Equal 54 Pty Ltd v Dennis Galimberti

[2016] VSC 588

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMON LAW DIVISION
PROFESSIONAL LIABILITY LIST

S CI 2013 06384

EQUAL 54 PTY LTD (ACN 063 125 477)	Plaintiff
v
DENNIS GALIMBERTI (AND OTHERS ACCORDING TO THE ATTACHED SCHEDULE)	Defendants

---

JUDGE:	Kennedy J
WHERE HELD:	Melbourne
DATE OF HEARING:	3, 4, 5, 6 and 11 October 2016
DATE OF JUDGMENT:	17 November 2016
CASE MAY BE CITED AS:	Equal 54 Pty Ltd v Dennis Galimberti & Ors
MEDIUM NEUTRAL CITATION:	[2016] VSC 588

---

Negligence – Solicitor –  Scope of solicitor’s duty of care in relation to purchase of interest in hotel business, including shares, and signing of guarantee – whether solicitor breached duty of care - whether failure to advise of defects in the structure of the partnership deed executed in relation to purchase - whether failure to advise of defects in company search in alleged conversations immediately prior to the signing of the guarantee – Whether breaches caused losses – Part X of the Wrongs Act 1958 (Vic) - whether alleged losses suffered, in particular, whether alleged loss suffered by reason of finding of Emmett J in Frauenstein v Farinha [2007] FCA 1953 that the shares obtained were liable to be set aside - whether the causes of action are statute barred pursuant to s 5(1)(a) of the Limitation of Actions Act1958 (Vic) - whether any liability should be reduced by reason of the provisions of Part IVAA of the Wrongs Act1958 (Vic) - Contributory negligence

---

APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Harvey with Mr S Dyrenfurth	Taylor Stratmann Lawyers
For the First Defendant	Ms A Ryan QC with Mr D Klempfner	Colin Biggers & Paisley Lawyers

HER HONOUR:

1. The plaintiff, Equal 54 Pty Ltd (Equal 54), is a company associated with Mr James Panagopoulos. The first defendant, Mr Dennis Galimberti, is a legal practitioner who conducted Maurice Blackburn Cashman Pty Ltd’s (Maurice Blackburn Cashman) liquor licencing and conveyancing department under the name of “Hall & Thompson”.

1. In or about March 2005, Mr Panagopoulos entered into negotiations to purchase an interest in a pub known as the Equilibrium Hotel, located in the World Square shopping centre in Sydney. In September 2005, Mr Panagopoulos retained Mr Galimberti to act for him in respect to this purchase.

1. Subsequently, Equal 54 entered into a Partnership Deed with San Marco World Square Pty Ltd (San Marco World Square) and Cine San Marco Pty Ltd (Cine San Marco) in December 2005, and also later executed a Deed of Guarantee and Indemnity in favour of Industry Funds Management (Nominees 2) Pty Ltd (IFM) (the Relevant Guarantee).

1. Equal 54 now sues Mr Galimberti in negligence for damages alleged to have been suffered as a result of Equal 54’s entry into the Partnership Deed and the Relevant Guarantee.

1. In particular, it is alleged that Mr Galimberti breached his duties, first, in failing to advise of defects in the structure of the Partnership Deed (described as the “first breaches”), and, second, by failing to advise as to irregularities in a company search obtained on 27 March 2006 in conversations which allegedly took place immediately prior to the signing of the Relevant Guarantee (the “second breaches”).

1. Mr Galimberti accepted that he owed a duty of care, but denied breaching the duty or causing Equal 54 any loss or damage. Further, he alleged that Equal 54’s causes of action are statute-barred pursuant to s 5(1)(a) of the Limitation of Actions Act 1958 (Vic) (Limitations Act).  He also alleges that Equal 54 was contributorily negligent and, further, that any liability should be reduced by reason that there were “concurrent wrongdoers” who are proportionately liable pursuant to the provisions in Part IVAA of the Wrongs Act1958 (Vic) (Wrongs Act). Such concurrent wrongdoers have been joined as defendants to the extent they were not deregistered or deceased.

1. Thus, the issues that arise (in relation to each breach) are:

(a)   What was the scope of the duty of care owed by Mr Galimberti to Equal 54?

(b)   Did Mr Galimberti breach this duty of care?

(c)    Was this breach causative of the loss alleged by Equal 54?

(d)  Did Equal 54 suffer the loss as alleged?

(e) Are the causes of action pleaded by Equal 54 statute-barred pursuant to section 5(1)(a) of the Limitations Act?

(f)     Was Equal 54 contributorily negligent?

(g)   Should any liability be reduced by reason of the provisions of Part IVAA of the Wrongs Act?

1. An earlier defence based on an alleged failure to mitigate was abandoned in closing.[1]

   [1]Transcript of Proceedings (11 October 2016) 546.

BACKGROUND

Mr Panagopoulos and Equal 54

1. Mr Panagopoulos was a director of Equal 54 from 4 August 1999 until 13 February 2014 (the company was formerly known as Aspendale Waters Pty Ltd and Savvy Management Pty Ltd).

1. Mr Panagopoulos engaged in various business ventures associated with the hospitality industry from the 1980s, including with night clubs and hotels as a hands on operator.

1. He became a bankrupt on 28 October 2013 (claiming that his ongoing directorship was an  “oversight”, and that Equal 54 was by then no longer trading).

Mr Galimberti

1. Mr Galimberti was admitted to practice in 1980 on completing articles with Peter Kempson & Co. He transferred to Maurice Blackburn Cashman in 1983 and became a partner in 1986, undertaking personal injury work.

1. He then had a period away from the law of 10 years when he was the CEO of the Footscray Football Club, returning to Maurice Blackburn Cashman in about 1996. At that time he went into the commercial department known as Hall and Thompson which undertook licencing, commercial property, conveyancing and liquor licencing. He accepted that he held himself out to have specialised expertise and/or experience in all aspects of pub/hotel ownership (including acquisitions and sales) and liquor licensing.[2]

   [2]Plaintiff’s Fifth Amended Statement of Claim, 3 June 2016, [4] (Plaintiff’s FASOC); First Defendant’s Amended Defence to Fifth Amended Statement of Claim, 3 October 2016, [4] (Defendant’s DFASOC).

1. He now owns the Hall and Thompson business as a sole practitioner.

1. Mr Galimberti commenced undertaking transactional work for Mr Panagopoulos and his entities in around the mid-90s.

Other entities

1. It will be recalled that Equal 54 entered the Partnership Deed with San Marco World Square and Cine San Marco.

1. San Marco World Square was the owner and operator of the Equilibrium Hotel.

1. The directors of San Marco World Square as at 13 December 2005 were Tobias Farinha, Miguel Farinha, and Marco Zagato. Given Tobias was Miguel’s father and Marco Zagato’s father-in-law, this group was collectively known as “the Farinhas”. Cine San Marco was a company associated with the Farinhas, as was Cockle Bay San Marco Pty Ltd (Cockle Bay San Marco).

1. Between 28 June 2004 and 15 November 2005, Mr Carl Frauenstein was also a director of San Marco World Square.  Mr Frauenstein was an aeronautical engineer by training who met the Farinhas in semi-retirement and became involved with a number of their ventures as a silent partner. In addition to the Equilibrium Hotel, there was also a restaurant and café business carried on in Bondi Junction. The companies associated with Mr Frauenstein were Carl World Square Pty Ltd (Carl World Square) and Casetron Pty Ltd (Casetron).

1. Prior to 27 March 2006, there were 100 shares issued in San Marco World Square, divided as to 70 to Cockle Bay San Marco and 30 to Mr Frauenstein.

1. As at July 2005, San Marco World Square had entered into a loan facility of over $5,000,000 with a financier, IFM. The Farinhas and companies associated with them, as well as Mr Frauenstein, had also executed a Deed of Guarantee and Indemnity in favour of IFM (the First Guarantee).

Preliminary negotiations

1. Mr Panagopoulos came to meet the Farinhas through his friends, Mr Ibo Gulden and Mrs Bronwyn  Gulden, who relocated to Sydney in circumstances where Mr Gulden came to work for the Farinhas at their restaurant, Baia.  

1. Mr Panagopoulos became interested in the Equilibrium Hotel when Mr Gulden told him that the Farinhas were looking to create a gaming venue in the CBD of Sydney, which turned out to be part of the World Square precinct at the base of the Ernst and Young tower. Mr Panagopoulos viewed a gaming venue in the CBD in George Street as an attractive proposition.

1. In or about March 2005, Mr Panagopoulos entered into preliminary negotiations to purchase an interest in the Equilibrium Hotel.

1. Mr Panagopoulos later met Mr Colin Steingold, solicitor for the Farinhas, and was also provided with a projected cash flow from a business consultant, Mr Lawrence Myer (though Mr Panagopoulos claimed that he did not give this document much weight given the Equilibrium Hotel was not yet open).

September 2005

1. In September, Mr Panagopoulos telephoned Mr Galimberti expressing interest in buying a share of the Equilibrium Hotel. There is no record of this conversation although the evidence of Mr Galimberti was that Mr Panagopoulos asked him to get some documents to confirm some numbers he had been given.

1. On 19 September 2005, Mr Galimberti wrote a file note of a conversation with Mr Steingold, which included reference to Savvy Management, which was the intended purchaser at that time.

1. His oral evidence of this conversation included:

“Basically he was saying… that they were seeking to sell 30 per cent for 1.4 million in this hotel called the Equilibrium Hotel. It had 30 gaming machines, it was in the CBD of Sydney and that they needed to have a partner exit because he was a partner who was wanting to exit, and that part of the 1.4 million was required to pay out this partner and that there would be a premium of between 250 and $300,000 required in order to have him leave.”

“And did he say at this stage who the partner was?” --- “I don't recollect.” --- “All right. Then Savvy Management?” --- “The arrow to Savvy Management was that Savvy Management - his understanding was that Savvy Management would be the purchaser and that it would be providing out of the 1.4 between 250 to 300 to have the partner exit.”

1. On 22 September 2005, Mr Steingold emailed Mr Galimberti setting out “salient aspects relating to The Equilibrium Hotel” and attaching a Confidentiality Deed for execution; Lease; and a Company extract for San Marco World Square (which were later forwarded to Mr Panagopoulos). The email included the following statement:

We confirm that we act for San Marco World Square Pty Limited (“San Marco”). A copy of the company extract results for this company is enclosed. This entity is the nominee of a partnership between two entities, namely Cine San Marco Pty Limited (70%) being the entity owned and controlled by the Farinha family and Carl World Square Pty Limited (30%) being the entity owned and controlled by Carl Frauenstein. The Farinha family have exercised their right to pay back to Carl Frauenstein the moneys invested by him in this venture and to bring in a new partner in his place. The background to this has been discussed with your client.

1. On 27 September 2005, Mr Galimberti also sent a letter to Mr Steingold raising questions in respect of the proposed transaction.  These included:

Re: Joint Venture Agreement

11. Have Carl World paid for their total investment representing 30% of the venture? If not, how much is outstanding? What other obligations is our client expected to assume in respect to the former obligations of Carl World?

12. You say $6.3M has been borrowed from Members Equity. Did Carl World or Frauenstein sign any personal guarantees or put up any security to support that loan?

Is it expected that our client will be required to replace Carl World and/or Frauenstein with its own guarantee or replacement security? If so in what form?

1. At 11.38 am, Mr Steingold emailed Mr Galimberti asking for details of the accountant and saying, inter alia: “I am currently working out what documentation to prepare in relation to the transfer of the 30% interest to your client and will advise you shortly of this.”

