Helco Pty Ltd v O'Haire, D.P

[1990] FCA 339

Re: HELCO PTY LIMITED; MONRO FAMILY HOLDINGS PTY LIMITED and K.A. and S.E.
MONRO PTY LIMITED
And: DENIS P. O'HAIRE and BRIAN V. O'HAIRE
No. G181 of 1989
FED No. 339
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Einfeld J.(1)

CATCHWORDS

Trade Practices - Negligent Misstatement - contract for sale of business - guarantee by directors - "letter of comfort" by solicitor for the purchasers as to clients' financial capabilities - guarantors bankrupt - failure to pay complete purchase price or honour guarantee - whether letter misleading - inducement - solicitor's duty of care - whether solicitor liable - purchaser's solicitor interest in the contract - question of breach of professional responsibility

Trade Practices Act 1974 S 52

HEARING

SYDNEY

#DATE 12:7:1990

Counsel and solicitors Mr R. Kaye instructed by
for the Applicants A.G. Robinson and Associates

Counsel and solicitors Mr M.A. Pembroke instructed by
for the Respondents Ebsworth and Ebsworth

ORDER

Application dismissed.

Applicants to pay respondent's costs.

Direct the Registrar to forward the papers in the matter to the Law Institute of Victoria for examination of whether the first respondent has been in breach of his professional responsibilities and obligations.

Note: Settlement and entry of orders are dealt within accordance with Order 36 of the Federal Court Rules.

JUDGE1

The principal facts in this unusual case can be simply stated. The applicants who manufactured swimwear and sportswear sold their business (the business) to a company called Hitex Corporation Pty Ltd (Hitex) on 10 November 1987. The price was $375,000 plus stock at valuation which was to take place after settlement. Under the contract for sale, this price was to be paid as to $50,000 deposit on exchange of contracts, $250,000 on completion/settlement and the balance 12 months after completion. Stock was estimated in the contract at $150,000. Exchange took place on 8 September 1987. In fact $275,000 was paid on completion and the stock was valued at $136,105. Thus what became payable on 10 November 1988 (12 months after completion) was $186,105. With interest accumulating at $107.07 per day, that amount had grown to $240,875.29 at the beginning of the trial (the damages).

1. The obligations of Hitex under the contract for sale were guaranteed by John Wallace Stevenson and Kaye Elizabeth Blaikie (sometimes called Kay Blackie) husband and wife directors and shareholders of Hitex (the guarantors), whose solicitors at the time were the respondents. In a telephone conversation on 13 August 1987 during the contract drafting process and prior to the finalisation of the terms of the contract (the telephone conversation), later confirmed by letter of the same date from the firm of which he and his brother were the principals (the letter), the first respondent is alleged to have in effect assured the applicants' solicitor that to his own knowledge the guarantors were well capable of meeting their commitments under the guarantee. It is agreed that the second respondent was in no way involved other than as a member of the firm.

2. Hitex went into receivership on 24 June 1988 with a nett deficiency of liabilities over assets in excess of $2 million. When they were unable to meet many of Hitex's liabilities of which they were also guarantors, each of the guarantors petitioned for bankruptcy on 21 September 1988. Hence the applicants' action seeks to recover from the respondents the balance of the purchase price for the business plus interest on the basis that the first respondent's words and actions were conduct of the respondents in trade or commerce which had misled or deceived them in contravention of section 52 of the Trade Practices Act (the Act). The respondents are also said to have been guilty of negligent misstatement in similar ways. The applicants claim the damages under either head of claim or both. It is not disputed that the respondents were in the circumstances subject to the Act under the extended definitions provided for in section 6.

3. The actual words spoken in the telephone conversation were a matter of some dispute but I regard the letter as the more definitive in this regard. Whatever words were used on the telephone, the letter was written at the request of the applicants' solicitor to confirm what the first respondent had said on the telephone. I am satisfied having heard both the solicitor for and the principal director of the applicant companies that the only words seriously taken into account by the applicants when considering whether to enter into the contract for sale were, if any, those in the letter and not the telephone conversation.

