Braham v ACN 101 482 580 Pty Ltd & Ors
[2018] VSC 575
•2 October 2018
IN THE SUPREME COURT OF VICTORIA
Not Restricted
AT MELBOURNE
COMMON LAW DIVISION
PROFESSIONAL LIABILITY LIST
S CI 2012 03622
SIMON BRAHAM
Plaintiff
v
ACN 101 482 580 PTY LTD (ACN 101 482 580) & ORS (according to Schedule)
Defendants
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JUDGE:
EMERTON JA
WHERE HELD:
Melbourne
DATE OF HEARING:
19-23, 26-28 February; 1, 2, 5 March; 23, 24 April 2018
DATE OF JUDGMENT:
2 October 2018
CASE MAY BE CITED AS:
Braham v ACN 101 482 580 Pty Ltd & Ors
MEDIUM NEUTRAL CITATION:
[2018] VSC 575
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NEGLIGENCE – Plaintiff invested in an arrangement promoted by L involving an investment in woodlots and a loan to overseas commodity traders – Plaintiff made the investment by acquiring units in a partnership – Woodlot investment benefited from an ATO Product Ruling and the plaintiff understood the arrangement to entitle him to a tax deduction for his investment – Firm gave advice to L about aspects of the investment arrangement and drafted the partnership agreement – Whether the firm acted for the partnership – Whether there was an express or implied retainer between the firm and the plaintiff – Whether L acted as agent for the plaintiff and other partners when retaining the firm to advise and draft – Whether the firm was retained to advise on the tax effectiveness to the partners of the partnership arrangement – Whether the firm owed the plaintiff a duty of care arising in tort – Whether the plaintiff was vulnerable – Whether by drafting the Partnership Agreement the firm made representations to the plaintiff that were misleading or deceptive – No retainer or common law duty of care – No misleading or deceptive conduct – Proceeding dismissed.
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APPEARANCES:
Counsel
Solicitors
For the Plaintiff
Mr P G Cawthorn QC with Mr C Madder
Rigby Cooke Lawyers
For the First Defendant
Dr A Hanak
Minter Ellison
TABLE OF CONTENTS
Introduction 1
Issues 7
Background 9
2005 investment 9
Ambry, Ludekens and investments in Great Southern 11
Generally 11
In 2005 12
In 2006 27
Advising — May/June 2006 27
Drafting — June 2006 34
The Partnership Agreement: terms and execution 36
Was Ambry retained by or on behalf of Braham? 41
Did Ambry otherwise owe Braham a duty of care? 63
Was Ambry’s conduct misleading or deceptive? 70
Conclusion on liability 72
Issues remaining undetermined 72
Disposition 77
HER HONOUR:
Introduction
1 The plaintiff, Dr Simon Braham, is an ear, nose and throat surgeon. He graduated in medicine in 1990 and qualified as a specialist surgeon in 1999. By 2005, he had been self-employed as a surgeon for several years and was generating a very healthy income. He was looking to make investments of a type that were tax effective and would set him up for retirement.
2 Braham had a close friend with whom he discussed investments, Dr Andrew Ludekens. Ludekens was also a medical doctor who had worked with Braham, but he fancied himself as an investor and as someone who could give investment advice and organise investments for others. By mid-2005, Ludekens had put in place a series of investments and was or was seeking to provide investment services to others. He was the sole director and principal of Lotus Capital Group Pty Ltd (‘Lotus Capital’), which purported to ‘[grow] investments for quality of life’.
3 Braham considered Ludekens to be a successful investor. The two talked about investments over many years and, as at 2005, Braham trusted Ludekens and relied on him to provide good investment advice.
4 Managed investment schemes involving agricultural products were a form of investment that met Braham’s investment criteria. Braham, on the advice of Ludekens, invested in forestry products over five consecutive financial years commencing in the financial year ending on 30 June 2005.
5 This proceeding arises from Braham’s investment in 2006 in a woodlot scheme managed by Great Southern Management Australia Limited (‘Great Southern’) combined with a secondary investment to service borrowings for the woodlots (in combination, the ‘2006 investment’). Braham made the 2006 investment on the recommendation of Ludekens. The first defendant, then known as Ambry Legal (‘Ambry’), played a role advising on and documenting certain matters relating to the 2006 investment. The nature and extent of that role is in issue in this proceeding.
6 Braham’s first investment in forestry products was in 2005 (‘2005 investment’). It was also an investment in Great Southern woodlots that was recommended by Ludekens. The 2005 investment involved Braham entering into an arrangement with other investors described as a partnership. The partners applied tax refunds obtained from the investment in the woodlots as capital contributions to the partnership, which were in turn invested externally to generate income to cover payments on the loan taken out to acquire the woodlots.
7 The structure and mechanics of the 2005 investment appear to have been devised and organised by or through an accounting firm, Nancy Keep & Associates. Ludekens had some kind of association with Nancy Keep and referred potential investors such as Braham to her.
8 The following year, 2006, Ludekens again suggested to Braham that he invest in Great Southern woodlots. This time, Ludekens was directly involved in devising and setting up the structure for the investment.
9 The investment in woodlots in the 2006 Great Southern project (‘2006 Great Southern project’) took the form of an upfront establishment services fee payable by the investor to Great Southern as the responsible entity for the 2006 Great Southern project. The establishment services fee represented the full cost payable to Great Southern for leasing the land and planting, watering, growing and maintaining the trees up until harvest. Product Ruling 2004/16 issued by the Australian Taxation Office (‘ATO’) in relation to the 2006 Great Southern project (‘Product Ruling’) entitled certain investors to an upfront income tax deduction for the full amount of the establishment services fee incurred by them. Additionally, investors could fully finance the payment of the establishment services fee with a loan from Great Southern Finance Pty Ltd (‘GSF’), which was repayable with interest over a term of ten years. The Product Ruling also entitled certain investors to an income tax deduction for the interest incurred on the loan from GSF.
10 However, the Product Ruling gave protection only to ‘Growers’ who had been accepted to participate in the 2006 Great Southern project by 30 June 2006, where the Grower had executed a Land and Management Agreement on or before that date (cl 48). The Product Ruling used the term ‘Grower’ without defining who or what the Grower was, but contemplated that a Grower might be ‘an entity’.
11 Pursuant to the Product Ruling, the Grower’s participation in the 2006 Great Southern project had to constitute the carrying on of the business of primary production (cl 49). Clauses 60 to 72 (inclusive) set out the criteria for establishing if the Grower was carrying on a business, as required. Clause 63 provided:
Generally, a Grower will be carrying on a business of afforestation, and hence primary production, if:
• The Grower has an identifiable interest (by lease or by licence) in the land on which the Growers trees are established;
• The Grower has a right to harvest and sell the wood produce from those trees;
• The afforestation activities are carried out on the Grower’s behalf;
• The afforestation activities of the Grower are typical of those associated with an afforestation business; and
• The weight and influence of general indicators point to the carrying on of a business.
12 As had been the case for the 2005 investment, Ludekens proposed to Braham that the 2006 investment be undertaken through a partnership. In this case, a company controlled by Ludekens would be the managing partner and Braham would be one of a number of ‘silent partners’. The investment in the 2006 Great Southern project would be fully funded by a loan from GSF and, like the 2005 investment, it would give rise to a substantial income tax refund to Braham. Once again, Ludekens proposed that Braham apply his tax refund as a capital contribution to the partnership, which would make a secondary investment in order to generate income to meet obligations under the loan from GSF. This secondary investment was to be in the form of a loan to Moneela (‘Moneela’), a company operating out of Singapore and trading in commodities.
13 In the middle of 2005, Mr Keith Harvey (‘Harvey’) of Ambry provided advice, on the instructions of Ludekens, about certain matters pertaining to an investment in Great Southern woodlots and an ancillary investment in the form of an annuity or loan arrangement with a third party designed to generate income for the repayment of the loan taken out to acquire the woodlots. Ambry also prepared a draft partnership agreement at this time.
14 However, nothing further occurred on the file in 2005. In May 2006, Ambry opened a new file to provide advice to Ludekens about the obligations of promoters of managed investment schemes in the context of the development of an investment product involving the acquisition of woodlots by a partnership, with a secondary investment in the form of an annuity or a loan.
15 On 1 June 2006, Braham had a discussion with his accountant, Mr Anthony Lamanna, about his likely taxable income for the financial year ending 30 June 2006. Lamanna told Braham that his taxable income would be $1,273,000. This estimate was later revised down to $1,173,000. Braham informed Lamanna that he was considering a further agribusiness investment for the 2006 financial year and gave Lamanna an indication of what the amount of his investment would be.
16 On 11 June 2006, Lamanna advised Braham to take independent advice regarding the proposed investment.
17 On 19 June 2006, Ambry entered into a further retainer naming Ludekens as the client to prepare a partnership agreement for an investment in the 2006 Great Southern project, as well as a loan agreement for the secondary investment. Ludekens’ vehicle, Lotus Capital, would be the partner responsible for the acquisition of the woodlots and the management of the partnership business, and it would also enter into the secondary investment via the loan agreement on behalf of the partnership.
18 On 27 June 2006, Ambry forwarded to Ludekens for completion and execution a form of partnership agreement and loan agreement (‘Partnership Agreement’ and ‘Loan Agreement’ respectively).
19 On 28 June 2006, Braham and one other ‘silent partner’ executed the Partnership Agreement at offices occupied by Ambry and Ludekens. On that same day, Ludekens completed an application form for the woodlots, naming the applicant as Lotus Capital ‘as manager’ and giving ‘Lotus Partnership No 1’ as the account name.
20 On 30 June 2006, Great Southern issued an invoice in the name of ‘Lotus Capital Group Lotus Partnership’ as the investing entity for the purchase of 500 woodlots in the 2006 Great Southern project. Great Southern also executed the Land Management Agreement under a power of attorney on behalf of the investing entity.
21 The investment in the 2006 Great Southern project organised by Ludekens was for a total of $1.5 million, funded by a loan for that amount from GSF (‘GSF loan’). The GSF loan was taken out through the ‘Lotus Partnership No 1’ account. The loan agreement with GSF was executed on 30 June 2006 by GSF under a power of attorney on behalf of the borrower and on behalf of Braham as one of two guarantors. On 20 July 2006, Braham signed a finance application which contained a revocable power of attorney in favour of GSF.
22 On 11 August 2006, Ludekens applied for an ABN for the partnership. The Australian Business Register recorded the entity name as ‘S Braham and C Calleja and others’ under the trading name ‘Lotus Partnership No 1 and 2006 Braham Poon Richards and Calleja Partnership’.
23 There is some uncertainty as to the name of the partnership in which Braham became a partner for the purposes of the 2006 investment. Whatever the name of the partnership, its managing partner was Lotus Capital, an entity controlled by Ludekens. Ludekens referred to the partnership as the ‘Lotus Trees Partnership’ and I will do the same.
24 The Lotus Trees Partnership submitted a tax return for the 2006 financial year which claimed a loss of $1.5 million, representing the purchase price of the woodlots in the 2006 Great Southern project. A loss of $1.245 million was distributed to Braham.
25 In October 2006, Braham filed his 2006 income tax return claiming a deduction of $1,245,000, which represented his share of the Partnership loss of $1,500,000 on the basis that he held an 83% interest in the Lotus Trees Partnership. Braham thereby reduced his taxable income from $1.267 million to $22,472 and his tax liability to $2,738.56 for that financial year ending 30 June 2006.
26 In November 2006, Braham received a Notice of Assessment from the ATO allowing his deduction and giving him a tax refund of $531,466.91, which he provided to Ludekens as his capital contribution to the Lotus Trees Partnership.
27 However, three years later, on 18 March 2010, the ATO wrote to Braham advising him of the Commissioner’s intention to disallow the deduction for the partnership loss claimed in Braham’s 2006 tax return. The ATO subsequently advised Braham of its intention to conduct an audit.
