Edwards v Legalese Pty Ltd T/A Peter Scragg & Associates

[2012] SADC 95

DISTRICT COURT OF SOUTH AUSTRALIA

(Civil)

EDWARDS & ORS v LEGALESE PTY LTD T/A PETER SCRAGG & ASSOCIATES

[2012] SADC 95

Judgment of His Honour Judge Beazley

26 July 2012

TORTS - NEGLIGENCE - ESSENTIALS OF ACTION FOR NEGLIGENCE - DUTY OF CARE

PROFESSIONS AND TRADES - LAWYERS - DUTIES AND LIABILITIES

SOLICITOR AND CLIENT - PROFESSIONAL NEGLIGENCE

Nature of retainer in determining the scope of the duty of care - specific advice generally not sought as to loan negotiations - client experienced businessman - duty to warn where the plaintiffs' commercial interests at risk - effect of changing circumstances in determining the scope of the duty of care - whether the defendant did advise the first plaintiff of such risks - whether omission to advise plaintiffs of risks inherent in failing to meet commitments to lenders - whether duty of solicitor to remind client of advice - whether defendant liable in contract and/or in tort - relevance of inadequate record keeping by the defendant - whether any alleged breach of duty was causative of the plaintiffs' alleged losses, or ought result in nominal damages only - limitation period in respect of contractual claims.

HELD: 1)The plaintiffs' claim in contract is statute barred. 2)The plaintiffs' claim in tort dismissed because no breach of duty established by the plaintiffs. 3)Had the plaintiffs proved any such breach, they had failed to establish that such breach was causative of their losses.

DAMAGES

Claim by plaintiffs for loss of opportunity to continue to operate the business which was lost on the appointment of Receivers on 22 July 1999 - assessment of Loss - distinction between personal cause of action vested in first and second plaintiffs as guarantors and as shareholders of third plaintiff and Falzon Investments Pty Ltd (In Liquidation) - consideration of "reflective loss" principle of company law that a shareholder cannot sue to recover loss caused to the value of shares by reason of alleged harm to the company - such alleged losses as shareholders, per se, are merely a reflection of losses suffered by Falzon Brick Co and Falzon Investments and are not recoverable, at law, by the first or second plaintiff as shareholders.

EVIDENCE

Hypothetical evidence of what the plaintiffs may have done in assumed circumstances - General principles in Browne v Dunn, Jones v Dunkel and Blatch v Archer - whether Jones v Dunkel or Blatch v Archer inference ought be drawn against the defendant for failure to call a witness - approach to oral recollections of events which occurred at least 11 years previously - weight ascribed to contemporanous documents - expert evidence as to insolvency - general principles - whether doubtful solvency or inevitable insolvency - inability to pay debts as they fell due - cash flow or balance sheet test.

Astley v Austrust Ltd (1999) 197 CLR 1; Tasmanian Sandstone Quarries Pty Ltd v Tasmanian Sandstone Pty Ltd, and Legalcom Pty Ltd [2010] SASCFC 6; and [2009] SASC 111; Commonwealth v Cornwell [2007] 81 ALJR 933 at [4]; Gattellaro v Spencer [2011] NSWCA 415, and [2010] NSWSC 1122; Hall v Foong (1995) 65 SASR 281; Hawkins v Clayton (1988) 164 CLR 539; Midland Bank v Hett, Stubbs v Kemp [1979] 1 Ch 384; Griffiths v Evans [1953] 1 WLR 1424; Palios Meegan & Nicholson v Shore (2010) 108 SASR 31; Meerkin & Apel v Rossett Pty Ltd (1998) 4 VR 54; Capital Brake Service Pty Ltd v Meagher [2003] NSWCA 225; Artistic Builders Pty Ltd v Nash [2010] NSWSC 1442; Heydon v Nama Ltd (2000) 51 NSWLR 1; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; Johnson v Gore Wood & Co (2001) 2 AC 1; Thomas v D'Arcy (2005) 1 Qd 666; Christensen v Scott (1996) 1 NZLR 273; Ballard v Multiplex (2008) 68 NSWLR 1019; Gould v Vaggelas (1985) 157 CLR 215 at 219; Prudential Assurance Co Ltd v Newman Industries (No 2)(1982) 1 Ch 204; Gould v Vaggelas (1984) 157 215; Johnson v Gore Wood & Co [2002] 2 AC 1; Thomas v D'Arcy [2005] 1 Qd R 666; Groeneveld Australia Pty Ltd v Nolten [2010] VSC 249; Mercedes Holdings Pty Ltd v Walters (No2) [2011] FCA 236; David Ballard v Multiplex (2008) 68 ACSR 208; Willoughby v Clayton UTZ [2005] WASC 47; c.f. Christensen v Scott [1996] 1 NZLR 273; Jones v Dunkel (1959) 101 CLR 298; Spence v Demasi (1988) 48 SASR 538; Manly Council v Byrne (2004) NSWCA 123; Putland v Nowak [2012] QCA 121; The Bell Group (In Liq) v Westpac Banking Corp (No 9) (2008) WASC 239, considered.

EDWARDS & ORS v LEGALESE PTY LTD T/A PETER SCRAGG & ASSOCIATES
[2012] SADC 95

Introduction

1. This action, a claim in negligence and/or breach of retainer against the defendant solicitors, arises out of the demise of the clay brick and paver manufacturing business of Falzon Brick Co Pty Ltd, (“Falzon Brick Co”). That business had for many years been conducted upon certain land at St Agnes, the registered proprietor of which was a related entity, Falzon Investments Pty Ltd (“Falzon Investments”).

2. On 22 July 1999, the Commonwealth Bank of Australia (“the CBA”), appointed Bruce James Carter (“Mr Carter”) as the Receiver and Manager of Falzon Brick Co pursuant to powers contained in a Mortgage Debenture, dated 28 August 1989, granted by Falzon Brick Co. On the same day, the CBA appointed Mr Carter as the Administrator of Falzon Investments pursuant to a charge granted by Falzon Investments over its assets, including the land at St Agnes.

3. Although clay bricks and pavers had been manufactured by Falzon Brick Co since the 1960s, the background to the subject action involves the conduct of those directors and shareholders (“Mr and Mrs Edwards”) who acquired the shares of Falzon Brick Co and Falzon Investments in 1989; their financial difficulties in meeting their commitments to the CBA and the Commonwealth Development Bank (“the CDB”), each of which had funded Mr and Mrs Edwards’ acquisition and ongoing operation of the business; their dispute with the vendors of the respective shares (“the Falzons”) and, ultimately, the alleged negligence of Legalese Pty Ltd, (“the defendant”), the solicitors representing Falzon Brick Co in 1998 and 1999.

4. The plaintiffs in the subject action, are Kenneth Edwards; his wife Raelene Edwards; and Falzon Brick Co. Mr and Mrs Edwards, at all relevant times, since 16 October 1989, had been the directors and shareholders of Falzon Brick Co and Falzon Investments.

5. They bring this action against the defendant, alleging that it, by its employee Peter Scragg, had breached the terms of certain oral retainers with them containing implied terms that the defendant would exercise reasonable care, skill and diligence in the discharge of the retainers, and a corresponding duty of care in tort. They assert that the defendant had failed to advise them adequately about an alleged restraint upon the rights of the CBA to act upon any breaches by the plaintiffs of the terms of their loan agreement with the CBA. The defendant denies any such breach.

6. The plaintiffs’ claim relates directly to events which occurred between the months of February 1998 and July 1999. It involves some complex questions of law, including the status of the “reflective loss principle”, pursuant to which a shareholder, generally, cannot sue to recover loss caused to the value of shares, as such losses merely reflect the losses suffered by the company itself.[1]

   [1]    Johnson v Gorewood & Co (2002) 2 AC 1, Prudential Assurance Co Ltd v Newman Industries Ltd (No2) 1 ch 204; Thomas v D'Arcy [2005] 1 Qd 666; Mercedes Holdings Pty Ltd v Waters (No3) [2011] FCA 236; cf. Christensen v Scott [1996] 1 NZLR 273

7. It will be necessary to distinguish between the pleaded claims in contract on the one hand, and tort on the other. A defendant cannot plead contributory negligence to a claim brought for breach of contract which, as in the subject case, predates the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001.

8. Subject to the terms of any such retainer, a solicitor has a concurrent duty in both contract and tort to take reasonable care in the provision of services, and the client may assert the cause of action most favourable to him.[2] There is clearly a distinction, at least at the time of the events in July 1999, between a client’s remedy in contract as compared with tort.[3]

   [2]    See Astley v Austrust Ltd (1999) 197 CLR 1.

   [3]    See also Commonwealth v Cornwall [2008] 81 ALJR 933 at [4]

9. In Astley v Austrust Limited, supra, the High Court said, at [47]:

   The implied term of reasonable care in a contract for professional services arises by operation of law. It is one of those terms that the law attaches as an incident of contracts of that class. It is part of the consideration that the promisor pays in return for the express or implied agreement of the promisee to pay for the services of the person giving the promise. Unlike the duty of care arising out of the law of tort, the promisee in contract always gives consideration for the implied term and it is a term that the parties can, and often do, bargain away or limit as they choose. Rather than ask why the law should imply such a term in a contract for professionals services, it might be more appropriate to ask why should the law of negligence have any say at all in regulating the relationship of the parties to the contract? The contract defines the relationship of the party. Statute, criminal law and public policy apart, there is no reason why the contract should not declare completely and exclusively what are the legal rights and obligations of the parties in relation to their contractual dealings. The proposition that, in the absence of express agreement, tort and not contract regulates the duty of care owed by a professional person to a person hiring the professional services is inconsistent with the historical evolution of professional duties of care which, until recently, could the subject of action only in contract. Moreover the conceptual and practical differences, between the two causes of action remain of considerable importance. The two causes of action have different elements, different limitation periods, different tests for remoteness of damage and as will appear different apportionment rules.[4]

   [4]    See also Commonwealth v Cornwall [2008] 81 ALJR 933 at [4]

10. The starting point in determining whether a solicitor is liable to a client, is the scope of the retainer. The alleged retainer was not reduced to writing. The defendant has submitted that any claim in contract is statute barred. Subject to my findings on that question, one issue which featured prominently in final addresses is the identity of the parties to any such alleged retainer. While the plaintiffs have pleaded, in the subject proceedings, that the parties to such oral retainers with the defendant were Mr Edwards and Falzon Brick Co, their final submissions were premised upon the retainer, in some way, including a duty to protect the interest of Mrs Edwards.

11. The defendant submitted that Mr and Mrs Edwards were not parties to nor covered by any oral retainer with it. It referred to an inconsistent assertion deposed to by Mr Edwards, in other proceedings, to the effect that the defendant had been retained solely by Falzon Brick Co.[5]

    [5]    Magistrates Court Action No 14995 of 2000 - Ex D 26, and Ex P3, p 1072.

12. As is readily apparent, over 11 years had elapsed between the demise of the business, and when this action came on for trial.

13. Although the claim relates to certain discreet periods in which it is asserted by the plaintiffs that the defendant failed to give appropriate advice to them, I will set out, in some detail, the trading history of Falzon Brick Co and its dealings with the CBA and the CDB over the 10 year period between 1989 and 22 July 1999.

14. This detailed trading history is necessary as the defendant has asserted that, notwithstanding the fact that the business of Falzon Brick Co had survived for some 10 years by 1999, it was inevitably destined to fail.

15. The resolution of the disputes between the parties has been made all the more difficult due to that passage of 11 years since the appointment of Mr Carter by the CBA on 22 July 1999. That delay, understandably, adversely affected the memory of all of the witnesses.

