New South Wales Supreme Court CITATION : A. I. McLean Pty Ltd v Hayson [2008] NSWSC 927 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 28, 29 and 30 April 2008, and 1, 5, 6, 7, 8, 12, 13, 14 and 15 May 2008 JUDGMENT DATE : 11 September 2008 JURISDICTION : Equity Division - Commercial List JUDGMENT OF : Bergin J DECISION : Plaintiffs' claims dismissed. Cross-claims dismissed. CATCHWORDS : [OPTIONS] - whether plaintiffs' pleaded method would have amounted to valid exercise of option - whether method would have been achievable in the circumstances - [COMMERCIAL AGREEMENTS] - whether agreement to enter into "similar" agreement in context of a suite of complex arrangements and agreements would have been achieved and/or enforceable/enforced - [NEGLIGENCE] - breadth of lawyers' retainers/duty of care - whether lawyers breached retainers/duty of care - [EVIDENCE] - expert evidence in professional negligence suits against lawyers - reasons therefor - scope of duty/standard of care Civil Liability Act 2002 LEGISLATION CITED : Civil Liability Amendment (Personal Responsibility) Act 2002 Corporations Law 1999 (Cth) Legal Profession Act 1987 CATEGORY : Principal judgment Banque Commerciale SA (in Liq) v Akhil Holdings Ltd (1990) 169 CLR 279 Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1 Bell v Peter Browne & Co (1990) 2 QB 495 Booksan Pty Ltd v Wehbe [2006] NSWCA 3 Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209 BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Brand v Digi-Tech (Australia) Ltd [2002] NSWSC 416 Chappel v Hart (1998) 195 CLR 232 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Daniels v Anderson (1995) 37 NSWLR 438 Dean v Allin [2001] 2 Lloyd's Law Reports 249 Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184; [2004] NSWCA 58 Dunlop v Woollahra Municipal Council [1982] AC 158 F & D Normoyle Pty Limited v Transfield Pty Limited (2005) 63 NSWLR 502 Gore v Montague Mining Pty Ltd [2000] FCA 1214 Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 CASES CITED : Heydon v NRMA Ltd (2000) 51 NSWLR 1 Hicks v Roberts (1977) 16 ALR 466 Hill v van Erp (1997) 188 CLR 159 Imbrahim v Pham [2007] NSWCA 215 Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430 Macidone v Parbery (1994) Aust Torts Rep 81-290 McLean Tecnic v Digi-Tech [2005] NSWSC 386 Midland Bank Trust v Hett Stubbs & Kemp (1979) 1 Ch 384 Notaras v Sly and Weigall (2005) 12 BPR 23,765 Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 Rosenberg v Percival (2001) 205 CLR 434 Tepko Pty Ltd v Water Board (2000) 206 CLR 1 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 Tonitto v Bassal (1992) 28 NSWLR 564 Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 636 Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 WCW Pty Ltd v Bolster & Co, unreported, FCFCA, 6 January 1993 A. I. McLean Pty Ltd (First Plaintiff) McLean Tecnic Pty Ltd (Second Plaintiff) Paul Thomas Hayson & Ors trading as Harris & Co (First Defendant) PARTIES : Mark Coolican Paul & Ors trading as Bartier Perry (Second Defendant) John Hugh Clifford Colvin & Ors trading as Freehill Hollingdale & Page (Third Defendant) Anthony Geoffrey Hartnell & Ors trading as Atanaskovic Hartnell (Fourth Defendant) Peter William Cornelius trading as Peter Cornelius (Cross Defendant) FILE NUMBER(S) : SC 50141 of 2005 B McClintock SC/B Katekar/CH Withers (Plaintiffs) DL Davies SC/MS White (First Defendant) COUNSEL : JC Kelly SC/WV McManus/P Arblaster (Second Defendant) MJ Slattery QC/R Pepper (Third Defendant) TF Bathurst QC/AJ Payne (Fourth Defendant) SD Robb QC/JAN Hogan-Doran (Cross Defendant) Blake Dawson (Plaintiffs) Yeldham Price O'Brien Lusk (First Defendant) SOLICITORS : Colin Biggers & Paisley Laywers (Second Defendant) Malleson Stephen Jaques (Third Defendant) Ebsworth & Ebsworth then HWL Ebsworth Lawyers (Fourth Defendant) Middletons (Cross Defendant) - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST BERGIN J 11 SEPTEMBER 2008 50141 of 2005 A I MCLEAN PTY LIMITED & ANOR v PAUL THOMAS HAYSON AND THE PARTNERS OF HARRIS & COMPANY & ORS JUDGMENT Introduction 1 This litigation arises out of the exercise of options by the first plaintiff, A I McLean Pty Limited (AI McLean), pursuant to Investor Option Agreements between it, as Investor, McLean Tecnic Pty Ltd (McLean Tecnic), the second plaintiff, as Covenantor, and companies within the New Zealand Digi-Tech Group of companies, Digi-Tech Equities Limited (DTEL) and Digi-Tech Communications Limited (DTCL). This Court held that the options were not exercised validly: Graham Leonard Brand & Ors v Digi-Tech (Australia) Limited & Ors; Christopher Gerard Kelliher & Ors v Digi-Tech (Australia) Limited & Ors [2002] NSWSC 416 (Einstein J); Digi-Tech (Australia) Ltd v Brand & Five Ors; Digi-Tech (Australia) Ltd v Kelliher & 3 Ors; Kalifair Pty Ltd & 3 Ors v Digi-Tech (Australia) Ltd & 3 Ors; McLean Tecnic Pty Ltd & 1 Or v Digi-Tech (Australia) Ltd & 3 Ors (2004) 62 IPR 184; [2004] NSWCA 58 (the CA Judgment). The plaintiffs were subsequently held liable to pay Digi-Tech (Australia) Limited (DTAL) approximately $30 million: McLean Tecnic & Anor v Digi-Tech & Ors [2005] NSWSC 386 (McDougall J). 2 The investment involved investors purchasing rights to exploit the intellectual property in two products, known as 'Freerider' and 'Terminal Adapter', in Australia under Sale and Purchase Agreements with DTAL (Sale Agreements). Those products were promoted as enabling simultaneous transactions on the Internet. The investment was promoted as tax effective, with tax deductions available for instalments of the purchase price paid over five years. The proposed arrangement was that the investors would license the purchased rights to an Australian-registered company Digi-Tech Software Pty Limited (DTSPL), established by the investors. The investors had the capacity to exit the investment by exercising an option and obtaining financial "assistance" to make the final "balloon" payment by DTEL paying the Covenantor subscription monies for shares in the Covenantor. 3 The original plan was that the investors would enter into one agreement that would encompass both the Terminal Adapter and Freerider intellectual property. It was envisaged that prior to 30 June 1997 the partnership of investors would contain something in the order of forty people, utilising a number of sub-partnerships to accommodate the law that restricted the number of partners to twenty. Late in the afternoon of 30 June 1997 advice was received from a Queens Counsel that the partnership should preferably contain no more than twenty partners. It was this advice that apparently caused the establishment of two partnerships and the division of the intellectual property into two separate licences. The investors then joined in one of two partnerships, the Freerider Partnership or the Terminal Adapter Partnership according to the products in which they had purchased rights. However there were some investors that joined both partnerships. Those investors that joined both partnerships accordingly entered two Option Agreements; one in the Freerider Partnership and one in the Terminal Adaptor Partnership. 4 In this litigation the plaintiffs claim damages from a number of solicitors allegedly retained to exercise the options and in relation to the exercise the options. The plaintiffs allege, inter alia, that each of the solicitors in breach of their retainers and negligently failed to cause the options to be exercised validly. It is claimed that each of the solicitors knew that McLean Tecnic was a member of both partnerships and that they should have recognised that by reason of that membership there would be a breach of the warranties in clause 4.1(a) and 4.1(b) of the Option Agreements at the time of the exercise of the options, rendering the exercise invalid. The plaintiffs allege that all the solicitors failed to recognise this problem and that they failed to comply with their retainers with the plaintiffs and breached their duties of care to the plaintiffs in failing to exercise the options validly. Each of the defendants cross-claims against each of the other defendants and against PCP for contribution and/or indemnity. 5 It is not suggested by any of the solicitors that at the time of the exercise of the options, they recognised that McLean Tecnic's membership of both partnerships would have, or even may have, amounted to a breach of the warranties in clause 4.1(a) and clause 4.1(b) of the relevant Option Agreement. However notwithstanding previous findings by this Court to the contrary there is a claim that the options were exercised validly. It was submitted that this claim is available, because it is based on arguments not previously raised or brought to the Court's attention. The parties 6 AI McLean holds all the issued capital in McLean Tecnic. The sole director of both plaintiffs is Alan Ian McLean (known as Ian McLean). On 19 September 2005 Mr McLean appointed Neil Singleton and Scott Pascoe as Voluntary Administrators of the plaintiffs under Part 5.3A of the Corporations Act 2001 (Cth) (the Act). On 14 October 2005, the creditors of the plaintiffs resolved under s 439C of the Act that the plaintiffs execute Deeds of Company Arrangement under Part 5.3A of the Act. As at 14 October 2005 DTAL claimed to be a creditor of the plaintiffs in the amount of $31,949,347.10. 7 The firms of solicitors sued by the plaintiffs are Harris & Company, the first defendant (Harris & Co), Bartier Perry Lawyers, the second defendant (Bartier Perry), Freehill Hollingdale & Page, the third defendant (Freehills), and Atanskovic Hartnell, the fourth defendant (ANH). Those defendants have cross-claimed against each other and also against Peter Cornelius & Partners, the cross defendant, (PCP) for contribution and/or indemnity. The individual solicitors within the respective defendant firms who allegedly provided the relevant legal services to the plaintiffs are: Ian Smith from Harris & Co; Oliver Shtein from Bartier Perry; Kevin Broadley, Rebecca Davies, the late Mr Chris Tappere and Catherine Rowe from Freehills; and Diana Chang from ANH. The plaintiffs do not sue the cross defendant PCP, albeit that PCP was obviously instructed by the plaintiffs to provide, and did provide, legal services to them in respect of the transactions the subject of this litigation. The solicitor at PCP who provided those legal services was the late Peter Simms. 8 The matter was heard on 28, 29 and 30 April 2008, and 1, 5, 6, 7, 8, 12, 13, 14 and 15 May 2008. Mr B McClintock SC leading Mr B Katekar, of counsel, and (on 13 and 14 May) Mr CH Withers, of counsel, appeared for the plaintiffs; Mr DL Davies SC leading Mr MS White appeared for Harris & Co, Mr JC Kelly SC leading Mr WV McManus, of counsel, and Mr P Arblaster, of counsel, appeared for Bartier Perry; Mr MJ Slattery QC leading Ms R Pepper, of counsel, appeared for Freehills; Mr TF Bathurst QC leading Mr AJ Payne, of counsel, appeared for ANH; and Mr SD Robb QC leading Mr JAN Hogan-Doran, of counsel, appeared for PCP. Others 9 There were a number of other entities and individuals who were involved in the events that give rise to the allegations made by the plaintiffs against the defendants in these proceedings. The accountants for the plaintiffs were Rost & Kitchener, Chartered Accountants. It appears that the accountant within that firm who provided advice to the plaintiffs was Werner Bali. Gary Urwin became the managing director of DTSPL. John Reid was the director of DTAL and other companies in the Digi-Tech Group. 10 Graham Leonard Brand, a director of Morgan & Banks Investments Pty Ltd (then known as Toltex Human Resources Pty Limited (Toltex)) was also a director of Divome Properties Pty Limited (Divome). Toltex and Divome were major investors in the Freerider Partnership and DTSPL and were referred to at times as the "Morgan & Banks interests". Companies associated with Divome and Toltex were Kalifair Pty Limited (Kalifair) and Kalinick Pty Limited (Kalinick). Christopher Gerard Kelliher was also a major investor in both Partnerships in his own right. Counsel briefed from time to time, were Mr BW Walker SC and Mr I Jackman. Dr John Carter provided consultancy services to Freehills. THE FACTS 11 It will be necessary to deal with specific aspects of the transaction documents later, however at this stage the CA Judgment provides a summary of the documents that were executed by the investors in June 1997: The Partnership Agreements 28 The partners (Investors) in each Partnership agreed to enter into and carry on the business of manufacturing, importing, marketing, distributing and selling the product concerned in Australia (cl 2.1). The Partnership had the right to use the intellectual property rights under the Sale Agreement (cl 2.2). Each partner agreed to maintain their shareholding interest in DTSPL, which was the licensee company, for as long as the partner retained its capital interest (cl 2.4(a)(i)). Each partner agreed to pay all future calls made on the shareholding interest in DTSPL for as long as the partnership interest was retained (cl 2.4(a)). The Sale Agreements 29 DTAL, as the owner of the intellectual property rights to the Products, assigned to each relevant Partnership for five years all its right, title and interest in those rights in respect of Australia, including an exclusive right to use and exploit those rights in Australia in accordance with each Sale Agreement (cl 2.1). 30 "Intellectual Property Rights" were defined to mean all intangible property rights of DTAL relating to the Products including (among others) know-how and trade secrets, whether or not capable of protection by a patent, and the copyright to the relevant software. 31 DTAL was entitled to terminate each Sale Agreement without prejudice to its other rights if the Partnership concerned either committed a material breach which was incapable of being rectified or committed a material breach which was not rectified within a reasonable time after written notice of the breach had been given (cl 4.1). 32 On termination or expiry of each Sale Agreement, each Investor (partner) was required to pay the balloon payment - if it was outstanding (cl 5.3(b)). 33 Each Investor (partner) was required each quarter to make payment of an instalment in respect of the purchase price and a contribution to the capital of DTSPL. The total amount payable by the Investors each quarter was approximately $347,000. 34 The steps required for an Investor (partner) to exercise an option varied depending upon whether the Investor was a corporate body or a natural person. If the Investor was a corporation, generally speaking the option was granted to its holding company. When the option was exercised, the holding company would sell or put the shares in the corporate investor to DTAL. If the Investor was a natural person, it was first necessary for the natural person to transfer his or her interests in the Partnership and shares in DTSPL to a corporate nominee so that the option operated with respect to the shares in that corporate nominee. 35 For an Investor to transfer their interests and obligations under the Sale Agreements, the Investor was required to deliver to DTAL a deed pursuant to which the transferee was bound by the Sale Agreement to perform the obligations of the Investor, i.e. a deed of accession (cl 20.4). The Licence Agreement 36 The Licence Agreement ran in tandem with the term of the Sale Agreement. Pursuant to the Licence Agreement, the parties to the Investor Partnerships licensed to DTSPL the exclusive right to use and exploit the Intellectual Property Rights in Australia. The Individual Option Agreements 37 The Option Agreements required any natural person wishing to exercise an option first to assign his or her interests in the Partnership in question and shares in DTSPL to a corporate nominee. Under the option, DTEL agreed to acquire the shares in the corporate nominee. This structure was adopted to enable the transfer of the interests in each Partnership and the shareholding in DTSPL to occur through a conduit company that had no liabilities. Thus, cl 2.2 provided: "Subject to: (a) the payment of instalments of the Option Fee from time to time as set out in the Schedule; (b) the Investor transferring all of its equity interests (including the Investor Debt and any Instalment Debt) in each of the Investor Partnership and DTSPL in accordance with the Investor Partnership Agreement to the Company; and (c) provided that there is no outstanding breach of the warranties and undertakings in clause 4 of this agreement. the Investor Option may be exercised by the Investor at any time during the Investor Option Period ... " And, in terms of cl 4(b), the investor warranted that, on the date on which the option was exercised, the "Company" would have no indebtedness other than the "Investor Debt" to any person. 38 "Instalment Debt" was defined by reference to the outstanding proportions of the purchase price instalments payable to DTAL. "Investor Debt" was defined to mean "the proportion of the purchase price payable to DTAL pursuant to the Sale Agreement for which the Investor is severally liable less all amounts paid by or on behalf of the Investor to DTAL by way of instalment and the Instalment Debt". Plaintiffs make the Investment – May 1998 12 Mr Simms' file note of 26 March 1998 was in terms that included the following: Newco (McLean Tecnic P/L) must be 100% owned subsid of AI McLean P/L…Each p'ship owns different software. My brief – liability of Ian and coy. Option Agreement…after 2 years [Ian] walk away and outstanding debts written off… Assignment of old partner to Ian (need to know financials – Werner to do). 13 As early as March 1998 Mr Simms was instructed to provide detailed advice on the transaction documents. On 31 March 1998 PCP requested copies of the relevant agreements from DTAL's lawyers, Mallesons, advising that they needed them before they were "able to advise our client in relation to the transaction as a whole". On the same day Mr Simms' file note records: DTAL (NZ Coy) licensed to p/ship to FR/TA. Equity agt. – we will be party DTAL and P/ship get tax write offs instalment payts + balloon payt. Investor (under option) can require DTEL to pay the balloon payt to DTAL… 14 On 2 April 1998 PCP wrote to the solicitors for the parties exiting the partnership who were assigning or transferring their rights to the plaintiffs in terms that included the following: We wish to advise that we act for McLean Tecnic Pty Limited. We have received various draft agreements from Mallesons Stephen Jaques in relation to the assignment of certain partnership interests to our client. We fax warranties which are to be included in the assignment documentation. We are instructed that our client wants to proceed with this matter on an urgent basis and we look forward to your assistance. 15 On 4 April 1998 Mr Simms' file note recorded as follows: *outgoing has to release its option *NB 4.3 assignment what are they? … - outgoing parties will release of option – Mallesons will not be producing it. We have to cover this. - if exercise option don't pay balloon payt comes from "Company Debt". Instalment Debt means instalments 2.3 – get benefit of tax. - collapses all other agreements. 16 On 1 May 1998 PCP wrote to Mallesons advising that they had met with Mr Urwin and agreement had been reached in relation to the various agreements and settlement was proposed to take place in Canberra the following week. 17 The Digi-Tech parties and the outgoing partners recognised that the Partnership Agreements prohibited Partners from assigning their Partnership Interests to unrelated third parties. They also recognised that the Partnership Agreements prohibited unrelated third parties being admitted as new Partners to the Partnerships. Accordingly the Digi-Tech parties and the outgoing Partners entered into Deeds of Variation to the Partnership Agreements which inserted a new clause 14.4A as follows: Each of [the outgoing partners] may assign its Partnership Interest together with its corresponding shareholdings in DTSPL, its rights and obligations under the Sale Agreement and under the licence agreement with DTSPL, and any receivable owed by the Partnership or DTSPL to that Partner for the time being held byu that Partner to McLean Tecnic Pty Limited. 18 The plaintiffs executed the requisite transaction documents on 4 May 1998 in Canberra pursuant to which McLean Tecnic became a partner of both the Terminal Adapter and the Freerider Partnerships. Commercial disagreement – late 1998/early 1999 19 In late 1998 and early 1999 there was disagreement between the investors and DTAL as to who was responsible for the research and development costs of one of the products. That disagreement was not resolved and relationships began to sour. Terminal Adapter Notices of default – 29 January 1999 20 On 29 January 1999 DTAL issued Notices of Default to the members of the Terminal Adapter Partnership alleging breaches of obligations under the Sale and Purchase Agreements. Those alleged breaches included a failure to make payments pursuant to the Licence Agreement and a failure to provide DTAL with audited financial statements. DTAL required the breaches to be remedied within 30 days of the date of service of the Notice. DTSPL retains Harris & Co 21 In February 1999 Mr Urwin informed Mr Smith that DTAL was alleging that the Terminal Adapter Partnership was in default of its obligations under the Sale Agreement. Mr Urwin advised Mr Smith that the Notices of Default had been served by DTAL and requested Mr Smith to provide some advice to DTSPL in relation to the default notice. 22 On 23 February 1999 Harris & Company provided a letter to DTSPL in relation to the work it was requested to provide and the estimate of the costs of that work. That letter described the work as: To advise the company in relation to a default notice issued by Digi-Tech (Australia) Limited. 23 Mr Smith had some discussions with Mr Urwin in relation to how DTSPL should respond to the Notice, however in early March 1999 Mr Urwin advised Mr Smith that the Terminal Adapter Partnership had contacted Mr Kevin Broadley a Partner of Freehills. Freehills Retained 24 On 12 March 1999 Mr Broadley met with Mr Urwin and Mr Smith. In a memorandum to Ms Davies, Mr Broadley wrote: There is a current dispute between the company/partnership and the New Zealand company from whom assets (mainly software) were purchased on 30 June 1997. … As I understand the remaining dispute it is that the New Zealand company says the partnership/company has ongoing obligations to contribute large sums to research and development to the products supplied. The partnership/company deny this, and, further, say they have a claim against the New Zealand company in that the products purchased on 30 June 1997 were underdeveloped and they were mislead about that. The New Zealand company claims that a payment of $56 million due; they say a "balloon" payment due at the end of the contract term, is payable now; this is denied. The company/partnership are prepared to negotiate as it may be in their best interest that the product be improved. They have an outlet in Sydney and have some commitments from Optus and are looking for more business. The current legal question on which they want some necessarily preliminary advice is whether the company/partnership have a legal obligation to expend significant further moneys to assist the New Zealand company's research and development. 25 On 19 March 1999 Rebecca Davies another partner of Freehills wrote to Mr Urwin thanking him for instructing Freehills "on behalf of the Partnership, to advise you in relation to its involvement in arrangements with Digi-Tech Australia". Ms Davies advised that the solicitors at Freehills who would work on the matter included herself, Mr Broadley and Ms Rowe. Conference with Mr Walker SC – 22 March 1999 26 On 19 March 1999 Mr Smith a partner of Harris & Co had a telephone conference with Ms Davies who advised that Freehills would obtain a QC's advice on releasing the covenantors and assigning the investor's interests to a third party. On 22 March 1999 Ms Davies, Ms Rowe, Mr Smith and Mr Urwin met in conference with Mr BW Walker SC. Mr Walker gave advice in relation to the assignment of the investors' interest under clause 20.4 of the Sale and Purchase Agreement (the Sale Agreement). That clause was in the following terms: Transfer of Investors: In the event that an Investor transfers its interest in the Investor Partnership and DTSPL in accordance with clause 14 of the Investor Partnership Agreement and provided that the transfer is not in breach of the Security given by that Investor and that Investor has paid all amounts under clause 6.2 of this Agreement which at the date of the transfer were due and payable (but unpaid) that Investor may transfer its interest and obligations under this Agreement to such transferee by delivering to DTAL: (a) a deed pursuant to which the transferee is bound by this Agreement to perform the obligations of the Investor; and (b) at the option of DTAL, a Security or an effective novation of the existing Security granted by the Investor to DTAL or evidence satisfactory to DTAL that the existing Security granted by the Investor will continue to apply, and thereafter this Agreement will be deemed to be novated so that the transferee will have assumed all the rights and obligations of the transferor as if the transferee was an original Investor and the transferor Investor will have no further rights or obligations under this Agreement. (emphasis added) 27 Mr Walker advised that assuming that the prerequisites (compliance with clause 14 of the Partnership Agreement and payments being made pursuant to clause 6.2) were met, there was no difficulty in transferring the investors' interests to a third party. Mr Walker emphasised the word "thereafter" in the clause and advised that it was only after clause 20.4(a) and (b) were satisfied that the transferor investor was released from liability. Mr Walker also advised that if the investors presented DTAL with a Security and a Novation, DTAL would probably be obliged to reply within approximately 10 working days and could not act unreasonably in refusing to accept a Security or Novation. 28 Ms Rowe made a file note of the conference which included the following: Our clients were concerned if they presented DTAL with the transfer deed and the Security or Novation DTAL would then turn around and terminate the contract for material breach. This was confirmed as a possibility and, of course, the issue will then be whether there has been a material breach and the termination is valid. 29 Mr Walker was also asked to provide advice in relation to clause 11.1 of the Sale Agreement. That clause was in the following terms: 11 COVENANTOR'S LIABILITY 11.1 Guarantee: Each Covenantor hereby unconditionally guarantees to DTAL the due and punctual payment by the Relevant Investor of all moneys becoming due and payable by the Relevant Investor under this Agreement prior to the Guarantee Expiry Date (which will for the avoidance of doubt exclude any money becoming due and payable pursuant to clause 6.5(b)). While as between each Covenantor and the Relevant Investor the Covenantor may be a surety only, the relationship between each Covenantor and DTAL will be deemed to be that of principal debtor and creditor and the Covenantor will not be released from any liability under this clause by any act or thing which would release a surety only. 30 Mr Walker advised that the term "Relevant Investor" included the replacement/transferee investor. He also advised that the existence of clause 20.5 suggested that there were different methods for releasing the Investor and the Covenantors and transfer of the interest under clause 20.4 did not automatically mean that the Covenantor was "off the hook". Clause 20.5 was in the following terms: 20.5 Substitution of Covenantor: A Covenantor may at any time apply to DTAL to be released from its obligations under this Agreement and DTAL must release such Covenantor if the following conditions are satisfied: (a) The Relevant Investor is not in default under the terms of this Agreement; and (b) The Covenantor procures that another person whom DTAL deems in its reasonable opinion to be suitable and capable of meeting the obligations of the Covenantor under this Agreement enters into a deed pursuant to which that person assumes the obligations of the Covenantor pursuant to this Agreement. 31 Mr Walker also advised that the words in parentheses in clause 11.1 meant that the money due and payable under clause 6.5(b) were "undoubtedly excluded" from the Covenantor's guarantee, meaning that the "balloon payment" which may be payable under clause 6.5(b) was not guaranteed by the Covenantor. Clause 6.5(b) was in the following terms: (b) In the event that an Investor exercises the option given to it under a Digi-Tech Investor Option Agreement then on the date of exercise of such option the unpaid balance of the proportion of the Purchase Price payable by the Investor will become immediately due and payable to DTAL by that Investor unless the Investor is a transferring Investor in accordance with a Digi-Tech Investor Option Agreement so that the Purchase Price will be payable by the person who succeeds the transferring Investor as a partner of the Investor Partnership. Negotiations 32 During March 1999 there were a number of meetings between the Partners and representatives of DTAL, some of which were attended by Mr Smith, at which attempts were made to settle the dispute with DTAL. Mr Smith was asked by Mr Urwin to speak to John Reid of DTAL on behalf of DTSPL and the Partnerships. A committee had been set up to operate the business of the Partnerships consisting of Mr Urwin, Mr Brand, Mr Andrew Cleland, (both of whom were directors of DTSPL), and Mr Kelliher. During the negotiations Mr Smith consulted with members of the Committee but mainly with Mr Brand. 33 On 24 March 1999 Ms Davies sent to Mr Smith a draft letter from Freehills to DTAL "for your comments". The letter to Mr Reid at DTAL advised: We act for the members of the Terminal Adapter Investor Partnership, and Digi-Tech Software Pty Limited. Our clients have entered into various agreements with Digi-Tech (Australia) Limited. … Our clients' position is that there are no subsisting breaches of any of their contractual obligations to Digi-Tech (Australia) Limited. Despite that, we are instructed that yesterday you indicated to our clients' representative, Mr Ian Smith, that you intended to issue "determination" notices to our clients. Our clients have retained us to advise them in relation to their dealings with Digi-Tech (Australia) Limited. 34 It would appear from a note written on a copy of that letter that Mr Smith telephoned Messrs Urwin and Kelliher in relation to the letter and they advised him that it was "O.K.". Terminal Adapter Termination Notices – 25 March 1999 35 DTAL served Notices on the Terminal Adaptor Investor Partnership dated 25 March 1999 terminating the Sale Agreements effective 10 working days from the date the Notices were served. The Notices included the following: In dealing with the Partnership and Digi-Tech Software Pty Limited (DTSPL) DTAL has experienced consistent and repeated delays in receiving information or receiving payments, consistent and repeated failures to meet agreed time frames, consistent and repeated failures to meet promises and undertakings as well as consistent and repeated delays in accessing information or allowing an independent agent to verify information. 36 The Notices set out the background to the dispute between DTAL, DTSPL and the Partnership, mainly in relation to the provision of accounts and information in relation to the operation of the business of the Partnership. Freehills Meetings 37 On 26 March 1999 a further meeting at Freehills occurred attended by Mr Smith, Mr Urwin, Mr Brand, Mr McLean and his solicitor Mr Simms, Mr Broadley, Ms Davies and Ms Rowe. The discussion at that meeting included reference to reviewing the Default Notice and a claim for misleading or deceptive conduct. At a further meeting at Freehills on 30 March 1999 with the same attendees, consideration was given to a document prepared by Freehills setting out the alternatives available to terminate the relationship with DTAL and to avoid making the "balloon payment". The options were: (1) to treat the contract as remaining on foot and exercise the option; (2) to treat the termination notice as a repudiatory breach; and (3) to negotiate. At this meeting Ms Davies advised that Freehills saw option (1) as the preferred course. Ultimately Mr Smith was asked to attempt to negotiate further with Mr Reid of DTAL concerning the Termination Notice. 38 At a further meeting on 7 April 1999 at Freehills attended by Mr Broadley, Ms Davies, Ms Rowe, Mr Smith, Mr Urwin, Mr Kelliher and Mr Brand, various alternatives were discussed, including continuation of the relationship with DTAL but under a new agreement. Mr Smith's evidence was that at this meeting he was asked to prepare documents for the assignment of the investors' interests in the Partnerships. Mr Smith's note of the meeting includes a reference to "IMS to prepare assignment docs". Ms Rowe's note of the meeting does not make any reference to that request, rather it states that: "Ian to draft option letters to exercise options on 15th". It does not seem that Mr Smith was asked to proceed further with either assignment or exercising the options because further settlement negotiations were pursued. Freerider Partnership Notices of Default – 8 April 1999 39 On 8 April 1999 DTAL served Notices of Default under the Freerider Sale Agreement. That Notice alleged that the Freerider Partnership was in breach of the Sale and Purchase Agreement in that, inter alia, it had failed to provide audited financial statements of the partnership and DTSPL as required under clause 8.10 of the Sale and Purchase Agreement. There were other alleged breaches including a failure to promote the products and a failure to strictly enforce the Licence Agreement between the Partnership and DTSPL. The Notice required the breaches to be remedied within 30 days from 8 April 1999. DTAL's offer 40 On 5 May 1999 Mr Kelliher wrote to Freehills (Ms Rowe, Ms Davies and Mr Broadley) in relation to a "proposal" from DTAL. That communication included the following: I have just faxed over a 7 page letter from DTAL regarding what they consider to be a commercial settlement. They propose two options neither of which is acceptable to us and not consistent with the meetings to date however it is at least a proposal we can counter. … Also we need some advise (sic) on the witholding (sic) tax issues that have been raised repeatedly by them Horwaths issued an opinion that withholding tax did not apply due to the capital nature of the purchase however DTAL assert that it is more royalty based and would therefore attract NRWT. Do you have someone who can provide another opinion on this. 41 On 7 May 1999 Paul King and Chris Colley of Greenwoods & Freehills provided advice to Ms Davies and Ms Rowe referring to the proposals put forward by DTAL. That memorandum recorded that they had been asked to advise on the withholding tax implication of the proposal "in relation to a dispute with the 'Investor Partners', whom we are advising". The advice was that the withholding tax clause suggested by DTAL was far from clear. On 7 May 1999 a meeting was held attended by Ms Davies, Ms Rowe, Mr Brand, Mr Urwin, Mr McLean and Mr Kelliher at which the DTAL proposal and the withholding tax issue was discussed. Possible Commercial Resolution 42 On 26 May 1999 Blake Dawson Waldron (Blakes) as solicitors for the Digi-Tech parties wrote two letters to Freehills. An open letter advised that their client DTAL relied on its Notice of Termination dated 24 March 1999 as effective termination of the Terminal Adapter Agreement. It further advised that they were instructed that DTAL had not waived any of the breaches of the Freerider Agreement specified in the Notice of Breach dated 8 April 1999 and that it would rely on any failure to comply with that notice if it became necessary. In answer to the allegation of misleading and deceptive conduct, Blakes advised that they were instructed that the allegation was disputed and that DTAL would vigorously defend any action brought for breach of the trade practices legislation. The other letter was on a without prejudice basis and recorded that negotiations were ongoing and appeared to be approaching an "in principle agreement". Further meeting with Freehills 43 On 16 June 1999 Mr Broadley and Ms Rowe met with Mr Urwin at which meeting Mr Urwin advised that the preferred timetable was along the following lines: 1. continue negotiations – get the other side's best offer, (by 30 June) 2. get Brett Walker's advice on prospects, (by 30 June) 3. prepare a notice – settle with us and Brett Walker, (by early July) 4. get advice from us and Brett Walker on possible litigation strategy, (by early July) 5. call a partners' meeting to consider settlement versus litigation, (early to mid July) 6. proceed as instructed by the partners, (mid July). 