Ferraretto and Snappy Apple Pty Ltd v Cowell Clarke - [2012] SASC 224

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
FERRARETTO AND SNAPPY APPLE PTY LTD v COWELL CLARKE
[2012] SASC 224
Judgment of The Honourable Justice White
12 December 2012
PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - OTHER MATTERS ARISING BEFORE TRIAL
The plaintiffs allege a breach of duty by the defendant in its preparation of documents relating to a share sale agreement, claiming that the first plaintiff has thereby been left exposed to liabilities arising under guarantees which he had given to various creditors.
The plaintiffs seek an order that certain issues in the proceedings be heard and determined in advance of others.
Held (refusing the application):
(1) The Court cannot be confident that there will not be some overlap of issues and evidence in the various stages of a split trial, (at [28]-[32]);
(2) The plaintiffs contemplate more than just a two-stage trial, with potential for stages of the trial still to be heard as late as November 2017, (at [34]);
(3) There is a risk that credibility findings in relation to the first plaintiff may need to be made at each stage of the trial, (at [35]-[36]);
(4) There is potential for the Court to reach inconsistent findings of fact at different stages of the trial, (at [37]-[38]).
Corporations Act 2001 (Cth) Part 5.7B; Supreme Court Act 1935 (SA) s 30B; Supreme Court Civil Rules 2006 (SA) r 211, referred to.
Tepko Pty Ltd v Water Board (2001) 206 CLR 1; FAI General Insurance Co Ltd (in Liq) v Sherry (2002) 225 LSJS 141; Rivers v Rivers (2002) 220 LSJS 74; Duke Group Ltd (in Liq) v Alamain Investments Ltd (in Liq) (No 2) [2006] SASC 33; City of Onkaparinga v Hassell Pty Ltd [2007] SASC 163; Abigroup Contractors Pty Ltd v Hardesty & Hanover International LLC [2008] SASC 369; Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514, considered.

FERRARETTO AND SNAPPY APPLE PTY LTD v COWELL CLARKE
[2012] SASC 224

WHITE J: This decision concerns an application by the plaintiffs under Rule 211 of the Supreme Court Civil Rules 2006 (SA) to have certain issues in the proceedings heard and determined separately from others.
The plaintiffs allege negligence by the defendant, a firm of solicitors, in the services it provided to them under a retainer in relation to a share sale agreement. That agreement involved the disposal of a significant number of the shares held by Mr and Mrs Ferraretto in their capacity as trustees of the A & T Ferraretto Family Trust (“the Trust”).
Harbert Australian Private Equity Fund 1 LP (“Harbert Delaware”) was the purchaser of some of the shares. Another Harbert entity (Harbert Fund Advisors (Australia) Pty Ltd) (“Harbert Australia”) acted as its agent in relation to the negotiations and the share sale agreement.
The negotiations concluded on 21 July 2010 when Harbert Australia, on behalf of Harbert Delaware, executed a letter with Mr and Mrs Ferraretto containing its proposed terms for the sale and disposal of the Trust shares in Solar Shop Australia Pty Ltd (“Solar Shop”). Later, on 6 August 2010 a number of formal documents (“the Transaction Documents”) were executed giving effect to the terms set out in the letter of 21 July 2010. Settlement of the transactions occurred on 22 October 2010.
Earlier, Mr Ferraretto (the first plaintiff) had resigned as director of Solar Shop. It is not clear whether his resignation was required by the terms agreed, or proposed to be agreed, by the parties. Following the settlement on 22 October 2010 the Trust has been a minority shareholder in Solar Shop.
Since 31 October 2011, the second plaintiff (Snappy Apple Pty Ltd) has been the trustee of the Trust. Solar Shop was placed into receivership on 7 September 2011 and into liquidation on 25 November 2011.
Thereafter, various suppliers have sought to enforce the guarantees which Mr Ferraretto had given to them in relation to their supplies to Solar Shop on credit. It is that action which has given rise to the present proceedings.
The plaintiffs claim that the defendant was in breach of duty in the assistance which it provided to them in relation to the execution of the letter of 21 July 2010 and in its preparation of the Transaction Documents. They allege, in particular, that the defendant failed to ensure that the Transaction Documents included a provision by which Solar Shop would indemnify Mr Ferraretto for any liability arising under one of his guarantees for which a release could not be negotiated (S/C [23.2]) or some other provision by which Mr Ferraretto would be held harmless in the event of a claim by a supplier or other creditor (S/C [23.3]).
