Lederberger v Mediterranean Olives Financial Pty Ltd

[2012] VSCA 262

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2011 0106
ISRAEL LEDERBERGER and PAULINE SCHEINER (as executors of the deceased estate of GITA LEDERBERGER)	Appellant
v
MEDITERRANEAN OLIVES FINANCIAL PTY LTD	First Respondent
MEDITERRANEAN OLIVES ESTATE LTD	Second Respondent
ALBANY FINANCIAL PTY LTD	Third Respondent
WA BLUE GUM LTD	Fourth Respondent
SAMUEL LEDERBERGER	Fifth Respondent
STERLING & SHEINK (a firm)	Sixth Respondent

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JUDGES	NETTLE, REDLICH JJA and BEACH AJA
WHERE HELD	MELBOURNE
DATE OF HEARING	17 August 2012
DATE OF JUDGMENT	17 October 2012
MEDIUM NEUTRAL CITATION	[2012] VSCA 262
JUDGMENT APPEALED FROM	[2011] VSC 301 (Pagone J)

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CONTRACT – Parties – Identification of parties – Parties’ conduct – Whether conduct relevant to identification of parties to contract – Distinction between conduct to interpret contract and conduct to identify parties to contract.

PARTNERSHIP – Authority to bind partners – Ostensible authority – Whether entry into primary production tax-avoidance scheme act for carrying on in usual way partnership business of selling camping goods – Implied actual authority – Whether arising from acquiescence – Acquiescence limited to carrying on in usual way partnership business of selling camping goods – Ratification – Ratification impossible without knowledge of transaction.

LEGAL PRACTITIONERS – Solicitors – Duty of care – Whether solicitors under duty of care to advise prospective executrix that acceptance of office as executrix and trustee would render her personally liable for debts of partnership of which as executrix and trustee she would become member – Causation – Relevance of client’s evidence as to whether she would have accepted office as executrix and trustee if advised of risk of personal liability – Wrongs Act 1958, Part X.

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Appearances:	Counsel	Solicitors
For the Appellant	Mr R Merkel QC with Mr M I Ravech	Spigler & Schwarz
For First – Fourth Respondents	Mr J W S Peters SC with Mr P Fary	Herbert Geer
For Fifth Respondent	Mr D Silberman (Solicitor)	Dov Silberman Lawyers
For Sixth Respondent	Mr J J Gleeson SC with Mr D W Bennett	Minter Ellison

NETTLE JA

REDLICH JA
BEACH AJA:

1. The first, second, third and fourth respondents (‘the respondents’) alleged that they entered into a number of agricultural contracts for tax effective products with members of a partnership.  They sought to recover from the individual partners debts arising from those contracts.  Mrs Gita Lederberger in her capacity as trustee of the Estate of her late husband, Hirsch Lederberger, and her son Samuel Lederberger were the partners.  The trial judge found that Mrs Lederberger, as trustee of the Estate was liable for the partnership debts owing to the respondents.  The trial judge dismissed third party proceedings by Mrs Lederberger against her solicitors Sterling & Sheink (the third party) in which she sought indemnification from them for any liability that she may have to the respondents.

1. Mrs Lederberger died on 31 October 2011.  By order of the Court of Appeal made by consent, Mr Israel Lederberger and Ms Pauline Scheiner (as executors of the estate of Mrs Gita Lederberger) were substituted as the appellants.  They have appealed the judgment of Pagone J in favour of the respondents and his dismissal of the third party proceedings. 

1. The grounds of appeal raise the following issues.  First, with whom did the respondents contract and could the respondents rely upon post-contractual conduct to determine the identity of the contracting parties?  Secondly, if the members of the partnership were the contracting parties, did Samuel Lederberger have actual or ostensible authority to enter into the agricultural contracts? The question of ostensible authority necessitates consideration of whether the agricultural contracts involved carrying on in the usual way business of the kind carried on by the partnership.  A related question is whether the partners had provided authority to enter into the contracts pursuant to powers of attorney executed by Samuel Lederberger.  Thirdly, if Samuel Lederberger had acted without authority, had Mrs Lederberger ratified or impliedly sanctioned the investments?  Fourthly, was the trial judge able to make adverse findings of fact against Mrs Lederberger on the respondents’ claims and in the third party proceedings which were contrary to the facts set out in her witness statement when she had not been cross examined as to the content of her statement?  Fifthly, was the third party obliged to advise her as to the risks associated with becoming the trustee of her husband’s estate?  Sixthly, if they were in breach of their duty, was it causative of her liability to the respondents?

Agreed Facts

1. Mr Hirsch Lederberger established Loaders Traders Pty Ltd in the late 1950s.  By a will drawn by Mr Granek of Sterling & Sheink in 1992, Mr Hirsch Lederberger left a third of his business to his son Israel Lederberger (known as Bob Lederberger), a third to his son Samuel Lederberger and a third was left on trust in the estate, with the income of that share to go to his wife.  In October 2000, Mrs Lederberger retained the third party to advise and act for her in proving the Will of her late husband who had died on 16 August, and in obtaining a grant of probate as executrix of the Will (‘the Retainer’).  In August 2003, Samuel Lederberger bought his brother’s share of the business.  The Will was proven on 9 September 2003 and probate was granted to Mrs Lederberger whereupon she became executrix of the Will and sole trustee of her husband’s estate (‘the Estate’).

1. In late 2003, Samuel Lederberger sought advice from the accountant for Loaders Traders Pty Ltd, Mr Robert Lebovits, as to how he could protect himself against the debts of the business.  Mr Lebovits proposed a partnership structure, whereby Loaders Traders Pty Ltd would act as a bare trustee for the partners.  On 1 October 2003, a partnership (‘the Partnership’) using the name ‘Loaders Manufacturers & Traders’ was registered as a business with the Australian Business Register.  ‘Loaders Manufacturers & Traders’ was registered as a business ‘in relation to’ Loaders Traders Pty Ltd.  The primary activity of the business was that of importing, wholesaling and selling camping goods.

1. On 28 November 2003, Loaders Traders Pty Ltd made a written declaration of trust, declaring that it acted as a bare trustee for the Partnership.  Under the partnership structure, one third of the Partnership was held for the Estate, with the other two thirds held by Lederberger Investments Pty Ltd (‘Lederberger Investments’), a company of which Samuel Lederberger was the sole director and secretary.

1. Mediterranean Olives Financial Pty Ltd, Mediterranean Olives Estate Ltd, Albany Financial Pty Ltd and WA Blue Gum Ltd are the first, second, third and fourth respondents respectively.  Mr Tom May at all material times acted on behalf of the respondents.  

1. In 2006, Samuel Lederberger expected the partners trading as Loaders Manufacturers & Traders to post a significant profit.  He met with Mr Lebovits to discuss ways to invest in a tax effective scheme.  Mr Lebovits explained the benefits of participating in the WA Blue Gum Project 2006 (‘the Blue Gum scheme’) in order to secure substantial tax deductions.  In May or June 2006, Samuel Lederberger met with Mr May for the purposes of entering into the Blue Gum scheme.  Mr May also met with Mr Lebovits more than once to discuss the scheme.

1. On 27 June 2006, Samuel Lederberger signed an application form, which included an authority described as a power of attorney in respect of the Blue Gum scheme, by which Mr May was authorised to enter into the necessary contracts on behalf of the entity described as ‘the grower’.  The grower’s name on the application was recorded as ‘Loaders Manufacturers & Traders’.  Mr May was aware that Samuel Lederberger was contracting on behalf of others, although he was not aware of the identity of the other parties at that time.  A partnership tax return was lodged, claiming the benefit of the deductions available through the Blue Gum scheme.

1. In 2007, Mr May and Mr Lebovits discussed an investment in a similar scheme and on 14 June 2007, Samuel Lederberger signed an authority granting Mr May power of attorney to enter into a series of contracts as part of the ‘Mediterranean Olives Project 2007’ (‘the Mediterranean Olives scheme’).  The grower was again described as ‘Loaders Manufacturers & Traders’.  A partnership tax return was lodged, claiming the benefit of the deductions available through the Mediterranean Olives scheme.

1. The partners, Lederberger Investments and Mrs Lederberger as trustee of the Estate, claimed and received significant reductions to their taxable incomes in 2006 and 2007.

The trial

1. At trial, the primary question was the identity of the parties with whom the respondents had contracted.  Loaders Traders Pty Ltd and Lederberger Investments had both entered into deeds of company arrangements, and no claims could be pursued against them.  The respondents contended that they entered into the agricultural contracts with the members of the Partnership, being Lederberger Investments and the Estate.  Samuel and Mrs Lederberger claimed that the contracts with the respondents were not entered into on behalf of the partners, but with the bare trustee, Loaders Traders Pty Ltd.

1. The trial judge found that the respondents had contracted with the partners.  His Honour found that the fact that the business name, Loaders Manufacturers & Traders, was listed as being a business ‘in relation to’ Loaders Traders Pty Ltd was not determinative.  He attached significant weight to the fact that the partners were the only parties that claimed and received benefits from entry into the tax deduction schemes.[1] His Honour found that the contracts entered into by Mr May on behalf of the Partnership did not exceed Mr May’s authority, because he had been authorised by Samuel Lederberger on behalf of the partners to do so. Mrs Lederberger claimed that she was not liable for the debts of the partnership, because, pursuant to s 9 of the Partnership Act, the debts were not incurred in ‘carrying on in the usual way business of the kind’ carried on by the firm. His Honour, in rejecting this contention, held that participation in the tax effective scheme was within the usual way the business of the Partnership was carried on. His Honour also concluded that even if Mr May and Samuel Lederberger did not have authority to enter the contracts, they had been ratified by the partners.

   [1]Mediterranean Olives Financial Pty Ltd & Ors v Gita Lederberger & Ors [2011] VSC 301 (‘Reasons’) [5].

1. Mrs Lederberger maintained that any liability by her to the respondents was due to the negligence of the third party in discharging its obligations under the Retainer.  His Honour appears to have accepted that the Retainer gave rise to a duty to advise Mrs Lederberger as to the personal liability that would arise upon her becoming the trustee of one third of the partnership.  Her solicitors did not dispute that they had given no such advice but maintained that the liability to which she was exposed was not foreseeable.  His Honour found that Mrs Lederberger’s evidence as set out in her witness statement that she would not have assumed the position of trustee had she been so advised was not probative of what she would have done.  Pagone J concluded that the failure to give such advice was not causative of any loss arising from decisions made by Samuel Lederberger in the course of running the business and dismissed the third party claim.  He ordered that Mrs Lederberger was liable to the respondents to pay the sums agreed in the contracts.  We turn then to the grounds of appeal.

Identity of the contracting parties[2]

[2]Ground 1 in the Amended Notice of Appeal.

1. At the outset we observe that this appears to have been the primary issue at trial.  It was the subject of careful and lengthy reasons in his Honour’s judgment.  On appeal it attracted almost no argument in the appellant’s written submissions and no oral argument.  The third party addressed the matter more fully in its written submissions and in oral argument focussed upon the contention that the trial judge in determining who were the contracting parties had taken into account post contract conduct.  We shall return to this question later in these reasons.

1. The appellants and the third party contend that the trial judge erred in holding that the partners, Lederberger Investments Pty Ltd or Mrs Lederberger, as trustee of the Estate, entered into the agricultural contracts.  The application forms for entry into each of the tax effective schemes were signed by Samuel Lederberger, with Mr Lebovits as a witness.  The loan agreements did not refer to either partner or the Partnership, and instead were signed by Mr May as ‘Attorney under Power for Loaders Manufacturers & Traders’.  Neither partner was referred to in any of the contractual documents.  The communications between Samuel Lederberger and Mr May were said to be equivocal and Samuel’s subjective intentions irrelevant.