44 On 22 June 1999 a meeting took place at Freehills attended by, inter alia, Mr Brand and Mr Kelliher. That meeting also included solicitors within Greenwoods & Freehills who were to provide advice in relation to a "withholding tax issue". Although it is apparent that the main purpose of the meeting was to deal with that issue the note of the conference made by Ms Rowe also included the following: 2 The Option Agreement Greenwoods/Freehills has also been asked to advise on whether there are any circumstances by which "John Reid" (ie: DTAL/DTEL/DTCL) can get out of performing their obligations under the Option Agreement. Specifically, they want advice on whether any of the above companies can legitimately refuse to perform their obligations under the Option Agreement if the nominee Company has a withholding tax liability. Greenwoods will advise on this in regard to the above, however, Freehills will be required to agree to their legal interpretation. Freehills are to provide advice on whether there are any other avenues under the Option Agreement by which the above companies can refuse to perform their obligations. 45 On 30 June 1999 Mr Kelliher telephoned Freehills and "confirmed his instructions" of 22 June 1999 that he wanted Freehills to "do a very detailed review of the Option Agreement". In a file note of the telephone conversation (probably with Ms Davies) the following appears: We need to be sure that there is no way under the agreement for DTAL/DTEL etc – to refuse to fulfil its obligations. Negotiations fail 46 During the period May to August 1999 the Partnerships and DTSPL, with the assistance of Freehills and Mr Smith, attempted to negotiate a commercial resolution of the disputes. Those negotiations broke down in early August 1999. At a meeting at Freehills on 11 August 1999 attended by Mr Broadley, Ms Rowe, Mr Brand, Mr McLean, Mr Kelliher, Mr Urwin and Mr Simms it was noted that the negotiations had "terminated". Various strategies were discussed at this meeting including whether to exercise the options and "see how DTAL react". It was noted that Freehills were to "do option paper". Other alternatives that were considered included continuing with the Terminal Adapter and walk away from Freerider. Possible Assignments 47 When the negotiations broke down, Mr Urwin telephoned Mr Smith and advised him that the investors were looking to assign their interests and that there was concern that DTAL could "stop" the assignment. Mr Urwin asked Mr Smith to set out for him the relevant provisions of the various agreements. On 17 August 1999 Mr Smith wrote to Mr Urwin in the following terms: RE: DIGITECH ASSIGNMENTS I refer to our telephone conversations on Tuesday relating to the assignment by investors in the Terminal Adaptor Partnership and the Freerider Partnership. The relevant provisions of the differing documents are as follows: Sale Agreement Clause 20.4 of the Sale Agreement provides that where an investor transfers its interest in the Partnership and DTSPL in accordance with clause 14 of the Partnership Agreement, that investor may transfer its interests and obligations under the Sale Agreement by delivering to DTAL: (i) a deed pursuant to which the transferee is bound to performs the obligations the investor; and (ii) at the option of DTAL a Security or a novation of the existing Security or evidence satisfactory to DTAL that the existing Security will continue to apply. Documents pursuant to the Sale Agreement (a) A deed as described in clause 20.4(a) binding the Assignee; (b) Security or assignment as required by clause 20.4(b). Covenantor The covenantor's obligations expire on the Guarantee Expiry Date. The Guarantee Expiry Date is a defined term and means that if the investor exercises the option before 30 September 1999 the Guarantee Expiry Date will be 30 September 1999 Partnership Agreement Natural Persons Clause 14.3 permits a partner to transfer without the consent of the other partners or DTAL all its partnership interest, shareholding in DTSPL and its rights and obligations under the Sale Agreement to a transferee which is a body corporate nominated by that partner (see clause 14.3(b)). Corporate Partners Corporate partners may transfer their partnership interest together with shareholding in DTSPL and rights and obligations under the Sale Agreement to a transferee which is a wholly owned subsidiary of that partner. Documents Prior to transfer the transferee must execute a deed to which the transferee agrees to be bound by the Partnership Agreement (see clause 14.6). Under the Sale Agreement (the final paragraph in clause 20.4) the transferor investor has no further rights or obligations once the transfer has been completed. Clause 24.4 makes no reference to successful or satisfactory exercise of the option and clause 14 of the Partnership Agreement (in sub-clause (b) as opposed to sub-clause (c)) permits assignment for any reason (sub-clause (a) refers to assignment for the purpose of the option). Fixed Equitable Mortgage Pursuant to clause 5(a) of the Charge the investor covenants not to dispose of the property except as permitted by the Sale Agreement. Option Under the Option the investor may require DTEL to subscribe for the Company Shares. The Company Shares are the shares in the Company. Company is defined to be a corporate nominee of the Investor used solely as the holder of equity interests in the Investor Partnership and in DTSPL. There appears no reason why each investor needs to have his own corporate nominee. Meeting at Freehills - 16 August 1999 48 On 16 August 1999 a meeting took place at Freehills present at which were Mr Broadley, Ms Rowe, Mr Simms, Mr McLean, Mr Urwin, Mr Brand and Mr Kelliher (by telephone). It was decided that advice should be taken from Mr Walker SC in relation to the "prospects generally in relation to the alleged breaches of the Terminal Adapter and Freerider Agreements". The note of the conference made by Ms Rowe included the following: This advice was wanted before the exercise of the Investor Option, currently scheduled to take place on Friday 20 August. Gary Urwin to supply additional documents to Freehills in order to prepare Brief and to update statements. A conference has now been arranged with Brett Walker SC at 3.00 pm on Thursday 19 August. We should also ask Brett Walker how he considers we should deal with the issue of invalidity of the Termination Notice to the Terminal Adapter partnership. 3 Exercise of the Investor Options I pointed out that there may be a problem in the exercise of the options by individual investors due to the possible requirement to comply with s.20.4 of the Sale and Purchase Agreement to effectively transfer the individual investors' interests to a nominee company. (See comments in attached "Report on Investor Option Agreements"). Clause 20.4 states that DTAL may require "a Security or an effective novation of the existing Security granted by the Investor to DTAL or evidence satisfactory to DTAL that the existing Security granted by the Investor will continue to apply, …". Graham Brand and Gary Urwin were of the opinion that this was not a problem because the existing securities are a Fixed Equitable Mortgage over the investor's interest in DTSPL and therefore the individual investors would be quite happy to give evidence to DTAL that the existing Security will continue to apply, and that DTAL could not be unreasonable in its refusal to accept that evidence. [we consider it may be wise to obtain further advice from Senior Counsel regarding the effective exercise of the options] . Graham Brand also stated that those investor partners who are companies also wished to transfer their interests to a nominee company (rather than as originally envisaged, simply requiring DTEL to subscribe for shares in the investor partner company). This may raise a problem as the Investor Option Agreements for investor partners who are companies currently provide for DTEL subscribing for shares in the investor partner company. Graham Brand said that he was going to get Ian Smith to look into this [however, we may wish to recommend that Senior Counsel's opinion is obtained on this issue also, particularly as Freehills has not as yet reviewed in detail the Option Agreements relating to Investor Partners who are a Company]. All investors of both partnerships intend to exercise their Options on Friday 20 August 1999. Ian Smith/Gary Urwin are to draft all documents and make all arrangements for the exercise of these options. Graham Brand stated that the smaller investors were prepared to follow whatever decision was taken by the investors present at this meeting. The clients acknowledged that exercise of the Option would in all probability mean that any deal with Optus would be lost. 49 The note also referred to the reasons why it was considered important to exercise the options sooner rather than later including the fact that a Termination Notice had not yet been served on the Freerider Partnership. The "Report on Investor Option Agreements" referred to in Ms Rowe's note, was a document that Ms Rowe created at the time that she first became involved in the matter and was amended by her from time to time. The version of that document that was probably attached to the note of the meeting of 16 August 1999 included the following: 2.3 Clause 2 Requirements: Exercise of the Option is subject to the following: The following must be complied with in order for the exercise of the Option to be valid: (a) The Option can only be exercised during the Investor Option Period [cl 2.2]. The Investor Option Period is defined in the interpretation clause [cl 1.1]. (b) The Company must be used solely as the holder of equity interests in the Investor Partnership and DTSPL [cl 1.1]. (c) The Investor must not deal with or encumber any of the Company Shares except as contemplated by the Option Agreement [cl 2.2]. (d) The instalments of the Option Fee as set out in the Schedule must have been paid to DTEL [2.2(a)]. Note "Option Fee" as defined in clause 1.1 defines the total option fee instalments which must be paid, determined by when the Option is exercised. (e) There must be no outstanding breach of the warranties and undertakings in clause 4 of the Option Agreement [cl 2.2(c)]. Clause 4 warranties are:- · the nominee company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL; · the Company will not undertake any activity not expressly provided for or contemplated in the Investor Partnership Agreement prior to the expiry of the Investor Option Period. Certain fees etc are excepted; Note: The Investor Option Period currently expires on 31 July 2000, this will require changing. · the Company must have no debt to any person other than the Investor Debt (balloon payment) on the date on which the Option is exercised; · all payments of the Instalment Debt or any other indetedness arising under the Option Agreement must be met by the Company (or guarantor of the Instalment debt as per the Sale and Purchase Agreement) prior to the exercise of the Option; · the Company must not alter its constituent documents or agree to vary terms of the Investor Partnership Agreement without prior written consent of DTCL; and · the Company must comply with all laws relating to administration of the company, including the Corporations Law. 50 Ms Rowe also noted that DTAL appeared to have the right to ask for a security in respect of the nominee company to which individual investors had novated the Sale Agreement and the Investor Partnership Agreement. Ms Rowe observed that it did not seem to pose the same problem for corporate investors because "they do not need to transfer their interest to a nominee company". In respect of this last observation Ms Rowe included the note "see comments below at 3". Paragraph 3 was not completed at that time. Telephone Conversation – 18 August 1999 51 On 18 August 1999 Mr Smith and Ms Rowe had a telephone conversation in which Mr Smith advised Ms Rowe that he wished to enable the exercise of the options without the involvement of DTAL and asked Ms Rowe to include the following question in the Brief to Mr Walker SC: Whether, when assigning under clause 20.4(b) of the Sale and Purchase Agreement, it would be better to give a new security or to novate the existing security (or both). In addition, whether Senior Counsel considers that "evidence satisfactory to DTAL that the existing Security granted by the investor will continue to apply," is a viable third option. 52 Ms Rowe advised Mr Smith that she had raised the issue of clause 20.4(b) at the meeting on 16 August 1999 because she was concerned that it may be an area in which DTAL may not accept or hold up the exercise of the options. Ms Rowe's note of the conversation with Mr Smith included the following: Ian Smith said he understood that Freehills were taking care of the litigation side of things whereas he was undertaking the documentation and other things associated with the exercise of the Investor Options. I confirmed that this was what had been decided at the meeting on Monday 16th. I said that it had also been raised in the meeting on Monday that the Investors who are companies did not want to exercise the option in such a way as to have DTEL subscribe for shares in them (as per the Investor Option Agreement for companies). Ian Smith said that he had thought of a way around this, but was yet to fully think it through, whereby the Investor Companies would transfer their interest to a wholly owned subsidiary (as per the Investor Partnership Agreement) and then this wholly owned subsidiary would be the vehicle into which DTEL should subscribe for shares. Ian said he was drafting up some deeds to effect this which he wanted Brett Walker's opinion on. 53 The Observations of the Brief to Mr Walker SC from Freehills referred to "our clients" as "members of the Terminal Adapter Investment Partnership, the FreeRider Investment Partnership (the Partnerships) and Digi-Tech Software Pty Limited (DTSPL)". The Observations included the background in relation to the negotiations to settle the dispute with DTAL and the fact that those negotiations had broken down. They also included the following: As negotiations have broken down the investors in both Partnerships are intending to exercise their Investor Option as set out in the relevant Investor Option Agreement (there are two Option Agreements, one for investors who are individuals and the other for investors who are body corporates). It is envisaged that this exercise of the Investor Options will result in litigation between DTAL and the Partnerships, either by DTAL alleging breach of contract or by our clients bringing some of the various actions outlined below. Advice sought … 5. May the investors in the Freerider and/or Terminal Adapter Partnerships lawfully exercise their Investor Options? 6. If our clients are to exercise the Investor Options we seek Senior Counsel's advice on procedures to be followed when exercising the Options. This can be discussed in conference. By way of summary, under the Option Agreement for investor partners who are individuals the investor sets up a nominee company into which the investor transfers all of its equity interests in the Investor Partnership and shareholding in DTSPL in accordance with the Investor Partnership Agreement. These interests include the investor's rights and obligations under the Sale and Purchase Agreement and the Licence Agreement. The Investor Option is the investor's right to require DTEL to subscribe for a number of shares at par in the nominee company equivalent by value to the remaining Investor Debt (ie: the outstanding instalment payments of the purchase price, including the balloon payment). The nominee company and DTEL must then procure that all of the subscription monies are paid to DTAL in payment of the Investor Debt due to DTAL. We seek your advice as to whether, when assigning under clause 20.4(b) of the Sale and Purchase Agreement, it would be better to give a new security or to novate the existing security (or both). In addition, whether Senior Counsel considers that "evidence satisfactory to DTAL that the existing Security granted by the Investor will continue to apply", is a viable third option. The existing Security is by way of Equitable Charge or Mortgage, with the secured property being the investor's equity interests in DTSPL and the Investor Partnership. Under the Option Agreement for investors partners who are body corporates the Investor Option is the investor's right to require DTEL to subscribe for a number of shares at par in that body corporate partner. Mr Ian Smith of Harris and Company, who has been briefed to advise our clients in relation to the exercise of the options, may have some points on which he would like to obtain Senior Counsel's advice in this respect, and which he will address in conference with you tomorrow. … Conference Attendees We look forward to conferring with you on Thursday 19th August. Kevin Broadley and the writer will attend with Messrs Gary Urwin and Ian Smith of Harris and Company, Solicitors who is an investor and has been briefed to deal with the exercise of the options. Mr Peter Simms of Peter Cornelius & Partners represents a major investor Mr Ian McLean and Mr Simms may also attend at the conference. Mr Chris Kelliher is overseas this week and so will not attend. Rebecca Davies of our office is unable to attend. Mr Walker's Advice – 19 August 1999 54 Ms Rowe prepared a file note of the conference with Mr Walker SC on 19 August 1999 which included the following: 1. Exercise of Option and Clause 20.4 of the Sale and Purchase Agreement Senior Counsel was of the view that if the Options were to be exercised then the interests to be transferred to the nominee companies should be assigned in accordance with the relevant Agreements and the Investor Option Notice delivered to DTAL. The Investor Option Notice should be accompanied by a covering letter asking DTAL to elect what form of security they would like to be given as per clause 20.4(b) of the Sale and Purchase Agreement. In an ideal world DTAL will elect what security they want and all will be well. If DTAL reply by saying that our clients cannot validly assign due to the termination of the Terminal Adapter Sale and Purchase Agreement (or the Freerider Agreement) then we should supply one of the securities mentioned in of clause 20.4 (b) accompanied by a letter stating:- · given DTAL's failure to elect their preferred security they have been provided with a security of the investor's choice; · that DTAL cannot refuse to perform the cooperative acts necessary under clause 20.4 (b); and · if DTAL continue to fail to cooperate the Investor Partners will take them as being in breach of contract. This course of action must be rapid. 55 Litigation strategies were also discussed, in respect of which Ms Rowe made the following note: The assignor (ie: the investor who assigns their interests to the nominee company and exercises their option) may be a proper party to the validity of the exercise of the Investor Options. Only one assignor/investor need to be a party to the proceedings, but if so, only this assignor/investor will be bound by the decision the other assignors/investors would only benefit from the precedent set. If an assignor/investor is not a party to the proceedings they are not bound by the decision nor are they entitled to share in the benefit or detriment of the outcome. DTSPL Letter – 19 August 1999 56 On 19 August 1999 DTSPL wrote (by letter wrongly dated 18 August 1999) to each of the investors referring to the recent negotiations and advising that advice had been given by Mr Walker SC and Freehills that the most appropriate course of action was to exercise the options and exit from the Partnerships. That letter included the following: In the case of corporate enterprises The agreement with the above allows for either of the existing investor to call upon Digi-Tech Equities Ltd, or in the alternative for the existing investor to assign its interest in the partnership to a wholly owned subsidiary, and then call upon Digi-Tech Equities Ltd, to subscribe for capital in it in an amount equivalent to the sum outstanding under the terms of the original purchase agreement. Again the sum subscribed will be applied to repay the amount outstanding. Harris & Co, Mr Ian Smith, has been briefed by this office and is liaising with each of Freehill Hollingdale & Page and Mr Brett Walker QC, in relation to the final form of documentation required to complete the processes described. It is proposed that a single corporate entity will be utilised as the assignee of the interests of individual partners in each of the Terminal Adapter and Free Rider Investor Partnerships. For those investors who are corporates I would confirm that you have been contacted either directly, or through your professional adviser, requesting that you incorporate the subsidiary required to receive the assignment described. 57 That letter also reminded investors to sign a Power of Attorney in favour of Mr Urwin authorising him to sign the documentation that was required to effect the processes outlined in the letter. The letter enclosed a copy of a Power of Attorney, drafted by Mr Smith, for those investors who had not already provided a Power of Attorney. The Mauritius proposal 58 Mr Smith was advised by Mr Urwin or Mr Andrew Sneddon, a tax accountant who was advising the Partnerships, of a proposal to transfer the investors' interests to companies known as "Suntech" and "Transpacific" based in Mauritius. Mr Smith understood that this proposal had a dual purpose: the first was to effect a release of the investors from their obligations by an assignment of their interests to the Mauritius companies; the second was to ensure that if the Investor Option Agreements were ultimately exercised and DTAL did not accept the exercise of the options, the Corporations Law would not apply to the directors of the assignee companies. 59 Mr Smith accepted in cross-examination that Mr Urwin had sought his advice in relation to the proposal to assign the Partnerships members' interests to the Mauritius companies (tr 233). On 20 August 1999 Mr Smith wrote to Mr Urwin in the following terms: I have spoken to Andrew Sneddon and he advises it is necessary for each of the partners to rollover their interests in the Partnership to the one company as opposed to the previous proposal that the individual investors would assign to Suntech or Transpacific and the corporates would assign to a wholly owned subsidiary. The difficulty with this is that pursuant to the Partnership Agreement it would not be possible for the wholly owned subsidiaries to transfer directly to Suntech or Transpacific without the consent of DTAL. Under clause 14.4 of the Partnership Agreement a corporate partner may transfer without consent to: (a) a Wholly Owned Subsidiary of that Partner; (b) a natural person who is the sole shareholder of that Partner; (c) a relative (as defined in s. 9 of the Corporations Law) of the person referred to in (b) above; or (d) a body corporate nominated by a relative referred to in (c) above. Whilst the concept of a relative of a sole shareholder in nominating a company appears devoid of logic, that is what the clause says. The only way I can see it working is for each corporate partner to assign their interest to a Wholly Owned Subsidiary in consideration of the issue of shares in that subsidiary. The corporate partner that assigned would then transfer the shares in the subsidiary to a natural person and a relative of that new shareholder would then nominate pursuant to clause 14.4 (d) either Suntech or Transpacific. The Wholly Owned Subsidiary would then assign to Suntech or Transpacific at the same time as each of the natural investors transferred to Suntech or Transpacific. I have no idea what the tax consequences of the transfer of shares from the corporate partner to the natural person in the Wholly Owned Subsidiary would be. I suggest Andrew Sneddon be asked for his advice about the whole proposal as soon as possible. Please ring me to discuss. Orthoptic Pty Ltd 60 On 20 August 1999 Mr Smith wrote to Mr Werner Bali, an accountant with the firm Rost & Kitchener, who acted as the plaintiffs' accountants. That letter was in the following terms: I have spoken to Ian McLean last night and he said he was coming to see you at some stage this morning. I enclose a Power of Attorney for McLean Technic Pty Limited appointing Gary Urwin as that company's attorney to execute documents in relation to the transfer of that company's interests in Digitech. I also enclose a Power of Attorney for Orthoptic Pty Limited, being the wholly owned subsidiary of McLean Technic Pty Limited appointing Gary Urwin. Please fax copies of each to me when completed. 61 On the same day Mr Bali sent to Mr Smith copies of Powers of Attorney signed by McLean Tecnic and Orthoptic Pty Limited (Orthoptic) in favour of Mr Urwin. Mr Bali also sent a copy of the Certificate of Registration of Orthoptic and details of that company's officeholders, registered office and shareholder. Orthoptic had been registered on 10 August 1999. Freerider Notices of Termination – 7 September 1999 62 On 7 September 1999, DTAL issued a Notice of Termination to each of the partners in the Freerider Partnership. That Notice claimed that the investors had not rectified the alleged breaches specified in the Notice dated 8 April 1999. It stated that in accordance with the terms of the Sale Agreement termination was effective after ten working days from 7 September 1999. Each investor was advised that pursuant to clause 5.3(b) of the Sale Agreement they must pay the balloon payment on termination. 63 On 8 September 1999 Mr Urwin telephoned Ms Rowe and discussed whether it was necessary for the Sale Agreements to be on foot for the options to be exercised validly. Although Ms Rowe agreed with Mr Urwin that the Option Agreement did not expressly state that the Sale Agreement had to be on foot, she expressed the view that if the Sale Agreement had been validly terminated there was no longer any interest for the investor partner to transfer pursuant to the Option Agreement. Ms Rowe advised her colleagues within Freehills (Mr Broadley, Mr Tappere and Paul Harris) that she would like to discuss this issue further because it was very complex. On the same day Ms Rowe asked Dr John Carter whether he was able to assist in advising on this issue, and on the same day Dr Carter agreed that he would meet with Ms Rowe that week. Bartier Perry advice to Mr Brand – 8 September 1999 64 On 30 August 1999 Mr Brand approached Mr Shtein and informed him of the general background of the investment and the dispute that had arisen with DTAL. He advised him of Freehills' involvement and the decision that had been made to exercise the options to "exit the scheme". Mr Brand asked Mr Shtein to act "only in relation to the exercise of the options". It appears that at this time Mr Brand's two companies, Toltex and Divome, had not signed the Sale and Purchase Agreement. The Option Agreements were with the wholly owned subsidiaries, Kalifair and Kalinick. At this stage the plan was to assign Kalifair's and Kalinick's interests to the companies in Mauritius, Suntech and Transpacific. 65 During the time that Mr Shtein was reviewing the documents provided to him by Mr Brand he was informed that Mr Smith had been advising various other Partners in the Partnerships and was himself an Investor Partner. Mr Brand also advised Mr Shtein of a proposal that was being considered by the Partners being advised by Harris & Co to transfer their rights and obligations to a single Mauritius company. Mr Brand asked Mr Shtein to attend a meeting with Mr Smith to "discuss the merits" of that proposal. 66 On 7 September 1999, Mr Smith, Mr Shtein, Mr Kelliher and Mr Brand met at Mr Smith's offices at Harris & Co. Mr Shtein's draft advice to Mr Brand consequent upon that meeting advised Mr Brand that Bartier Perry was not persuaded that Kalifair or Kalinick should transfer their rights as proposed to the companies in Mauritius. Mr Shtein set out the reasons for that advice as: · the last sentence in clause 2.2 of the Option Agreement which forbids dealings in shares in a corporate partner in a way fatal to the exercise of the option; · it amounts to a fresh transaction (with the incurrence of new liabilities) by the assignee; · the possible adverse perception if the transferee is a Mauritius company, as this may be seen as an attempt to avoid liabilities in Australia; · it will reduce flexibility of Kalifair and Kalinick to act independently in any proceedings and to control outcomes; · it entails stamp duty and other expense; · it complicates what is already an extremely complicated situation. 67 The draft advice included the following in relation to the Sale Agreement: (l) Clause 11 contains the provisions whereby the covenantors guarantee to DTAL the due payment by relevant investors of all monies. The guarantee only applies to money becoming due and payable "prior to the Guarantee Expiry Date". This is a defined term. The date is connected to the date of exercise of the option under the Option Agreement. Clause 11.1 excludes from the guarantee any money becoming payable under clause 6.5(b) i.e. money becoming payable if the option is exercised. This indicates an intention to insulate guarantors from liability to pay the balloon. However this exclusion/insulation may not extend to money becoming payable on termination under clause 5.3(b). (m) Clause 20.4 facilitates the novation of a partner's interest pursuant to clause 14 of the Partnership Agreement. 68 Mr Shtein also advised that the exercise of the option was subject to "there being no outstanding breach of the warranties and undertakings in clause 4" which provided relevantly: 4.1 The Investor warrants and undertakes to each of DTAL and DTCL that: (a) the Company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL and the Company will not prior to the expiry of the Investor Option Period undertake any activity not expressly provided for or contemplated by the Investor Partnership Agreement; (b) on the date on which the Investor Option is exercised, the Company will have no indebtedness to any person other than the Company Debt; 69 Mr Shtein advised that he was not sure whether the termination of the Sale Agreement prevented the option from being exercised and gave the following further advice: General issues on exercising the option The greatest care must be taken to ensure the option is validly and formally exercised. We can give a more detailed advice later but it is appropriate to address the requirement in clause 2.2 of the Option Agreement that when the option is exercised there must be no outstanding breach of the warranties and undertakings in clause 4 of the Option Agreement. We address that clause now with reference to the paragraphs in clause 4: (a) sole purpose/sole activity. We assume this can be satisfied. (b) no indebtedness. This obviously requires great care. If the partner entities have engaged in any transaction it could have given rise to indebtedness. There is a tax issue in relation to withholding tax possibly payable in respect of the payments made to DTAL to date. (c) payment of Instalment Debt . This should be manageable. The Instalment Debt has to be quantified in any event. 70 A copy of this advice was obviously provided to Mr Urwin and Mr Simms because on 8 September 1999 Mr Urwin sent Mr Smith a copy of Mr Shtein's advice to Mr Brand and Mr Simms sent a copy of Mr Shtein's advice to Mr Smith. 71 On 9 September 1999 Ms Rowe wrote to her colleagues at Freehills by e-mail in the following terms: Subject: TA and FreeRider I just spoke with Peter Simms (Solicitor for Ian McLean). Ian McLean was not one of the original investors. He acquired his interest in the FreeRider and TA Partnerships in May 1998 after some of the original investors defaulted. Peter has the assignment documents by which the interests were assigned to Ian. The documents contain certain representations and warranties by DTAL. Peter is not sure how relevant these will be to the litigation but asked if we would like copies of them. I said I would get back to him. Peter has also spoken with Ian Smith and had ascertained that he has been retained by Gary Urwin to exercise the options rather than by the Investor Partnerships. In light of this Peter has decided to get Oliver Stein (sic) (the same lawyer who provided the advice to the Morgan and Banks interests) to advise Ian McLean as well. I don't know whether Chris Kelliher has also obtained separate legal advice. Notice of Demand – 9 September 1999 72 On 9 September 1999 DTAL served a Notice of Demand on McLean Tecnic in respect of the Terminal Adapter Partnership. DTAL demanded the outstanding purchase price of NZ$19,993,362.09 and A$263,136.31. Additional Advice – 10 September 1999 73 On 10 September 1999 Freehills obtained "additional advice" from Ian Jackman, a member of the Outer Bar at that time, and Dr John Carter on "various matters". There were differing views expressed as to whether the Sale Agreement had to be on foot in order to exercise the options, however, the advice of all who were consulted was that in respect of the Freerider Partnership, the interests of the investors were best served by exercising the options prior to the expiry of the 10 working days referred to in the Notice of Termination. On 10 September 1999 Ms Rowe sent an email to Mr Urwin, Mr Smith, Mr Kelliher, Mr Brand and her colleagues at Freehills providing this information. That email concluded as follows: Although we are aware that certain partners are taking advice as to whether they wish to exercise their options, they may wish to bear this in mind in their considerations. 