16. The inherent doubts which arise as to the reliability of oral recollections of events which occurred many years earlier were noted by the High Court of Australia in West v GIO (NSW),[6] and more recently in Bell Group Ltd v Westpac Banking Corp (No 9)[7] and Fifteenth Eestin Nominees Pty Ltd v Rosenberg.[8]

    [6] (1981) 148 CLR 62 at 69.

    [7] [2008] WASC 239.

    [8] [2009] 24 VR 155.

17. In Savril Contractors Limited v Bank of New Zealand,[9] the Court of Appeal noted research to the effect that:

    A fair judicial decision is unlikely by the time 10 years has passed after the occurrence of the events on which a claim is based due to the deterioration of the evidence of the true facts….at this point adjudication will as likely result in a judicial remedy for a claimant with a spurious claim as one with a meritorious claim.

    [9] (2004) NZCA 4 at [18].

18. In Capital Break Service Pty Ltd v Meagher,[10] the Court of Appeal (NSW) expressed the need for caution in making findings of fact, and in forming conclusions on liability in professional negligence, because of the danger associated with hindsight. That warning is particularly apt where so much time has elapsed between the date of the alleged advice; the subsequent date of the alleged loss, and the evidence given during the trial.

    [10] [2003] NSWCA 225 at [30] and Artistic Builders Pty Ltd v Nash [2010] NSWSC 1442.

19. In Hall v Foong, Debelle J. said:[11]

    It is important that the court does not allow hindsight to insinuate itself into its reasoning. Hindsight is no doubt useful in other contexts but, as a general rule, it must be avoided when determining liability. As Megarry J observed in Duchess of Argyll v Beuselinck [1972] 2 Lloyds LR 172 at 185:
    In this world there are few things that could not have been better done if done with hindsight. The advantages of hindsight include the benefit of having a sufficient indication of which of the many factors present are important and which are unimportant. But hindsight is no touchstone of negligence. The standard of care to be expected of a professional man must be based on events as they occur, in prospect and not in retrospect.
    

    [11] (1995) 65 SASR 281.

    In addition, it is not possible to identify one course only as being the proper advice to be given by the defendant to his client. Opinions will differ as to what was the most appropriate advice. I do not think a court could fairly conclude that the defendant had been negligent if he had advised either of the first two options or even if both had been discussed and a choice made between them. Advice of this kind involved an exercise of judgment. A solicitor is not guilty of negligence merely because he has committed an error of judgment unless that error is grossly made: Faithfull v Kesteven (1910) 103 LT 56; Fletcher & Son v Jubb [1920] 1 KB 275; Duchess of Argyll v Beuselinck.

    Procedural Matters

20. The subject proceedings have a long and vexed history, having been commenced in the Magistrates Court on 14 July 2005, almost six years after the appointments of Mr Carter by the CBA to the respective entities.

21. On 21 September 2010, after the commencement of the trial, the plaintiffs sought and were given leave to file a fourth Amended Statement of Claim.[12]

    [12] T. p 621.

22. An application by the plaintiffs later in the trial to further amend their pleadings to include a claim by Mr Edwards for damages for “distress, vexation and inconvenience” was refused by this court.[13]

    [13] T. pp 236-238. cf. Mackay v City of Campbelltown (1988) 15 NSWLR 501, and AON Risk Services Aust Ltd v Australian National University (2009) 239 CLR 175.

23. Various expert reports were tendered by the parties with respect to the solvency, at various times, of Falzon Brick Co, and the proper method for valuing its assets as at the month of July 1999.

24. At the commencement of the trial the plaintiffs sought leave to tender an additional expert accounting report from the Chartered Accountant, Matthew White. This report was not an addendum report but, in effect, an acknowledgement that his previous reports were based upon incorrect assumptions. Mr White, in evidence in chief, described this proposed report as “more soundly based”, having regard to the provision of additional financial statements of the Falzon Brick Co business.[14] The defendant objected to the tender of that report. I received it de bene esse. I have concluded that the report ought to be received in evidence, and that the defendant, following an adjournment, was not embarrassed by its receipt into evidence.

    [14] MFI P 37; T. pp 797-800.

25. Some eight days into the trial, an application[15] was made to refer the within proceedings to mediation. That application was opposed, and was ultimately refused by the Court.

    [15] T. pp 623 and 1210-1211.

26. There were disputes between the parties as to whether full discovery had been made. Eventually, late in the trial, the plaintiffs located and produced a large number of additional business and financial records, including taxation records and the minute book of Falzon Brick Co.[16]

    [16] Affidavit of Mr Deller sworn 9 November 2010 and T. p 717.

27. Some nine volumes of documents were eventually admitted into evidence. Objections had been taken by the parties as to some of them. Save for certain documents which were clearly inadmissible, I took the view that I ought to receive the balance of documents, to which there had been objection, de bene esse. I do not intend to give individual rulings on each document in these reasons.[17] If any documents are referred to, and form part of the reasoning process, I have regarded them as relevant. If I do not mention them, then I have regarded them as either inadmissible, or of insufficient weight to influence the reasoning process.

    [17] T. pp 102 - 104.

    Synopsis

28. In order to understand the basis of the plaintiffs’ claim, I set out now, in a chronological form, an overview, which reflects my findings of facts, established, at the least, by reliable contemporaneous documents tendered at the trial.[18]

    [18] Fifteenth Eestin Nominees Pty v Rosenberg [2009] 24 VR 155 at [112].

29. The parties differ as to the inferences which may be drawn from these facts, in consequence of other events occurring at relevant times.

30. Mr and Mrs Edwards had retained other solicitors to advise them with respect to the purchase of the Falzon Brick Co business, and the respective funding arrangements in 1989. They did not however obtain any independent assessment of the viability of that business.[19] There can be no doubt, at least in hindsight, that Mr and Mrs Edwards had paid an excessive price for the assets of Falzon Brick Co in 1989, and that, accordingly, they were obliged to borrow large sums at high interest rates from the CBA and the CDB.

    [19] T. pp 245-251.

31. On 19 May 1989 Mr and Mrs Edwards entered into a contract to purchase, from the Falzon family, the business plant and equipment of Falzon Brick Co and the St Agnes land from Falzon Investments in addition to stock in trade, which contract was conditional upon, inter alia, finance being obtained in the sum of 1.3 million dollars. Their application for finance from another financier was unsuccessful.

32. They had subsequently elected to purchase the shares of the two entities for the sum of $1,200,000, in addition to stock in trade in the sum of $106,465.[20] They had borrowed $750,000 from the Commonwealth Development Bank (“CDB”) at an initial interest rate of 20.25%; $480,000 from the CBA of which $370,000 was at the initial interest rate of 20.25% and the balance on overdraft at 22%[21]; and $100,000 from the Falzon family as vendor finance, the latter being for 2 years at 15% per annum.[22]

    [20] Ex P1, p 240.

    [21] Ex P1, p 128.

    [22] T. pp 251-256.

1. Settlement took place on or about 16 October 1989.

2. Mr Edwards had no experience in the brick making field prior to the subject purchase. He had however worked in various fields over the years including mechanical work, building work, real estate and the supply of lucerne pellets.[23] It was common ground that he was a “self-made man”, one who was an experienced business man, highly accomplished in negotiating financial arrangements with lending institutions.[24]

   [23] T. pp 57-70.

   [24] T. pp 241-244 and 1097-1098.

3. Mr Edwards viewed the purchase as a means by which he could provide a future business opportunity for his two sons. I find that Mrs Edwards had little or no involvement in the business, and regarded it as, in effect, her husband’s business.

4. Following the subject purchase, however, Falzon Brick Co immediately faced trading difficulties. In 1990, just one year later, Mr Edwards had sought alternative financial arrangements from the CDB. By letter dated 21 November 1990, the CDB refused the request, and demanded interim financial statements.[25]

   [25] Ex D16

5. Mr Edwards deposed, in evidence in chief, to his belief that the Falzon Brick Co business was not able to sustain the CDB loans with interest rates allegedly increasing from 20.25 to 24 to 25% per annum.[26] In fact, over time they had decreased. Falzon Brick Co, however, still fell into arrears with its loan from the CDB, which arrears were exacerbated by a kiln explosion in 1991.

   [26] T. p 87.

6. In 1991 or 1992 Mr Edwards complained to Emanuel Falzon that the plaintiffs were unable to repay the vendor finance because the figures represented by the Falzon family had not been achieved by them. He deposed that an agreement was reached at that time that the Falzon family would forgive the debt of $100,000.[27] Subsequently, however, the Falzons commenced proceedings to recover the alleged debt.

   [27] T. p 105.

7. At or about that time, Mr Edwards incorporated a company known as Kilnblast Pty Ltd of which he was the director and shareholder.[28] It was subsequently employed on or about 18 December 1998 in factoring debts on behalf of Falzon Brick Co.

   [28] T. p 106.

8. Despite the construction of a larger kiln in March 1992, Falzon Brick Co fell further into arrears with respect to the CDB loan.[29]

   [29] T. p 92.

9. By early 1993 its sales were described “as the worst on record”.[30] In addition it faced trading difficulties consequent upon conditions imposed upon it by the Environment Protection Authority (“the EPA”). Disputes with the EPA continued to plague the plaintiffs until the appointments of Mr Carter in 1999.

   [30] Ex D22

10. Those trading difficulties continued, with the loss of another kiln, and price pressures caused by cheaper products being marketed by competitors.[31]

    [31] Kiln explosions occurred in 1991 and 1994, T. pp 699-700.

11. On 20 June 1994, Mr Edwards wrote to the CDB acknowledging, “that we cannot repay, and have no prospect of repaying [the loan obligations to it]”;

12. Mr Edwards offered to pay, to the CDB, the proceeds of the sale of two of his properties, and the proceeds of the insurance claim in respect of the loss of a kiln, thereby reducing the borrowings to the CDB. Mr Edwards implored the CDB to write off part of the loan, on the basis that, upon a sale of the company’s assets, there would be little left over after the CBA, as first mortgagee, was paid out.

13. He explained that if he did not keep his equity in his home then it is “senseless to keep working for less than $10.00 an hour”. He wrote further; “if your bank decides to require sale of the company’s assets and my personal assets, then frankly I cannot resist it”.

14. However it was the CBA, pursuant to the respective security documents, which was entitled to be paid the proceeds of the insurance claim. Accordingly in or about early August 1994, Falzon Brick Co paid to the CBA, the sum of $132,000.[32] Thereafter Mr Edwards attended with another solicitor upon the CBA to discuss the outstanding loan.[33]

    [32] Ex P3, pp 940 and 1023.

    [33] T. pp 340-341.

15. On 17 August 1994 the CBA altered its lending arrangements, granting Falzon Brick Co a fully drawn loan of $400,000 (“the 1994 CBA loan”) secured, inter alia, by equitable mortgages over the respective assets of Falzon Brick Co, and Falzon Investments; and by guarantees executed by Mr and Mrs Edwards.

16. On that day the CBA wrote to Falzon Brick Co detailing the effect of the 1994 CBA loan, the relevant terms of which are as follows:

    Fully drawn loan  $400,000

    The facility is subject to the banks usual terms and conditions generally, for facilities of this type, and in particular to the following –

    Term of loan

    The term of the loan is 10 years approximately, based on the nominal interest rate quoted in this letter.

    Repayments

    Monthly instalments of $4,000 on the loan are required to cover repayment of loan principal and interest. The first instalment will be due one month after the loan is funded. Repayments are to be reviewed annually and upon repayment of your Commonwealth Development Bank loan with a view to reducing the overall term. Should interest rates rise at any time, then repayments are to be increased at that time to cover the additional cost.

    Interest Rate

    Interest is calculated daily on the outstanding balance and is charged monthly on the first business day of every month and on repayment of the loan.