1. The business name ‘Loaders Manufacturers & Traders’ was registered in the Business Name Register as a business ‘in relation to’ Loaders Traders Pty Ltd for the period 22 February 2005 to 8 August 200. In their report pursuant to s 439A of the Corporations Act 2001, the administrators of Loaders Traders Pty Ltd state that Loaders Traders Pty Ltd ‘carries on business under the name of Loaders Manufacturers & Traders’.  The appellants and Mrs Lederberger’s solicitors thus submitted that the contracts with the respondents were entered into with Loaders Traders Pty Ltd and not the Partnership. 

1. The trial judge found that the respondents entered into the tax effective scheme contracts with the Partnership.  His Honour said:

In my view it is clear that the plaintiffs were contracting with the partners of the partnership who in fact claimed, and obtained the benefit of, the substantial tax deductions secured through participation in the two projects.  The application form with the first plaintiff identified Loaders Manufacturers & Traders as the relevant grower.  The application asked whether that entity was registered for GST and, in Mr Samuel Lederberger’s hand, there was circled the word ‘yes’ in the 2006 application form and the box marked yes was ticked in the 2007 application form that he signed.  The partnership was registered for GST whilst Loaders Traders was not. 

The documents subsequently entered into by Mr May pursuant to the power of attorney to give effect to the applications made by Mr Samuel Lederberger on behalf of a disclosed but unidentified principal described Loaders Manufacturers and Traders as the ‘grower’.  A sub-lease was entered into dated 30 June 2006 describing the landholder as WA Blue Gum Limited (the fourth plaintiff) and the grower as ‘Loaders Manufacturers & Traders’ with the company number ‘VIC 0359052S’.  A loan agreement was entered into for the 2006 year with Albany Finance Pty Ltd (the third plaintiff) as financier and ‘Loaders Manufacturers & Traders VIC 0359052S’ as grower.  A project management contract was entered into for the 2006 year between WA Blue Gum Limited (the fourth plaintiff) and Loaders Manufacturers & Traders VIC 0359052S as the grower.  All of these documents permitted the 2006 returns to be prepared (and financial advantage to be obtained) and no complaint was ever made by the defendants until these proceedings.  No complaint was made or correction sought by the defendants about the description of the party to participate as grower when the parties entered into the 2007 transactions involving the Mediterranean Olives project.  By this stage there could have been no doubt in the minds of the defendants that the parties who had contracted in the 2006 year, who had claimed the tax deductions in that year and who were about to contract for the 2007 year to the same effect had been described as ‘Loaders Manufacturers & Traders’ including the number ‘VIC 0359052S’.[3]

[3]Reasons [17].

1. Identification of the parties to a contract must be in accordance with the objective theory of contract.[4]  That is the intention that a reasonable person, with the knowledge of the words and actions of the parties communicated to each other, and the knowledge that the parties had of the surrounding circumstances, would conclude that the parties had.[5]  The process of construction requires consideration not only of the text of the documents, but also the surrounding circumstances known to the parties and the purpose and object of the transaction.[6]  This in turn presupposes knowledge of the genesis of the transaction, the background, and the context in which the parties are operating.[7]

   [4]Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154, [54].

   [5]Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179.

   [6]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 462 (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).

   [7]Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 350; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6, [1976] 3 All ER 570, 574.

1. When one looks at the suite of documents between the parties and the surrounding circumstances to the agreements between Mr May under power of attorney and the respondents, it becomes clear that the parties to the contracts were the respondents and the members of the Partnership.  On two or three occasions before entering into the agreement with Mr May and the respondents, Mr May met Mr Lebovits to discuss the tax benefits of participation in the Blue Gum scheme.  Mr May was unaware of the precise nature of the contracting entity, but knew that Mr Lederberger was not entering the transaction on his own behalf.  In relation to the Mediterranean Olives scheme, Mr May gave evidence regarding his understanding of the business arrangements of the other contracting parties:

In my discussions with Mr Lebovits it was clear to me that there was some sort of partnership, but I didn’t know who the partners were and that what was intended to be accomplished by the transactions in part was that whoever those entities were would be able to claim a tax deduction in respect, between them, of the whole amounts paid.

1. Samuel Lederberger gave evidence that the purpose of the entry into the tax effective scheme was that, by investing as a ‘grower’ in the Blue Gum scheme, and subsequently in the Mediterranean Olives scheme, there would be a significant reduction in the grower’s income tax liability.  The grower’s name on the application form was ‘Loaders Manufacturers & Traders’, which was registered for GST.  The Partnership was registered for GST, but Loaders Traders Pty Ltd was not.

1. It was not contended that his Honour had erred in principle, but that his finding of fact that it was the partners – not Loaders Traders Pty Ltd – who were party to the tax effective scheme with the respondents was in error.  We do not agree.  In identifying the parties to the contract, his Honour was entitled to consider the objective and purpose of the transactions, the communications and actions that took place between Samuel Lederberger, Mr May and Mr Lebovits and the knowledge that these parties had of the surrounding circumstances to the agreement in order to ascertain the objective intention that these parties had in entering the contract.  In our opinion his Honour was right to find that a reasonable person, with the knowledge that the parties had of the surrounding circumstances, would conclude that it was the partners in the Partnership that entered into the transaction agreements with the respondents in relation to the Blue Gum and Mediterranean Olives schemes.

Post-contractual conduct to determine the identity of the contracting parties[8]

[8]Ground 5C in the Amended Notice of Appeal.

1. Under cover of its notice of contention, the third party submitted that the trial judge erred in determining the identity of the parties by reference to post-contractual conduct which was in any event equivocal.

1. In finding that the members of the Partnership were parties to the agricultural contracts his Honour attached significant weight to the Partnership and Estate tax returns lodged for the financial years ending 30 June 2006 and 2007:

[T]ax returns were filed by the partnership claiming, and obtaining, the benefit of the tax deductions which participation in the Mediterranean Olives project secured.  A partnership tax return for the 2007 year was lodged with the Commissioner of Taxation claiming, and obtaining, the benefit of the deductions available through the Mediterranean Olives project.  Question 59 of the 2007 partnership return recorded that a loss had been distributed to the estate of the late Hirsch Lederberger of which Mrs Lederberger was the trustee.  The estate filed a tax return for the 2008 financial year declaring as income a share of the estate’s partnership income or loss from ‘Loaders Manufacturers and Traders’ and was signed by Mr Samuel Lederberger.  A partnership tax return for the 2008 financial year of the partnership so styled was returned disclosing a loss distributed to the estate for that year.  The partnership accounts recorded non-operating expenses, fees paid or payable to the plaintiffs in respect of the Blue Gum project and the Mediterranean Olives project.  That return was signed by Mr Samuel Lederberger.[9]

[9]Reasons [16].

1. The Partnership and Estate tax returns showed that it was the Partnership, not Loaders Traders Pty Ltd, that had obtained significant tax benefits from entry into the tax effective schemes.  These tax returns evidently informed the trial judge’s conclusion that it was the members of the Partnership that had contracted with the respondents in order to obtain the benefit of significant tax reductions secured through participation in the two schemes.[10]

   [10]Ibid [17].

1. The admissibility of post-contractual conduct as an aid in construing the content of, or parties to a contract was for a long time unsettled.[11]  However, in FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd,[12] Brooking J (with whom Nathan and Eames JJ agreed) stated in emphatic terms that evidence of subsequent conduct was not admissible in the construction of the contract.  His Honour said that ‘[a]ny general principle that the conduct of the parties after a contract has been made may be used as throwing light on its meaning would be uncertain in its operation and mischievous in its effect.’[13]  Subsequently in Ryan v Textile Clothing & Footwear Union of Australia,[14] Hayne JA (with whom Brooking and Tadgell JJA agreed), citing Lord Diplock in Gissing v Gissing[15] stated that the ‘intention of the parties’ that is to be ascertained by the process of construction is an objective intention, being that which was reasonably understood by the other parties to be manifested by that party's words or conduct.[16]  Then in Brambles Holdings Ltd v Bathurst City Council,[17] Heydon JA (as he then was, Mason P and Ipp AJA agreeing), after referring to the first principle which related to pre-contractual conduct, drew upon FAI Traders and Ryan in summarising the principles governing the admissibility of post-contractual conduct:

The second relevant principle is that post-contractual conduct is admissible on the question of whether a contract was formed: Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 at 77; Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 668, 669 and 672; B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9,147 at 9149, 9154-9156; Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9,251 at 9,255.

The third relevant principle is that post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed.  As explained by Priestley JA (Meagher JA agreeing) in Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 326-330, the status of the relevant High Court authorities is unclear: hence unless it is demonstrated that the later decisions of the Victorian Full Court and Court of Appeal against admissibility, Ryan v Textile Clothing & Footwear Union of Australia [1996] 2 VR 235 and FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, are clearly wrong or they are overruled, they should be followed in New South Wales. No attempt was made to demonstrate that they are clearly wrong.

The fourth relevant principle is that the construction of a contract is an objective question for the court, and the subjective beliefs of the parties are generally irrelevant in the absence of any argument that a decree of rectification should be ordered or an estoppel by convention found.  No argument of these kinds was advanced in this case.[18]

[11]Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45, [112] (Kirby J). Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154, [59].

[12][1993] 2 VR 343.

[13]Ibid 350.

[14][1996] 2 VR 235.

[15][1971] AC 886, 906.

[16]Ryan v Textile Clothing & Footwear Union of Australia [1996] 2 VR 235, 262.

[17](2001) 53 NSWLR 153.

[18]Ibid 163-164.

1. The third and fourth principles stated by Heydon JA in Brambles Holdings have been put beyond doubt by the High Court.[19]  The third principle has been affirmed by the clear statements in Agricultural and Rural Finance Pty Ltd v Gardiner[20] that subsequent conduct is inadmissible as an aid in the construction of a contract as ‘the governing theoretical framework as to the determination of contractual rights and obligations is the objective theory’.[21]  The approach to issues of construction by reference to post-contractual conduct would be at odds with the general principle that ‘it is not legitimate to use as an aid in the construction of [a] contract anything which the parties said or did after it was made’.[22]

   [19]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461-462 [22]; Equuscorp Pty Ltd v Glengallan Investments (2004) 218 CLR 471, 483 [34]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179 [40].

   [20]Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570, 582 [35] (Gummow, Hayne and Kiefel JJ), 625 [163] (Heydon J) was to the same effect as a matter of principle.

   [21]Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, 614.

   [22]Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570, 582 [35] (Gummow, Hayne and Kiefel JJ), citing James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583, 603; Administration of Papua and New Guinea v Daera Guba (1973) 130 CLR 353, 446.

1. In Pethybridge v Stedikas Holdings Pty Ltd,[23] the case on which the sixth respondent relies, it was argued that even under the restrictive view of post-contractual conduct outlined in Heydon JA’s third principle above, subsequent conduct was admissible to determine the identity of the parties to the contract.  Campbell JA (Beazley and Basten JJA agreeing) said that subsequent communications cannot be looked to as an aid to construction of a contract, but can be looked to as an aid to deciding whether a contract has been entered into at all.[24]

   [23][2007] NSWCA 154.

   [24]Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153, 163-164; Magill v National Australia Bank Ltd [2001] NSWCA 221, [50]–[53] (Ipp AJA with whom Meagher and Heydon JJA agreed); Walker v Andrew [2002] NSWCA 214, (2002) 20 ACLC 1476, 1483–1484, 116 IR 380, 388, [2002] NSWCA 214, [39];  Independent Timber Importers v Mercantile Mutual Insurance [2002] NSWCA 304, [17];  El-Mir v Risk[2005] NSWCA 215, [66];  Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149, [99] (Giles JA, Hodgson and Campbell JJA agreeing).