The plaintiffs make a separate claim that the defendant failed to provide any advice as to the steps which Mr Ferraretto should take to negotiate and procure releases from his guarantees before resigning as director of Solar Shop and causing the Trust to reduce its shareholding (S/C [23.4]).
The plaintiffs allege that, had the defendant given proper advice, they would, by one or more of a number of alternative means, have secured a position by which Mr Ferraretto would be protected from liability to Solar Shop’s creditors under his guarantees (S/C [27]). These means included Solar Shop procuring the release by the creditors of Mr Ferraretto from his liabilities under his guarantees; the grant by Solar Shop to Mr Ferraretto of an unlimited indemnity in respect of his liabilities under those guarantees for which a release could not be procured; and the provision of a bank guarantee (from Westpac) securing Solar Shop’s obligations under that indemnity (S/C [13]).
They claim, in effect in the alternative, that in the event that Mr Ferraretto’s continuing liability could not have been avoided, the Trust would have been able to negotiate a higher consideration for the sale of its shares to Harbert Delaware [S/C [32]).
The plaintiffs seek relief in relation to three categories of claims by the Solar Shop suppliers. First, the liabilities to six specified suppliers which remained unpaid at the time of Solar Shop going into liquidation on 25 November 2011. The nature and amount of those liabilities are known and comprise approximately $1.3 million.
Secondly, the liabilities to a further 79 suppliers which remained unpaid as at 25 November 2011 (S/C [31.1A]). The nature and amount of these liabilities is not presently known. I will refer to this category as the “31.1A claims”.
The third category comprises the claims and other liabilities of Solar Shop which were paid or discharged prior to the liquidation but which may be set aside as preferences under Part 5.7B of the Corporations Act 2001 (Cth) (S/C [31.2]). There are seven creditors in this category but some have received more than one payment which may be vulnerable under Part 5.7B. It is not presently known whether or not any creditors will assert a liability in Mr Ferraretto in respect of all or any of the payments in question or, if such an assertion is made, whether the liability will be established. Accordingly, neither the actual existence nor amount of any claims in this category is known presently. I will refer to this category of claim as the “31.2 claims”.
The Statement of Claim indicates that the plaintiffs seek relief in a number of alternative forms. These include declarations as to the liability of the defendant, an interim assessment of damages and an adjournment of the final assessment of damages.
By its Defence, the defendant admits its retainer by the plaintiff at relevant times but denies that the retainer had the content alleged by the plaintiffs. It denies that any of the acts or omissions claimed by the plaintiffs, if established, were causative of the liabilities for which the plaintiffs seek relief and raises pleas of contributory negligence and failure to mitigate. The defendant contends, in particular, that Mr Ferraretto has failed to invoke a provision in an earlier agreement for the sale of some of the Trust’s shares in Solar Shop which bound Harbert Delaware to make reasonable commercial efforts to cause Solar Shop to release the Trustees from their guarantees as soon as practicable after completion.
The above (somewhat general) summary has been drawn from the parties’ respective pleadings. It is therefore based on claims and allegations and does not represent any conclusions or findings of fact.
The Application for Split Trials
The plaintiffs seek an order that all issues in the proceedings, other than the 31.1A claims and 31.2 claims (and the claims for Mr Ferraretto’s costs and expenses in responding to those claims) be heard and determined first, and that the hearing and determination of the 31.1A and 31.2 claims (and the claim for associated costs and expenses) take place separately.
The plaintiffs contemplate that if they succeed in establishing liability in the first stage of the trial there would be a later trial or trials in relation to their entitlement to, and the quantification of, the 31.1A and 32.1 claims (and the associated costs and expenses claims).
The usual position is that all issues arising in an action should be determined in the one trial.[1] The principles which govern the exercise of the Court’s power under Rule 211 to order the hearing and determination of certain issues in a trial in advance of others are well settled.[2] I venture to repeat my summary of some of those principles in Abigroup Contractors Pty Ltd v Hardesty & Hanover International LLC:[3]
The general rule is that all issues should be dealt with in a single trial. The trial process should not be unduly fragmented. In particular, it is inappropriate that one Judge be asked to hear and determine disputed issues of fact, which involve an assessment of the credibility and reliability of the same witnesses, in more than one trial arising from the one action. Further, the experience of the courts has been that splitting issues arising from the one action for separate determination with a view to shortening proceedings and saving costs frequently results in a prolongation of the proceedings and the incurring of additional costs.[4]
[1] Tepko Pty Ltd v Water Board [2001] HCA 19 at [168]-[171]; (2001) 206 CLR 1 at 55.