28 On 8 September 2010, the Deputy Commissioner determined that the tax deduction was not allowable, on the grounds, inter alia, that Braham:
• did not directly execute the application to invest in the Managed Investment Scheme [the 2006 Great Southern project] and apply for loan finance and there was no evidence that he had any right to receive income from the Scheme;
• had a purpose other than the derivation of income for entering into the Scheme;
• was not wholly committed to the [GSF] loan as evidenced by the lack of repayment leading to doubt as to whether any expenditure had been incurred;
• did not accept liability for the [GSF] loan, given that no loan repayments had been made for some three years;
• was not of a class of entity to which the Product Ruling applied.
29 Moneela had ceased to service the GSF loan in 2008.
30 On 27 October 2010, the ATO issued a Notice of Amended Assessment to Braham for primary tax of $595,535 in respect of the 2006 tax year, plus a shortfall interest charge of $190,862.65. It also required Braham to pay a shortfall penalty in the amount of $238,214.10.
31 Braham, through his lawyers, pursued an objection with the Commissioner of Taxation against the disallowance of the deduction for the 2006 tax year. On 7 July 2011, the Commissioner confirmed the primary tax payable of $595,535, but reduced the penalty by 20% for voluntary disclosure. The shortfall interest charge was reduced to $166,310.75.
32 On 5 September 2011, Braham filed an application for review of the Commissioner’s decision in the Administrative Appeals Tribunal (‘AAT’). Just over two years later, on 16 September 2013, Braham entered into a Deed of Settlement with the Commissioner, which implemented the terms of a confidential compromise agreed at a mediation conducted in August 2013. Relevantly, the Deed of Settlement confirmed Braham’s liability for primary tax in the amount of $595,535 for the 2006 tax year, but the Commissioner waived penalties and interest in full.
Issues
33 Braham blames Ambry for his predicament and pleads that Ambry is liable to compensate him for the loss of the tax deduction and for the costs of doing battle with the Commissioner of Taxation. He contends that, had he invested individually instead of through a partnership, his investment in the 2006 Great Southern project would have conformed with the Product Ruling, entitling him to the tax benefits described. His deduction for the establishment services fee would not have been disallowed, and he would not have incurred the legal and accounting expenses associated with his subsequent dispute with the Commissioner of Taxation.
34 The essential claim brought by Braham is that Ambry owed him a duty of care in contract and/or in tort with respect to the provision of the advice given by Ambry about the taxation and other legal aspects of the partnership structure for the 2006 investment, including drafting the Partnership Agreement and ancillary Loan Agreement; that the advice given by Ambry was negligent and incorrect; and that, as a result, Braham has suffered the losses which he claims against Ambry in the proceeding.
35 Further or alternatively, Braham claims that the advice provided by Ambry amounted to misleading or deceptive conduct for which he seeks the relevant statutory remedy.
36 Ambry denies the existence of any retainer with Braham or any duty of care to him resulting from any retainer with Ludekens. It also denies that it made any representations to Braham or any representations to Ludekens that were misleading or deceptive. As a result, it denies any negligence on its part. Further, it points to what it submits are fatal weaknesses in Braham’s case on causation, submitting that he was better off having invested in the 2006 Great Southern project through a partnership than he would have been had he invested individually, as he would have been pursued for the GSF loan had he taken it out in his own name. As to the loss and damage claimed, Ambry submits that Braham failed to mitigate his losses by settling the dispute with the ATO in a timely manner and that amounts claimed in respect of fees paid to Ludekens to assist in the ATO dispute are extortionate and ought not to be recoverable from Ambry. Finally, Ambry pleads contributory negligence and/or that the claim must be apportioned. Ambry has joined Ludekens, Ludekens’ purported employer Romad Financial Services Pty Ltd and Romad’s director Rory McLeod Deutsch to the proceeding for this purpose.
Background
37 The allegations in the Third Further Amended Statement of Claim (‘TFASC’) concern events involving Ambry and Ludekens commencing in mid-2005. The 2006 investment had its genesis in the 2005 investment, and Ambry was retained to advise on aspects of the 2006 investment in the context of an existing arrangement and an existing relationship with Ludekens.
2005 investment
38 Braham entered into the 2005 investment on the recommendation of Ludekens. He did so as part of an undocumented partnership (‘2005 partnership’) that acquired 333 woodlots in the 2005 Great Southern project. The arrangements for the 2005 investment were put in place by Nancy Keep. These arrangements included a secondary investment involving ‘Raj’ (Raj Sharma) and another person called ‘Harry’ (Harry Singh). Raj and Harry were associated with Moneela.
39 Braham’s evidence was that, so far as he was concerned, the 2005 and 2006 investments flowed the one from the other. Braham gave evidence that he organised a meeting with his accountant, Anthony Lamanna, on 13 July 2005 to ensure that Lamanna understood the nature of ‘these investments’. Ludekens, Raj Sharma and another accountant, Des Decker, came along to explain the accounting nature of the investments so that Lamanna could understand ‘the accounting behind the investments’. Lamanna made a file note of the meeting in which he recorded the presence of Ludekens as ‘a friend of SB’ and noted, ’83 partnerships — over 300 partners’, but nothing more. He made no record of any accounting information.
40 I observe that by the date of the meeting with Lamanna in July 2005, Braham should already have committed to the 2005 investment in order to obtain the tax deduction in the 2005 tax year.
41 Braham went ahead with the 2005 investment, although it is unclear precisely when or how. He obtained a tax refund of more than half a million dollars in late 2005 and did not make his capital contribution to the 2005 partnership until February 2006, when he went to Ambry’s offices and handed over a large cheque to be paid to Ludekens.
42 The 2005 investment was successful to the extent that Braham received his tax refund and invested it by giving it to Ludekens for the purpose of the secondary investment. The tax assessment that produced the tax refund for the 2005 year was not challenged or disallowed.
43 However, the 2005 investment had several unusual features, not least of which was that, despite the information-gathering meeting with Lamanna, Braham seemed to know virtually nothing about the composition and workings of the 2005 partnership.
44 The 2005 partnership was not documented in a written partnership agreement. The 2005 tax return for the 2005 partnership shows that, apart from Braham, the partners were Eric Poon, Joseph Dintini, Simarpal Aujla and Nevin Gupta, only one of whom — Poon — was known to Braham. The 2005 partnership held only one asset, which was the 333 woodlots in the 2005 Great Southern project. However, this asset was not recorded in the partnership balance sheets. The invoice relating to the purchase of the 333 woodlots showed the lots to be held jointly by two individuals: N Gupta and S Chandramohan. Ms Chandramohan was not a member of the 2005 partnership.
45 While Braham held the majority interest in the 2005 partnership, he was not involved in the approval of the partnership accounts and had no recollection of any meeting of the 2005 partnership at which its tax return was approved. Braham continued to hold an interest in this partnership in the following tax years, yet he made no mention of this interest when providing information to his accountant for the purposes of completing his tax returns in later years. Furthermore, the members of the 2005 partnership apparently changed without Braham’s knowledge or involvement.
46 So far as I can tell, neither Ludekens, Lotus Capital nor any other company or entity controlled by Ludekens was a partner or otherwise directly involved in the 2005 partnership arrangements. Ludekens appears to have acted only as a ‘spotter’ for the 2005 investment.
47 Nonetheless, so far as Braham was concerned, the 2005 investment presented no problems, either in relation to the professional advice given to the partnership or otherwise.
Ambry, Ludekens and investments in Great Southern
Generally
48 Ludekens gave instructions to Ambry lawyers and Ambry lawyers acted on those instructions in both 2005 and 2006 in relation to an investment or investments in woodlots managed by Great Southern in combination with an annuity investment or loan involving an unnamed third party.
49 It is relevant to understanding the nature of any retainer involving Ludekens that from 2005 and throughout 2006, Ludekens operated at least part of his business activities, including those of Lotus Capital, from Ambry’s offices. In 2005 and up until April 2006, Ambry’s offices were located in Albert Road, South Melbourne, not far from Braham’s residence. In April 2006, Ambry moved to new premises in Little Collins Street and Ludekens moved there too.
50 Harvey gave evidence that he met Ludekens in about 2004 and that, at some point after 2004, Ludekens started to work from Ambry’s offices in South Melbourne. The South Melbourne office was all cubicles and partitions; no lawyer had their own office, but there were three meeting rooms. Ludekens’ desk was in the staff room, off to one side. Harvey’s recollection was that Ludekens would come and go from the office. Ludekens had a couple of assistants who were also in cubicles in the staff room, but none of them was there very often. Ludekens was connected to the Ambry switchboard, but had his own dedicated line that was totally separate from the lines used by Ambry lawyers and staff. Ludekens was charged rent by Ambry for the use of the office space and the phone system.
51 Harvey gave evidence that when he was in the office, Ludekens would often look to get free advice. However the advice that he sought was generally of a commercial rather than of a legal nature. Harvey said:
What we were continually talking about was managing the risk associated with his business affairs … he would grab me as I was walking past and he’d ask me a question. He used to have this little blue notebook and he had all these questions lined up and we’d talk about it and he’d take detailed notes …
52 Harvey told the Court that he sometimes gave Ludekens ‘off-the-cuff’ advice, mainly about commercial issues. He said that what he did for Ludekens was ‘always asset protection’. Although Harvey practiced mainly in tax, he had a background in small business banking so when a client was going into a new business, Harvey would work out how to structure the new business in such a way that the client’s other businesses would not be ‘pulled down’ if the new business failed, but so as to make tax losses available to the client’s other entities.
53 During the course of the trial, particularly at the outset, Braham’s counsel sought to establish that Harvey was involved in the conception of the 2006 investment, was himself an investor and partner in the 2005 partnership, and therefore had an interest in promoting it to potential investors like Braham. Harvey denied any such involvement. Harvey’s alleged involvement as a promoter/investor was not pursued in final submissions. It was simply not sustainable on the evidence.
In 2005
54 An email from Ambry’s practice manager to Ludekens dated 28 July 2005 details at least six matters in which Ambry was acting for Ludekens in mid-2005, either in his personal capacity or for one or more of the companies that he owned and controlled. Ludekens, either directly or through a corporate structure, had interests in and/or operated a number of property developments and service providers of various kinds, in relation to which Ambry periodically gave advice. The 28 July email refers to a matter called ‘Great Southern’ and to an agreed flat fee ‘for a relatively short tax sign off on the structure summarised in Keith’s [Harvey’s] email to you of 23 July 2005’. Ludekens has annotated this part of the email as follows:
this has been of great assistance. It had immediate results, as it helped me secure sales in trees this week of $900,000 by giving me confidence that I have professionally covered the tax and profit risks ... I trust that this is correct! It has also given me a stronger position to negotiate a better deal with Raj in addressing the credit risk, with some considerable improvements being negotiated at the moment.
– please could Keith [Harvey] finalise the spreadsheet, as it is almost but not completely finished.
– Raj has also been pleased. It has partly changed how he runs his business.
– Raj has requested Ambry to please draft a generic partnership/annuity agreement for use with his clients generally. I have told him the $5,000 needs to be paid first, and I hope to pick up a cheque from him on Saturday morning. Please provide a quote to do this, or contact me if a clearer scope is required.
55 The email referred to from Harvey to Ludekens of 23 July 2005 is not in evidence, although there is an email of 24 July 2005 from Harvey to Ludekens offering a ‘PI sign off’ notwithstanding the continuing existence of a Part IVA ‘problem’. Ludekens’ annotation to Ambry’s email confirms that Ludekens was ‘selling trees’ in mid-July 2005, that he was engaged in negotiations with ‘Raj’ involving credit risk and that ‘Raj’ was using or proposing to use a partnership structure combined with an annuity investment for his clients and proposed to retain Ambry to provide ‘a generic partnership/annuity agreement’.