4. However, the telephone conversation was relevant to set the circumstances for the letter and the sale itself. One part of it, as the applicants allege, and the respondents mostly deny, contained a claim by the first repondent of a considerable degree of knowledge of and insight into the guarantors' financial situation. In that context, it is necessary to set out the terms of the letter:
   

13th August, 1987 ATT: MR ROBINSON Messrs A. G. Robinson and Associates, FACSIMILE [phone] Dear Sirs,

RE: HITEX CORPORATION PTY. LTD. FROM HELCO We refer to the discussion between yourself and our Mr O'Haire this morning (13th August 1987). We now confirm that to our knowledge Mr. Stevenson and the other director of Hitex Corporation, Kay Blackie, jointly have personal net worth well in excess of the debt to be guaranteed by them arising out of this transaction. We await Heads of Agreement. Yours faithfully O'HAIRE and O'HAIRE DENIS P. O'HAIRE Enc.

1. The applicants assert that on its face and in the context referred to, this letter says that the guarantors, to the personal knowledge of the respondents, have more than adequate assets to be able to meet their guarantees if called upon. They argue that the letter means that the first respondent warranted that the guarantors were then and would, on 10 November 1988, be able to pay the amount of $186,105 (or, if the estimated value of stock and the down payment at settlement had been correct, $225,000). The applicants' solicitor told his clients that this letter was most unusual in that it represented an acceptance of personal liability by the first respondent as the guarantors' solicitor to underwrite their guarantee.

2. The letter has many ambiguities. These include (my underlining):
   

* We now confirm * to our knowledge * jointly have

* personal net worth * well in excess of * the debt to be guaranteed

1. All of these except "personal net worth" are entirely matters of construction. As to "personal net worth", each word needs to be understood. "Personal" has to be contrasted with "jointly"; "net" raises the question, net of what?; and the meaning of "worth" has to be determined. In the context, I am inclined to think that
   

(a) "jointly" and "personal" mean the combined position of husband and wife together;

(b) "net" means what is ascertained by subtracting the value of actual and real liabilities and encumbrances from the value of assets.

1. As to the guarantors' "worth", evidence was led from an expert accountant that it was difficult to assess accurately the assets of Mr Stevenson in particular. Given that qualification, the accountant's assessment was that there was a surplus of assets over liabilities. Although the surplus was very difficult to quantify with accuracy, it appears to me to have been sufficient to cover the maximum possible amount of the guarantee if the assets of Mr Stevenson had been liquidated and fair prices obtained. However, this would take time and his immediate financial liquidity in August 1987 certainly does not appear to have been "well in excess" of the expected or actual amount of the guarantee due in November 1988, in any ordinary meaning of those words.

2. That brings me to the word "now" and the phrase "the debt to be guaranteed" which, apart from whether the letter was conduct within the meaning of the Act, are the matters which were mainly contested in the litigation. The applicants allege that the letter is and must be read as an enforceable warranty by the first respondent that 15 months after it was given, the guarantors would if required, and would be able to, pay about $200,000 based on the first respondent's own knowledge of the guarantors' affairs at the time the warranty was given. In fact of course it says no such thing expressly. The question is whether the letter overall, in its context and the general circumstances, should be so construed. If not, it is really as effectively i.e. legally or enforceably, meaningless for the applicants as most "letters of comfort" of its kind have always hitherto been regarded.

