Kerol Pty Ltd & Ors v Eldic & Ors

[2003] HCATrans 654

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A129 of 2002

B e t w e e n -

KEROL PTY LTD, NOEL ROSS EDGE AND ADELAIDE CONVEYOR COMPANY PTY LTD

Applicants

and

TOM ELDIC

First Respondent

GORDON RALPH VERGELIUS

Second Respondent

VERGELD ENGINEERING PTY LTD (IN VOLUNTARY LIQUIDATION)

Third Respondent

LOW & PARTNERS (A FIRM)

Fourth Respondent

Application for special leave to appeal

McHUGH J
KIRBY J

TRANSCRIPT OF PROCEEDINGS

FROM ADELAIDE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 11 APRIL 2003, AT 11.58 AM

Copyright in the High Court of Australia

__________________

MR W.J.N. WELLS, QC:   If the Court pleases, I appear with my learned friend, MR A.L. TOKLEY, for the applicant.  (instructed by Johnson Lawyers)

MR M.F. BLUE, QC:   If the Court pleases, I appear for the second respondent.  (instructed by Tom Doman)

MR S.T. LANE:   If the Court pleases, I appear for the fourth respondent.  (instructed by Finlayson Lawyers)

MR WELLS:   There is no appearance for the first respondent or for the third respondent, a corporate respondent, your Honours, which is deregistered.

McHUGH J:   The Deputy Registrar has certified that she has been informed by Mr Tom Eldic, the first respondent, that he will submit to any order of the Court.  Yes, Mr Wells.

MR WELLS:   If the Court pleases.  Your Honours, there are two issues on the application for special leave and I wonder if I might start with the second of the two issues, that is the complaint that is made against the solicitors.  Can I preface the submissions that we make by saying that the case for a duty of care owed by the solicitors proceeds upon an assumption that the solicitors, that is Low & Partners, were actually involved in the preparation of the contract.  In fact, although they were retained, it was their registered conveyancer who did all the drafting and otherwise acted in the matter.  If we are right about the existence of a duty of care, our

submission is that it is a very easy step to conclude that there was a breach of the duty of care, having regard to the non-involvement of solicitors, where the skill and competence of solicitors was required.

The proposition that we put on the duty of care can be put in this way upon the facts and circumstances either found or not disputed, which I will come to.  The solicitors knew, or ought reasonably to have known, that the unrepresented, inexpert purchasers, the applicants, had ceded control to the solicitors in the drafting of a document by which contractual rights were to be conferred.  The nature and scope of those contractual rights, and in particular clause 6, the non-competition clause, were effectively in the hands of the solicitors.  The proposition put in that way bears some echoes to the proposition formulated by your Honour Justice McHugh in Parramatta City Council v Lutz in 1988 when your Honour sat on the Court of Appeal in New South Wales.

KIRBY J:   I sat with him.

MR WELLS:   And your Honour also sat, indeed.  At that time the decision followed closely upon the decision of this Court in Sutherland Shire Council v Heyman and your Honour Justice McHugh identified some tension between a proposition based on ceded control and the notion of general reliance which had been enunciated by the former Chief Justice in Sutherland Shire Council v Heyman.  However, the notion of ceded control, we submit, has enjoyed some revival in more recent times and that is reflected in the decisions of this Court in Hill v Van Erp and some of the reasons given by Justices of this Court in Esanda Finance v Peat Marwick.  In both of those cases, some of the Justices - in Hill v Van Erp Justices Gaudron and Gummow - made reference to the importance and significance of ceded control in identifying a special position of vulnerability and, indeed, dependence.

The same comments were made by their Honours Justices Toohey and Gaudron in Esanda Finance, where their Honours drew some parallel with the principles that are applied in relation to non-delegable duties.  The importance, we submit, in this case of the touchstone of ceded control is that in the circumstances, which I shall identify, the purchasers, by reason of that ceded control, found themselves, to use the more current language, in a special position of vulnerability and dependent – we would say perhaps more than they realised – on the professional actions of the solicitors who were retained to act for the vendor company, although, it is important to observe, were not retained to act for the directors of the vendor company.

In those circumstances, our submission is that the solicitors came under a duty of care.  No doubt it was not broadly expressed in scope because, amongst other things, it involved a duty to take a positive step and the duty, we would submit, was to take all reasonable steps to ensure that the purchasers were separately advised.  Obviously enough that does not mean that they had to guarantee separate advice, but they had to take reasonable steps to warn the purchasers that this was a matter on which they should take their own advice, and again that reflects ‑ ‑ ‑

KIRBY J:   Could you tell me how the fact came about that solicitors acting for the vendors inserted in the agreement a clause designed to protect the purchasers.  How precisely did that happen?

MR WELLS:   Your Honour, the only evidence on that was given by the registered conveyancer, Mr Stevens, who had little or no recollection of the steps that were taken.  He was only able to say this, that the printed contract note, in which appeared clause 17 which was struck out, was not a form of contract which he as an employee of the solicitors’ firm used, but that clause 6 which was inserted in place of clause 17, but inserted in the added special conditions, appeared to be based on a precedent which the firm of solicitors had, but he did not himself recall on whose instructions he drew and inserted clause 6.