56 There is no evidence, and it was not contended, that Raj retained Ambry to draft a ‘generic partnership/annuity agreement’ at any point. Harvey was not and never became acquainted with ‘Raj’.
57 However, Harvey gave written advice to Ludekens in relation to an entity referred to as the ‘Lotus Trees Partnership’ in the middle of 2005. Specifically, the advice concerned ‘the taxation treatment of an annuity that the partnership will acquire to finance repayment of a loan used to acquire certain woodlots offered for purchase by Great Southern Limited’ (‘Annuity Advice’).
58 Ludekens first sought the Annuity Advice on 28 June 2005, that is, just before the end of the 2005 financial year. However, the final form of Ambry’s advice was not provided until 2 August 2005. In August 2005, Ambry also prepared a draft partnership agreement and prompted Ludekens to provide instructions on its terms in October 2005. No instructions were provided.
59 Ambry’s records include a ‘client engagement form’ naming the client as ‘Ludekens, Andrew’ regarding ‘Great Southern Project Advice’ and a closing form for the same matter (Ambry File 6932) dated 8 December 2006. Ambry’s work on the Annuity Advice is recorded in an invoice addressed to Ludekens dated 30 July 2005. Additional work is recorded in an invoice for ‘Great Southern project’ addressed to Ludekens dated 12 October 2005. The invoice of legal fees to 30 July 2005 records work commencing on 28 June 2005 and concluding on 30 July 2005 with Ambry settling a letter of advice (the Annuity Advice) and preparing an accompanying spreadsheet.
60 A number of versions of the Annuity Advice are in evidence. They bear the dates 30 June 2005, 18 July 2005 and 2 August 2005. The versions are identical except insofar as they record instructions given as to the number of woodlots acquired and, flowing from that, the number of partnership units that will be issued, the capital contribution required from the participants and the purchase price of the annuity, which was the form of secondary investment then in contemplation. There is also a difference in the way in which the different versions refer to the ATO product ruling upon which Harvey is instructed to rely in assuming that the anti-avoidance provisions of the tax legislation do not apply.
61 The first section in the Annuity Advice sets out the instructions given to Harvey by Ludekens. Ludekens’ instructions to Harvey are recorded as follows:
(a) Ludekens and another person (collectively, ‘General Partner’) have acquired a certain value of woodlot plantations from Great Southern and have financed this investment by borrowing the same amount from a finance company associated with Great Southern.
(b) They have offered various high income earners the opportunity to join as a partner (referred to as a ‘participant’) in farming the woodlots, describing the number of units on issue and their price.
(c) There is a partnership agreement providing for, among other things, each participant to contribute an amount of capital to the partnership, such contribution to be made by 30 September 2005.
(d) The partnership agreement provides for the General Partner to indemnify the participants from liability under the loan, for 100% of the losses from the partnership for the first three years to accrue to the participants, for 100% of the profits from the partnership to accrue to the participants until they have recovered all the losses incurred by the partnership and, after the participants have recovered all of their losses, for the General Partner to receive 10% of the net income earned by the partnership.
(e) The partnership is to acquire an annuity from a Singapore resident.
62 The Annuity Advice sets out the terms of the proposed annuity. It then records the instruction that Harvey is to rely on the tax ruling and to assume that the anti-avoidance provisions in the income tax law do not apply to any part of the two investments made by the partnership.
63 In the relatively short section containing legal advice (as opposed to setting out his instructions), Harvey advised that the whole of the amount received from the Singaporean borrower each year would be assessed as income of the partnership in the tax year in which it was received. He included a table setting out the net income of the partnership for each year of the annuity stream, and concluded by stating that ‘the table on the following page’ summarised the cash flow and income tax consequences of both the woodlot investment and the annuity. The ‘table on the following page’ is the Cashflow Analysis to which I refer below.
64 In his evidence, Harvey confirmed that he did not give advice about the general anti-avoidance provisions of the tax law — he said he was not qualified to do so. He did not know who the ‘participants’ in the investment were going to be and he was not given a copy of the partnership agreement described in Ludekens’ instructions.
65 The Annuity Advice was therefore given on the basis that the investment vehicle would be a partnership and that the anti-avoidance provisions of the tax law would not apply to the partnership’s investments in woodlots and the annuity. Harvey was not asked to advise on these matters. It is evident from Ludekens’ instructions to Harvey in July 2005 that Ludekens had already decided to use a partnership structure for the 2006 investment before seeking Harvey’s advice. This was a structure with which Ludekens was already familiar through his association with Nancy Keep and the 2005 investment.
66 Accompanying the Annuity Advice, Harvey prepared a spreadsheet headed ‘Cashflow forecast for business model designed 22 July 2005’ (‘Cashflow Analysis’). It charts the money flowing in and out of a woodlot investment conducted in tandem with an annuity investment.
67 Harvey sent two emails to Ludekens about the Cashflow Analysis a few minutes apart on the evening of 24 July 2005. The subject matter of the emails is ‘Trees model’. The first email is in the following terms:
Dear Andrew,
I attach a cashflow model that I am happy to give a tax sign off on … I note the following:
(1) I have assumed a $1,000 investment and a $2,000 return in year 10.
(2) Best case scenario is that the taxpayers realise a net after tax profit of $545 after ten years.
(3) However, the taxpayer will be cashflow negative in years 4-9 (total $393.42).
I remain strongly of the view that the credit risk associated with this deal is such that it does not make commercial sense.
There is still a part IVA problem (general anti avoidance rules) … However I can give an opinion that gives a PI policy sign off on this issue
Do you want an opinion on this model? If so, the cost will be $5,000 and you can have it by Friday.
68 The second email from Harvey to Ludekens states:
Andrew, please also note the following financial facts:
The NPV of the taxpayer’s cashflow at a discount rate of 15%
(on a $1,000 investment) = $75.26This really does not stack up.
69 There is no record of any response to these emails. In particular, there is no record of any response to Harvey’s offer to provide an opinion on the Trees model.
70 When called upon to explain the emails, Harvey said that underlying them was a concern about Ludekens looking to ‘get into bed’ with someone who had allegedly disappeared with $2 million. Harvey said that he was concerned about the credit risk associated with the whole transaction. On top of that, the Trees model assumed earnings of 15% per year every year for ten years, which Harvey thought was unrealistic. According to Harvey, there were several commercial problems and the deal did not ‘stack up’.
71 Also in evidence is a file note prepared by Harvey which appears to date from the same time, setting out instructions from Ludekens and raising some questions (‘Harvey’s 2005 file note’).
72 Harvey’s 2005 file note contains different woodlot and other numbers from those in the Annuity Advice, but describes a partnership arrangement in broadly the same terms as in the instructions for the Annuity Advice. The file note refers, relevantly, to the General Partner entering into a ‘debt defeasance arrangement with “Harry”’, which involves the partnership paying ‘Harry’ $1.12 million by 30 September 2005 (representing 48% top marginal tax rate plus 8% commission payable by Great Southern), with ‘Harry’ assuming all liabilities under the loan and keeping the General Partner and the Limited Partners indemnified against any claim made by Great Southern under the loan. It also involves ‘Harry’ obtaining a 10% interest in the profit from the woodlot investment after the Limited Partners have recovered 100% of the money they invested.
73 In Harvey’s 2005 file note, he notes that if the loan is at an interest rate of 10% and if ‘Harry’ does not participate in any profit from the woodlots, the internal rate of return that ‘Harry’ will require to break even on the transaction is 24.25%. The file note continues:
These facts raise the following questions:
(7) Are the Limited Partners entitled to a tax deduction for their share of the investment in the Great Southern woodlots?
(8) What are the taxation consequences of the debt defeasance transaction?
a. Who is entitled to claim the interest expense on the Loan?
b. Does the transaction trigger a CGT event?
c. How is the payment to Harry treated in Harry’s hands (if Harry has an unrecognised tax liability this will impact on his creditworthiness as a party to the arrangement)?
(9) Summarise the legal and commercial risks being assumed by the Limited Partners.
74 This is the only place in the Ambry file for the Annuity Advice (Ambry file 6932) where the question of the tax deductibility of the partners’ share in the woodlots investment is recorded as being raised.
75 Harvey gave evidence that ‘the following questions’ in his 2005 file note were questions that he asked himself, and he confirmed that he appreciated that whether the Limited Partners would be entitled to a tax deduction for their share of the investment was ‘an essential thing to be decided’. He did not say by whom.
76 Harvey also confirmed that he was aware that the General Partner was going to be making offers to high income earners to join the investment(s) as partners. He said he did not know who ‘Harry’ was, but he became aware of an entity of some sort called Moneela after ‘all of this happened’.
77 Regarding his discussions with Ludekens more generally, Harvey gave evidence that Ludekens asked him about partnerships and told him about investing with commodity traders.
78 As for the Cashflow Analysis, Harvey remembers sending it to Ludekens by email. He said he talked to Ludekens many times about the fact that the investment arrangement (the woodlots investment combined with the annuity investment) produced a negative cash flow and that it just did not make sense because someone had to put money in from years four to nine to make it work.
79 Another document prepared at around the same time in 2005, almost certainly by Ambry, is entitled ’Summary of the Lotus Trees Partnership Agreement’ (‘2005 Summary’). The 2005 Summary refers to the Managing Partner having acquired 333 woodlot plantations from Great Southern, financed by borrowing $999,000 from GSF. It refers not to ‘participants’ or ‘Limited Partners’, but to ‘Silent Partners’. The 2005 Summary records that:
(a) The Silent Partners will pay an amount to the Managing Partner to be determined as a function of the Silent Partner’s tax credit in year one. This will count as a capital contribution to the partnership.
(b) The Managing Partner will utilise the tax credits to acquire an annuity.
(c) The Managing Partner will have sole and exclusive control of the partnership business.
(d) The Silent Partners will agree not to interfere in the management of the partnership business and they will appoint the Managing Partner as their attorney authorised to complete all arrangements for the purpose of the partnership business.
(e) The Managing Partner agrees to indemnify the Silent Partners from all liability under the loan from GSF.
80 In addition, paragraph 19 of the 2005 Summary states:
The Silent Partners warrant and represent that they have obtained independent financial and legal advice with respect to the investment in the partnership business.
81 On 6 October 2005, Nicole Segal, an Ambry solicitor, sent the 2005 Summary to Ludekens for review, asking him to confirm that it accorded with his instructions. Ms Segal stated that she was awaiting a response in order to prepare a partnership agreement. There was apparently no response. The email was sent again on 24 October 2005. Again, there is no evidence of any response from Ludekens.
82 Nonetheless, a draft partnership agreement was prepared on or around 19 August 2005. It also records the number of woodlots as 333, and a loan from GSF in the amount of $999,000. The Managing Partner is named as ALTE4 Pty Ltd (ACN 115 066 861), an Ambry shelf company acquired by Ludekens.
83 The Ambry file contains a version of the 2005 Summary that is heavily annotated. The annotations are not those of the Ambry lawyers involved in the matter. The content of the annotations strongly suggests that they were made by Ludekens. On the last page, under a handwritten notation, ‘think like the Buffett partnership’, are notes forming what I will call the ‘Mind Map’. The Mind Map is reproduced on the next page.
(‘Mind Map’)
84 The Mind Map describes an arrangement whereby 333 wood lots would be acquired from Great Southern against a borrowing from GSF of $999,000, with Silent Partners obtaining tax refunds in the amount of $959,000, which could be invested either through ‘LF4’ (I infer, ‘Lotus Fund 4’) or directly with ‘HD’ (possibly Harry Singh). A number of negatives are listed under the ‘HD’ option, including ‘wrong tax, DD exposure, O/S risk, not know HD, no paperwork, average deal, focused’. By contrast, under LF4, it is noted: ‘correct tax, accountable in Aus, transparent, know me, paperwork, better deal, diversified’.
