harvest Proceeds that had been paid. The Trustee contended that his Honour ought to have concluded that the total amount of compensation to which the Receiver is entitled is $18,962,734.84, plus pre-judgment interest, consisting of:

  • the sale price of the Scheme Land of $18,320,000;

  • costs of the appointment of the Receiver of $371,976.90; and

  • the costs of judicial advice obtained by the Receiver of $270,757.94.

  1. In relation to the Solicitors, the Trustee contended that the primary judge ought to have included that the Solicitors should have advised the Trustee to seek to negotiate a better deal to ensure that the transaction documents complied with the terms of the Trust Deed and to minimise risk to the Trustee and the Covenantholders. The Trustee also contended that his Honour erred in concluding that the Trustee would have entered into the Tree Sale Agreement in the form in which it was completed, even if the Trustee had received adequate advice from the Solicitors and ought to have concluded that, if the Trustee had received adequate advice, it would have sought to negotiate a different transaction with Gunns such that entering into the Tree Sale Agreement would not have resulted in material prejudice to the interests of the Covenantholders or any reduction in the protection afforded to the Covenantholders pursuant to the Trust Deed. The Trustee also contended that his Honour erred in concluding that no reasonable trustee would have relied upon the advice of the Solicitors.

  2. I have had the opportunity of reading in draft form the reasons of Gleeson JA for concluding that the appeal should be dismissed and that the cross-appeal should be dismissed. In particular, I agree with his Honour’s reasons for concluding that the primary judge made no error in the assessment of compensation payable by the Trustee by reason of its breaches of trust. I also agree with his Honour’s reasons for concluding that the breach of duty by the Solicitors did not have a relevant causal connection with the loss suffered by the Covenantholders. I agree with the orders proposed by Gleeson JA.

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Endnotes

Decision last updated: 04 February 2021

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