74 Ms Rowe also enclosed a draft letter to DTAL's solicitors in relation to the Freerider Notice of Termination, and sought instructions in respect of its contents. That letter advised that Freehills was acting for the "members of" the Freerider Partnership and DTSPL. It denied any breaches and reserved the members of the Partnership and DTSPL's rights, without limitation, in relation to the Notice. 75 On 12 September 1999 in an email to Ms Rowe, Dr Carter raised the following: Included in the warranties is a warranty (clause 4(b)) that on exercise of the option the Company will have no "indebtedness" to any person other than the Investor Debt. It seems a safe assumption that default under the sale and purchase agreement does not create any additional debt owed by the Company, but you might have a look to confirm that. Rowe/Smith Discussion – 14 September 1999 76 On 14 September 1999 Ms Rowe, Mr Smith and Mr Urwin had a conversation in relation to the exercise of options. Ms Rowe recorded her recollection of that conversation in an email she sent on that day to her colleagues within Freehills. Mr Smith could not recall the details of the conversation but said that the contents of Ms Rowe's email to her colleagues accorded with his general recollection of events. That email included the following: Exercise of the Options – and repudiation Ian Smith told me that the individual investors in FreeRider are assigning their interests to a nominee company today. The exercise of the options is expected to take place on Thursday. The Terminal Adapter individual investors are expected to assign to a nominee company tomorrow. … Does the Sale and Purchase Agreement have to be on foot for exercise of the option? I briefly outlined the differing views between Ian Jackman and John Carter, and that it gives us another avenue to explore and argue. Exercise of the Options – other issues discussed with Ian Smith I realised that I had not mentioned to Gary and Ian that there may be issues in exercising the options for those partners who, due to incorrect execution, think they may not be a party to the agreements. I spoke with Ian Smith at 11.00 and discussed this with him, telling him that by exercising the options or assigning the interests to a nominee company those investors would be affirming that they are a party to the agreements. He agreed with me and said he had thought of this too but that he has just been retained to draft the documents and is not offering advice to individual partners on this. He understands that all the partners have got some form of separate legal and/or accounting advice. I said our position was that, even though we too were not offering separate advice to individual partners, as we were aware there may be an issue here we wanted to make sure we pointed it out to Gary and Ian as soon as possible given that the assignment of the FreeRider interests may take place today. I have left a message for Gary to call me so I can point this out to him as well. 77 On 14 and 15 September 1999 Mr Smith arranged for the assignment of investor interests for most of the Freerider partners. This included the execution of: (a) a Deed of Assignment by the assigning investor; and (b) a Deed by the assignee agreeing to take over the assignor's obligation to DTAL in relation to clause 20.4 of the Sale Agreement. Mr Smith's affidavit evidence was that he did not "carry out an assignment for the McLean entities because at that time I had no instructions to act for them" (par 54). Meeting at Freehills – 15 September 1999 78 On 15 September 1999, there was a meeting at Freehills attended by Mr Broadley, Mr Tappere and Ms Rowe, Mr Smith, Mr Shtein, and Mr Simms. Mr Simms' file note records the following: Need to exercise option – perhaps avoids argument can't exercise if agt terminated. … Ian Smith – exercise FR for all partners – individuals & coys. Who is doing exercise of TA option – needs to be close coordination – Oliver. Oliver and Smith to liaise re exercise & run past FHP. Holds P/A for McLean coy re FR & TA – Urwin. FHP acting for – Gary will call meeting partners to instruct FHP Thurs next wk 3.00 pm. FHP. FHP acting for each individual partner separately (severally liable under S&P agt.). FHP won't advise against a/cs and advisors. Covenantors – who represent? … Must send Sept instalment if option not exercised (30/9/99). Payt option fee? … Oliver doing TA for Ian. Smith acting for Ian re FR. Duncan getting FR docs to Smith. 79 Ms Rowe's note of the meeting was less detailed, however it records that the options were being done by Mr Smith, Mr Shtein and Adelaide (a general reference to a firm of solicitors in that city) and were "to be run by us/Brett Walker". 80 Mr Broadley and Mr Tappere signed two letters dated 14 September 1999 from Freehills directed to the partners of each of the Partnerships and the shareholders of DTSPL. It would appear that these letters were handed out at the meeting on 15 September 1999. One letter was to "update" the partners and the shareholders in relation to "significant issues" said to have arisen as the result of developments the previous week, subsequent instructions and a conference with Mr Jackman on 10 September 1999. That letter explored whether the Sale Agreement had to be on foot for the exercise of the options. It outlined the differences of opinion between Mr Jackman, who was of the view that it had to be on foot and Dr Carter whose opinion was that it did not have to be on foot. The letter included: 2. Execution of the Documents We understand that there are issues for some of the investor partners or covenantors concerning the correct execution of the agreements. We note that Bartier Perry have provided advice to Toltex Human Resources Pty Limited, Divome Property Pty Limited and their wholly owned subsidiaries Kalifair Pty Limited and Kalinick Pty Limited on this issue. Although we are not in a position to advise any of the partners individually, you should be aware that if the agreements have not been signed, or if there is an issue as to whether any of the investors or covenators are a party to the agreements, the exercise of their option would, in all likelihood, affirm that they are a party to the agreement. 81 The other letter dated 14 September 1999 was headed: "Nature and scope of instructions in relation to the Terminal Adaptor and Free Rider Investor Partnerships and Digi-Tech Software Pty Limited". Under the heading "Nature of instructions" the letter recorded that "to date" Freehills had been receiving "preliminary instructions" about potential proceedings involving the Partnerships and DTSPL "from Gary Urwin, Chris Kelliher, Graham Brand and Ian McClean (sic)". The letter continued: We are aware that there are approximately 18-20 individual partners (either natural or corporate) in each of the Partnerships (with some overlapping partners), and that these partners together own all the shares in DTSPL. To date we have not been instructed to act on behalf of any of the individual partners, either as partners in the Partnerships or as shareholders in DTSPL (see further "Scope of Instructions" below). 82 The letter advised that Freehills did not see any actual or potential conflict in acting for both the Partnerships and for DTSPL, however because of the "diverse constitution" of the Partnerships and the shareholding in DTSPL, there was concern to formalise the nature of their instructions. The letter suggested the creation of a committee consisting of three people that could provide formal, authoritative instructions on behalf of the two Partnerships and DTSPL. The letter then continued: Scope of instructions On our present understanding: 1. we are instructed to consider the various materials provided, with a view to commencing (alternatively, defending) potential proceedings, on behalf of the Partnerships and/or DTSPL against the Digi-Tech companies based in New Zealand; 2. in particular, we are instructed to consider the possibility of separate and/or earlier proceedings in an attempt to recover monies expended in New Zealand by the Partnerships and/or DTSPL on research and development; 3. we are instructed to consider, on behalf of the Partnerships (but not separately on behalf of any individual partner(s)), issues relating to the potential exercise of the options set out in the Option Agreements; 4. we are not instructed to consider, on behalf of any individual partners or shareholders, or any group thereof, any proceedings against professional advisers who were involved in any of the transactions concerning the Terminal Adaptor and/or Free Rider products/intellectual property. As to item 3, we plan to be in a position to advise in writing very shortly. That advice will be addressed to the Partnerships. We trust that the nature and scope of our instructions, as set out above, both coincides with your understanding and meets with your approval. If not, please do not hesitate to contact Kevin Broadley or Chris Tappere, as soon as possible. Bartier Perry retained 83 On 15 September 1999 Bartier Perry wrote to the plaintiffs, care of PCP in response to Mr Simms' letter of 13 September 1999. Mr Simms' letter was as follows: We refer to our telephone conversation of 13 September 1999 and enclose the various documents relating to our client's involvement in the Terminal Adapter and Freerider Partnership. We confirm that you will prepare on our client's behalf, the requisite Notice of Exercise of Option. Catherine Rowe will be in contact with you in relation to a meeting which is currently proposed for 2.00 PM this coming Wednesday at the offices of Freehill Hollingdale & Page. 84 Bartier Perry's response of 15 September 1999 was in the following terms: Thank you for your instructions received on 13 September 1999. You require us to advise AI McLean Pty Limited & McLean Technic Pty Limited on their rights and obligations under the respective "Digi-Tech Investor Option Agreements" and to draft notices of exercise of option in relation to those agreements. We are advising Graham Brand, Kalifair Pty Limited and Kalinick Pty Limited in relation to the Terminal Adaptor Partnerships. Should any conflict of interest emerge we may cease to act for you or for all concerned. We also advise up front that due to the complexity and volume of work, we cannot guarantee that notices of exercise will be ready on a fully considered basis for service in New Zealand by the end of September. We have not reviewed any Free Rider document and note that there are complications in your case. If this is not acceptable to you, we will be happy to send back the papers now without costs or expense. 85 On 16 September 1999 PCP wrote to Mr Shtein confirming acceptance of the terms of Bartier Perry's retainer. That letter noted the advice that Mr Shtein would not be involved in the exercise of the option for the Freerider Partnership but would be preparing a notice of exercise of option "for our client's interest in the Terminal Adaptor Partnership". That letter also requested Mr Shtein to provide the amount of the option fee required to be paid at the time the option was exercised. 86 On 16 September 1999 Bartier Perry wrote to Mr Smith referring to the discussions at the meeting at Freehills the previous day and confirming that Mr Smith "will be acting on behalf of McLean Tecnic Pty Limited and A I McLean Pty Limited in respect of the exercise of options relating to the Free Rider Partnership". Bartier Perry enclosed copies of the various documents originally sent to them by Mr Simms and advised that they had retained the McLean documents relating to the Terminal Adapter Partnership "where time is not so pressing". 87 On the same day Bartier Perry wrote to Mr Simms referring to the discussions at Freehills the previous day and advising that they would no longer be acting on behalf of the plaintiffs in respect of the exercise of options relating to the Freerider Partnership. Bartier Perry advised that they had forwarded all documents that had been sent to them on 14 September 1999 in relation to the Freerider Partnership to Mr Smith at Harris & Co. 88 Mr McLean was apparently holidaying in South Africa at this time and on 16 September 1999 PCP wrote to him at his hotel confirming the telephone conversation with him on 15 September 1999 in the following terms: 1. It is proposed by Gary Urwin and Ian Smith that the Notice of Exercise of Option for the Freerider Partnership will take place on 17 September, 1999. We have been advised by both Gary Urwin and Ian Smith that they will be exercising the Option on your behalf. 2. Oliver Shtein will be preparing the exercise of option in the Terminal Adaptor Partnership on your behalf. 3. If the options are not exercised prior to the time on which the next instalment is due then you must ensure that the instalment is paid. 4. If the Options are exercised then the exercise of the option must be accompanied by payment of the option fee. 5. There will be a meeting of partners on Thursday, 22 September, 1999 at the offices of Freehills at 3.00 PM. The purpose of the meeting is to ensure that each of the partners decides whether or not Freehills should act for them and to appoint a committee for the purpose of taking instructions. Unless you advise us to the contrary, we will assume that you wish for Freehills to continue to act for you. 6. Freehills will immediately start to prepare for litigation (either to commence a claim or defend a claim) as quickly as possible and will be updating the various statements that they hold and will be looking at the question of representations made approximately early 1997. This process will take approximately 2 or 3 weeks. Harris & Co Letter to Freehills – 17 September 1999 89 On 17 September 1999 Mr Smith wrote to Ms Rowe in the following terms: I refer to our telephone conversation last night and now enclose the draft Notices of Exercise of Option. Also enclosed is a draft letter I propose sending with the Notices of Exercise. I would be grateful for your comments. I propose to send the Notices of Exercise either last thing tonight or first thing on Monday morning. "Run them by" Freehills 90 There is a controversy in relation to whether Freehills was to approve the Notices of Exercise of Option. On the one hand Mr Smith claimed that he understood that Freehills would vet the documents and that he had to "run them by" Freehills for approval prior to sending them to DTEL. Mr Broadley agreed in evidence that at the meeting at Freehills on 15 September 1999 Mr Smith said he would run the option exercise documents past Freehills (tr 639). Mr Broadley said he did not have a clear recollection of the discussion however he did recall Mr Smith asking for "some assistance". He said it was something to do with the exercise of the options and "it seemed that he was wanting it looked at from a litigation point of view" (tr 640). 91 Mr Smith gave affidavit evidence (affd. 10/09/07) that after he sent the Notices to Ms Rowe she subsequently telephoned him and said: "The Notices are okay" (par 62). In evidence-in-chief on 30 April 2008, Mr Smith confirmed that his best recollection was as stated in his affidavit but that there was an alternative that he received a message from his secretary to the effect that Ms Rowe had telephoned and said that the Notices were okay (tr 198). Mr Smith's then secretary, Irene Webber, gave affidavit evidence (affd. 02/05/08) that she was employed at the relevant date and that she recalled undertaking work in respect of the exercise of the Freerider Option at the direction of Mr Smith. However she did not recall speaking to Ms Rowe or any other person from Freehills in connection with the Freerider Option but accepted that it was possible that she did. Her practice was that when she received calls for Mr Smith, she would either transfer them to him or take a message and pass it onto him. This additional evidence from Mr Smith and Ms Webber was given as a result of Harris & Co's lawyers looking at a Freehills' "Prebill" in which there was an entry for Ms Rowe's time on 17 September 1999 as follows: "Perusing facsimile from Ian Smith; telephone attendance on Irene Webber". 92 Ms Rowe denied quite vehemently that she would ever have said to either Mr Smith or Ms Webber that "the Notices are okay". In cross-examination by Mr Davies SC, Ms Rowe agreed that on 16 September 1999 she had a conversation with Mr Urwin and Mr Smith about the calculation of the amount that was to be included in the Notices. Ms Rowe suggested to Mr Smith and Mr Urwin that a clear explanation of the method of calculation should be attached to the Notices and that Mr Smith and Mr Urwin may wish to "run that by Freehills" (tr 695). When it was suggested to her that at the meeting of 15 September 1999 she had said that the options were to be run past Freehills and Mr Walker SC, her evidence was (tr 696): A. …I wouldn't have suggested that. I was a junior solicitor. If there was any suggestion made about running anything past anybody, it would have been made by somebody, and I don't think that you can say it's – it's not saying, "You must run them by us." It's one, two, three, four, five, six, seven, eight, nine – 12 words on a page. Q. I want to make it quite clear that I am not, on 15 September, suggesting that it was you personally who suggested they be run by Freehills, but that somebody from Freehills suggested it? A. "To be run by us/Bret Walker". Was it a suggestion, was it an option, was it – it just – are you – sorry. Are you suggesting to me that we were requesting them and that we were saying that they should be run by us? … Q. If you have a look again on page 162, it was you, as the junior solicitor, who suggested in this phone call to Mr Urwin and Mr Smith that they may wish to run the matters there discussed by Freehills first? A. Yes. Q. And that meant running the documents by Freehills, didn't it? A. Well, I don't know. Was it the calculation? I don't know from there. I don't know. It's not clear. 93 Ms Rowe was also cross-examined about the facsimile dated 17 September 1999 that Mr Smith sent her enclosing the Notice of Exercise of Options and requesting her comments. Her evidence was as follows (tr 701 – 703): Q. I suggest to you that you subsequently rang Mr Smith and spoke either to him or to his secretary, Ms Webber? A. No. I believe there is a file note time sheet entry for me calling his office, which is, I believe, his secretary, Irene Webber. … Q. You told her to let Mr Smith know that the notices were okay? A. No. Q. What did you say to her? A. I would probably have left – I don't know. I have no idea what I would have said to her, but I can imagine it would have been something like, "could you please ask Ian to call me back". Q. Did Mr Smith ring you back? A. Well, there is no note of it, there's no file note, there's no nothing. … Q. Were you satisfied with the notices that Mr Smith had drafted and the other documents he had sent you? A. No, it wasn't for me to be satisfied. I certainly wouldn't have made any comment at all about those notices. There is no way that I would have reviewed those notices, as a junior lawyer, and said, "Yep, they're okay to go." Absolutely, categorically out of the question. And I certainly wouldn't have done it without sending it off to my supervising partner or somebody else first. … Q. So what do you suggest that you were ringing Ms Webber about? A. Probably to say, "Could you get Ian to call me back because what would Ian like me to do with these notices of exercise?" Q. Well, you knew they were to be run past you, whoever had suggested it, didn't you? A. But did he want them run past us in order to get senior counsel's view of them? I don't recall. I don't recall the conversation. I just would not have phoned him and said that they are okay or made any judgment whatsoever about those documents, knowing that the option agreements were complex and convoluted and knowing that I was a junior lawyer who could not sign off on anything without first getting it approved by a partner. There is no way I would have done that. Q. But, you see, you agree that on 16 September you had suggested that he run certain things past Freehills in the documents he was preparing associated with the calculations, didn't you? A. Yes. Q. You received in that fax of 17 September the notices, didn't you? A. I received a letter. Q. With attached notices? A. A covering letter and attached notices. Q. But you know can't remember what you did in response to that? A. Well, I can – well, know, I can't remember. There is one entry that says "Telephone attendance on Irene Webber". That is the only thing I know that obviously happened. I didn't speak to Ian Smith. I would have file-noted it. I wouldn't have okayed those documents without getting signed-off from a partner. I don't see that there is anything else on here that says that any other partner reviewed them. I knew we weren't providing advice on them. Was I calling Ian Smith to say, "Do you want me to send them off to senior counsel?", the same as we'd asked him did he have any deeds he wanted run by senior counsel. I just would not have signed off on those documents. I would not have told him that they were okay. 94 The letter that was sent to Ms Rowe included the draft covering letter to DTEL and the Notices. The covering letter to DTEL included the statement: The amount of the Investor Debt has been calculated in accordance with the Schedule annexed to the Option Agreement between the relevant Investor and your company and has adopted the conversion rate adopted in that Schedule. 95 Ms Rowe carefully documented the 16 September 1999 conversation with Mr Urwin and Mr Smith in a file note dated 17 September 1999. That file note focused on the calculation of the instalments of the purchase price, the exchange rate and the amount of the outstanding purchase price that had to be stated on the Notice. That file note included the following: I suggested that a clear explanation of the method of calculation be attached to the Investor Option Notice. Ian Smith said he intended to do so. I suggested that they may wish to run this by Freehills first. 96 Mr Smith was cross examined about the provision of the letter and Notices to Freehills prior to the exercise of the Freerider option. Mr Slattery QC suggested to him that the reason he sent the documentation for Ms Rowe's comments was specifically related to the explanation of the method of calculation rather than seeking any general approval. That cross examination included the following (tr 279 – 281): Q. I suggest to you that the reason you forwarded these documents to Ms Rowe on this occasion was so that she could look at the way that you had dealt with the expression of the calculation issue? A. No, I wouldn't have sent the investor option notices if that was the case. … Q. What comment were you expecting on the notices from her? A. Well, I was invited to send them to Freehills, so I was expecting a comment, "These are good", or "These are bad". Q. You knew that the form of notice was in fact a schedule to either the partnership agreement or the sale and purchase agreement didn't you? A. Yes. Q. Or was it the option agreement? It is a schedule to one of the documents, isn't it? A. Yes. Q. And that, essentially, all that the option notice in form does is add names into what is otherwise a contractually mandated standard document? A. Yes. Q. As you understood it, her only purpose in looking at the documents was to look at the calculation issue, wasn't it? A. No. Q. Do you say to this court that one of your purposes in sending that was so that she could look over and check and approve what you were doing for individual partners? A. One of the purposes was for her to check, or Freehills, at their invitation, to check the letter to DTAL and the option exercise notices. Q. Check for what purpose? A. Their effectiveness. Q. I have suggested to you that there was a purpose, which was to check the calculation and the phrases that you used in your draft notice – you understand that don't you? A. Yes. That was one of the purposes. Q. So are you saying - - A. If I didn't have the second purpose, I wouldn't have sent the option notices to her. Q. We will come to that. So you say another purpose was so that she could check the effectiveness of these; is that right? A. Yes. Q. Why? A. The correctness. Q. What do you mean by "effectiveness"? A. Whether they were the notices required to exercise the options. Q. But you knew that – they were mandated in a schedule to the agreement? A. Yes, but I took the invitation of Freehills to look at them and sent them to them. Q. And I suppose that, if that was your understanding of what Freehills were to do, you would need to send Freehills all the relevant information you had about the notices, wouldn't you? A. No. Q. Well, you would at least have to send Freehills all the notices, wouldn't you? A. I did. Q. You didn't. A. Well, I sent them - - Q. Do you say to the Court that you believe that you sent Freehills all the notices? A. No, I believe I sent Freehills the notices set out here. Q. Look on that page. Do you find the name "McLean" anywhere? A. No. Q. It is not there, is it? A. No. Q. Whatever you were doing, Mr Smith, I suggest to you that you weren't asking Freehills about any advice, any supervision, any checking about anything to do with any of the McLean entities, were you? A. I was asking for their general advice about these notices of exercise. Q. Well, you knew that – and I invite you to look at it – if the McLean notices are absent from what you attached and the name "McLean" is not mentioned in the draft letter you were sending, they couldn't advise you about the McLean entities, didn't you? A. Yes. 97 I am satisfied that the reason Ms Rowe suggested that the Notices be "run past" Freehills was so that she could check whether there was a "clear explanation of the method of calculation" attached to the Notices. I am satisfied that when Ms Rowe saw the covering letter and in particular the reference to the calculation method she would have been satisfied that there was a clear explanation of the method of calculation attached to the notices. I am satisfied that Ms Rowe probably informed Ms Webber that the letter was "okay" because it did include "a clear explanation of the method of calculation". 98 Ms Rowe was not asked by either Mr Smith or Mr Urwin to give approval of the Notices of exercise of the option in a general sense. All she was asked to do, by them taking up her invitation to run them past her/Freehills, was to see whether they included an appropriately clear explanation of the method of calculation. Indeed Ms Rowe had pointed out to Messrs Smith and Urwin the previous day that even if the method of calculation discussed was to her mind in accordance with the Sale Agreement, it did not preclude DTAL from putting up a separate argument "as to how the sum was to be calculated or the final figure resulting". I do not accept Mr Smith's claim that he understood that Freehills were to give advice generally as to "effectiveness" of the Notices. The only reason they were "run past" Ms Rowe/Freehills was to check whether the "clear explanation of the method of calculation" had been attached to the Notice. Exercise of Freerider Option – 20 September 1999 99 On 20 September 1999 Mr Smith wrote to DTEL delivering Investor Option Notices for each investor in the Freerider Partnership listed in the letter. That letter included the following: On behalf of the Investors listed below we hereby deliver Investor Option Notices for each Investor who holds an option to require Digi-Tech Equities Limited to subscribed (sic) for shares in the Company shown next to the Investor's name: (a) A I McLean Pty Limited – McLean Technic Pty Limited 100 The letter also advised that a cheque for the Instalment Debt and Option Fee for each of the investors had been delivered to KPMG. The Investor Option Notice for the plaintiffs was in the following terms: INVESTOR OPTION NOTICE To: Digi-Tech Equities Limited Pursuant to clause 2.3 of the Digitech Investor Option Agreement, A I McLean Pty Limited, ACN 000 404 295, gives notice that it exercises the Investor Option and requires Digi-Tech Equities Limited to subscribe for Company Shares in accordance with the terms of the Digitech Investor Option Agreement. The amount of the Investor Debt as at the date of this Investor Option Notice is NZ$3,776,415.30. All capitalised terms have the meanings given to them in the Digitech Investor Option Agreement dated 4 May 1998 between Digi-Tech Equities Limited, Digitech Communications Limited, A I McLean Pty Limited and McLean Tecnic Pty Limited. Dated: 20 September 1999 SIGNED for and on behalf of ) A I McLean Pty Limited by ) its Duly authorised attorney ) GK Urwin in the presence of: ) 101 Mr Urwin purported to sign that Notice as AI McLean's Attorney. 102 On 21 September 1999 DTSPL wrote to the directors of McLean Tecnic in terms that included the following: I refer to your recent instructions and confirm that a Notice of Exercise of the Option was served upon Digi-Tech Equities Ltd on 20 September 1999. … The offices of Freehill Hollingdale & Page (Freehills) Solicitors were retained throughout to advise on the completion of the processes described. Further, advice has also been sought from those same offices in relation to the amounts, if any, that are payable to any of the Digi-Tech related entities before and upon completion of the processes described. For the abundance of caution, Freehills have recommended that partners pay the September instalment to Digi-Tech Australia Limited that would have otherwise been payable under the terms of the Sale and Purchase Agreement if they had remained as participants, together with the Option Fee that would have been payable to Digi-Tech Equities Limited at that same time. That same advice also suggested that the sums described should be paid before the Option with Digi-Tech Equities Limited was exercised. Accordingly the following amounts have been paid on your behalf: · Repayment of debt Digi-Tech Australia Limited 12,295.95 · Option fee Digi-Tech Equities Limited 3,597.00 Total 15,892.95 Accordingly, the totality of the sums described, $15,892.95 is now due to be refunded. In these circumstances I would be obliged to receive by return mail your cheque for the sum described made payable to Penny Clarke Pty Limited, the entity through which the payments may have been funded. 103 On 21 September 1999 Blake Dawson Waldron (Blakes), solicitors acting for DTAL, wrote to Harris & Co advising that the Freerider Sale Agreement had already been terminated and clause 4(c) of the Option Agreement prohibited the exercise of the options. Blakes also advised that by reason of clause 4(b) of the Option Agreement, the existence of other undischarged liabilities "(such as the liability for withholding tax and the liability to contribute capital)" prevented the exercise of the alleged rights. Blakes also advised that Digi-Tech would rely upon its rights under clause 20.4(b) of the Sale and Purchase Agreement. Bartier Perry Advice – 22 September 1999 104 On 22 September 1999 Mr Shtein wrote to Mr Simms at PCP advising that he had reviewed the Terminal Adaptor documentation and enclosed draft documents, an issues paper and an action plan. That letter advised that documents had been sent to Freehills "in case they have any concerns" and that it was proposed that the Terminal Adapter Notice of Exercise of Option would be issued before the end of the week. The following two entries in relation to the warranty in clause 4(b) of the Option Agreement were included in Mr Shtein's action plan: Ensure all outstanding Option Fees and Instalment Debt has been paid BPS cannot advise on these outstanding amounts. Ensure that nominee company has no indebtedness to any other person other than Investor Debt No debt must exist including any tax liability (stamp duty, withholding tax). 105 Mr Shtein's advice included a detailed analysis of the "Stages" of the process for the exercise of the option. Those "Stages" were identified as: Stage 1 - Preparation For Exercise of Option; Stage 2 - Exercise of Option; Stage 3 - Effect of Exercise; and Stage 4 - After Exercise. Mr Shtien identified three conditions precedent to the exercise of the option as specified in clauses 2.2 (a) to (c) of the Option Agreement. The first was the payment of instalments of the Option Fee; the second (which applied only to individual investors) was the transfer of the investors' equity interests; and the third was that there was to be no outstanding breach of the warranties and undertakings in clause 4 of the Option Agreement. The analysis also included the following: For existing corporate investors, it is too late to remedy any defect in the way they were incorporated. However, we certainly do not advise attempting any assignment to new freshly incorporated entities. (See for example Freehill's letter of 14 September and clause 2.2 of the Option Agreement). 106 Mr Shtein's advice in respect of the third condition precedent that there be no outstanding breach of the warranties and undertakings in clause 4 of the Option Agreement included the following: This requires the Investor to ensure that it is not in breach of any of the four warranties and undertakings stated in clause 4 of the Option Agreement, namely: Clause 4(a) "the Company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL and the Company will not prior to the expiry of the Investor Option Period undertake any activity not expressly provided for or contemplated by the Investor Partnership Agreement, provided that nothing in this paragraph shall restrict the ability of the Company to receive fees or other remuneration from the Investor in consideration of its assuming the Investor's rights and the obligations as contemplated by this Agreement, or committing to the Investor to assume them." As said above, we are of the opinion that the nominee company should be newly incorporated with various restrictions in its Constitution. Also note that the Investor must ensure that the nominee company undertakes no other activity than that expressly provided or contemplated by the Partnership Agreement. Clause 4(b) "on the date on which the Investor Option is exercised, the Company will have no indebtedness to any person other than the Investor [Company] Debt" The Company must have no indebtedness (other than the Investor Debt) immediately before the exercise of the option. We note that you have taken or will take Greenwoods & Freehills advice about any withholding tax which could create such indebtedness. "Investor Debt" is defined as: "means the proportion of the purchase price payable to DTAL pursuant to the Sale Agreement for which the Investor is severally liable less all amounts paid by or on behalf of the Investor to DTAL by way of instalment and the Instalment Debt" The drafting of clause 4 (b) assumes that the nominee company will have become liable for the purchase debt. This assumes that the novation of the Sale Agreement is complete. 