The Supreme Court of New South Wales considered a professional negligence claim against a law firm in which the failure to identify a side deed to a lease, during a nine day retainer and a time sensitive and important transaction, resulted in significant losses.
- The duties owed in the conduct of a retainer performed by Maddocks Lawyers for a time sensitive and important transaction, in which the failure to identify a side deed to a lease resulted in a judgment of $13 million in damages payable to the client company (representative of a lost chance) and $344,000 payable to the company directors.
Maddocks Lawyers acted for About Life Pty Ltd (About Life) in the sale of their Double Bay store to Harris Farm for $10 million in April 2017. About Life operated a chain of wholefoods grocery stores, and the sale of the store came at a crucial time for About Life as they were in significant financial difficulty. About Life were in discussions with both Harris Farm and David Jones in respect of a sale of one or two of the About Life stores. On 12 April 2017 one of About Life’s directors, Michael Green, received an offer from David Jones to buy About Life’s Lane Cove and Double Bay stores for $10 million. Also, on 12 April 2017, following commercial discussions and negotiations between About Life and Harris Farm, Harris Farm instructed Herro Solicitors to prepare a contract of sale in which Harris Farm offered to acquire the Double Bay store for $8 million (with the offer to be accepted by 21 April 2017 by About Life returning a signed contract). The sale to Harris Farm was expected to complete by 30 June 2017.
Maddocks’ retainer, the subject of the proceedings, spanned a total of nine days inclusive of the Easter weekend. Mr Green, considering that the size of the transaction warranted the involvement of a major firm such as Maddocks, called Mr McNee a partner of Maddocks who specialised in corporate mergers and acquisitions, capital raising and the buying and selling of companies and assets, on 12 April 2017. Maddocks had acted for About Life once before in respect of proposed capital-raising from existing shareholders earlier in 2017. Mr McNee involved two other partners from Maddocks, Mr Law and Ms Badcock. Ms Badcock had been practicing for 20 years in commercial property transactions.
On the morning of Thursday, 13 April 2017, Mr Green forwarded the contract prepared by Harris Farm’s solicitors to Ms Badcock noting “Please let me know what you think. I’m focused on speed to access funds and certainty”. Mr Green preferred the Harris Farm offer to the David Jones offer as it presented more certainty. The complete contract, including the special conditions and an annexure, was not provided to Ms Badcock until the evening of Thursday 13 April 2017( being the day before the Easter long weekend). The contract was delivered to Ms Badcock by Tammie Phillips, the CEO of About Life.
The annexure to the contract was the Double Bay lease (wherein About Life leased the premises from the Council of the Municipality of Woollahra). The contract of sale included clause 10 that relevantly provided:
10 Vendor’s promises
10.1 The vendor promises that, to the best of the vendor’s knowledge and other than as disclosed in this contract –
10.1.12 anything attached to this contract is accurate and complete;
Ms Badcock, after some communication with Mr Green, stayed back that night to review the contract and provide high level comments as to the “risk to completion of the Harris Farm deal.” This was required as Mr Green communicated that he was needing to get back to various investors the next day (on Good Friday), and pressing the importance as About Life were in a “bad way with our bank”. In her email Ms Badcock dealt with vendor disclosure requirements noting that the purchaser may have a right to rescind the contract if any warranty is breached.
On 20 April 2017 Ms Badcock, after discussions with Mr Green, emailed an amended copy of the contract to Mr Green notably with the price changed to $10 million and striking through clause 10.1.2 because the contract and annexures had been prepared by Harris Farm and not About Life. At 9.23 am on 21 April 2017 Mr Green informed Maddocks that Harris Farm had accepted the amended offer, and eventually it was agreed that the contract exchange would take place later that day. At 4.37pm Ms Badcock sent an email to Ms Phillips, Mr Green and Mr Beecroft (three directors of About Life) attaching an updated copy of the contract, advising of the changes made to the contract since it was signed (the day before). The email specifically noted (amongst 11 other bullet points):
Clause 10.1.2 has been reinstated at the request of the purchaser. Under this clause, About Life gives a warranty that to the best of its knowledge anything attached to the contract is accurate and complete. We are comfortable for this warranty to be provided in relation to the title documents that we have attached. The lease, however, was provided by the purchaser. Are you able to confirm to that to the best of your knowledge it is an accurate and complete copy of the lease? (It appears to be, however, if for example there are any side deeds or variations, then the document is not ‘complete’.) Please also confirm that you agree to provide this warranty in relation to the equipment list that was provided today.
This email was sent 23 minutes before the proposed exchange. Ms Phillips was preparing to leave her office to attend her daughter’s 18th birthday party scheduled for 6pm when the email arrived. Ms Phillips had never had an experience where a contract had been amended after she signed it, and was not expecting to be presented with last minute critical and material changes. Ms Badcock’s email did not make clear the importance of her requests. In response, Ms Phillips provided a copy of the Double Bay lease (a copy of which had not been attached to Ms Badcock’s email) and stated “I personally didn’t provide a copy of the lease to the other party. Attached is the registered lease, is it this version? Agree to warranty in relation to equipment.”
Crucially Ms Badcock’s email did not trigger Ms Phillips’ memory that, in 2014, About Life had entered into a Deed of Agreement with Woolworths providing Woolworths with first right of refusal to the Double Bay premises. When Ms Phillips searched for the Double Bay lease to provide to Ms Badcock she searched for the document by name, rather than entering into the relevant folder of documents on About Life’s shared drive where the Deed of Agreement with Woolworths was also saved. At this point in time Ms Phillips had forgotten about the existence of the Deed entirely, and her evidence in this respect withstood extensive cross examination.
