Local Court of New South Wales CITATION: GIO Finance Ltd v Windfarm Pty Ltd [2005] NSWLC 4 JURISDICTION: Civil GIO Finance Ltd PARTIES: Windfarm Pty Ltd Defendant Alexa Mia Pty Ltd 1st Third Party Robert Gellert & Benedict Noonan practising as Lang, Gellert & Noonan solicitors 2nd Third Party FILE NUMBER: 8829/99 PLACE OF HEARING: Downing Centre DATE OF DECISION: 05/20/2004 MAGISTRATE: Magistrate H Dillon CATCHWORDS: Negligence - Solicitor's Duty of Care LEGISLATION CITED: CASES CITED: Rogers v Whitaker (1992) 175 CLR 479 REPRESENTATION: J .J Millar T.J Morahan ORDERS: Judgment These proceedings have a curious history. They were commenced by GIO Finance Ltd ("GIO") against Windfarm Pty Ltd ("Windfarm") in 1999. Windfarm was the vendor of a newsagency in Coogee and lessor of a photocopier from GIO. Alexa Mia Pty Ltd ("Alexa Mia") was the purchaser of the newsagency business. Alexa Mia was joined as First Third Party by Windfarm. The solicitors which had represented Windfarm in the sale of the business were also joined by Windfarm as Second Third Parties. On 21 December 2001, I gave judgment for GIO as against Windfarm but found for Windfarm in the Third Party action against Alexa Mia. My reasons for decision were published on that day. Alexa Mia subsequently successfully appealed to the Supreme Court. The action as between Windfarm and the solicitors, however, was adjourned part-heard with liberty to restore. The matter came on for hearing on 29 April 2004 and this decision concerns only that vestigial part of the proceedings. It is necessary, however, to refer to certain parts of my previous judgment and also to the decision of Dowd J in the Supreme Court. Windfarm has joined the second third party, the firm of solicitors which acted on the sale of the business to Alexa Mia. In summary, it asserts that the solicitors were instructed by Windfarm to do all things necessary and take all reasonable steps to prepare the Agreement for Sale of Business to Alexa Mia. It asserts that the solicitors were bound by their duty of care to warn and advise Windfarm about the consequences of entering the Agreement for Sale of Business without adequate provision being made for the assignment of the lease of the copier upon terms which would relieve Windfarm of liability in respect of the copier. Finally, Windfarm asserts that the solicitors breached their duty of care and their contractual and fiduciary duties by drafting the Agreement without the necessary express provisions concerning the assignment of the lease and in failing to warn and advise Windfarm of the consequences of entering the Agreement upon the terms drafted and, in particular, failing to advise Windfarm not to complete the Agreement until satisfactory arrangements had been made with the purchaser to procure the assignment of the lease. In short, Windfarm alleges that the solicitors were negligent and breached the terms of the retainer agreement with Windfarm. The firm denies any negligence or breach of its duty of care or its contractual and fiduciary duties. Evidence was not given by any member of the firm and no other evidence was tendered. In relation to the action as between Windfarm and the Second Third Parties, I made the error, in my decision of 21 December 2001, of purporting to determine the action. Fortunately, I was saved from a worse mistake by the alertness of counsel who correctly pointed out that I had, up to that time only reserved judgment in the other actions but remained part-heard in this one. I amended the written reasons I delivered to reflect that situation but probably, in hindsight, should have deleted the section dealing with the action between Windfarm and the solicitors in its entirety. In argument before me on 29 April 2004, Mr Morahan, for the solicitors, urged me not to resile from the comments I had published previously and Mr Millar, for Windfarm, was courteous enough to invite me to do so without, however, demanding that I eat humble pie. Despite the courtesy of counsel for both parties I think that an apology for my prematurity is in order. It was a mistake which ought not to have occurred and that needs to be plainly acknowledged. Fortunately, any potential harm done or prejudice caused has now been cured by the opportunity taken by the parties to fully ventilate their arguments. The facts in the case were summarised in my decision of 21 December 2001 but it is necessary to refer again to some of those findings to determine this case. (On 3 January 2003, Dowd J, in upholding the appeal of Alexia Mia against my decision, confirmed the relevant findings of fact I had made but held, in effect, that the corporate veil shielded the directors of that company.) I will refrain from considering again the evidence which resulted in those findings except insofar as is necessary here. Windfarm's case against Alexa Mia was, as I stated in my decision of 21 December 2001, based on an understanding that, when Alexa Mia purchased the Coogee Bay newsagency from Windfarm, the written contract would provide that each party do all things reasonably necessary to achieve the assignment of the lease of GIO Finance's photocopier from GIO to Alexa Mia. The