    The nominal rate applicable to the loan facility is 9.50 per cent per annum (0.79 per cent per interest debiting period), which equates to an annual effective rate of 9.92 per cent and which is the banks loan index rate. (This represents a concession of 1.75 per cent of the banks usual rate for this facility). The nominal rate may be varied in line with movements and the banks respective index rates at any time during the course of the facilities without written notice to you.

    Movements in the banks index rates can be monitored by you, as the rates are published each Monday in the Advertiser under the heading “Commonwealth Bank Lending Rates”.

    Should the loan not be conducted on the banks usual terms and conditions, the bank may, at its discretion, apply a higher rate equivalent to the banks loan index rate plus 4.5 per cent.

    Regardless of any interest rate movements, interest will continue to be calculated daily on the outstanding balance of the facilities.[34]

    [34] Volume 1, Tender Book p 290.

17. The plaintiffs did not seek legal advice from the defendant about the terms of the 1994 CBA loan, until almost four years later, in the month of February 1998.

18. On 7 November 1994 the CBA increased the monthly loan payments, due by the plaintiffs, to the sum of $4,270 per month.

19. The plaintiffs continued to meet their obligations to the CBA in early 1995, but fell heavily into arrears with respect to the CDB loan. Eventually the CDB elected to write off about $490,000 of its loan.[35]

    [35] Volume 1, p 338

20. By August 1995, Mr Edwards had entered into negotiations with the CDB to pay out the then reduced balance of its loan to Falzon Brick Co. Ultimately the CDB decided, no doubt because of its adverse view of the Falzon Brick Co business, to write off that reduced balance of $304,240.35 owed by the plaintiffs, upon condition that they pay to it a further reduced sum of $104,601.12.

21. To enable the offer from the CDB to be accepted, Mr Edwards “obtained” $100,000 from Barry Hodby. That sum was secured over the Edwards home at Tusmore. In a note purportedly detailing instructions from Mr Edwards much later on 23 September 1998, Mr Scragg recorded that Mr Hodby had initially sought to purchase a half interest for $150,000 but decided after three months not to proceed as “he felt that it was not making enough money”.[36] I accept that that note accurately reflects Mr Edwards’ instructions at that time.[37]

    [36] Ex P2, p 805.

    [37] cf. evidence of Mr Hodby. T. p 643.

22. In any event the said sum of $100,000 was paid to the CDB to forgive the debt at the reduced figure.[38]

    [38] T. pp 108 and 644-645.

23. In 1996, Mr Edwards had fallen ill. He left his sons Paul and Linkoln to manage the business. There was a dispute as to the nature of Mr Edward’s illness. In a note of a meeting with Mr Edwards, again taken much later by him, on or about 24 May 1999, the chartered accountant, David Kidman, who was assisting Mr Carter, had recorded comments by Mr Edwards about that alleged illness. Mr Edwards deposed that he did not suffer from such an illness.[39] Save that I accept that Mr Kidman did accurately record comments made to him by Mr Edwards, it is unnecessary for me to reach any conclusion save that Mr Edwards was absent from work for several months.

    [39] T. pp 160 (xn) and  534 (xxn).

24. The CBA had asserted that if the CDB loan was paid out, it was entitled, pursuant to the 1994 CBA loan, to raise the monthly loan repayments from the $4,270 which had been fixed since November 1994. It purported to do so on three occasions, firstly on 29 August 1995 to the sum of $5,780; secondly on 3 November 1997 to the sum of $6,230; and finally on 25 February 1998 in the sum of $6,720.

25. On 11 December 1996, Mr Edwards informed the CBA that the “company was in a mess”, and that his two sons no longer worked for the company.

26. By February 1997, and, notwithstanding the extinguishment of the CDB debt by the payment of the vastly reduced sum, Falzon Brick Co had fallen into arrears with respect to its loan to the CBA. It was also facing difficulties with its operations in respect of a licence from the EPA.[40]

    [40] T. p 113.

27. In March 1997 Falzon Brick Co’s stocks were reported to be “low”.[41] Equipment failure led to the plant being out of operation for 15 weeks.

    [41] T. pp 354-355.

28. By 2 June 1997 the CBA had indicated that it was prepared to accept a payment of $4,270 per month until July because of the plaintiff’s “equipment failure and endeavours to keep other creditor payments in order”.[42]

    [42] Volume 1, p 359.

29. Mr Edwards borrowed $190,000 from the Australian Credit Union, part of which was to repay the “loan” of $100,000 to Mr Hodby.[43] The Credit Union loan was secured over Mr and Mrs Edwards’ Tusmore home, and subject to the variable rate of 6.70%.[44] The use by Mr Edwards of the proceeds of the Credit Union loan; the subsequent deposit of monies in a Queensland bank account; and the expenditure of moneys in that State in March and April 1999; became the subject of detailed cross-examination by counsel for the defendant.[45] That cross-examination was directed to the question as to whether Mr Edwards had simply resigned himself to Falzon Brick Co’s impending insolvency.

    [43] T. p 110.

    [44] Ex P1, p 385.

    [45] T. pp 443-445 and 521-523.

30. In September 1997 a loan application seeking the sum of $100,000 for a period of five years was prepared by a consultant, Mr Tennant, on behalf of Falzon Brick Co.[46] There was a dearth of evidence as to whether it was processed by the company. What is clear is that the cash flow predictions in that application, were not achieved, and the loan was not obtained.[47]

    [46] Ex P2, p 762.

    [47] T. pp 357-358.

31. On 3 November 1997, the CBA served a Notice of Demand, alleging arrears in the sum of $25,445. The CBA proposed to amortise the existing debt of $393,792 to be paid by monthly payments of $6,230 commencing in October 1997. The last payment by Falzon Brick Co had been made on 22 August 1997.

32. Mr Edwards wrote to the CBA on 14 November 1997 stating that he was aware of the arrears. He explained that “cash flows had been horrific” and that it was his intention to make additional weekly payments of $2,000 until the arrears were brought into order.

33. On 16 February 1998 Mr Edwards met with the CBA. He disputed that the CBA had the right to increase the monthly payments in accordance with the conditions outlined in the Letter of Approval dated 17 August 1994. On 25 February 1998 the CBA offered to discount the debt by $15,000 subject to the increase in monthly payments.

34. The defendant is an incorporated law firm trading as Peter Scragg & Associates. Although it had acted for Falzon Brick Co, and Mr Edwards on other unrelated matters, during 1997, it had not been retained in respect of the subject matter until late February 1998.

35. At that time Mr Edwards, on behalf of Falzon Brick Co, and/or his own behalf, sought advice from the defendant as to the proper construction of the terms of the 1994 CBA loan. The plaintiffs did not provide to the defendant, at that time, copies of any security documents between the CBA and Falzon Brick Co. Mr Edwards did however produce the respective letters of 17 August 1994 and 25 February 1998, referred to herein. At issue, at least at that time, was whether the method by which the CBA had fixed monthly instalments on the ongoing facility of $400,000, was valid; and, whether the CBA could increase the monthly rate from $4,270.

36. As I have noted, no written retainer was entered into between Mr Edwards and Falzon Brick Co on the one hand, and the defendant on the other. It is plain however, and I find, that at that time, the scope of the retainer was limited to the defendant providing advice as to the proper construction of the 1994 CBA loan, and commencing, and conducting proceedings against the CBA in respect thereof. It was not instructed to negotiate any compromise with the CBA. At all times it was Mr Edwards who exclusively had negotiated, and would continue to negotiate, terms with the CBA.

37. It is of course obvious that the scope of any retainer may vary with any change in circumstances.[48]

    [48] See Carmody v Priestly & Morris [2005] WASC 110 at [119] and Tasmanian Sandstone Quarries Pty Ltd v Tasmanian Sandstone Pty Ltd & Legal Com Pty Ltd [2009] SASC 111

38. Mr Edwards had informed the defendant at that time, that, on his construction of the terms of the 1994 CBA loan, Falzon Brick Co was obliged to pay only $4,000 per month, plus or minus any increase or decrease in the CBA’s index rates. Mr Scragg formed the opinion that such a construction was arguable. Pursuant to instructions given by Mr Edwards, Mr Scragg wrote to the CBA on 4 March 1998.[49]

    [49] Dated 4 February 1998 in error T. p 116.

39. Mr Scragg advised Mr Edwards to establish a bank account with a different institution so as to enable the plaintiffs to pay general operating expenses in the event of any action by the CBA. On 6 March 1998, Mr Edwards opened a trading account with the ANZ Bank at Ridgehaven.[50] About this time, production at the Falzon Brick Co business had stopped because of a problem with an extruder shaft.[51]

    [50] T. p 120.

    [51] T. p 118.

40. On 1 April 1998, the EPA had issued a licence on terms unsatisfactory to the plaintiffs and only for a three month period to 30 June 1998. Again upon instructions, the defendant wrote to the EPA, objecting to those terms of the draft licence agreement proffered by it.[52]

    [52] Letter dated 1 April 1998, Ex P1, p 390.

41. Upon the instructions of Mr Edwards and Falzon Brick Co, the defendant issued proceedings on 6 April 1998 (“the construction proceedings”), against the CBA, seeking a declaration as to the proper construction of the 1994 CBA loan agreement, and certain other relief. That prayer for relief however did not include an injunction to prevent the CBA from acting upon its securities.

42. On 9 July 1998, Falzon Brick Co failed to pay, on time, the licence fees then due to the EPA. Mr Edwards explained that he did not wish to have been taken to have agreed to the contentious conditions.

43. On 14 September 1998, Falzon Brick Co received the sum of $105,000 from AMP General Insurance in respect of another insurance claim by it for the loss of a kiln. It was to be the last of the insurance claims.

44. Despite these monies being in the nature of much needed capital, Falzon Brick Co used it to pay expenses, including “catch up payments” to the CBA. The account with the CBA was, at that time, up to date. Mr Edwards, conceded in evidence, that he knew that Falzon Brick Co was obliged to continue to make monthly payments to the CBA notwithstanding that the construction proceedings were before the Court.[53]

    ·The months of October 1998 to February 1999

    [53] T. p 428.

45. On 12 October 1998, the construction proceedings, which had been listed for trial, were adjourned to enable Falzon Brick Co, as plaintiff, to amend its pleadings.[54]

    [54] District Court action 471 of 1998.

46. Mr Scragg deposed, in evidence, that, following the adjournment, Mr Edwards had said to him:[55]

    Did these proceedings mean that the bank couldn’t take any action until they were resolved? I said, No, they didn’t. If you wanted to prevent the bank taking any action, you would need to obtain an injunction …and the court would impose a condition, that you pay sufficient money to make sure that its position didn’t deteriorate.

    [55] T. pp 997 (xn) and 1097 (xxn).

47. Mr Scragg further explained that he did indicate to Mr Edwards at that meeting that, “if he was compliant with his obligations and there was a dispute about the obligations, he could expect a sympathetic hearing if the matter came before the court”.[56]

    [56] T. pp 1006-1007.

48. Mr Edwards, was asked in cross-examination:[57]

    QAnd in the course of that discussion you asked Mr Scragg, did you not, if the Commonwealth Bank could take any action against Falzon Brick or seek to secure its securities while the District Court proceedings were still going.

    AI don’t recall doing that, no.

    QI suggest that you did.

    AI will deny it then …there would be no reason for me to bring that matter up with Mr Scragg at that stage, there is no logic in it.

    [57] T. pp 441-443.

49. Mr Edwards subsequently denied any conversation with Mr Scragg about an injunction.[58]

    [58] T. p 444.

50. The conversation alleged by Mr Scragg is significant in many respects. On the one hand it represents an acknowledgement by Mr Scragg that Mr Edwards had specifically raised with him, albeit at a different time from that alleged by Mr Edwards, the topic of whether the CBA could take action while the construction proceedings remained on foot.