107 On 22 September 1999 Mr Shtein wrote to Mr Broadley referring to the discussions at Freehills on 15 September 1999 and enclosing "various documents" that Mr Shtein had prepared "for our clients" regarding the exercise of the options. Mr Shtein reminded Mr Broadley that Bartier Perry was acting for Graham Brand, Toltex, Kalinick, Kalifair, Divome, and the two plaintiffs. Mr Shtein noted that the material from Mr Brand included the assignment of his partnership interest and related notices and novations. The letter continued: If there is any aspect of these documents that concerns you, or you think affects the anticipated litigation in any respect, please contact us. 108 On 23 September 1999 Mr Tappere and Mr Shtein had a telephone conversation regarding Mr Shtein's letter of 22 September 1999. Mr Tappere made a note on that letter that Freehills were considering their position and as a consequence could not respond in substance to it. 109 On 23 September 1999 Blakes wrote to Bartier Perry advising that its "clients' position could be shortly stated" that "[a]s a consequence of various events of default under the Terms of the Sale Agreement dated 30 June 1997 relating to the Terminal Adapter Investor Partnership" that agreement had been validly terminated. It also advised that the plaintiffs were "no longer entitled to exercise rights pursuant to" the provisions of the Agreement in particular rights under clause 20.4(b) of the Agreement. Blakes claimed that any attempted novation of the "current equitable mortgage" was "ineffective". 110 On 24 September 1999 Mr Smith wrote to Mr Urwin referring to their telephone conversations over the previous week and confirming his instructions of 24 September 1999 to prepare documentation for the assignment for members of the Terminal Adapter Partnership. That letter referred to the very tight timeframe and suggested that the assignment and notices of assignment take place the following Monday requesting DTAL to nominate by Tuesday what form of security it wanted. That letter included the following: As in the Freerider arrangement I confirm your advice that you are relying on Andrew Sneddon for the taxation and stamp duty aspects of the transaction. It will be necessary to pay the September instalment and Option Fee to KPMG as occurred with the Freerider Partnership. If the Partners want companies incorporated specifically for the assignment as opposed to shelf companies being acquired, it will be necessary to let us have details of exactly who needs a company first thing on Monday morning. 111 Mr Smith also asked Mr Urwin to let him know if any of the Partners needed a Power of Attorney. 112 On 24 September 1999 Mr Urwin wrote to Mr Simms in the following terms: McLean Tecnic Pty Ltd I refer to our conversation of last evening and confirm that the following sums are now payable by the above in relation to its participation in the following Investment Partnerships: Free Rider Terminal Adaptor Investor Partnership Investor Partnership $ $ Repayment of Advance 65,784.09 12,295.95 Digi –Tech (Aust) Ltd Optus Fee 19,244.01 3,597.00 Digi-Tech Equity Ltd Total 85,028.10 15,892.95 In accordance with our conversations, I would be obliged if you could facilitate a cheque in the total sum of $100,921.05 payable to Penny Clarke Pty Limited, the entity through which investors contributions are being consolidated. 113 It was accepted during the trial that the figures in this letter under the Freerider Partnership column should have been under the Terminal Adapter column and vice versa. "Payments up to date" 114 On 24 September 1999 PCP wrote to Mr Shtein enclosing a schedule of payments and advising that they were instructed "that our client's payments are up to date". That letter continued: We hope that you now have sufficient information to complete the exercise of option document. We confirm that the directors of A I McLean Pty Limited are presently overseas and that it will be necessary for a person in Australia to execute the documents on behalf of the company. After you have considered this question, could you please telephone the writer to discuss the practical solution to this problem. Freehills Cease to Act 115 On 24 September 1999 Freehills wrote each of the Partnerships and to DTSPL referring to the letters of 14 September 1999 and advising that they had "formed the view that we are no longer able to act for any of the partners or DTSPL" in relation to the litigation that was anticipated against the Digi-Tech parties. A recommendation was made that each of the Partnerships and DTSPL retain other legal advisers and that Mr Urwin should also obtain separate representation. 116 On 1 October 1999 Freehills wrote to Blakes in respect of the Freerider Investor Partnership and responded to Blakes' letter of 21 September 1999. It advised Blakes that the members of the Freerider Partnership and DTSPL denied any breaches of the Sale and Purchase Agreement. It also denied any other undischarged liabilities such that clause 4(b) would prevent the exercise of the rights. A covering letter of the same date addressed to Blakes advised that Freehills was ceasing to act for DTSPL and the Partnerships as of that date. Terminal Adapter option exercised – 28 September 1999 117 On 28 September 1999 Bartier Perry wrote to DTEL enclosing the Terminal Adapter Investor Option Notice on behalf of the plaintiffs. That letter advised that the monies due under the Option Agreement were to be paid by way of settlement to DTEL's solicitors' trust account. The letter called upon DTEL to contribute subscription monies "immediately". The notice was in the following terms: Pursuant to clause 2.4 of the Digi-Tech Investor Option Agreement, A I McLean Pty Limited gives notice that it exercises the Investor Option and requires Digi-Tech Equities Limited to subscribe for Company Shares in accordance with the terms of the Digi-Tech Investor Option Agreement. The amount of the Company Debt as at the date of this Investor Option Notice is NZ$19,993,367.85 and AUD$197,352.27. All capitalised terms have the meanings given to them in the Digi-Tech Investor Option Agreement dated 4 May 1998 between Digi-Tech Equities Limited, Digi-Tech Communications Limited and A I McLean Pty Limited. The Release 118 A Release was provided to McLean Tecnic by A I McLean in the following terms: RELEASE TERMINAL ADAPTER INVESTOR PARTNERSHIP To: McLean Tecnic Pty Limited In consideration of the payment to us of $10.00 receipt of which we acknowledge, we hereby release you from any claim, obligation or liability except any such claim, obligation or liability which is necessary for the valid exercise of the option under the Digi-Tech Investor Option Agreement to which we are a party. 119 Mr Simms signed the Release as a "duly authorised signatory" for AI McLean. Mr Simms also arranged for the appointment of an alternative director to A I McLean for the purposes of signing the Option Documents in the absence of Mr McLean. 120 On 28 September 1999 Mr Shtein sent a copy of the draft Release for Kalifair and Kalinick to Mr Smith. That Release was in the following terms: DEED OF RELEASE TERMINAL ADAPTER INVESTOR PARTNERSHIP TO: Kalifair Pty Limited Kalinick Pty Limited We hereby release you from any claim, obligation or liability except any such claim, obligation or liability which is necessary for the valid exercise of the option under the Digi-Tech Investor Option Agreement to which you are a party. 121 Mr Smith instructed his secretary, Ms Webber, to "do one of" the Deeds "for each assigning partner addressed to the company they assigned to". No such Release was prepared for A I McLean/McLean Tecnic in respect of the Freerider Partnership. 122 The plaintiffs submitted that it must have been, or certainly should have been, obvious to Mr Smith when he received the draft Release from Mr Shtein, that at the time of the exercise of the Freerider option the previous week there had been no release of McLean Tecnic's indebtedness to A I McLean and thus a breach of the warranty in clause 4(b) of the Option Agreement had occurred. This was not obvious to Mr Smith. Mr Smith did not recall whether Mr Shtein had told him why he thought it desirable for Toltex and Divome to release Kalifair and Kalinick (tr 412). He gave the following evidence (tr 413): Q. Do you say you have no recollection of the thought processes in your mind that led you to give the instruction to your secretary that is set out there? A. Well, the thought process would have been "That's probably not a bad idea. We should do that in relation to the others." Q. Did it occur to you that it might be a problem because it had not occurred in relation to Freerider? A. No, not that I recall. No. … Q. You say you didn't become aware of any problems with these transactions? A. I became aware when Einstein J delivered his decision and I was in counsel's chambers and we were going through it. 123 On 30 September 1999 Bartier Perry wrote to PCP enclosing their account in relation to the Terminal Adapter Investor Partnership. That account was for one-sixth of the fees and disbursements to that date. The six parties sharing those costs were Toltex, Divome, Mr Brand, Mr Kelliher, A I McLean, Gary Urwin/William Shorrock. The letter continued: We started the matter advising Toltex and Divome. The others joined in later. As we said in our costs letter to those who joined in later, we did not maintain separate time records in respect of each of the above. Most time was spent coming to grips with the complicated structure and reviewing all the correspondence maintained in two binders provided by Graham Brand. This was relevant to all concerned. Exercising the options for the individual investors was more complicated and difficult to document than for the corporates. It also involves stamp duty issues. ANH Retained 124 On 29 September 1999 ANH wrote to the two Partnerships and DTSPL referring to a meeting on 27 September 1999 and confirming that the two partnerships and DTSPL "would like us to act for them in relation to providing advice in respect of claims raised" by DTAL and in respect of raising possible claims against DTAL. That letter confirmed that the scope of ANH's instructions, and stated that the identity of the members of the Partnerships for whom ANH were to act was to be discussed at a meeting of the Partnerships to be convened as soon as possible. In the meantime ANH were to proceed on the basis that they had instructions to act for most of the members of the Partnerships and DTSPL. The letter set out the work to be carried out as follows: While the amount of the work which we will have to do may change as the matter progresses, we anticipate that we shall need to do the following: · meet with solicitors from Freehill Hollingdale & Page ("FHP") to obtain a briefing on the background of the matter; · meeting with you and other relevant members of the Partnership for the purpose of taking instructions; · instruct Counsel to advise; · advise you generally 125 On 7 October 1999 Blakes wrote to Mr Shtein confirming they acted on behalf of the DTEL and DTCL. That letter included the following: Terminal Adaptor Investor Partnership Your clients are well aware that our clients maintain that they have validly terminated the Agreement for Sale and Purchase dated 30 June 1997. Accordingly, your clients are not entitled to exercise any rights under the provisions of that Agreement or the other associated agreements. Our clients reserve their rights under the agreements generally. 126 Mr Shtein forwarded Blakes letter to Messrs Brand, Kelliher, Urwin and Simms advising that he thought it related only to the assigning "individual" investors and that he proposed to reply, "by pointing out that the position DTEL and the DTAL are adopting means investors can only assume that they have taken all steps available to them to exercise their options validly". 127 On 7 October 1999 Blakes wrote to ANH advising that they were instructed to commence proceedings for the recovery of the purchase price following the valid termination of the Terminal Adapter Sale Agreements. On the same day Ms Chang wrote to Messrs Kelliher, Brand, Urwin and Simms informing them of the receipt of the letter and suggesting that she meet with them earlier than planned to discuss a response to the letter and ANH's views on the matter to date. 128 On 12 October 1999 Mr Shtein wrote to ANH confirming that Bartier Perry acted for Kalifair, Kalinick and Mr Brand. He also confirmed that Bartier Perry acted for McLean Tecnic, Mr Kelliher and Mr Urwin in relation to the exercise of the options. Mr Shtein enclosed copies of the option exercise documents and advised: We understand you are representing our clients in relation to all litigious aspects. We expect therefore to have an indirect role only. We look forward to discussing the enclosed documents with you and we are instructed to assist you in any way we can. Equally, if it occurs to you that there are difficulties in respect of the way in which the options were exercised, we should be grateful for your advice about that. 129 On 14 October 1999 ANH wrote to the Partnerships and DTSPL confirming their understanding that the scope of their instructions and that the identity of those persons for whom they were to act was to be discussed at a meeting to be held that day. ANH advised that they had been proceeding on the basis that they had instructions to act for the major investors for each of the Partnerships and DTSPL. They also advised that they assumed that their instructions would extend to acting for each of the partnership entities "as a whole". By this time ANH had spoken with Mr Walker SC and Mr Jackman who confirmed they were available to continue acting in the matter and advised that they proposed to forward briefs to Mr Walker SC and Mr Jackman by the end of the week. The letter discussed the anticipated proceedings by DTAL and the available defences/responses to those claims. In this regard the letter included the following: Whilst DTAL might seek to rely on both grounds of termination it is likely in our view that DTAL will rely on termination under clause 4.1(a) of the TA Agreement, which in the present circumstances requires a material breach of the TA Agreement persisting after reasonable notice to remedy that breach. DTAL's assertions relating to the breaches, and the investors' responses have been the subject of detailed analysis by your previous legal advisers and it is not appropriate to repeat them here. What should be emphasised, however, is that the breaches are central to the resolution of the dispute between the parties, and that DTAL need only succeed in proving one material breach (either incapable of rectification or not remedied) to establish a prima facie case against the investors. 130 The letter referred to the possible available defences including DTAL's failure to provide a product capable of exploitation; an equitable set off; and claims of misleading or deceptive conduct under the Trade Practices Act 1974 (Cth). The letter also included the following: Investor Option agreements We met with Mr Oliver Shtein and Mr Duncan Bruce of Bartier Perry & Purcell on Tuesday 12 October 1999 and received from them copies of documents referable to the exercise by Chris Kelliher, Graham Brand, Kalifair Pty Ltd, Kalinick and McLean Technic Pty Ltd of the option under the Investor Option Agreements ("Option Agreements") they each entered into with Digi-Tech Equities Pty Ltd ("DTEL") and Digi-Tech Communications Pty Ltd ("DTCL"). We have subsequently received from Mr Urwin similar documents referable to other investors in TAIP. We understand from our discussions with Messrs Shtein and Bruce and from our review of the documents they provided to us that the above investors and Messrs Urwin and Shorrock have also transferred their interests in TAIP and DTSPK (sic) to nominee companies ("transferees") and that relevant notices of such transfers have been given to DTAL. To date whilst the option fees paid by the above investors have been accepted on behalf of DTEL, it has not taken any steps that it is required to under the Option Agreements such as subscribing for shares in the transferees. … We understand that other investors of the FreeRider Investor Partnership (although not all) have also exercised their rights under the Option Agreements and that Mr Ian Smith will provide us with copies of the documents relative to them. In the time available to us we have considered the impact of the exercise of the options under the Option Agreements by some of the investors, on the underlying dispute with DTAL regarding the TA Agreement and the FreeRider Agreement. It is our preliminary view that serious consideration should be given to the investors seeking some relief against DTEL and DTCL under the Option Agreements such as specific performance, in any proceedings either commenced by or against DTAL. We understand that the underlying purpose of the Option Agreements was to give investors the right to call on DTEL to effectively underwrite, through a subscription of shares in the investor partner company, the balloon payment under the TA Agreement and the FreeRider Agreement. DTCL has also provided a guarantee and indemnity in respect of DTEL's obligations under the Option Agreements and any loss suffered by the investors by reason of breach by DTEL of its obligations under those agreements. We expect to be in a position to give you a more considered view on the above strategy once we have reviewed the documents we have received this week relative to the exercise of the options. We also anticipate that we may need to discuss this aspect of the matter further with at least Messrs Shtein and Bruce and probably with Mr Smith as they have given more detailed consideration to the various aspects of the transfer of the investors' interests in the Partnerships, DTSPL and the TA Agreement and the FreeRider Agreement. 131 On 14 October 1999 Mr Smith sent Ms Chang schedules listing the partners in both partnerships and listing all the documents that he had served on DTEL. 132 On 15 October 1999 Mr Shtein wrote to Ms Chang in terms that included the following: As we discussed with you, we believe the validity of the exercise of the options by the partners (including our clients) is an important issue including in any litigation which eventuates. Freehills did not seem to have this view. We enclose a form of letter we propose to issue. You may wish to suggest changes to it and/or send it yourselves. The letter from Blakes dated 7 October leaves us unclear on a number of issues including DTEL's position in relation to the investor partners who did not need to novate the Sale Agreement in order to exercise their options. It seems inappropriate for us to probe these issues further with Blakes if you are advising our clients on them. The Digi-Tech Litigation 133 ANH acted for the present plaintiffs, as plaintiffs in the Digi-Tech litigation before Einstein J ([2002] NSWSC 416) and in the Court of Appeal ([2004] NSWCA 58) in which declarations were sought, inter alia, that the options had been validly exercised. There were two proceedings relevant to the plaintiffs: the first numbered 50169 of 1999 related to the Terminal Adapter Partnership filed on 24 December 1999 (the TA proceedings); and the second numbered 50087 of 2000 related to the Freerider Partnership Agreement filed on 29 June 2000 (the Freerider proceedings). 134 The defendants in both proceedings were DTAL, DTEL, DTCL and Mr Reid. The defendants filed a defence in the TA proceedings in March 2000 and in the Freerider proceedings in September 2000. In the Terminal Adapter proceedings the defendants claimed that the options were not validly exercised because the plaintiffs were "indebted otherwise than in respect of the Company Debt (as defined)" (par 44(b)) of the Defence. That claim was particularised as follows: The best particulars the defendants can give prior to discovery are as follows:- Each Company was indebted to the Commissioner of Taxation in respect of withholding tax payable on amounts of consideration paid to DTAL under the Sale Agreement. Each Company was or would be indebted to the relevant authority in either NSW or the ACT for stamp duty payable on the assignment. Each Company was liable to contribute to the cash resources of the Partnership and DTSPL pursuant to clause 8.15 of the Sale Agreement. 135 After the Defence was filed in the Terminal Adapter proceedings the parties proceeded to deal with the discovery of documents. ANH and Blakes corresponded in respect of discovery and by letter dated 30 March 2000 Ms Chang wrote that "if the only basis relied upon by your clients for denying that the Investor Options were validly exercised are the matters set out in paragraph 44(b) of the Defence" she would accept that a particular category need not be discovered. Blakes wrote back on 11 April 2000 advising that Ms Chang's assumption was "not correct". 136 On 12 April 2000 Ms Chang wrote to Blakes in terms that included the following: In addition, in light of your statement in your letter dated 11 April 2000 (in relation to the categories of documents to be discovered by the Defendants) that the matters set out in paragraph 44(b) of the Defence are not the only matters on which the Defendants' rely for denying that the Investor Options were validly exercised, we request further and better particulars of the other grounds on which your clients rely for denying that the Investor Options were validly exercised. 137 Blakes responded on 28 April 2000 as follows: We are instructed that the matters set out in paragraph 44(b) of the Defence are the only matters on which the Defendants' rely for denying that the Investor Options were validly exercised. However, the Defendants reserve their rights to add any new grounds of alleged invalidity which become apparent during the course of the proceedings. 138 In September 2000 the defendants filed a Defence in the Freerider proceedings in which, for the first time, the indebtedness between the two Partnerships was raised in paragraph 49(e)(iv) as follows: …on the date on which the Investor Option Agreement was purported to be exercised, it [McLean Technic] was also indebted in respect of its participation in the Terminal Adapter Partnership. 139 By this time the Option Period had expired. ANH did not advise the plaintiffs to attempt to exercise, or re-exercise, the options before the expiry of the option period on 31 July 2000. 140 Einstein J held relevantly [2002] NSWC 416: McLean Tecnic 1379 In my view the defendants' submissions in relation to McLean Tecnic make clear how the purported exercise of two relevant Investor Options failed. The evidence taken from the defendants submissions discloses the following factual history: · McLean Tecnic had investments in both the TA and the FR partnerships. · Its sole shareholder, AI McLean Pty Ltd, had two separate and independent Corporate Option Agreements; one specifically relating to the TA Sale Agreement and the indebtedness owing under that Agreement, and one specifically relating to the FR Sale Agreement and the indebtedness owing under that Agreement. · By an Investor Option Notice dated 20 September 1999, AI McLean Pty Ltd required DTEL to subscribe for NZ$3,776,415.30 of shares in McLean Tecnic [FR TB 6/206] with the resulting subscription monies to be applied by McLean Tecnic to meet its indebtedness under the FR Sale Agreement. · At that date, apart from the other indebtedness discussed above, McLean Tecnic was indebted to DTAL for NZ$19,993,367.85 and AUD$197,352.27 [TB 26/1770] in relation to the TA Sale Agreement. · The purported exercise of the FR Option failed leaving the indebtedness of $3,776,415.30 owing to DTAL. [see FR Defence para 49 (e)(v)] · By an Investor Option Notice dated 28 September 1999, AI McLean Pty Ltd required DTEL to subscribe for NZ$19,993,367.30 and AUD$197,352.27 of shares in McLean Tecnic [TB 26/1770, last page] with the resulting subscription monies to be applied by McLean Tecnic to meet its indebtedness under the TA Sale Agreement. · However, as discussed above, at 28 September 1999 McLean Tecnic was still indebted to DTAL for $3,776,415.30 relating to the FR Sale Agreement. · Accordingly, the purported exercise of the option failed. [see TA Defence para 53 (f) (v)] [I interpolate to note that as the Defendants pointed out, a simultaneous exercise of both options would have avoided this problem. Alternatively, McLean Tecnic could have assigned one of its investments to a sister company. AI McLean Pty Ltd could then have exercised the specific option for each of those companies.] · McLean Tecnic also had an indebtedness to DTSPL at 30 September 1997 as shown by the accounting records of DTSPL at 31 October 1999 [see exhibited 'PC1' to Carter 13 May 2002]. · The indebtedness was for: Purchase and Option fees due September 1999 15,892.95 Capital - unpaid call 42,827.00 $58,719.95 · DTSPL, it would appear, paid for and on behalf of McLean Technic the purchase and option fees due September 1999 totalling $15,892.95, to DTAL and DTEL. · However, the $15,892.95 was borrowed from DTSPL to enable the payments to be made to DTAL and DTEL resulting in a continuing indebtedness by McLean Tecnic. · This indebtedness existed at the time the options were exercised. 1380 The holding is that the purported exercise of both options accordingly failed. 141 The Court of Appeal dealt with the exercise of the option relevantly as follows [2004] NSWCA 58 (62 IPR 184): Issue 8 199 We repeat that this issue is: "Was the exercise of options for McLean Tecnic P/L invalid because: (a) at the time of exercise in relation to one partnership, it had an existing liability in relation to the other; and (b) it was indebted to DTSPL?" 200 Einstein J answered both questions in the affirmative. 201 The facts that give rise to this issue are the following. McLean Tecnic was an Investor in both the Terminal Adapter and Freerider Partnerships. A I McLean was the sole shareholder of McLean Tecnic. A I McLean had entered into an Option Agreement in regard to the Terminal Adapter Partnership and had entered into another, and separate, Option Agreement in regard to the Freerider Partnership. 202 Clause 2.2 of the McLean Option Agreements provided that the options thereunder might be exercised by A I McLean at any time during the option periods "provided that there is no outstanding breach of the warranties and undertakings in cl 4 of this Agreement". 203 Clause 4.1 of the two McLean Option Agreements provided: "The Investor warrants and undertakes to each of DTAL and DTCL that: (a) the Company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL and the Company will not prior to the expiry of the Investor Option Period undertake any activity not expressly provided for or contemplated by the Investor Partnership Agreement; (b) on the date on which the Investor Option is exercised, the Company will have no indebtedness to any person other than the Company Debt; … 204 On 20 September 1999, A I McLean sought to exercise its Freerider Option Agreement. It required DTEL to subscribe for NZ$3,776,415 worth of shares in McLean Tecnic. At that date, however, McLean Tecnic was indebted to DTAL for NZ$19,993,367 and A$197,352.27 in relation to the Terminal Adapter Sale Agreement. 205 Einstein J accepted Digi-Tech's submission that because, as at 20 September 1999, McLean Tecnic was so indebted to DTAL, the exercise by A I McLean of the Freerider Option Agreement was invalid. The basis of this submission was that, by reason of McLean Tecnic's indebtedness to DTAL in relation to the Terminal Adapter Sale Agreement, the warranty that McLean Tecnic would have no indebtedness other than the Company Debt (cl 4.1(b)) was breached. 206 On 28 September 1999, A I McLean sought to exercise the Terminal Adapter Option Agreement. But, at that time, because of the failure of the exercise of the Freerider Option Agreement, McLean Tecnic was still indebted to DTAL for NZ$3,776,415.30. Accordingly, Einstein J held that A I McLean's exercise of the Terminal Adapter Option Agreement was also invalid as being in breach of cl 4.1(b). 207 Mr Sullivan QC, who together with Mr Stowe, appeared for the McLean appellants, submitted that the judge's construction of the warranty in cl 4.1(b) as to the Company (McLean Tecnic) having no indebtedness to any person other than the "Company Debt", produced an absurdity, and cl 4.1 should be construed so as to avoid that result. 208 Mr Sullivan drew attention to the following definitions. "Company Debt" was defined by the Option Agreements to mean "the proportion of the purchase price payable to DTAL pursuant to the Sale Agreement for which the Company is severally liable less all amounts paid by or on behalf of the Company to DTAL by way of instalment and the instalment debt". "Investor Partnership" was defined in each case as being the Terminal Adapter Partnership and the Freerider Partnership respectively, as was "Investor Partnership Agreement". 209 These definitions indicate that "Investor Partnership" and "Investor Partnership Agreement" are separate concepts for the purposes of the Terminal Adapter and the Freerider Option Agreements. In other words, under the Terminal Adapter Option Agreement, the Investor Partnership was the Terminal Adapter Partnership and Investor Partnership Agreement meant the Terminal Adapter Partnership Agreement. Likewise, under the Freerider Option Agreement, these terms had a similar meaning with "Freerider" being substituted for "Terminal Adapter". 210 A I McLean entered into the two Option Agreements on 4 May 1998. On that date (and thereafter) McLean Tecnic was not incorporated for the sole purpose of making an investment in either the Freerider or the Terminal Adapter Investor Partnership (as required by cl 4.1(a) of the Options Agreements); that is because it had made an investments in both. Thus, on a literal view of cl 4.1(a), there had been a breach of that clause from the very moment the Option Agreements were entered into. 211 Mr Sullivan pointed out further that McLean Tecnic, with the knowledge and concurrence of Digi-Tech, undertook an activity not expressly provided for or contemplated by the Freerider Investor Partnership Agreement, as it undertook the role of a partner in the Terminal Adapter Investor Partnership (and vice versa). 212 He submitted, therefore, that on the construction upheld by the judge, there would have automatically been a breach of the warranty and undertaking in cl 4.1(a) - thus invalidating the exercise of the options under cl 2.2. This invalidation would have been inevitable. On that basis A I McLean never had the benefit of an option that was capable of being exercised. Therein, it was submitted, lay the absurdity. 213 Both Digi-Tech and the McLean appellants accepted that in construing the Option Agreements, due regard had to be paid to the circumstances in which the documents came into being. According to Einstein J: "[T]he events on the evening of 30 June and in the early hours up to about 4.00 am of 1 July were in fact what can only be described as a madhouse of frantic efforts by all who participated to consummate the split transactions being documented literally on the spot under the most considerable time pressure imaginable". (emphasis in the original judgment) 214 Mr Sheahan submitted that regard also had to be had to the fact that the Agreements were structured so that each partnership shared in the income generated by the products of both partnerships. Accordingly, he submitted, each Investor Partnership Agreement should be construed as expressly contemplating that partners might also be partners in the other Partnership that was associated with the scheme. 215 Mr Sheahan submitted that on that basis there would not be a breach of cl 4.1(a) and no absurdity would result. He pointed out that cl 2.2 contemplated that there might be a breach of the warranties and undertakings in cl 4 but, provided the breach was remedied before the option was exercised, the option could be exercised validly. 216 Mr Sheahan submitted that McLean Tecnic could have assigned its rights and duties to two separate but related companies, each wholly owned by A I McLean. Each would then have acquired an interest in only one of the Partnerships, thus satisfying cl 4.1(a). He pointed out that Mr Kelliher was also a partner of both Partnerships and he had exercised his two Option Agreements validly by, prior to the exercise thereof, assigning his two sets of interests to two different companies. Had McLean Tecnic done the same, there would have been no breach of warranty by it. 217 On this basis, Mr Sheahan submitted, A I McLean could have had the benefit of the Option Agreements without words being supplied, omitted or corrected in cl 4.1(a). 218 Mr Sullivan submitted, in reply, that the expression "indebtedness" in cl 4.1(b) of the Terminal Adapter Option Agreement should be construed as "indebtedness other than indebtedness that would satisfy the definition of Company Debt in respect of the Freerider Option Agreement" and, in relation to the McLean Freerider Option Agreement, as "indebtedness other than indebtedness that would satisfy the definition of Company Debt in respect of the Terminal Adapter Agreement." 219 Mr Sullivan accepted that the fairness of the construction for which he contended would be contingent upon construing the Option Agreements so as to make it a condition precedent to the exercise of the option in respect of one Partnership, that McLean Tecnic had paid the option fees (and was not in default in relation to the Instalment Debt) due in respect of the other. As he candidly pointed out, were that not so, it might be open to McLean Tecnic to exercise the option in respect of one Partnership, when there existed default in respect of the payment of the Instalment Debt and non-payment of option fees in respect of the other Partnership. This would have the consequence of requiring DTEL to subscribe in a company which was liable for the balloon payment in respect of the Partnership for which the option was not exercised (where, also, the option fees might be owing and where there might be outstanding amounts in relation to the Instalment Debt). 