Smoothace Pty Ltd v McInerney, FG
[1996] FCA 667
•4 SEPTEMBER 1996
CATCHWORDS
TRADE PRACTICES - application for damages pursuant to s74 Trade Practices Act 1974 (Cth) - action relates to advice given by solicitors in relation to settlement of an action in Supreme Court - allegations that the solicitors did not supply services reasonably fit for the purpose of representing and safeguarding the interests of the applicants, and did not supply services of such a nature and quality that might reasonably be expected to represent and safeguard the interests of the applicants in the settlement transaction and documentation of the agreement - satisfied further action by the solicitors was appropriate in the circumstances.
SOLICITORS - retainer - application for damages for breach - retainer was to give advice in relation to settlement of Supreme Court proceedings - allegations of negligence, failure to exercise due skill and care - whether applicants knew of the existence of the floating charge - effect of that knowledge - further action by solicitors appropriate in the circumstances.
DAMAGES - necessity to show some real practical connection between breach and losses suffered.
Trade Practices Act 1974 (Cth) s74
Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp (A firm) [1979] 1 Ch 384, cited
Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, considered
Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR 40-822, cited
Brown v The Jam Factory Pty Ltd (1981) 35 ALR 79, cited
Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310, cited
SMOOTHACE PTY LIMITED, DAVID TREGONNING AND KERRIE ANN TREGONNING v
FG McINERNEY, JE DRISCOLL, MA McDONALD and ME DAVIES
No G599 of 1994
Tamberlin J
Sydney
4 September 1996
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. G599 of 1994
GENERAL DIVISION )
BETWEEN: SMOOTHACE PTY LIMITED,
(ACN 050 292 718)
DAVID TREGONNING and
KERRIE ANN TREGONNING
Applicants
AND: F G McINERNEY,
J E DRISCOLL,
M A McDONALD and
M E DAVIES
Respondents
CORAM: TAMBERLIN J
PLACE: SYDNEY
DATED: 4 SEPTEMBER 1996
MINUTE OF ORDERS
THE COURT ORDERS THAT:
The respondents pay the applicants the sum of $48,408, together with interest up to the time of judgment calculated in accordance with the Rules of the Supreme Court of New South Wales.
The respondents pay the applicants' costs of the application.
NOTE: Settlement and entry of orders is dealt with in accordance with Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. G599 of 1994 GENERAL DIVISION )
BETWEEN: SMOOTHACE PTY LIMITED,
(ACN 050 292 718)
DAVID TREGONNING and
KERRIE ANN TREGONNING
Applicants
AND: F G McINERNEY,
J E DRISCOLL,
M A McDONALD and
M E DAVIES
Respondents
CORAM: TAMBERLIN J
PLACE: SYDNEY
DATED: 4 SEPTEMBER 1996
REASONS FOR JUDGMENT
In this matter the applicants claim damages from the defendants under s74 of the Trade Practices Act 1974 (Cth) ("Trade Practices Act") and common law damages in contract.
The individual applicants are shareholders and directors of Smoothace Pty Ltd ("Smoothace"). The respondents are a firm of solicitors practising in Wollongong under the name Maguire and McInerney. At relevant times in 1991-1992 they acted as solicitors for the applicants.
On 9 October 1991, the applicants, who were then plaintiffs in the Equity Division of the New South Wales Supreme Court, agreed to settle an action against a company, Verview Pty Limited ("Verview"), and two individual defendants, Mr Jon Michaels ("Mr Michaels") and Ms Debra Sullivan ("Ms Sullivan") arising from the purchase of a retail children's clothing outlet. The defendants, Mr Michaels and Ms Sullivan were principals of Verview.
The consent orders made by Hodgson J on 9 October 1991 were that the summons and notice of motion be dismissed with no order as to costs. His Honour noted that the parties had made an agreement to settle the proceedings, the salient provisions of which are as follows:
"....