85 It is tolerably clear from its content that the Mind Map was drawn (or perhaps doodled) by Ludekens and reflects his thinking about the investment product that he is putting together and how it will be made attractive to investors like Braham.
86 Nicole Segal, a solicitor at Ambry, prepared the draft partnership agreement in August 2005 reflecting the structure described in the 2005 Summary. Segal gave evidence that she took instructions in relation to this draft agreement and that she prepared the draft partnership agreement under the supervision of Harvey.
87 Nothing appears to have been done on the file after Segal’s requests for instructions on the partnership agreement in October 2005. I infer that no further instructions were forthcoming.
88 However, two other important documents were discovered as part of the Ambry file relating to ‘Lotus Trees’ that most likely date from 2005. Both are on the letterhead of Lotus Capital. The first of these documents is this diagram or flowchart:
(‘Flowchart’)
89 The Flowchart shows the structure of the proposed ‘Lotus Trees’ investment. In his evidence, Harvey said he did not recall being instructed to prepare the Flowchart, but he agreed that it was the kind of thing he might have put on the whiteboard.
90 The other document on Lotus Capital letterhead explains in a series of dot points the proposed arrangements for investing in a financial product called the ‘Lotus Trees Partnership’. The document, headed ‘Procedure for Investment in Lotus Trees Partnership’ (‘Procedure Document’) is an explanation, plainly directed to potential investors, of how an investment in the Lotus Trees Partnership is to be made. There are two versions of the Procedure Document: one on Lotus Capital letterhead; the other on plain paper. The text of the two versions differs in a few respects, but the investment procedure described is essentially the same. The version that is not on letterhead appears to be a later version, as it names the Managing Partner as the Ambry shelf company acquired by Ludekens, ALTE4 Pty Ltd (ACN 115 066 861).
91 The Procedure Document explains that the ‘General Partner’, as the managing partner on behalf of the partnership, will make the investment in woodlots with Great Southern, fully financed by a loan from GSF, before the end of the tax year. The establishment services fee will be incurred by the General Partner on behalf of the partnership, resulting in a tax loss that will be claimed in the partnership tax return. The partners will claim their respective shares of the partnership loss in their individual tax returns and receive tax refunds, which they will re-invest in the partnership by way of capital contribution. The partnership will then enter into the secondary investment of the tax refund moneys, and the income generated from this investment will be used by the partnership to meet the interest and principal payments on the loan from GSF. This secondary investment is described in the Procedure Document as an ‘annuity investment’.
92 Harvey gave evidence that he did not prepare the Procedure Document and that he did not recall receiving it either. He commented that it had some ‘stupid things in it’ and said that he did not know who had ‘cobbled it together’.
93 Braham gave evidence about the 2005 and 2006 investments and as to the advice that he received from Ambry in 2005. He said that in 2005, Ludekens suggested that he make an investment in a managed investment scheme through a company called Great Southern. Ludekens told him that Great Southern was a good investment, that ‘we’ could borrow the money in a fully tax deductible manner and could use the refunds from the tax deduction to make a secondary investment that would be used to repay the borrowings. The secondary investment would be through a company called ‘Nala’, and this would generate enough income to pay off the principal and interest on the Great Southern loan. ‘They’ went ahead with the 2005 investment and he got a tax refund.
94 It is unclear whether Ludekens himself invested in the 2005 Great Southern project and the associated secondary investment.
95 Braham said that while Ludekens introduced him to the 2005 investment, it was run by Nancy Keep. Nancy Keep prepared the 2005 partnership return and Braham’s accountant included this partnership loss, or his portion of it, in his income tax return for 2005. That generated a refund of approximately $500,000. He was instructed to deposit money into Harvey’s trust account in February 2006.
96 Braham gave evidence that at the 13 July 2005 meeting with Lamanna, both Ludekens and Raj talked about the Product Ruling and said that they had engaged a lawyer who was an expert in taxation matters, Harvey, to advise about it. The issue of the Product Ruling was paramount, so Ludekens arranged for Braham to meet Harvey in order for Braham to satisfy himself that the investment was compliant with the Product Ruling, among other things.
97 Braham gave evidence that he went to Ambry’s offices in around September 2005. Ludekens was present. They sat at a table which looked like a boardroom table in the office. Braham said he was shown the Flowchart and the Procedure Document. He said both Ludekens and Harvey ‘walked [him] through it’. Braham could not remember exactly who said what about the procedure for investing. Generally, he understood that the partnership took a loan from Great Southern and bought some trees, then lodged a tax return. The partnership would get a tax loss that was passed on to the investor, who then lodged their tax return with the tax office and was eligible for a tax refund. The refund was then invested in the annuity, which was used to pay off the finance. Braham identified the version of the Procedure Document without the Lotus Capital letterhead as the document he was taken through in the course of this meeting.
98 Braham said he could not remember the word ‘annuity’ being used at the time. Ludekens and Harvey told him the money would be invested in futures in Singapore in order to generate enough revenue to pay off the loan from Great Southern. He understood that Raj fitted into this scenario as part of Moneela. As for the Procedure Document, Ludekens told him that it was produced by Harvey to explain the investment to potential investors like him. He read it and took it at face value. Braham said Harvey was present when the Procedure Document was given to him, but he cannot recall exactly what Harvey said about it. Braham does not recall being shown the Cashflow Analysis.
99 Braham gave evidence that he asked both Harvey and Ludekens if they were certain that the investment, as they had structured it, was going to ‘fall in the realms of the Product Ruling’, because this was one of the crucial things that Lamanna had asked him to follow up on. He said that Harvey told him that the investment was definitely within the realms of the Product Ruling. According to Braham, Harvey said that ‘they’ [Ambry] had being doing this for years and that he would be able to get a deduction for his contribution. It was explained to him that the investment was to be effected through a partnership, although not much was said about the partnership. It was simply suggested that this was the best way for this investment to be undertaken.
100 Braham’s next clear recollection of going to Ambry’s offices was when he gave the cheque to Harvey from the tax refund on the 2005 investment. That was early in 2006.
101 Harvey does not recall meeting with Braham in 2005, let alone taking Braham through the investment procedure for the Lotus Trees Partnership described in the Procedure Document. Harvey’s first recollection of meeting Braham was in February 2006 when Braham delivered the cheque for Ludekens.
102 When asked about the 2005 investment, Braham said he understood that it was a partnership run by Ludekens and Raj, with Nancy Keep as the accountant and Harvey as the advising solicitor. He took his refund cheque to Ambry on 7 February 2006 and gave it to Harvey. He cannot recall the conversation they had then.
103 It is tolerably clear from the evidence that the 2005 investment was structured and co-ordinated by Nancy Keep and/or possibly ‘Raj’, not by Ludekens. Braham gave evidence that when he discussed the 2006 investment with Ludekens he was told that the partnership was ‘going along slightly different lines’ from the one in 2005. In 2006, Ludekens wanted to have more control of it himself, and he was keen that the documentation be done correctly, so he engaged Harvey to advise the partnership about the documentation.
104 This suggests that Harvey’s involvement, such as it was, was in relation to the 2006 investment only, although I note that Harvey’s 2005 file note refers to a payment to ‘Harry’ being made by 30 September 2005, which cannot refer to the 2006 investment. Nonetheless, the timing of the Annuity Advice makes it unlikely that Harvey gave advice relevant to the structuring of the 2005 investment. Significantly, there is no evidence that Harvey had any discussions with Keep, Raj or Harry in 2005, or at all. Harvey gave evidence that he did not know Keep. He said he may have met Harry when Ludekens introduced him to a ‘tall guy’ during the course of a short meeting, but he could not otherwise recall meeting Harry.
105 The weight of the evidence is that the 2005 investment was put together by or through Keep, most likely in association with Raj and Harry. Ludekens referred investors to Keep. For the 2006 financial year, however, Ludekens decided to set up his own investment product, based on the model used by Keep. Ambry played a part in advising on that venture, but not on the 2005 investment.
106 Accordingly, I find that such work as was carried out in 2005 by Ambry for Ludekens in relation to an investment that included an investment in Great Southern woodlots concerned the 2006 Great Southern project.
In 2006
107 Following Nicole Segal’s emails to Ludekens in October 2005 seeking instructions for a partnership agreement, a significant period of time elapsed before Ludekens instructed Ambry to carry out any further work relating to investment in the 2006 Great Southern project. The next set of instructions from Ludekens was not forthcoming until May 2006.
Advising — May/June 2006
108 Ludekens retained Ambry in May 2006 (‘May 2006 retainer’) to provide advice on the Corporations Act requirements for the promotion of managed investment schemes and a product being developed by Ludekens referred to as ‘Lotus Trees’. There were three letters of advice (‘MIS advices’), each of which was prepared by an Ambry solicitor, Ms Davina Mighalls, now Davina Aliotta (‘Aliotta’).
109 Ambry’s practice manager, Mr Gerhard Moll, was initially involved in discussions with Ludekens in relation to the MIS advices. Both Moll and Aliotta made file notes of a conference with Ludekens on 4 May 2006. In his file note, Moll recorded a series of questions:
1. Is there one/two or no MIS in this structure?
2. Is a p’ship the best vehicle for
(a) Buying and financing trees
& (b) Investing in annuity stream
3. What is best tax structure
4. Mgmt. agreement for Harry?
Product (Annuity style)
i. co-payment 15% benchmark
balance (10%) target but not promised
ii. modifiable to suit investor’s circ.s
iii. discretion to offer different people different rates of return
iv. roll-over past clients into new fund
v. able to accept cornerstone investor (same terms as other parties)
vi. ASX listing ready.
110 For her part, Aliotta made a brief file note referring to a ‘P’ship’ and a ‘Fund’, and recorded a series of questions: whether the partnership would be a managed investment scheme; whether the fund would be a managed investment scheme; what were the consequences of classification; what steps would allow exclusion from the provisions of Chapter 7; how to manage the structure.
111 On the same day, Aliotta, seeking to confirm the May 2006 retainer, prepared a letter to Ludekens summarising the work required by Ludekens. The particular items of work for which Ambry was or would be retained were described as follows:
i) provide you [Ludekens] with advice as to whether the structures you have proposed to utilise in promoting, offering and issuing the product known as ‘Lotus Trees’ are ‘managed investment schemes’ under the Corporations Law;
ii) provide you with advice as to the necessary (if any) disclosure requirements under Chapter 7 of the Corporations Act 2001 of the outcome of our advice in relation to subparagraph i) above;
iii) assist you with preparing an appropriate information document to be provided to potential purchasers of ‘Lotus Trees’.
112 It will be observed that these items of work do not cover questions 2 and 3 in Moll’s file note. Ambry was not retained to advise whether a partnership was the best vehicle for buying and financing trees or investing in an annuity stream. It was not retained to advise what was the best tax structure.
113 The scope of the May 2006 retainer was confirmed by email from Aliotta to Ludekens on 8 May 2006 in the limited terms set out above. The email concludes:
Also, please let me know what entity will be seeking this advice so that we may handle the file (and invoicing) appropriately.
114 On 11 May 2006, Ludekens and Aliotta exchanged a series of text messages which were subsequently transcribed by Aliotta in a file note. When asked in what name Ludekens wanted the Lotus Trees file to be opened and invoiced, Ludekens replied ‘Lotus fund No 4’. Aliotta enquired whether this was a new entity, because she had ascertained that no entity was registered in that name. Ludekens replied, ‘Then in my name until entity registered thanx’.
115 Ludekens did not suggest that he wanted to retain Ambry on behalf of the partnership or the individual partners. He identified himself as the ‘client’ and referred to his intention to set up an entity to be the client at some stage in the future.