220 Mr Sullivan submitted that such a result (that is, the construction of such a a condition precedent to the exercise of the option) could be obtained by adding words to two parts of the Option Agreement. Firstly, cl 2.2, he submitted, should read: "Subject to the payment of instalments of the Option Fee ( and other partnership debts ) from time to time as set out in the Schedule …" Secondly, he submitted that the Schedule should be read as if it contained the following words: " Other Partnership Debts" means such of the amounts set out below which have fallen due at the time of the exercise of the Option : [ Table setting out Option Fees and Instalment Debt due in respect of the other partnership ]" 221 In our opinion, however, Mr Sullivan's solution involves a substantial rewriting of the Option Agreement, does too much violence to the words used, and is unnecessary. The solution proffered by Digi-Tech is reasonable in the context, requires far less change to the ordinary meaning of the words used, and does not result in absurdity (as shown by the example of Mr Kelliher). In our view, Einstein J was justified in preferring the submissions advanced on behalf of Digi-Tech on this issue. 222 Accordingly, we uphold the views expressed by the judge in regard to this aspect of Issue 8 and the arguments of the McLean appellants in this respect fail. 223 Einstein J also found that at 30 September 1997 McLean Tecnic owed DTSPL $58,719.95. This was in respect of $15,892.95 being purchase and option fees due in September 1999 and $42,827 for an unpaid call on capital. It was said that this indebtedness prevented the exercise of the options by A I McLean. 224 The McLean appellants' principal argument on this issue was that this alleged indebtedness was a matter outside the pleadings and was not available for adjudication. 225 Digi-Tech accepted that it did not make specific reference to these two debts in its pleadings. It sought to make its case on accounts put in as exhibits. The existence of the two debts in question was not addressed in oral evidence. The exhibits in question were tendered when dealing with other issues. 226 In the context of this case, with many issues in dispute and thousands of pages of exhibits tendered in evidence, it was important to ensure that the respective cases of the parties were pleaded in such a way that no party could be taken by surprise. We have stressed this in regard to Issue 6. It seems to us that the failure to plead the existence of the two debts must have resulted in surprise and unfairness to the McLean appellants. 227 The judge accepted that the indebtedness existed merely by relying on the documents tendered. It is true that the McLean appellants tendered the documents in question themselves and asserted that they were correct. But the documents were very bulky, and the two items were an infinitesimal part of the information contained therein. Whether or not the documents became evidence for all purposes is not to the point. The significance of the omission to make any reference to the two debts in the Digi-Tech pleadings is that the McLean appellants did not apply their minds to the question whether these particular debts were correctly shown in those documents when they tendered them. 228 The documents were tendered at a time when the McLean appellants did not know that Digi-Tech would try to use the alleged debts to contend that A I McLean had not exercised the Option Agreements validly. The question was simply not canvassed in the course of oral evidence. It received very little attention in closing oral addresses (the McLean appellants apparently did not challenge the $42,827 debt at all). But this was not the only issue in this case which did not receive the attention of counsel in closing. We repeat that, having regard to the complexity and vastness of the issues, that is quite understandable. 229 In these circumstances, it seems to us that it would be unfair and dangerous for factual findings to be made as to the indebtedness of the Mclean Tecnic on the strength of those documents alone. 230 In our opinion, the judge's findings on this issue should be set aside. In our view, however, given the way the issue was dealt with by the parties (with some degree of technical fault on both sides), it would be just to order a re-trial in respect of this issue (that is, whether the indebtedness as now alleged existed at the relevant time). What should the solicitors have done? 142 The plaintiffs claim that each of the solicitors should have recognised that by reason of McLean Tecnic's membership in both Partnerships; (a) McLean Tecnic's incorporation would have been for a purpose other than investment in the respective Partnerships and/or McLean Tecnic would have been carrying on activity not expressly provided for in the requisite Investor Partnership Agreement; and (b) there would be an indebtedness other than the Freerider Company Debt at the time of the exercise of the Freerider option; and (c) there was at least a risk that there would be an indebtedness other than the Terminal Adapter Company Debt at the time of the exercise of the Terminal Adapter option on 28 September 1999. 143 The plaintiffs claim that when the solicitors recognised each of these matters they should have warned the plaintiffs of the probabilities that those matters would amount to breaches of clause 4.1(a) (the sole purpose breach) and 4.1(b) (the indebtedness breach) of the Option Agreement and that they would probably render any exercise of the option invalid. 144 The plaintiffs claim that the solicitors should then have advised the plaintiffs that the "only" way to validly exercise an option was for McLean Tecnic to assign its interest in each of the Partnerships and its corresponding shareholding in DTSPL to two companies incorporated for the sole purpose of making an investment in the respective Partnerships and DTSPL. It is claimed that the solicitors should have advised the plaintiffs that McLean Tecnic would then call upon DTCL and DTEL to enter into "similar" Investor Option Agreements with the two companies so as to require DTEL to assist the relevant new "Company" to meet the obligation under the Sale Agreement. 145 The plaintiffs make an additional claim against ANH that it should have reviewed the transaction documents and the documents relevant to the plaintiffs' purported exercise of the options to see whether the options had been validly exercised prior to issuing proceedings seeking declarations that such options had been validly exercised. The plaintiffs also claim that ANH should have recognised that the option period was still open until 31 July 2000 and advised the plaintiffs of the "only" way to validly exercise the option. Preliminary Issues 146 A number of preliminary issues were raised. All defendants argued that the options were exercised validly. If that is so, that is the end of the plaintiffs' cases against each of the defendants. The next issue was whether the pleaded "only" method of exercising the option validly would have in fact been amounted to a valid exercise of the option. If not then the central plank to the plaintiffs' claims against the defendants falls away. If the pleaded method would theoretically amount to a valid exercise of the option it is necessary to decide whether in all the circumstances it would have been achievable. Validity of Exercise of Options 147 The defendants submitted that the plaintiffs' claims in the present proceedings must fail because the Options were in fact, exercised validly. As I have said earlier, it was claimed that this submission is able to be made notwithstanding the findings of the Court in the Digi-Tech litigation to the contrary, because the particular arguments relied upon in this litigation were not raised in the Digi-Tech litigation. I agree with Mr Bathurst QC that it is regrettable that these arguments were not raised in the Digi-Tech litigation, however I am satisfied that the defendants are entitled to raise them in this litigation. 148 Mr Bathurst QC, whose submissions the other defendants adopted, submitted that the Options under the Investor Option Agreements were both validly exercised on 28 September 1999. It was submitted that by the operation of clause 2.2 of the Option Agreement, the option could be exercised at any time during the Investor Option Period provided there was no breach of the warranties and undertakings in clause 4 of the Option Agreement. 149 Clause 2.2 of the Option Agreements provided: 2.2 Subject to the payment of instalments of the Option Fee from time to time as set out in the Schedule and provided that there is no outstanding breach of the warranties and undertakings in clause 4 of this agreement, the Investor Option may be exercised by the Investor at any time during the Investor Option Period. During the Investor Option Period, the Investor agrees that it must not deal with any of the Company Shares except as contemplated by this agreement and any purported exercise of the Investor Option other than by complying with this clause is invalid. 150 Other relevant provisions of the Option Agreements included the parties' acknowledgement and agreement that all outstanding amounts of both the Instalment Debt and the Option Fee became "immediately due and payable to DTAL and DTEL respectively upon the exercise of the Investor Option" (cl 2.3). It also provided as follows: 2.4 The Investor may exercise the Investor Option by executing and delivering to DTEL an Investor Option Notice specifying the amount of the Company Debt during the Investor Option Period and paying or procuring the payment of all outstanding amounts of the Instalment Debt to DTAL and all outstanding amounts of the Option Fee to DTEL. The Investor Option is deemed to have been exercised when the executed Investor Option Notice and payment of the outstanding amounts of the Option Fee are delivered to DTEL and payment of the outstanding amounts of the Instalment Debt is delivered to DTAL. 2.5 The parties acknowledge and agree that the Company's obligations to pay the Instalment Debt to DTAL pursuant to the Sale Agreement, the guarantee of that obligation pursuant to the Sale Agreement and the Investor's obligations to pay the Option Fee to DTEL pursuant to this agreement are each respectively released upon receipt of payment of the outstanding amounts of the Instalment Debt by DTAL and the receipt of payment of the outstanding amounts of the Option Fee by DTEL. 2.6 The Investor Option may only be exercised by the Investor to require DTEL to subscribe for that number of Company Shares at par which is equivalent by value to the Company Debt specified in the Investor Option Notice. 2.7 Upon the exercise of the Investor Option: (a) DTEL is deemed to have subscribed for that number of Company Shares at par which is equivalent by value to the sum of Company Debt specified in the Investor Option Notice; (b) DTEL must immediately contribute to the Company the subscription monies for the Company Shares which is equivalent by value to the sum of Company Debt specified in the Investor Option Notice and nominate at least 2 persons to act as the officers of the Company; and (c) upon receipt of the subscription monies from DTEL in accordance with clause 2.7(b), the Company must: (i) allot and issue to DTEL the relevant number of Company Shares calculated in accordance with clause 2.7(a); (ii) register DTEL as a shareholder in the register of members in respect of the issued Company Shares referred to in clause 2.7(c)(i); (iii) obtain written resignations from all of the officers of the Company appointed by the Investor; (iv) appoint the persons nominated by DTEL pursuant to clause 2.7(b) as the officers of the Company; and (v) apply all of the subscription moneys received from DTEL to the payment of the Company Debt due to DTAL. (d) For the purpose of effecting the transactions referred to in clauses 2.7(b) and 2.7(c)(v), the parties must establish a settlement account with a firm of solicitors or chartered accountants in New Zealand who will be given irrevocable instructions to receive the subscription money from DTEL and to forthwith pay that amount without deduction to DTAL in satisfaction of the Company Debt. 2.8 The Company Shares issued to DTEL are to rank pari passu in all respects with the existing issued Company Shares from the date of their allotment. 2.9 The parties acknowledge and agree that all of the Investor's and Company's duties and obligations pursuant to this agreement are released upon the exercise of the DTEL Option by the Investor and the Company attending to the matters referred to in clause 2.7(c), and that the Company's obligations to pay the Company Debt under the Sale Agreement are extinguished on the Company attending to the matter referred to in clause 2.7(c)(v). … 4.1 The Investor warrants and undertakes to each of DTAL and DTCL that: (a) the Company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL and the Company will not prior to the expiry of the Investor Option Period undertake any activity not expressly provided for or contemplated by the Investor Partnership Agreement; (b) on the date on which the Investor Option is exercised, the Company will have no indebtedness to any person other than the Company Debt; … 5.1 A party may not assign its rights under this agreement except as provided by this clause 5 or with the consent of the other parties. 5.2 The parties acknowledge that: (a) the Company may assign: (i) its interest in the Investor Partnership and its corresponding shareholding in DTSPL in accordance with the Investor Partnership Agreement; and (ii) its rights and obligations pursuant to the Sale Agreement including its obligations to pay the Instalment Debt and the Company Debt in accordance with the Sale Agreement, and further acknowledge that the Company will be released from all of its present and future obligations and duties under each of the Investor Partnership Agreement and the Sale Agreement, including its obligations to pay the Instalment Debt and the Company Debt, upon such an assignment being validly completed; and (b) the guarantor of the Instalment Debt pursuant to the Sale Agreement may be substituted pursuant to the Sale Agreement whether pursuant to an assignment as contemplated in clause 5.2(a) above or otherwise and further acknowledge that the relevant guarantor of the Instalment Debt will be released from all its present and future obligations and duties under the Sale Agreement, including its guarantee of the Company's obligations to pay the Instalment Debt, upon such a substitution being validly completed. 5.3 The parties agree that upon such an assignment as referred to in clause 5.2(a) above, the Investor and the Company are released from all of their respective duties and obligations under this agreement. DTCL and DTEL each agree that they will enter into a similar agreement with the assignee (and where the assignee is a company, the sole shareholder in the assignee company) to permit the assignee to require DTEL to assist the assignee to meet its assigned obligations under the Sale Agreement, provided that the assignee's obligations to pay any option fee are reduced according to the amount of the Option Fee paid by the Investor under this agreement. 151 On 20 September 1999 McLean Tecnic paid the total amount that it was required to pay under the Freerider Option Agreement but because the Terminal Adapter option had not been exercised McLean Tecnic remained liable to pay its instalments as a member of that Partnership. It was therefore in breach of clause 4.1(b) of the Option Agreement. 152 On 28 September 1999 McLean Tecnic paid the outstanding Option Fees and Instalment Debt under the Terminal Adapter Partnership and was released from any debt owed by it to A I McLean on that day. 153 It was submitted that at the time of the exercise of the Terminal Adapter Option on 28 September 1999, the pre-conditions to the valid exercise of each option were met. Notices of Exercise of Option had been delivered and all payments required for the respective exercises of the options had been made. It was further submitted that in circumstances where it was known to each party that McLean Tecnic had invested in both Partnerships and where simultaneous exercise of both options (in the sense of delivering all documents and making all necessary payments at the same time) was not expressly required, such a construction would accord with the objective intention of the parties. 154 It was also submitted that at the time the McLean parties' Terminal Adapter documents were delivered pursuant to clause 2.4 of the Option Agreement the conditions precedent to the operation of clause 2.2 of both the Terminal Adapter and the Freerider Option Agreements were simultaneously satisfied and McLean Tecnic ceased to be in breach of clause 4.1(b) of both Agreements at the same time. Reliance was placed on the submission made by Counsel for the Digi-Tech parties in the Court of Appeal, recorded in the CA Judgment that "cl 2.2 contemplated that there might be a breach of the warranties and undertakings in cl 4 but, provided the breach was remedied before the option was exercised, they could be exercised validly": [215]. It was submitted that on the proper construction of the Option Agreements the plaintiffs exercised the options validly on 28 September 1999 and thus the plaintiffs claims against all defendants must fail. 155 The circumstances in which these Option Agreements came into existence include the fact that it was originally intended that only one partnership would be established for both products. At that time the parties obviously intended that the Investor would be provided with an option to require DTEL to subscribe for shares in the Company thus allowing the Investor to exit from the investment. The only reason that two partnerships were established was to accommodate the advice from the Queens Counsel that the partnership should consist of no more than twenty members. The fact that Digi-Tech accepted McLean Tecnic's membership of both partnerships and received and kept the instalment payments made by McLean Tecnic in respect of both partnerships supports the conclusion that dual partnership was intended and permissible. In the Digi-Tech litigation it was argued that the parties did not intend that a debt in respect of one partnership would amount to a breach of clause 4.1(b) so as to invalidate the exercise of the option in the other partnership. However that construction did not find favour with the Court in the Digi-Tech litigation, and I must accept that the debt in the Terminal Adapter Partnership amounted to a breach of clause 4.1(b) at the time of the exercise of the Freerider option. 156 The deeming provision in clause 2.4 of the Option Agreement identifies the time at which the exercise occurs and refers to only two pre-requisites: the first is the delivery to DTEL of the executed Investor Option Notice and payment of the outstanding amounts of the Option Fee; the second is the delivery of payment of the outstanding amounts of the Instalment Debt to DTAL. There is nothing in the Option Agreement, or indeed in the suite of Agreements, to suggest that the deeming provision in clause 2.4 would be stayed until any breach of clause 4 was cured. Such a stay would create uncertainty both in respect of the deeming provisions in clause 2.4 and clause 2.7(a). The mechanism for exercise of the option was an important matter for all parties. The construction contended for by the defendants would result in a lack of certainty of when the option would be exercised and/or when the parties' rights and obligations would be triggered. I am satisfied that such uncertainty would not have been intended in these complex transactions involving such large amounts of money. 157 In addition the express terms of the Option Agreement are against such a construction. It is clear that the parties anticipated that there might be a "purported" but invalid exercise of the option because clause 2.2 of the Option Agreement referred to that possibility occurring where there were extant breaches of clause 4 as at the time the option was purportedly exercised. 158 I am not satisfied that the options were simultaneously and validly exercised on 28 September 1999. 159 There was a further submission that the only impediment standing in the way of the valid simultaneous exercise of the option on 28 September 1999 was the plaintiffs' new assertion that there was an outstanding breach of the warranty in clause 4.1(a). It is not necessary on this aspect of the matter to deal with this submission having regard to my finding that the options were not validly exercised on 28 September 1999. "Only" Method of Valid Exercise 160 A central plank in the plaintiffs' cases against each of the defendants is the claim that there was only one method by which the options could have been exercised validly. This claim was not made in the Digi-Tech litigation and it was not made in its present form in the present proceedings until the eve of the trial. It is appropriate to set out the history to the development of this claim. 161 When the plaintiffs commenced these proceedings on 19 September 2005, their original claim was that the defendants should have taken steps to ensure that the options were exercised validly by effecting one of the following: (i) a transfer of the rights and obligations of McLean Tecnic in relation to the FRP to a wholly owned subsidiary in accordance with clause 5.2 of the McLean Freerider Option Agreement, and then calling on DTCL and DTEL to meet their obligations to grant a new option agreement pursuant to clause 5.3 of the McLean Freerider Option Agreement, and then validly exercising that new agreement; or (ii) a transfer of the rights and obligations of McLean Tecnic in relation to both the FRP and TAP to two wholly owned newly formed subsidiaries in accordance with clause 5.2 of the two McLean Option Agreements and then calling on DTCL and DTEL to meet their obligations to grant two new and separate option agreements pursuant to clause 5.3 of each of the McLean Option Agreements, and then validly exercising those two new agreements; or (iii) validly exercising on the same day, the two McLean Option Agreements in relation to the McLean Parties' interest in each of the two separate Partnerships. 162 That claim was not changed in the Amended Summons filed on 24 February 2006. However in the Further Amended Summons filed on 4 December 2006 the plaintiffs made the following claim: 54. In circumstances where a corporate entity was a partner in both the Terminal Adapter and Freerider Partnerships, which McLean Tecnic was, the option rights under the McLean Option Agreements could have been validly exercised by the McLean Parties at any time within the Investor Option Period in the following ways: Assignment to two separate nominee companies (a) The assignment of McLean Tecnic's interests in the TAP, its corresponding shareholding in DTSPL, and its rights and obligations under the Terminal Adapter Sale Agreement and the Terminal Adapter Licence Agreement, to a wholly owned, newly formed subsidiary company with no trading history, incorporated for that purpose alone, and otherwise pursuant to and conformably with the requirements of the Terminal Adapter Partnership Agreement, the McLean Terminal Adapter Option Agreement and the Terminal Adapter Sale Agreement, following which McLean Tecnic would exercise the option rights under the successor option agreement as envisaged by clause 5.3 of the McLean Terminal Adaptor Option Agreement pleaded in paragraph 52 above; and (b) in addition to (a), but whether or not on the same day, the assignment of McLean Tecnic's interests in the FRP, its corresponding shareholding in DTSPL, and its rights and obligations under the Freerider Sale Agreement and the Freerider Licence Agreement to a separate, wholly owned, newly formed subsidiary company, with no trading history, incorporated for that purpose alone, and otherwise pursuant to and conformably with the requirements of the Freerider Partnership Agreement, the McLean Freerider Option Agreement and the Freerider Sale Agreement following which McLean Tecnic would exercise the option rights under the successor option agreement envisaged by clause 5.3 of the McLean Freerider Option Agreement pleaded in paragraph 53 above. Exercise of both options on the same day (c) In the alternative to (a) and (b), but subject to McLean Tecnic having no indebtedness other than in respect of its obligations to pay the Terminal Adapter Company Debt and the Freerider Company Debt, by AI McLean exercising the option rights under both of the McLean Option Agreements on the same day in accordance with their terms and thereby ensuring that, on exercise of both options, McLean Tecnic's indebtedness under the Terminal Adapter Sale Agreement and the Freerider Sale Agreement were simultaneously satisfied through the operation of each option as pleaded in paragraphs 46 and 47 above, such that, at the time of exercise of each option, McLean Tecnic had no other indebtedness which would amount to a breach of warranty under clause 4.1(b) of each of the McLean Option Agreements and thereby prevent a valid exercise of each option. One assignment to a nominee only (d) In the alternative to (a), (b) and (c): (i) in the event that only (a) above was done, subject to McLean Tecnic having no indebtedness other than in respect of its obligations to pay the Freerider Company Debt, by AI McLean subsequently exercising the option under the McLean Freerider Option Agreement in accordance with its terms; and (ii) in the event that only (b) above was done, subject to McLean Tecnic having no indebtedness other than in respect of its obligations to pay the Terminal Adapter Company Debt, by AI McLean subsequently exercising the option rights pursuant to the McLean Terminal Adapter Option Agreement in accordance with its terms. Particulars (a) Clause 14.4 of each of the Terminal Adapter Partnership Agreement and the Freerider Partnership Agreement. (b) Clauses 6.5(b) and 20.4 of each of the Terminal Adapter Sale Agreement and the Freerider Sale Agreement. (c) Clauses 2.2 to 2.9, 5.2 and 5.3 of each of the McLean Option Agreements. 163 On 4 April 2008 the plaintiffs amended their claim restricting the way in which the option could be validly exercised to the single process, as outlined in paragraphs 54(a) and (b). All other claims in 54(c) and (d) were abandoned. Prior to the amendment being filed, Blakes wrote to the solicitors for each of the defendants by letter dated 28 March 2008 which included the following: 1. Paragraphs 54(c) and (d) have been deleted. By those deletions, the plaintiffs allege that the only manner in which the options could have been exercised validly was by McLean Technic first assigning its respective interests under the two partnerships and related agreements to separate nominee companies. This is because of the operation of the "sole purpose" warranty in clause 4.1(a) of each of the McLean Option Agreements. [emphasis added] 164 The plaintiffs therefore contended at trial that the only valid method of exercise of the options was by the plaintiffs assigning McLean Tecnic's interests in each of the Partnerships, its respective shareholdings in DTSPL, and its rights and obligations under each of the Terminal Adapter and Freerider Sale Agreements and Licence Agreements to wholly owned, newly formed subsidiaries incorporated for the sole purpose of making an investment in the respective Partnerships and DTSPL, following which McLean Tecnic would exercise the option rights under the respective successor option agreements as envisaged by clause 5.3 of the Terminal Adapter and Freerider Option Agreements. 165 The plaintiffs did not explore in evidence or explain why they had decided to abandon the alternative methods as pleaded, that is, the exercise of the options on the same day as pleaded in paragraph 54(c) and a single assignment to a nominee as pleaded in paragraph 54(d) endorsed by Einstein J in his judgment in the Digi-Tech litigation (par [1379]). 166 The first step in the "only" method pleaded by the plaintiffs is the assignment of McLean Tecnic's "interest" in the two Investor Partnerships and its respective shareholding in DTSPL. Clause 14.1 and 14.2 imposed restrictions on the "disposition" of McLean Tecnic's "Partnership Interest". "Partnership Interest" was defined as "the equity interest" of McLean Tecnic in the Partnership. Clauses 14.1 and 14.2 of the Freerider Partnership Agreement provided as follows: ` 14. RESTRICTION ON DISPOSITION Transfer of Partnership Interest 14.1 A Partner may not sell, transfer, declare itself trustee of or otherwise dispose of any legal or equitable interest in their Partnership Interest or any receivable owed by the Partnership to the Partner except in accordance with this deed. 14.2 Subject to clauses 14.3 and 14.4, a Partner may not sell, transfer, declare itself trustee of or otherwise dispose of any legal or equitable interest in their Partnership Interest or any receivable owed by the Partnership to the partner. 167 Clause 14.4 dealt with McLean Tecnic's position. It provided as follows: Corporate Partners 14.4 Each Partner which is a body corporate may at any time without the prior consent of the other Partners and DTAL transfer all of their Partnership Interest together with their corresponding shareholding in DTSPL, its rights and obligations under the Sale Agreement and under the proposed licence agreement with DTSPL, and any receivable owed by the Partnership or DTSPL to that Partner for the time being held by that Partner to a transferee which is: (a) a Wholly Owned Subsidiary of that Partner; (b) a natural person who is the sole shareholder of that Partner; (c) relative (as defined in section 9 of the Corporations Law) of the person referred to in clause 14.4(b); or (d) a body corporate nominated by a relative referred to in clause 14.4(c). 168 Clause 14.4 provided not only for the "transfer" of McLean Tecnic's "Partnership Interest", that is its "equity interest" in the Partnership, but also purported to provide for the "transfer" of McLean Tecnic's rights and obligations under the Sale Agreement and Licence Agreement at any time without the prior consent of the other Partners and DTAL. 169 The next step, or second limb, of the plaintiffs' method as pleaded is the "assignment of rights and obligations" pursuant to the Sale Agreement. Notwithstanding that clause 14.4 of the Investor Partnership Agreement purported to provide for the "transfer of rights and obligations" under the Sale Agreement, clause 5.2(a)(ii) the Option Agreement referred to an assignment "in accordance with the Sale Agreement". The relevant provisions of the Sale Agreement in relation to "assignment" are found in clause 20 which provided relevantly: 20. ASSIGNMENT, LICENCE AND SUB-CONTRACTING … 20.2 By Investors: Subject to clauses 8.2, 9.1, 20.3 and 20.4 none of the Investors or the Investor Partnership may delegate or assign its rights under this Agreement or grant a sub-licence to any person without the prior written consent of DTAL. … 20.4 Transfer of Investors: In the event that an Investor transfers its interest in the Investor Partnership and DTSPL in accordance with clause 14 of the Investor Partnership Agreement and provided that the transfer is not in breach of the Security given by that Investor and that Investor has paid all amounts under clause 6.2 of this Agreement which at the date of the transfer were due and payable (but unpaid) that Investor may transfer its interest and obligations under this Agreement to such transferee by delivering to DTAL: (a) a deed pursuant to which the transferee is bound by this Agreement to perform the obligations of the Investor; and (b) at the option of DTAL, a Security or an effective novation of the existing Security granted by the Investor to DTAL or evidence satisfactory to DTAL that the existing Security granted by the Investor will continue to apply, and thereafter this Agreement will be deemed to be novated so that the transferee will have assumed all the rights and obligations of the transferor as if the transferee was an original Investor and the transferor Investor will have no further rights or obligations under this Agreement. 170 The prohibition in clause 20.2 was subject to the provisions of clause 20.4. Clause 20.4 applied when, as the pleaded method required, the Investor transferred its interests in the Investor Partnership and DTSPL pursuant to clause 14 of the Investor Partnership Agreement. Clause 20.4 would have allowed the plaintiffs to transfer their "interest and obligations under the Sale Agreement" to the assignee. 171 The final step in the plaintiffs' pleaded method is the exercise by McLean Tecnic of the "successor option agreement as envisaged by clause 5.3" of the Option Agreement. That successor option agreement would be between DTEL, DTCL, McLean Tecnic as Investor and the newly formed subsidiary company, as the Company. Difference in language 172 The difference in language between clause 14.4 of the Investor Partnership Agreement, in which reference was made to the "transfer" of "rights and obligations under the Sale Agreement", clause 20.4 of the Sale Agreement in which reference was made to the "transfer" of "interest and obligations" under the Sale Agreement, and the plaintiffs pleaded method in which reference is made to "assignment" of "rights and obligations" under the Sale Agreement, was not the subject of separate submissions. In those circumstances I do not need to deal with those differences other than to say that such differences are further support for the observations made in the Digi-Tech litigation in relation to the extraordinary way in which the Agreements were completed and executed. 173 On one view, these differences, and in particular the plaintiffs' choice of language in the pleaded method of "assignment" of "rights" in accordance with the Sale Agreement, as opposed to the "transfer" of "interest and obligations", may suggest that the assignment was prohibited unless DTAL consented to it in writing (cl 20.2). If that is right then the plaintiffs' pleaded method is flawed because it makes no provision for the step of obtaining DTAL's written consent. In addition, the prospect of obtaining DTAL's written consent in the circumstances that pertained in 1999/2000 would, in my view, have been far less than probable. "Sole purpose" 174 In any event, the defendants claimed that there are a number of practical and legal impediments to the validity of the exercise of the options in accordance with the plaintiffs' "only" method as pleaded. That method requires McLean Tecnic, a party to the successor options (as the sole shareholder of the assignee companies), to exercise the successor option. Underlying this pleaded method is the assumption that the successor option agreement would include provisions "similar" to clause 4 of the Option Agreement, in particular the warranty in clause 4.1(a) that the assignee companies would have "been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL". 