1. Negotiations then stalled in late September. 

November/December 2005

1. On 7 November 2005, Mr Galimberti wrote a file note of a telephone call with Mr Panagopoulos which read: “they are having difficulty getting the other partner out. He [Mr Panagopoulos] said it may not go ahead.” 

1. On 14 November 2005, the Equilibrium Hotel had its official opening.

1. On 22 November 2005, Mr Galimberti wrote a file note: “Co. Est Equal 54 P/L as trust unit trust”. Mr Galimberti said that Mr Panagopoulos had rung him and told him a company, Equal 54, had been established as trustee for a unit trust such that the deal was “back on track”.

1. On 25 November 2005, Mr Steingold sent a letter to Mr Galimberti which purported to respond to his letter of 27 September 2005. It included reference to the fact that guarantees would be required, including in relation to the $6,300,000 facility from Members Equity and to Multiplex for approximately $2,200,000.  It further includes the following:

JOINT VENTURE AGREEMENT

11. Essentially Carl World has paid for its total investment representing its 30% interest. Your client is not assuming any other obligations of Carl World in relation to the venture other than the share of the debt structure set out in 1 above. However, as agreed between our respective clients, any premium paid to Carl over a period of 18 months to 24 months to have Carl exit the venture is to be shared between our clients. This payment will essentially come out of the business.

…

It is proposed at this stage that your client will be purchasing a 30% share of the profits and losses in the venture from the Farinha Family. Once the exit of Carl Frauenstein has been formally documented, a new structure will come into place between your client and the Farinha Family as partners in the venture as to 30% and 70% respectively.

1. On 28 November 2005 at 2.28 pm, Mr Steingold emailed Mr Galimberti enclosing a draft deed between Cine San Marco, Tobias Farinha, Marco Zagato, Miguel Farinha and Mr Panagopoulos (as “Jim”) (Draft Heads of Agreement) and calling for comments. The email was copied to Mr Panagopoulos. It included the following Recitals:

A. Cine acquired a 70% interest in the restaurant, hotel, tavern and gaming venture located at World Square, corners George and Goulburn Streets, Sydney (Premises) and known as the Equilibrium Hotel (Venture).     

B. Cine has exercised an option to acquire the other 30% interest in the Venture from Carl World Square Pty Limited (Carl). Cine is attending to the final details governing the removal of Carl as a partner in the Venture.

C. Jim has expressed an interest to acquire a 30% interest in the Venture and Cine has agreed to enter into an arrangement whereby Jim acquires a right title and interest in and to 30% of the profits and losses in the Venture from Cine upon execution of this deed and the parties enter into a new partnership upon the implementation of the determination of the old partnership between Cine and Carl.

1. The operative provisions included the following:

OPERATIVE PROVISIONS:

1.        Sale of Interest

1.1 With effect from the date of execution of this deed, Jim hereby acquires the right title and interest in and to 30% of the profits and losses in the Venture from Cine for the consideration set out below.

1.2The consideration payable by Jim is the sum of $1,400,000.00 payable as to the amount of $150,000.00 upon execution of this deed and the balance of $1,250,000.00 upon execution of this deed and the balance of $1,250,000.00 into the trust a/c of Steingold Abel payable within a period of 21 days from the date of execution of this deed.

2.        Guarantees

2.1Jim and any associated entity of Jim which acquires the interest set out in clause 1.1 above hereby agrees to sign all such documentation including any personal guarantees in relation to the Venture…

3.        New Partnership

3.1 Upon payment to Carl of any amounts owing to Carl in relation to his interest in the Venture and the release of Carl Frauenstein’s (Frauenstein) guarantees in relation to the Venture, a new partnership will be formed between Cine and the associated entity of Jim in relation to the Venture.

…

3.3Jim hereby acknowledges that in the event that there is any premium payable to Carl to finalise his exit as a partner from the Venture, such premium shall be payable by the business of the Venture on terms negotiated between Toby, Marco and Frauenstein.

1. The Heads of Agreement were never signed although both parties appeared to conduct the case on the basis that they were binding (in fact, the only source of  the obligation to pay $1,400,000 is contained in the Heads of Agreement).

1. The words in italics in clause 1.2, “into the trust account of Steingold Abel”, were in handwriting. The evidence of Mr Galimberti was that this was his handwriting and was included because his advice was that if Mr Frauenstein did not exit, then the money would need to be returned to Mr Panagopoulos. 

1. On the same day, Mr Galimberti wrote a file note of a meeting with Mr Panagopoulos recording that he “went through” the  Heads of Agreement with him. The note also records “he wants to share in December 2005 profits.  He does not want to come in in Jan and cop the losses only”. There is also a notation: “$150,000 secured by 5% of their shares” which Mr Galimberti said was a suggestion from him that the Farinhas should encumber 5% of their shares in return for the pre-payment of the deposit, which was $150,000 at that stage, and which the Farinhas were pressing for. This appeared to accord with evidence from Mr Panagopoulos that the initial deposit should be secured by shares.

1. On 29 November 2005, Mr Galimberti then sent a letter to Mr Panagopoulos which he accepted was the retainer letter. His evidence was this had been delayed given  the client was cost sensitive such that it was not appropriate to “start the meter running” until there was some certainty about the deal. The letter read:

Re:      San Marco World Square Pty. Ltd. (“San Marco”)

The Equilibrium Hotel

We refer to your instructions in this matter and note your instructions that you are purchasing 30% of the shares in San Marco which is the entity that owns the business of The Equilibrium Hotel.

We note that you wish for us to act in this transaction and also in a transaction where you are borrowing the sum of $500,000.00 from Campbell Promotions Pty. Ltd.

We note that you will be paying approximately $1.4M to acquire 30% of the shares in San Marco.

We note that this may involve all or any of the following work and documentation:

1.Initially the transaction with the Farinha family who currently own approximately 70% of the shares in San Marco will be recorded as a Heads of Agreement.

2.Subsequent to the Heads of Agreement there will be a Sale Agreement whereby initially you will purchase 30% of the shares in San Marco in a venture with the Farinha family. It is contemplated however that once the exit of Carl Frauenstein is negotiated by the Farinha family from San Marco, a new structure will come into place between yourself and the Farinha family.

3. Loan Agreement and second mortgage with Campbell Promotions Pty. Ltd.[3]

We would estimate our total fees in the transaction which encompasses the scope of works described in 1 to 3 above would be $13,000.00 which includes GST.

If the new structure however is more complex than what is presently contemplated we may need to review our assessment. Certainly the sum of $13,000.00 covers the Heads of Agreement, the negotiation with the solicitor for the Vendor regarding changes to the Heads of Agreement, the Loan Agreement and second mortgage with Campbell Productions Pty. Ltd. and the initial Sale Agreement with the Vendors. If the subsequent structure is materially different to these initial documents we may need to revise our assessment of total legal costs.

The estimate does not include disbursements…

[3] The evidence of Mr Panagopoulos was that Campbell Promotions lent part of the purchase funds.

1. Although fees were estimated at $13,000, both men accepted that Mr Panagopoulos negotiated a reduction to $11,000. Mr Galimberti further alleged that this curtailed the retainer.   

1. On the same day, Mr Galimberti also sent a letter to Mr Panagopoulos setting out a proposed letter to Mr Steingold commenting on the draft Deed between Cine San Marco, Tobias Farinha, Marco Zagato, Miguel Farinha and Mr Panagopoulos.

1. The letter included:

2. Our client wishes his interest in the business to commence immediately on payment in full of the consideration. He does not want his share dependant on Carl’s exist. If your client cannot negotiate Carl’s exit he would be left in a position whereby he would need to recover the moneys paid to your client. Our client wishes to purchase 30% of the business from your client and it is a matter for your client to arrange for Carl’s exit.

...

5. The Deed should contemplate the entry by the shareholders of the company into a Shareholders Agreement..

…

We are prepared to give you a draft Shareholders Agreement …

1. The proposed letter was consistent with the evidence of both men that Mr Galimberti was recommending a shareholders agreement structure.

1. A file note of 1 December 2005 recorded a meeting between Mr Galimberti and Mr Panagopolos.  It included the statement: “If Carl does not exit I want money back. $1.4 m.” Further: “So - my entry is dependent on Carl’s exit” and “Balance into trust account pending Carl’s exit.” The evidence of Mr Galimberti as to this entry was that Mr Panagopoulos had previously rejected his recommendation that the deposit be secured by shares. However, his further recommendation was that the balance be paid into Mr Steingold’s trust account so that if Mr Frauenstein did not exit then the money would be repaid to Mr Panagopoulos.  

1. On 1 December 2005, Mr Galimberti sent a letter to Mr Steingold which included the following:

1.Our client wishes his interest in the business to commence immediately on payment in full consideration. If your client cannot negotiate Carl’s exit the full purchase price (1.4M) would need to be paid back to our client. Please alter Clause 1.2 so that it reads that the $1,250,000.00 is paid into the Trust Account of Steingold Abel and if Carl’s exist cannot be effected within 12 months of this date the sum of $1,250,000.00 plus the deposit of $150,000.00 will be repaid to Jim immediately without deduction

…

4.The Deed should contemplate the entry by the shareholders of the company into a Shareholders Agreement

...

1. On the same day Mr Steingold spoke to Mr Galimberti. The file notes record that he told him:

1.        It is a Partnership Agreement. Not a shareholders agreement.

2.        He is (JP) coming in irrespective of Carl leaving.

If Carl does not leave it will be

40% Farinha

30% JP

30% Carl

Jim is in from the inception of business for profits losses and capital gains.

3.        Warranties are fine.

3.        $150,000 (for the deposit)  is now $200,000.

1. The file note also records:

   P/O Jim Panagopoulos 1/12/05

   Re above.

2. There is an issue about what occurred in relation to the P/O (phone out) to Mr Panagopoulos which will be referred to below.

1. However, on 2 December 2005, Mr Steingold sent a letter to Mr Galimberti which included  the following:

1. We advise that your client’s interest is being sold to him at the outset and is not dependent on the exit of Carl Frauenstein (CF). It is the intention of our client having exercised its option to purchase CF’s interest the venture to now implement this. CF has resigned as a director of San Marco World Square Pty Limited and has told our clients and others that he is exiting the venture. It is merely the mechanics of such exit and any premium payable to CF that is now being dealt with (emphasis added).

It is important to bear in mind that your client is being treated as having entered the venture from the outset. On your basis, this would be very difficult to give effect to as there would have to be a cut off period to redetermine profits and losses which is not the intention of the parties.

In summary, our client is purchasing CF’s interest in the venture and your client is purchasing a 30% interest in the venture from our client (emphasis added)

…

4. The Deed in question should be a partnership deed as essentially the structure is one of partnership. San Marco World Square Pty Limited is merely  the disclosed nominee of the partnership.

1. Mr Panagopoulos said he received a copy of this letter.

1. Mr Galimberti conceded that he did not ask for a copy of the option referred to in this letter, nor did he make any inquiries as to what was meant by the “mechanics” of Mr Frauenstein’s exit given he had been told by his client that they were “taking care of Carl….”

1. On 2 December 2005, Equal 54 paid a $200,000 deposit. 

1. On 8 December 2005, Mr Galimberti sent a letter to Mr Panagopoulos attaching a copy of a draft Partnership Deed. It purported to provide a short summary of the key provisions of the Partnership Deed,  but was “not intended to be an exhaustive summary of the provisions of the Deed but merely a summary of the key provisions.” It suggested that he should read the Deed carefully in conjunction with the advice.