1. Campbell JA also noted the submission that the question of who the parties were to the contract was in substance no different to a question whether there was a contract entered into with the appellant at all, but found it unnecessary to form a view about the correctness of that argument.[25]

   [25]Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154, [59].

1. Where there is an issue as to whether a particular person was a party to a contract, further questions may arise as to whether it is permissible to have regard to subsequent conduct, as constituting an admission by conduct as to the parties' rights,[26] or whether inferences may be drawn from such conduct as to the existence of a subsisting contract.[27]  As the respondents did not seek to rely upon such arguments at trial or on appeal, we express no view about them.

   [26]Pitcher v Langford (1991) 23 NSWLR 142, 160; Grey v Australian Motorists & General Insurance Co Pty Ltd [1976] 1 NSWLR 669, 684–685; Jones v Sutherland Shire Council [1979] 2 NSWLR 206, 231; Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175, 188.

   [27]Tomko v Palasty[2007] NSWCA 258, [13]–[14], [68].

1. The sixth respondent submitted that post-contractual conduct is not available to identify the parties to a contract wholly in writing as the identification must be made in accordance with the objective theory of contract by ascertaining what each party was reasonably entitled to conclude from the attitude of the other.  Plainly the general principle, affirmed by the High Court in Agricultural Finance, does not allow use of the subsequent conduct of the parties as an aid in the construction of a contract.[28]  But we are not inclined to think that this now well-settled principle has affected the second principle stated by Heydon J in Brambles Holdings so as to have precluded the trial judge from relying upon tax returns filed after the tax effective scheme contracts had been signed, in order to ascertain whether the respondents and the partners of the Partnership had entered into the agricultural contracts.  

   [28]Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570, 582 [35]; James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583, 603 (Lord Reid); repeated by Gibbs J in Administration of Papua and New Guinea v Daera Guba (1973) 130 CLR 353, 446.

1. Moreover, even if the tax returns filed by the Partnership and the partners were inadmissible for the purpose of identifying the parties to the contracts, we consider that his Honour, in his detailed examination of the circumstances which led to the signing of the agricultural contracts, including the object and purposes of the agricultural contracts, was correct to have concluded from those circumstances and the suite of documents relating to the Blue Gum and Mediterranean Olives schemes that the partners were the contracting party.

1. The Lederbergers’ business was restructured in 2003 to enable Samuel Lederberger to carry on the business as a partnership, which was registered as Loaders Manufacturers & Traders.  The negotiations between Mr May, Samuel Lederberger and Mr Lebovits show that the purpose of the transactions was to reduce the tax liability of Loaders Manufacturers & Traders.  The application form lists the grower as registered for GST, when only Loaders Manufacturers & Traders, not Loaders Traders Pty Ltd was registered for GST.

1. These grounds are not made out.

Authority[29]

[29]Grounds 2, 3 and 5B of the Amended Notice of Appeal.

1. The trial judge found that Samuel Lederberger had both implied actual authority from his mother to enter into these agricultural contracts on behalf of the partners and also ostensible authority to do so.

1. The appellants contend that Mr May and Samuel Lederberger possessed neither actual or ostensible authority to enter into the contracts on behalf of Mrs Lederberger.  They assert that the decision of Samuel Lederberger to enter into the tax effective scheme was not an act for carrying on in the usual way business of the kind carried on by the Partnership, nor had his mother authorised him or Mr May to enter into those contracts on her behalf.

1. Section 9 of the Partnership Act 1958 (‘the Partnership Act’) provides:

Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

1. In Construction Engineering (Aust.) Pty Ltd v Hexyl Pty Ltd,[30] Mason, Wilson, Brennan, Deane and Dawson JJ construed s 5 of the Partnership Act 1892 (NSW), which is analogous to s 9, in these terms:[31]

It can be seen that s 5 comprises two distinct limbs. The first deals with actual authority. It provides not that every partner is deemed to be an agent of the firm and his other partners for the purposes of the partnership business but that every partner is an agent of the firm and his other partners for that purpose.  The actual authority to which it refers is, however, but prima facie in that it may be negated or qualified by contrary agreement of the partners…

…

The second limb of s 5 deals with ostensible authority. Even though actual authority may be lacking, the act of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member binds the firm and his partners unless the other party ‘either knows that he has no authority, or does not know or believe him to be a partner’. Again, this limb effectively states the common law.

[30](1985) 155 CLR 541.

[31]Ibid 547-8.

Ostensible authority – Business of the kind carried on by the Partnership

1. It is convenient to deal with the question of authority in the same order as it was dealt with by the trial judge.  He first dealt with ostensible authority, concluding that Samuel Lederberger was authorised to enter the tax effective scheme contracts on behalf of the Partnership.  His Honour stated that entry into the tax effective scheme could not be said ‘to be outside the usual way the business of the partners was carried on.’[32]  His Honour reasoned as follows:[33]

It may readily enough be accepted that the reality of importing, wholesaling and selling camping goods is fundamentally different from the reality of the activities in a business of growing blue gums or olives.  However, that kind of broad description of businesses overstates the true situation in this case.  The businesses carried on by the partners by participation in the blue gum and olive tree transactions did not involve them in physical activity themselves.  Their participation in a business for tax purposes arose by virtue of the legal rights and obligations created through activity carried on by others.[34]  The business carried on through the partners’ participation in the Blue Gum and Mediterranean Olives projects was through the agency created by the agreements.[35]  There was no sense in which the activities of the partners would ordinarily be regarded as themselves being involved in growing trees or olives beyond the legal conclusions flowing for tax purposes from entering into legal relations.  Participation in the business of blue gum growing and olive growing from the point of view of the partners (and judged from the point of view of that commercial partnership) was little more than an incident of dealing with its profits and its tax liabilities.  Participation in the tax effective scheme was incidental to the partners’ business purposes of maximising business profits and participating in legally available products to reduce a tax liability.[36]  That, indeed, was the evidence of Mr Lederberger which I set out in paragraph 2 above.  The transactions may be seen to flow from, be incidental to, and to form a part of the ordinary activities of the business of, the partnership.[37] 

[32]Reasons [26].

[33]Ibid [26].

[34]Cooke v Federal Commissioner of Taxation [2002] FCA 1315;  Federal Commissioner of Taxation v Cooke [2004] ATC 4268;  Vincent v Federal Commissioner of Taxation (2002) 124 FCR 350;  Ferguson v Federal Commissioner of Taxation (1979) 9 ATR 873; Federal Commissioner of Taxation v Brand (1995) 31 ATR 326;  Merchant v Federal Commissioner of Taxation (1999) 41 ATR 116; Federal Commissioner of Taxation v Lau (1984) 6 FCR 202; Federal Commissioner of Taxation v Emmakell Pty Ltd (1990) 22 FCR 157;  Hance v Federal Commissioner of Taxation (2008) 74 ATR 644, 667 (Finn, Dowsett and Edmonds JJ); Howland-Rose v Federal Commissioner of Taxation (2002) 118 FCR 61.

[35]Cooke v Federal Commissioner of Taxation [2002] FCA 1315, [60] (Stone J).

[36]Cooke v Federal Commissioner of Taxation [2002] FCA 1315; Federal Commissioner of Taxation v Cooke [2004] ATC 4268; Federal Commissioner of Taxation v Cooling (1990) 94 ALR 121; Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639.

[37]Federal Commissioner of Taxation v Cooling (1990) 94 ALR 121, 135–6 (Hill J with Lockhart and Gummow JJ agreeing).

1. The second limb of s 9 of the Partnership Act effectively states the common law doctrine of ostensible authority.[38]  The question was whether, in investing in the tax effective agricultural contracts, Samuel Lederberger was carrying on in the usual way business of the kind carried on by the firm.  If he was, his mother as trustee of the Estate would then be bound by the terms of the contracts.[39]  

   [38]Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541, 547; Seiwa Australia Pty Ltd v Beard (2009) 75 NSWLR 74, [301].

   [39]Construction Engineering (Aust.) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541.

What was the ‘kind of business’ of the Partnership?

1. A partner has ostensible authority to act as an agent for the other partners, but this authority is limited to conducting business of the kind usually carried on by the firm.  In National Commercial Banking Corporation v Batty, Brennan J said:

The general authority of a partner to bind the firm is limited.  ‘Each partner is an agent only in and for the business of the firm; and, therefore, his acts beyond that business will not bind the firm’:  Bank of Australasia v Breillat (1847) 6 Moore 152 at 194; 13 ER 642 at 658. If a partner's act is not in fact ‘for the purpose of the business of the partnership’ the firm is bound by his act only if it is ‘an act for carrying on in the usual way business of the kind carried on by the firm’ and the absence of authority is unknown to the person with whom he is dealing. An act which is not done ‘in the ordinary course’ of a firm’s business cannot be ‘an act for carrying on in the usual way’ the firm’s business. (I do not need to consider the reverse proposition.)[40]

[40](1986) 160 CLR 251, 275. Acts ‘not done in the ordinary course’ was a reference to s 10 of the Partnership Act 1892 (NSW) (s 14 of the Partnership Act 1958 (Vic)) which governs liability for any wrongful act of a partner acting in the ordinary course of business.

1. Whether an act of a partner can be construed as being ‘business of the kind carried on by the firm’ invariably involves a close analysis of the facts.[41] The second limb of s 9 of the Partnership Act requires the business carried on by the firm to be characterised as being of some particular ‘kind’ so that it can be further determined whether the specific act of the partner was done for carrying on ‘in the usual way’ that kind of business.[42]  It is necessary to decide, on the facts of the case, what the business is and what acts are apt to be done in carrying it on.[43]  Whether an act of a partner can be seen to be carrying on business of the kind carried on by the firm in the usual way is to be decided objectively, by reference to whether the transaction appears to be of a kind that is within the ordinary authority of the partner.[44]  While the term ‘business of the kind carried on by the firm’ may permit something more general than the business that is actually carried on by the firm,[45] the act of a partner must come within the scope of the kind of business carried on by the partnership.

   [41]Shannon v Whiting (1900) 7 ALR 49.

   [42]Seiwa Australia Pty Ltd v Beard (2009) 75 NSWLR 74.

   [43]Walker v European Electronics Pty Ltd (In Liq) (1990) 23 NSWLR 1.

   [44]Seiwa Australia Pty Ltd v Beard (2009) 75 NSWLR 74, [267]; United Bank of Kuwait v Hammoud [1988] 1 WLR 1051.

   [45]Ibid [249], [257].

1. In Seiwa Australia Pty Ltd v Beard Campbell JA formulated the test in these terms:

Thus, the ‘business of the kind carried on by the firm’ is what the kind of business would reasonably seem to be to someone dealing with the firm, and in particular to someone who had had the type of contacts and dealings with the firm that the [client] had had.  It is in this way, by reference to the circumstances of the particular case, that one solves the question about with what degree of generality the ‘business of the kind carried on by the firm’ is to be described.[46]

[46]Ibid [301].

1. However the test is stated, the scope of the partners ostensible authority remain as stated by Baron Parke in Brettel v Williams:

One partner does communicate to the other [LJ Ex reports this as ‘others’], simply by the creation of that relation, and as incident thereto, all the authority necessary to carry on their partnership in its ordinary course, (see Hawtayne v Bourne)[47] and all such authority as is usually exercised by partners in the same sort of trade, but no more.  To allow one partner to bind another by contracts out of the apparent scope of the partnership dealings, because they were reasonable acts towards effecting the partnership purposes, would be attended with great danger.[48]

[47](1841) 7 M&W 595.