(a)that the first defendant agrees to sell to the first plaintiff, and the first plaintiff agrees to purchase from the first defendant,
(i)the goodwill of a business of selling by retail children's clothing and accessories carried on by the first defendant at Shop 30, Macquarie Centre, Herring Road, North Ryde ("the North Ryde Shop Business");
(ii)all plant, fittings, chattels and fixtures used in connection with the North Ryde Business;
(iii) all stock in trade of the North Ryde
Shop Business existing at the date hereof other than stock in trade purchased by the firstnamed plaintiff; and
(iv)the further stock in trade referred to in sub-paragraph (b) below.
for an aggregate price of $125,000 apportioned as to $35,000 to the stock in trade referred to in sub-paragraph (b) below and as to the remaining $90,000 to items (i), (ii) and (iii) above (Apportioned between them in accordance with the provisions of the form of Agreement referred to in sub-paragraph (c) below).
...
(d)The defendants jointly and severally warrant to the plaintiffs and each of them that the first defendant has, and will at the time of transfer have, unencumbered title to, and right to sell and transfer, the goodwill, plant, fittings, fixtures and stock-in-trade referred to in sub-paragraphs (a) and (b) above.
(e)The plaintiffs and each of them hereby release and forever quit claim, in favour of the first defendant, to all and any right, title and interest which they or any of them may have now, or in the future may have, in respect of the goodwill, plant fittings and chattels, fixtures and stock in trade of a business of the selling by retail of children's clothing and accessories carried on at Shop 319 Westfield Shoppingtown, Chatswood under the name "Coco Kidz" ("the Chatswood Shop Business").
(f)The first defendants release and forever quit claim, in favour of the firstnamed plaintiff, to be paid a sum of $17,114.84 and any other moneys now or hereafter to become payable by the firstnamed plaintiff to the first defendant pursuant to a Franchise Agreement between them dated 26 November 1990 ("The Wollongong Franchise Agreement").
(g)The parties agree to terminate the Wollongong Franchise Agreement as at and from midnight on 8 November 1991, provided that the firstnamed plaintiff shall not have any liability to pay any moneys to the first defendant in respect of sales effected by the firstnamed plaintiff down to 8 November 1991 pursuant to the Wollongong Franchise Agreement or to pay any further moneys to the first defendant pursuant to the terms thereof, notwithstanding the fact that the first defendant shall be entitled to carry on business pursuant to the Wollongong Franchise Agreement down to 8 November 1991.
(h)The defendants shall indemnify and hold harmless the secondnamed plaintiff and the thirdnamed plaintiff in respect of all and any liability which they or either of them may incur to Australia and New Zealand Banking Group Limited pursuant to a guarantee or guarantees given by them and each and either of them to that Bank in respect of any indebtedness and liabilities to the Bank of the first defendant.
(i)The defendants and each of them undertake to use their best endeavours to procure a release and discharge by the said Bank of the secondnamed and thirdnamed plaintiffs in respect of the indebtedness and/or liability referred to in the immediately preceding paragraph.
...
(k)The plaintiffs and each of them shall not, as from 8 November 1991, trade under or by the name "Coco Kidz".
(l)In consideration of the settlement reached, the plaintiffs and each of them release the defendants and each of them, and the defendants and each of them release the plaintiffs and each of them, in respect of the relationship which has previously existed between them including, without limiting the generality of the foregoing, oral agreements alleged to have been made in July and on 26 August 1991.
..." (Emphasis added)
The respondents acted for the applicants on the settlement.
The substance of the claims under the Trade Practices Act and on the retainer are that in rendering professional services to the applicants on and in relation to the above settlement the respondents:
(a)were negligent;
(b) failed to exercise due care and skill;
(c) did not supply services reasonably fit for the purpose of representing and safeguarding the interests of the applicants in relation to the settlement; and
(d)did not supply services of a nature and quality that might reasonably be expected in order to achieve the result of representing and safeguarding the interests of the applicants in the settlement transaction and properly documenting the agreement.
Factual Background
Prior to August 1991 Verview conducted a retail and wholesale clothing business under the franchise trading name "Coco Kidz" from retail outlets at Chatswood, Macquarie Centre, Manly and Darling Harbour. There was also a wholesale outlet at Surrey Hills.