51. On the other hand it is also significant, in that the denial by Mr Edwards that such a conversation had occurred at that time, must be seen in the context that the trial of the construction proceedings was to be delayed for some time. One might have thought that as Falzon Brick Co was obliged to continue to make monthly payments, from limited resources, in the interim, it was the obvious question to have asked at that time.

52. Mr Edwards was later asked:

    Q…leaving aside whatever Mr Scragg said or didn’t say, it is the case, isn’t it, that when the trial of this matter was adjourned in October 1998, you knew that Falzon Brick Company had borrowed the money from the bank.

    AIt had, yes.

    QYou knew it had to service the borrowings by making monthly payments.

    AI did.

    QIt had in fact to pay at that stage $4,270 per month.

    AThat is correct.

    QAnd you knew, didn’t you, that if it didn’t pay it, the bank could move in.

    AOh, yes, I was aware of that.

53. There was no suggestion by counsel for the plaintiffs, that, if indeed Mr Scragg had advised Mr Edwards, in the manner deposed by Mr Scragg, the defendant was under any obligation to remind him of that advice after it had been given.

54. Generally there is no duty upon a solicitor to remind a client of advice. See Scottsdale Homes Pty Ltd v Gemkip Pty Ltd;[59] Powell on Professional Negligence;[60] and Yager v Fishman and Co.[61]

    [59] [2008] SQC 326.

    [60] (3rd ed) [4-106].

    [61] [1944] ALLER 552 at 558.

55. On 15 October 1998, Mr Edwards provided to the CBA a personal balance sheet disclosing an excess of liabilities over assets. Counsel for the defendant was critical of Mr Edwards in respect of his disclosures, or, more particularly, his non-disclosures, to the CBA.

56. Mr Edwards conceded that he had omitted to disclose certain assets including a deposit in his name in the sum of $62,500 in an ANZ Bank account in Surfers Paradise, and certain assets in his wife’s name.[62] He denied having deliberately left those assets out of the balance sheet. He explained that he “prepared this perhaps with a little bit of poetic licence, but I did not deliberately lie to anyone”.

    [62] T. pp 449-451.

1. On 16 November 1998, the CBA offered to resolve the construction proceedings. In respect of the then loan debt of $364,830, the CBA proposed a payment by Falzon Brick Co of the reduced sum of $280,000 in full settlement; or other alternatives, including refinancing with an alternative lender.

2. The terms of the offer also included the discontinuance of the construction proceedings.

3. Mr Edwards deposed, in chief, that, had he made a commercial decision to borrow a sum of $280,000 to pay out the CBA, he could have done so from Barry Hodby. Mr Edwards deposed to discussions with Mr Hodby about this time, and the latter’s apparent willingness to advance the sum of $280,000.

4. Mr Edwards was asked in cross-examination:

   QI suggest to you that that letter gave you everything and probably more, than you could possibly hope for if Falzon Brick Co had litigated, had gone to trial and won the court action; is that correct? Do you accept that”

   AIt’s very close to it, yes …

   QBut winning the action that way wasn’t really what you wanted, was it?

   AThe loan agreement that I had in place was very, very favourable to me. If I had taken the 280 from Mr Hodby that would not have been long-term finance. I would have had to find another bank to reset that mortgage or find another way of paying that mortgage out, which ever way I decided to do. If I was going to go to a bank, the rate of interest would be a lot higher than what I was currently getting from the Commonwealth Bank, and that’s a major difference.

5. This evidence of Mr Edwards, which gave an insight into his reasoning process at the time, is of some significance. He was being offered a discount of at least $80,000 by the CBA, if he paid the sum of $280,000 – the very sum which had been, on his evidence, readily available from Mr Hodby. He chose not to borrow it. It was not an injection of capital, but replacing one loan with another.

6. Initially the plaintiffs were granted three months grace to consider the various alternatives. By letter dated 3 December 1998, the defendant sought an extension to four months. This was accepted by the CBA, but was conditional upon terms which included monthly payments being continued at the lesser rate of $4,270. Although the defendant did not respond on behalf of the plaintiffs to the conditions sought by the CBA, the rate of $4,270 had been fixed some four years earlier in November 1994.

7. Mr Edwards conceded, in cross-examination, that he had always acknowledged “very openly”, the obligation of Falzon Brick Co to pay the monthly sum of $4,270 to the CBA.[63]

   [63] T. p 494 (xxn).

8. The plaintiffs, however, did not pay any monthly instalments at all. Mr Edwards described the position as:[64]

   I was cash strapped. We were spending every penny we possibly could. Every penny that was being made by the brick yard was being poured back into meeting the requirements of the EPA, and those requirements were quite extensive.

   [64] T. p 135 (xn).

9. The plaintiffs expressly claim that it was only on 22 April 1999, that the defendant did advise Mr Edwards that the CBA could not act upon its securities until the construction proceedings had been determined.[65] On any view, notwithstanding that no concluded agreement had been entered into on 3 December 1998 for the monthly payments of $4,270 to continue for four months, Falzon Brick Co had defaulted in its obligations, under the 1994 CBA loan, by failing to pay any sum at all. Mr Edwards was well aware, on his own admission, that at that time, the CBA could act upon that default.

   [65] Ex P37; pg 198

10. Despite the above Mr Edwards proffered as one of the reasons for not borrowing the $280,000 from Mr Hodby in December 1998, the following:

    I was far better off, financially, to stay with the CBA … especially seeing that they could not act upon me, they could not action these demands until the 471 action had been completed.[66]

    [66] T. pp 156 and 167.

11. The difficulty with that evidence is that at the time of the CBA offer in November 1998, Mr Edwards, on his own case, had not received the alleged advice of 22 April 1999.

12. When cross-examined, Mr Edwards was asked:[67]

    [67] T. p 499 (xxn).

    QAnd the position is, it was your case in these proceedings, that you had the ability to draw on other sources of funds if you had to, is that your case.

    AIt is, yes.

    QYou didn’t draw on any of these other sources of funds in the middle of April 1999, did you.

    ANo, I did not.

    QThat is because it was your judgment that you could take the risk of not paying the bank, wasn’t it.

    ANo, that was a judgment, but it was drawn from advice that I had been given.

    QThis is prior to any alleged advice. It was your position as at middle of April 1999 –

    ASorry, I apologise.

    Q– that you didn’t – that you would take the risk of not paying the bank, is that correct.

    AThat is before the first demand?

    QYes, it is.

    AYes, well I was doing my best to pay them. I hadn’t paid them up to that stage as I explained earlier.

    QThe bank didn’t just sit and wait, did it.

    ANo, it didn’t.

    QIt issued the first wave of demand and letters on 16 April 1999.

    AThat’s correct.

    QThey are in tender book 2. By all means look at them again if you wish, but I will just put to you some brief propositions and if you can answer them without looking at the books that would save a bit of time. Those demands were addressed to you.

    AThere were a group of demands each time your Honour. I believe there was one to Falzon Brick Company, one to Falzon Investment and one each to my wife and myself.

    QYou read them.

    AI did read them, yes.

    QIt was obvious to you, I take it, that the bank was not prepared to let matters drift.

    AA letter of demand is serious, yes.

    QYou understood that meant that the company was in serious trouble.

    AI realised there was a demand there that had to be met.

    QIndeed you were potentially in serious trouble personally.

    AYes.

    QAnd your wife.

    AThat’s right.

    QSo it looked to you, I suggest, as though you were having to reach some agreement with the bank or they might move on their securities, is that correct.

    AThat correct, yes.

    QNow it’s still the case that when you received those demands the company hadn’t been paying Mr Scragg.

    AI am not quite sure when, but we did strike a repayment agreement with Mr Scragg and we were paying a monthly instalment, I am not quite sure when that happened but I do know we did so that, but it is quite possible I hadn’t paid Mr Scragg.

13. In my opinion such discussions as occurred between Mr Edwards and Mr Hodby were, at the highest, preliminary discussions only. Mr Edwards deposed that he did not seek to refinance because he regarded the CBA loan as beneficial. By contrast Mr Scragg deposed that Mr Edwards had told him that he was seeking to refinance, and needed more time than the bank would give him.[68]

    [68] T. p 999 (xn).

14. On 7 December 1998, Mr Edwards had written a formal response to the EPA, within the document, entitled “Environmental Improvement Program”, filed in the Environment, Resource and Development Court. This included a costing of $46,000 to undertake the work required by the EPA. He noted that Falzon Brick Co had explored the possibility of relocating the business but could not afford to do so, and no assistance was being offered to him.[69] Mr Edwards had told the EPA that Falzon Brick Co “did not have the financial capacity to undertake capital works in excess of $5,000 per year”.[70]

    [69] Ex D27.

    [70] T. p 463.

15. At some stage a decision was made by Mr and Mrs Edwards for a “revaluation” of the assets of Falzon Brick Co. Mr Edwards deposed to this being done upon the advice of the company’s accountant. Ultimately in the financial statements for the year ending 30 June 1998, the plant and equipment was re-valued upwards to $600,000 and the St Agnes land was re-valued upwards by $490,000.[71]

    [71] Ex P2, pp 521-522.

16. On 10 February 1999, the CBA gave notice of its intention to act upon its securities. Mr Edwards conceded that while he continued to pay the mortgage over the Tusmore home, he did not pay the CBA.[72] Mr Scragg deposed to a meeting with Mr Edwards in which the latter had said something to the effect – “look don’t be too concerned about it”.[73] Mr Edwards acknowledged that he was paying neither the Bank nor the defendant. In cross-examination Mr Edwards was asked:

    QI will rephrase that question: at this point in late February early March, it was your decision that the bank wasn’t then going to be paid, is that correct?

    AThe bank took the last money your Honour. If I didn’t keep the business rolling, if I didn’t carry on with the EPA requirements, there would be no possibility of ever paying the bank so the priority was to put the company in a position where it could pay the bank and that is what I was endeavouring to do.[74]

    ·The 2 March 1999 letter

    [72] T. pp 495-496.

    [73] T. p 1001 (xn), Mr Edwards at p 494 (xxn).

    [74] T. p 495.

17. On 23 February 1999, Mr Edwards prepared a draft letter to the CBA, which was forwarded to the defendant for its approval.

18. In early March 1999 Mr Scragg read the draft letter and approved it.

19. Mr Edwards re-engrossed that letter on 2 March 1999 and sent it to the CBA.[75]

    [75] Ex P1, p 408 and T. p 141.

20. In that letter Mr Edwards wrote, inter alia:

    Furthermore the financial pressure caused by the requirements of the Environment Protection Authority and the slow market place have prevented the ability to make repayment to the CBA. If this were not the case the repayment agreement of $4,270 per month would have been maintained with or without the consequences of the 16^th November. I am very conscious of my debt….In regard to the CBA “optimistic” opinion I can only suggest that this is a time for negotiating for the benefit of all. In July 1994 negotiations resulted in the loan from the CBA being reduced and re-written, negotiations now are the solution for all parties to share in a win/win situation.

21. As I have already noted, the plaintiffs assert, and the defendant denies, that the defendant was negligent in approving that letter. They assert that it allegedly contained admissions by them as to their indebtedness to the CBA, which adversely affected their application for an injunction, much later, on 23 July 1999.

22. On 15 March 1999 the solicitors for the CBA had responded to the effect that the four month grace period would expire on 9 April 1999, and that the CBA intended to issue a demand for outstanding monthly payments due on 12 April 1999.[76] It must have been plain to Mr Edwards that the CBA would not negotiate further. In addition the offer by the CBA to reduce the plaintiffs’ loan by what then amounted to $100,000 would soon lapse.

    ·The month of April 1999

    [76] Ex P2, p 430.