3. Two other apparently admitted facts must also be stated. The applicants place the background to the telephone conversation and the letter as their desire, and their solicitor's efforts, to obtain some security for the deferred part of the purchase price. The applicants allege that more formal security like a mortgage, bill of sale, letter of credit etc was said to be not available. Their solicitor says that he was even told by the first respondent that the guarantors would regard the need for security as an "insult". Their solicitor asked for details of the guarantors' financial situation more than once but the applicants agreed to go ahead with the purchase in November 1987, and bound themselves by exchanging contracts in September 1987, without this information having been supplied and with no security in place from the guarantors. It did not, apparently, seem strange to the applicants that people said by their own solicitor to be asset rich, could or would supply neither security nor information. The applicants now seek to erect the letter (and the telephone conversation) as security supplied by the respondents, as if they were and had been additional guarantors.

4. A second admitted fact of some significance is that in about mid September 1987, the first respondent had purchased a substantial interest in Hitex and became a director of that and other companies in the Hitex group. It appears that he supplied, or there was taken out of his purchase moneys for the shareholding, the money for at least the deposit on this sale. Although presumably this move was at least in contemplation at the time of the telephone conversation and the letter, these matters were not made known to the applicants or their solicitor.

5. It is not at all strange or unusual to have provision for postponed payment of a part of a purchase price. In such cases it is also common, and presumably prudent, to make provision to secure the deferred liability. It is not disputed that the applicants deliberately chose to proceed with their sale without security in the form of actual or readily convertible money in the event that the guarantee had to be called on. However, in my view, their acceptance of this kind of what has normally been regarded as an unenforceable "letter of comfort", is very difficult to understand. Their solicitor's willingness to allow them to do so without a clear explanation to them of the risks they were assuming and their explicit instructions that they understood the risks is even more extraordinary. On the assumption that the letter induced the applicants to enter and proceed with the contract, it provided at best a right of action of a fairly speculative kind and not the immediate access to money they were undoubtedly seeking. If the applicants' solicitor intended that the first respondent become personally bound by the letter to pay any amount not recoverable from the guarantors under the guarantee, why was the first respondent not required to be a guarantor in terms? Why was he not asked to supply personal security or at least personal financial information? How was the first respondent's supposed willingness to warrant the guarantee, without more, any better or more reliable than the guarantee itself?

6. The enforceability of "letters of comfort" has recently been considered: Bank of Brussels Lambert S.A. v Australian National Industries Ltd (Rogers CJ Commercial Division, New South Wales Supreme Court, unreported 12 December 1989) presently on appeal; Kleinwort Benson Limited and Malaysia Mining Corporation (1989) 1 All ER 785. But at best each letter will turn on its own words and circumstances and on the nature of the dispute being considered. Here the respondents did not directly cross examine the applicants' witnesses on their claim that they were "induced" to enter and complete the contract by the first respondent's letter. However, the evidence persuades me that the applicants thought the purchase price and arrangements to be particularly good and that they proceeded with the sale without true security for their money in the belief that, but without investigating whether, the guarantors were financially honourable or substantial people who would and would be able to meet the guaranteed debt 12 or 15 months down the track and regardless of the fact that people of the description or quality being advocated for them by the first respondent as their solicitor might normally be expected and able to supply some security to achieve the facility of postponement.

7. Looked at from the applicants' standpoint, despite supposedly being business people of wealth and reliability, the guarantors apparently:
   (a) needed to postpone for 12 months about 40% of the total
   

purchase price;

(b) could not supply security themselves for this deferral;

(c) resisted and refused to supply any financial information

about themselves;

(d) were or would be "insulted", or likely to be insulted, by

the request for security; and

(e) needed to rely, to secure their purchase, on a letter

which represented at best no more for the applicants than a right to sue the "other side's" solicitor about whose financial situation they did not enquire and apparently knew nothing.