1. The letter went on to highlight, inter alia, clause 3.1 which provided that the Farinha Family was holding a 70% share in the business and Equal 54 (JimCo) holding 30%. Further, clause 6.1 which provided that he was “entitled to shares in the Company in the same proportions as your interest in the partnership”.

1. Some further negotiation on subsidiary matters ensued and, on 13 December 2005 at 12.47 pm, Mr Galimberti obtained a company search of San Marco World Square. This showed that Mr Frauenstein was no longer a director but that the shareholding was unchanged (i.e. 70 shares were held by Cockle Bay San Marco with 30 still being held by Mr Frauenstein).  

Partnership Deed

1. The Partnership Deed was then executed on 14 December 2005 between San Marco World Square (“the Company”), Equal 54 (“JimCo”) and Cine San Marco (“FarinhaCo”) as Partners.  It was substantially similar to the draft and  included the following recitals:

1        The Partners intend to become partners in the business known as the Equilibrium Hotel with retrospective effect from the commencement of the opening of the Equilibrium Hotel on 29 September 2005.

2         The Business is conducted for the Partnership by the Company.

1. “Business” was defined to mean the business of operating the Hotel (defined as the Equilibrium Hotel in clause 1.1).

1. Clause 3.1 provided that the parties entered into the Partnership with effect from the Commencement Date (29 September 2005), while clause 3.6 provided that the Partners were to “share in the profits and losses of the Partnership in their Respective Proportions” with effect from this date.

1. Clause 3.2 further provided that the parties acknowledged that at the date of this Deed the “Respective Proportions” of the Partners in the Partnership were: 

   FarinhaCo -    70%

   JimCo -          30%

2. “Respective Proportions” was further defined to mean the respective proportions of the “Partners’ Interests” with “Interest” being defined as the entitlement of a Partner to a share of the profits of the Partnership and to a distribution of a share of the proceeds of the sale of the assets of the Partnership including to the shares to which a Partner is entitled in the Company (clause 1.1).

1. The Company was not a member of the Partnership (clause 3.5). Rather, clause 3.4 provided that the Company would at all times act as a nominee of the Partnership in accordance with the directions of the Partners in the conduct of the Business.

1. In terms of shares, clause 6.1 provided that unless otherwise unanimously agreed by the Partners, the Partners would be entitled to shares in the Company in their Respective Proportions. Clause 8.10 also provided that shares in the Company would be issued to the parties in the same proportion as they held their respective Interests in the Partnership.

1. The Partnership Deed therefore appeared to provide for a 30% share in the profits and losses of the Partnership. Although, it also provided for an interest in shares in the Company, this was said to be in a nominee company only.

1. Given the Respective Proportions were 70/30, the Partnership was framed on the basis that Mr Frauenstein was effectievly removed.

Allocation of shares and Guarantee

1. On 20 December 2005, Equal 54 paid the balance of the purchase price of  $1,200,000 to Cockle Bay San Marco  (a related Farinha entity).

1. On 21 December 2005, Mr Panagopoulos was appointed as a director of San Marco World Square. However, he claimed that he was not involved in the day-to-day management or running of the hotel, though he was to be provided with financial reports on a monthly basis so he could monitor its performance.

1. On 15 March 2006, Mr Galimberti sent a letter to Mr Panagopoulos and Equal 54 enclosing his account for $8,853.79 (including disbursements of $48.90 and GST of $804.89). The covering letter records:

In the interim we enclose our account for our professional services for acting for you in relation to the Partnership Deed and the acquisition of 30% of the shares in San Marco World Square Pty Limited for your early attention.

1. The invoice records:

RE: The Equilibrium Hotel

TO: Our professional fee in acting for you on your instructions, and advising you, and attending to matters as requested by you, including all attendances, correspondence, telephone calls.

1. Mr Panagopoulos accepted that by this stage the Equilibrium Hotel business had been up and running from November (and in fact ran until mid-2011).

1. Then, in March 2006, Equal 54 received a share certificate certifying that it was the registered holder of 300 ordinary fully paid shares.  A company search of 27 March 2006 further showed the shareholders to be Cockle Bay San Marco with 700 shares;  Mr Frauenstein with 30 shares; and Equal 54 with 300 shares (with the result that it held some 29.12% of the issued shares).

1. On 31 March 2006, the Relevant Guarantee was given by Equal 54 and Mr Panagopoulos in favour of IFM.  There is disputed evidence as to the circumstances in which this was signed, which will be dealt with below.

1. The parties also adduced into evidence a draft financial report for “Cine San Marco Pty Ltd and Equal 54 Pty Ltd in partnership trading as Equilibrium Hotel” for the period ended 30 June 2006. It records combined sales and net gaming revenue of $3,394,609, notwithstanding that an overall loss is recorded which is allocated as between the two partners. 

1. In fact, in his affidavit of 27 March 2013, Mr Panagopoulos says:

In about June 2006 I became aware that the money I had invested in San Marco through the Second Defendant had been misappropriated and used by the Farinhas in other business ventures operated by them instead of the Equilibrium Hotel.

Federal Court proceedings

1. On 31 October 2006, a Federal Court proceeding was issued in which Mr Frauenstein, inter alia, challenged the allocation of the 300 shares in San Marco World Square to Equal 54. 

1. On or about 21 June 2007, Equal 54 withdrew from the Federal Court proceedings and submitted to such order as the Court deemed fit.[4] On 21 June 2007, Mr Panagopoulos also resigned as a director of San Marco World Square.

   [4]See Fraunenstein v Farinha [2007] FCA 1953, [198].

1. In terms of the shares, on 25 June 2007, Mr Galimberti wrote a file note of his conversation with Mr Panagopoulos.  It records:

He said he extricated himself from the proceedings by handing back / “surrendering” his shares to Frauenstein and by relying on the fact that he is a partner in the partnership on the advice of Pateman Legal.

1. However, the evidence of Mr Panagopoulos was that he relinquished the shares to the Court (not Mr Frauenstein) to be held in escrow pending the outcome of the Court proceedings. Mr Panagopoulos claimed that he relied on advice of Pateman Legal in taking this step, following a statement by lawyers for the Farinhas in open court that they had contravened the pre-emptive rights provisions in the Constitution in the issue of these shares.

1. However, there was no evidence at all that the shares were handed to either Mr Frauenstein, nor to the Court.  Moreover, even if they were temporarily held in “escrow” as suggested by Mr Panagopoulos, a company search of San Marco World Square of November 2015 suggests that the 300 shares were still shown as issued to Equal 54 right up until the time of deregistration of the company in June 2014.

1. Mr Panagopoulos also appears to have continued to work in the business through this time.

1. Between 26 September 2007 and 21 January 2014, San Marco World Square was in receivership (with receivers appointed by IFM). The Equilibrium Hotel, however, continued to trade.

1. On 4 December 2007, a Notice of Demand for Payment was sent to various of the guarantors.  However, the defendant accepts that there was no evidence to show that it was served on Equal 54.

1. On 10 December 2007, the Federal Court decision in Frauenstein v Farinha was handed down.[5]  Emmett J found, inter alia, that: [6]

[t]he purported allotment of shares in the capital of [San Marco] World Square to Equal 54 was made in contravention of its Constitution and would be liable to be set aside.

[5][2007] FCA 1953.

[6]Ibid [232(4)].

1. This finding was made following the concession of Counsel for the Farinhas that there had been a failure to comply with the Constitution of San Marco World Square in connection with the purported allotment of shares to Cockle Bay San Marco and Equal 54 and that the allotments were ineffective.[7] Schedule 11 of the Constitution provides that, before issuing shares of a particular class, the directors must offer them to the existing holders of that class.[8] There is no evidence that this occurred.  Moreover, the evidence of Mr Frauenstein was that he had no knowledge of Equal 54 holding 300 shares.

   [7]Ibid [9], [195].

   [8]There was a preliminary issue raised by the defendant as to whether the Constitution adduced into evidence was actually the applicable Constitution. This was abandoned in closing: Transcript of Proceedings (11 October 2016) 474.

1. Emmett J also found that no partnership involving Cine San Marco and Carl World Square had actually come into existence.[9] However, it was not suggested, nor pleaded, that such a finding was binding in this proceeding between these particular parties.

   [9]Ibid [232(1)].

1. On 1 August 2008, San Marco World Square went into liquidation.

1. Many of the other entities involved with the Equilibrium Hotel have also gone bankrupt and/or been deregistered.  However, on 27 November 2008, a Lender and Guarantor Deed between IFM, Mr Frauenstein, Carl World Square and Casetron was entered. This provided for IFM to promise not to sue Mr Frauenstein or his entities under his guarantee, in return for payment of $1,000,000.

Purchase of the business by Wanslea Grove Pty Ltd (Wanslea)

1. Mr Panagopoulos claimed that from about October 2007 he began negotiations with IFM and the receivers to purchase the hotel in circumstances where he claimed he was fearful of being made bankrupt. In the result he did this through a company, Wanslea, of which he was a director and shareholder.

1. Thus, on 5 December 2008, Wanslea purchased both the “Business” and “Assets” of the Equilibrium Hotel as defined (and as a going concern) from the vendor, San Marco World Square Pty Ltd (in liquidation) (Receivers and Mangers appointed) for $2,000,000 pursuant to a Business and Asset Sale Agreement.

1. Equal 54 also entered into a Customer, Purchaser and Guarantor Deed with, inter alia, IFM.

1. Mr Panagopoulos agreed that the effect of the documentation was that, provided Wanslea paid certain prescribed moneys due to IFM, IFM would not pursue Mr Panagopoulos or Equal 54 for moneys owing under the Relevant Guarantee.

1. The sale of the Equilibrium Hotel was completed on 5 December 2008, and Wanslea operated from that day under the new name of “World Square Pub”. Mr Panagopoulos claimed that there was “some success” initially.

1. In 2010, the parties entered into a variation deed in circumstances where it appeared that Wanslea had failed to pay interest payments. The deed included provision for the capitalisation of interest (clause 5.3).

1. Wanslea thereafter continued to operate the World Square Pub, until it was closed in mid-2011. The evidence of Mr Panagopoulos was that the pub began to perform poorly in March 2010, though it was not performing poorly prior to that time. Rather, the Global Financial Crisis had a big impact whereupon the “corporate dollar was switched off”.

1. On 7 June 2012, IFM demanded payment of $8,179,476.68 from Equal 54 pursuant to the Relevant  Guarantee, following default by Wanslea.

1. On 27 September 2012, Equal 54 consented to judgment being entered against it in the sum of $8,179,476.68, being the amount owed under the Relevant Guarantee, plus interest and costs.

1. On 27 March 2013, Mr Panagopoulos swore an affidavit in NSW Supreme Court proceeding 2012/207713 seeking to set aside the consent judgment entered against him and Equal 54.  However, his application was unsuccessful.[10]

   [10]See Industry Funds Management (Nominees 2) Pty Ltd v Panagopoulos [2013] NSWSC 868.

1. On 28 October 2013, Mr Panagopoulos made himself a bankrupt.

1. On 10 December 2013, Equal 54 commenced this proceeding against Mr Galimberti.

WITNESSES

1. Equal 54 called Mr Panagopoulos and Mr Frauenstein, while the defendant called Mr Galimberti.

1. Mr Panagopoulos generally had little independent memory, and was often taken to documents to prompt his memory such as it was. At one stage he was taken to a note which related to a conversation between Mr Galimberti and Mr Steingold which did not concern Mr Panagopoulos at all. Despite this, Mr Panagopoulos was prepared to give evidence as though the file note pertained to him. He also had difficulty recalling dates, and did not always recall conversations (even with prompting).