[48]Brettel v Williams (1849) 4 Exch 623, 630. Approved by Owen CJ in Eq in The Union Bank of Australia v Fisher (1893) 14 NSWR Eq 241, 15;  and in Seiwa Australia Pty Ltd v Beard (2009) 75 NSWLR 74, [283] (Campbell JA).

In the usual way

1. Even if the act of the partner is within the scope of the partnership’s business, it will not bind his co-partners where the partner’s mode of conducting the business is so unusual or extraordinary as to be outside his or her authority.  Hodges J in Goldberg v Jenkins & Law,[49] stated the principle governing a partner’s power to bind his co-partners in these terms:

In my opinion, a partner can only bind his co-partners by conducting the business in a way in which businesses are ordinarily conducted, and consequently he has not, in my opinion, authority to go outside the ordinary mode of dealing and the ordinary mode of transacting business.[50]

[49](1889) 15 VLR 36.

[50]Ibid 38–39.

1. The rationale for the rule is that the extraordinary manner of carrying out the transaction should put the other party to it on inquiry as to the authority of the partner with whom he or she is dealing.[51]

   [51]KL Fletcher, The Law of Partnership in Australia, (Lawbook Co, 9^th Edition, 2007), 165; Goldberg v Jenkins & Law (1889) 15 VLR 36; Siewa Australia Pty Ltd v Beard (2009) 75 NSWLR 74 (Campbell JA).

1. The appellants submitted that for an act to bind the partners, it is not sufficient that the act was a convenient means of carrying on a business of that nature.  The act must be reasonably necessary to carry on the partnership business of that kind.

1. In The Union Bank of Australia v Fisher,[52] Manning J said:

Lindley LJ, in his work on Partnership, (referring to the 5th ed (1888) W Maxwell & Son] at p 126), shews (and his very language has been judicially adopted by North J, in the case of [In re Cunningham & Co Ltd (1887)] 36 Ch D 532 at 538) that necessity is the limit of authority.  He says: ‘It will be observed that what is necessary to carry on the partnership business in the ordinary way is made the test of authority where no actual authority or ratification can be proved’.[53]

[52](1893) 14 NSWR Eq 241.

[53]Ibid 249.

1. We agree with the conclusion of Campbell JA in Seiwa that the proposition that for an act to be usual in a particular kind of business it must be reasonably necessary and not merely convenient, for the carrying on of that type of business, is too wide.[54]  An act will bind the firm if it be an act of the type that it is usual for the firm to perform, even though there is no necessity for that specific act to be undertaken in order to carry on that type of business of the firm.  As Campbell JA states:

The type of necessity that was involved in The Union Bank of Australia v Fisher was of a more focused type — it looked at what was necessary to carry out a particular task that the solicitor had agreed, in the course of carrying out business that is of the kind that the firm carries on, to carry out.  It accepted that the drawing of abstracts of title was part of the usual conduct of a solicitor's business, and accepted that preparation of an abstract required the solicitor to have access to the deeds, so that the relevant details could be copied and included in the abstract.  What The Union Bank of Australia v Fisher held was not necessary was to borrow the original of the deeds from someone who held the deeds as their security for a mortgage by deposit of title deeds.  The point is expressed by A'Beckett CJ in Beyfus v Greene (1855) 1 VLT 174 at 175:

‘These and other cases, whilst upholding the general principle that one partner has authority to bind the rest in regard to partnership transactions, in the ordinary modes of creating such obligations, show that when these modes are departed from, an authority must be proved in respect of the whole [that is, from all the partners] before the act of one will bind the remainder.’

A different type of necessity, which is really a species of implied actual authority, exists in relation to those acts that are necessary to carry on the business that has been expressly agreed to be carried on.[55]

[54]Seiwa Australia Pty Ltd v Beard (2009) 75 NSWLR 74, [291].

[55]Ibid 92 [294].

1. We do not accept the appellants’ contention that the act must be capable of being characterised as ‘reasonably necessary’ before the partner’s act can fall within the scope of his or her ostensible authority to bind the firm.  Accepting that the requirement of reasonable necessity may arise in cases where the partner is performing an individual task of the kind specifically carried on by the partnership, that is not the present case.

Conclusion on ostensible authority

1. The respondents had pleaded ostensible authority and relied upon it at trial.  They maintained in their written submissions on appeal that the trial judge had been correct to rely upon the tax cases and to conclude that Samuel Lederberger had ostensible authority.  Their written submissions were to the effect that attention to taxation affairs was so connected to the business of the Partnership that it should be objectively regarded as within the scope of the Partnership business.  During the course of oral argument senior counsel for the respondents announced that he would no longer seek to support the judgment at first instance in the ground that Samuel Lederberger had ostensible authority.

1. Samuel Lederberger stated that for some time prior to his father’s death and thereafter, he and his brother, then he alone, had run and managed the business.  Throughout that period, up until the investment in the Blue Gum scheme, the exclusive activity of the business was the importing, wholesaling and selling of camping goods.  The business had never invested in any tax effective schemes in the past or been involved in any agricultural activity.  As we have noted, in late 2003, Samuel Lederberger sought to restructure Loaders Traders Pty Ltd so as to protect his personal assets, and via a deed of assignment Samuel assigned to Lederberger Investments all of his interests in the business.  By the declaration of trust Loaders Traders Pty Ltd became the bare trustee for the Partnership.  With those protections in place Samuel Lederberger carried on the Partnership business and eventually entered into the agricultural contracts.  The investment in the tax effective schemes were therefore a particularly unusual activity for the business that had, from the late 1970s at the latest, engaged exclusively in the activity of importing and selling camping goods.  Someone dealing with the Partnership would reasonably understand it to be a camping business.

1. His Honour concluded that ‘[p]articipation in the tax effective scheme was incidental to the partners’ business purposes of maximising business profits and participating in legally available products to reduce a tax liability’ and that ‘[t]here is no meaningful sense in which participation in the tax effective products can be said to be outside the usual way the business of the partners was carried on.’[56]  With respect we cannot agree.  The investment in these agricultural tax effective contracts was so exceptional that it could not be considered business of the kind carried on by the firm nor could it be regarded as business carried on in the usual way by the Partnership.  Whether the contracts be viewed as growing blue gums and olives or reducing taxable profits that exposed the partners to significant and extraordinary liabilities such as the forestation and olive fees which were recorded as non-operating expenses and borrowings recorded as current liabilities, these were not acts for carrying on in the usual way business of a kind carried on by the Partnership.

   [56][2011] VSC 301, [26].

1. In reaching the conclusion that entry into the tax effective agricultural contracts was usual business of the kind carried on by the firm his Honour relied on Cooke v Federal Commissioner of Taxation.[57] Cooke’s case was concerned with the construction of s 51(1) of the Income Tax Assessment Act 1936 (Cth). The third party submitted that if the tax cases were in any sense relevant, they compelled the conclusion – contrary to that reached by his Honour – that the scheme participants carried on a gum or live tree business under the contracts.[58]  Mr May’s evidence was to that effect.  Its primary submission and that of the appellants was, however, that the taxation cases were not relevant to the question whether the contracts were a carrying on in the usual way business of the kind carried on by the firm.   

   [57]See footnotes 34, 35 and 36 of the passage of his reasons which we have set out at [39] above.

   [58]Cooke v FCT (2002) 51 ATR 223, 239–241 [60]–[64]; FCT v Cooke (2004) 55 ATR 183 [50], [66]–[67], [73]; Hance v FCT (2008) 74 ATR 644, [76]–[78], [91].

1. Stone J held in Cooke that for the purposes of s 51(1) business may be carried out through an agent.[59] Section 51(1) provides that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except in certain circumstances not presently relevant. Section 51(1) relates to losses ‘necessarily incurred’ in carrying on of a business. Expenditure ‘necessarily incurred’ in carrying on a business for the purposes of s 51(1) means no more than it was ‘appropriate, plainly adapted for the needs’ of carrying on the relevant business.[60] Carrying on a business so as to satisfy the purpose of s 51 imports different considerations to ‘carrying on in the usual way business of the kind carried on by the firm’ under s 9 of the Partnership Act.

   [59]Cooke v Federal Commissioner of Taxation (2002) 51 ATR 223, [60] (Stone J).

   [60]Commonwealth v Progress Advertising and Press Agency Co Pty Ltd (1910) 10 CLR 457, 469.

1. In our opinion the agricultural tax effective contracts were not business of a kind carried on by the Partnership nor could they be regarded as business carried on in the usual way by the Partnership.The fact that the transactions were for the purpose of ‘maximising business profits’ or ‘reducing a tax liability’ did not render them acts for carrying on in the usual way business of the kind carried on by the Partnership.  The test is ‘business of the kind carried on by the firm’ in the ‘usual way’.  The agricultural contracts did not satisfy that description.

1. Samuel Lederberger had no ostensible authority to invest the partnership’s income in these transactions.

Actual authority

1. Although the issue of implied actual authority was raised by the pleadings, it appears to have received relatively little attention during the trial and hence in his Honour’s reasons.  The appellants contend that his Honour made no finding of actual authority but conflated actual authority with implied authority.  We think that by the following findings his Honour did accept that Samuel Lederberger had actual authority: 

Counsel for MrsLederberger also propounded largely emotive, but unpersuasive, submissions against her liability for partnership debts.  In that vein, her counsel submitted:

‘It would be most unfair if this Court were to hold MrsLederberger, an 89 year old lady, accountable for agricultural business debts, of which she was totally unaware, on the basis that she was committed, unbeknownst to her, to personal liability for those debts by her son Sam.’

Her evidence to support those submissions included other emotive evidence beginning with her birth in Poland in 1921 and broad assertions of a lack of belief in ‘such schemes’ as had been entered into through Mr May.  However, her evidence was also that Mr SamuelLederberger was in charge of the business which she knowingly allowed him to run, and which he did run, on behalf of the partnership created by the Will.[61]

[61]Reasons [27].

1. His Honour then referred to Polkinghorne v Holland[62] and Weyers v Federal Commissioner of Taxation[63] and continued:

Whatever may have been the business experience of MrsLederberger , she undoubtedly knew that a business was being conducted and she knew that it was her son who had the day to day management of it just as her husband did during his lifetime.  MrsLederberger no doubt had full trust and confidence in Mr SamuelLederberger and was permitted fully to act for the partners in that business.  He acted in his capacity as agent forLederberger  Investments and for the estate of which MrsLederberger was the trustee when applying to participate in the Blue Gum and Mediterranean Olives schemes.  MrsLederberger made no case against her son that he exceeded his authority or that he was liable for any loss to which his actions had exposed her.[64]

[62](1934) 51 CLR 143.

[63](2006) 63 ATR 268.

[64]Reasons [27].

1. Mrs Lederberger’s evidence was that she had allowed her son to run the business of the Partnership on her behalf and took no part in its conduct.  That much was clear from her unchallenged evidence, where she stated that ‘[a]s far as I was concerned, the business was my sons’ business after Hirsch died and I left it to them to deal with.’  It was not suggested that Samuel Lederberger consulted with or received any direct authorisation from his mother with regard to entering the agricultural contracts.  They were not discussed with Mrs Lederberger and her approval was not sought.  No actual authority was expressly given by Mrs Lederberger. 

1. Actual authority may be implied.[65]  Extrinsic evidence is admissible to establish both the conduct of the parties and the circumstances of the case in order to determine the nature of the agency relationship.[66]  The circumstances in which implied actual authority can be inferred have been discussed in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd,[67] Hely-Hutchinson v Brayhead,[68] Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd[69] and Cousens v Grayridge Pty Ltd.[70]  In Freeman and Lockyer, Lord Diplock described 'actual' authority as ‘a legal relationship between principal and agent… [i]ts scope is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the course of business between the parties’.[71]

   [65]Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480; Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 133 CLR 72.