[2] FAI General Insurance Co Ltd (in Liq) v Sherry [2002] SASC 431; (2002) 225 LSJS 141; Rivers v Rivers [2002] SASC 197; (2002) 220 LSJS 74; Duke Group Ltd (in Liq) v Alamain Investments Ltd (in Liq)(No 2) [2006] SASC 33 at [23]; City of Onkaparinga v Hassell Pty Ltd [2007] SASC 163 at [24].
[3] [2008] SASC 369; (2008) 260 LSJS 210.
[4] Ibid at [93]; 223.
It is also appropriate to note the cautions expressed by Kirby and Callinan JJ in Tepko Pty Ltd v Water Board:[5]
The attractions of trials of issues rather than of cases in their totality, are often more chimerical than real. Common experience demonstrates that savings in time and expense are often illusory, particularly when the parties have, as here, had the necessity of making full preparation and the factual matters relevant to one issue are relevant to others, and they all overlap.
The second and related comment is this. A party whose whole case is knocked out on a trial of a preliminary or single issue, may suspect, however unjustifiably, that an abbreviated course was adopted and a decision reached in the court's, rather than the parties', interests.
Thirdly, there is an additional potential for further appeals to which the course of the trial on separate issues may give rise. Indeed, that could occur here were this appeal to be allowed and a retrial had in which the remaining issues of causation and damages were decided. Single-issue trials should, in our opinion, only be embarked upon when their utility, economy, and fairness to the parties are beyond question.[6]
[5] [2001] HCA 19; (2001) 206 CLR 1.
[6] Ibid at [168]-[170]; 55.
Counsel for the plaintiffs indicated that their case at trial will be that Mr Ferraretto has one cause of action, and one cause of action only, because the events which would have enlivened Solar Shop’s liability to indemnify Mr Ferraretto, and the liability of Westpac under the guarantee which should have been obtained from it, have already occurred. The damages to which Mr Ferraretto may be entitled may consist of a number of components, that is, arising from the claims made under each of his guarantees, but nevertheless some loss has already occurred.
The plaintiffs acknowledge, however, that on the authority of Wardley Australia Ltd v The State of Western Australia,[7] the Court may hold that Mr Ferraretto has multiple causes of action, with each arising only when a demand is made by a creditor under the guarantee provided to it by Mr Ferraretto. If that be so, some of the plaintiff’s causes of action may not yet have arisen, may not arise for a considerable time, and may never arise. They are concerned in that circumstance that the Court may not be able to make, or may in the exercise of a discretion decline to make, a declaration of liability under s 30B of the Supreme Court Act 1935 (SA) and defer the consequent assessment of quantum.
[7] (1992) 175 CLR 514.
That is the principal reason for the plaintiffs seeking an order for split trials. They contend that if the trial is conducted in the conventional way, they will, at least potentially, have to adduce evidence from each of the 85 creditors because they will have to anticipate the possibility of the Court making a once and for all determination. Should the Court determine that the plaintiffs’ causes of action in relation to some creditors have not yet arisen, their claims in respect of those creditors will be dismissed and will have to be the subject of separate proceedings.
The plaintiffs estimate that the first stage of the trial will occupy between 10 and 15 days, but that if all issues are litigated, the trial will take some 5-6 weeks.
The plaintiffs also refer to the desirability of the Court being able to assess the damages to which they may be entitled by reference to established events, rather than by an assessment of a liability accruing in the future. This will allow the Court to avoid the risk of under-compensation or over-compensation.[8]
[8] Cf Wardley Australia Pty Ltd v The State of Western Australia (1992) 175 CLR 514 at 527.
Decision on Application for Split Trials
Although I understand the difficulties which the plaintiffs face presently, I consider that the application for the hearing and determination of some issues in the trial in advance of others should be refused.
First, even with the assistance of counsel, it is difficult to identify all the issues which may arise for determination in the trial. The plaintiffs’ claim as to the loss said to arise from the breach of duty alleged against the defendant is a little unusual as it seems to depend on the attitude which each individual creditor would have taken to a request, had it been made in a timely way, to release Mr Ferraretto from his guarantee. This gives rise to a number of distinct factual enquiries with a variety of permutations. In this circumstance, it is difficult for the Court to be confident at this stage that there will not be some overlap of issues in the various stages of a split trial, if such a course is ordered.