1. Such gaps might be readily explicable by the passage of time. However, from  having opportunity to assess his demeanour during both examination and cross examination, he evinced a preparedness to tailor his evidence in an effort to bolster his case. Thus, his evidence about his relationship with the Farinhas was not forthright. For example, although he had purported to suggest that they were not “well known to him” in an outline of evidence, his actions suggested a much closer relationship. In a letter of 28 November 2005 he had also written that he had many common interests with the Farinhas and that a friendship had existed “for some years”. He also appeared to down play his desire to enter the deal prior to Christmas.

1. More particularly, as will be seen below, his attempts to give precise evidence as to certain oral conversations in March 2006 were not credible and are to be rejected.

1. Overall, then, I am unable to be satisfied that I can generally rely on the evidence of Mr Panagopoulos. In particular, I am not satisfied that he gave credible evidence about the conversations leading up to the execution of the Relevant Guarantee in March 2006.

1. Mr Frauenstein gave evidence by video link and demonstrated only limited memory of the relevant events which appear to have caused him considerable angst.

1. His evidence will be further referred to below.

1. Mr Galimberti was said to be an unsatisfactory witness.

1. Many of the complaints amounted to a rejection of his opinions (for example that the retainer was curtailed by the giving of a discount and/or that the deal changed from a shareholders agreement to a partnership agreement) rather than any attack on credit. However, there was also a substantive attack on Mr Galimberti’s note-taking. 

1. It is true that there were examples of incomplete or inadequate note taking. However, although the notes were not always satisfactory, I generally found Mr Galimberti to be a straightforward, honest witness.

1. I have also generally preferred his evidence over that of Mr Panagopoulos, but have considered any conflicts in the context of any available surrounding objective evidence.

GENERAL PRINCIPLES

1. A solicitor owes a client a duty to exercise reasonable skill in the performance of the solicitor’s retainer, which derives from both contract and tort.[11]

   [11]Astley v Austrust Ltd (1999) 197 CLR 1, 20-1 [44]-[48].

1. The exercise of reasonable skill is the touchstone, not the wisdom of hindsight.[12]

   [12]Goddard Elliott v Fritsch [2012] VSC 87, [410].

1. What is required for the performance of the duty depends on the circumstances including the scope of the retainer, the scope of any additional responsibility assumed by the solicitor, and the nature of the task entrusted to and undertaken by the solicitor.[13]

   [13]Ibid [415] citing Trust Co of Australia v Perpetual Trustees WA Ltd (1997) 42 NSWLR 237.

1. Expert evidence is admissible but not necessary to establish the scope and alleged breach of the standard of care owed by the lawyer to the client, since the court is able to determine those issues for itself.[14]

   [14]Dual Homes Pty Ltd v Moores Legal Pty Ltd (2016) 306 FLR 277, 302 [120].

1. The standard of care which is expected of a person with some special skill or competence (as here), is codified in s 58 of the Wrongs Act as follows:

In a case involving an allegation of negligence against a person (the defendant) who holds himself or herself out as possessing a particular skill, the standard to be applied by a court in determining whether the defendant acted with due care is, subject to this Division, to be determined by reference to—

(a) what could reasonably be expected of a person possessing that skill; and

(b) the relevant circumstances as at the date of the alleged negligence and not a later date.

1. In determining the standard, s 48 of the Wrongs Act is also relevant in circumstances where it is alleged that a person failed to take precautions against a risk of harm.  It provides as follows:

(1)     A person is not negligent in failing to take precautions against a risk of harm unless—

(a)     the risk was foreseeable (that is, it is a risk of which the person knew or ought to have known); and

(b)     the risk was not insignificant; and

(c)     in the circumstances, a reasonable person in the person's position would have taken those precautions.

(2)     In determining whether a reasonable person would have taken precautions against a risk of harm, the court is to consider the following (amongst other relevant things)—

(a)     the probability that the harm would occur if care were not taken;

(b)     the likely seriousness of the harm;

(c)     the burden of taking precautions to avoid the risk of harm;

(d)     the social utility of the activity that creates the risk of harm.

(3)     For the purposes of subsection (1)(b)—

(a)     insignificant risks include, but are not limited to, risks that are far-fetched or fanciful; and

(b)     risks that are not insignificant are all risks other than insignificant risks and include, but are not limited to, significant risks.

1. In the decision of the Court of Appeal in Erikson v Bagley,[15] the Court stated that the first step in the analysis requires the appropriate identification of the risk against which it is alleged that a particular defendant failed to exercise reasonable care. This is not to be confined to the precise set of circumstances in which the plaintiff was injured. Rather, what must be reasonably foreseeable is the nature of the particular harm that ensued, or, more relevantly, the nature of the circumstances in which that harm was incurred. 

   [15][2015] VSCA 220, [33].

1. For the purpose of each of the sub-paragraphs of s 48(1) of the Wrongs Act, the Court must consider the question of the foreseeability of the risk, its probability, and the reasonableness of precautions to protect against it.  This must further be considered “from the view point of the defendant in the circumstances that were known, or ought to have been known, to the defendant.  Such an analysis must be prospective, and not retrospective.”[16]

   [16]Ibid [35].

SCOPE OF DUTY IN THIS CASE

1. In determining the scope of the duty of care in this case, Equal 54 alleges that the terms of the Retainer included that Mr Galimberti would “act for and advise” Equal 54 and Mr Panagopoulos “in relation to the purchase of an interest in the Equilibrium Hotel”.[17] Further to this Retainer, that Mr Galimberti owed Mr Panagopoulos and Equal 54 a duty of care in tort to exercise reasonable skill and care in acting for and providing advice to Equal 54 and Mr Panagopoulos.[18]

   [17]Plaintiff’s FASOC, [6].

   [18]Ibid at [13].

1. In his pleadings, the defendant generally admitted the terms of the Retainer as pleaded insofar as it related to Mr Panagopoulos,[19] though alleging that the retainer came to an end in about 15 March 2006.[20] The defendant also admitted that a duty of care was owed to Mr Panagopoulos, but did not admit that such a duty of care was owed to Equal 54.[21] In oral evidence, Mr Galimberti suggested that the retainer was to be curtailed such that he was to only consider the “mechanics” of the transaction given the discount given on fees.

   [19]Defendant’s DFASOC, [6].

   [20]Ibid [7A(b)].

   [21]Ibid [13].

1. I do not accept that the retainer was to be minimised such that Mr Galimberti was to only consider the “mechanics” of the transaction given the discount given on fees. There was no attempt by him to contain his retainer this way. Given that solicitors who seek to limit their retainer ought do so clearly, and usually in writing, I am not satisfied that any such limitation ought be imposed.[22]

   [22]Richtoll Pty Ltd v WW Lawyers (in Liquidation) Pty Ltd [2016] NSWSC 438, [163].

1. At trial it was also conceded that there was no longer any dispute that Mr Galimberti was acting on behalf of Equal 54.

1. As to the duration, the issue is largely academic given the findings made below. More particularly, Counsel for the defendant fairly accepted that, notwithstanding the pleading, if the alleged conversations concerning the Relevant Guarantee actually took place, the defendant would not be able to suggest that there was no retainer.

1. Accordingly, I accept that Mr Galimberti owed Equal 54 a duty to exercise reasonable care in advising and acting for it in relation to the purchase of an interest in the Equilibrium Hotel.  I do not consider that this was too broad and/or that it in any way “masks” the true nature of the duty (as the defendant suggested). Rather, it was consistent with the retainer letter (that he was to generally “act” in relation to the transaction), the actual work performed (including advising on the partnership deed); as well as the terms of the invoice (which referred to giving advice).

FIRST BREACHES

Standard

1. It was alleged that Mr Galimberti breached his duty of care by failing to:

   (a) ensure the Partnership Deed was effective in its terms; and

   (b) advise Equal 54 and Mr Panagopoulos of the defects in the structure of the Partnership Deed and the business proposed to be carried out pursuant to the Partnership Deed.[23]

   [23]Plaintiff’s FASOC, [15(a)]-[15(b)].

2. As to these breaches, Equal 54 submitted that Mr Galimberti should have taken reasonable precautions as follows:[24]

   (a) he should have made enquires to verify that Mr Frauenstein was exiting the business by:

   (i) asking Mr Steingold for more detail as to Mr Frauenstein’s departure – this should have produced information that the Farinhas and Mr Frauenstein were in dispute over his departure;

   (ii) asking Mr Steingold for a copy of the option dated 20 July 2005 and the Farinhas purported exercise of the option by email dated 12 September 2005;

   (iii) asking Mr Frauenstein about the exercise of the option. Mr Frauenstein would have told him about the rejection of the exercise of the option dated 14 September 2005 and that he and the Farinhas were in dispute

   (b) he should have advised Equal 54 that Mr Frauenstein’s exit was unresolved and that Mr Frauenstein and the Farinhas were in dispute about his exit.

   [24]Plaintiff’s Closing Submissions, 10 October 2016, [61] (Plaintiff’s Closing Submissions).

3. Equal 54 conceded that this was exhaustive of the breach claim and the defendant did not object to the Court dealing with the breach on the basis of the above matters set out in the Closing submissions.[25]

   [25]Transcript of Proceedings (11 October 2016) 510, 553.

1. Turning, then, to whether there was a failure to take precautions “against a risk of harm”, the risk identified was that Equal 54 might not obtain the property it was bargaining for. This property appeared to be a 30% interest in the Equilibrium Business venture.  

1. Such a risk was foreseeable given it was a risk of which the solicitor knew or ought to have known given it is common in most purchase transactions.

1. The risk was also not insignificant in this case given the presence of the third party was well known to Mr Galimberti. In such circumstances, it became important to investigate whether the third party had in fact been “taken care of” in circumstances where the Partnership deed proposed a 70/30 split.   

1. However, Mr Galimberti emphasised:[26]

   [26]First Defendant’s Closing Submissions, 10 October 2016, [30] – [31] (Defendant’s Closing Submissions).

·    As the transaction had unfolded, Mr Frauenstein’s exit was of less significance given the interest being sold to Equal 54 was not dependent on the exit of Mr Frauenstein and Equal 54 was purchasing a 30% interest directly from the Farinhas and not from Mr Frauenstein;

·    Equal 54 knew of the Farinhas’ difficulties in procuring the exit of Mr Frauenstein;

·    Mr Galimberti proposed protections including by providing for a refund of the investment and a shareholders’ agreement (as per the letter of 1 December 2005). However, when these amendments were refused by Mr Steingold Equal 54 chose to press on anyway.

1. It is true that there had been reference to a “staged” departure in the correspondence of 25 November 2005 and the Heads of Agreement whereby Equal 54 would purchase a 30% share directly from the Farinhas first (not Mr Frauenstein).  Further, that it was only once the exit of Mr Frauenstein was documented that a new structure would come into place whereby Equal 54 and the Farinhas would be partners as to 30%/70%.  However, by the time Equal 54 was invited to execute the Partnership Deed it was contemplated that the respective proportions in the business were 70%/30% on the basis that Mr Frauenstein was removed (i.e. the split was not 40/30/30 as contemplated in the 1 December 2005 conversation with Mr Steingold if Mr Frauenstein remained). In circumstances where the Farinhas were to retain 70%, it became vital to ensure that they could obtain the other 30% from Mr Frauenstein if Equal 54 was to obtain good title to a 30% interest.