In the period December 1990 to April 1991, the applicants, Mr and Mrs Tregonning, paid to Verview $125,000 with the intention that it would represent fifty percent of a total amount of $250,000 which would pay to Verview in return for a fifty percent shareholding in Verview.
Between May 1991 and 22 August 1991 differences arose between the directors of Verview, Mr Michaels and Ms Sullivan and Mr and Mrs Tregonning.
On or about 22 August, Mr and Mrs Tregonning demanded that Verview repay the sum of $125,000 paid by them.
On 26 August 1991 Mr Michaels said he could not refund the money but suggested a transfer of the business of the shops at Chatswood and Macquarie Centre with everything in them to satisfy the claims.
On 27 August 1991 Mr Tregonning telephoned the respondents. He spoke with Mr McInerney and expressed his view that there was no hope of recovering the sum of $125,000. On his version, Mr Tregonning referred to a proposed agreement whereby he and his wife would take over the Chatswood and Macquarie Centre shops and he indicated to Mr McInerney that he did not trust Mr Michaels, and he asked the respondent to "take care of all the formalities so that everything would be in order and "they would be protected".
Prior to the meeting with Mr McInerney, on or about 28 August, Mr Tregonning decided that Smoothace as trustee of the family trust should take the transfer of the shops.
In fact in August 1991 the applicants were not aware that Verview had executed an equitable charge in favour of the ANZ Banking Group Limited ("ANZ Bank") over all its assets, including the Macquarie Centre and Chatswood shops. Notice of that charge was registered with the Australian Securities Commission on 4 July 1991.
Accordingly, the assets which Smoothace acquired pursuant to the settlement agreement were subject to a charge in favour of the ANZ Bank. Mr Tregonning said that if he had been aware of this charge he would have insisted on the charge being released. If that had not been done he would have sought to rescind the agreement.
On 2 September 1991 Smoothace took possession of the "Coco Kidz" shops at Chatswood and Macquarie Centre. Thereafter Mr and Mrs Tregonning directed the whole of their time and energies to the management and operation of these shops. Mr Tregonning worked as overseer and stock purchaser about forty hours per weeks and Mrs Tregonning was store manager and book-keeper about two days per week.
On or about 1 October 1991, Mr Michaels evicted Smoothace from the Chatswood premises and took possession of all plant, equipment, stock-in-trade and other assets at these premises. On the same day Mr Tregonning gave instructions to Mr McInerney to commence proceedings against Verview and Mr Michaels in the Supreme Court of New South Wales. These were instituted on 1 October 1991 and were listed for directions on 9 October 1991.
Mr Tregonning says that he did not know of the charge until about 19 November 1991 when Mr Ratcliffe, his adviser, told him of the existence of the charge.
Mr and Mrs Tregonning say that at no stage were they advised by Mr McInerney or Mr McDonald, in relation to the existence, legal significance, or effect on their rights and obligations as a result of the charge.
Clause (d) of the terms of settlement quoted above provided for a warranty by Verview, Mr Michaels and Ms Sullivan to the applicants to the effect that Verview, as at 9 October 1991, had an unencumbered title to sell and transfer the goodwill, plant, fittings and fixtures and stock in trade.
It is common ground that a company search of Verview was requested by the respondents on 9 October 1991. The results were obtained by the respondents on 14 October 1991 and the search disclosed a fixed/floating charge imposing a liability of up to $100,000 over all the company's undertaking and assets whatsoever, present and future, including its uncalled capital and uncalled premiums.
It appears that it was the suggestion of counsel for Mr and Mrs Tregonning, Mr Lindgren QC, on 9 October 1991 that the warranty clause should be inserted in the settlement terms and he suggested that a search should be carried out so that if,
in fact, there was an encumbrance then it would be possible to "come back".
Notwithstanding the receipt of the search information, the respondents did not, after 14 October 1991, contact Mr and Mrs Tregonning and advise them of the existence of the charge or of the legal consequences flowing therefrom, nor as to the appropriate course of action for them to take. It must have been obvious that some positive action to advise the applicants was called for on their part because they considered it was important to have the search made.