It does seem probable that there will, in any event, be some overlap between the issues in the proposed separate stages. The plaintiffs’ own submissions acknowledged that the exercise (and possibly the existence) of the Court’s power under s 30B to make declarations in respect of liabilities which may not yet have accrued is likely to arise. Although it is not possible to be certain, it seems that this may well require the Court to consider at least some of the circumstances relating to the 31.1A and 31.2 claims in the first trial as well as in a second or subsequent trial.
Further, it seems that some of the issues of causation will require the Court to hear evidence about at least some of the potential claims of all creditors, and not just about the known claims which the plaintiffs contemplate being determined in the first trial. An example is the plaintiffs’ assertion that the parties had contemplated an agreement under which Westpac would provide an indemnity in respect of those liabilities for which a release could not be negotiated. The determination of whether such a guarantee may have been provided would seem, on its face, to require the Court having some evidence about the potential full extent of the liabilities proposed to be the subject of Westpac’s indemnity.
Further again, the attitude of many of the 85 creditors to a request to release Mr Ferraretto from his director’s guarantees (had that request been made at the relevant time) seems directly relevant to the attitude Westpac would have formed in relation to the request for a guarantee.
I acknowledge that this may depend ultimately on the way in which the plaintiffs present the case. However, on the basis presently pleaded, it does seem that some evidence of at least some of the unknown claims may be necessary in the first stage of the trial.
Secondly, the Court does not have a clear understanding at this stage of the matters bearing upon the plaintiffs’ alleged contributory negligence and failure to mitigate. There is close inter-relationship between these issues, on the one hand, and the claim of causation made by the plaintiffs on the other. The lack of clarity about the inter-relationship between these issues tells against an order for split trials. I repeat, however, a matter which I raised with the parties during the course of submissions, namely, that an order for split trials should not have the effect that a witness called by the plaintiffs at the first stage of the trial would not be available for cross-examination by the defendants on an issue arising only in the second stage of the trial.
Thirdly, the plaintiffs contemplate not just a two-stage trial but potentially multiple trials as the claims of creditors in the 31.1A and 32.1 categories gradually emerge. Related to this is the potential for very long intervals between the first stage of the trial and the subsequent stages. Proceeding in the manner contemplated by the plaintiffs would mean that the timing of the second or a subsequent stage would be determined by the time at which a creditor chooses to make a claim against Mr Ferraretto under his guarantee. Theoretically, at least, this could be as late as November 2017. I acknowledge that this scenario may be realised in any event; for example, if the Court makes a declaration of liability in favour of the plaintiffs but adjourns the final determination of quantum in order to give time for further claims to emerge.
Next, if the alleged contributory negligence and failure to mitigate by Mr Ferraretto is to be examined separately in relation to each claim, it seems probable that he will have to give evidence at each stage of the trial. This gives rise to the possibility of conflicting findings about his credit. This is especially so given that, from time to time in these proceedings, the plaintiffs have asserted positions which are materially different.
Further again, a positive finding concerning Mr Ferraretto’s credibility and reliability (whether favourable or adverse) may create a circumstance in which Judges hearing different stages of the trial have to disqualify themselves on the grounds of reasonable apprehension of bias. A course of action which allows that possibility should be avoided if possible.

Finally, as I understand the way in which the plaintiffs propose proceeding, there is the potential for the Court to reach inconsistent findings of fact at different stages of the trial. This can be illustrated by reference to the position of Westpac. In the first stage of the trial, the Court may be asked to consider whether Westpac would have provided the contemplated indemnity, having regard to the known claims. In the second stage, it may have to consider whether Westpac would have provided that indemnity in relation to both the known claims and the 31.1A and 32.1 claims which had by then emerged. This could lead to differing results.
The plaintiffs’ counsel acknowledged that this potential existed but submitted that the prospect of the risk being realised is low. Counsel may well be right in that respect, but the very existence of the risk counts against the application for the split trials.
Given the prima facie position that all issues in a trial should be heard and determined at the one time, the Court needs to be persuaded that the hearing and determination of some issues in advance of others is appropriate. Having regard to the matters just outlined, I am not so persuaded.
Conclusion
For these reasons, I refuse the plaintiffs’ application for split trials.