uncontradicted evidence given by Elizabeth Ruz is that, in September 1998, she gave instructions to Mr Ben Noonan concerning the sale of the business. He then prepared a draft Agreement for Sale of Business. Ms Ruz's evidence was that she had specifically drawn the question of the photocopier to Mr Noonan's attention whilst the Agreement was under preparation. The Agreement was prepared and ultimately signed without any reference to the photocopier in it despite Windfarm specifically noting the details on a document headed "Information Required for Preparation of Contracts" (a schedule of fixtures and other items to be included in the sale of the business). The Agreement was executed on 2 October 1998. Later that month, before completion of the contract, it came to the notice of Windfarm's solicitors that no provision had been made in the Agreement for the assignment of the lease of the photocopier. This led to something of a flurry of activity, including negotiations with GIO Finance, culminating in a letter dated 23 October 1998from Lang, Gellert & Noonan to Alexa Mia's solicitors and a response on 26 October 1998. Lang, Gellert and Noonan wrote: Further to our telephone conversation we confirm that included in the sale is a Nashua 3522 photocopier which is leased from GIO Finance Ltd. We attach photocopier of the Lease Agreement… The Vendor will undertake to do all things necessary to assign their interest in the aforesaid photocopier as from the date of settlement and will indemnify the purchaser for any monies owing under the lease to the date of settlement. Will the purchaser proceed to settlement accepting this undertaking and providing a similar undertaking of its own? Alexa Mia's solicitors responded: We refer to your letter of 23 October 1998 and confirm our client's mutual undertaking in relation to the lease for the photocopier. After the sale was completed, Alexa Mia's directors refused to provide directors' guarantees to GIO Finance, effectively scuttling the proposed assignment of the lease from Windfarm to Alexa Mia because the assignment was conditional upon such guarantees being provided. Whether or not they were entitled to seek refuge behind the corporate veil, the directors of Alexa Mia dishonourably reneged on a deal they had made on behalf of Alexa Mia. Windfarm argues that the second Third Party was negligent in a number of respects, and that, as a result, it suffered loss. The loss it was occasioned, it is said, was the full amount in damages that it was ordered to pay GIO Finance in the first part of this action decided on 21 December 2001. These were particularised in the Third Party. In summary, Windfarm alleges, first, that the Second Third Party breached its duty of care to it in failing to draw the Agreement for Sale of Business to ensure that, on completion, Windfarm would be released from all liability in respect of the photocopier or that Alexia Mia would be bound to take assignment of the lease or, alternatively, would be bound to indemnify Windfarm for any liability or losses in relation to the photocopier. Secondly, Windfarm alleges that its solicitors fail properly to advise it that completion should be delayed until Alexa Mia had done all things necessary to secure the assignment and GIO Finance had consented to the assignment of the lease. Thirdly, Windfarm alleges that, once it became clear in November 1998 that Alexia Mia would not indemnify it, a conflict of interest arose for the Second Third Party. It further alleges that the Second Third Party ought immediately to have withdrawn, enabling Windfarm to seek independent advice and representation and avoiding the imposition of costs orders made against it in the sum of $3000 on 30 March 2000 and on 1 May 2000 in the sum of $360 when the matter was necessarily adjourned because of the conflict and a failure on the part of the Second Third Party to hand over the relevant files and papers in a timely fashion. Windfarm therefore claims the sum awarded against it as a result of my decision of 21 December 2001 and the amount of the costs orders made against it. There is no dispute on the part of Lang, Gellert & Noonan that a duty of care was owed by the firm to its client, Windfarm. It does not deny that a mistake was made in not including a clause providing for assignment of the lease in the original Agreement for Sale of Business. Its position, however, is that the default was cured by the letters of 23 and 26 October 1998 and that Windfarm's loss was not a consequence of the original error. The standard of care required of professionals and skilled persons is well-established. In Rogers v Whitaker the High Court said (1992) 175 CLR 479 at [12]. The decision in Rogers v Whitaker amounted to a rejection of the so-called Bolam principle (see Bolam v Friern Hospital Management Committee [1957] 1 WLR 582; [1957] 2 All ER 118). In Sidaway v Governors of Bethlehem Royal Hospital [1985] AC 871 at 881, the Bolam principle was stated by Lord Scarman in the following terms: "The Bolam principle may be formulated as a rule that a doctor is not negligent if he acts in accordance with a practice accepted at the time as proper by a