   [66]Cousens v Grayridge Pty Ltd [2000] VSCA 96, [6].

   [67][1964] 2 QB 480.

   [68][1968] 1 QB 549.

   [69](1975) 133 CLR 72, 79 (Gibbs, Mason, and Jacobs JJ).

   [70][2000] VSCA 96.

   [71][1964] 2 QB 480, 502.

1. In Hely-Hutchinson v Brayhead,[72] upon which the respondents placed particular reliance, the chairman of the board of directors of the defendant company entered into two contracts on behalf of the company and reported the matter to the board afterwards.  Lord Denning MR (with whom Lord Wilberforce and Lord Pearson agreed), found that the chairman had obtained implied authority through the continued acquiescence of the board.  He explained implied actual authority in these terms:

It is implied when it is inferred from the conduct of the parties and the circumstances of the case, such as when the board of directors appoint one of their number to be managing director.  They thereby impliedly authorise him to do all such things as fall within the usual scope of that office.  Actual authority, express or implied, is binding as between the company and the agent, and also as between the company and others, whether they are within the company or outside it.[73]…

The judge held that [the chairman] had ostensible or apparent authority to make the contract, but I think his findings carry with it the necessary inference that he had also actual authority, such authority being implied from the circumstance that the board by their conduct over many months had acquiesced in his acting as their chief executive and committing [the company] to contracts without the necessity of sanction from the board.[74]

[72][1968] 1 QB 549.

[73]Ibid 583.

[74]Ibid 584.

1. It may be inferred that implied authority has been granted to an agent even in the context of financial decisions of great significance to the company, in circumstances where a principal, such as other board members, have deferred decision-making to that agent.  For example in Equiticorp Finance Ltd v Bank of New Zealand,[75] Clarke and Cripps JJA found that Mr Hawkins, the ‘Chairman’ or ‘Chief Executive of the Equiticorp Group’, had implied authority to use the liquidity reserves of Equiticorp Financial Services Ltd to discharge the debts of a wholly-owned subsidiary.  They noted that not a single instance was cited on which the board of Equiticorp Group had ever failed to comply with a express direction given by Hawkins.  Clarke and Cripps JJA said:

The evidence as to the decision-making mechanisms in place within Equiticorp Financial Services Ltd (Aust) is consistent with the findings of [the trial judge] as to the conduct of Equiticorp Group generally, namely that it was conducted under the general authority of Hawkins to whom was deferred, whether or not after consultation with the more senior members of management, decisions of significance.  We agree with the finding of [the trial judge] that the decision to apply the liquidity reserve of Equiticorp Financial Services Ltd (Aust) was one which Hawkins had implied actual authority to make.[76]

[75](1993) 32 NSWLR 50.

[76]Ibid 138.

1. Cousens v Grayridge Pty Ltd[77] affirmed the statement of principle that any agent has such authority as is to be inferred from the conduct of the parties and the circumstances of the case.[78]

   [77][2000] VSCA 96.

   [78]Ibid [5].

1. The respondents relied upon this line of authority to contend that the trial judge was right to conclude that Mrs Lederberger had given her son Samuel implied actual authority.  They submitted it had been given in two ways.  First, by signing the 2006 trust tax return, which claimed and obtained the benefit of the tax deductions pursuant to entry into the Blue Gum agreements, Mrs Lederberger had given implied actual authority to Samuel to enter into the a further tax scheme – the Mediterranean Olives scheme – in 2007.  Counsel submitted that from that implied authority to enter the 2007 Mediterranean Olives scheme, and Mrs Lederberger’s failure to make any objection to the schemes, the trial judge was entitled to infer that she had given her son actual authority to enter into the Blue Gum scheme in 2006 as well.  The trust’s accountant, Mr Lebovits, had signed the tax agent’s declaration on the 2007 trust tax return, stating that the tax return had been prepared in accordance with information supplied by the taxpayer, Mrs Lederberger, and that Mrs Lederberger had authorised the tax agent to lodge the tax return.  The tax declaration was submitted as evidence that Mrs Lederberger knew what she was signing, was aware of the ramifications of the Blue Gum scheme and had, by implication, given actual authority to Samuel Lederberger in relation to the Blue Gum scheme and the Mediterranean Olives scheme.

1. Alternatively, the respondents contended that Mrs Lederberger had acquiesced to her son Samuel running the business as he saw fit, which gave him implied actual authority to enter into the tax effective scheme.  They relied upon that part of Mrs Lederberger’s evidence contained in her witness statement in which she said that in mid 2003 ‘Sam and Bob told me that they had decided that Bob would leave the business and that Sam would continue to run it on his own.  I was not part of the decision making process.’

1. However, any acquiescence on the part of a principal is confined to acts done in the usual course of business.  As stated in Hely-Hutchinson, where a principal, in that case a board of directors, grants implied actual authority to an agent, they ‘thereby impliedly authorise him to do all such things as fall within the usual scope of that office.’[79]  The scope of the authority is not so broad as to authorise the agent to do any act whatsoever.  An inference that actual authority has been conferred will depend upon what has been permitted to happen without demur.  The inference will not be open from conduct of which the partner was wholly unaware and which she had no reason to suspect or anticipate.[80]

   [79][1968] 1 QB 549, 583 (Lord Denning MR).

   [80]Bank of New Zealand v Fiberi Pty Ltd (1992) 8 ASCR 790, 802 (Allen J).

1. Mrs Lederberger’s conduct did not amount to an implied authority to do things that fell outside the usual scope of Samuel’s authority.  For the reasons we have given in dealing with ostensible authority, these contracts fell outside the ordinary course of the partnership business.  The trial judge, in our respectful opinion, was in error in inferring from Mrs Lederberger’s acquiescence in Samuel Lederberger’s conduct of the partnership business that he had implied actual authority to enter these agricultural contracts.

1. The argument that implied actual authority could be inferred from Mrs Lederberger’s signature on the 2006 trust tax return, together with Mr Lebovits’ declaration that she as the taxpayer had provided him with information is refuted by her own witness statement:

I never realised that my late husband’s estate was a partner and I never thought that I was involved at all.  I just thought that I was entitled to a third of the income from the business as a living allowance.  I didn’t understand why I needed to sign it but I signed it because [Mr Samuel Lederberger] or [Mr Lebovits] asked me to sign….I didn’t know anything about the management of the business as my two sons initially, and later Sam on his own, were responsible for it.  I didn’t see any accounts.  I was not provided with any documents.  I was not given any reports regarding the business.  As far as I was concerned, the business was my sons’ business after Hirsch died and I left it to them to deal with.  I was just given a living allowance as I needed something to live on and that was all.

1. Mrs Lederberger was not cross-examined on the evidence provided in her witness statement.  She gave unchallenged evidence that she signed the trust tax return but ‘didn’t know anything about it’.  Not only did she not know anything about the contents of the trust tax return or the tax benefits obtained as a result of entry into the Blue Gum scheme, but she was also unaware that the trust of her late husband’s estate was part of a partnership.

1. Furthermore, the decision by Samuel Lederberger to enter into the tax effective schemes was conduct of which Mrs Lederberger was wholly unaware and had no reason to anticipate.  Mr Lederberger acknowledged that prior to the tax effective schemes, the business had engaged in no activity other than the wholesaling, importing and selling of camping goods.  Mrs Lederberger did not give implied authority to Samuel Lederberger to enter into the contracts with the respondents.

1. The third party also contended that his Honour erred in concluding that Mr May was authorised by the partners to sign the contracts pursuant to the powers of attorney.  It pointed to the fact that each power of attorney did not on its face indicate that the grantor was Mrs Lederberger or the Estate, Lederberger Investments or the Partnership.  As the power of attorney was not executed by all or any of the partners it was submitted that in the absence of consent by Mrs Lederberger, she could not be bound by Mr May’s conduct.[81]  The respondents answer was that as Mr May acted with the actual authority of Mrs Lederberger, which amounted to consent, any formal deficiency in the power of attorney would not matter.  As we have concluded that the respondents failed to establish such actual authority it is unnecessary to further consider this issue.

   [81]Dal Pont, Powers of Attorney (Lexis Nexis, 2011), [3-37];  Collier and Lindsay, Powers of Attorney in Australia and New Zealand (The Federation Press, 1992), 85.

Ratification[82]

[82]Grounds 4, 5 and 5A in the Amended Notice of Appeal.

1. The trial judge found that even if either Mr May or Samuel Lederberger had acted without the necessary authority, Mrs Lederberger had subsequently ratified any unauthorised entry into the contracts by signing the 2006 trust tax return and obtaining the benefit of the deduction in tax liability as a result of the partnership’s investment in the tax effective scheme.  In addition to this positive act of signing the 2006 tax return, the trial judge relied upon other matters as indicia of an implicit sanctioning of her son’s actions.  His Honour also concluded that if Mrs Lederberger objected to the schemes, she ought to have filed an amended tax return.  He said:[83]

In this case the evidence all points to ratification of any unauthorised entry into the agreements pursuant to the power of attorney by Lederberger Investments, by Mrs Lederberger and by Mr Samuel Lederberger.  Mrs Lederberger left the running of the business to Mr Samuel Lederberger and Lederberger Investments.  It was Mr Samuel Lederberger who was the natural person responsible for management of the affairs of the partnership.  This fact was known to Mrs Lederberger and was clear from her testimony as well as that of Mr Samuel Lederberger.  The tax returns claimed the losses on the investments and secured the benefits which the investments were designed to provide…  In doing so both the accountant and Mr Samuel Lederberger by express statements and conduct ratified on behalf of the partners the agreements entered into pursuant to the powers of attorney.  No amended returns had been filed suggesting that the expenses were not allowable as deductions for the partners as they had been claimed.  Mrs Lederberger prepared and signed the 2006 trust tax return further ratifying the contracts from which she obtained financial benefit.

[83]Reasons [28].

1. Ratification can be inferred from silence or acquiescence.  But for a principal to ratify the unauthorised transactions of an agent, the evidence must establish that the principal had full knowledge of all the material circumstances in which the unauthorised transactions were made and thereby consciously sanctioned the agent’s unauthorised act.  Silence or acquiescence will not constitute ratification absent proof of a knowing acceptance sufficient to be treated in equity as an assent to what would otherwise be an infringement of rights.[84]  The evidence must establish knowledge by the principal which enables his or her subsequent inaction to be seen as an adoptive act[85] or consciously sanctioned.[86]

   [84]Orr v Ford (1989) 167 CLR 316, 337 (Deane J).

   [85]Tobin v Melrose [1951] SASR 139, 147 (Ligertwood J).

   [86]Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56, [62] (Young CJ in Eq).

1. The respondents rely upon Mrs Lederberger’s signature on the 2006 return as ratification of the Blue Gum scheme contract and prospective authorisation that Sam could enter the Mediterranean Olives scheme contract.  They also rely on the trial judge’s conclusion that the accountant’s declaration on the 2007 tax return and Samuel’s signature constituted further evidence of ratification by Mrs Lederberger.  They rely upon his Honour’s finding that Mrs Lederberger did not seek to amend the tax returns.

1. As to the last of these matters, the appellants claim that Mrs Lederberger was not put on notice that such an allegation would be made and that it was not raised in the pleadings or by evidence.  They submitted that procedural fairness precluded the making of the finding made by the trial judge.  The question of ratification was raised in the respondents’ reply and in the amended issue list.  However the failure to amend the tax returns was not specifically identified as ratification.  It is not clear whether it was specifically raised during the respondents’ submissions or whether it was the subject of objection.  For reasons which we shall explain, we have concluded that the evidence did not permit the conclusion that the Partnership’s entry into these contracts was ratified.  It is unnecessary, therefore, to consider whether his Honour’s finding gave rise to procedural unfairness.   