116 The May 2006 retainer was confirmed in writing on 16 May 2006 in a letter from Ambry Senior Associate Matthew Clarke to Ludekens. The retainer letter included a disclosure statement which outlined the terms on which Ambry would act for Ludekens. Both the disclosure statement and the letter confirmed that the May 2006 retainer was between Ambry and Ludekens. The retainer had the limited scope previously agreed, that is, it involved advising on two questions and assisting with the preparation of an information document for potential investors. The retainer letter continues:
If our analysis reveals that another structure would be more appropriate in order to achieve your commercial objectives listed below, we will provide you with an amended estimate of our fees in relation to providing further advice and tax advice in respect of the proposed structure.
You have advised us that your commercial imperatives are as follows:
• staggered return rates (e.g. 15% return on investment with a further 10% return targeted but not advised);
• modifiable product to be offered to suit different investors’ circumstances;
• discretion to offer different investors different rates of return;
• ability to roll existing clients into the new structure;
• able to accept a ‘cornerstone’ investor to acquire a substantial portion of the products issues (for example, a 25% interest);
• structure must able [sic] to list on a stock exchange.
117 A new file was opened for the May 2006 retainer — Ambry file 9035. There is no evidence that any ‘further advice’ or ‘tax advice’ was sought from or provided by Ambry as part of this retainer.
118 On 24 May 2006, Aliotta sent an eight page letter of advice, headed ‘Lotus Fund No 4’, to Ludekens advising as to whether the partnership structure proposed by Ludekens was a managed investment scheme. Aliotta understood the investment to have two ingredients: an investment in woodlots and then a purchase of an annuity. In deciding whether the partnership was a managed investment scheme, Aliotta referred to a partnership agreement drafted by Ambry pursuant to Ludekens’ instructions setting out the proposed commercial relationship between the ‘Managing Partner’ and the ‘Silent Partners’.
119 In the 24 May advice, Aliotta warned that a regulator would most likely consider the two actions — the investments in the woodlots and the annuity — to be part of one larger arrangement or scheme. She observed that it would be artificial to separate them, as Ludekens had given instructions that:
• the intention is to promote or offer the two investment opportunities together;
• the two investment opportunities will be promoted to the same group of potential investors; and
• the two investment opportunities will be promoted by the key people that will be involved in, and driving from a commercial perspective, both arrangements.
120 In the 24 May advice, Aliotta considered briefly the possibility of using a corporate structure for the secondary investment to undertake share trading activities and invest in property development projects. She offered to provide further advice as to the consequences of utilising a corporate structure. The advice concluded as follows:
As set out in our confirmation of retainer of 16 May 2006, please let us know if you would like for us to consider alternate business structures that may be used to operate this proposed investment opportunity and we will provide you with an estimate of our fees to undertake further work.
121 Ludekens and Aliotta conferred on both 24 May and 25 May 2006 in relation to the MIS advices. Aliotta made a file note of the conference with Ludekens on 24 May that records discussions about what are ‘wholesale’ clients for the purpose of the financial services regime, and about a partnership that would conduct the business of buying trees and ‘lending’.
122 Ludekens is recorded as instructing Aliotta that a new partnership would be established each year for convenience and simplification. Aliotta’s file note records an instruction that Ambry provide a letter of advice regarding, among other things, what a partnership might look like that was buying trees and lending money, and where there were new partnerships every year.
123 On 25 May 2006, Aliotta provided a further letter of advice to Ludekens following the instructions that Aliotta had received on 24 May about the proposal that the partnership be involved in lending money. In the 25 May advice, Aliotta advised that the partnership would be a MIS as only one of the partners would have control over its operation, but that it would not need to register as a MIS as none of the clients would be ‘retail clients’. Aliotta recommended that the partnership agreement prepared in 2005 be reviewed and that a loan agreement be drafted. The letter concluded ‘If you wish for us to prepare these documents, please let us know and we will provide you with an estimate of our fees to undertake this work’.
124 Aliotta’s file note of a discussion with Ludekens on 24 May 2006 records that Ludekens was advised that he needed to consider whether ‘issuing’ a partnership interest would require him to register as dealing in a financial product. Aliotta advised Ludekens to seek further advice on any problems that might arise from the issuing of a partnership interest and to consider the promoter penalty regime. Ludekens was to get back to Aliotta if he wanted advice on those matters. In this discussion, Ludekens confirmed that he was working on the information document which was to be given to his investor clients.
125 On 30 May 2006, Aliotta had a further discussion with Ludekens. A file note on the Ambry file contains Ludekens’ handwriting at the top of the page and Aliotta’s comments underneath on what Ludekens has said or written. This was an ‘update meeting’ to find out what Ludekens was proposing to do and what work Ambry would do for him. The file note records that Ludekens was looking to qualify more people as wholesale clients. He also posed the question, ‘Can we run a second partnership without being aggregated?’
126 The substance of the 30 May conference was confirmed in an email sent by Aliotta to Ludekens the next day. The 31 May email records that the work in relation to the information document for proposed investors had been put on hold and identifies further advice that Ludekens wanted from Ambry before any documentation was prepared. The further advice sought by Ludekens included whether the annuity/loan arrangement could be structured to suit particular income and capital flows; whether the ‘self-dealing’ exemption would apply; as to the appropriate method to calculate the purchase price of an interest in the partnership; at what point the aggregation of partnerships would mean that a financial services business was being conducted; and how commission should be paid in relation to the acquisition of woodlots by the partnership. The 31 May email confirmed that the partnership agreement and the loan agreement would not be prepared until the further advice was provided to Ludekens.
127 In her evidence, Aliotta said that at least four of the five pieces of advice mentioned in the 31 May email were never commissioned. She could not recall whether the fifth piece of advice — relating to ‘self-dealing’ — was commissioned or prepared. In the event, based on Ambry’s records, Ludekens declined to instruct Ambry to provide any of the advices identified in the 31 May email, even though they were apparently considered to be necessary or important for the development of his Lotus Trees product and the preparation of the partnership and loan agreements.
128 On 1 June 2006, Aliotta and Ludekens had a further discussion, the contents of which were recorded by Aliotta in a file note. Ludekens was pressed for time, asking how necessary work could be prioritised and the work delivered. Aliotta’s file note records instructions that partnerships were ‘already put in place’ and that ‘Nancy’ was finding investors. Ludekens would try to put ‘5’ in trust the following day.
129 Aliotta provided Ludekens with a third letter of advice on 24 June 2006. The 24 June advice was headed, ‘Will you be conducting a financial services business?’ It concerned whether Ludekens would be conducting a financial services business if the Lotus Trees Partnership structure and operations were ‘replicated’ or expanded. Among other things, the 24 June advice sets out Ludekens’ instructions about the composition of the proposed partnership. Aliotta was instructed that Ludekens anticipated either that the partnership would expand to in excess of 20 members or that the partnership structure and operations would be replicated a number of times. The 24 June advice records the instruction that the partnership might be expanded to ‘say 100 members or so’.
130 At this point in time, therefore, Ludekens’ instructions to Ambry were that there might be a number of partnerships, that further partnerships might be formed in the future and/or that the size of the partnership or partnerships might be significantly expanded. Neither the identity of any of the partners nor their interest in the partnerships — if known by Ludekens — was disclosed to Ambry. In this context, Aliotta advised:
It is likely that representatives of the Partnership will be providing a financial service on behalf of the Partnership; being the provision of financial product advice through the marketing of interests in the partnership.
131 On 27 June 2006, Aliotta had a number of telephone conversations with Ludekens that she diligently recorded in a file note. Ludekens spoke of existing wholesale clients ‘(3)’ and of 15 retail clients ‘spread across various’. Aliotta recorded the need to separate wholesale and retail clients and noted that ‘Nancy’ was ‘not to promote Andrew entities in any way’. ‘Raj’ was also mentioned.
132 It is plain from the foregoing that the May 2006 retainer was to assist Ludekens to put together an investment product to be sold to an unspecified number of unidentified investors who could or would belong to any number of different partnerships. Although the form chosen for Ludekens’ investment product — the Trees model — raised a number of legal issues, Ambry was retained to advise on only certain of those issues. Ludekens engaged Ambry to advise in a piecemeal fashion, as and when it suited him. Ambry was never retained to advise generally or to ‘sign off’ on the Trees model.
Drafting — June 2006
133 The most immediately relevant item of work carried out by Ambry in 2006 on the instructions of Ludekens was the drafting of the Partnership and the Loan Agreements. Ambry undertook this work between 19 and 27 June 2006. The drafting work was carried out on the instructions of Ludekens by Nicole Segal under the supervision of Harvey. It followed immediately upon and was related to the first two MIS advises given by Aliotta in that it concerned the same product.
134 By letter dated 19 June 2006 addressed to Ludekens, Segal confirmed the terms of the retainer, which was to draft a partnership agreement and a loan agreement in relation to the Lotus Trees Partnership (’19 June 2006 retainer’). The accompanying disclosure statement identified Ludekens as the client and the matter as ‘Lotus Trees – Partnership Agreement and Loan Agreement’.
135 A new file was opened for the 19 June 2006 retainer — Ambry file 9506. The Ambry ‘client engagement form’ names ‘Andrew Ludekens’ as the client and classifies the matter as a commercial matter, not as a taxation matter. The matter is described as:
Ludekens — Lotus Trees
Partnership and loan agreement
136 On or some time shortly prior to 20 June 2006, Segal met with Ludekens to take instructions about the structure of the Lotus Trees Partnership. Segal annotated what appears to be a condensed version of the 2005 Summary. It contains only 10 paragraphs, compared to the 22 paragraphs in the 2005 Summary, and no information about the number of woodlots, the amount of any loan to buy the woodlots or the cost of a partnership unit. This summary describes the Partnership Agreement as an agreement between the ‘Managing Partner (Andrew’s entity)’ and ‘Silent Partners’ whereby each Silent Partner would subscribe for partnership units subject to certain conditions. The Managing Partner was to have sole and exclusive control of the Partnership Business.
137 On 20 June 2006, Segal sent to Harvey and Ludekens a document entitled ‘Summary of the Lotus Trees Partnership Agreement’, which appears to be the document referred to in the preceding paragraph, incorporating the changes noted by Segal at her conference with Ludekens.
138 Segal met with Ludekens on 23 June 2006 and made a file note of the meeting. The file note, recording instructions from Ludekens, refers to a number of matters: capital contributions being made by 30 September 2006; property owned by the partners being deemed to be owned by them as a separate legal entity; the partners having to conduct themselves as if they had no direct ownership of the partnership property. The file note also contains some instructions in relation to the Loan Agreement.
139 In her evidence, Segal said she could not recall whether the Partnership Agreement was based on the draft partnership agreement prepared in August 2005. However, it appears that it was. A typographical error in the heading of the Partnership Agreement — ‘Parters’ rather than ‘Parties’ — was carried over from the August 2005 version, indicating that it was used as the basis for the Partnership Agreement prepared in June 2006.
140 Segal went on to prepare several drafts of the Partnership Agreement and the Loan Agreement, the last versions of which were sent to Ludekens at 11.00am on 27 June 2006. The schedules and execution pages to the Partnership Agreement were not completed when it was sent to Ludekens. As a result, neither the Grower nor the Managing Partner was named. The execution clauses do not identify the parties as Ludekens had not provided instructions as to who the members of the partnership would be. Segal’s covering email noted that the schedules were for Ludekens to complete.
141 The Loan Agreement sent to Ludekens was also incomplete in that it did not name the borrower or the lender and it did not specify the amount of the loan. One of the schedules specified the term of the loan to be seven years and described minimum repayments referrable to the (unknown) principal sum, but did not specify interest rates. The seven year term had no obvious rationale, given the 10 year term of the GSF loan and the substantive provisions of the Loan Agreement itself.