23. By April 1999 a rival supplier, Inglewood Bricks had been placed into administration, and its products were released to the market at reduced prices.

24. By 14 April 1999 the defendant had written to Mr Edwards at Falzon Brick Co complaining that its accounts had not been paid, stating that:

    … in the meantime, regrettably, we are unable to continue to act for you until some arrangement is put in place”. You should note that you have the following hearings coming up [including the construction on proceedings – 29 April 1999].

25. On 16 April 1999 the CBA wrote to Mr and Mrs Edwards personally, noting that no payments had been received, nor had there been any refinance approval, in spite of its letter of 15 March 1999. It warned, relevantly, that:

    the company is deemed to be in default of a repayment arrangement and the Bank is not prepared to allow the matter to drift any longer. Further notices will issue, to position the Bank to appoint a Receiver and Manager over the company and/or to exercise power of sale, if the matter is not resolved to the Bank’s satisfaction.[77] (my emphasis)

    [77] Ex P2, p 421.

26. The CBA subsequently served Notices of Demand for outstanding loan repayments, upon Mr and Mrs Edwards, Falzon Brick Co and Falzon Investments on 16 April 1999; 11 May 1999; and 9 July 1999.

27. Proceedings were issued by the Falzons against Mr and Mrs Edwards, in an attempt to recover the vendor finance.[78] The defence and counterclaim of Mr and Mrs Edwards to those proceedings was ultimately filed on 17 April 1999.

    [78] Ex D11, District Court Action No 1294 of 1997.

28. On 19 April 1999 the defendant faxed a letter to Mr Edwards noting that there had been no significant reduction in its outstanding accounts, and noting that it would seek to remove itself from representing the plaintiffs in the construction proceedings.

    ·The 22 April 1999 meeting

29. The plaintiffs plead, and the defendant denies, that on 22 April 1999, the defendant’s Mr Scragg advised Mr Edwards that the CBA could not enter into possession of the St Agnes land and the business of Falzon Brick Co unless or until there had been a prior determination of the construction proceedings.[79] Although Mr Edwards could not remember the exact words, he deposed, in chief, that Mr Scragg had said:

    That I need not be too concerned about the letters of demand because (the construction proceedings) had to take precedence, and had to be heard before any action – any court action could be taken regarding this matter.[80]

    [79] Statement of Claim pars 29-31.

    [80] T. p 147.

30. Mr Scragg denied ever giving such advice to Mr Edwards. He deposed, that, on that occasion, it was Mr Edwards who stated that Mr Scragg ought not be too concerned.[81] It is to be noted that this conference had occurred only eight days after Mr Scragg had discussed the non payment of the defendant’s fees; six days after the receipt by the plaintiffs of the CBA’s Notice of Demand; and three days after a fax from Mr Scragg disclosing an intention to cease acting.

    [81] T. p 1066.

31. The plaintiffs assert that, in reliance upon this disputed advice, they did not pay the sums due to the CBA pursuant to the aforesaid notices.

32. Mr Edwards, in examination in chief, conceded that in or about April 1999 the cash flow of Falzon Brick Co was “at a standstill for a very long period of time, four months and it – when you are not bringing money in, you don’t have it to send out, to be quite honest”.[82]

    [82] T. p 144.

33. He repeated in cross-examination that Falzon Brick Co did not have enough financial resources to pay its debts as at 22 April 1999.[83]

    [83] T. p 529.

34. The next day, on 23 April 1999, Mr Edwards wrote directly to the CBA. He did not present a copy of that letter to Mr Scragg for his approval, although he intimated that it incorporated matters discussed with Mr Scragg.

35. He informed the CBA, inter alia, that:

    It has always been my intention to meet the banks requirement of $4,270 per month but to date I have not been able to …I have not at this stage attempted to obtain refinance as was discussed in 1998, because I felt the licence problems with the EPA would jeopardise any present and future attempts in that direction. During the past three and half months I have used personal funds, and my vehicle has been sold to support Falzon, now I do not have funds to make the payment of $18,450 as requested.

36. As to the sale of his vehicle, Mr Edwards conceded in cross-examination, that his letter was not “totally true”, because he had replaced one vehicle with another and “it wasn’t a necessary requirement to support Falzon”.[84] In addition, the reference to not having attempted to obtain refinance, seems, at least prima facie, to be inconsistent with the Hodby approval of the sum of $280,000.

    [84] T. p 518.

37. On 29 April 1999 neither Mr Scragg nor any other member of the defendant firm attended upon this Court in respect of an interlocutory hearing in the construction proceedings.

    ·The month of May 1999

38. On 6 May 1999, some two weeks after the meeting with Mr Scragg on 22 April 1999, Mr and Mrs Edwards appointed an agent to sell their Tusmore property with an auction date of 6 June 1999.[85] A contract for sale was entered into on 9 August 1999.

    [85] T. pp 511-512.

39. Mr Edwards initially denied that the property was put on the market, saying that “that is totally incorrect”. He initially denied that it was sold so as to remove it from the CBA. He deposed to it being a “mystery” as to how it came on the market, because all he had sought from the agent was a “marketing exercise”.[86]

    [86] T. pp 510-515.

40. In cross-examination, he explained that if he had “just sat on the house after July 22, then the Bank would ….eventually take charge of the house”. That answer was however directed to the settlement of the contract of sale and purchase, and not to why it had been put up for sale.[87]

    [87] T. p 510-515

41. In the event the house was sold for the sum of $310,000. I find that the sale price represented its then true value, as was opined in the expert report tendered by the plaintiffs themselves.[88]

    [88] Report of Alex Smithson. Ex P5 pg 1847

42. On 11 May 1999 the CBA responded, acknowledging the receipt of one payment of $4,270 on 7 May 1999, but demanding the payment of arrears. It intimated that if payment was not received, “this may result in the appointment of a Receiver and Manager”. (my emphasis)

43. On 12 May 1999 the EPA wrote to Falzon Brick Co confirming that while “initial improvements to [kiln 1] had been successful, I confirm my previous advice that Falzon must adhere to the agreed timetable for the completion of improvements …involving the purchase of insulating materials that are attached to the inner walls of the kiln”.

44. On 13 May 1999 the CBA advised Mr and Mrs Edwards that Mr Carter had been appointed to undertake an independent review of the business of Falzon Brick Co.

45. On 24 May 1999, Mr Edwards, together with an associate Mr Ward, met with Mr Carter and Mr Kidman as part of Mr Carter’s investigation. At no time was Mr Scragg invited by Mr Edwards to attend any of those meetings.

    ·The month of June 1999

46. On 9 June 1999 Mr Edwards wrote again to the EPA noting that it was “ambitious” for him to complete the work by 30 June 1999, as “my bankers are concerned about the business and at this stage have suggested that they are not prepared to assist me with this investment”.

47. On 23 June 1999 Mr Edwards wrote again to the EPA, expressing, inter alia:

    I did attempt in that correspondence to explain that my bankers are not prepared to advance funds for the installation of the insulation blanket to the kiln referred to as kiln 1. More specifically my bankers are not prepared to assist me at all, but wish to make other arrangements for finance.

    The controversy and derogative press releases have had a serious affect on the stability of this business. Builders are timorous to deal with us because of uncertainty of reliable supply, the general public’s conception is that the neighbours have, or are going to close the factory down.

    The issue of a licence for only three months supports these attitudes, more importantly the ability to refinance will be destroyed. I need a licence for 12 months to enable me to re-establish this business and reputation as well as find another financier.

    The correspondence of the 6^th June 1999, say that further complaints have been made by residents regarding the adverse affects of fugitive emissions, these I suggest are either criminally driven by greed or made by stupidly innocent unqualified people who do not understand the difference between condensation and fugitive emissions. The second point made in that correspondence is contradictory to the attitude of yourself and Tom Whitworth when you both inspected the kiln during the firing process.

    As agreed I have not used kilns 3 and 4 during the last licence period and I have not intended using them until I am totally satisfied with kiln 1, preferably lined with insulating blanket and definitely not before discussion with yourself. The condition – (4.1) appears to terminate the use of kilns 3 and 4 permanently, I believe this condition is too prohibitive.

    The improvements made by this company to eliminate fugitive emissions from kiln 1 have been substantial, even though it has not been lined with insulation blanket. Sufficient enough for the E.P.A. to believe and trust that the intention of Falzon and its employees is to work within the licence conditions and in co-operation with yourself.

    This company is in difficult times and without a proper licence e.g. 12 months this company may well founder.

    I trust the E.P.A. will understand and believe in this company and myself and give its support.

1. Throughout June 1999, Mr Edwards provided information to Mr Carter and Mr Kidman. In a note dated 16 June 1999, Mr Kidman recorded, and, I find accurately so, that Mr Edwards had told him that he was not willing to incur the sum of $35,000 for the EPA work if the CBA appointed a Receiver.

2. On 21 June 1999 the defendant reported to Mr Edwards the outcome of the interlocutory application in the construction proceedings. Mr Scragg deposed that at that time the defendant was not actively pursuing those proceedings on behalf of Falzon Brick Co. Indeed he deposed that Mr Edwards had been told that it was for him to conduct that matter on his own behalf.[89]

   [89] T. p 1009.

3. On 22 June 1999, Mr Kidman recorded in a note, again I find recorded accurately, that Mr Edwards had told him that, “it is not worth having any insurance on the land and buildings …and that he has not been looking at the future lately due to the uncertainty surrounding the CBA”.

4. On 30 June 1999, the EPA advised Mr Edwards that it had only renewed the licence for a three month period. A condition of that temporary licence was that fugitive emissions from the kilns must not occur.[90] It warned that if Falzon Brick Co did not substantially comply with its obligations, then the Authority will consider whether it should decline to renew the licence.

   ·The month of July 1999

   [90] T. pp 474-475 (xxn).

5. In a note dated 5 July 1999, Mr Scragg recorded a comment, which he ascribed to Mr Edwards, that he should tell the CBA “not to appoint a receiver and he would make an offer”.[91] Mr Edwards denied that he had ever made that comment to Mr Scragg.[92] Mr Scragg deposed in evidence that he was not subsequently instructed by Mr Edwards to make any offer. The resolution of these contrasting versions of that note given by Mr Scragg, on the one hand, and Mr Edwards on the other, also assumes a critical role in determining, at least, the reliability of those witnesses.

   [91] T. p 1011.

   [92] T. p 563 (xxn).

6. On 9 July 1999, the CBA issued Notices of Demand against the plaintiffs and Falzon Investments demanding repayment of the sum of $17,080 within three days. Although the debt totalled the sum of approximately $380,000 at that time, the Notice was restricted to “the failures to pay in the months from November 1998 to February 1999”.[93]

   [93] Ex P3, p 952.

7. The CBA informed Mr Edwards that “the Bank is not prepared to let this matter drift on indefinitely and will proceed with recovery action should the demand for payment not be satisfied and monthly repayments of $7,925 commence in July 1999”. Mr Edwards did not pay either the sum claimed by the CBA in its Notice, nor did he seek to have the offer of $280,000, which had lapsed in April 1999, revived by the CBA.

8. By about 12 July 1999 Mr Edwards had received a copy of a draft report which Mr Carter proposed to give to the CBA. It gave a pessimistic view of the possibility of Falzon Brick Co returning to profitability. Mr Edwards did not, even at that time, approach Mr Hodby or any other lender for refinance.[94]

   [94] T. p 167.

9. On 12 July 1999, the defendant wrote to Mr Edwards, enclosing an application by the CBA to strike out the construction proceedings. I have no doubt that Mr Edwards had, about that time, received the Notices of Demand; the Carter draft report; and now the application by the CBA to strike out the Statement of Claim in the construction proceedings.