1. As will be shown below, I accept that Equal 54 was aware that there were difficulties in obtaining the departure of Mr Frauenstein. However, such matters go to causation.  They do not in my view  exculpate the solicitor from taking appropriate precautions against the relevant risk and advising his client fully about them in relation to the transaction he ultimately chose to enter on 14 December.  

1. Nor did the proposed protections previously raised absolve the solicitor from taking appropriate precautions in the context of the structure proposed by the Partnership Deed.

1. In determining the precautions a reasonable person would have taken (under s 48(2) of the Wrongs Act), there was a high probability that the harm would occur if care was not taken, i.e. that the 30% interest would not be obtained if title could not be given. It was likely the harm would be serious given the large sum invested ($1,400,000). There is also obvious social utility in the buying and selling of businesses in a market economy.

1. Turning, then, to the sort of inquiries the plaintiff suggests, I consider that a reasonably competent solicitor, at least, would have asked for evidence as to the existence of the option; its exercise; and whether or not Mr Frauenstein had accepted such exercise in considering what advice to give in this case. Such inquiries were not unduly burdensome in the context of this transaction.

1. Further, the fact that Mr Galimberti was told by the solicitor acting for the vendor that the option had been exercised did not exculpate him from asking for a copy of that option. This was particularly so given the somewhat troubling wording of the 2 December 2005 correspondence from Mr Steingold that the “mechanics” of the exit were still being dealt with. 

1. In such circumstances, then, I consider that Mr Galimberti should have asked for more details as to Mr Frauenstein’s departure which should have included inquiry as to a copy of the option; its purported exercise; and Mr Frauenstein’s response. As will be seen below, this would further have led him to advise that the exit appeared to be unresolved (as Equal 54 alleges).

1. In circumstances, where Mr Galimberti did not make any such inquiries, I consider that he has not acted as could reasonably be expected of a solicitor acting on a purchase transaction such as this. More particularly, I am satisfied that he has not acted as could reasonably be expected of a solicitor with specialised experience in the acquisition of hotels.

1. Accordingly, I am satisfied that Mr Galimberti has breached his duty of care.

Causation and Loss

Causation

Principles

1. Section 51 of the Wrongs Act provides as follows:

(1)      A determination that negligence caused particular harm comprises the following elements –

(a) that the negligence was a necessary condition of the harm (factual causation); and

(b) that it is appropriate for the scope of the negligent person’s liability to extend to the harm so caused (scope of liability).

(2)     In determining in an appropriate case, in accordance with established principles, whether negligence that cannot be established as a necessary condition of the occurrence of harm should be taken to establish factual causation, the court is to consider (amongst other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party.

(3)      If it is relevant to the determination of factual causation to determine what the person who suffered harm (the injured person) would have done if the negligent person had not been negligent, the matter is to be determined subjectively in the light of all relevant circumstances.

(4)      For the purpose of determining the scope of liability, the court is to consider (amongst other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party.

1. Section 52 of the Wrongs Act further provides that, in determining liability for negligence, the plaintiff always bears the onus of proving, on the balance of probabilities, any fact relevant to the issue of causation. 

1. In Dual Homes Pty Ltd v Moores Legal Pty Ltd,[27] Dixon J reiterated his summary of the various propositions about the operation of the statutory causation test drawn from decisions of the High Court considering the interstate equivalents of the Wrongs Act that he had previously expressed when sitting as a member of the Victorian Court of Appeal in Settlement Group Pty Ltd v Parcell Partners (a firm).[28] They relevantly include:

   [27](2016) 306 FLR 277, 304 [127].

   [28][2013] VSCA 370, [99].

a) The determination of factual causation under s 51(1)(a) is a statutory statement of the ‘but for’ test of causation: the plaintiff would not have suffered the particular harm but for the defendant’s negligence.

b)   Under the statute, factual causation requires proof that the defendant’s negligence was a necessary condition of the occurrence of the particular harm. A necessary condition is a condition that must be present for the occurrence of the harm.

c) There may be more than one set of conditions necessary for the occurrence of a particular harm and it follows that a defendant’s negligent act or omission which is necessary to complete a set of conditions that are jointly sufficient to account for the occurrence of the harm will meet the test of factual causation within s 51(1)(a). In such a case, the defendant’s conduct may be described as contributing to the occurrence of the harm. It is not necessary that the defendant’s negligence be the sole necessary condition of the occurrence of the harm.

d) Section 51(2) makes special provision for cases in which factual causation cannot be established on a ‘but for’ analysis. The provision permits a finding of causation in an appropriate case, notwithstanding that the defendant’s negligence cannot be established as a necessary condition of the occurrence of the harm.

Application

1. In considering the issue of causation in this case it is relevant to consider the evidence of Mr Panagopoulos about what he would have done absent the negligence. As the defendant highlighted, this is to be done by means of a “counterfactual hypothesis” which must identify what the plaintiff would have done had reasonable care been exercised and how the taking of that action would have averted the loss.[29]

   [29]Wodonga Regional Health Service v Hopgood [2012] VSCA 326, [31].

1. The “counterfactual hypothesis” here is identified in particulars to paragraph 17 of the FASOC as follows:

As a consequence of the First Breaches, the Plaintiff paid the total sum of $1,400,000.00 to Cockle Bay San Marco Pty Ltd for the shares in San Marco World Square Pty Ltd. If the First Defendant had advised as to the serious difficulties the Farinhas had in obtaining Mr Frauenstein’s shares in San Marco World Square Pty Ltd, the Plaintiff would not have paid the total sum of $1,400,000.00 for those shares. Consequently, the Plaintiff suffered loss and damage of $1,400,000.00 when, on 10 December 2007, Emmett J held that the shares were liable to be set aside.

1. As will be seen below, there are difficulties with the premise of these particulars. Thus, I do not accept that the loss is constituted by payment for shares since the transaction as framed contemplated a 30% interest in profits and losses with shares in a nominee company only.

1. Nevertheless, for the purposes of the causation issue I will accept the case as framed, which is essentially a “no transaction” case that Equal 54 would not have paid the money at all if it had received advice as to the “serious difficulties the Farinhas had in obtaining Mr Frauenstein’s shares”.

1. Evidence was led from Mr Panagopoulos to the effect that if he had been told that the Farinhas were in dispute with Mr Frauenstein as to the purchase of his shares in San Marco World Square, he would not have gone ahead, including by way of payment of the deposit.

1. However, it is important to consider this self-serving evidence in the context of all the circumstances, particularly given that Mr Panagopoulos was not an impressive witness.  Such circumstances include the information that Mr Galimberti could have obtained if the relevant inquiries had been made which largely turns on the evidence of Mr Frauenstein. They also include the state of Mr Panagopoulos’ knowledge in December which  partly turns on what was said in the conversation he had with Mr Galimberti on 1 December.

Evidence of Mr Frauenstein

1. Emmett J records that on 20 July 2005, Mr Tim Somerville, acting as Mr Frauenstein’s attorney, signed a Letter Agreement which provided for the parties to use their endeavours to cause a binding written agreement to be entered relating to the interests of the parties in the World Square Project by 7 September 2005. Further, that if no such written agreement was entered into by the said date, then “at the option” of the Farinhas to be exercised before 14 September 2005, for the repayment of all monies invested by Mr Frauenstein within 12 months of the exercise of such option.[30]

   [30]Frauenstein v Farinha [2007] FCA 1953, [68].

1. The evidence of Mr Frauenstein was that he remembered that there was an agreement along these lines. Thus, it appeared that there was an “option” in existence.

1. Emmett J further records that on 12 September 2005, Mr Frauenstein received a letter from Toby Farinha and Marco Zagato concerning the Letter Agreement which purported to exercise the option under the Letter agreement to purchase his interest in the World Square Project.[31]

   [31]Ibid [86].

1. Again Mr Frauenstein recalled that something along these lines took place and he must have received an email along these lines. Thus, it appears that the option had been exercised on about 12 September 2005.

1. Emmett J also records that on 14 September 2005, Mr Frauenstein sent a facsimile responding to the letter from Toby Farinha and Marco Zagato concerning the Letter Agreement disputing the purported exercise of the option as valid, inter alia, because they had not negotiated in good faith.[32]

   [32]Ibid.

1. The evidence of Mr Frauenstein was that he would have rejected the letter and he must have written the facsimile of 14 September 2005. This supports a finding that the exercise of the option was in fact rejected on 14 September 2005.

1. Mr Frauenstein also gave evidence that at the opening of the Equilibrium Hotel in November 2005 there was a confrontation between himself and Mr Steingold, who knocked him over. He later had a conversation with Tobias Farinhas in which he told him it was best for him not to be involved in the hotel business. He then resigned as a director on 15 November 2005. Mr Frauenstein also said he had got to the point where this was “extremely unhealthy” for him and he did not want to be there anymore. He also said he “must have” told the Farinhas that.

1. Hence, he agreed that it was generally “accurate” for Mr Steingold to say that he had resigned as a director; that he had told the Farinhas and others that he was exiting the venture; and that “it is merely the mechanics of such exit and premium payable” that was being dealt with.

1. He also gave evidence that it was “most unfortunate” for him to have crossed the path of the Farinhas and he had actually gone to counselling “because of these people”.

1. Therefore, on the basis of the evidence of Mr Frauenstein, if relevant inquiries had been made, the information available would be that the option which was in existence had been exercised and had been refused on 14 September 2005. However, that Mr Frauenstein had told the Farinhas that he was exiting, and that he did not want to “be there” anymore.   

Discussion on 1 December

1. Mr Panagopoulos gave evidence that he had a discussion with Mr Galimberti in relation to what Mr Steingold said on 1 December 2005. In relation to the “40/30/30” split, Mr Panagopoulos said that he had had conversations with the Farinhas which suggested that “it would take longer to get Mr Frauenstein out” due to other business dealings they shared. At this point, Mr Panagopoulos said he spoke to Mr Galimberti in detail and again, they reiterated that the focus was becoming “more and more” on the shares in the company.

1. In cross examination, it was put to Mr Panagopoulos that Mr Galimberti had earlier given advice that he should not enter into this arrangement unless Mr Frauenstein exited. Mr Panagopoulos denied that Mr Galimberti gave him any such advice. He also did “not recall” saying to Mr Galimberti that he still wanted to go in “because they, the Farinhas, will look after me”.

1. In relation to events of 1 December he further claimed that he and Mr Galimberti “came to the realisation” that it did not matter whether Mr Frauenstein left because he was only to be a passive investor.  He also denied discussing the new structure with the Farinhas and said he agreed to the arrangement on 1 December on the basis of the advice which he got, as Mr Galimberti was very clear that as long as he got the shares in the San Marco World Square entity, the rest would work out later.

Mr Galimberti

1. Mr Galimberti said that on 1 December he discussed with Mr Panagopoulos that the deal had changed and it was no longer going to be via a Shareholders agreement. Mr Galimberti said he told Mr Panagopoulos that the deal was going to be a partnership. Mr Galimberti gave evidence that Mr Panagopoulos already seemed to have known that and that he had been speaking to the Farinhas. According to Mr Galimberti, this was a problem that he had been experiencing, that by the time he had put a position to Mr Steingold and recieved his response, Mr Panagopoulos was already ahead of him. According to Mr Galimberti, Mr Panagopoulos responded with “that’s fine. The Farinhas are going to look after Carl”. He further said that he did not like the proposed structure but that Mr Panagopoulos had “accepted that position”.