1. The only evidence provided by Mrs Lederberger in her statement was to the effect that she signed the original return at the request of her son or the accountant without knowing anything about it or understanding why she needed to sign it.  She said in her statement that she was never involved in the business, did not see any accounts and was not a business person.  Mrs Lederberger’s evidence was that she had no knowledge of the tax effective schemes and was unaware that the Estate formed part of a partnership.  She said that she had not seen any documents relating to those schemes and that had she known, she would have advised her son against getting involved.  Her witness statement included the following:

I had no idea, until after Sam told me that he had gotten into trouble with Tom May, about any involvement in managed investment schemes concerning olives or blue gums.  I didn’t know anything about those schemes.  I have not seen any documents in relation to those schemes.  I don’t believe in such schemes.  I don’t understand how they work and I don’t like them.  I only found out later that Sam had gone into them and I couldn’t do anything about it.  Had I known that Sam was considering going into those schemes, I would have told him that I was against it.

1. It was not suggested at trial by any witness that the information in the Estate’s return came from her.  The appellants point to the fact that in any event the tax returns contain no reference to the contracts or the tax schemes to which they relate.  The probable inference from all of the evidence is that information in all of the relevant returns came from Samuel Lederberger who alone had a detailed knowledge of the affairs of the partnership and who dealt with the accountant.

1. Mrs Lederberger’s evidence in chief was constituted by her witness statement.  It was conceded on the appeal that senior counsel at trial had made a forensic decision not to require Mrs Lederberger, then an elderly lady, to attend for cross- examination.  Whether or not the respondents invited the trial judge not to act upon parts of her evidence, invited him to draw inferences from other facts which were inconsistent with her evidence and invited him to draw inferences that she had ratified the contracts, it is clear that she was denied any opportunity to respond to any of those matters.  Although a failure to comply with the rule in Browne v Dunn[87] – a complaint which is the subject of a discrete ground of appeal – does not preclude the tribunal of fact from relying upon any evidence affected by the breach of the rule, the breach should be taken into account in assessing the evidence on the issues to which the breach relates.  There is no indication in the reasons for judgment that any allowance was made for these matters.  Rather, in drawing the inference of ratification the trial judge attached no or little weight to her unchallenged evidence in chief. 

   [87](1829) 57 ER 909.

1. In our view, particularly in the face of her uncontradicted evidence, no inference of authorisation or ratification could be drawn from the fact that Mrs Lederberger signed the 2006 return.  We accept the appellants’ submission that there was a paucity of evidence to establish that Mrs Lederberger had a knowledge of the contracts.  The acts of the accountant and her son, as agent, in relation to the 2007 return could not constitute ratification by Mrs Lederberger, as principal, of Samuel’s unauthorised acts.[88]  Moreover, there was no explanation before the trial judge or this court as to how Samuel Lederberger came to sign the Estate’s 2007 return.

   [88]Jones v Peters [1948] VLR 331, 335 (Herring CJ).

1. His Honour’s finding that Mrs Lederberger had ratified the investments by failing to amend the 2006 trust tax returns once she knew of the scheme is unsustainable.  It is inconsistent with Mrs Lederberger’s evidence that once she found out what Sam had done, she didn’t believe there was anything she could do about it.  Even if her evidence in chief could be put to one side, the bare fact that the returns were not amended does not support an inference of ratification.[89]

   [89]          In oral argument it was acknowledged that had there been consideration given to amending the returns, there were factors other than ratification that could explain why no amendments were sought. 

1. It is not possible to infer from Mrs Lederberger’s evidence that she had full knowledge of the partnership’s involvement in the tax effective scheme and acquiesced to the scheme on that basis.  The state of the evidence does not support any inference of ratification.  Had the respondents wished to establish ratification, at the very least they were obliged to challenge Mrs Lederberger’s claim that she knew nothing about the schemes by cross examination.

Third party claim[90]

[90]Grounds 6–9 in the Amended Notice of Appeal.

Duty of care

1. By her Third Party Statement of Claim, Mrs Lederberger alleged that:

1)   At all relevant times, Sterling & Sheink knew of the following facts and circumstances:

a)   Mrs Lederberger was an elderly Polish lady, aged 82 years, with no prior business experience who had never worked in the Business and had no capacity to do so;

b)   during his lifetime, her deceased husband, Hirsch, carried on the Business as a sole trader, and their sons, Israel and Samuel Lederberger, worked as employees in the Business;

c)   the deceased died on 16 August 2000;

d)     clause 2 of the deceased’s will provided that a two-thirds interest in the Business should vest in Israel and Samuel Lederberger as tenants in common in equal shares; the remaining one-third interest in the Business should be held by Mrs Lederberger as trustee for life, to pay the income therefrom to herself for life; and, after her death, that one-third interest should also vest in Israel and Samuel Lederberger as tenants in common in equal shares;

e)   for some time after the deceased’s death, Israel and Samuel Lederberger carried on the Business as if it were their own, without reference to Mrs Lederberger;

f)    in or about mid-2003, Samuel Lederberger, on the recommendation of Mr Lebovits of Green & Sternfeld Pty Ltd, chartered accountants, resolved to bring about a grant of probate of the will, and the consequent vesting of ownership of the Business in accordance with the will, so that he could:

·      purchase Israel Lederberger’s one third interest in the Business and thereby obtain effective control of the Business;

·    assign the resulting two-thirds interest in the Business to Lederberger Investments Pty Ltd, which was a company he controlled;

·    thereafter, control the carrying on of the Business as a partnership between Lederberger Investments Pty Ltd as the owner of a two-thirds interest in the Business and Mrs Lederberger as trustee of the remaining one third interest in the Business, using Loaders Traders Pty Ltd, another company which he controlled, as bare trustee for or agent of the partnership; and

·    thereby, shield himself from any personal liability for the debts of the Business;

g)   to achieve those ends, Samuel Lederberger retained Mr Granek of Sterling & Sheink to draw, and Mr Granek drew, a sale of business agreement for the purchase by Samuel Lederberger of Israel Lederberger’s one-third interest in the Business; a deed of assignment for Samuel Lederberger to assign his resulting two-thirds interest in the Business to Lederberger Investments Pty Ltd; and a declaration of trust to record the appointment of Loaders Traders Pty Ltd as bare trustee for the partnership;

with the result that:

h)     if and after probate of the will were granted, the Business would operate under the control of Samuel Lederberger, in a structure calculated to ensure that he would not be personally liable for any of the debts of the Business, while Mrs Lederberger, as trustee of a one third interest in the Business, would be personally liable for all of the debts of the Business.

2)   In or about August 2003, Mrs Lederberger retained Sterling & Sheink as solicitors to advise and act for her in proving the will and in obtaining a grant of probate as executrix of his will.

3)    It was an implied term of the retainer that Sterling & Sheink would act with due skill and care.

4)   Sterling & Sheink failed to advise her that by obtaining probate of the will she would expose herself to personal liability for the debts of the Business and neglected to advise her that, if she wished to obtain a grant of probate, she ought take steps to exclude herself from personal liability for the debts of the Business by means of suitable contractual provisions.

5)   Sterling & Sheink thereby breached the implied term of due skill and care and further or alternatively were negligent. 

1. At trial it was not in issue that Mrs Lederberger retained Sterling & Sheink as she alleged and that it was an implied term of their retainer that they would perform the retainer with due care and responsibility.  It was also not in issue that Sterling & Sheink knew of the facts and circumstances set out above and yet did not advise her of them or that, if she obtained probate of the will, she would thereby expose herself to personal liability for the debts of the Business. 

1. In their defence to the third party statement of claim, Sterling & Sheink denied that they had thereby breached the implied term of due care and responsibility and denied that they were negligent.  During her closing address, however, counsel who then appeared for Sterling & Sheink told the judge that she would not be contending that Sterling & Sheink did not breach the implied term and were not negligent in failing to advise Mrs Lederberger that by ‘entering into a trusteeship [she] could be personally liable for the trust’.  Counsel said that she would put the defence solely on the basis that:

…the nexus between that breach of retainer and a negligence verdict is broken by two factors…

The first factor is that, in fact, the effect of a breach of retainer in not telling a party that they could be personally liable for the trust of which they have become the trustee is a general proposition.  The actual factors that would lead to Mrs Lederberger being liable in fact is the result of contractual factors that break the nexus.

1. Counsel then added by way of explication that what she meant by ‘contractual factors’ was the partnership’s entry into the Blue Gum and Mediterranean Olive tax avoidance schemes in 2006 and 2007 and that she would be contending that Sterling & Sheink’s negligence was not causative of the losses associated with those schemes, because such losses were not a foreseeable consequence of the negligence: 

it [was] not foreseeable that a contractor [was] going to enter into contracts [with the plaintiff] of these kinds.  In fact, that [the entry into the contracts] only arose in 2006 and 2007, and it would be extraordinary to hold a solicitor liable for a failure to give general advice in the terms pleaded against it.

…

the first defendant, in its submissions, says that certain work was done after 2003, which we don’t deny.  My point is the contracts [the Blue Gum and Mediterranean Olive scheme documents], [were] never put to the solicitor to advise upon, the manner in which the first defendant may be held to be liable may take paths that I don’t anticipate.  So one can go no further than saying that it is not foreseeable; it is separate; no damage arising.

…

… Depending on what it is about the contracts that your Honour finds that might hold Mrs Lederberger liable, the bottom line will be that Mr Granek [of Sterling & Sheink] didn’t advise in respect of that, wasn’t told in respect of that, and it does appear to be a rather repetitive statement.

If your Honour otherwise takes the view, though that the genesis of all of this might have been avoided by Mr Granek, in the first place, letting her know she might be personally liable, then nothing I can say undoes that.  So we are, as it were, we are cleft between the two forks.  All I can say is that, in fact by saying Mr Granek should have told his client that she might be personally liable, we say that might have avoided a position whereby she would join [the partnership].  But a general statement exposing her, that she might be joined, is not relevant damages to complete the cause of action…

1. Unsurprisingly, counsel for Mrs Lederberger proceeded in accordance with those concessions, with the result that the only issue left to the judge for determination on the third party claim was one of causation: whether Sterling & Sheink’s failure to advise Mrs Lederberger of her potential exposure to personal liability for the debts and other liabilities of the Business caused her to suffer the loss incurred by reason of the partnership’s subsequent entry into the two tax avoidance schemes.

1. The judge decided that issue in favour of Sterling & Sheink.  His Honour did so on the basis that he was not persuaded by Mrs Lederberger’s uncontested testimony[91] that, had she been advised she would be personally liable for the debts of the Business, she would not have accepted appointment as executrix.  His Honour, went on to add, however, that, if Mrs Lederberger’s testimony were taken at face value, it would still not establish a ‘causative link’ between Sterling & Sheink’s failure to warn and the loss which Mrs Lederberger suffered; because the loss was too remote.

   [91]Discussed in greater detail below.

1. Evidently, the judge reasoned that, so far as the contractual claim for breach of retainer was concerned, the applicable principle was the first rule in Hadley v Baxendale[92] and, in his Honour’s view, ‘The loss occasioned from the partnership’s participation in the Blue Gum and Mediterranean Olives scheme was far from flowing from the ‘usual course of things’.  Then, as to the claim in negligence, his Honour stated that the controlling principle was the ‘common sense’ test of causation adumbrated in March v E & M H Stramare Pty Ltd[93] and, after essaying the test, he concluded that:

It may readily be accepted that Mr Granek ought to have advised his client about the exposure to personal risk by becoming trustee of an estate in partnership with others of a business conducted by her but the failure to do so cannot be said to have caused the loss arising from the decisions made by her son in the course of running the business in which she was a partner.  The solicitor’s failure does not become for Mrs Lederberger a tortious[94] indemnity for all risks and losses arising from her role as trustee…[95]

[92][1843-60] All ER Rep 461; (1854) 9 Ex 341.