On 5 November 1991 Mr and Mrs Tregonning sought release from the guarantee to the ANZ Bank but this was refused by the ANZ Bank.
Mr and Mrs Tregonning in fact traded up to 27 February 1992 when the ANZ Bank appointed a receiver. When the receiver for the ANZ Bank took possession of the Macquarie Centre shop, Smoothace had no other premises from which to trade and the business was destroyed.
The Issues
The issues raised for determination are:
Whether the respondents breached their contract with the applicants.
Whether Mr and Mrs Tregonning knew of the floating charge before entering into the terms of settlement on 9 October 1991 and if so, the effect of that knowledge.
Whether the applicants are entitled to claim damages in respect of losses incurred up to 27 February 1992 in continuing to carry on the business.
Whether Mr Tregonning is entitled to claim remuneration in the sum of $10,000 for work performed up to 27 February 1992.
Whether legal costs in proceedings relating to a guarantee to the ANZ Bank are recoverable by the applicants.
Whether the part of an amount of $7,500 received by Mr and Mrs Tregonning in settlement of those proceedings against the ANZ Bank should be off-set against their claim.
I will now turn to these issues.
Liability of the Respondents
The test with respect to the liability of the respondents is what a reasonably competent practitioner would do having regard to the standards normally accepted in his or her profession. The duty of a solicitor is related to the terms of the retainer. See Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp(A firm) [1979] Ch 384 at 403 per Oliver J.
The importance of the terms of the retainer was recently emphasised by the House of Lords in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (the Lloyd's Names case), where Lord Browne-Wilkinson said at 206:
"The existence of an underlying contract (e.g. as between solicitor and client) does not automatically exclude the general duty of care which the law imposes in those who voluntarily assume to act for others. But the nature and terms of the contractual relationship between the parties will be determinative of the scope of responsibility assumed and can, in some cases, exclude any assumption of legal responsibility to the plaintiff for whom the defendant has assumed to act."
At 194 Lord Goff made a statement to similar effect.
According to Mr Tregonning, whose evidence I accept on this point, the terms of the retainer given to the respondents, were as stated in the telephone conversation on 27 August 1991 with Mr McInerney, in which Mr Tregonning said words to the effect that an agreement had been reached with Mr Michaels to take over two of the shops. He broadly described the agreement and went on to say:
"I don't trust Michaels. Will you take care of all the formalities for us so that everything will be in order and we will be protected." (Emphasis added)
Mr McInerney says that he does not recall Mr Tregonning using these words. However, I think it probable that such words were said since the whole object of retaining the respondents was to ensure that the applicants were protected against liability arising from the transactions which were the subject of the settlement. The late insertion of the warranty was specifically directed to this end.
Mr Tregonning states that Mr McInerney assented to his request and suggested that Mr Tregonning call in and see him.
In view of the evidence of Mr Tregonning and his wife and the nature of the transaction together with the conversation testified to by Mr McDonald on 9 October 1991, I am of the opinion that the retainer was not just to draw up any necessary documentation in order to implement a settlement agreement, but that it was to ensure that proper advice was given as to the effect of the agreement so as to protect the interests of Mr and Mrs Tregonning. The retainer, in relation to the settlement, in my view, did not terminate on 9 October 1991. The giving of instructions by the respondents to make the company search and the subsequent receipt of the search
results, in my view, imposed an obligation on the respondent beyond the mere drawing up of the terms of settlement.
I consider that the respondents failed to advise or protect the applicant, and in so doing breached their retainer.
Knowledge of the Charge
There was a substantial amount of evidence concerning the question as to when Mr and Mrs Tregonning first became aware of the existence of the charge.