KIRBY J:   Is that not a difficulty that there is no contractual obligation and therefore you are in the realm of tort.  In the realm of tort, in order to establish the additional obligation that contract denies, you really have to establish the factual foundations that give rise to the duty.  Those facts do not appear to do that, or at least they fall short of establishing the colour and texture that would give rise to a duty or an obligation.

MR WELLS:   I appreciate what your Honour says and can I respond by setting out for you what we contend, on the facts found or undisputed, were the facts which we say are material and relevant to the existence of the duty.  First of all, as I said, the solicitors were retained by the vendor company but not by the directors.  It must be assumed that in some way either the directors or their agents - because one of the directors, Mr Vergelius, had a brother who was a real estate agent and who seemed to be the go-between – gave some instructions on the matter, but the retainer was with the vendor company.

As your Honour Justice Kirby has noted, the special conditions included a non-competition clause in favour of the purchasers.  The solicitors knew that the purchasers - that is the applicants - had not retained their own solicitors.  The evidence of Mr Stevens indicates that he had some brief contact with Mr Edge, who was the principal in the purchaser company, and with Mr Edge’s accountant, Mr Donnelly.  That is before the contract was drawn, it would appear, and it is quite clear that the post‑contract conduct involved Mr Stevens carrying out important tasks on behalf of the purchaser and is therefore clearly consistent with his knowledge at the time that the purchasers were not themselves advised by or represented by their solicitors.

McHUGH J:   I thought that Jeff Stevens did not meet or speak with Mr Edge before the contract was signed.

MR WELLS:   There was a finding, your Honour, that there was not a particular meeting before the contract was signed, which Mr Edge asserted and Mr Stevens denied, and that was resolved in favour of Mr Stevens’ evidence, but Mr Stevens’ own witness statement identifies an occasion or occasions on which he spoke by phone on one occasion to Mr Edge and on another occasion to Mr Donnelly, but he is not able to say what those conversations were about or what they bore upon.  I only mention them because we say it is clear enough that Mr Stevens was aware that Mr Edge had no legal representation himself.

I continue with some of the other salient features.  The solicitors, we say, knew and certainly ought reasonably to have known that the drawing of the non-competition clause involved the defining of contractual rights to be conferred on the inexpert and unrepresented purchaser and they knew or reasonably to have known that the purchaser might very well have an interest in binding the directors who were the principals in the business and would be wishing to pursue that interest.  One can come to that conclusion clearly enough from these considerations, that the directors were the principals in the business and provided the business with its skill and expertise and, indeed, one of the directors, Mr Vergelius, provided that skill and expertise in part through a consultant company.  The negotiating correspondence showed that the purchasers wanted to bind the principals in the business.

Now, there is no evidence that that negotiating correspondence was before Mr Stevens and if one is not going to express the proposition that a competent solicitor would want to have it, one can at least say that there was no evidence that the solicitors had received any instructions from their client, the vendor company, that there was any agreement to exclude the directors from the non-competition clause.  More importantly, however, it was obvious to any reasonably competent solicitor that neither clause 17 of the printed contract note nor clause 6 of the special conditions was apt or effective to protect the purchaser investment in the goodwill of the business, where the vendor was a corporation.  It simply was not effective for that purpose.

We would say in addition to that, it was obvious to any reasonably competent solicitor that the terms of clause 6 itself, which your Honours can find on page 49 of the application book, particularly as a replacement for clause 17, might well lead an unrepresented and inexpert purchaser to believe that it did bind the directors as principals of the vendor company.

McHUGH J:   But your problem, Mr Wells, it seems to me, is that there is just a complete absence of evidence as to what really went on.  My reading of the judgments seems to indicate that the respondents themselves seem to think that they had been bound to an extent that they had not even agreed to.  Is my recollection right?  It is more than a week since I read all the material in this case.

MR WELLS:   There was some evidence that Mr Eldic was unhappy with clause 17 and wanted it struck out, but there is no evidence that there was any discussion with Mr Edge about the terms of either clause 17, or clause 6 when it came to be replaced.  Your Honours, we would respectfully contend that, on the contrary, the state of the evidence is such that it presents a quite crisp issue for decision.  None of the propositions that I have placed before the Court thus far, with perhaps the exception of the relevance of the precontract correspondence, can be controverted.  The evidence, in our respectful submission, undisputed as to these matters, is sufficient for the purpose of identifying the existence of the duty of care.