1. Under cross examination, Mr Galimberti stated that (by December) it was “less important” that Mr Panagopoulos get the shares because he was only getting the shares in a nominee. Mr Galimberti also gave evidence that Mr Panagopoulos was happy with the  arrangement (contained in the partnership deed), though he had advised Mr Panagopoulos not to enter into the arrangement on 1 December unless Mr Panagopoulos received Mr Frauenstein’s shares, he got a shareholders agreement, and Mr Frauenstein’s exit. Mr Galimberti stated that if this could not be done then the money should be put in trust so that if Mr Frauenstein did not exit and he became a problem, Mr Panagopoulos would be able to get his money back. However, Mr Panagopoulos rejected the advice because he had already spoken to the Farinhas, and it was now going to be a partnership and Mr Frauenstein was to be “taken care of”. Mr Galimberti further stated that he has a vivid recollection of this conversation because it was a very important one and had Mr Panagopoulos accepted his advice he would not have got into the predicament that he found himself in.

1. The evidence of Mr Galimberti was somewhat unsatisfactory given his suggestion that he gave “advice” which was “rejected” was not the subject of a file note.   However, there was objective evidence prior to 1 December that Mr Galimberti was recommending that the money be put in trust which was generally consistent with his account (as per the handwritten notation in the Heads of Agreement; the other file note of 1 December; and the letter of 1 December). The evidence of Mr Panagopoulos that he did not discuss the new structure with the Farinhas was not credible, nor was his suggestion that Mr Galimberti “focused” on the shares given Mr Galimberti clearly considered that the company was a nominee.  To the extent necessary, I therefore generally accept and prefer Mr Galimberti’s evidence.

1. More significantly, the evidence of both men suggests that Mr Panagopoulos was well aware that there were ongoing difficulties with getting Mr Frauenstein “out.”  I also accept that he was prepared to go ahead despite this on the basis that the Farinhas would “look after him” which was consistent with his ongoing friendship with, and apparent faith in, the Farinhas. 

Conclusion on Causation

1. It is true that there was no evidence to the effect that Mr Panagopoulos was specifically aware that the option had been refused which would have been ascertained had appropriate inquiries been made. 

1. However, such information was essentially “out of date” since it related to events in September.  Moreover, Mr Panagopoulos was clearly aware that there were ongoing “difficulties”. Thus, as highlighted in the file note of 7 November 2005, Mr Panagopoulos actually told Mr Galimberti that the Farinhas were still having difficulty “getting the other partner out.” His own evidence also suggests that he was prepared to proceed on 1 December though he was aware that it might “take longer to get Mr Frauenstein out.”

1. It is unlikely that outdated information from Mr Galimberti about the earlier rejection of the option would have any impact in such a context.  This is particularly so given Mr Panagopoulos actually claims in his affidavit that he ultimately paid the money on the basis of “assurances from the Farinhas” that Mr Frauenstein did actually relinquish his interest. [33] As highlighted, below, this evidence is vague. He also sought to suggest in oral evidence that he “relied on his lawyer.”  Nevertheless, his own sworn testimony suggests that he was ready to accept that any previous difficulties were somehow overcome solely on the basis of assurances from the Farinhas. 

   [33] Affidavit of James Nicholas Panagopoulos 27 March 2013 [32].

1. The evidence also supported that there was some general urgency to “close the deal” to take advantage of commercial opportunities prior to the quiet period after Christmas.

1. It must be borne in mind that the plaintiff always bears the burden of proving, on the balance of probabilities, any fact relevant to the issue of causation.[34] In determining what would have happened absence the negligence, I am to determine the issue subjectively “in the light of all relevant circumstances.” Those circumstances then, include the difficulties with the testimony of Mr Panagopoulos; the limitations of the information which could have been obtained; his up to date knowledge that there were “difficulties” in getting Frauenstein out; his readiness to believe that any difficulties were ultimately overcome (based on his faith in the Farinhas); as well as his motivation to close the deal prior to Christmas.

   [34]Wrongs Act 1958 (Vic) s 52.

1. Taking all these matters into account, I am unable to be satisfied that, if Mr Galimberti had advised him of the “difficulties” including the earlier rejection of the option, that Mr Panagopoulos would not have entered the arrangement and paid the sum of $1,400,000 as he now claims.  Given the factors above, I am in fact satisfied that Mr Panagopoulos would still have proceeded in December even if he had been advised of such “difficulties.”  

1. It follows that the factual causation test is not satisfied, nor is it appropriate for the liability to extend to any harm caused.

1. I am therefore not satisfied that the breach of duty caused Equal 54 to pay the sum of $1,400,000 million in December 2005 as alleged.

Loss

1. As indicated above, Equal 54 alleged that the loss was the total sum of $1,400,000 which was paid “for the shares”. Further, that this loss was not suffered until 10 December 2007 when Emmett J held that the shares “were liable to be set aside”, at which time it was said that the shares effectively became “worthless”.[35]

   [35]Plaintiff’s Closing Submissions, [72(a)].

1. Equal 54’s claim was essentially that of a contingent loss on the basis that the characterisation of the transaction was that of a purchase of shares only.

1. I will therefore consider the case as put, presuming it is appropriate to characterise the transaction in this way and, further, that the loss is a “contingent” one.

Whether loss sustained if loss is contingent

1. In alleging that the loss was a contingent loss such that it only came to fruition when the loss became an actual loss in December 2007, Equal 54 accepted that the initial allotment of the 300 shares in San Marco was valid.[36]

   [36]Ibid [80].

1. In fact, Equal 54 cited two decisions which supported that the initial share issue was valid: Reef & Rainforest Travel Pty Ltd v Commissioner of Stamp Duties,[37] and Grant v John Grant & Sons Pty Ltd.[38]

   [37][2002] 1 Qd R 683.

   [38](1950) 82 CLR 1.

1. In Grant v John Grant & Sons Pty Ltd, shares were transferred in breach of a right of pre-emption. Williams J noted that in such a case every member of the company would be a person aggrieved in respect of this pre-emptive right and each could bring an action to have the share register rectified.[39] The result of the case was an order for the share register to be rectified.[40]

   [39]Ibid 29.

   [40]Ibid 53.

1. This decision was cited by McPherson JA in Reef & Rainforest Travel Pty Ltd v Commissioner of Stamp Duties which concerned whether the transfer of shares in breach of a right of pre-emption was sufficiently effective to be a dutiable transfer. It was submitted that the transfer was void ab initio such that no duty could be owing.

1. However, McPherson JA (with whom Thomas JA and Muir J agree) held that there was a valid and dutiable transfer. Further, that where a share had been transferred in breach of pre-emption rights a shareholder might seek rectification of the share register if registration of the transfer had already taken place.[41]

   [41]Reef & Rainforest Travel Pty Ltd v Commissioner of Stamp Duties [2002] 1 Qd R 683, 687 [9].

1. Both of these decisions therefore stand for the proposition that there is a valid transfer of shares unless and until there is a rectification of the register.

1. Equal 54 in this case then points to the judgment of Emmett J as a materialisation of the “contingency”. At paragraph 232(4) of that judgment, His Honour determined that the purported allotment of shares was made in contravention of the Constitution and “would be liable to be set aside”. That is, that the register could be rectified.

1. There was, however, no order requiring rectification, which stands in contrast to the order made in Grant v John Grant & Sons Pty Ltd, above. Rather, the order itself is expressed in contingent terms, namely, that the allotment “would be liable” to be set aside.

1. This is consistent with the other findings made by Emmett J in that decision. Thus, the finding that the shares could be set aside was made on the basis, not only that they were in violation of the Constitution, but that the transaction was oppressive to the minority shareholder.[42] As a result, Emmett J found that the proper course was to have the majority shareholders purchase the minority shares, and His Honour fixed a time for hearing the parties as to the price at which that ought to be done.[43] That is, there was no order for the register to be rectified, because that was not necessary for the minority shareholder to be relieved in that case.[44] All that was required was an order that the minority shares be bought, with no order actually setting aside the allotment of the shares of Equal 54 or for rectification of the register.

   [42]Frauenstein v Farinha [2007] FCA 1953, [218]-[219].

   [43]Ibid [232(6)], [233].

   [44]In fact Mr Frauenstein had actually sought to restrain interference with the register on the basis that he could rely on the allotment and seek relief on the basis of oppression: Ibid [197]-[198].

1. Accepting, then, that the loss is a contingency and the shares had some value, the contingency never actually eventuated. This is also consistent with the fact that Equal 54 appears to have continued to hold its shares right up until the point of deregistration.

1. Accordingly, even if the Court accepts that the loss is to be characterised in the way alleged by Equal 54, no loss is sustained given the “contingency” never materialises.

1. It remains, however, as a matter of completeness, to consider whether any other loss might be suffered on the basis that the loss was not truly contingent and/or on the basis that the transaction has been mischaracterised by Equal 54.

Whether loss suffered if not contingent

1. In my view, the preferable characterisation in this case is that, even if the transaction was solely concerned with shares, it was not a situation of contingent loss at all since any loss would be suffered immediately on the obtaining of the shares which would be less valuable than the plaintiff was entitled to expect.

1. Thus in the case of Winnote Pty Ltd v Page,[45] the respondent solicitor prepared a real property lease as a means of securing the right to exploit a peat deposit on a block of land, despite the fact that the proper means of securing this right was to seek a mining lease and licence from the Crown. The plaintiff mined the peat for five years until a third party acquired the mining rights from the Crown. The plaintiff submitted that its claim was not statute barred because it only suffered a contingent loss at the time of entering the transaction and that no actual loss occurred until the third party secured the rights.

   [45]Winnote Pty Ltd v Page (2006) 68 NSWLR 531.

1. In rejecting this approach, Mason P (with whom Tobias JA agreed, Basten JA dissenting) conveniently set out the relevant authorities in this area, citing the decision of Law Society v Sephton wherein Lord Walker described “transaction cases” as:

… cases where the client had through the negligence of his professional adviser ended up with a package of rights less valuable than he was entitled to expect – damaged or defective goods, to pursue the metaphor, rather than the undamaged and serviceable goods which he should have got.[46]

[46]Ibid 540 [46].

1. Mason P further noted that, in the decision of Wardley Australia Ltd v Western Australia,[47] the Court also distinguished the line of cases in which the plaintiff acquires property (or a chose in action) and suffers actual loss in the circumstances from cases involving a contingent loss.[48]

   [47](1992) 175 CLR 514 (Wardley).

   [48]Winnote Pty Ltd v Page (2006) 68 NSWLR 531, 540 [48].

1. The Court thereby found that the plaintiff suffered actual damage in 1988 at the time of the transaction because it had, through negligence, ended up with a package of rights less valuable than it was entitled to expect; the loss was not merely contingent as might be expected in a non-transactional case.

1. The case of Winnote was also referred to in the recent NSW Court of Appeal decision of D’Agostino v Anderson,[49] which concerned the purchase of land and business relating to a chiropractic clinic. Unbeknown to the plaintiff at the time of entry into the transaction, consent for use as a chiropractic clinic had lapsed. However, it was not until a later time that the plaintiff received a notice to this effect from the Council.

   [49] [2012] NSWCA 443.

1. In considering the relevant time for the limitation period, the Court rejected the proposition that the loss was merely contingent, stating that on purchase the plaintiff acquired a “package of rights that was different to what they understood they were acquiring”.[50]

   [50]Ibid [11].

1. In so doing, the Court also cited the High Court decision in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd,[51] wherein the plaintiff purchased a shopping arcade based on a negligent valuation which did not account for the pending construction of a nearby shopping centre. In considering the nature of the loss, the High Court stated that it was incorrect to treat the case as being like Wardley,[52] since the plaintiff was not exposed to contingent loss but had suffered actual loss involving the purchase of an asset at an over-value.[53]

   [51](2004) 217 CLR 640.