142 Segal gave evidence that in preparing the Partnership Agreement she did not consult the Product Ruling for the purpose of confirming that the arrangements in the Partnership Agreement would be compliant with the terms of the Product Ruling. Indeed, there is no evidence that any Ambry lawyer considered whether the arrangements in the Partnership Agreement would comply with the requirements of the Product Ruling.
The Partnership Agreement: terms and execution
143 There are at least three versions of the ‘final’ or near final form of the Partnership Agreement:
(a) The Partnership Agreement emailed to Ludekens by Segal on 27 June 2006 which does not name the partners, is unexecuted and has near empty schedules;
(b) The Partnership Agreement executed by the Silent Partners — Braham, Eric Poon, Hayben Richards and Claude Calleja — and dated ‘1 January 2006’, which has completed schedules naming Lotus Capital as both the Grower and the Managing Partner. This version contains a number of amendments to the version in (a) above;
(c) The Partnership Agreement apparently provided by Ludekens to Great Southern and by Great Southern to the ATO which is also executed but has different execution clauses and different information in its schedules, in that Andrew Ludekens and Victoria Wen are included as parties/partners and named jointly as ‘the Grower’. This version was described by Braham’s solicitor in his evidence as ‘the problematic version’ and I shall also refer to it as such.
144 In each version, there are three parties or categories of party: the Managing Partner, the ‘Grower’ and the Silent Partners. The recitals record that the Grower has acquired woodlot plantations from Great Southern which it holds as bare trustee for the Managing Partner, who will carry on the business of planting and farming the woodlots and that the Managing Partner has offered each Silent Partner a subscription of partnership units in the partnership. The Partnership Agreement entitles the Silent Partners to the profits and losses of the partnership business in accordance with their partnership units. It does not provide for the Managing Partner or the Grower to make any financial contribution to the partnership, and they are not allocated any partnership units.
145 The Partnership Agreement provides that all property owned by the Partners is deemed to be owned by the partnership business as a separate legal entity, and that Partners are to conduct themselves as if they had no direct ownership of the partnership property. Each Partner expressly waives the right to acquire any property owned by the partnership business.
146 The Partnership Agreement regulates the commercial relationship between the Silent Partners on the one hand and the Managing Partner on the other as follows:
(a) For the first three years from the commencement date, 100% of the losses from the partnership business will accrue to the Silent Partners in proportion to their partnership units.
(b) Subsequently, 100% of the profits or losses will be distributed to the Silent Partners in accordance with their partnership units until the Silent Partners have recovered all losses incurred.
(c) Once the Silent Partners have recovered all of the losses incurred from the partnership business, the Managing Partner is entitled to receive a specified percentage of the net income earned by the partnership business until it is terminated.
(d) The Managing Partner has sole and exclusive control over the partnership business and the Silent Partners agree not to interfere in the management of the partnership business.
(e) The Managing Partner does not guarantee that the Silent Partners will receive any profits or losses from the partnership business and is not responsible to any Silent Partner for any profits or losses.
147 It is evident that the interests of the Managing Partner and those of the Silent Partners are not co-extensive under the terms of the Partnership Agreement. The Managing Partner makes no financial contribution but runs the partnership business and, if all goes well, draws an income from it; the Silent Partners are passive investors who provide capital and stand to share in the profits, if any, generated by the partnership business. They also bear any and all losses.
148 This is the context in which the Silent Partners warrant that each has obtained independent financial and legal advice with respect to joining the partnership business, that each has been furnished with sufficient information about the partnership business and the Managing Partner to allow him or her to make an informed investment decision prior to joining the partnership business, and that each is familiar with the partnership business and the Managing Partner’s proposed investments.
149 When and how the Partnership Agreement was executed is attended by significant uncertainty. There is a dispute as to Ambry’s involvement in both the finalisation of the Partnership and Loan Agreements and the execution of the Partnership Agreement. Ambry contends that no Ambry lawyer had anything to do with the Partnership or Loan Agreements after Segal emailed the drafts to Ludekens on the morning of 27 June 2006.
150 The Partnership Agreement forwarded to Ludekens on 27 June 2006 makes provision for its execution by seven unidentified parties and, apart from describing the partnership business as ‘the business of planting and farming woodlots and harvesting trees’ and naming ‘Lotus Fund No 1 Pty Ltd’ as a Silent Partner, its schedules are empty. In fact, Lotus Fund No 1 Pty Ltd never became a Silent Partner.
151 The ‘unproblematic’ executed version of the Partnership Agreement referred to in paragraph 143(b) above names Lotus Capital as both the Managing Partner and the Grower and identifies the four Silent Partners — Braham, Eric Poon, Claude Calleja and Hayben Richards — and their respective interests in the Partnership. Each Silent Partner has executed the Partnership Agreement, although one of them, Calleja, did not forward the page with his completed execution clause until 26 July 2006 and it is unclear who he forwarded it to.
152 In contrast, the problematic version of the Partnership Agreement names the Grower as ‘Andrew Ludekens and Victorian Wen’ and includes execution clauses for Ludekens and Wen which were subsequently deleted. It identifies only three Silent Partners (Hayben Richards is not included as a partner in the schedule). It is missing significant detail: its schedules contain no partnership units, no woodlot numbers and no information identifying the area of the woodlots.
153 Based on its records, Ambry did not make any amendments to the versions of the Partnership Agreement and the Loan Agreement that were forwarded to Ludekens on 27 June 2006. The only Ambry invoice in evidence for this file records the last item of work carried out by Ambry to be the 27 June email to Ludekens attaching the incomplete and unexecuted versions of the Partnership Agreement and the Loan Agreement. Harvey confirmed in his evidence that he did not have any further discussions with Ludekens about the Agreements before 30 June 2006. Segal gave evidence that she was not involved in finalising the schedules.
154 Indeed, there is no evidence of any communication between Ambry and Ludekens in relation to the Partnership or Loan Agreements between 27 June and 26 July 2006, when Moll and Segal wrote to Ludekens stating that unless further instructions were received within seven days, the file would be closed. Ambry records show the file to have been closed on 28 July 2006.
155 However, Braham contends that Ambry was involved in the execution of the Partnership Agreement and that he was given assurances at that time. He gave evidence that in June 2006, he was asked to come in to Harvey’s office to sign the Partnership Agreement. Eric Poon had already signed and Braham and Hayben Richards signed it at the same time in Harvey’s office. Harvey and Ludekens were there at the time. Braham said he discussed with Harvey whether ‘they’ were still satisfied that the partnership as structured was going to satisfy the Product Ruling, that he would get his deduction and that the investment would go ahead as planned. Braham told the Court, ‘They convinced me that it would. They told me there was no problem with any of it’. The person who said this to him was either Harvey or Ludekens or both.
156 Harvey said that he had no recollection of Braham, or Eric Poon, coming into his office to execute the Partnership Agreement. He had no recollection of Braham asking him whether he was satisfied that the partnership would satisfy the Product Ruling.
224 The existence of the Loan Agreement, to be entered into on behalf of the Lotus Trees Partnership as lender and the borrowing entity, does not affect my finding that the relevant retainers were with Ludekens, not with the Partnership or the individual partners. The Loan Agreement was part of the package that was Ludekens’ investment product. That was Harvey’s understanding. When it was put to Harvey that the Loan Agreement was being prepared for the lender, not the borrower, Harvey answered:
Yes, it was. Well, it was to be prepared by Ludekens, on his instructions.
225 When the proposition was repeated, Harvey said:
Well, my client was Ludekens. He was — he was putting together a transaction that involved several people.
226 When the Loan Agreement was sent to Ludekens on 27 June 2006 for him to complete the schedules, neither the lender nor the borrower was identified. Ambry did not insert the name of the Lotus Trees Partnership as the lender and the Loan Agreement makes no reference to the Lotus Trees Partnership or, indeed, to any facts or circumstances relating to the Lotus Trees model or the Lotus Trees Partnership. Furthermore, the Loan Agreement was not executed until 15 September 2006, well after the 19 June 2006 retainer had come to an end.
227 Braham points to what he contends was a concession made by Segal in her evidence that the work carried out by Ambry was for Lotus Capital and the other partners in the Lotus Trees Partnership. The evidence to which Braham refers related to the preparation of the Loan Agreement and was as follows:
Counsel – It is not uncommon I suggest to you for somebody to consult a lawyer and to do so on behalf of somebody else?
Segal – I’ve never had that experience.
Counsel – Let me give you an example, let’s just give an example because that was a pretty obscure question I must admit. Sometimes parents may come in and say we want you to act on behalf of our children with respect to the purchase of a property, or a child with respect to the purchase of properties. Can you appreciate that?
Segal – I appreciate that could happen.
Counsel – Could sometimes happen?
Segal – I have never experienced that but I appreciate that could happen.
Counsel – Well sometimes someone might come in who is associated with a company and say, look, I want you to do something, and you open the file in the individual’s name because that way they pay the bill. Do you follow what I’m saying?
Segal – I would usually open it in the company’s name or the individual and the company.
Counsel – But I suggest to you that the loan agreement was being prepared for the partnership, wasn’t it, in this case?
Segal – No. It was definitely prepared for Dr Andrew Ludekens.
Counsel – At the loan, you agreed with me a moment ago, was going to be made by the partnership, wasn’t it, not by Dr Ludekens?
Segal – He was the client, Dr Ludekens was definitely the client.
Counsel – But the lender?
Segal – And in fact the draft that I’ve sent doesn’t even have the partners, the parties’ names, so I couldn’t have prepared an agreement for people I don’t know.
Counsel – But Dr Ludekens was putting it together for a group of investors, wasn’t he?
Segal – Correct.
Counsel – And he wasn’t personally going to be an investor. The managing partner was contemplated to be Lotus, wasn’t it?
Segal – Yes.
Counsel – That’s one of Dr Ludekens’ companies, isn’t it?
Segal – Yes. He was the client.
Counsel – It was being put together for Lotus, one of Dr Ludekens’ companies, wasn’t it?
Segal – Yes.
228 This hardly amounts to a concession that Segal was acting for the individual partners in the Lotus Trees Partnership when she drafted the Loan Agreement. Lotus Capital was Ludekens’ vehicle, nominated by him to be a member of the Lotus Trees Partnership in order to generate an income for him (or his family trust) by managing the partnership business. Lotus Capital was also used for other investments or businesses run by Ludekens for his own benefit.
229 Having regard to the way in which the case was argued, it is necessary, finally, to say something about two cases where implied retainers were identified by intermediate appellate courts in circumstances roughly analogous to the present: Watson v Ebsworth & Ebsworth and Amadio Pty Ltd v Henderson.
230 In Watson, a solicitor was acting for L, F and their company RPM. They entered into a marketing arrangement with two others, W and G, to form a merchandising company, GMM. The solicitor, who continued to act for RPM, accepted a retainer to act on behalf of ‘the team’. The trial judge held that no contractual retainer came into existence between the solicitor and GMM as a result of the solicitor’s dealings with W and G. The Court of Appeal overturned the trial judge on the basis that the solicitor had frequent contact throughout the relevant year with W and GMM’s controller and general manager, and he was aware of the structure of the various entities and that W was the moving force behind GMM, which was responsible for the merchandising activities. As a result, the trial judge should have held legal work done on the instructions of W relating to merchandising issues was being done on behalf of GMM rather than RPM.
231 In Watson, there were 175 separate file notes of conversations and meetings between the solicitor and the party seeking to establish the implied retainer. In this case, there is no evidence that I accept of any direct communication between Braham, or any of the other Silent Partners, and Ambry.