At 6 pm on 21 April 2017 a solicitor from Maddocks attended at Herro Solicitors for a final page turn, and exchanged contracts and a cheque for the $1 million deposit.
On 23 May 2017 Mr Matthew Franich from Woolworths contacted Ms Phillips and asked if About Life had sold the Double Bay store to Harris Farm, to which Ms Phillips confirmed that they had. On 25 May 2017 Mr Franich telephoned Ms Phillips again, with Woolworths legal counsel, and advised her that they had a right of first refusal for the Double Bay store. Ms Phillips remembered the right of first refusal as soon as it was mentioned.
On 30 May 2017 Woolworths sued About Life, Harris Farm and the Council, seeking to restrain About Life from assigning the Double Bay Lease to Harris Farm and seeking a mandatory injunction to require About Life to withdraw the request to Council to consent to the assignment. Woolworths was successful, following which About Life assigned the Double Bay lease to Woolworths in exchange for $10 million less Woolworths’ costs of the proceedings. The funds, received in December 2017, were “too little, too late” for About Life, which was placed into voluntary administration in December 2018 owing $11.8 million.
The decision at trial
Rees J, in a detailed judgment, found that Maddocks performance of their retainer departed from the requisite standard. Rees J considered that Maddocks failed in multiple respects, including in failing to obtain instructions on the key issues in the transaction, failing to obtain copies of the key documents earlier in the transaction and failing to obtain information from the client at the outset as to the background of the transaction and the client’s commercial objective. While Ms Badcock did eventually identify the key issues in the transaction and seek instructions, this request was made late and without any clarity. The email sent 23 minutes before the exchange of documents, with the query nestled amongst 11 other dot points, did not give a stressed and time poor client the “tools that the client needed to understand what was being asked, why it was important, and to give thought to the matter in response to that advice.” Further, the various responses to Ms Badcock’s late email from the three directors (Ms Phillips did not deal with the side deeds query, Mr Beecroft responded generally but not in a specific way and Mr Green did not respond at all) should have caused Ms Badcock to appreciate that the request for instructions had not been understood and Ms Badcock should have taken further steps to explain the key issue and obtain proper instructions.
Rees J found that Maddocks did not discharge its duty to the client to protect their interest in the transaction, and Maddocks therefore failed to discharge its contractual obligations to About Life under the retainer and in negligence.
Rees J also had to grapple with awarding damages for loss of chance, and ultimately determined that the appropriate measure of damages was “the difference between the trajectory which the company took, being external administration, and the trajectory it would have taken if it had entered into a contract with Woolworths at the outset. About Life’s damages are the gap between the two trajectories.” Rees J considered the “difference between the counter factual and About Life’s actual fate as at 30 June 2017” was $15.896 million. This was calculated on the basis of a lost chance of $5.526 million (representing the value of a conveniently timed merger offer from Natural Grocery Co), less 10% to allow for the possibility that offer could have been withdrawn or lowered, and taking About Life’s net liabilities of $11.8 million at its administration in December 2018 and applying a compounding 3.5% monthly discount rate, to arrive at a figure of negative $10.37 million as at 30 June 2017.
Maddocks alleged contributory negligence against About Life asserting that, through its directors, it failed to take reasonable care for its own interest. About Life were found to have been negligent in this respect in relation to their failure to check the company records to ensure that their solicitor had been provided with all the important details about the asset, namely the side deed with Woolworths. Rees J did consider that “Maddocks bore the greater responsibility to elicit this information, should its client fail to volunteer it.” The court reduced the damages payable by Maddocks to About Life by 20% as a result of the contributory negligence.
Maddocks also joined About Life’s directors to the proceedings as concurrent wrongdoers, on the grounds that they failed to discharge their obligations as directors by exercising reasonable care and diligence. The court held that “the factual matrix for About Life’s contributory negligence and the proportionate liability claim against the directors coincide and no further deduction from About Life’s damages should be made on this account.”
Maddocks also contended that the directors of About Life breached their directors’ duties, by adopting a flawed expansion plan which contributed to the financial strife the company found itself in. The court dismissed this argument, adopting the principle applied in Daniels v Anderson (1995) 37NSWLR 48 that “directors must be allowed to make business judgments and business decisions in a spirit of enterprise untrammelled by the concerns of a conservative investment trustee.”
The court also commented that, were it necessary to decide, it would find that Maddocks were liable to Mr Green and Ms Phillips for misleading and deceptive conduct. Rees J found that there was a problem in the circumstances in which Ms Badcock’s email advice was sent, “being shortly before exchange, the lack of information about what was being asked (including elaborating on what was meant by a ‘side deed’), why it was important, and the need (to borrow a phrase) to “STOP AND THINK”. No additional damages were awarded as this overlapped with a finding that Maddocks owed a duty of care to About Life’s directors which was breached, and led to a claim made against the directors by Harris Farm.
Implications for you
When performing professional duties, importance ought to be placed on communicating with the client to obtain appropriate background information, including as to the client’s commercial objectives, identifying whether the urgency of the retainer impacts on the ability to perform the retainer, obtaining full instructions on key issues and ensuring that seeking instructions on key issues is done in a timely manner and with an understanding of the level of knowledge held by the client.