1. Assuming it was made, as I believe is likely, I think it nonsense that the applicants' solicitor was put off by, and that the applicants accepted, the alleged suggestion of the first respondent that pressing for security would or might be regarded by the purchaser as "insulting". A commercial transaction of this kind does not, I believe, admit of such emotive or ego-based considerations, least of all by purchasers seeking a significant concession. The fact that the applicants did not press for readily enforceable and convertible security or other support for the guarantors' or their solicitor's word, coupled with the answers given and the attitude displayed in evidence, make it perfectly obvious to me that the applicants were always proposing to proceed with the sale to Hitex come what may about security beyond the guarantee itself, especially as to satisfying themselves about the financial viability and strength of the guarantors. In these respects at least, the applicants' solicitor does not appear to have served them and their interests as well as he might have.

2. For the first respondent's letter to amount to misleading or deceptive conduct, it means in the context of this case that some one or more of the key assertions in the letter were calculated to and did in fact mislead or deceive the applicants into entering the contract for sale, as the applicants allege. Certainly the first respondent's conduct in the telephone conversation and the letter was to say the least imprudent and is or ought to be of concern in a professional sense. It is of course true that his prime duty was to his clients and not the applicants. But his failure to inform the applicants' solicitor either in the telephone conversation or the letter - or subsequently before exchange or completion - that he was intending to take, in the process of taking, or had taken a considerable equity in the purchasing company, and to explain the closeness of his relationship to the guarantors and the source of his knowledge of their financial situation, was in my opinion stark and wrong.

3. As it may be assumed that this purchase was regarded by the guarantors and their companies as beneficial to their interests, it is remarkable that the first respondent did not explain at some time prior to completion that he therefore had a personal and commercial interest in this contract going through, that he was personally supplying at least part of the purchase price, and that his comments on the guarantors' financial strength should be viewed in the light of his being or being about to become their business partner. It can certainly be assumed that the first respondent would hardly have paid a substantial sum to take this position if he had believed his money to be at risk or his co-directors to be otherwise than people of substance. But this might also have blinded him to the need, as solicitor acting for the purchaser in the sale by the applicants, to be scrupulously objective in everything he did and said. A serious conflict of interest is at least possible.

4. However, this is a case under section 52 of the Act, not an accounting for professional inadequacy or impropriety. The issues for determination here are whether the letter was misleading and whether it induced the applicants to act on it.

5. In my opinion it did not relevantly mislead. There is no basis for the applicants' claim that the letter amounts to a "guarantee of the guarantee and the guarantors" 15 months ahead. I believe that the letter was in fact no more than an assurance or re-assurance that the purchasers should feel content that the risk of non-payment of the postponed part of the purchase price was as minimal as the first respondent knew from what the guarantors had disclosed to him and from other knowledge he had.

6. It is therefore not necessary to determine whether the respondent's conduct was "in trade or commerce". However, assuming for present purposes, and without deciding, that the letter and the telephone conversation were conduct "in trade or commerce": see most recently Concrete Constructions Pty Ltd v Nelson (1990) 92 ALR 193, I cannot see that the first respondent's conduct, if misleading or deceptive, was such as to have induced the applicants to enter into and conclude the contract for the sale of the business to Hitex.

7. The claim based on negligent misstatement also fails. The elements of this tort are by now well known: Hedley Byrne and Co Ltd v Heller and Partners Ltd (1964) AC 465; Mutual Life and Citizens Assurance Co. Ltd v Evatt (1971) AC 793; L. Shaddock and Associates Pty Ltd v Parramatta City Council (1981) 36 ALR 385. In my judgment there was no relevant misstatement inducing action by the applicants to their detriment. I am not convinced that the first respondent owed the relevant duty of care to the applicants. If he did, it was not breached in this case. In fact it is doubtful that any relevant statement could have been made by the first respondent because if there was a duty, the statement would have been a future speculation of the kind which is not generally available in this area of the law. I do not accept that the first respondent knew that the applicants would proceed with the sale in reliance on the letter in the relevant sense.

8. The application is dismissed. The applicants are to pay the respondents' costs. I direct the Registrar to forward the papers in the matter to the Law Institute of Victoria for examination of whether the first respondent has been in breach of his professional responsibilities and obligations.