175 The defendants submitted that the assignee companies under the pleaded method would immediately be in breach of a "similar" clause 4.1(a) of the successor option agreement because the assignee companies would not have been brought into existence, that is "incoropated", for the sole purpose of making the "investment", but rather for the purpose of enabling McLean Tecnic to exit the investment as referred to in clause 5.2 of the Option Agreement. 176 The first submission made by the plaintiffs in response was that the defendants' submission "contradicts what the Court of Appeal has found" (tr 111). This submission amounts to a claim that the Court of Appeal "found" that the pleaded method would not fall foul of the sole purpose provision. The Court of Appeal was considering Issue 8 which was: Was the exercise of options for McLean Tecnic P/L invalid because: (a) at the time of exercise in relation to one partnership, it had an existing liability in relation to the other; and (b) it was indebted to DTSPL. 177 Although Issue 8 related to the breach of clause 4.1(b) of the Option Agreements, which was the basis upon which validity had foundered in the judgment of Einstein J, the Court of Appeal referred to the sole purpose provision in clause 4.1(a) in the following way (Mr Sullivan QC appeared for the present plaintiffs who were appellants in the Court of Appeal; Mr Sheahan SC appeared for the Digi-Tech parties, who were respondents in the Court of Appeal): 210 A I McLean entered into the two Option Agreements on 4 May 1998. On that date (and thereafter) McLean Tecnic was not incorporated for the sole purpose of making an investment in either the Freerider or the Terminal Adapter Investor Partnership (as required by cl 4.1(a) of the Options Agreements); that is because it had made an investment in both. Thus, on a literal view of cl 4.1(a), there had been a breach of that clause from the very moment the Option Agreements were entered into. 211 Mr Sullivan pointed out further that McLean Tecnic, with the knowledge and concurrence of Digi-Tech, undertook an activity not expressly provided for or contemplated by the Freerider Investor Partnership Agreement, as it undertook the role of a partner in the Terminal Adapter Investor Partnership (and vice versa). 212 He submitted, therefore, that on the construction upheld by the judge, there would have automatically been a breach of the warranty and undertaking in cl 4.1(a) - thus invalidating the exercise of the options under cl 2.2. This invalidation would have been inevitable. On that basis A I McLean never had the benefit of an option that was capable of being exercised. Therein, it was submitted, lay the absurdity. 213 Both Digi-Tech and the McLean appellants accepted that in construing the Option Agreements, due regard had to be paid to the circumstances in which the documents came into being. According to Einstein J: "[T]he events on the evening of 30 June and in the early hours up to about 4.00 am of 1 July were in fact what can only be described as a madhouse of frantic efforts by all who participated to consummate the split transactions being documented literally on the spot under the most considerable time pressure imaginable". (emphasis in the original judgment) 214 Mr Sheahan submitted that regard also had to be had to the fact that the Agreements were structured so that each partnership shared in the income generated by the products of both partnerships. Accordingly, he submitted, each Investor Partnership Agreement should be construed as expressly contemplating that partners might also be partners in the other Partnership that was associated with the scheme. 215 Mr Sheahan submitted that on that basis there would not be a breach of cl 4.1(a) and no absurdity would result. He pointed out that cl 2.2 contemplated that there might be a breach of the warranties and undertakings in cl 4 but, provided the breach was remedied before the option was exercised, the option could be exercised validly. 216 Mr Sheahan submitted that McLean Tecnic could have assigned its rights and duties to two separate but related companies, each wholly owned by A I McLean. Each would then have acquired an interest in only one of the Partnerships, thus satisfying cl 4.1(a). He pointed out that Mr Kelliher was also a partner of both Partnerships and he had exercised his two Option Agreements validly by, prior to the exercise thereof, assigning his two sets of interests to two different companies. Had McLean Tecnic done the same, there would have been no breach of warranty by it. 217 On this basis, Mr Sheahan submitted, A I McLean could have had the benefit of the Option Agreements without words being supplied, omitted or corrected in cl 4.1(a). … 221 In our opinion, however, Mr Sullivan's solution involves a substantial rewriting of the Option Agreement, does too much violence to the words used, and is unnecessary. The solution proffered by Digi-Tech is reasonable in the context, requires far less change to the ordinary meaning of the words used, and does not result in absurdity (as shown by the example of Mr Kelliher). In our view, Einstein J was justified in preferring the submissions advanced on behalf of Digi-Tech on this issue. 178 The defendants submitted that the Court of Appeal was not dealing with the factual issues that arise for determination in the present proceedings. I agree with that submission. The defendants also submitted that the Court of Appeal was not dealing with the question of whether McLean Tecnic was in fact in a position to have achieved valid assignments of the rights and obligations to two wholly owned subsidiary companies, as at September 1999, or at any other date. There were no submissions made to the Court of Appeal in relation to the legal and practical impediments that may have stood in the way of a valid and effective assignment as at September 1999, or during the ten-month period that followed to the expiry date of the Option Period. 179 Neither paragraph [216], nor any other part of the CA Judgment, amount to a "finding" that the defendants' submissions in relation to "sole purpose" contradict. Firstly the observations made by the Court of Appeal are premised on the fact that Mr Kelliher's assignments were validly made. Secondly there was no recognition that Mr Kelliher had a contractual obligation to assign his interests prior to exercising the option whereas McLean Tecnic did not. Thirdly the basis upon which the Court of Appeal said that there would be no breach of the clause 4.1(a) warranty by McLean Tecnic was limited to the consideration of dual membership of partnerships as made clear from the second sentence of paragraph [216]. The Court of Appeal was not asked to consider, nor did it consider, whether the "sole purpose" warranty would be breached for reasons other than dual membership of the Partnerships. 180 The plaintiffs' also made a submission that "other corporate partners" did "assign down and were found to have validly exercised their options" (tr 112). The defendants submitted that this claim is both legally and factually incorrect and that the plaintiffs have attempted to gloss over the findings of Einstein J. His Honour made no finding or declaration that any corporate partner had validly assigned. Any claims that had been commenced by the corporate investors in the Digi-Tech litigation were all settled after the litigation commenced but prior to judgment. The only declarations as to validity were in relation to a small number of individual investors and their assignees. 181 There were seven corporate partners in the Terminal Adapter Partnership. Five of them were original parties in the proceedings before Einstein J. Two of those parties and their holding company or corporate nominee settled during the course of the proceedings. Einstein J found that the other corporate parties, McLean Tecnic, Kalifair and Kalinick, and their holding companies, did not validly exercise the Investor Option Agreements, but for reasons un-associated with clause 4.1(a) of the Option Agreement. The only findings his Honour made in respect of options that were validly exercised were in relation to three of the individual investors and their assignees, being Messrs Brand, Chambers and Kelliher. 182 There were five corporate partners in the Freerider Partnership. Four of them were original parties in the proceedings before Einstein J. Three of those parties and their holding company or corporate nominee settled during the course of the proceedings. The remaining corporate partner party was McLean Tecnic who, together with A I McLean, were found to have invalidly exercised the Investor Option Agreements. The only findings made by his Honour that options had been validly exercised were in relation to four individual investors and their assignees, being Messrs Kelliher, Smith, O'Loughlin and Whiting. 183 It was submitted therefore that the plaintiffs' submission that the corporate partners in the partnership were found to have validly exercised their options is factually incorrect. I agree with that submission. 184 The plaintiffs submitted that the defendants' construction of clause 4.1(a) of the Option Agreement was not sensible. The defendants submitted that any assignee brought into existence for the purpose of getting the plaintiffs "off the hook" would immediately be in breach of the sole purpose warranty in a "similar" clause 4.1(a) of any successor option. It was also submitted that there was not a sole purpose in the putative assignees to make an investment in one or other of the Partnerships, but rather to exercise the options and obtain relief from the trap into which the plaintiffs had been drawn. 185 The defendants placed reliance on the cross-examination of Mr Shtein (tr 465-466) in which Mr McClintock put to him "you knew, and you knew full well, that what Mr McLean desired was to avoid the liability for making the balloon payment; you knew that didn't you?". Indeed the cross-examiner went further (tr 466): Q. I'm asking you, Mr Shtein, about what you thought Mr McLean's purpose was in September 1999. You knew, didn't you, that the whole purpose from his point of view was to avoid making the balloon payment? A. I don't understand that question, because Mr McLean wasn't liable to make the balloon payment. You have to look at it in terms of the legal structure of the documents. 186 Mr McClintock also suggested to Mr Shtein that the "ultimate purpose" was to avoid making the balloon payment (tr 465). Mr Shtein disagreed with that proposition and gave evidence, correctly in my view, that the liability for the balloon payment remained with McLean Tecnic, but that the capacity to discharge the obligation to pay the balloon payment was DTEL's payment for shares in McLean Tecnic. The highlighting of this cross-examination by the defendants was to demonstrate that the "ultimate purpose" or "whole purpose" of incorporating the subsidiary assignee would be to avoid making payments as opposed to making an investment. It was submitted that the assertions made in cross-examination carry with them all the necessary admissions that the assignee company would not be incorporated for the sole purpose of making an investment. I am of the view that this submission does not have a great deal of force. It is true that counsel is taken to have been cross-examining on instructions as to the "whole purpose" however the better approach seems to me to be to analyse the pleaded method to assess whether the incorporation of the assignee subsidiary companies would have been for the sole purpose that would be specified in clause 4.1(a) of the "similar" successor option agreement. 187 The plaintiffs next submitted that the defendants have confused motive and purpose. Mr McClintock submitted that there was no question that when the options came to be exercised, the plaintiffs' "motive" was to avoid making the balloon payment, however it was submitted that the purpose of the incorporation of the assignee companies was to make the investment as required, albeit through the pleaded process of assignment. The defendants submitted that the terms of clause 4.1(a) invoke an inquiry about the purpose for which the assignee company would be brought into existence. It was submitted that on the plaintiffs' theory of the case the only purpose the assignee companies serve is to act as a device to facilitate getting the plaintiffs "off the hook". 188 An analysis of the pleaded method provides an understanding of the "purpose" of the incorporation of the assignee companies. "Purpose" is defined as "the reason for which something is done or created or which something exists". "Motive" is defined as, "a reason for doing something, especially one that is hidden or not obvious": The New Oxford Dictionary of English (1998) Clarendon Press, Oxford. The pleaded method requires the assignee companies: (a) to accept the assignment of Mclean Tecnic's interest in the relevant Investor Partnership and its corresponding shareholding in DTSPL; (b) to accept the assignment of McLean Tecnic's "rights and obligations" under the Sale Agreement and Licence Agreement; and (c) to exercise the option that would be included in clause 2.1 of a successor option agreement requiring DTEL to subscribe for Company Shares in the assignee companies. 189 The pleaded method requires the assignment to a wholly owned subsidiary. McLean Tecnic would be the sole shareholder of the assignee companies and would become a party to the similar successor option agreements. The pleaded method requires McLean Tecnic to exercise that successor option to require DTEL to subscribe for shares in the assignee companies to enable the assignee companies to use the subscription moneys from DTEL to make the balloon payment. 190 "Investment" is not defined in the Option Agreement. Nor, I presume, would it be defined in a "similar" successor option agreement. However the Investor Partnership Agreement gives some clue to what was and would be intended by the use of the word "investment" in clause 4.1(a). The Investor Partnership Agreement included an agreement between the Partners to enter into and carry on the business in partnership of manufacturing, importing, marketing, distributing and selling the relevant Products in the Territory. It also contained an acknowledgement that each Partner was severally liable for paying a proportion of the specified purchase price instalments set out in the Sale Agreement (cl 2.2). The Partners also acknowledged that they would subscribe for shares in DTSPL proportionate to the Partner's Partnership Interest (the equity interest in the Partnership) (cl 2.3). The Investor Partnership Agreement also included the following: 2.4 Each Partner further acknowledges and agrees that: (a) it must: (i) maintain its shareholding interest in DTSPL; and (ii) pay all future calls made on that shareholding interest as contemplated by the Initial Share Application Form, for so long as that Partner retains its Partnership Interest; (b) on each Relevant Subscription Date, if required to subscribe for additional shares in DTSPL, it must subscribe in accordance with the Additional Share Application Form for that number of additional fully paid shares in DTSPL which is proportionate to its Partnership Interest at the Relevant Subscription Date so that the aggregate sum contributed to DTSPL on each Relevant Subscription Date by all of the Partners subscribing for fully paid shares is A$31,513; and (c) except as otherwise provided by clause 2.4(b), the size of its shareholding in DTSPL shall at all times be proportionate to the size of its Partnership Interest. 2.5 For the avoidance of doubt, a Partner is not required to subscribe for additional shares in DTSPL on any Relevant Subscription Date if Digi-Tech Equities Limited is a majority shareholder of the Partner and, in accordance with the Option Agreement, the subscription monies received by the Partner from Digi-Tech Equities Limited have been applied by the Partner to the payment of the Partner's outstanding payment obligations pursuant to the Sale Agreement. 191 The meaning of "investment" in clause 4.1(a) of the Option Agreement and any similar successor option agreement was not merely the purchase of the shares in DTSPL. The fact that it also refers to the "investment" in the "Investor Partnership", defined as the "partnership constituted or evidenced by the Investor Partnership Agreement in relation to" each of the Terminal Adapter and Freerider Partnerships, means that it included the carrying on of the business of the requisite Partnership. It was intended that the Company was to be incorporated for the "sole purpose" of making the "investment", that is carrying on the business of the Partnership and the maintenance of the shares in DTSPL. 192 "Purpose" and "motive" are very similar concepts. The plaintiffs' purpose in incorporating the assignees in line with the pleaded method was for the plaintiffs to assign their interests, rights and obligations under the respective Agreements, to extract themselves from any liability to the Digi-Tech parties and have the benefit of the release referred to in clause 5.2(a) of the Option Agreement (release from "all of its present and future obligations and duties under the Investor Partnership Agreement and Sale Agreement") and to have the benefit of the release under clause 5.3 of the Option Agreement (release from the "respective duties and obligations" under the Option Agreement). I accept that the plaintiffs were also motivated to do this because they did not wish to be liable to the Dig-Tech parties. 193 The plaintiffs accepted that the "plain purpose" of assignment pursuant to clause 5 of the Option Agreement would be to get rid of McLean Tecnic's indebtedness and secure its release (tr 911). However, it was submitted that if the defendant's construction were correct, it would mean that, ipso facto, a valid assignment could never take place. It seems to me that this submission is not correct. The fact that there may be a breach of clause 4.1(a) at the time of assignment pursuant to clause 5 of the Option Agreement does not invalidate the assignment. Clause 5 does not require an assignment to a company incorporated for the "sole purpose" of making the requisite investment. It must be remembered that the successor option agreement containing the relevant clause 4.1(a) warranty would not be in existence at the time of the assignment. The valid completion of the assignment is the trigger for the parties to agree to the successor option agreement. At the time the successor option agreement would come into existence an assignee incorporated for more than one purpose would be in breach of the warranty in clause 4.1(a), but such breach would not invalidate the assignment. Indeed, as recorded in the CA judgment, Senior Counsel for the Digi-Tech parties in the Digi-Tech litigation "pointed out that cl 2.2 contemplated that there might be a breach of the warranties and undertakings in cl 4 but, provided the breach was remedied before the option was exercised, the option could be validly exercised": at par [215]. 194 The construction of the provisions of the suite of Agreements in the assessment of whether the pleaded method would have effected a valid exercise of the options, must be sensible and businesslike, however it must be kept in mind that strict adherence to the "only" manner pleaded in paragraphs 54(a) and (b) would be required. Part of that strict adherence includes the requirement that there be no breach of clause 4.1(a) of the successor option agreement at the time of the exercise of the option. The strictness with which the provisions of clause 4 of any successor option agreement would have to be adhered to at the time of the exercise of the option in the pleaded method, is evidenced by the approach adopted by the Court in the Digi-Tech litigation. Notwithstanding the parties' clear intention that the plaintiffs be permitted to invest in both Partnerships, the exercise of the option was held to be invalid by reason of the indebtedness caused by that dual membership. 195 It is necessary to construe the terms of the "similar" clause 4.1(a) in the context that compliance with it would be a pre-requisite to the valid exercise of the successor option agreement. The analysis by the defendants has focused on the subjective purpose of McLean Tecnic in complying with the requirement to incorporate a subsidiary and become the sole shareholder of that subsidiary pursuant to the pleaded method. I do not think it is helpful to construe the clause in the context of a comparison of "purpose" and/or "motive". That seems to me to cloud the real issue for consideration in construing the clause. 196 I will assume for the purpose of this analysis that the warranty in a successor clause 4.1(a) would be that the assignee subsidiary "has been incorporated for the sole purpose of making an investment". A "sole" purpose is the "one and only" purpose: The New Oxford Dictionary of English. It is necessary to decide whether the assignee's "sole purpose" would be to make the investment. The plaintiffs' purpose in establishing or incorporating the company is not relevant, nor is the plaintiffs' motive in establishing or incorporating the company. It is true that assignment pursuant to of clause 5 of the Option Agreement, if validly completed, would give to the plaintiffs a full release from the obligations under the Investor Partnership Agreement and the Sale Agreement. However that is the effect of assignment. 197 I agree with the plaintiffs' submission that it would appear that the commercial rationale for the "sole purpose" warranty was to ensure that when the plaintiffs received the intellectual property back, it would be unencumbered. The fact that the making of the investment by the assignees had the consequence of extracting the plaintiffs in the way described above, does not mean that their incorporation was for that "purpose". The context in which the term "sole purpose" is found in clause 4.1(a) – referring to the future activity of the company - supports the conclusion that the relevant inquiry is directed towards the purpose of the company's incorporation rather than the purpose of the party responsible for that incorporation. The purpose, indeed the sole purpose, of the incorporation of the assignee subsidiary was for it to make the investment. 198 The submission made by the defendants in support of its attack on the validity of the pleaded method included the submission, as referred to above, that the sole purpose in the putative assignees was to exercise the options and obtain relief from the trap into which the plaintiffs had been drawn. That seems to me to inappropriately combine separate steps in the pleaded method. Firstly it is not the exercise of the options pursuant to which the plaintiffs would obtain the relief, but rather the assignment. Secondly, notwithstanding the exercise of the successor option agreement, the subsidiary assignee would remain as a Partner in the "investment", but with a restructured capital base. DTEL would become a shareholder of the subsidiary assignee although it is not clear what percentage of shareholding McLean Tecnic would maintain in the subsidiary assignee, once DTEL was deemed to have taken up its shares. 199 I am not satisfied that under the pleaded method, the assignee subsidiary companies would be in breach of the sole purpose warranty in the "similar" clause 4.1(a) of the successor option agreement. Other impediments 200 There were a number of other matters raised by the defendants as "impediments" in the pleaded method. These additional matters, if accepted, would not invalidate the exercise of the option in the pleaded method but are matters to be taken into account in determining whether such a method could realistically have been implemented at the relevant time. At this point I will consider them generally rather than as they relate specifically to the individual cases against each of the defendants. Probable breaches of Corporations Law 201 The risks of insolvent trading by the assignee subsidiaries were not theoretical. The defendants submitted that an assignee would be incurring a new debt when it became a party to a novation and in the circumstances that pertained in September 1999, its directors could have no expectation that it could meet that debt by DTEL honouring its obligations under any successor option agreement, which may or may not come into existence. That would probably amount to a breach of s 588G of the Corporations Law which at the relevant time provided: 588G Directors duty to prevent insolvent trading by company 1. This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be. … 2. By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. 202 The defendants also submitted that assignment of McLean Tecnic's rights under the Freerider and Terminal Adapter Sale Agreements to wholly owned subsidiaries required delivery of a deed by those subsidiaries to DTAL by which the subsidiaries bound themselves to perform the obligations of McLean Technic under the respective Sale Agreements (cl 20.4(a)). Entry into such deed would also have been exposed to the claim that it was an insolvent transaction under the Corporations Law. A director who caused the subsidiary to execute such a deed contemplated by clause 20.4(a) would be exposed to possible liability for breach of the duty to prevent insolvent trading imposed upon directors by s 588G. 203 The defendants submitted that the plaintiffs' only attempt to identify a person apparently willing to expose himself or herself to the risk of personal liability under s 588G for the balloon payment was to refer to steps taken by Mr Urwin in relation to individuals and corporate investors separate to the plaintiffs' interests. It was submitted that the Court is invited to infer, in the absence of evidence on the topic from Mr McLean or Mr Urwin, that Mr Urwin would have been so willing. It was submitted it is one thing for Mr Urwin to agree to act as an officer for individuals and corporate investors that he had personally introduced to a failed investment; but quite another for him to agree to act as an officer of companies associated with Mr McLean/the plaintiffs who entered the scheme a year later, acting upon the advice of his own advisers and not in reliance upon advice from Mr Urwin. It was submitted that the plaintiffs' invitation to infer such an outcome is an impermissible appeal to hindsight. 204 Mr Urwin gave evidence but was not cross-examined by the plaintiffs to suggest that he would have been willing to act as a director of an assignee subsidiary company as contemplated in the pleaded method. It was submitted that the plaintiffs' failure to ask this question in cross-examination allows the Court to comfortably conclude that the answer to the question would not have assisted the plaintiffs' case. 205 The plaintiffs were entitled to rely on s 5D(3)(b) of the Act to protect them from an adverse inference for not calling Mr McLean to say what the plaintiffs would have done if they had been advised to pursue the pleaded method. However there was no statutory impediment to cross-examining Mr Urwin in relation to whether he would have been willing to become a director of an assignee subsidiary. The pleaded method is a theoretical construct of the plaintiffs, unsupported by any evidence that it was a realistic and effective method of exercising the options validly. The failure to raise this topic with Mr Urwin is a matter that I should take into account, along with all the relevant surrounding circumstances, in my determination of the likelihood of whether assignment as pleaded would have in fact occurred. 206 The defendants also submitted that the entry into the deed contemplated by clause 20.4 of the Sale Agreement by the assignee subsidiary would have been: (a) an uncommercial transaction within the meaning of s 588FB of the Corporations Law; (b) an insolvent transaction within the meaning of s 588FC of the Corporations Law; and (c) a voidable transaction within the meaning of s 588FE of the Corporations Law. 207 A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction having regard to: (a) the benefits (if any) to the company of entering the transaction; (b) the detriment to the company in entering into the transaction; (c) benefits to other parties respectively; and (d) any other relevant matter: s 588FB(1). In Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363, the Full Court of the Federal Court said that the Court must consider each of these matters and reach a conclusion as to whether a reasonable person in the company's circumstances would not have entered into the transaction. These circumstances include the state of knowledge of those who were relevantly the company's directing mind. If the Court concludes that a reasonable person in the company's circumstances would not have entered into the transaction, then the transaction is uncommercial. Such a transaction will be liable to be set aside or varied as a voidable transaction in certain circumstances as prescribed. It was submitted that this was a real risk in the circumstances that pertained in September 1999. 208 Section 588FC outlines the circumstances under which a transaction is an insolvent transaction. It provides that it is an insolvent transaction if it is either an unfair preference or uncommercial transaction of the company and: (a) the transaction is entered into or given effect at a time when the company is insolvent; or (b) the company becomes insolvent because of matters including entering the transaction or a person giving effect to that transaction. 209 There is in evidence a report of Barry Taylor, director of HLB Mann Judd, Chartered Accountants, dated 10 September 2007. That report contains the following: 12.6 In my opinion, had MT as an investor in the TAP and the FP validly exercised the McLean Options granted to it in the IOAs in the period 20 September 1999 to 31 July 2000…there would have been significant uncertainty that DTEL, and DTCL as guarantor, would have been able to discharge their resulting obligations to subscribe for sufficient shares in MT or in a special purpose company established by MT, totalling A$23,980,467.83 being the aggregate amount of MT's obligations…A$20,204,052.53 and…A$3,776,415.03. 210 Although it was suggested in cross-examination that there may have been the possibility of daylight accommodation in New Zealand for "round robin" transactions (tr 573), this part of Mr Taylor's evidence seems to me to be unchallenged. 211 The defendants submitted there was a significant uncertainty that DTEL and DTCL would have been able to discharge their resulting obligations to subscribe for sufficient shares in McLean Tecnic or in a special purpose company established by McLean Tecnic, totalling A$23,980,467.83. It was submitted that no reasonable person would have been prepared to accept the position of a director of the assignee subsidiary with such attendant uncertainties and that there is no evidence of any persons who were willing to accept the position. A further submission was made that the benefits (if any) to the assignee subsidiary of entering into such an assignment were far outweighed by the risks of the assignee subsidiary having entered into an uncommercial transaction, an insolvent transaction or a voidable transaction. Finally it was submitted that the assignee subsidiary would have become insolvent or that there was a real risk of its insolvency as a result of the transaction such that it would have been an unfair preference or uncommercial transaction. 212 The complexity of the proposed assignment and the dangers inherent in such a transaction also included the prospect of the assignee company being obliged to pay the balance of the purchase price to DTAL without the benefit of a successor option and thus any "assistance" from DTEL. 213 The plaintiffs submitted that a director would only have contravened s 588G if there were "reasonable grounds for suspecting that the company is insolvent, or would so become insolvent". There would be no liability if the director had reasonable grounds to expect, and did expect, that the company was solvent at the time a debt was incurred: s 588H. 214 The plaintiffs also submitted that under the pleaded method the director of the assignee subsidiary would have been reasonably entitled to expect: (i) that the assignee subsidiary would be entitled under the successor option agreement to exercise its option and thus avoid liability to make the balloon payment; (ii) that even if the exercise of the option was disputed by the Digi-Tech parties, a court would ultimately have enforced its right to exercise the option; and (iii) if, for whatever reason, the exercise of the option failed, the guarantee under the Sale Agreement would have remained in place such that the plaintiffs and not the assignee subsidiary would have been liable for the balloon payment. Accordingly it was submitted that the director would have had reasonable grounds for believing that the assignee subsidiary could pay its debts as and when they fell due for the simple reason that it would never have incurred any debt or if it did, responsibility for payment would have been that of the McLean Parties as principal debtor. It was submitted that the director, properly advised, would not have had any concern about s 588G liability. 215 The plaintiffs submitted that even if there were liability under s 588G, the director would have been afforded the protection of s 1318 of the Corporations Law. That section would provide the so-called "protection" to the director of the assignee subsidiary where it could be shown that it would be unjust and oppressive not to excuse that director from liability: Daniels v Anderson (1995) 37 NSWLR 438 at 524-525. This submission has no force in the absence of evidence as to: the possible identity of the person who may have been willing to take on the directorship of the assignee subsidiary; the qualifications and background of that person; and the particular circumstances to be considered as a basis for the exercise of the court's discretion under s 1318: Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430 at pars [139]-[184]. 216 Mr McClintock submitted that it is obvious that if the plaintiffs had been advised that this was the only method to adopt to avoid "losing everything" they would have taken that advice and assigned their rights in the respective Partnerships. I am not satisfied that it is obvious at all. There was no evidence from which I could be satisfied that that any person would have been willing to serve as director of a subsidiary assignee in the circumstances with the prospects of breaches of the Corporations Law. Indeed in the absence of cross-examination of Mr Urwin I could not be satisfied that he would have been so willing. 