We would further say in that respect, your Honours, that the necessary material upon which to base the decision as to whether a duty of care exists or not is material which derives – certainly not exclusively but very largely – from the existence and nature of the non-competition clause itself and the circumstance that it was inserted into a contract, clearly a clause supposed to be in favour of the purchaser, but inserted in there and drawn by the solicitors for the vendor in circumstances, as I say, where they knew that the purchaser was inexpert and unrepresented.  Our respectful submission is that on the matters that I have outlined, that is sufficient.  It is not a matter of, in this case, even seeking to identify any other existing findings.  Those undisputed and indisputable facts, in our respectful submission, are more than sufficient for the finding of the duty of care.

Can I add briefly, because I must turn to the second issue, three further comments which are relevant to the imposition of the duty of care.  The first is the obvious and, one might say, the still necessary condition that it was reasonably foreseeable that the purchasers would suffer economic loss if the contract by which they acquired the goodwill of a business failed to protect the goodwill.  The second is that the solicitors’ client, that is the vendor company, itself had no interest in excluding the directors from the non‑competition clause.  The directors might have, but the vendor company did not.  There was no adverse interest in that respect and, on the contrary, it is reasonable to say that the vendor company would have had itself an interest in binding the directors in order to deliver what they had sold, namely the goodwill.

Finally, if I may add, there is a very strong public interest, in our respectful submission, operating in favour of the finding of duty of care, which we would express in this way.  The potential for injury and detriment to the administration of justice if a legal practitioner were seen to be a contributor to injustice by controlling the terms of a transaction to the detriment of an unrepresented lay party favours the recognition of a duty of care directed towards ensuring equality and even‑handedness in the transaction.

KIRBY J:   I think there is an issue of principle lurking here but the question is whether or not the facts of this case really present that issue of principle and the way the case was conducted at trial presents the principle for decision by this Court.  If it does not, experience teaches that it is often unwise to bring cases with important principles to the Court where they are not ripe on the facts to be explored by us.

MR WELLS:   Your Honour, in our submission, the Court should not be misled by the peremptory nature in which this issue was disposed of by the trial judge.  The principal issue that his Honour considered was whether there was a retainer but there is, in our respectful submission, no doubt that not only was the duty of care pleaded, and in particular the duty to warn pleaded, but it was pursued and pursued on appeal and, in our respectful submission, for the reasons that we set out in this submission, there is not an absence of facts.  There is a presence of all the necessary facts to establish the duty.  It is not to the point that one might have wanted to have more; the question is whether the facts that exist here are themselves sufficient to found the duty.  Our respectful submission is that they manifestly are.

Can I turn, albeit briefly, to the other issue and put this submission:  Your Honours, as Chief Justice Doyle identified at paragraph 18 on page 41 of the application book, there were two issues that arose in relation to what his Honour called the unresolved issue, which I will call, for the sake of a label, the misleading deceptive conduct by lack of response.  The first one was whether it had been pleaded or otherwise accepted as an issue at trial; the second was whether the findings of the trial judge necessarily precluded a different result in any event.

Our submission is that on the first of those, the learned Chief Justice was wrong, that Justice Williams was right to an extent - that is, in our respectful submission, his Honour did not go far enough - and it is difficult to discern in that consequence where Justice Mullighan sat, since he agreed with both.  The error that we identify in the learned Chief Justice’s reasons is to be found in paragraphs 40 and 42 on pages 44 and 45, which I summarise in this way.  His Honour, we respectfully submit, failed to distinguish between facts that are pleaded and the cause of action which is

pleaded in the statement of claim by reference to pleaded facts.  His Honour seems to have taken the view that because the facts of the non-response were not sufficiently pleaded as facts in the statement of claim, that therefore they were not raised in the pleadings.

Our submission is they manifestly were raised in the pleadings, because that was the cause of action, and it is that error that we respectfully submit lies at the heart of the decision that was ultimately reached by a majority in the Full Court, Justice Williams on the second issue, in our respectful submission, with all respect to his Honour, second‑guessing the trial judge.  Those are my submissions, if the Court pleases.

McHUGH J:   Thank you, Mr Wells.  The Court need not hear you, Mr Blue or Mr Lane.

We are not convinced that the Full Court of the Supreme Court of South Australia erred in its conclusions in this case or that an appeal, if special leave were granted, would enjoy sufficient prospects of success to warrant the grant of leave.

As to the first point raised by Mr Wells, that is to say whether the solicitors for the vendor owed an unrepresented purchaser a duty of care, we are of the view that, on the facts of this case, there are insufficient prospects of establishing a duty of care on the part of the fourth respondent to warrant the grant of special leave.

The second point relied on by Mr Wells is that the trial judge failed to resolve certain issues.  Chief Justice Doyle considered that the case raised in the applicants’ counsel’s argument in his closing address, and which was not in fact dealt with by the trial judge, was far removed from the case that seemed to be presented at the trial.  Chief Justice Doyle said that there was a risk of unfairness to the defendants if the judge were now asked to make findings on the unresolved issues.  Justice Mullighan agreed with his judgment.  Whether Chief Justice Doyle was right or wrong on this aspect of the case raises no special leave question.

Accordingly, in our view special leave must be refused with costs.

AT 12.22 PM THE MATTER WAS CONCLUDED