[93](1991) 171 CLR 506 (‘March v Stramare’).

[94]It appears in his Honour’s reasons as ‘tortuous’, but that cannot be what he meant.

[95]Reasons, [36].

1. It appears that counsel did not remind the judge that, with effect from 13 December 2003, s 51 of the Wrongs Act 1958 replaced the March v Stramare ‘common sense’ test of causation with a two part test of factual causation[96] and whether it is appropriate for the scope of the negligent person’s liability to extend to the harm so caused. Nor does it appear that counsel reminded his Honour that, as a result of s 44 of the Wrongs Act, the s 51 two part test of causation applies to all claims for damages for negligence,[97] regardless of whether the claim is brought in tort, in contract, under statute or otherwise.  Consequently, his Honour’s analysis proceeded upon a misconception of the law and must be rejected. 

   [96]In effect, the but for test.

   [97]Subject to the exceptions delineated in s 45.

1. Counsel for Sterling & Sheink sought to uphold his Honour’s judgment by arguing that, apart from the issue of causation, his Honour ‘erred in law and fact’ in holding that Sterling & Sheink ‘owed … a duty of care to [Mrs Lederberger] to warn her about her exposure to personal risk and liability for the debts of the Partnership by becoming trustee of her late husband’s estate’.

1. We reject the argument.  It flies in the face of the concessions which counsel for Sterling & Schenk made in final address and is opposed to the way in which the case was decided.  It would be unfair to Mrs Lederberger to decide this appeal on a basis so different from the way in which the case was argued below[98] and it would be less than satisfactory to attempt a determinative consideration of the question of duty on the basis of facts and law which the judge was never called upon to consider.

   [98]Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 438; Coulton v Holcombe (1986) 162 CLR 1, 8; Geelong Permanent Building Society (in Liq) v Encel [1996] 1 VR 594, 604–7; Whisprun Pty Ltd v Dixon (2003) 200 ALR 447, 461 [51]–[52].

1. Counsel for Sterling & Sheink submitted that it was not clear that trial counsel made any concession as to the existence of duty or breach or that the judge understood that either point to be conceded.  That submission is untenable.  It is plain from the passages of the transcript to which we have referred that both duty and breach were conceded, and it is plain from the balance of the transcript that the trial of the third party claim was conducted on that basis.

1. Alternatively, counsel for Sterling & Sheink argued, if the better view be that the existence of duty was conceded, the concession ought be construed as limited to a duty to warn Mrs Lederberger that, by accepting appointment as trustee, she would be exposing herself to liabilities incurred in carrying on in the usual way, a business of the kind ordinarily conducted by the partnership. 

1. That proposition is equally misplaced.  It is apparent from the passages of the transcript to which we have referred that trial counsel did not dispute that Sterling & Sheink were under a duty to warn Mrs Lederberger that, if she accepted appointment as executrix, she would be personally liable for the debts of the Business; and it is clear from the passages of his Honour’s reasons to which we have referred that his Honour understood the concession to be just that.

1. Counsel for Sterling & Sheink argued in the further alternative that, since foreseeabilty goes to both duty and breach, and since trial counsel put foreseeability squarely in issue, it was not unfair for Sterling & Sheink now to contend that, because of an absence of foreseeability, no duty arose. 

1. That argument is misconceived, too. The concept of foreseeability in the identification of duty is different from foreseeability in the determination of causation.  At common law, foreseeability involves an abstract and, in a sense, ‘undemanding test of foreseeability’[99] which imports broad considerations of ‘principle and policy’,[100] ‘the totality of the relationship between the parties’,[101] the ‘fact-value complex’ and ‘questions of fairness, policy, practicality, proportion, expense and justice’[102] and ultimately, in England[103] although not in terms in Australia,[104] the identification of what is ‘fair, just and reasonable’.[105]  With causation, foreseeability directs attention to the ‘Shirt calculus’[106] and, therefore, ultimately to an analysis which is distinctly more precise and fact specific.[107] These considerations are in effect now codified in Division 2 of Part X of the Wrongs Act.[108]

   [99]Vairy v Wyong Shire Council (2005) 223 CLR 422, 446 [71] (Gummow J).

   [100]Crimmins v Stevedoring Industry Finance Committee (1999) 200 CLR 1, 32 [73] (McHugh J).

   [101]Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540, 596 [145] (Gleeson CJ).

   [102]Swain v Waverly Municipal Council (2005) 220 CLR 517, 547–8 [79] (McHugh J).

   [103]Caparo Industries Plc v Dickman [1990] 2 AC 605, 618; D v East Berkshire Community Health NHS Trust [2005] 2 AC 373, 387 [24].

   [104]Cf Sullivan v Moody (2001) 207 CLR 562, 582–3 [49]–[53] (Gummow J).

   [105]Vairy v Wyong Shire Council (2005) 223 CLR 422, 444 [66] (Gummow J); State of New South Wales v Fahy (2007) 232 CLR 486, 505 [57] (Gummow and Hayne JJ).

   [106]Wyong Shire Council v Shirt (1980) 146 CLR 40, 47–8 (Mason J).

   [107]Vairy v Wyong Shire Council (2005) 223 CLR 422, 447 [72] (Gummow J).

   [108]See ss 48–50, and 58–60 as to duty and ss 51–56 as to causation.

1. In our view, this appeal should be decided on the basis of Sterling & Sheink’s concession that it owed Mrs Lederberger a duty to warn her that, if she accepted appointment as executrix, she would be personally liable for the debts of the Business; and that Sterling & Sheink negligently breached that duty by failing to warn her that she would be so liable.

1. In case the matter goes further, however, we add that, if duty were in issue, we would in any event be disposed to hold that Sterling & Sheink owed Mrs Lederberg a duty of care in the circumstances alleged, to advise her that, by accepting appointment as executrix, she would be exposing herself to personal liability for the debts of the Business and that, because of the arrangements into which Samuel Lederberger had entered, she would be the only natural person directly exposed to those liabilities.

1. Contrary to submissions which were advanced on behalf of Sterling & Sheink, it has long been accepted that a solicitor should make clear to his client the legal effect of a step which the client is proposing to take.[109]  Accordingly, if, as in this case, a solicitor is retained generally to act in a client’s interests in relation to a transaction into which the client is proposing to enter – here, obtaining probate and consequently accepting appointment qua trustee as a member of the partnership – the solicitor is bound to go through the contractual documents – here, at least the will read in light of the circumstances which were known to obtain – and explain to the client in terms she is likely to understand the rights and obligations to which it will subject her.[110]  Especially is that so where, as here, the client is inexperienced in the relevant area[111] or the documents are in unusual form.[112]  Furthermore, even where a client is not lacking in sophistication, but the relationship between the solicitor and the client is one which suggests that the client is reliant on the solicitor for such advice as may be required, there is a duty on the solicitor to give that sort of advice[113] and it may arise whether or not the advice is specifically sought.[114] 

   [109]Re A Solicitor, ex parte Incorporated Law Society (1895) 39 Sol J 219, 220 (Pollock B).

   [110]Fox v Everingham & Howard (1983) 50 ALR 337, 341 (Woodward, Muirhead and Sheppard JJ).

   [111]Caradine Properties Ltd v D J Freeman & Co (1989) 5 Const LJ 267 (Denning MR); Flenley and Leech, Solicitors’ Negligence [1.10]; Boden v Gordon (Unreported, Supreme Court of Queensland, McPherson J, 1 September 1983).

   [112]Sykes v Midland Bank Executor & Trustee Co Ltd [1971] 1 QB 113, 124B.

   [113]Austrust Ltd v Astley (1996) 67 SASR 207, 227–8, reversed on appeal, but not on this point, (1999) 197 CLR 1.

   [114]Littler v Price [2005] 1 Qd R 275, 281 [37]–[48]; Fox v Everingham & Howard (1983) 50 ALR 337, 341–2; Sykes v Midland Bank Executor & Trustee Co Ltd [1971] 1 QB 113, 124B and 130F.

1. It is sometimes said that the duty is confined to warning on the hidden pitfalls and legal obscurities of the transaction in view and that a solicitor is not required to offer any advice as to its perceived business efficacy.[115]  But it depends on the circumstances of the case.[116]  Where, as here, in the course of performing a retainer a solicitor becomes aware of information which is not confidential and is of potential significance, it is to be expected that the solicitor will draw it to the attention of the client and point out its ramifications.[117]

   [115]Pickersgill v Riley [2004] All ER (D) 407 (Feb) (PC).

   [116]Haigh v Wright Hassall & Co (a firm) [1994] EG (CS) 54.

   [117]Mortgage Express Ltd v Bowerman & Partners [1996] 2 All ER 836, 842.

1. In this case, Sterling & Sheink acted for the deceased and drew his will.  They also acted for Samuel Lederberger and drew the documents for the implementation of the arrangements which he undertook on the advice of Mr Lebovits.  In those circumstances, they should have understood, and it is not disputed they were aware, that the object of the exercise was to insulate Samuel Lederberger from personal exposure to the liabilities of the partnership.  They must also be assumed to have realised that, by accepting appointment as executrix, Mrs Lederberger would be exposing herself to personal liability for the debts of the partnership, and thus that the legal structure into which she was about to go was prima facie unfavourable from her point of view: pregnant with hidden pitfalls and legal obscurities of partnership law of which such an 80 year old laywoman was unlikely to be aware.   

1. There is no suggestion that Mrs Lederberger was or appeared to be anything other than the elderly, immigrant lady as to which she deposed in her witness statement.  Nor is it said that she had any conception of what she was letting herself in for; apart perhaps from a jejune notion that Samuel Lederberger as such would run the business and see to it that she received a living allowance.  This is a case in which a client plainly lacking in sophistication, and so not knowing what specific advice to ask for, was ex facie reliant on her solicitors to advise her in relation to the hidden pitfalls and legal obscurities of accepting appointment as executrix, and thereby entering into a partnership for the debts and liabilities of which she alone would be personally liable.    

1. It would not have been at all burdensome or impractical for Sterling & Sheink to frame and render the advice which was required.  Nor, apart from some desultory submissions by counsel for Sterling & Sheink – to the effect that the court ought be hesitant about imposing new heads of liability on solicitors who are not specifically instructed to advise upon risks – has it been suggested that there are any reasons of policy which militate against the existence of a duty to advise in the circumstances of this case.  And, in point of principle, this case does not involve the recognition of a new head of liability.  On its facts, it falls within the ambit of the established duty of a solicitor to make clear to his client the legal effect of a transaction into which the client is proposing to enter and so to explain the hidden pitfalls and legal obscurities of what is proposed.[118]

   [118]Pickersgill v Riley [2004] All ER (D) 407 (Feb) (PC).

1. In the result, it seems to us that, whether the question of duty is conceived of in terms of principle, or in light of the totality of the relationship between the parties, or as a reflex of fairness, policy, practicality, proportion and expense, or indeed as coming within an established head of liability, it is reasonable to require that Sterling & Sheink have had in contemplation the risk to Mrs Lederberger of being held personally liable for the debts of the Business; and, therefore, they were under a duty to warn her against it. 