10. There was a dispute about whether Mr Edwards had conferred with Mr Scragg on 13 July 1999.

11. Mr Edwards suggested that he may have faxed the July Notices of Demand to Mr Scragg. Mr Scragg did not have copies of the Notices on file and did not recollect that he had received them. He recalled discussions with Mr Edwards only about the strike out application, and his outstanding fees. He could not recall anything being mentioned at all about the Carter draft report. He said that Mr Edwards had dealt with that “entirely independent of me”.[95]

    [95] T. p 1080

12. Mr Edwards explained that he had “a blank about this meeting”.[96] He said that he did not think that he had “a serious discussion” with Mr Scragg about the Carter report.

    [96] T. p 169 (xn) and p563 (xxn)

13. Making full allowance for the tyranny of time, I find difficulty in comprehending that response. I have no doubt that Mr Edwards did attend upon Mr Scragg on that day. It is obvious that all three matters, namely the application to strike out, the Notices of Demand and the Carter Report; should have been of great concern to him on 13 July 1999, irrespective of what he had been allegedly advised on 22 April 1999. After all, Mr Edwards had deposed to keeping Mr Scragg “up to date at all times”.[97]

    [97] T. p 563 (xxn).

14. It would have been odd, to say the least, if he had chosen not to tell Mr Scragg of the pessimistic report prepared by Mr Carter. It gives rise to the question, why would he not tell him? It may be that he did not regard it as relevant to Mr Scragg’s retainer. It may be that he was embarrassed about the Carter opinion as to insolvency. It may be that he was concerned about his failure to pay the defendant’s accounts. In any event it would also seem odd in light of the attitude of the CBA, that Mr Edwards would not seek some confirmation of the advice of Mr Scragg that he alleged had been given on 22 April 1999.

15. There is no suggestion that the plaintiffs raised again with the defendant, the alleged advice of 22 April 1999, between that date and the entry into possession by Mr Carter on 22 July 1999, despite the threat on 11 May 1999, by the CBA to appoint a Receiver; the discussions between Mr Edwards, Mr Carter, and Mr Kidman in May and June 1999, and the meeting with Mr Scragg on 13 July 1999. Whatever was the reason for not doing so, I find that Mr Edwards neither produced nor discussed with Mr Scragg, the Carter report on 13 July 1999.

16. On 20 July 1999, the defendant filed an amended Statement of Claim in the construction proceedings.[98] Those amendments also did not include a claim for injunctive relief against the CBA.

    [98] Ex P3, p 938.

17. On the same day, Mr Carter delivered the final investigative report to the CBA. This included an admission by Mr Edwards that the budgeted sales for July 1999 would not be achieved. The essence of the report was that Falzon Brick Co was insolvent.[99]

    [99] T. pp 624-627.

18. Falzon Brick Co continued to operate its business, albeit with trading and other difficulties, and in default of full debt repayments to the CBA until the appointments of Mr Carter by the CBA on 22 July 1999.

    ·The events on 22 and 23 July 1999

19. On 22 July 1999, Mr Kidman, and Mr Eagle, on behalf of Mr Carter, took possession of the assets of Falzon Brick Co and Falzon Investments.

20. Mr Edwards was absent, however his son, Paul, was at the site. He rang Mr Edwards and asked him if he wanted him (Paul) to pay the $18,000 debt claimed by the CBA. Mr Edwards asked whether the advertisements about the appointment of a Receiver had been placed in the newspaper. When told they had, Mr Edwards told Paul “well, the damage has already been done, so no need to pay the $18,000”. 

21. Mr Paul Edwards contacted the defendant’s office on 22 July 1999. In the absence of Mr Scragg on leave, the defendant’s Mr Peter Caporaso wrote to Falzon Brick Co, stating, relevantly:

    We understand that the Commonwealth Bank has entered the premises of the Falzon Brick Co, purportedly under the mortgage between the company and that bank. We confirm our advice that the indebtedness of the company to the bank is in dispute. We refer there to District Court action 471 of 1998 between the company as plaintiff and the bank as defendant. We confirm our advice that the company is entitled to re-enter the premises of the company, and to use whatever reasonable force is necessary to do so.

22. The police were called to intervene in light of a heated discussion at the site.[100]

    [100] T. p 1183 - Mr Kidman.

23. Mr Caporaso was not called as a witness. In its opening the defendant intimated that it saw no need to call him. A note taken by Mr Eagle indicated that Mr Caporaso had conceded that the Receivers were properly in possession, and could only be removed by a court order.[101]

    [101] Ex P2, p 629.

24. Insofar as Mr Caporaso had provided any incorrect advice, or made an improper demand of the Receiver, in his letter, it is of no relevance, save for the question of the credit of Mr Scragg, as to the source of that advice; and whether it assists in any conclusion as to the advice allegedly given by Mr Scragg on 22 April 1999.

25. On 23 July 1999 the defendant filed an application in the construction proceedings seeking orders, inter alia, that the CBA’s Notice of Demand dated 9 July 1999, and the consequential appointment of Mr Carter be declared invalid. For the first time the application had sought that an injunction be granted restraining the CBA from further acting on its securities pending the outcome of the construction proceedings.

26. On the same day a Judge of this Court dismissed the said application. In ex tempore reasons in support of that decision the Court said:

    At first sight it does appear that the bank may have acted precipitously in the appointing a Receiver when there were issues between the parties that are yet to be determined by this court …however…the dispute which is before this court involves the rate of interest that the bank could properly charge over a long period of time. The action taken by the bank relates to defaults by the plaintiff since the legal proceedings were commenced.

27. His Honour referred to the abovementioned letters of 2 March 1999 and 23 April 1999 from Mr Edwards to the CBA, and noted the admissions contained therein, including the obligation to continue monthly payments of $4, 270. The Court concluded that the CBA’s claim related to a closed period since the proceedings were issued.

    ·The subsequent events

28. The plaintiffs did not seek to appeal from that order dismissing the application. They did not attempt to pay to the CBA the amount claimed by it on the notices.[102] They did not instruct Mr Scragg to make any other application to set aside the appointment of the Receiver,[103] nor to negotiate with the Bank for a lesser payment. When asked whether he had turned his mind to approach Mr Hodby to borrow the sum of $280,000, upon the assumption that the CBA offer was still open, Mr Edwards said that, “No, I was pretty distraught at that particular stage and maybe should have done a lot of things I didn’t do”.[104]

    [102] Ex P3, pp 986-1006.

    [103] T. p 1012.

    [104] T. p 569.

29. Mr Scragg deposed that, upon his return to Adelaide, he had chastised Mr Caporaso, and indeed his own secretary, for the advice given in the letter of 22 July 1999. He suggested that Paul Edwards had influenced Mr Caporaso to write such a letter.

30. While I accept that the lawful position of the Receiver had not been correctly stated by Mr Caporaso in his letter; and as was apparently later conceded by him to Mr Kidman, I simply do not accept the evidence of Mr Scragg as to the alleged tone, and detail of his discussions with Mr Caporaso and his secretary.

31. The plaintiffs invite me to conclude that his account was untruthful and that he was attempting to distance himself from an inference that Mr Caporaso’s letter had simply reflected advice given by Mr Scragg on 22 April 1999.

32. It may well be that Mr Scragg was indeed distancing himself from any suggestion that he had given the impugned advice to Mr Edwards on 22 April 1999.

33. It doesn’t follow that he was untruthful in his denial of giving that advice. It may simply be that this is a reconstruction on his behalf, made with the benefit of hindsight.[105] I repeat that I do not accept that he reacted in the manner he suggested, particularly in the near impossible position in which Mr Caporaso had been placed. Mr Scragg was clearly aware, albeit that he was on leave, that an application would be made on behalf of the plaintiffs to injunct the CBA, and Mr Carter. The only bases for such an injunction would be a bona fide dispute as to the quantum of the debt; and that the CBA had acted precipitously in the circumstances.

    [105] T. p 570.

34. On 30 July 1999 Mr Edwards and his son Paul met with Mr Scragg. On Mr Edwards account there was a brief comment about what went wrong?,[106] to which Mr Scragg replied that the Judge had made his decision. The discussion then turned to the question of Kilnblast Pty Ltd recovering “its assets” from the Receiver. Mr Paul Edwards was not asked about this meeting. What is abundantly clear however is that Mr Edwards did not raise the impugned alleged advice of 22 April 1999 and did not otherwise complain to Mr Scragg.

    [106] T. p186-189

35. In August 1999, Mr Edwards, on behalf of Kilnblast Pty Ltd instructed the defendant to institute proceedings against Falzon Brick Co (Receiver and Manager appointed) claiming an entitlement to certain assets, including equipment and bricks at the St Agnes site.[107] The defendant continued to act for Mr Edwards, and the associated entity, Kilnblast Pty Ltd, in respect of ongoing disputes, with Mr Carter, and the CBA.

    [107] Ex P3, p 1162.

36. Mr Carter, in his capacity as Receiver, eventually filed a Notice of Discontinuance on behalf of Falzon Brick Co in the construction proceedings.

37. He was unable to obtain a purchaser for the business of Falzon Brick Co as a going concern.[108] He sold its fixed assets and remaining stock. On 24 August 1999 it was resolved that Falzon Investments be wound up. On the same day an application for injunctive relief brought by Kilnblast Pty Ltd against the CBA and Mr Carter in this court was refused. I accept Mr Scragg’s evidence that Mr Edwards declined to give an undertaking as to damages or provide security for costs.[109]

    [108] See letter from RV Jordan (9/8/99). Ex D45

    [109] T. pp 1012-1014.

38. The St Agnes property was sold for $215,000 on 24 December 1999. The total net proceeds of $191,388.98 were insufficient to pay out the debt of $315,277.75 then outstanding to the CBA. Proceedings brought by the CBA seeking the sum of $146,968.22, from Mr & Mrs Edwards, as guarantors, were compromised, with them being released from any debt to the CBA following the payment by them of the sum of $5,000 in addition to costs.[110]

    [110] Action No 1299 of 1999 in the Supreme Court Ex P3, p 1013.

39. Eventually the defendant ceased to act for Mr Edwards and Kilnblast Pty Ltd. Mr Edwards had informed Mr Scragg that he was seeking “a second opinion”.[111] On 14 November 2000 the defendant commenced proceedings in the Magistrates Court against Mr Edwards and Kilnblast Pty Ltd to recover its outstanding fees.[112] Those proceedings were ultimately resolved by way of a payment by Mr Edwards to the defendant of a lesser sum.

    [111] Ex D36.

    [112] Ex P3, p 1040.

40. No complaint had been made by Mr and Mrs Edwards as to the defendant’s alleged breach of retainer, and/or negligence until the within proceedings were issued, almost six years later, on 14 July 2005.[113]

    [113] T. pp 105 and 577.

    The final pleadings

41. I repeat that the plaintiffs were given leave to file the fourth Amended Statement of Claim late in the proceedings.[114]

    [114] T. pp 620-622.

42. For reasons which may be obvious, I do not propose to set out in detail, the final pleadings in this action. Properly distilled however, the plaintiffs claim that the defendant negligently advised or omitted to advise them with respect to:

    ·the approval of the draft letter of 23 February 1999 which was re‑engrossed and sent by Mr Edwards, on 2 March 1999 to the CBA. The plaintiffs allege that the defendant ought to have advised Mr Edwards to delete any acknowledgement of debt to the CBA.

    ·allegedly advising them on 22 April 1999 that the CBA could not act upon its securities until the construction proceedings had been determined;

    ·omitting to advise them as to the risks faced by those plaintiffs in failing to pay amounts demanded of them by the CBA.