217 The problems identified in relation to the prospects (not unrealistic) of breaches of the Corporations Law, the lack of any evidence from the plaintiffs as to the real prospect of any person being willing to have acted act as a director in the circumstances, combined with the lack of cross-examination of Mr Urwin on this topic on this complex set of circumstances that pertained in September 1999, persuade me that the assignment under the pleaded method would not have been achievable. No successor option agreement 218 The defendants submitted that as a matter of practicality, from September 1999 until the end of the Option Period, the plaintiffs and the Digi-Tech parties were in dispute, with litigation pending and thereafter commenced. It is also to be remembered that the circumstances at the time included that the Digi-Tech parties were claiming that the balloon payments of NZ$57,341,995 and NZ$17,461,332 were due and payable as the result of the termination of the Sale Agreements. The Digi-Tech parties were also claiming that there was no option to be exercised because the agreements had been terminated. 219 It was submitted that had the plaintiffs purported to assign their rights and obligations, as pleaded, a successor option agreement would not have been concluded. This submission has force. Mr Reid had already advised that the Digi-Tech parties would be resisting the exercise of the options that were in place. Correspondence from Blakes had made it patently clear that the Digi-Tech parties were not going to entertain any suggestion that the options had been validly exercised. It is hardly likely that a change in attitude would have occurred and either DTAL would have provided its consent to allow assignment under clause 20.2, if such consent were necessary, and it is also unlikely that DTEL and DTCL would have agreed to the terms of a successor option agreement. 220 Clause 5.3 of the Option Agreement provided that DTEL and DTCL "each agree" that they would enter into a "similar agreement" with the assignee (and the sole shareholder of the assignee) "to permit the assignee to require DTEL to assist the assignee to meet its assigned obligations under the Sale Agreement". The original Option Agreement was between DTEL, DTCL, A I McLean, as Investor, and McLean Tecnic, as the Company. DTEL granted to McLean Tecnic "the right to require DTEL to subscribe for Company Shares". On one view of the provisions of clause 5.3 of the Option Agreement it would appear that the successor option is to be granted to the assignee company directly rather than to McLean Tecnic as the sole shareholder of the assignee. However if that were so there would seem to be no need for Mclean Tecnic to be a party to that agreement. This is just one aspect of the uncertainty that flows from such a provision. 221 All that DTEL and DTCL agreed to do was to enter into a "similar" agreement. "Similar" means "having a resemblance in appearance, character, or quantity, without being identical": The New Oxford Dictionary of English (1998) Clarendon Press, Oxford. It is odd that the parties would use such a loose term, particularly when it involves the prospective exercise of an option. Commercial certainty would have been well served by the use of the term "identical". It would have then been clear that the parties intended that the terms of the successor option agreement, but for the identification of the assignee and shareholder, were to be in exactly the same terms as the Option Agreement. The use of the word "similar" creates uncertainty and means that the parties to the successor option agreement would have to agree on what terms of a "similar" nature were to be included in that agreement. 222 In any event, I am of the view that no such "similar" option agreements would have been concluded in the hostile circumstances that pertained in September 1999 and during the period to 31 July 2000. I am also satisfied that having regard to the vagueness of the provision in clause 5.3 of the Option Agreement in relation to a "similar" agreement, any application for specific performance of the successor option agreement would probably have been doomed to failure. It does not seem to me that a Court of Equity would have granted specific performance of such a vague provision in such a complex web of arrangements and agreements, particularly in respect of an exercise of an option. 223 On balance I am satisfied that a successor option agreement would not have been concluded nor would the vague agreement to agree on "similar" terms as contained in clause 5.3 of the Option Agreement been enforceable or enforced: Coal Cliff Collieries Pty Limited v Sijehama Pty Ltd (1991) 24 NSWLR 1 per Kirby P at 26-27. 224 Although I am satisfied that the plaintiffs' cases must fail for these reasons, I will, having regard to the complexities of this litigation, consider the specific claims against each of the defendants. Evidentiary matters 225 The authorities suggest that in the absence of expert evidence as to professional standards or common practice in circumstances such as those the subject of this litigation, the Court must define the scope of the duty by reference to general principles: Heydon v NRMA (2000) 51 NSWLR 1 per Malcolm A-JA at 56 par [155], citing the judgment of Kirby P (as his Honour then was) in Waimond Pty Limited v Byrne (1989) 18 NSWLR 642 at 654; but in my view there are intrinsic dangers in taking these authorities as establishing that it is never necessary to call such evidence. Kirby P was referring to the scope of the duty of care, not the standard of care. The difference between these two concepts was referred to by Malcolm A-JA in Heydon v NRMA as follows (par [146]): Both barristers and solicitors owe a duty of care to those whom they advise or for whom they act. In the present context, their duty is to exercise reasonable care and skill in the provision of professional advice. The standard of care and skill is that which may be reasonably expected of practitioners. 226 It is true that in Boland v Yates Property Corporation Pty Limited (1999) 74 ALJR 209 at 219, par [45], also cited by Malcolm A-JA in Heydon v NRMA at [149], Gleeson CJ referred to the fact that the trial judge relied not only upon the evidence of the experts but upon her own opinions and judgment in reaching the conclusions about the alleged negligence of lawyers in that case. However that was not an endorsement of trial judges applying, carte blanche, their own opinions and judgments about the conduct of lawyers in professional negligence suits in the absence of expert evidence. 227 It is usual in suits against lawyers against whom charges of negligence are made, to provide those lawyers in the process of a fair trial, with the opportunity to challenge the evidence that is claimed to establish: (a) the circumstances and particular conduct relied upon; (b) the standard of conduct or care expected of the lawyer in the particular circumstances; and (c) that the lawyers conduct fell below the requisite standard. If it is only the trial judge's opinion and/or judgment that fixes the standard against which the conduct is to be measured, the lawyers against whom the proceedings have been brought will not have the opportunity to explore and/or challenge the opinion and will not be aware of the opinion prior to the delivery of judgment. 228 It will depend on the circumstances of the particular case. There may be straightforward cases in which there is no issue between the parties that expert evidence needs to be called. However where it is an issue, as is the case here, it is necessary to assess whether the plaintiffs have discharged the onus of establishing: the scope of the duty of care; the requisite standard of conduct or care against which the defendants' conduct is to be measured; and whether the defendants' conduct fell below that standard. In the present case it will be necessary to assess whether the evidence is capable of establishing the standard of conduct or care that would have been expected of each of the defendants in their particular roles in the transactions/litigation in 1999/2000 and whether that conduct fell below that standard. 229 A solicitor's duty in exercising an option may in part depend upon whether there was a practice within the profession in relation to the exercise of options of the kind in question at the time. In Tonitto v Bassal (1992) 28 NSWLR 564, Sheller JA, with whom Handley JA and Hope A-JA agreed, said at 574: It is generally accepted that effectual exercise of an option requires strict adherence to the method prescribed in the instrument creating the option: see Greig and Davis, The Law of Contract (at 307). 230 In that case the option was in relation to the purchase of land and included the following terms: 2. This option may be exercised by the Grantee or his nominee at any time before 5.00 pm on the 30th day of June 1988 as follows: (a) By delivery of written notice of exercise of option and a bank cheque for ($23,600-00) by way of deposit payable under the Contract and a signed Contract for Sale in the form of the Contract hereunto affixed and marked with the letter "A". (b) The notice, cheque and Contract for Sale shall be delivered personally or posted by Registered Mail to any of the Grantors at their last known place of residence or to the office of Messrs Parisi Partners at 21-27 Memorial Avenue, Liverpool. (c) Where the notice is delivered by Registered Mail pursuant to paragraph (b) of this clause, service of the notice shall be deemed to have been effected on the day following the date of posting. 231 In that case expert evidence was called from a highly experienced and qualified solicitor with extensive conveyancing practice. The evidence of that solicitor established that the accepted conveyancing practice was that where a form of option required exercise in a particular manner, that manner had to be "scrupulously followed" (at 574-575). 232 Mr McClintock submitted that expert evidence was unnecessary in the circumstances of this case because the content of the defendants' duty of care is a question of law for the Court depending upon the particular facts of this case. In support of this submission Mr McClintock relied upon a another passage from Kirby P's judgment in Waimond Pty Limited v Byrne in which his Honour was dealing with the absence of expert evidence in that case and observed that it was possible that the decision not to call expert evidence may have been based on what Oliver J said in Midland Bank Trust v Hett Stubbs & Kemp (1979) 1 Ch 384. Mr McClintock relied on only part of the passage of Oliver J's judgment cited by the President at 653-654 (at 402 of Oliver J's judgment) as follows: But evidence which really amounts to no more than expression of opinion by a particular practitioner of what he thinks he would have done had he been placed, hypothetically, and without the benefit of hindsight, in the position of the defendants, is of little assistance to the Court, whilst evidence of the witnesses' view of what, as a matter of law, the solicitor's duty was in the particular circumstance of the case is, I should have thought, inadmissible, for that is the very question which it is the Court's function to decide. 233 The passage of Oliver J's judgment in Midland Bank Trust v Hett Stubbs & Kemp cited by Kirby P at 653 also included the following (at 402 of Oliver J's judgment): The extent of the legal duty in any given situation must, I think, be a question of law for the court. Clearly, if there is some practise in a particular profession, some accepted standard of conduct which is laid down by a professional institute or sanctioned by common usage, evidence of that can and ought to be received. 234 I agree that the scope of the duty in this case can be decided without expert evidence. The scope was to exercise reasonable skill and care in the provision of the legal services the defendants were instructed to provide. The legal services the defendants were instructed to provide can be ascertained without expert evidence. The question of whether expert evidence was necessary to establish the standard of care or conduct against which each of the defendants' conduct is to be measured is more complex. 235 The plaintiffs submitted that this Court can conclude, without expert evidence, that if asked to advise in respect of and execute, an option on behalf of a client, a commercial solicitor would have: (a) read the documents; (b) brought his or her mind to bear on the contractual requirements for valid exercise in light of the known circumstances; and (c) advised his or her client of those requirements and taken the necessary steps to ensure compliance with them. It was submitted that in the present case, that meant ensuring there were no breaches of clause 4 of the Option Agreement and if there were any breaches of clauses 4.1(a) and/or 4.1(b), pursuing the method as pleaded in paragraphs 54(a) and (b) of the amended pleading. 236 It will be necessary to deal with this issue when considering each of the claims against each of the defendants that their conduct was in breach of their retainers and their duty of care, however the plaintiffs did not call any evidence from either a lawyer, expert in the field of commercial transactions and/or commercial litigation in the relevant period 1999/2000 or otherwise, as to what a diligent and competent lawyer would have been expected to have done in the complex circumstances that pertained at the relevant time in respect of the roles of each of the defendants. These are matters left for the Court to work out without the benefit of any expert evidence except of course the evidence from the solicitors who are the subject of the plaintiffs' claims. 237 The defendants also submitted that it is significant that the plaintiffs failed to call their principal, Mr McLean, to prove that the plaintiffs probably would have assigned their rights in the manner pleaded. The plaintiffs attempted to resist an adverse inference being drawn from the absence of any evidence from Mr McLean by reliance upon the evidence of Professor Richard Mattick, a consultant clinical psychologist. Professor Mattick's reports (Ex B & Ex C) included opinions in relation to Mr McLean's memory. In paragraph 13.9 of Exhibit B Professor Mattick wrote: In terms of his prognosis, like all individuals as they age, his memory is likely to gradually worsen. It is likely that if he lives for sufficient years that he will develop a dementing process but he will, at the very least, continue with this quite significant senescence affecting his recall at an increasing rate over the next few years. 238 In Exhibit C Professor Mattick expressed the following opinion: 10.9 In terms of his memory functioning, today he performs poorly in auditory immediate, visual immediate and immediate memory. His auditory delayed, visual delayed and general memory indices are all quite poor. 10.9.1 His auditory memory problems are consistent across time, with poor auditory memory being evident at the initial assessment, at the second assessment, and again at this assessment. He performed somewhat better in auditory delayed memory testing at the second assessment, but this is not consistent with his earlier poor performance or his poor performance today. Overall, his auditory immediate and delayed memory indices are all quite poor, as are his visual indices. 10.9.2 His memory indices place him in the bottom few per cent of people of his age in terms of memory functioning. 10.10 Again, there is no evidence that Mr McLean was feigning any memory dysfunction. His commentary concerning memory problems over his life, gathered during the interview, was consistent with his presentation today of a person with quite impaired memory, particularly for verbal material. One cannot exclude the affects of ageing on his memory functioning, and this may be worsening his memory abilities currently, but again there is no evidence of any feigning of dysfunction. 239 However the following evidence was elicited in cross-examination by Mr Kelly SC (tr 378-379): Q. Indeed, isn't it the effect of your assessment of Mr McLean that he is perfectly capable of coming to a court and giving evidence? A. I have no difficulty with that assertion. Q. He might be a bit nervous about it? A. Yes. Q. Most people are? A. Yes Q. You would positively say to the court, would you not, that, on the strength of your assessment, he definitely is capable of coming to court and giving evidence? A. I have no difficulty with that. Mr McLean can give an account of himself. Whether the information he recalls is accurate is the question. 240 The plaintiffs submitted that if there were any issue upon which it would be expected the plaintiffs would call evidence from Mr McLean, then a reasonable explanation has been given for his absence from the witness box. I am not satisfied that Professor Mattick's evidence provides a reasonable explanation for Mr McLean's absence. It may have been that had Mr McLean given evidence he would not have been able to bring certain matters to mind, even significant matters, however that will never been known. Professor Mattick said he had no difficulty with the assertion that Mr McLean was perfectly capable of coming to Court and giving evidence. 241 Mr McClintock submitted that in any event, there was no issue upon which it was necessary for the plaintiffs to call Mr McLean. It was submitted that any evidence from Mr McLean as to what he would have caused the plaintiffs to do in particular in relation to assignment, would have been inadmissible by reason of s 5D(3)(b) of the Civil Liability Act 2002 (the Act). The Act commenced on 20 March 2002 (s 2). Section 5D was introduced by the Civil Liability Amendment (Personal Responsibility) Act 2002 and commenced operation on 6 December 2002. Section 5D(3) provides: (3) If it is relevant to the determination of factual causation to determine what the person who suffered harm would have done if the negligent person had not been negligent: (a) the matter is to be determined subjectively in the light of all relevant circumstances, subject to paragraph (b), and (b) 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. 242 The defendants submitted that the Act does not have any application because the events in question occurred before the commencement of the Act. Clause 6(1) of the Transitional Provisions in Part 3 of Schedule 1 to the Act provides: The amendments to this Act made by the 2002 amending Act extend to civil liability arising before the commencement of the amendments, but do not apply to or in respect of proceedings commenced in a court before that commencement. 243 "Civil liability" is not defined. In F & D Normoyle Pty Limited v Transfield Pty Ltd (2005) 63 NSWLR 502, Ipp JA recorded at 508 par [39] what Bryson JA had pointed out to counsel during argument of the appeal including: (d) Clause 14 of Sch 2 to the Civil Liability Amendment (Personal Responsibility) Act inserted transitional provisions in the Civil Liability Act 2002 (the transitional provisions so inserted were contained in Sch 1, Pt 3, cl 6). By those transitional provisions, the amendments to the Civil Liability Act made by the Civil Liability Amendment (Personal Responsibility) Act extended to civil liability arising before the commencement of the amendments, but not to proceedings commenced in a court before the amendment. 244 This proposition was accepted as correct in Booksan Pty Ltd v Wehbe [2006] NSWCA 3 per Ipp JA at par [156], with whom Giles and Tobias JJA agreed. The civil liability the subject of the present proceedings arose before the commencement of the amendments. The proceedings were not commenced until after the amendments. In those circumstances, s 5D(3)(b) of the Act applies to these proceedings. 245 On the premise that the Act does apply to these proceedings, s 5D(3)(b) would have rendered inadmissible any evidence from Mr McLean about what he would have caused the plaintiffs to do if the solicitors had advised them to pursue the pleaded method. However that section would not affect any evidence that may have been called from the Digi-Tech parties as to what they would have done in respect of a successor option if the plaintiffs had assigned their rights. The context 246 It is very important to consider the question of whether the defendants should have realised that McLean Tecnic's membership of both Partnerships would have caused a breach of clause 4.1(a) or clause 4.1(b) of the Option Agreement at the time of the exercise of the option without the luxury of calm retrospective analysis. It is also necessary to consider the defendants' failure to advise the plaintiffs to follow the pleaded method in that same context. It is essential to consider the defendants' conduct in the circumstances in which they found themselves in the latter part of 1999 and, in the case of ANH, up to 31 July 2000. 247 Those circumstances included: (a) the negative and/or hostile attitude of Mr Reid of DTAL advising that at no stage would any exercise of the options by the Partners be recognised; (b) the real commercial problems with the "products" that were the subject of the investment; (c) the purported termination of the Terminal Adapter Sale Agreement in early April 1999; (d) the lengthy negotiations between March and August 1999 to attempt to reach a commercial settlement with the Digi-Tech parties; (e) the serving of a termination notice in respect of the Freerider Partnership Sale Agreement in early September 1999; (f) the differing views expressed by Senior Counsel, junior counsel, solicitors and Dr Carter as to whether it was possible to assign rights in the circumstances of the Terminal Adapter termination and the Freerider termination notice; (g) the numerous Partners seeking advice in respect of both the attempted commercial settlement with the Digi-Tech parties and generally how to protect themselves from having to pay the balloon payment in circumstances where the tax effectiveness of the investment was not certain; (h) the numerous people advising the plaintiffs without precise delineation of their roles, including accountants, solicitors and counsel; (i) DTSPL's instructions to assign to companies in Mauritius; (j) serious concerns about the process of assignment as identified by Mr Shtein in the letter of advice to Mr Brand on 8 September 1999; (k) the abandonment of the plan to assign to the Mauritian companies; (l) Senior Counsel's advice to exercise the Freerider Option forthwith; (m) the plaintiffs changing position in respect of instructions given to Harris & Co in August 1999, withdrawing instructions from Harris & Co in September 1999 and instructing Bartier Perry because of a perceived conflict of interest and then in September 1999 instructing Bartier Perry to re-instruct Harris & Co when work and/or time constraints prevented completion of documentation within the required time frame; (n) Mr Simms advising the plaintiffs at all times and being present at numerous meetings representing the plaintiffs: and (o) the constant consideration that complex multi-party litigation was pending and then commenced. 248 When the plaintiffs decided to make the investment and took the assignment from the outgoing partners in May 1998, the Digitech parties and the outgoing partners realised that they had to amend the respective Partnership Agreements to allow for assignment to third parties. It was not merely utilising the machinery within the Partnership Agreement. The Digitech parties had to actually turn their minds to amendments to enable the plaintiffs to become members of both Partnerships. All parties, including the Digi-Tech parties, were fully aware that the plaintiffs were members of both Partnerships. The plaintiffs paid the Instalments as required and the Digitech parties accepted the payment of those instalments. It is clear to me that everyone was lulled into the secure and comfortable position that dual membership of the Partnerships was permitted and condoned. The plaintiffs own choices (with the assistance of Mr Simms) of disparate and peripatetic instructions also meant that no single lawyer was required to consider the exercise of the options in both Partnerships. The complex transactional documents to be considered and advised upon combined with the abovementioned factors greatly reduced the likelihood that possible breaches under clause 4.1(a) and clause 4.1(b) by reason of that dual membership at the time of the exercise of the options would have been recognised. 249 In the absence of any evidence from the plaintiffs in respect of the standard of care and/or the expectation of what a prudent and competent solicitor would have done in the particular circumstances of each of the defendants' retainers, it is permissible to make the following observations. The plaintiffs were provided with legal services, either individually or by reason of their membership of the Partnerships, by numerous, highly qualified and experienced commercial lawyers. Those lawyers included Mr Simms, Mr Smith, Mr Shtein, Mr Broadley, Ms Davies, Mr Tappere, Dr Carter, Ms Chang, Mr Jackman and Mr Walker SC. 250 There was also the team of lawyers at Blakes. They did not raise the indebtedness breach until September 2000, although they alleged invalidity in the exercise of the options as early as September 1999. The alleged breach of clause 4.1(a) was not raised and was eschewed by Senior Counsel for the Digi-Tech parties in the Court of Appeal in the Digi-Tech litigation. The possible breaches by reason of the dual membership may seem very obvious to the plaintiffs now that they have lived with this claim for the last eight years, but looking back at the reality of what was happening in the period September 1999 to 31 July 2000, it is clear that no lawyer identified this point. 251 The fact that so many highly qualified and experienced commercial lawyers failed to identify these possibilities, is not to be viewed as establishing the standard of conduct expected of a diligent and competent lawyer at the particular time. However it is part of the factual matrix establishing the extremely complex circumstances to be taken into account in considering the plaintiffs' claims against each of the defendants. Harris & Co 252 There is no issue that Harris & Co's retainer by DTSPL included a term that it would advise the Terminal Adapter Partnership in relation to the Default Notice issued by DTAL on 29 January 1999. There is also no issue that in providing that advice, Harris & Co was required to exercise all reasonable skill and care as solicitors in undertaking the work. It is obvious that Harris & Co were instructed from time to time to provide additional legal services. 253 Freehills were instructed in March 1999 within weeks of the Harris & Co retainer letter of 23 February 1999 without any consultation or prior notice to Harris & Co. Unfortunately there was no clear express demarcation of the work and/or advice to be provided by these two firms in early 1999. Freehills' retainer, as accepted by them in their letter of 19 March 1999, refers to a much broader role than Harris & Co of advising the Partnership "in relation to its involvement in arrangements with Digi-Tech Australia". 254 The plaintiffs claim that the description of Harris & Co's role in the Observations of the Brief from Freehills to Mr Walker SC of 18 August 1999 was an accurate description of the Harris & Co retainer. That description was that Mr Smith/Harris & Co had been briefed "to advise our clients in relation to the exercise of the options". Those Observations were provided to Mr Smith prior to it being sent to Mr Walker and he did not correct or change the description of his role as recorded by Ms Rowe. The plaintiffs also rely upon the description of Harris & Co's role in the DTSPL letter to investors dated 18 August 1999. That letter described the role of Harris & Co as having been briefed by DTSPL "in relation to the final form of documentation required to complete the processes described" in that letter. That letter also stated that Mr Smith was liaising with Freehills and Mr Walker SC. 255 The plaintiffs claim that the Harris & Co retainer included a term that they would prepare documentation for the plaintiffs to execute and "thereby validly exercise the option rights under the Freerider Option Agreement". They claim that Harris & Co had an obligation to advise the plaintiffs, either directly or through their agents or other solicitors, of any material risks that the manner in which the option rights pursuant to the Freerider Option Agreement were exercised may be invalid. There is also a claim that Harris & Co had an obligation to advise the plaintiffs on all appropriate steps to overcome any such risks, and to prepare documentation for execution on behalf of the plaintiffs consistently with such advice. 256 Harris & Co deny that the retainer included a term requiring advice to be given to the plaintiffs on the manner in which they were to exercise the option so as to achieve a valid exercise of option. The Amended Commercial List Response filed on 13 May 2008 sought to limit Harris & Co's obligations in contract and in tort to preparing the documentation for the exercise of the option without any obligation to advise the plaintiffs on the method by which the option could be exercised. Harris & Co claimed that Mr Urwin retained the firm to provide legal services to DTSPL to prepare documents for a number of investors, including the plaintiffs, for the purpose of exercising the Freerider Option Agreement and to send those documents, once finalised to DTEL. It claimed that it was instructed to prepare the documents in accordance with the instructions and advice of other legal advisers retained by DTSPL. It also claimed that from 8 September 1999, Mr Smith was aware that Mr Shtein did not agree with his views as to the manner in which the investors in the Partnerships were to assign their interests to other entities prior to exercising the option rights. 257 Harris & Co relied heavily on the communications between Mr Smith and Mr Simms on 9 September 1999. Mr Smith gave affidavit evidence (10/09/07 – par 52) that on 9 September 1999 Mr Simms telephoned him and asked him whether he had seen Mr Shtein's advice to Mr Brand dated 8 September 1999 and what he thought about it. Mr Smith's evidence was that he informed Mr Simms: I don't know. I am not providing advice about how to exercise the option. I am instructed by Gary Urwin to prepare documents for the assignment of Freerider investor interests and the option notices. I am not acting for Ian McLean. 258 That evidence is supported by Ms Rowe's e-mail to her colleagues in Freehills on 9 September 1999 in which she wrote: Peter [Simms] has also spoken with Ian Smith and had ascertained that he has been retained by Gary Urwin to exercise the options rather than by the Investor Partnerships. In light of this Peter has decided to get Oliver Stein ( sic ) (the same lawyer who provided the advice to the Morgan and Banks interests) to advise Ian McLean as well. 259 On 13 September 1999 Mr Simms instructed Mr Shtein to act for the plaintiffs. Harris & Co submitted that at this time Mr Smith and it were "entirely sidelined". 260 On 14 September 1999 Mr Smith and Ms Rowe had another telephone conversation mainly in relation to parties who had not executed the Sale and Purchase Agreements correctly, however that conversation also touched upon Mr Smith's role. Ms Rowe made a file note of the conversation which included the following: [Mr Smith] has just been retained to draft the documents and is not offering advice to individual partners on this. He understands that all the partners have got some form of separate legal and/or accounting advice. 261 I have dealt earlier with the discussion on 15 September 1999 at Freehills' office at which it was suggested that Mr Smith "run past" Freehills the documents relating to the exercise of the option. As I have already said, the matter that was to be "run past" Freehills/Ms Rowe was the inclusion of the appropriate explanation in the Notices, rather than having Freehills assess whether the notices would effect a valid exercise of the option. Harris & Co denied that the plaintiffs instructed or relied upon the firm to provide them with any advice in relation to the method by which the option rights were to be exercised. They also denied that they were instructed by Bartier Perry to provide any legal services to the plaintiffs other than the preparation of the documentation. 262 Harris & Co claimed that at all relevant times from about March 1999 onwards it was aware that Freehills was acting on behalf of DTSPL and the plaintiffs and providing them with advice in relation to the exercise of the options and generally in relation to the dispute between the investor partners and DTAL. It also claimed that Freehills had briefed Mr Walker to advise on issues including the exercise of the options and that Bartier Perry had been retained by investors in both Partnerships to provide advice as to the proper exercise of the options. Harris & Co claimed that on 8 September 1999, DTSPL received advice from Bartier Perry that a pre-condition to the valid exercise of the options was that an investor must have no indebtedness other than the debt owing under the relevant Sale and Purchase Agreement. This was advice contained in the letter to Mr Brand that was provided to Mr Simms. Harris & Co claimed that on and from 15 September 1999 it was aware that Bartier Perry was acting for the plaintiffs in relation to the option agreement save that it was instructed to prepare and issue, after approval by Freehills, the necessary documentation in order to exercise the Freerider option. 263 Harris & Co denied that it had an obligation to make all appropriate enquiries of the plaintiffs to ascertain: (a) whether, as at 20 September 1999, McLean Tecnic had been incorporated for the sole purpose of making an investment in the Freerider Partnership and DTSPL; and (b) that it had not undertaken any activity not expressly provided for or contemplated by the Freerider Partnership Agreement so as to comply with the warranty in clause 4.1(a) of the Option Agreement. Harris & Co also denied that it had an obligation to make enquiries of the plaintiffs to ascertain whether as at 20 September 1999, McLean Tecnic did not have any other indebtedness, so as to comply with the warranty in clause 4.1(b) of the Option Agreement. It was submitted that its role was to create documents in accordance with the requirements of the Option Agreement and not to advise on, or repeat others' advice on, the requirements for a valid exercise of the option. 