232 In Amadio a member of a law firm (G&W) helped to create a syndicate of investors as a 20-strong partnership to purchase a building. A representative of G&W contacted a representative of another law firm, NF, to assist with the conveyancing aspects of the transaction. Each investor signed a letter of instruction addressed to G&W, stating, among other things, ‘I authorise you to instruct solicitors on behalf of the partnership to act in the conveyance of the property and the mortgages’. The trial judge found that this letter of instruction from the investors had been shown to the representative of NF before he agreed to do the conveyancing work. In light of that instruction and the way in which NF carried out the retainer and rendered an account for its costs to ‘The Partners Coles Myer Building’, the Full Federal Court upheld the decision below that there was a client-solicitor relationship between NF and the investors/partners. The Full Court accepted that any duty to advise on the effect of the terms of the lease was owed to the investors as partners or as a group and was not affected by different interests which they may have had as individuals.
233 Watson and Amadio are distinguishable. There were no conversations, meetings or written communications between Ambry and Braham, and no authorisation from Braham for Ambry to act for him or the Partnership.
234 In my view, a reasonable person, with knowledge of the words and actions of the parties, and knowledge of the surrounding circumstances, would not conclude that Ambry was acting for Braham when drafting the Partnership Agreement or the Loan Agreement, or when giving any of the other advice to Ludekens in relation to the 2006 investment. The evidence establishes that in 2005 and 2006, Ludekens retained Ambry to provide advice and assistance on aspects of the development of an investment product that had the Lotus Trees Partnership at its core. Ludekens was the client and he gave instructions to Ambry on his own behalf, not on behalf of prospective unidentified Silent Partners. The retainers were limited retainers. On at least two occasions, Ludekens declined to obtain further advice on the investment structure proposed.
235 Accordingly, I reject the proposition that there was a retainer between Braham and Ambry giving rise to a duty to advise Braham in relation to the tax effectiveness of the partnership structure.
Did Ambry otherwise owe Braham a duty of care?
236 Braham submits that even if there was no solicitor/client relationship between him and Ambry, Ambry owed him a duty of care in tort arising, so he contends, because Ambry’s engagement was for the purpose of establishing a structure to allow the partners’ investments to occur, which included each partner obtaining the anticipated tax benefits that were integral to how the 2006 investment would operate. Ambry knew that compliance with the Product Ruling was critical if each partner was to obtain his or her tax deduction in order to fund the secondary investment with Moneela. The partners of the Lotus Trees Partnership, including Braham, were intended to benefit from the legal work that was performed. Ambry therefore owed a duty of care to Braham, both as a partner and in his own right, because Braham was vulnerable and wanted to protect himself from harm.
237 Braham contends not only that Ambry owed him a duty of care in advising him and acting for him in connection with the Partnership Agreement, the Loan Agreement and the 2006 Great Southern Project, but also in relation to his ‘taxation affairs’.
238 Generally speaking, solicitors do not owe a duty of care to persons who are not their clients. In Hill v Van Erp, Brennan J explained:
Generally speaking … a solicitor’s duty is owed solely to the client subject to the rules and standards of the profession. That is because the solicitor’s duty is to exercise professional knowledge and skill in the lawful protection and advancement of the client’s interests in the transaction in which the solicitor is retained and that duty cannot be tempered by the existence of a duty to any third person whose interest in the transactions are not coincident with the interests of the client.
239 However, a duty to a third person may arise in certain circumstances. In Carey v Freehills, in the course of considering whether a firm of solicitors retained by a company to give advice also owed a duty of care to a director and shareholder of the company, Kenny J outlined circumstances in which a duty of care by a solicitor had been held to arise independently of a retainer:
a duty of care has been said to arise in the context of negligent misstatement causing loss. A duty of care has also been recognised as being owed by a solicitor to a beneficiary of a client’s will, in the absence of reliance by the third party beneficiaries. Significantly, however, there the High Court emphasised the coincidence of interest between the client and the beneficiaries. In Blackwell v Barroille Pty Ltd (1994) 51 FCR 347, a Full Court of this court held that a solicitor owed a duty of care to the client’s trustee in bankruptcy as a result of the reliance by the trustee on the solicitor.
240 As the alleged duty fell outside the recognised categories of relationship giving rise to a duty of care, Kenny J applied a multifactorial approach in assessing whether a duty of care had arisen in the absence of an express or implied retainer, confirming that proper approach is to undertake a close analysis of the facts bearing on the relationship between the plaintiff and the putative tortfeasor by reference to the ‘salient features’ or factors affecting the appropriateness of imputing a legal duty to take reasonable care to avoid harm or injury. Salient features may include the nature of the harm suffered, any indeterminacy of liability, vulnerability to risk of harm and, importantly in the case of duties imposed on solicitor, whether the duty of care would give rise to inconsistent obligations.
241 Braham submits that following factors gave rise to a duty of care owed to him by Ambry when Ambry advised Ludekens on aspects of the 2006 investment:
(a) The Partnership Agreement was prepared for the purpose of being entered into by the partners to implement the partnership structure advised by Ambry for their investments in the 2006 Great Southern project and with Moneela;
(b) The Loan Agreement was prepared for the purpose of being entered into by the Partnership to implement the loan to Moneela;
(c) Ambry thereby assumed responsibility for the partnership structure, knowing that it was fundamental, whichever structure was adopted, for the partners’ investment in the 2006 Great Southern project to conform with the Product Ruling to ensure that they obtained the anticipated tax refunds to use for the loan to Moneela;
(d) Ambry was aware from Braham’s meetings and conversations with Harvey that Braham was to be a partner;
(e) Braham did not have his own solicitor, was not told to retain his own solicitor and hence was vulnerable;
(f) There were no conflicting duties: it has not been suggested that Braham’s interests as a partner were adverse to or in conflict with the interests of Ludekens;
(g) Ambry was conscious (at the very least) that the partners were to be high worth individuals like Braham.
242 These factors can be summarised as follows: (a) Ambry advised on (that is, recommended) the partnership structure knowing the importance of the tax deduction to the partners; (b) Ambry knew Braham was to be a partner; (c) Braham was not told to retain his own solicitor and he was therefore vulnerable; (d) Braham’s interests and those of Ludekens/Lotus Capital were aligned in the proposed arrangements.
243 In light of the factual findings I have made, these propositions must be rejected.
244 While the Partnership Agreement was prepared for the purpose of being entered into by persons who would become partners, Ambry was not retained to advise all parties to the transaction. It was retained in the limited sense described above to advise Ludekens. Furthermore, Ambry was not instructed to advise on the partnership structure or as to whether a partnership was an appropriate vehicle for investing in the 2006 Great Southern project. Ambry gave no advice about the appropriateness of the partnership structure and Ambry did not assume any responsibility for it.
245 Harvey did not know Braham was to be a partner. He did not know who any of the partners were to be.
246 As a result, the loss of Braham’s tax deduction was not foreseeable by Ambry. Ambry had no ability to obtain information from Braham or to exercise control over his tax affairs.
247 Braham was not vulnerable in the relevant sense. Ambry gave him no reason to believe that it was retained to act for all of the partners. The fact that Braham did not engage his own solicitor was a choice that he made. He was a highly skilled and intelligent man who was capable of obtaining his own legal advice and had done so on other occasions. He had accounting advice available to him from Lamanna and financial advice available to him from Ludekens. He had more than sufficient resources to obtain his own solicitors to advise him in relation to the 2006 investment.
248 Braham was counselled to take independent advice about several aspects of the 2006 investment. On 11 June 2006, Lamanna emailed Braham with details of his estimated net income for the year ending June 2006. Lamanna added, relevantly:
In regard to agribusiness and other tax effective investments that you may be currently considering, I strongly recommend that you conduct your own due diligence that, amongst other matters, satisfactorily addresses the following issues regarding each particular investment:
(1) …
(2) Ensure that the promoters(s) is registered with necessary regulatory bodies (ASIC, etc);
(3) Ensure that the promoters(s) is appropriately qualified and registered with recognised professional bodies;
(4) …
(5) Ensure that the investment is supported with an approved tax product ruling issued by the Australian Taxation Office;
(6) …
(7) Is their [sic] an approved prospectus?
… Given the financial investment you are considering, I strongly encourage that you obtain independent financial advice before committing to any such investment.
249 Hence, Braham received professional advice to obtain independent advice before entering into the 2006 investment, including as to whether the proposed investment was supported by the Product Ruling.
250 Indeed, by executing the Partnership Agreement, Braham warranted that he had obtained independent legal advice. Had he taken any time at all to read the Partnership Agreement, he would have been aware that the Silent Partners’ rights and obligations were not the same as those of the Managing Partner and he would have seen the sense in obtaining independent advice.
251 According to Braham, the warranty in cl 13.1(3) of the Partnership Agreement refers to the partners obtaining financial and legal advice with respect to joining the partnership business and is not a warranty that they have obtained independent specialist taxation advice as to the efficacy of the partnership business, the tax aspects of which were integral to it. Braham submits that the financial and legal advice that the partners warranted having obtained was limited to financial advice about joining the partnership in their individual circumstances and to legal advice about their rights and obligations inter se with other partners.
252 I reject this submission. It involves a distinction without a difference. Had the partners obtained advice about joining the partnership and about their rights and obligations in the partnership arrangement, they would have been advised about their entitlement to a tax deduction, as this was integral to their investment and the viability of the arrangement.
253 Finally, Ludekens’ interest in the Lotus Trees Partnership and the interests of the Silent Partners were not one and the same. Ludekens was the promoter of the 2006 investment rather than a co-investor. Pursuant to terms of the Partnership Agreement, the rights and obligations of the Managing Partner were markedly different from those of the Silent Partners, including in relation to the burden of making contributions and bearing losses. The existence of a duty of care in the form pleaded by Braham could have required Ambry to act against the interests of Ludekens. It would, on Braham’s case, have required Ambry to advise Braham to invest directly in the 2006 Great Southern project rather than through Ludekens’ investment vehicle, at an obvious cost to Ludekens. It might also have required Ambry to disclose information acquired from Ludekens and which was subject to the duty of confidentiality.
254 In my view, the duty of care that Braham asserts is not compatible with the obligations that Ambry owed to Ludekens as the client.
255 Braham also asserts a form of ‘penumbral duty’, submitting that a solicitor has a duty not only to do what he or she is instructed to, but also to take positive steps beyond the agreed function to avoid a real and foreseeable risk of loss. Braham submits that even if there were a number of limited retainers, as contended for by Ambry, they were all in connection with or entered into against the background of the 2006 investment. Central to the 2006 investment was compliance with the Product Ruling, but Ambry failed to advise that the Product Ruling did not extend to partnerships investing in the 2006 Great Southern project. According to Braham, Ambry should have advised that the structure proposed offended the Product Ruling, even if not specifically asked to advise about it.
256 It is doubtful that a solicitor owes a ‘penumbral duty’ beyond the scope of the express or implied terms of the retainer. In any event, for the reasons I have given, Ambry owed no duty of care to Braham, penumbral or otherwise. Braham was given a big and unmistakable warning about the 2006 investment by Lamanna on 11 June 2006, at about the time he began to seriously think about his tax position and was considering entering into another tax effective managed investment scheme like the 2005 investment. He did not take independent advice as recommended and, although he warranted when he executed the Partnership Agreement that he had obtained independent financial and legal advice with respect to joining the partnership business, he had not. He was well able to take steps to protect himself but he chose not to do so.
257 Having regard to the matters raised by Braham, I find that Ambry owed him no duty of care.
Was Ambry’s conduct misleading or deceptive?
258 Braham alleges that Ambry engaged in misleading or deceptive conduct by representing to him and/or to Ludekens that a partnership structure would comply with the Product Ruling. As the structure fell outside the Product Ruling, Ambry engaged in conduct that was misleading or deceptive. In the alternative, Braham alleges that Ambry failed to advise that the Product Ruling did not expressly extend to partnerships investing in the 2006 Great Southern Project or that investing in the 2006 Great Southern Project through the Partnership Agreement and the loan to Moneela would not comply with the Product Ruling.