43. The plaintiffs conducted the trial on the basis that the defendant had positively advised them, rather than by omission, that the CBA could not act upon its securities, in the event of any default by the Falzon companies, until the construction proceedings as to the terms of the 1994 CBA loan agreement had been determined. They assert that in reliance upon that alleged advice, they did not rectify their defaults prior to the appointment of Mr Carter by the CBA on 22 July 1999.

44. The plaintiffs did not specifically press the alternative claim that the defendant was negligent by omission. Their pleading was set out in paragraph 46.3 of the fourth Amended Statement of Claim. Some of those alleged failures to advise, could not, on the plaintiffs own case, have been made out. It was patently clear from Mr Edwards’s own evidence that, he knew at all times, save for the alleged 22 April 1999 advice, that if the loan instalments were not paid, the CBA could act upon its securities.

45. It is however possible to glean from some of the cross-examination that there may have been two complaints, if I were to conclude that the 22 April 1999 advice had not been given by Mr Scragg.

46. The first is, and of course contrary to the plaintiffs’ own case that Mr Edwards may himself have assumed wrongly, that the CBA could not act. Accordingly whatever was allegedly said by Mr Scragg to Mr Edwards in October 1998, he ought to have disabused Mr Edwards of a possible erroneous belief that the CBA could not proceed while the construction proceedings remained to be determined, and secondly, that in May 1999, he ought to have strongly warned Mr Edwards to pay the sum claimed by the Notice of Demand.

47. I will briefly discuss those possible alternatives because negligence by omission was implicitly pleaded by the plaintiffs. I will do so, conscious of the warnings expressed by the High Court of Australia that a trial court must not decide a case on a basis that had not been litigated.[115]

    [115] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] 230 CLR 89 at [132-133]

48. The plaintiffs claim that in consequence of the failure of the defendant to give appropriate advice, they have suffered losses in excess of one million dollars.[116] In their final pleadings they claimed a loss of equity and increase in equity, in their Tusmore home in the sum of $702,556.83. They made that claim, despite the fact that the Tusmore property had been sold in the manner and at the time to which I have referred.[117] They also claimed, inter alia, for a loss of the business assets of Falzon Brick Co and Falzon Investments; the costs of defending the CBA action; the loss of future profits; loss of remuneration; and the loss of dividends and the value of shares.

    [116] Report of Mr White, 8 November 2010, Ex P37, T. p 791.

    [117] Paragraph 49.4.4 of fourth Amended S.O.C.

49. The defendant denies liability to the plaintiffs. As to the plaintiffs’ claims in contract, the defendant pleads that any such claims are statute barred because the subject proceedings were not commenced within 6 years of 22 April 1999. It asserts that, in any event, at no time prior to the appointments of Mr Carter by the CBA did it nor its practitioner, Mr Scragg, give such advice, nor at any time did it, by omission or otherwise, breach any duty of care to the plaintiffs.

50. It asserts, in the alternative, that the plaintiffs did not rely to their detriment upon any advice of, nor omission to advise by the defendant; and that in any event, any alleged breach of duty by the defendant was not causative of any loss.

51. As to the alleged losses claimed by the plaintiffs, the defendant, in the alternative, asserts positively that the alleged losses were unrelated to any advice from it. In respect of the alleged loss of equity in the Tusmore house, the defendant refers to the appointment of the agent on 6 May 1999, well before any action by the CBA to recover monies from Mr and Mrs Edwards, as guarantors, was in contemplation.[118]

    [118] T. pp 511-513.

1. The defendant also refers to the post 22 April 1999 conduct of Mr Edwards. In particular the defendant concentrated upon the letter of 23 April 1999 to the CBA; the sale of the Tusmore property, the resumption of at least one payment to the Bank in May 1999, and his total lack of a reaction on and after 22 July 1999. Had he been committed to the survival of the company, it was submitted, he would have re-opened negotiations with the CBA.

2. Finally the defendant referred to the warning from the CBA as to the appointment of a Receiver and the warnings given by Mr Carter and Mr Kidman together with the draft Carter report. Yet on no occasion did Mr Edwards ask Mr Scragg to attend any such meeting, nor did he raise again with Mr Scragg, the alleged advice of 22 April 1999. It submitted that Mr Edwards’ letters to the EPA and his comments made to Mr Kidman were consistent only with a man who had given up hope. The pressing events in March and April 1999 had made it clear that he knew the end was close, indeed inevitable.

   Conclusion as to alleged breach on 22 April 1999

3. I have reflected very carefully upon these submissions. I simply do not accept that Mr Scragg did advise Mr Edwards on 22 April 1999 that the CBA could not take any action in respect of its securities until the construction proceedings had been determined.

4. On any view Mr Scragg was aware of the difficulties facing Falzon Brick Co, from a financial point of view, and in respect of the EPA. His own fees had not been paid. Most importantly Mr Edwards had not met the payment conditions which Mr Scragg had negotiated with the CBA. He had not sought refinance. I am confident that on 22 April 1999, very little was discussed between them save for the Notices of Demand, the outstanding fees, and Mr Scragg indicating that he was reluctant to keep acting.

5. I am satisfied that Mr Edwards position did not change after 22 April 1999. He had failed to pay the monthly instalments from December 1998 to April 1999. He had not accepted what was objectively, an excellent offer from the CBA. This had nothing to do with any alleged “advice” on 22 April 1999. It defies belief in the context of what was occurring in March and April 1999, that Mr Scragg would or did give the suggested advice to him.

6. I am satisfied that Mr Scragg did inform Mr Edwards in October 1998 that the construction proceedings would not prevent the CBA from proceeding on its securities. In my opinion it was the very time that such discussion would take place following the adjournment of those proceedings.

7. I am however unable to find whether there was any discussion about an injunction at that time. Mr Edwards vehemently denied it. There was no amendment made to the pleadings to include that relief.

8. In my opinion Mr Edwards has reconstructed in his mind the timing and detail of that advice. It may be that over the years he has reflected upon the Caporaso letter and convinced himself that it was the advice given to him earlier by Mr Scragg. I repeat that I cannot accept in the context of what had happened between December 1998 and 22 April 1998; and thereafter, that Mr Scragg gave such advice on 22 April 1999, nor indeed at all.

   The alleged omissions

9. I have referred to the plaintiffs’ pleading of breaches of duty by omission. In effect what was being submitted was that if I were to find against the plaintiffs in respect of the 22 April 1999 meeting, then the defendant had failed to properly explain to Mr Edwards that the CBA could act notwithstanding the construction proceeding; and by failing to tell Mr Edwards of the consequence of not satisfying the Notices of Demand.

10. I do not propose to discuss these submissions in detail. On my findings, Mr Scragg had made it clear to Mr Edwards in October 1998 that the construction proceedings would not prevent action by the CBA. He was not obliged to remind Mr Edwards of that advice. Mr Edwards is an astute businessman. In his evidence he said at all times that he was aware of the consequences of failing to pay the CBA. He also acknowledged the letter, from the CBA in July 1999 warning of the possible appointment of a Receiver.

    Conclusion

11. In my opinion each of the plaintiffs’ claims in negligence fails.

    Contributory Negligence

12. In the event it is not necessary for me to consider the question of contributory negligence. I note however that in Austrust v Astley, supra, the trial Judge had held the client in that case to be 50% contributory negligent. Although that finding was overturned by the Full Court of the Supreme Court, the High Court said at paragraph [33]:

    with the greatest respect to the learned Judges of the Full Court the unchallenged findings of the trial Judge compel the conclusion that Austrust was guilty of contributory negligence.

13. In the subject case the contributory negligence of the plaintiffs is obvious. They did not discuss the alleged advice again with Mr Scragg despite the obvious threats by the CBA of acting against them in May to July 1999. In my opinion it could be no less than that assessed in the Austrust case at 50%.

14. In the event that I am found to have erred on the question of the alleged breach of duty, I now proceed to discuss the question of causation.

    Causation

    The principles

15. It is trite that in order to succeed in their claim, in tort, the plaintiffs must establish on the balance of probabilities not only that the defendant, by its employee, Mr Scragg, had breached its duty of care to them, but that such breach was causative of the plaintiff’s loss or damage.

16. Accordingly the defendant cannot be liable for any of the plaintiffs’ alleged losses unless the plaintiffs establish that those losses would not have been suffered by them if the defendant had properly discharged its duty of care.[208] In the subject case they must establish on the balance of probabilities that they would have acted differently if they had been properly advised.

    [208] Gattellaro v Spencer (2011) NSWCA 415, Chappell v Hart (1998) 195 CLR 232, Kenny v Good Pty Ltd v Mgica (1999) 199 CLR 413, Lillicrap v Nalder and Sons (1993) 1WLR 94, Bennett v Minister of Community Welfare (1992) 176 CLR 408, Hall v Foong (1995) 65 SASR 281, Sykes v Midland Bank Executor & Trustee Co Ltd (1971) 1 QB 113, Simply Irresistible  Pty Ltd v Couper (2010) VSC 601.

17. In Hall v Foong, supra Debelle J said:[209]

    “The liability of the defendants for the negligence of the defendant Nield existed both in contract and in tort: Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384; Aluminium Products (Qld) Pty Ltd v Hill [1981] Qd R 33. In order to recover other than nominal damages for the lost opportunity, the plaintiff had to prove not only that the defendant was negligent in failing to advise her of the effect of Mr Cameron’s opinion but also that the defendant’s failure to advise had caused her loss: Sykes v Midland Bank Executor & Trustee Co Ltd [1971] 1 QB 113; Lillicrap v Nadler & Son [1993] 1 WLR 94; [1993] 1 All ER 724; Hanflex Pty Ltd v N S Hope & Associates [1990] 2 Qd R 218. The plaintiff had to prove on the balance of probabilities that, if properly advised, she would have acted differently. If she did not, she was entitled to nominal damages only for the breach of contract: Sykes v Midland Bank Executor & Trustee Co Ltd (1t 127); Lillicrap v Nadler & Son at 99; 729 and Hanflex Pty Ltd v N S Hope & Associates (at 228)”.[210]

    [209] (1995) 65 SASR 281, and See Chappel v Hart (1998) 195 CLR 232 at 239 (per Gaudron J)

    [210] At p 301.  See also Smith v Moloney [2005] SASC 305; cf Maguire v Makaronis (1997) 188 CLR 449; Target Holdings v Redferns [1967] AC 421 and Hilton v Barker Booth [2005] 1 WLR 567.

18. In Artistic Builders Pty Ltd v Nash[211], Hall J referred to a distinction between what plaintiffs must prove, by way of causation in a “fail to advise” case, and that based upon “negligent advice”.

    [211] (2010) NSWSC 1442.

19. In the subject case the plaintiffs have pleaded both the omissions to advise as well as the allegedly negligent advice on 2 March 1999, and 22 April 1999.

20. His Honour said that in the “fail to advise” case it is necessary for a plaintiff to establish what advice should reasonably have been given, and on the balance of probabilities, what would have happened if that advice had been given. By contrast his Honour noted that, in the “negligent advice cases,” the plaintiff’s task is simply establishing on the balance of probabilities that he had relied upon the negligent advice. His Honour said further:

    On the question of causation, a court may draw inferences that a causal connection has been established by having regard to objective items of evidence, including in particular, contemporaneous facts or documents. The authorities establish that it is appropriate, when applying this test, to have regard to objective pieces of evidence. Otherwise, it has been observed, on occasion, justice would not be done: Gore (t/as Clayton Utz) v Montague Mining Pty Ltd[2000] FCA 1214 at [38].