Causation

1. As we have noted above, the trial judge dealt with the issue of causation in the following terms:

It may readily be accepted that Mr Granek ought to have advised his client about the exposure to personal risk by becoming trustee of an estate in partnership with others of a business conducted by her son but the failure to do so cannot be said to have caused the loss arising from the decisions made by her son in the course of running the business in which she was a partner.  The solicitor’s failure does not become for Mrs Lederberger a tortuous indemnity for all risks and losses arising from her role as trustee.  The outcome might, of course, have been entirely different if Mr Granek, or his firm, had been asked to act on her behalf in entering into the transactions with the plaintiffs and he had failed to advise her about the risks that might arise from her role as trustee in entering into the transactions as partner.  Such a situation would have been more analogous to that in the Austrust case upon which she relied than the facts which actually occurred.[119]

[119]Reasons [36].

1. Mrs Lederberger gave the following unchallenged evidence regarding her retainer with Sterling & Sheink at trial:

If Mr Granek had told me that I would be responsible personally for debts of the business, I would have said to him that unless there was a way that I could receive a third of the income without being responsible, then I wanted no income from the business and nothing to do with it.  I love my sons, but there is no way in the world that I would have put my personal assets at risk for a business that I had no understanding of, control over or involvement with.[120]

[120]Reasons [34].

1. Mrs Lederberger’s evidence – that Sterling & Sheink’s breach of duty was the cause of Mrs Lederberger’s liability – was admitted without objection or cross-examination.  His Honour was not invited by any party to reject Mrs Lederberger’s evidence and no submission was made by Sterling & Sheink that Mrs Lederberger’s testimony was insufficient evidence that the firm’s failure to warn was a cause of her liability under the relevant contracts.  It was submitted by the appellants that the corollary to the common law rule of fairness applied in Browne v Dunn should have led his Honour not to reject Mrs Lederberger’s unchallenged evidence.

1. The appellants also contend that, having found that Sterling & Sheink had breached its duty of care by failing to warn Mrs Lederberger about her exposure to personal risk and liability for the debts of the business upon becoming trustee of her late husband’s estate, his Honour ought to have concluded that this breach of duty was a cause of Mrs Lederberger’s liability to the respondents, and that Mrs Lederberger’s liability fell within an area of foreseeable risk of loss.

1. Sections 51 and 52 of the Wrongs Act1958 deal with causation in negligence claims.  These sections provide:

51.  General principles

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

(a)that the negligence was a necessary condition of the occurrence 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.

52.  Burden of proof

In determining liability for negligence, the plaintiff always bears the burden of proving, on the balance of probabilities, any fact relevant to the issue of causation.

1. ‘Harm’ is defined in s 43 of the Wrongs Act to mean ‘harm of any kind and includes … economic loss’. Further, s 44 of the Wrongs Act provides for ss 51 and 52 to have application ‘to any claim for damages resulting from negligence, regardless of whether the claim is brought in tort, in contract, under statute or otherwise’. Section 51 is central to the question of causation in Mrs Lederberger’s claim against Sterling & Sheink.[121]

   [121]Cf Adeels Palace Pty Ltd v Moubarak (2009) 239 CLR 420, 433 [15].

1. In Adeels Palace Pty Ltd v Moubarak,[122] the High Court had to consider the operation of s 5D of the Civil Liability Act 2002 (NSW). Section 5D of the Civil Liability Act is the New South Wales equivalent of s 51 of the Wrongs Act.[123]  The Court said:[124]

Section 5D(1) of that Act divides the determination of whether negligence caused particular harm into two elements: factual causation and scope of liability.

Dividing the issue of causation in this way expresses the relevant questions in a way that may differ from what was said by Mason CJ, in March v E & M H Stramare Pty Ltd,[125] to be the common law’s approach to causation.  The references[126] in March v Stramare to causation being ‘ultimately a matter of common sense’ were evidently intended to disapprove the proposition ‘that value judgment has, or should have, no part to play in resolving causation as an issue of fact’. By contrast, s 5D(1) treats factual causation and scope of liability as separate and distinct issues.

It is not necessary to examine whether or to what extent the approach to causation described in March v Stramare might lead to a conclusion about factual causation different from the conclusion that should be reached by applying s 5D(1). It is sufficient to observe that, in cases where the Civil Liability Act or equivalent statutes are engaged, it is the applicable statutory provision that must be applied.

Next it is necessary to observe that the first of the two elements identified in s 5D(1) (factual causation) is determined by the ‘but for’ test: but for the negligent act or omission, would the harm have occurred?[127]

[122](2009) 239 CLR 420.

[123]The text of the sections is identical, save in two respects. First, while s 51(2) contains the words ‘in an appropriate case’, s 5D(2) contains the words ‘in an exceptional case’. Secondly, while s 5D(3) mirrors the subjective test set out in s 51(3), s 5D(3) goes on to provide that ‘any statement made by the person after suffering the harm about what he or she would have done is inadmissible except to the extent (if any) that the statement is against his or her interest’.

[124](2009) 239 CLR 420, 440.

[125]March v E & M H Stramare Pty Ltd (1991) 171 CLR 506.

[126]Ibid 515; quoting from Fitzgerald v Penn (1954) 91 CLR 268, 277.

[127]Footnotes in original.

1. In Adeels Palace, the Court concluded that factual causation was not made out. While there was a discussion about the operation of s 5D(2), the Court was not called upon to consider the provisions in s 5D dealing with the scope of liability.

1. In Mrs Lederberger’s witness statement (which, as we have noted, was tendered without objection and without any requirement for Mrs Lederberger to attend for cross-examination), Mrs Lederberger stated on the issue of causation:

Mr Granek never told me, either at that meeting or at all, that I had any responsibility for the debts of the business and I didn’t think that I did.  If Mr Granek had told me that I would be responsible personally for debts of the business, I would have said to him that unless there was a way that I could receive a third of the income without being responsible, then I wanted no income from the business and nothing to do with it.  I love my sons, but there is no way in the world that I would have put my personal assets at risk for a business that I had no understanding of, control over or involvement with.[128]

[128]While s 5D(3)(b) of the Civil Liability Act2002 (NSW) might have rendered such a statement inadmissible in a proceeding governed by that Act, as we have noted above, s 51 of the Wrongs Act contains no such provision.

1. Mrs Lederberger was, as we have said, not cross-examined at trial – and thus she was not challenged in respect of this evidence.  In argument before us, counsel for Sterling & Sheink sought to meet this problem for his client by two different arguments.  First, it was contended that there was no point in cross-examining Mrs Lederberger because it was in effect agreed that Mrs Lederberger had no recollection of relevant matters.  However, when one examines the relevant part of the transcript, it is clear, for the reasons we have already given, that there was no such agreement.

1. Secondly, counsel for Sterling & Sheink put the proposition ‘Well what else would you expect her to say’.  From this, we were invited to conclude that no weight should be given to Mrs Lederberger’s evidence on the question of causation because it was heavily infected with the hindsight of what had occurred subsequent to the grant of probate.  Specifically, reliance was placed upon statements in a number of High Court judgments to the effect that evidence of what a person would have done if warned, given with hindsight, is ‘so hypothetical, self-serving and speculative as to deserve little (if any) weight, at least in most circumstances’.[129]

   [129]Hoyts Pty Ltd v Burns (2003) 77 ALJR 1934, [54]; see also Chappel v Hart (1998) 195 CLR 232, 272–273; Rosenberg v Percival (2001) 205 CLR 434, [16], [24], [26], [109], [155] and [158]; .

1. Undoubtedly, there are cases in which a Court would give little, if any, weight to hindsight evidence of the kind referred to in the authorities relied upon by Sterling & Sheink’s counsel.  However, this case is not one of them.  In our view, having regard to Mrs Lederberger’s background and the circumstances we have already described, Mrs Lederberger’s evidence is entirely credible.  It was, at the very least, incumbent upon any party who wished to challenge her evidence on this issue to put the matter squarely in issue at trial and to seek to cross-examine her.  This was not done.  The trial judge was bound to take this into account when assessing the weight to be attached to her evidence.

1. As we have noted, s 51 of the Wrongs Act was not cited to the trial judge.[130]  As a result of this, his Honour expressed no conclusions or reasoning in respect of factual causation and the scope of liability as defined in that section.  However, all parties to this appeal agreed that this Court was in as good a position as the trial judge to determine causation.

   [130]Indeed, no section of the Wrongs Act was cited to his Honour.

1. In our view, factual causation was made out.  We do not think it was open to his Honour to reject Mrs Lederberger’s evidence that if she had been told that she would be personally responsible for debts of the business, she would not have taken out probate.  It follows that, but for Mr Granek’s breach of duty,[131] Mrs Lederberger’s personal assets would not have been put at risk.

   [131]Adeels Palace Pty Ltd v Moubarak (2009) 239 CLR 420, [45].

1. Of greater difficulty is the question of the scope of liability.[132]  For the purposes of determining the scope of liability, this Court is required to consider (amongst other relevant things) whether or not and why responsibility for the claimed harm should be imposed on the negligent party.[133]  Having regard to our conclusions in respect of the principal claim, we can state our conclusions with respect to the scope of liability briefly.

   [132]Cf s 51(1)(b) of the Wrongs Act.

   [133]Cf s 51(4) of the Wrongs Act.

1. On one level, it might be said that Mr Granek was only required to advise Mrs Lederberger that her personal assets might be at risk in respect of the debts of the business if she took out a grant of probate. So limited, it could be contended that any liability Mrs Lederberger might have had in respect of the transactions the subject of this appeal could only arise by a subsequent conferral of actual authority on Samuel Lederberger or a subsequent ratification of a transaction entered into by him. As such, it arguably follows that any losses caused to Mrs Lederberger by the transactions the subject of this appeal could not be within the scope of liability as defined in s 51 of the Wrongs Act.

1. However, in our view, such an approach is too narrow.  Had Mrs Lederberger been found to be liable in respect of the transactions entered into by Samuel Lederberger, then this liability would have come about because she was a partner in the business who had, by her conduct, ratified the relevant transactions.  None of this could have occurred if Mr Granek had not been in breach of the duty he owed to her.  This is so because if Mrs Lederberger had been given proper advice, she would not have been a partner and Samuel Lederberger would not have purported to act as her agent.[134]

   [134]See Freidin v St Laurent (2007) 17 VR 439, [31]–[34] (Chernov JA, with whom Callaway and Buchanan JJA agreed). But cf Hribar v Wells (1995) 64 SASR 129, 130 (King CJ). See further, Gorris v Scott (1874) LR 9 Ex 125; Close v Steel Co of Wales Limited [1962] AC 367; Henville v Walker (2001) 206 CLR 459, [100]–[103] (McHugh J).

1. In supporting the trial judge’s conclusions on this issue, counsel for Sterling & Sheink submitted that Mr Granek’s failure could not reasonably expose him or his firm to a liability requiring Mrs Lederberger to be indemnified for all risks and losses arising from her role as trustee.  Such a submission has a superficial attractiveness about it.  The problem is that Sterling & Sheink chose not to cross-examine Mrs Lederberger at trial.  Had they cross-examined Mrs Lederberger at trial, it is very likely they would have been able to limit any liability they might have by reference to what was likely to have been shown to be Mrs Lederberger’s developing state of knowledge concerning the business and its operations after probate was taken out.  It is, of course, beyond argument that Mrs Lederberger could not, on any view of the facts, simply seek to recover all losses for all time brought about by Mr Granek’s breach of duty.  That said, it is sufficient for the purposes of this case to say that if we had found that Mrs Lederberger had a liability in respect of the transactions the subject of this proceeding, then she would have been able to recover damages in respect of that liability from Sterling & Sheink because the damage claimed was within the scope of liability of the solicitors having regard to the content of the duty of care owed by them to Mrs Lederberger.

Conclusion

1. In the result, we shall allow the appeal and set aside the judgment below.  In lieu thereof we shall order that the plaintiff’s claim against Mrs Lederberger be dismissed and that Mrs Lederberger’s third party claim against Sterling & Sheink be dismissed.  We shall hear counsel as to costs.

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