259 Braham says that he entered into the Lotus Trees Partnership as a Silent Partner by reason of Ambry’s misleading or deceptive conduct. In about September 2005, he was shown the Procedure Document and the Flowchart by Harvey and Ludekens and was walked through them. The Procedure Document represented that the General (Managing) Partner would acquire the woodlots and that the Product Ruling allowed investors to claim immediate tax deductions. According to Braham, Ambry thereby represented to him that the partnership structure came with the Product Ruling.
260 Braham further contends that even without these representations, inherent in the very purpose of the partnership structure was that it came within the Product Ruling and, accordingly, the fact that it did not was an important qualifying fact that needed to be disclosed by Ambry. Without such a disclosure, the preparation and presentation of the Partnership Agreement (and the Loan Agreement, insofar as the two documents were in tandem the essential investment) amounted to misleading or deceptive conduct. They conveyed a representation that the structure would work.
261 Braham submits further that even if Harvey made no direct representation to him that the partnership structure came within the Product Ruling, such a representation was made to Ludekens and that he, Braham, is entitled to rely on ‘indirect causation’, since the loss was caused to him by Ludekens’ reliance on Ambry’s representation. In this context, Braham asserts that Harvey conceded that he took Ludekens through the Procedure Document and this representation continued and was not withdrawn or qualified when the Partnership and Loan Agreements were drawn up in June 2006. Having satisfied himself that the structure would work, Ludekens set about implementing it by marshalling potential partners, obtaining advice about discrete matters and then instructing Ambry to prepare the Partnership Agreement and Loan Agreement.
262 Braham therefore alleges that he suffered loss as a consequence of statements made to him and to Ludekens, since had he known what was being done offended the Product Ruling, he would not have proceeded in the way that he did.
263 In my view, there is no substance to the allegations of misleading or deceptive conduct by Ambry. Ambry did not produce the Procedure Document or the Flowchart. These documents were prepared and disseminated by Ludekens. Harvey did not ‘walk’ Ludekens through these documents in the sense that he explained the documents to Ludekens, because they were Ludekens’ own handiwork. Harvey himself was unimpressed by the Procedure Document. In his evidence he identified features of the Procedure Document that were ‘stupid’ and considered that it appeared to have been ‘cobbled together’. Ambry was not retained to give legal advice to Ludekens regarding the investment model generally, or specifically as to its compliance with the Product Ruling. No representations were made in that regard to Braham either directly or indirectly through Ludekens.
264 Furthermore, having regard to this context and to the findings that I have made concerning the retainers with Ludekens, the act of drafting the Partnership and Loan Agreements did not constitute a representation to the Silent Partners that they would become eligible for tax refunds for of their investments in the 2006 Great Southern project.
265 The allegation that Ambry engaged in misleading or deceptive conduct towards Braham is not made out on the evidence.
Conclusion on liability
266 There was no retainer, either express or implied, between Ambry and Braham. Ambry owed no duty of care to Braham in contract or in tort arising from its role in drafting the Partnership and Loan Agreements or from the legal advice provided to Ludekens in July and August 2005 and in May and June 2006. Furthermore, Ambry made no representations to Braham, either directly or through Ludekens, let alone representations that were misleading or deceptive.
267 This is sufficient to dispose of the proceeding. The proceeding must be dismissed.
Issues remaining undetermined
268 Considerable time was spent in the course of the trial on the remaining questions of negligence, causation and loss and damage. Expert evidence was adduced in relation to breach of duty and causation. Ambry also raised contributory negligence and proportionate liability in its defence, although little or no time was spent on these questions.
269 I have given careful consideration to whether I should make findings necessary for the disposition of the remaining issues in the proceeding in case I am subsequently held to be wrong in concluding that there was no express or implied retainer between Ambry and Braham, that Ambry otherwise owed no duty of care to Braham and that Ambry did not engage in deceptive or misleading conduct.
270 The authorities confirm that it may be efficient to make such findings of fact as may be required for the disposition of all issues at trial should their resolution become necessary upon any appeal. Thus, in Rebenta Pty Ltd v Wise, Basten JA (Ipp JA and Sackville AJA agreeing) said as follows:
It is often desirable in the case of a trial judge, who has heard evidence on a matter, to determine factual questions arising from the evidence, even if they are not necessary on conclusions which have been reached on other issues. That is because some account must always be taken of the possibility of a successful appeal, requiring the further evidence to be assessed, or in all likelihood repeated on a rehearing. The costs which are likely to flow to the parties in such an event will rarely be justified by the savings in judicial time. Further, such an event is more likely where there is a full appeal by way of rehearing, than where there is a more limited right of appeal.
271 In Housden v Boral Gypsum Ltd, Tate and McLeish JJA also considered the need for a trial judge to determine issues that were not dispositive of the proceeding. Housden involved a claim under the Accident Compensation Act 1985 in which the dispositive issue was held to be whether the claimant cut certain plasterboard sheets using a horizontal or vertical method. Having determined that issue against the claimant, the trial judge dismissed the claim without resolving a number of important issues. Justice Tate considered that the primary judge should have determined these issues for the following reasons:
The inevitable consequence of these issues not being decided at trial meant that, had it been shown on appeal that the judge’s finding with respect to the dominant method of cutting had been made in error, the proceeding would have had to have been remitted to the County Court. On the remittal it may have been necessary for a further trial to be conducted and appropriate findings made. This would have led to the parties incurring unnecessary further expense. It would also have led to judicial time and resources being expended on a proceeding which had already occupied about 18 days of court time.
…
the question of whether to determine more than the decisive issue in a case will be a matter for the trial judge to resolve in the individual circumstances of the case. There can be no hard and fast rule of universal application. The judge here correctly identified the decisive issue. He also correctly determined the decisive issue. Nevertheless, in the circumstances of a lengthy trial, as occurred here, where evidence was called from multiple witnesses and the factual matrix was fully explored, in my view the judge should have proceeded to have decided the remaining issues beyond that which was decisive. He should have considered what conclusions he would draw if he were wrong on the decisive issue. This is especially so because what was in contest included questions of the basic legal relationships between the parties.
272 For his part, McLeish JA said:
when assessing whether it is desirable to decide issues not strictly necessary to determine, a trial judge should consider in particular whether the court should make findings of fact in relation to those issues. Even if not all issues are to be finally dealt with, it may often still be efficient to make such findings of fact as would be required for the ultimate disposition of all issues in the trial, should their resolution become necessary upon any appeal.
That is not to suggest any universal rule. For example, the findings of fact that have been made may dispose of the case in a way that makes further factual inquiry or legal examination as to particular points meaningless or artificial. I express no opinion as to whether the judge in the present case ought to have determined any or all of the remaining issues in the trial.
273 In Carey v Freehills, the alleged duty of care was found not to exist between the solicitors and plaintiffs and no breach was demonstrated. However, Kenny J went on to ‘sketch out’ issues of causation, and observed that the claim for loss and damage faced factual and legal hurdles. However, in relation to loss and damage, her Honour said:
Given the findings already made, findings in relation to loss and damage would be entirely hypothetical and are not sensibly made. Any comment I would make here upon the recoverability question would not be made on the basis of ‘actual findings of fact’. Any supposed ‘findings’ would require me to assume an abundance of unproven suppositions and, in doing so, I could not be other than inexact. Such inexactness would not be of assistance in such as case as this, or in any future proceeding in which this recoverability question requires determination.
274 In this case, to make findings enabling the disposition of the allegations of breach of duty would require the assumption of facts supporting the existence of a duty of care. It is impossible to consider allegations of breach of duty in a vacuum. Even if the source of the duty is pin-pointed as the 19 June 2006 retainer and the drafting of the Partnership and Loan Agreements, the facts surrounding entry into that arrangement will be relevant to the scope of the duty and to what losses may be recoverable for breach. To consider all of the factual and circumstantial possibilities that might give rise to a duty of care would involve, as Kenny J said in Carey, the assumption of an abundance of unproven suppositions or, worse, facts that I have held to be false. At the very least, it would involve the Court grappling with shadows. The same difficulty affects consideration of whether there was contributory negligence and whether liability must or should be apportioned.
275 The difficulty can be illustrated by reference to the evidence on negligence adduced by Braham.
276 In support of his allegation that Ambry was negligent in advising on and preparing the documentation for the Lotus Trees Partnership, Braham relied on an expert report from an accredited tax law specialist, Mr Arthur Athanasiou. Mr Athanasiou concluded that in order to ensure an entitlement to a deduction for the initial investment for the year ended 30 June 2006 as set out in the Product Ruling, a competent and prudent legal practitioner specialising in taxation law would have advised each individual partner to invest in the 2006 Great Southern project individually and as a natural person. He opined the alleged conduct of and methodology used by Ambry was inconsistent with generally accepted professional practice standards.
277 Mr Athanasiou prepared his report and formed his opinion on the basis that the facts pleaded by Braham in his Further Amended Statement of Claim dated 12 September 2016 were true and accurately reflected the events that actually occurred. He assumed that as at 30 June 2006, there was a valid partnership ‘constituted by the Defendant (sic) and third parties under a written and signed agreement dated 1 January 2006’. Hence, Mr Athanasiou’s evidence was based on the pleaded allegations against Ambry, namely, that Harvey/Ambry:
(a) in or about July 2005, advised Braham on the financing of an investment loan through Moneela to generate an income stream to repay financing loans for the initial investment in woodlot interests;
(b) prepared cashflow spreadsheets for the benefit of Braham;
(c) encouraged Braham to invest in the woodlot interests;
(d) in or about Spring 2005, made representations to Braham about Harvey’s expertise;
(e) made representations to Braham about income tax deductibility to each partner of the Partnership (as an investor) for incurring the establishment services fee;
(f) made representations to Braham that the purpose of establishing the Partnership was to obtain better finance terms, presumably from GSF, to pay the establishment services fee;
(g) made representations to Braham that the payment of an establishment services fee through the Partnership came within the terms of the Product Ruling.
278 None of these assumptions was established in the proceeding. None is based in fact. Reliance on these false assumptions means that Mr Athanasiou’s evidence about the advice that would be given by a competent and prudent legal practitioner could be of no or very limited assistance in this proceeding.
279 If I am wrong in holding that Ambry owed no contractual or other duty of care to Braham, it will be necessary for (different) facts supporting the duty to be found in order for the scope and nature of the duty to be identified. In other words, it will be necessary to remit the proceeding to the Trial Division to identify the duty and to consider whether there has been a breach of any such duty. In these circumstances, I see no utility in deciding on a hypothetical basis whether causation is or could be established or whether the losses claimed are recoverable, and I decline to do so.
280 I am reinforced in this view by the peculiar difficulties attending the causation and loss analysis in this proceeding, which, on Ambry’s case, would require the Court to speculate about whether the liquidator of GSF will eventually seek to enforce the GSF loan against Braham as guarantor. I have considered whether the question of causation can be determined on assumed facts so as to be dispositive of the proceeding if I am wrong about liability, and I do not consider that this is the case.
281 As a final matter, I have not drawn any adverse inferences from Braham’s or from Ambry’s decision not to adduce any evidence from Ludekens. It was unnecessary to do so. I observe, however, that Ambry’s case was well supported by the documentary evidence; Braham’s was not.
Disposition
282 The proceeding is dismissed.
SCHEDULE OF PARTIES
S CI 2012 03622
BETWEEN
SIMON BRAHAM
Plaintiff
- and -
acn 101 482 580 pty ltd
First Defendant
ROMAD FINANCIAL SERVICES
Second Defendant
RORY Mccleod deutsch
Third Defendant
DR ANDREW LUDEKENS
Fourth Defendant
3
1
0