   [52](1992) 175 CLR 514.

   [53]HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640, 655-6 [29], [31].

1. Returning to this case, I do not accept that if any loss was suffered it was only contingent. Thus, the fact that the shares were issued in breach of pre-emption rights was known from the time of issue. The fact that this was declared later by Emmett J and/or that the register might later be rectified does not take away from the fact that the shares acquired were inherently of less value than that expected, i.e. that a loss was therefore suffered as at the time of issue.

1. Such an approach is also consistent with the way the case was put by Equal 54, which was that this was effectively a “no transaction” case.[54]

   [54]Plaintiff’s FASOC, [17]; Plaintiff’s Closing Submissions, [72(a)], [77(e)].

1. In a “no transaction” case, however, the proper basis for assessment of damages would be the tortious measure, that is, the plaintiff ought to be placed in the position it would be but for the negligent conduct.[55]

   [55]Hill v Van Erp (1997) 188 CLR 159, 169 (Brennan CJ).

1. In terms of events after 27 March 2006, the security documents were returned executed on 2 May 2006 to Simpson Legal by Mr Galimberti.  

1. He thereafter chased up the original share certificate, which he said was being requested by GEMI. He eventually received it on 14 August 2006 from UHY and then forwarded it by his correspondence of 21 August 2006 to Simpson Legal.

1. He also wrote to Mr Panagopoulos by correspondence of the same day saying he had forwarded the original certificate to Simpson Legal for them to hold “under the security documents for the loan”.

Under cross examination

1. In relation to the file note of 27 March 2006, this recorded that Mr Panagopoulos had “the share certificate”. Mr Galimberti accepted that, given he later chased the original share certificate, Mr Panagopoulos must not have had the (original) share certificate on 27 March as his file note of 27 March suggested. However, he maintained that he was told by Mr Panagopoulos that he had the share certificate.  He also accepted that the file note did not refer to GEMI.

1. He said he was not concerned that his client had 300 shares (when the total issued shares had only been 100 as at 15 February 2006).  Mr Panagopoulos was ringing because he wanted to pledge the shares to GEMI to get funds for another venture and he needed the share certificate to do it.  He did not know what arrangements he might have made to increase the shareholding to that level.

1. Mr Galimberti denied requesting a company search because he was told that Mr Panagopoulos was about to sign a guarantee. He denied being told that he was about to sign a guarantee.

1. He denied that the reason the company search was not sent until 28 March was because he had a conversation with Mr Panagopoulos about the content of the company search.  His evidence was that he simply organised for his secretary to do the searches who faxed them off in her own time.  She faxed them off and he did not speak to Mr Panagopoulos about it.

1. Mr Galimberti also again denied that he had  a conversation wherein he said that Mr Panagopoulos was “right to go ahead and sign the guarantee”.

1. He agreed that the historical search of Birdwood Street did not show a mortgage to GEMI.  However, under re-examination he said he believed this was because GEMI did not accept the property as security because it was in his wife’s name.

Resolution

1. Equal 54 submitted that I should prefer and accept the account of Mr Panagopoulos, in particular, because:

·    there was significance in the holding back of the company search which suggested that Mr Galimberti had spoken to Mr Panagopoulos about its contents;

·     that the timing of the signing of the guarantee was of some significance, and it could be not be a “mere coincidence” that this occurred on 31 March;

·    It  is not clear why Mr Panagopoulos needed Mr Galimberti to conduct a company search with respect to GEMI on 27 March given he already had the share certificate and given the funds had already been advanced by GEMI (citing the fact that the loan documentation was already sent on 20 March (and received on 23 March)); and

·    the historical title search showed that GEMI never held a registered mortgage over the property.

1. I see no significance in the fact that the company search was forwarded on 28 March.  Rather, it is likely that, as Mr Galimberti claimed, this was a matter left to his secretary.  The sending of the search certainly did not make it more likely that the conversation alleged by Mr Panagopoulos took place.

1. The timing of the signing of the guarantee is equally equivocal.  This  is particularly so given there is extensive surrounding objective documentation that suggests that the shares were relevant to the requirements of GEMI (as for example, the letter of Mr Galimberti of 15 March and the correspondence from Simpson Legal (for GEMI) of 20 March wherein Simpson Legal requests that the share certificate be provided).

1. In terms of why Mr Panagopoulos wanted the company search done, the evidence of both men was that Mr Panagopoulos was for some reason uncomfortable with the share certificate alone and wanted evidence from ASIC. The fact that GEMI was forwarding loan documentation “for execution” by Equal 54 received on 23 March does also not establish that the funds had been advanced, particularly since the executed documentation was not sent until 2 May. Moreover, it was clear that GEMI continued to press for share certificates between March and late July.[64]

   [64]See, for example, Letter from Hall & Thompson to Simpson Legal, dated 25 July 2006, wherein Mr Galimberti writes to Simpson Legal referring to “recent communications” and confirming that he had again asked for originals of the share certificates.

1. In terms of the title search, the explanation offered by Mr Galimberti was credible and acceptable.  Thus, from May 2004 the registered proprietor was a Ms Fiona Ackland (and not Mr Panagopoulos).[65] Moreover, the file note of 27 March 2006 provides objective evidence that a title search was requested on 27 March which was consistent with the fact that the subject of the conversation was security-related as Mr Galimberti says.

   [65]Exhibit J: Historical search statement produced 5 October 2016 and relates to 6 Birdwood St, Balwyn.

1. I am also unable to be satisfied that Mr Panagopoulos’ account is reliable or accurate.

1. Firstly, for reasons already given above, I was not generally satisfied that Mr Panagopoulos was a reliable witness.  This is to some extent highlighted in the above summary of his evidence where he gives two conflicting accounts of his “first” oral conversation of 27 March.  Significantly, he does not even mention the guarantee in the first version.

1. There was also a strong incentive for Mr Panagopoulos to tailor his evidence given the extensive liability imposed by the guarantee. Considerable caution must be applied before acceptance of such testimony based on oral evidence of a conversation which occurred many years ago and which is not recorded or referred to anywhere.

1. Mr Panagopoulos’ account is also directly contradictory of the evidence given in his affidavit evidence in the Federal Court to the effect that he did not obtain any legal advice in relation to the guarantee before signing it.

1. It also does not appear in the witness outlines.  Although it is true that outlines do not necessarily set out conversations “verbatim”, as Equal 54 alleged, the conversation is of such significance that it would be expected to be included if it had really taken place.

1. It also does not appear to be contained in any previous pleading, including the most recent fifth version of the Statement of Claim, nor the Reply.

1. The inclusion in the file note of reference to the title search as well as the surrounding documentation related to GEMI further lends support to the proposition that the company search was undertaken in the context of the taking of security by GEMI as Mr Galimberti suggested. I also did not find Mr Panagopoulos’ evidence that he effectively provided such security “voluntarily” to be credible given the formalities of the GEMI documentation adduced.

1. Finally, the evidence itself appears inherently improbable.  Thus, even allowing for the fact that I have found Mr Galimberti to have breached his duty of care, I am not of the view that he was dishonest, nor inclined to bald brave statements.  It is inherently unlikely that any solicitor would tell a client to effectively sign a guarantee. Although the file notes were not completely satisfactory, the complete absence of any file note on the guarantee question also weighs against any such conversation on this subject matter.

1. Overall, then, I am unable to be satisfied that the conversations took place as Mr Panagopoulos alleged. More particularly I reject that he asked for the search to be undertaken because he was about to sign a guarantee. Further, I reject that Mr Galimberti later rang Mr Panagopoulos and said words to the effect that he was “good to go” to sign the guarantee.

1. Instead, I have preferred and accepted the evidence of Mr Galimberti.  In particular, I accept that he was asked to conduct a company search and title search in the context of an application for finance to GEMI. Further, that these searches were provided to Mr Panagopoulos without any further conversation and in circumstances where he was not told that Mr Panagopoulos was about to sign the Relevant Guarantee.

Conclusion on second breaches

1. Given the fair concession of Counsel for Equal 54, it must follow that the claim in respect of the second breaches fails since no relevant advice was sought or given.  

1. However, if, contrary to the above, I had accepted Mr Panagopoulos’ evidence, I would also be of the view that no loss was caused by any negligent failure to advise (about the share issue) in relation to the Guarantee.  Thus, given it was accepted by Equal 54 that it was already bound to execute the Guarantee pursuant to the terms of the agreement of late 2005,[66] any failure in March 2006 is of no consequence.

   [66]See, for example, Plaintiff’s Reply to Defence to Fifth Amended Statement of Claim, 12 August 2016, [5(c)].

1. It is unnecessary to consider this matter further, however, given the concession made.  The claim based on the second breaches is not established.

CONCLUSION ON CLAIM

1. Given the claims made on the basis of both the first and second breaches fail, it follows that the claim must fail.

1. It is unnecessary to further consider any other defences.  However, for the sake of completeness, I will record a brief summary only of my views and observations.  

OTHER DEFENCES

Proportionate Liability

1. Part IVAA of the Wrongs Act establishes a regime of proportionate liability for “apportionable claims” permitting a court to limit the liability of a defendant who is a “concurrent wrongdoer” in relation to that claim to an amount reflecting that proportion of the loss or damage that the court considers just.

1. The claims in this case would appear to fall within the definition of “apportionable claims” as they are claims for economic loss arising from a failure to take reasonable care pursuant to s 24AF(1) of the Wrongs Act.

1. Therefore, the issue that would need to be addressed is whether the defendant was a “concurrent wrongdoer”.  

1. Section 24AH(1) of the Wrongs Act, states that a concurrent wrongdoer “in relation to a claim, is a person who is one of 2 or more persons whose acts or omissions caused, independently of each other or jointly, the loss or damage that is the subject of the claim”.[67]

   [67]Wrongs Act1958 (Vic) s 24AH(1).

1. In Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd,[68] it was noted that when determining whether there are concurrent wrongdoers there are two questions for the court: “what is the damage or loss that is the subject of the claim? Is there a person, other than the defendant, whose acts or omissions also caused that damage or loss?”

   [68](2013) 247 CLR 613, 627 [19] (Hunt & Hunt).

1. Mr Galimberti named 14 concurrent wrongdoers alleged to have also been responsible for the Equal 54’s loss and damage.[69] Of these alleged concurrent wrongdoers, only Casetron, the Farinhas, Mr Frauenstein and Mr Panagopoulos were joined as co-defendants. The remaining alleged concurrent wrongdoers are all either deregistered or deceased and thus, pursuant to s 24AI(3) of the Wrongs Act, did not need to be joined.

   [69]Defendant’s DFASOC, [21].

1. Although the matter may not be straightforward, both parties generally accepted that concurrent wrongdoers should be legally liable to the plaintiff in order to be concurrent wrongdoers.[70]

   [70]Transcript of Proceedings (11 October 2016) 494, 495, 557.

1. In Hunt & Hunt the majority stated that that legal liability would usually be present stating:

The word “caused” in a statutory provision in terms similar to s 34(2) has been read as connoting the legal liability of a wrongdoer to the plaintiff. The language of liability is used in contribution legislation, but not in Pt 4 of the Civil Liability Act. Nevertheless, it would usually be the case that a person who is found to have caused another’s loss or damage is liable for it. References to the liability of a wrongdoer should not, however, distract attention from the essential nature of the inquiry at this point, which is one of fact.[71]

[71](2013) 247 CLR 613, 635 [47] (French CJ, Hayne and Kiefel JJ) (emphasis added).