Although in some respects the evidence is unsatisfactory, I am persuaded that the likelihood is that Mr and Mrs Tregonning were aware in a general way of the existence of the registered charge as at 9 October 1991 but they did not have a proper appreciation of the legal consequences or details of the charge. I accept that at the meeting of 9 October 1991, some reference was made to the ANZ Bank having an encumbrance over the assets of Verview. A decision was made to insert the warranty clause and a search was arranged with a view to coming back if in fact the assets were encumbered.
Evidence was led from Ms Farooz Normoyle, who was during 1991 the Relationship Manager for the ANZ Bank at Caringbah. She wrote a letter to the directors of Verview on 11 September 1991 which reads:
"I refer to our recent meeting with Mr Michaels re above account and letter from Mr & Mrs Tregonning dated 28 August 1991.
I advise that release of Mr & Mrs Tregonning's Unlimited Guarantee in favour of Verview Pty Ltd will only be considered further upon receipt of the following:
-Balance Sheet and Profit & Loss of Verview Pty Ltd as at 30/6/91 including a break up of stock, furniture and fittings etc and trading results for each outlet.
-Budget/Cash Flow Forecast for the remaining business as it will be, should the Chatswood and Macquarie Centre shops transfer to Mr & Mrs Tregonning.
Please note that the Bank holds a Registered Mortgage debenture over all present and future assets, undertakings and unpaid/uncalled capital of Verview Pty Limited.
Please note that accounts of Verview Pty Limited have been stopped since 28th August 1991 due to withdrawal of support of Mr & Mrs Tregonning. Company can now operate on account number 2315-42122 instead until such time that (sic) matter is resolved. Please note that no excesses are allowed on this account and must operate in credit only.
Should you have any queries please feel free to call me.
Yours faithfully
Forooz Normoyle
RELATIONSHIP MANAGER"
(Emphasis added)
A copy of that letter contained an endorsement in the handwriting of Ms Normoyle, which reads:
"COPY SENT TO MR & MRS TREGONNING"
In a subsequent letter of 5 November 1991 to Verview there is typewritten notation that a copy was sent to Mr and Mrs Tregonning. It seems to have been the practice of Ms Normoyle to send copies of relevant correspondence to Mr and Mrs Tregonning.
I am satisfied on this evidence that a copy of the letter of 11 September 1991 was sent to Mr and Mrs Tregonning. Their testimony is that the letter was not received, but I think that the probability is that they received it and this serves to explain the conversation testified to by Mr McDonald on 9 October 1991. The letter indicated that the Bank at that time was holding a registered mortgage debenture over all present and future assets of Verview.
This question is of little importance in the final conclusion, as it is not suggested that any proper comprehensive advice was given to the applicants in relation to the nature and effect of the charge. Moreover, after the results of the search were obtained on 14 October 1991, there was no attempt to give any advice as to the above matters. The respondents must have appreciated that such a charge was contrary to the warranty contained in the terms of settlement and that it was of great importance to their clients, particularly as senior counsel had recommended, at the time of settlement, that that
search be carried out with a view to taking further action if appropriate.
Damages
It is submitted for the respondents that there was no other choice open to the applicants in early October 1991 but to enter into the settlement even knowing of the charge in view of the fact that the sum of $125,000 paid could not be recovered. Therefore any negligence by the respondents did not cause the loss suffered by the applicants.
It is also said that Mr and Mrs Tregonning were confident that the business would be successful and that they would have entered into the arrangement in any event.
In my opinion, if the applicants had been properly advised they could have instituted proceedings for breach of warranty or possibly have taken steps to wind up Verview with a view to having the liquidator set aside the charge under s565 of the Corporations Law as it then stood. These alternatives were effectively foreclosed as a result of the failure by the respondents to properly advise the applicants in accordance with the retainer.
As finally formulated there are three disputed heads of damage claimed. The first is trading losses for sixteen weeks amounting to $28,441; Mr Tregonning's lost wages sixteen weeks in an amount of $6,667; and legal expenses incurred in litigation with the ANZ Bank with respect to the ANZ Bank guarantee which represents $17,050, making a total of $52,158.
The respondents submit that there is no causal connection between the trading losses and the breach, or in the alternative, it is said that the trading losses were too remote.