responsible body of medical opinion even though other doctors adopt a different practice.": In Australia, it has been accepted that the standard of care to be observed by a person with some special skill or competence is that of the ordinary skilled person exercising and professing to have that special skill. But that standard is not determined solely or even primarily by reference to the practice followed or supported by a responsible body of opinion in the relevant profession or trade… the courts have adopted the principle that, while evidence of acceptable medical practice is a useful guide for the courts, it is for the courts to adjudicate on what is the appropriate standard of care… (Citations omitted.) Mr Cornelius dealt with a number of assumptions and hypotheses. He gave evidence concerning Agreements for Sale of Business. In short, his evidence was that it was the common practice for the understanding reached by the parties concerning any chattel leases to be provided for expressly in the Agreement. In relation to assignment of leases he said: The solicitor would discuss the question of the vendor's primary obligation [to the lessor of the chattel] under the lease and could be instructed to seek a release of the vendor's primary obligation under the chattel lease. The way this would be handled would depend to some extend on the attitude of the lessor towards the assignment. Except by arrangement which would involve the payment out of the lease and the granting of a new lease it is unusual for a lessor of chattel equipment to agree to an assignment of the lease to the purchaser of the business. However if this could be achieved then in accordance with common practice the agreement would provide for the assignment of the lease coupled with a promise in the form of a written indemnity from the purchaser to assume responsibility for the vendor's liability under the agreement including liability to pay rentals and to meet any residual, balloon payment, final instalment or payment required to meet the final book value. In accordance with common practice the solicitor would explain that despite the giving of the indemnity a situation might arise in which the lessor did not receive payment from the purchaser in which case the vendor would need to meet that payment and there would be a risk of recovery under the indemnity for the full recovery might not be successful for one reason or another, for example, because the purchaser had become insolvent. In some case where the amounts involved were relatively large the vendor might be advised to seek some alternative security such as a personal guarantee or charge over assets… … a solicitor in identical circumstances [as those obtaining here] would at the very least have included in the agreement provision under which the purchaser was to assume responsibility for the vendor's liabilities under the chattel lease agreement…(Emphasis added). He was asked to comment on a case in which no provision had been made regarding a lease but that the solicitor had sought to rectify the mistake by correspondence in the terms of the letter of 23 and 26 October 1998. He said: Assuming that there was co-operation from the purchaser to the extent that the purchaser had agreed in principle to accept liability to meet the lease payments a solicitor in common practice would try to achieve a result which would evidence an agreement and which would have the same binding effect as would have been the case had an indemnity been included in the agreement. The correspondence which passed between the solicitors may be found to have that effect however in common practice a solicitor in such circumstances would seek to obtain confirmation of the agreement in a way that would leave no room for doubt about the subject. To the extent that the facsimile in reply leaves such doubt the procedure fell short of common practice. Findings and conclusions Counsel for Windfarm submitted that there had been a number of errors made by the Second Third Party. The first, namely the drafting of the Agreement for Sale of Business without reference to the assignment of the photocopier or indemnification of the vendor in respect of the photocopier, is effectively conceded. What is not conceded is that there was any consequential loss. Windfarm then submitted that the letters of 23 and 26 October 1998 were intended by the solicitors to rectify the mistake but in fact compounded it by failing to ensure that Windfarm was indemnified by Alexa Mia (or perhaps its directors). For this submission it relies on the evidence of Mr Cornelius and the findings of fact made by me in my previous judgment and, indeed, the decision of the Supreme Court. Counsel for the Second Third Party submitted, without cavilling in any way with the decision of Dowd J, that a finding based on the letters of October 1998 that the solicitors failed in their duty of care to Windfarm is not clear cut. He relied also on Mr Cornelius who said, in respect of the letters, that "The correspondence which passed between the solicitors may be found to have that effect [of acquiring an indemnity for Windfarm]." DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.