    Similarly, McHugh J in Chappel (above) at footnote 64 on p 246 made observations which, though made in the context of causation in medical cases, provide, in my opinion, guidance of equal application to this case. His Honour stated:

    In determining the reliability of the plaintiff’s evidence in jurisdictions where the subjective test operates … demeanour can play little part in accepting the plaintiff’s evidence. It may be a ground for rejecting the plaintiff’s evidence. But given that most plaintiffs will genuinely believe that they would have taken another option, if presented to them, the reliability of their evidence can only be determined by reference to objective factors, particularly the attitude and conduct of the plaintiff at or about the time when the breach of duty occurred …

    The standard of proof on such a hypothetical or notional question is ordinarily the general civil standard of proof, namely, on the balance of probabilities: Gore (above) at [37]. In Sellars v Adelaide Petroleum NL (1994) 179 CLR 297 at 353, Mason CJ and Dawson, Toohey and Gaudron JJ observed:

    When the issue of causation turns on what the plaintiff would have done, there is no particular reason for departing from proof on the balance of probabilities notwithstanding that the question is hypothetical.

    The issue of causation, therefore, involves a consideration of what would or would not have happened in the particular circumstances of the case: Bennett v Minister of Community Welfare (1991-1992) 176 CLR 408 at 421 per Gaudron J. It was there stated (at 423):

    It might be said that, where questions of causation depend on hypothetical considerations, allowance should be made, as in the assessment of damages, for the possibility that some event would not have occurred. Possibilities, if they are not fanciful, must be taken into account, at least in a general way, whenever causation or the related issue of prevention is in issue. But questions of that kind are not answered “maybe” or, even, “more probably than not”. They are answered “yes” or “no”, depending on the probabilities for or against. (emphasis added)

    In examining the question of a causal connection through failure to advise, the following dicta of Gaudron J in Bennett (above) is instructive (at 423):

    For the purpose of considering what would or would not have happened if the Director had discharged his duty, it is necessary to have some regard to the duty itself. The duty may be likened to the duty to warn or the duty to instruct a person who might otherwise be at risk of injury. The immediate effect of the duty is to provide that person with information which he can use to protect himself. So too, Mr Bennett would have been provided with information if the Director had discharged his duty in this case. And, consistent with the existence of that duty, it must be taken that that information would have enabled him to bring proceedings within the time fixed by the Statute of Limitations. (emphasis added)

    In relation to the duty to inform and advise, Gaudron J, in Bennett (above), observed (at 423) that ultimately it was the lack of information which put the plaintiff in that case in the position whereby he lost his right to bring action to recover damages with respect to his 1973 injuries:

    … That lack of information was clearly referrable in the first instance to the Director’s breach of duty. And it remained referrable to that breach, notwithstanding efforts on Mr Bennett’s part to obtain legal advice. That is because there would have been no occasion for him to seek further legal advice through the Legal Assistance Scheme, had he been correctly advised in the first place …

    Accordingly, an absence of information or knowledge about a matter of significance (eg, a risk) may operate as a causative factor where there is a failure by a solicitor to inform and advise his or her client. In that way, a failure or omission to perform the duty of a solicitor can give rise to circumstances that produce loss or damage.

    Cases that have dealt with similar issues as to whether a person would have acted had particular legal advice been given include Norwest Refrigeration Services Pty Ltd v Bain Dawes (WA) Pty Ltd (1984) 157 CLR 149 at Sykes v Midland Bank Executor & Trustee Co Ltd [1971] 1 QB 113. See also Hanflex Pty Ltd v N S Hope & Associates (1985) 2 QR 218.

21. I do not propose to go into great detail in respect of this issue.

22. Counsel for the plaintiffs submitted that Mr Edwards had devoted a great portion of his life to this business, and that I should accept his evidence that he would have obtained the funds to pay out the CBA. As I have noted evidence was given by Mr & Mrs Edwards as to available assets as at May and July 1999. They deposed that they would have used them to keep the business operating.

23. He accordingly distinguished the subject case from those such as Hall v Foong, supra, in which no evidence had been called.

24. I am also reminded that in Sykes v Midland Banking Trust, supra, the Court said:

    In these circumstances, it seems to me impossible for a court (which cannot hope to know the plaintiff’s business as well as Mr Sykes knew it) to hold that the plaintiffs would probably not have taken the risk of entering into these underleases. Mr Sykes would not say so. It might be different if there were any facts or contemporaneous documents pointing in the plaintiff’s favour — but there are none. On the contrary, all the known facts and documents strongly suggest that the plaintiffs would have taken the risk of entering into these underleases even if they had been properly advised … (emphasis added)

25. I do not however accept that Mr Edwards would have approached his wife to ask for her assets. I have also reservations about whether he could have accessed his interest in the Alice Springs Motel or his wife’s interest in the Robe property. His actions on 22 July 1999, at which time he refused to make available the sum of $18,000 to his son, Paul, speaks volumes.

26. It is vital to remember that it was not simply the sum of almost $18,000 which was outstanding. The CBA was owed significantly more. As Mr Ellery noted there was a need for funds to pay out the CBA loan, then standing at over $370,000. It was demanding over $7,000 per month thereafter. In addition funds were needed for the EPA conditions and the replacement of plant. All of this was occurring in a poor economic climate.

27. He had done his best to delay the CBA, even to the extent of the late and clear overly optimistic cash flow projection.

28. The irresistible inference from the financial difficulties of Falzon Brick Co from December 1998, is that Mr Edwards did not wish to run the risk of further encumbering the Edwards’ personal assets, including the Tusmore house. This had been the consistent theme since 20 June 1994, save for the original Hodby loan of $100,000.[212] That is the very reason he gave for not accepting the offer of the Hodby loan in December 1998. It was simply replacing one loan with another.

    [212] See T. p685

29. I do not accept that the Edwards would have satisfied the CBA, for the sum claimed on the Notices, let alone for the full amount outstanding nor would it have been in a position as Mr Ellery, concluded, to pay creditors, satisfy the EPA and improve the plant and equipment.

30. While I am confident that Mr Edwards would have held on as long as he could, the end was in the CBA’s hands, not his. It inevitably would come to an end in late July 1999. Mr Edwards as an astute businessman knew this, and that is why he did not further approach Mr Hodby. I am not satisfied that the Edwards would have acted any differently if on their case they had been properly advised.

    Damages

31. It is unnecessary for me to address the assessment of damages in light of my findings as to liability.

32. However having heard the evidence generally, and the expert accounting evidence in particular, in my opinion it is appropriate to make some findings in respect of the various pleaded heads of damages. I do so in the event that I had erred on causation.

33. Counsel for the plaintiffs correctly submitted that despite the way in which the accounting witnesses had approached the task, the assessment of damages, if the plaintiffs had otherwise succeeded on liability, ought to reflect a loss of a commercial chance of the business continuing together with the individual plaintiffs losses. He properly conceded that the assessment could not be precise but required a “broad brush” approach.

34. The Court is obliged to do its best to determine such a loss. See Commonwealth v Amann Aviation Pty Ltd.[213]

    The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a Court from the responsibility of estimating them as best it can …where precise evidence is not available the Court must do the best it can.

    [213] (1991) 174 CLR 64 at 83

35. In approaching this task I make it clear that I prefer the evidence of Mr Ellery to that of Mr White in respect of the value of the assets of Falzon Brick Co. I also prefer the evidence of Mr Ellery and Mr Carter to that of Mr Clifton and Mr Powell as to the insolvency of Falzon Brick Co from May to July 1999.

36. In respect of the latter two opinions I make it clear that my decision to prefer Mr Ellery’s opinion in particular is based upon the fact that Mr Clifton and Mr Powell were constrained by their instructions to accept the validity of the cash flow projection and the financial statements provided to them.

37. In my opinion at all times but most particularly from December 1998 to July 1999 Falzon Brick Co was an unprofitable business, and could not survive without significant capital input.

38. It was inevitable that it would fail.

39. I will however deal with each head of damages separately, starting with the claims involving Mrs Edwards.

    ·The claim to the loss of equity in the Tusmore house

40. In my opinion, irrespective of any advice from Mr Scragg, this claim has no basis.

41. I find that the Edwards had made the decision to quickly sell the Tusmore house well before even the receipt of the Carter Report because they wanted to remove it from any action by the CBA, in respect of the continued breaches by Falzon Brick Co. The price they obtained upon sale was the market value at the time. There could be no claim for any loss, if indeed there was any loss, under that head.

    ·The alleged lost opportunity to derive share dividends in Falzon Brick Co, and the loss of value of shares in Falzon Investments

42. In respect of this claim Falzon Brick Co was a plaintiff in the action.

43. Notwithstanding that fact, Counsel for the plaintiffs referred to the decision of the Court of Appeal (NZ) in Christensen v Scott.[214]

    [214] [1996] 1 NZLR 273

44. In that case the Court held that in consequence of a breach of a duty of care to a shareholder or guarantor, it was arguable that a loss in the value of shares, was recoverable by the shareholder.

45. That decision has been the subject of criticism from both Australian Courts and several academics.[215]

    [215] Harris: Christensen v Scott - undermining the fundamentals of company law (1997) 15 C & SLJ 67

1. In Gould v Vaggelas[216], the High Court said of such a shareholder:

   He cannot recover damages merely because the company in which he was interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares or equal to the likely diminution in dividend, because such a “loss” is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss.

   [216] (1985) 157 CLR 215

2. This principle has been applied in all jurisdictions subsequently.[217]

   [217] Thomas v D'Arcy [2005] Q.C.A 68

3. In respect of the claim relating to Falzon Brick Co it is clear that the loss, if any, may be claimed by it as a loss of profit.

4. In respect of the claim relating to Falzon Investments the position may be different.[218]

   [218] Johnson v Gore Wood & Co [2002] 2 AC 1

5. In Johnson v Gore Wood & Co the House of Lords said that if a company suffers loss but has no cause of action to sue to recover that loss, then the shareholder may sue to recover it.

6. In Falzon Investments case, that company was placed into liquidation. It is a moot point as to whether the liquidator has no cause of action. In any event I am not satisfied that the sale of the St Agnes land did result in a loss.

   Loss of profits and loss of interest on those profits in Falzon Brick Co

7. I do not propose to discuss this claim at length. I do not accept that Falzon Brick was solvent as at July 1999. I do not accept the theoretical suggestions that it would have been profitable in the future.

8. I accept the evidence of Mr Ellery, in particular, to the effect that it was unlikely to produce any profits in the future. Attempting to assess a loss of a chance that the Falzon Brick Co would have continued for a short time upon the payment of $18,000 demanded on the Notices of Demand, is extremely difficult. It is theoretically possible it could have survived long enough to generate cash upon the sale of the remainder of the bricks. On my view the maximum possible “profit” was that opined by Mr Ellery of $261,642. This would include the claims for loss of wages, superannuation and interest on profits.

   ·Damages and legal fees from the CBA Guarantee proceedings

9. The defendant submitted that those claims must fail as being too remote. It also submitted that the plaintiffs had failed to prove that the costs were reasonably incurred.[219]

   [219] Unity Insurance Brokers v Rocco Pezzano (1995) 72 ALJR 937

10. I do not accept those submissions. The plaintiffs were the defendants to the CBA proceedings, not plaintiffs embarking on a dubious claim. Indeed they succeeded in reducing the CBA claim of about $147,000 to a mere $5,000. In my opinion, had the plaintiffs succeeded on liability this claim would have been recoverable.

    The loss of business assets

11. The claim as costed by Mr White totalled the sum of $134,279. I don’t propose to address that head of damage. The evidence as to value was quite confusing. Different valuations of the assets at different times were tendered in evidence. There is no utility in this Court detailing that evidence in light of my findings. I do note that in consequence of the events of 22 April 1999 the assets were sold. Further in consequence of the outcome in the guarantee proceedings a significant debt otherwise owed by Falzon Brick was written off.

    Conclusion

12. For the reasons I have given, the plaintiffs’ claim must be dismissed.

13. I will hear the parties as to costs.