It is necessary of course to show some real practical connection between the breach complained of and the losses. See Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR 40-822, Brown v The Jam Factory Pty Ltd (1981) 35 ALR 79: Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310.
In my view, there is, in this case, a real practical causal relationship between the losses incurred in trading and the breach. If the applicants had been properly informed as to the implications of the Bank having a charge over all the assets, then it is highly unlikely that the applicants would have continued to trade until the matter was resolved. It was suggested that many small businesses trade in circumstances where the assets of the business are subject to a charge. Many small businesses, of course, finance their activities by using a floating charge. However, the difference in the present case, is that enforcement of the floating charge was dependent upon the performance by Verview of its obligations to the ANZ Bank and not upon performance by Smoothace. In such circumstances, I accept the testimony of Mr and Mrs Tregonning that if they had known of the charge then they would first have required that Verview, Mr Michaels and Ms Sullivan procure a release of the assets from a charge. Failing that, the probability is that they would have ceased to trade.
The trading losses have not been calculated on the basis of the full trading period from 2 September 1991 through to 27 February 1992 but rather for sixteen weeks which takes into account a reasonable time to take steps to get proper advice, pursue the possible procurement of a release and to make a decision as to whether to relinquish the business at the Macquarie Centre shop.
I consider the trading losses are recoverable and are not too remote.
The same reasoning applies in relation to the lost wages of Mr Tregonning which amount to $6,667.
With respect to legal expenses incurred in connection with the collateral ANZ Bank litigation, my conclusion is that the claim ought to be allowed. The position is that on 19 June 1992 the applicants filed a statement of claim against the respondents, the ANZ Bank and the receiver appointed by the ANZ Bank. The claim was that the ANZ Bank had appointed a receiver who had unlawfully taken possession of and trespassed upon the tenancy of Shop 30, Macquarie Centre and exercised control over it and the stock in trade. As a result of which the applicants claimed for loss and damage. It was alleged that the receiver was not lawfully authorised to carry out the acts which he did on the premises.
The statement of claim also alleged that the guarantee which they had given to the ANZ Bank was an unjust contract under the Contracts Review Act 1980 (NSW) which ought to have been set aside. They further alleged breaches of the Trade Practices Act 1974 (Cth) and breach of warranty.
Those proceedings were compromised and a mutual deed of release was executed between the parties on 11 October 1995. The sum of $7,500 was paid by the Bank to the applicants without admission of liability.
In the course of those proceedings costs were incurred which amounted in total to $34,100. The guarantee had been given in respect of the overdraft account of Verview. On 28 August 1991 the applicants applied to have that guarantee released on the basis they were no longer shareholders or directors in Verview. However, the Bank refused to do so.
It is not possible from the scant material furnished to perform any accurate break up of the costs but doing the best I can on the limited material, it is my view that it is not
unreasonable to apportion those costs equally so that a figure of $17,050 should be allowed in respect of this claim.
The applicants agree that the fifty percent of the amount of $7,500 recovered under the settlement of those proceedings should be set off but the respondents contend that the whole amount of $7,500 received on the settlement of the dispute involving the ANZ should be set off.
In my view, since the $7,500 has not in any way been broken up and since it is not possible to accurately apportion the proceeds, I consider the approach taken by the applicant is not an unreasonable one.
Accordingly, with respect to the amount of $7,500 which has been paid, I agree that the appropriate amount to be deducted is $3,750.
Conclusion
My conclusion is that there should be judgment for the applicants in the sum of $48,408 together with interest up to judgment calculated pursuant to the Rules of the Supreme Court of New South Wales. The respondents should pay the applicants' costs.
I certify that this and
the preceding nineteen (19)
pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Tamberlin.
Associate: Date: 4 September 1996
Counsel for Applicant: Mr V R Gray
Solicitor for Applicant: Werry Altobelli
Counsel for Respondent: Mr S Donaldson
Solicitor for Respondent: Mallesons Stephen Jaques
Date of Hearing: 6 & 7 August 1996
Date Judgment Delivered: 4 September 1996
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