1. This to be contrasted with the stronger position of the minority who  stated that:

To answer the description of “a person … whose acts or omissions (or act or omission) caused” that damage or loss or harm, C (in common with B) must be (or have been) legally liable to A for the damage or loss that is the subject of the claim. The reference in the definition to “acts or omissions (or act or omission)” is to one or more legally actionable acts or omissions. The reference in the definition to acts or omissions having “caused … the damage or loss that is the subject of the claim” is not, as has correctly been held, merely to causation in fact. “Questions of causation are not answered in a legal vacuum” but “are answered in the legal framework in which they arise”. The reference here is to causation that results, or would result, in legal liability.[72]

[72](2013) 247 CLR 613, 649 [91] (Bell and Gageler JJ) (citations omitted).

1. The minority position reflects the position taken by state superior courts in cases prior to Hunt & Hunt. For example, in St George Bank Ltd v Quinerts Pty Ltd, Nettle J stated that “’concurrent wrongdoer’ includes a person whose acts or omissions caused the damage or loss that is the subject of the plaintiff’s claim only if the person is ‘liable’ to the plaintiff for that loss and damage”.[73]

   [73][2009] VSCA 245, [64] citing Shrimp v Landmark Operations (2007) 163 FCR 510, 521, [59]–[62].

1. I will therefore proceed on the basis that legal liability should be established, which was also consistent with the position taken by the parties.

Concurrent Wrongdoers in relation to the first breaches

1. In relation to the First Breaches, it was alleged that:[74]

1.The Farinhas are concurrent wrongdoers for making misrepresentations “as to Mr Frauenstein’s exit from the business”;

2.Cockle Bay San Marco and the Farinhas are concurrent wrongdoers for misappropriating Equal 54’s purchase money for an interest in the Equilibrium Hotel; and

3.San Marco World Square, or alternatively Marco Zagato as its director, are concurrent wrongdoers for allocating shares in San Marco World Square in breach of its Constitution.[75]  

Misrepresentations

[74]Defendant’s Table of Concurrent Wrongdoers, 11 October 2016. This document is presumed to be exhaustive of the defendant’s claims where the allegations have been narrowed; allegations regarding representations that the Equilibrium Hotel was a nominee for the partnership (at [21(iv) and (vi)] of the Defendant’s DFASOC) are presumed to have been abandoned.

[75]Defendant’s DFASOC, [21(v)]. In closing submissions, this allegation was expanded to also include Mr Panagopoulos and Tobias Farinha as directors of San Marco World Square: Defendant’s Table of Concurrent Wrongdoers, 11 October 2016.

1. It is presumed that the representations relied upon here were as follows:[76]

   [76]Defendant’s DFASOC, [21(viii)].

(a)   They were looking for a new investor in San Marco World Square to replace Frauenstein;

(b)   Frauenstein and his company, Carl World Square Pty Ltd, were exiting their involvement in San Marco World Square;

(c)    Frauenstein had relinquished his interest in San Marco World Square and was no longer involved in the Equilibrium Hotel.

1. The basis for this allegation was apparently contained in the affidavit of Mr Panagopoulos sworn 27 March 2013 (although the paragraphs relied upon were not specifically identified).

1. The affidavit did contain vague references to the effect that the Farinhas’ purpose “in seeking a new investor was to replace another director and shareholder”, and that the Farinhas “wanted to remove Mr Frauenstein from any involvement with San Marco or the Equilibrium Hotel”.[77] However, such evidence was vague and unsatisfactory and could not support the claim made.

   [77]Affidavit of James Nicholas Panagopoulos, 27 March 2013, [23].

1. Mr Panagopoulos did allege the following:[78]

After signing the Partnership Agreement, I was assured by the Farinhas that Frauenstein had relinquished his interest in San Marco and was no longer involved in the Equilibrium Hotel. On the basis of these assurances, I caused the Second Defendant to pay a further $1.2M to the Farinhas on 20 December 2005 making a total investment of $1.4M in the Equilibrium Hotel. I was directed by the Farinhas to pay the money into a bank account held by Cockle Bay San Mark Pty Ltd.

[78]Ibid [32].

1. Again, however, the evidence is vague since it does not even identify which Farinha said what and when. 

1. Moreover, no specific legal liability arising from these misrepresentations became clearly identifiable as to engage the statutory conditions.

1. Accordingly, I would be unable to be satisfied that the Farinhas could be found to be concurrent wrongdoers on the basis that they made misrepresentations “as to Frauenstein’s exit from the business”.

Misappropriation of funds

1. The allegation was again derived from the affidavit sworn by Mr Panagopoulos of 27 March 2013 in which he stated that:

In or about June 2006, I became aware that the money I had invested in San Marco through the Second Defendant had been misappropriated and used by the Farinhas in other business ventures operated by them instead of the Equilibrium Hotel.[79]

[79]Ibid [37].

1. No further detail regarding this alleged misappropriation of funds was provided.   Instead, the evidence amounted to a vague conclusory type allegation that Mr Panagopoulos “became aware” of a misappropriation.  Moreover, whatever may have happened to the $1,400,000 after the shares were issued has no causative relationship to the relevant loss (which was said to be constituted by the obtaining of the “worthless shares” by reason of the decision of Emmett J).

1. There was also no specific cause of action identifiable such that any legal liability could be found.

1. Again, then, I would be unable to be satisfied that Cockle Bay San Marco and the Farinhas are concurrent wrongdoers on the basis of the alleged “misappropriation.”

Allocation of Shares in Breach of Constitution

1. The actions of those who allocated the shares in breach of the Constitution would appear to have caused the damage as identified (being the obtaining of “worthless shares.”).

1. However, the evidence is again deficient since it is unclear which of the persons identified even voted for the resolution to issue the shares.  For example, no minutes of the meeting at which the resolution was passed were produced. It was not even put to Mr Panagopoulos that he voted in favour of the relevant resolution.

1. The defendant has also failed to identify any specific cause of action such as to prove any legal liability.

1. Accordingly, I am unable to be satisfied that the relevant persons are concurrent wrongdoers on the basis of the allocation of the shares.

Concurrent Wrongdoers in relation to second breaches

1. In relation to the second breaches, Mr Galimberti alleged that:

1.   The Farinhas are concurrent wrongdoers for making misrepresentations as to Mr Frauenstein’s exit from the business;

2.   San Marco World Square and Wanslea are concurrent wrongdoers for defaulting under loan advances; and

3.   Casetron, the Farinhas, Mr Frauenstein, Mr Panagopoulos, Cine San Marco, Carl World Square, Cockle Bay San Marco, Bellspin, Nextplan, and Joysea were all concurrent wrongdoers as co-guarantors under the Guarantee.[80] 

[80]Defendant’s Table of Concurrent Wrongdoers, dated 11 October 2016.

1. In regard to the allegation that the Farinhas are concurrent wrongdoers for making misrepresentations as to Mr Frauenstein’s exit from the business, my discussion on this allegation vis-à-vis the first breaches above equally applies.

1. The position put forward regarding the remaining alleged concurrent wrongdoers is broadly that, had these parties paid out the debt to IFM,  Equal 54 would not have suffered any loss or damage as a result of Mr Galimberti’s alleged negligence because IFM would have had its debt satisfied by the borrower and other guarantors.

1. Factually, it may be possible to establish a causative connection between the defaulting of the borrower and Equal 54’s alleged loss – that is, had the borrower not defaulted Equal 54 would not be liable for the debt.  However, the causative connection between Equal 54’s co-guarantors and the alleged loss would be unlikely to be established. 

1. Furthermore, as with the previous allegations of concurrent wrongdoing, no basis for the legal liability of either the borrower or the co-guarantors was identified. Thus it was not suggested that either the borrower or co-guarantors were in some way legally liable to Equal 54 for this alleged loss.

1. Finally, this part of the defence touches on the  complex question of whether a debt can be accurately characterised as ‘damage or loss’ under proportionate liability provisions. As stated by the minority in Hunt & Hunt:

Whether, and if so in what circumstances, a failure to discharge an obligation to pay under a loan or a guarantee might be said to have caused “damage or loss” to a lender gives rise to potentially complex issues. They should not be decided tangentially.[81]

[81]Hunt & Hunt (2013) 247 CLR 613, 652 [102]; see also the majority decision at [42].

1. This question is equally complex, if not more so, when asked in regard to co-guarantors instead of lenders. However, given the claim has already failed on a number of other grounds, it is unnecessary for me to examine this further.

Summary

1. If it were necessary to consider, it does not appear that any of the parties identified would be “concurrent wrongdoers” such as to engage the provisions in Part IVAA of the Wrongs Act.

Contributory Negligence

1. Although the original allegations of the Equal 54’s contributory negligence were particularised in some 16 paragraphs of Mr Galimberti’s defence, in closing all were abandoned except four.[82] The remaining allegations were that Equal 54 negligently:

   [82]Transcript of Proceedings (11 October 2016) 545.

a)   executed the Relevant Guarantee without seeking legal advice as to:

1)   its terms and effect; and

2)   whether it had any legal obligation under the Partnership Deed to provide the Relevant Guarantee;[83]

b)     failed to retain the defendant to obtain legal advice about the terms and effect of providing the Relevant Guarantee;[84]

c)   executed the Relevant Guarantee while being aware that Mr Frauenstein still held an interest in The Equilibrium Hotel;[85]

d)     paid the $1,400,000 purchase price for an interest in the Equilibrium Hotel to Cockle Bay San Marco in circumstances where it knew, or ought reasonably to have known, that the Farinha family had not yet negotiated or arranged the exit of Mr Frauenstein from the Equilibrium Hotel venture.[86]

[83]Defendant’s DFASOC, [17(b)(ii)(A)].

[84]Ibid [17(b)(ii)(B)].

[85]Ibid [17(b)(ii)(N)].

[86]Ibid [17(b)(ii)(L)].

1. In relation to Equal 54’s entry into the Relevant Guarantee, I would not be satisfied that the failure to seek legal advice amounted to a failure to take reasonable care given Mr Panagopoulos was already familiar with what a guarantee was, and given the real issue was about the status of the shares. Any knowledge of Mr Frauenstein’s ongoing interest also does not evince a failure to take reasonable care in circumstances where a finding would be made (contrary to the above), that a solicitor had failed to advise of relevant defects and instead told his client to sign a guarantee.  

1. In relation to the allegation that Equal 54 was negligent given its state of knowledge about Mr Frauenstein, the defence would only arise in circumstances where (contrary to the above) the court was satisfied that Equal 54 would not have entered the transaction if advised that the Farinhas had difficulties in obtaining the shares.  It is unlikely that any knowledge would suggest a failure to take reasonable care in such circumstances.

1. Accordingly, I do not consider that the contributory negligence grounds would be established if, contrary to the above, the plaintiff had established the relevant negligence claims.

CONCLUSION

1. Equal 54 has not established an entitlement to any damages under the first breaches or the second breaches.

1. It follows that the claim should be dismissed.

1. I will hear from the parties as to the final form of orders.

SCHEDULE OF PARTIES

BETWEEN:
EQUAL 54 PTY LTD (ACN 063 125 477)	Plaintiff
AND
DENNIS GALIMBERTI	First Defendant
CASETRON PTY LTD (ACN 097 278 334)	Second Defendant
TOBIAS FARINHA	Third Defendant
CARL FRAUENSTEIN	Fourth Defendant
JAMES PANAGOPOULOS	Fifth Defendant
MARCO ZAGATO	Sixth Defendant
MIGUEL FARINHA	Seventh Defendant