264 Prior to 20 August 1999 Mr Urwin put a proposal to Mr Smith whereby individual investors would assign their interests to the companies in Mauritius and corporate investors would assign their interests to wholly owned subsidiaries. As instructed by Mr Urwin on behalf of DTSPL Mr Smith prepared draft assignment documents. However when Mr Smith received a copy of Mr Shtein's advice to Mr Brand dated 8 September 1999 he accepted that there was a problem "in terms of the option" and he accepted that corporate investors' assignments to wholly owned subsidiaries would amount to fresh transactions with the incursion of new liabilities by the assignee (tr 202). Mr Smith also appreciated at the time he read Mr Shtein's advice on 8 September 1999, that DTAL had already called a default in relation to the Terminal Adapter Partnership and was claiming that the whole of the balance of the purchase monies, amounting to many millions of dollars, had already become due and payable. He appreciated that upon novation by a corporate investor to a wholly owned subsidiary, that subsidiary would be stepping into the debt in relation to which DTAL was claiming that monies were immediately due and payable. He appreciated that the practical effect of the corporate investor assigning to a wholly owned subsidiary would be that the director or directors of any such subsidiary would be placed in a position where they would be at personal risk of becoming liable for the debt as a consequence of insolvent trading (tr 203 – 204). 265 The issue of possible liability for insolvent trading was certainly a matter that weighed on Mr Smith's mind against the prospect of any assignment path being pursued by a corporate investor (tr 204). He accepted that all the points made by Mr Shtein in his advice of 8 September 1999 were good reasons to doubt the wisdom of going down any assignment path. He agreed that he had read the Freerider Option Agreement and the Terminal Adapter Option Agreement a number of times prior to September 1999 and in September 1999 gave his "closest consideration" to them (tr 209). He assumed that having read those documents at that time, it was his understanding that the effect of an assignment by a corporate investor to a wholly owned subsidiary under each of the Option Agreements would be to bring into existence a new option agreement with the assignee standing in place of McLean Tecnic (tr 209). 266 Mr Smith was cross-examined in relation to the letter he wrote to Mr Urwin dated 17 August 1999, headed "Digitech Assignments", extracted earlier in this judgment. Mr Slattery QC cross-examined Mr Smith about the letter as follows (tr 220): Q. You appear to be offering views here which would appear to cover both the Freerider and Terminal Adapter products; is that right? A. Yes. Q. You were going through, reading the agreements, and providing for him what you saw as at least a summary of those; isn't that right? A. Yes. Q. You understood that he was going to take your summary into account for his decision-making purposes in relation to the two partnerships; isn't that right? A. I assume so. Q. You understood that you were advising him about the content and legal effect of those four documents, at least – the option, the fixed equitable mortgage, the partnership agreements and the sale and purchase agreements for both the partnerships; isn't that right? A. Yes. Q. You have got little doubt, have you, that you were taking legal responsibility for the accuracy of your advice when you gave it to him on this occasion? A. Yes. Q. What you were saying to him was more, was it not, than just a bare summary of the content of those documents? A. In the letter? Q. Yes. A. Well it's a fairly – the letter is what it is. It's a fairly brief summary of the things, yes. Q. Before I go to some items of detail, I'm just wanting to put this to you, Mr Smith: although you have characterised the request in your affidavit as, "could you set out for me the relevant provisions in the agreements", you appreciated that what you were doing was giving advice to Mr Urwin beyond a bare summary of the contents of the agreement? A. No, I was setting out the relevant provisions. 267 Mr Smith agreed with Mr Slattery that he was offering an opinion in the letter about whether or not each of the investors would need to have a corporate nominee appointed (tr 221). He was a little resistant to the suggestion that he was providing legal advice, but ultimately agreed that he was (tr 222; L1-20). Mr Smith was referred to DTSPL's letter dated 18 August 1999 in which it was recorded that Harris & Co/Mr Smith, had been briefed by DTSPL and was liaising with each of Freehills and Mr Walker SC "in relation to the final form of documentation required to complete the processes described". Mr Smith agreed that this was an accurate description (tr 223). I am satisfied that this concession does not mean that Mr Smith accepted that he had been instructed to advise the plaintiffs on the method by which the plaintiffs could exercise the options validly. The plaintiffs had their own lawyers, Mr Simms and later Mr Shtein to provide that advice. 268 Mr Smith gave evidence that the reason a Mauritius based company was chosen was to avoid the prospect of directors of the assignee companies being liable for insolvent trading under the Corporations Law if they had defaulted on obligations owed to DTAL. Mr Smith did not think that it was necessary that the companies be based in Mauritius; rather they just had to be outside the jurisdiction of the application of the Corporations Law. He agreed that he did not tell Ms Rowe, Mr Broadley or anyone from Freehills about the Mauritian proposal. He also said that he did not recall informing Mr Walker about it (tr 236 – 237). He agreed that he decided he did not need to trouble Freehills about it at that stage (tr 237). 269 Mr Slattery cross-examined Mr Smith about the Observations in the Brief to Mr Walker in which Mr Smith's role was described as having been briefed to "advise our clients". The following evidence was given (tr 239 - 240): Q. That was a perfectly accurate description of the role that you were playing at that time, wasn't it? A. No. Q. What's wrong with it? A. Well, I hadn't been briefed to advise our clients. Q. What do you mean by that, Mr Smith – "hadn't been briefed to advise our clients"? What's wrong with that? A. Well, assuming "our clients" means the partners in the partnerships, I hadn't been briefed to advise them. Q. What, you find that, reading it now, quite jarring, quite wrong, do you? A. I don't know that it is quite jarring, it is just not a perfect example – a perfect description as you described it. Q. But you had been giving advice via Mr Urwin on 17 August that I took you to, hadn't you? A. I had given advice to Mr Urwin, yes. … Q. What's wrong with the description "briefed to advise our clients"; that's what you were doing, wasn't it? A. I was advising Mr Urwin. Q. But Mr Urwin, you understood, as I asked you before, was a point of contact for members of the partnerships, wasn't he? A. Yes. Q. You knew that what you were giving him was either going to be sent to them or, if not, in Mr Urwin's mind, used for their benefit, didn't you? A. Yes. … Q. You understood at the time when you were communicating with Mr Urwin that you were advising them through him, didn't you. A. I knew that I was giving advice or I was communicating with Mr Urwin. I didn't know whether he was – what he was doing with it. Q. You didn't know what he was doing with it? A. Well, I knew I was – I was giving advice to Mr Urwin. Had I gone the next step and thought what he was doing with it, I guess what you say is correct. Q. Well, what other next step could there be, other than that he was using it for the benefit of the partnership, as you understood it. A. I accept that. 270 The purpose of some of Mr Slattery's cross-examination was to suggest to Mr Smith that he was not keeping Freehills informed about what he was doing, as might be expected if Freehills had a supervisory or co-ordinating role over Mr Smith. That cross-examination included the following (tr 242 - 244): Q. You treated them, in effect, on a need-to-know basis, didn't you? A. I don't know that that's accurate. Q. Well, in relation to the tasks you were undertaking, if you didn't think they needed to know, then you didn't tell them; isn't that right? A. If I didn't think I needed assistance, yes, I didn't ask for the assistance. Q. You made the election about whether you would bring them in and seek assistance; isn't that right? A. In relation to the assignments, yes. Q. You have answered several questions just now by agreeing with me but then qualifying them by using the words "in relation to the assignment issue". Do you recall using that phrase? A. Yes. Q. Are you seeking to draw for the court some distinction between what you call the assignment issue and something else? A. Yes, there is the assignment - - Q. Would you please explain the distinction you are drawing? A. Well, the distinction is parties could assign their interests in the partnerships and subsequent to that they could exercise an option to require DTEL to subscribe for shares in the company to which they assigned. Q. I just want to explore with you the relevance of this distinction that you are drawing, Mr Smith. Mr Smith, did you see any commercial purpose in the assignments taking place without the options being exercised? A. Yes. Q. What was that? A. A release of the individual investor. … Q. Do you draw some important distinction that at that point in time you were only doing something to do with the assignment but not the exercise of options? A. No, I say there were two aspects to it. Q. Before we divide them up if we need to, you knew that what Ms Rowe was saying to Mr Walker was that you were there in your capacity as someone who is advising clients in relation to the exercise of the options, isn't that right? A. Yes. Q. I suggest to you that you knew that that was an accurate description of your job and that it related to advice about exercising the options? A. It wasn't such an important thing. I mean, the important thing was to explore, which I had, the question of whether one could assign. You must remember that there wasn't a fight between Freehills. It wasn't as though I was correcting everything that came out from them. … Q. You felt free to correct thing wrong in these observations, didn't you? A. Yes. Q. And you didn't correct this, I suggest to you, because you thought it was right? A. I mustn't have felt a need to correct it, yes. Q. And you didn't feel the need to because it was right, I suggest to you? A. Not necessarily. 271 After some further cross-examination Mr Smith agreed with Mr Slattery that he did not tell Freehills or Mr Walker that he was not briefed to advise on the options. The following evidence was then given (tr 245): Q. Can I suggest that the reason for that is because you knew that that was what your job was? A. It was part of the job. 272 Mr Smith accepted that the Mauritian proposal was still on foot at the time of Mr Walker's advice that the options were to be exercised whilst the agreements were still on foot. He claimed that he saw his role as assisting Mr Urwin/DTSPL with the question of assignment, prior to the exercise of any options. He also accepted that he did not provide Freehills with any information about the Mauritius proposal. He said he was not briefed to decide what Freehills were told and that he knew Freehills were having meetings with other representatives. Mr Smith's further evidence in cross-examination included the following (tr 259 - 261): Q. But you know that it is being suggested on your behalf in the pleadings in this case that Freehills either had a co-ordinating role or, indeed, a supervisory role in relation to your work, don't you? A. Yes. Q. You never invited Freehills to engage in any supervision or co-ordination about this, did you? A. Correct. Q. If they didn't know about it, you knew that they couldn't either supervise or co-ordinate it, didn't you? A. If they didn't know about it, I knew they couldn't co-ordinate it? That follows. … Q. You see, you knew, from what I asked you before lunch, what was in the observations to Mr Walker, didn't you? A. Yes. Q. And you knew that those observations said that you were advising about the exercise of the options, didn't they? A. Yes. Q. Unless you made very clear to Freehills that somehow the position had radically changed from the time that Mr Walker's observations were sent to you and you didn't disagree with them, that they were entitled to assume that you were continuing to do that; isn't that right? A. I don't know. Q. You don't know? That's the best answer that you can give to that question, is it? A. Well, I don't know whether they were entitled to assume that, because there was a lot of other information going to Freehills that I wasn't party to. Q. You appreciated, as a solicitor, that in being involved in a transaction where other solicitors were involved, it was important for you to not let anyone misunderstand what your role was going to be; isn't that right? A. Generally, I agree with that. Q. And one of the steps or ways that could clear up a misunderstanding is if someone overstates your role to correct them; isn't that right? A. Yes. Q. Notwithstanding that you say you were saying this to Mr Simms, you weren't going back to, in effect, what had been said to Freehills and Mr Walker and correcting the position, were you? A. No. 273 The reference in this last question to the communication with Mr Simms is a reference to the conversation set out in paragraph 52 of Mr Smith's affidavit referred to earlier in which Mr Smith said to Mr Simms that he was not acting for Ian McLean and he was not providing advice about how to exercise the option. Freehills submitted that if that conversation had taken place at about the same time that Freehills were describing Mr Smith's role in the Brief to Mr Walker as "advising the clients", Mr Smith would have corrected the Observations. That submission does not have any force in the light of Ms Rowe's e-mail of 9 September 1999 referred to earlier, in which she recorded the conversation in which Mr Simms said that Mr Smith had advised him that he was not acting for or advising the plaintiffs about how to exercise the options. 274 Mr Smith accepted that at the meeting at Freehills on 15 September 1999 Mr Shtein asked him whether he could exercise the Freerider option for the plaintiffs. He agreed that by the end of that meeting he had taken responsibility to exercise that option for the plaintiffs. He was cross-examined as follows (tr 273): Q. But you didn't announce to this meeting, "I'm going to take responsibility to exercise the option, but let no-one misunderstand, I'm not giving Mr McLean or anyone else any advice about it", did you? A. No. That was because his solicitors were there. 275 In cross-examination by Mr Robb QC for PCP, Mr Smith agreed that insofar as he was working in relation to the Terminal Adapter matter he was working in the interests of the Partners who would stand to lose from the dispute rather than for DTSPL. That cross-examination included the following (tr 297-299): Q. In commercial and legal substance, the persons who were relying upon your work during this period were the partners? A. In relation to the power of attorney, that's correct. Q. And in relation to anything you advised concerning the notice of default? A. The end people at risk were the partners, yes. … Q. A retainer just to draw documents without an implied assurance that all reasonable care would be taken to ensure that the legal pre-conditions for effective exercise had been complied would be nonsense, wouldn't it? A. I could see circumstances where that wouldn't be a nonsense. Q. What are those circumstances? A. The circumstances where you are just told to prepare an option notice – a notice exercising an option. 276 Mr Smith gave evidence that it was his role to do what he was requested to do by Mr Urwin which was to prepare documents and give advice to Mr Urwin as to the content of the sale documents and other Freerider documents (tr 299). In further cross examination he gave the following evidence (tr 299): Q. You are not suggesting are you, that you understood your retainer from Mr Urwin as simply being to prepare documents without having responsibility for their effectiveness? A. No. Q. Insofar as you took instructions from Mr Urwin, you understood that you were responsible for their effectiveness? A. For the documents I drafted yes. 277 In my view the concession in this last answer does not amount to an admission that Mr Smith accepted the obligation to ensure that none of the investors were in breach of the warranties in clause 4 of the Option Agreements. Rather Mr Smith accepted the obligation to ensure the "documents" were effective that is, they were in the form required with, as Ms Rowe emphasised, an adequate explanation of the relevant calculation. 278 Mr Smith agreed that Mr McLean and his companies were relying upon his services in relation to the Power of Attorney (tr 300 - 301). He also gave evidence that he was not providing advice separately to Partners as to how to exercise the option but he agreed that he was providing such advice to Mr Urwin (tr 315). He gave the following evidence in further cross-examination (tr 315 - 316): Q. Because otherwise it would be a nonsense for a solicitor to be drawing documents and being devil may care about whether they worked or not? A. I accept that. Q. So you understood at that time, in fact, that insofar as you had accepted instructions to prepare the option notices, it was your responsibility, as the solicitor, to take all reasonable care to ensure that, if they could be exercised validly, they would be exercised validly? A. Yes. Q. And albeit that you say that you were providing that advice to Mr Urwin, you knew that the only purpose of that exercise was for him to convey that advice to the partners for them to act upon? A. Either to act upon or take advice upon, yes. Q. But one thing that you knew might happen is that they simply acted upon? A. Either to act upon or take advice upon, yes. Q. But one thing that you knew might happen is that they simply acted upon your advice? A. Yes. Q. Up until about a month before 9 September, you knew that Mr McLean was one of the persons in the category of investors or interested investors who was likely to act upon your advice? A. Amongst others, yes. Q. And nothing had happened between 20 August and 9 September to cause you to believe that Mr McLean had ceased to be one of those persons who might rely upon your advice? A. My advice and presumably Mr Simms', who was his solicitor, who was present at the meeting, yes. Q. But so far as you knew, you were the only one, to that point of time, who had been instructed to prepare the option notices? A. Yes. Q. Whether or not any particular investor sought a second opinion from that investor's own solicitors, you simply had no knowledge whether or not Mr McLean was doing that vis-à-vis Mr Simms? A. No. 279 He accepted that in September 1999 he understood that to act for the holder of an option in respect of its exercise required not only that documents be prepared but that the documents be such, and the steps taken be such, as to cause the exercise to be effective (tr 320). Mr Robb asked Mr Smith about the letter from Bartier Perry to him dated 16 September 1999 in which Bartier Perry confirmed that Harris & Co would be acting on behalf of the plaintiffs in respect of the exercise of the options relating to the Freerider Partnership. In cross examination Mr Smith gave the following evidence about that letter (tr 321): Q. You did not take any steps to communicate with any of Mr Bruce, Mr Shtein or Mr Simms to deny the validity of the assertion made in that first paragraph? A. No. With hindsight, I should have. Q. You accept now, don't you, that the ordinary meaning of "we confirm that you will be acting on behalf of… in respect of the exercise of options" was that you would be the solicitor that would not only draw the documents but who would satisfy yourself, by proper legal thought and research, that the documents you were preparing would, in all the circumstances, be effective? A. When I read it, I read it in light of the agreement I thought I had, that I was just preparing the notice of exercise, which is what was discussed at the meeting before. Q. Well, I suggest to you that what - - A. It wasn't possible in the space of a day, when I was busy doing everyone else's things, to do a research of Mr McLean's affairs. That's why, when I read it, I thought, "that is confirming what was agreed yesterday, that I am exercising – I am preparing the notice of exercise." 280 Mr Smith agreed, in cross-examination by Mr McClintock, that he did not make any enquiry to determine what transactions McLean Tecnic had engaged in; whether it did or did not have any indebtedness; or whether it was in breach of the warranty in clause 4.1(b) of the Option Agreement (tr 386). He agreed he did not have any idea whether clause 4.1(b) of the Option Agreement was satisfied because he regarded his role as limited to preparing the exercise notice. He agreed that he did not turn his mind at any stage to whether the warranties in clause 4.1(a) or 4.1(b) had been satisfied and rejected the suggestion that he had an obligation to consider those matters prior to the exercise of the option (tr 387). 281 In exercising the options in the Freerider Partnership, Mr Smith followed Mr Walker's advice and requested DTAL to nominate the security required for the assigning companies. He agreed with Mr McClintock that the spreadsheet he received from Mr Shtein with the Deeds of Novation in respect of the McLean companies made perfectly clear that the McLean companies owed debts in respect of the Terminal Adapter Partnership as well as the Freerider Partnership (tr 400). Mr McClintock cross-examined Mr Smith as follows (tr 400 – 401): Q. These documents told you, didn't they, that there was a breach of clause 4.1(b)? A. When you say they told me, I didn't appreciate that. So in that sense they didn't tell me that, no. Q. You're saying that if you saw this document on the 16th, you didn't recognise that it indicated that there was a breach of clause 4.1(b)? A. Yes. Q. Looking at it now, though, you would agree with me that it shows that there was an indebtedness owed in relation to the terminal adapter partnership – that's right, isn't it? A. Yes, I have agreed with that. Q. And that tells you now, as you sit in the witness box, that there was a breach in respect of clause 4.1(b)? A. I'm aware of that, yes. 282 When Mr McClintock suggested to Mr Smith that his task was not restricted to simply copying out the exercise of option documents from the back of the Option Agreement and sending it off to DTAL, Mr Smith said that it is what he believed his task was because there was not time to do more (tr 402). Mr McClintock suggested to Mr Smith that it was always his intention to assign the plaintiffs' interest in the Freerider Partnership to Orthoptic and that he simply ran out of time to do it. Mr Smith denied this. I do not accept that Mr Smith always intended to assign McLean Tecnic's rights to Orthoptic, nor do I accept that the time constraints prevented Mr Smith from assigning McLean Tecnic's rights to Orthoptic. This was a company incorporated at a time when the Mauritius proposal was still on foot. I am satisfied that when that proposal was abandoned as a result of Mr Shtein's advice to Mr Brand it was no longer a corporate vehicle considered to be of use in the exercise of the option. 283 Mr Smith gave evidence that when he received a copy of the Deed of Release from Mr Shtein and instructed his secretary to prepare a similar Deed for each of the corporate entities, it did not occur to him that there may be a problem because such a Deed had not been completed in respect of, and at the time of the Freerider exercise of options. He accepted that if he had become aware of a difficulty with the exercise of the options he had an obligation to alert his clients to that difficulty. His evidence was that he did not become aware of any problems with the exercise of the options until Einstein J delivered his judgment. 284 Mr Smith was not asked by the plaintiffs, Mr McLean or Mr Simms to provide the plaintiffs with advice on the steps that needed to be taken to exercise the options validly. The plaintiffs instructed Mr Shtein at Bartier Perry to provide that advice because the plaintiffs were concerned that Mr Smith may not have been in a position to provide impartial advice because he was an investor in one of the Partnerships. 285 Mr Smith's role from February 1999 to October 1999 varied from his initial instructions to provide advice on the default notice; to negotiating directly with Mr Reid of DTAL in trying to reach a commercial settlement for the Partnerships and DTAL; to preparing documentation for assignment at the time it was planned to assign corporate investors rights to companies in Mauritius; to preparing the notices to exercise the option. I do not accept that the ambit of Harris & Co's retainer can be properly measured by the statements made by Ms Rowe in her Observations in the Brief to Mr Walker. Although it is true that Mr Smith did not correct the Observations when it referred to his role as advising the clients on the options, I do not accept that this was his role at the time of the exercise of the Freerider Option. Mr Simms was the plaintiffs' solicitor and he attended various meetings and instructed Bartier Perry to provide advice to the plaintiffs on the exercise of the options. It was Mr Shtein who was instructed not only to advise on the options but to prepare the option documentation. It was only when Mr Shtein concluded that he was over burdened with work and would not be able to exercise the options within the required timeframe, that Mr Smith was asked to prepare the documents for the plaintiffs to exercise the option in the Freerider Partnership. 286 The letter from Mr Shtein/Bartier Perry to Mr Smith/Harris & Co on 16 September 1999 confirmed that Mr Smith would be "acting on behalf of" the plaintiffs "in respect of the exercise of the options relating to the FreeRider Partnership". Mr Smith had informed Ms Rowe on 14 September 1999 that he had "just been retained to draft the documents" and was "not offering advice to individual partners". He also informed her that he understood that "all the partners" had some form of "separate legal and/or accounting advice". It is also clear that at this time Mr Smith understood that Ms Rowe would review the documents that he prepared and although he may have had a different view of the purpose of that review, it was limited to the adequacy of the explanation relating to the calculation in those documents. It was in these circumstances that Mr Smith received the letter from Mr Shtein of 16 September 1999 to act on behalf of the plaintiffs "in respect of the exercise of" the Freerider Options. 287 Harris & Co submitted that where the plaintiffs had gone to Bartier Perry because of a perceived conflict of interest it would not be lightly inferred that Mr Smith's retainer was any wider than the drafting of documents for the exercise of the option. In this regard reliance was placed on the following passage of the judgment of Lightman J in Dean v Allin & Watts [2001] 2 Lloyd's Law Reports 249 at 259: 33. In a situation such as the present where (to the knowledge of both parties) a solicitor is retained by one party and there is a conflict of interest between the client and the other party to a transaction, the court should be slow to find that the solicitor had assumed a duty of care to the other party to the transaction, for such an assumption is ordinarily improbable. But the special circumstances of a particular case may require a different conclusion to be reached. 288 I am not satisfied that there are any special circumstances which would impose on Mr Smith/Harris & Co an obligation to provide advice in relation to the steps to be taken to validly exercise the option when the plaintiffs had specifically instructed Mr Shtein to provide that advice because of Mr Smith's perceived conflict of interest. Harris & Co relied upon Imbrahim v Pham [2007] NSWCA 215 (paras [28], [62]-[63], [109]-[110] and [205]) in support of the proposition that Mr Smith did not owe a duty of care to advise the plaintiffs on the matters now complained of or other matters associated with the exercise of the option. The portions in Imbrahim v Pham relied upon by Harris & Co are not really of any assistance. That case was decided on its facts, as this must be. 289 Mr Smith was not advising the individual partners on the legal and/or accounting aspects of the exercise of the options. Mr Smith was preparing the documentation for the Partners. When Mr Shtein, with Mr Simms' approval, instructed Mr Smith to "act for the plaintiffs" I am satisfied that the ambit of Mr Smith's/Harris & Co's retainer was limited to the preparation of the documents in line with his role in respect of the other Partners. He was not instructed to investigate the affairs of the plaintiffs or to enquire as to the compliance with clause 4 of the Option Agreement. The plaintiffs expressly abandoned any such implied instructions when they withdrew their instructions because of Mr Smith's perceived conflict of interest. The peripatetic nature of the plaintiffs' instructions ensured that the complexities of the situation were compounded. 290 The plaintiffs alleged that Harris & Co were in breach of their duty of care to the plaintiffs by failing to deal with the issue that membership of both Partnerships meant that the warranty in 4.1(b) was breached. Harris & Co submitted that Mr Smith only commenced to act for the plaintiffs on the exercise of the Freerider option on 16 September 1999 and was not instructed to provide any advice about rights and obligations associated with the exercise of the option because that advice had already been provided by both Freehills and Bartier Perry. It was submitted that Mr Smith was engaged in very urgent circumstances where Mr Shtein was unable to assist. It was also submitted that the urgency of the situation is a matter to be taken into account when assessing whether a solicitor is negligent. In this regard reliance upon the following portion of Young AJA's judgment in Macidone v Parbery (1994) Aust Torts Rep 81-290 at 61,543: If a solicitor feels that because of time restraints he or she is not able to do what would properly be done in such cases, then the client must be given full information so that the client may elect some lesser protection from the solicitor or perhaps take the work elsewhere. In the instant case it will be remembered that the matter was urgent because the client had agreed with the vendor on a lesser price for a quick settlement and was also about to be married and go on his honeymoon. The solicitor certainly said nothing to indicate that he was not able to do what had to be done in the time available to him and indeed the time for completion was in fact extended a bit beyond what was originally contemplated. However, it is relevant to take into the factual mix when making an assessment as to whether in any particular case a solicitor was negligent, that he was under pressure of time. 291 DTAL had served a Termination Notice in respect of the Freerider Partnership on 7 September 1999 that was to expire 10 working days from that date. The advice given by Mr Walker was that the Freerider Option should be exercised prior to the expiry of the period under the Termination Notice. Although the Notice was dated 7 September 1999 Mr Smith was not instructed until Thursday 16 September 1999 with Notices having to be served by the following Monday 20 September 1999. It has to be remembered that Mr Smith was also completing the documentation including deeds of assignment for a number of other investors. 292 Harris & Co also submitted that had Mr Smith advised that assignment was the only way to avoid the indebtedness problem, a very real question would arise as to whether the plaintiffs would have followed that advice. It was submitted that it was only during the previous week that Mr McLean had retained Bartier Perry to advise him and the plaintiffs in relation to the exercise of the options and had received a copy of Mr Shtein's advice to Mr Brand dated 8 September 1999 advising strongly against assignment. 293 The plaintiffs also submitted that Mr Smith should have been aware by 28 September 1999 that the exercise of the Freerider option on 20 September 1999 might have been invalid after he learned of the possibility of intercompany debt and because releases had been forwarded to him by Mr Shtein. The plaintiffs claim that Mr Smith/Harris & Co breached their duty of care to the plaintiffs by failing to warn them of the possibility of the invalidity of the exercise of the Freerider option. 294 In Bell v Peter Browne & Co (1990) 2 QB 495 Mustill LJ, in agreeing with Nicholls and Beldam LJJ that the appeal should be dismissed, said at 512-3: Certainly, a solicitor may have a continuing retainer from his client, and no doubt there are retainers which require the solicitor to be constantly on watch for new sources of potential danger and to take immediate steps to nip them in the bud. … The proposition entails that the defendants have two duties, one express and the other implied. The express duty would be to perform the task for which they were retained and paid, namely to put into effect in a legally appropriate manner the informal arrangement between the plaintiff and his wife. The second duty, implied and presumably gratuitous, and commencing immediately after the last moment when a careful solicitor would have taken the necessary steps to formalise and protect his client's interests in the future proceeds of sale, would be to exercise continuing vigilance to discover any mistake which they, themselves, might have made, and then to busy themselves in putting it right. Evidently this obligation would continue up to, but not beyond, the time when the mistake became irretrievable. I find it impossible to imply such a strange obligation from the mundane facts of the present case; and equally improbable to suppose that if it did exist the obligation would be broken at any time other than the time when the mistake should have been discovered and put right; namely, straightaway. To my mind the solicitors were employed to complete the transaction, and to complete it within the appropriate time. No more than that. 295 To apply Lord Mustill's reasoning to the present facts, there would need to be an implied obligation for Harris & Co to re-check the work it had done at various times until ANH were instructed to commence the litigation. In the absence of any expert evidence as to what a reasonable solicitor would have done, I am of the view that such an obligation does not arise in the circumstances of this case. If Harris & Co were provided with information that should have alerted them to the possibility that the exercise of the option they had effected, or thought they had effected, may be invalid then their obligation was to advise the client at that time of such prospect. The mere fact of Mr Shtein sending the draft release to Mr Smith would not reasonably alert a solicitor in Mr Smith's position to the prospect of a breach of clause 4.1(b) of the Option Agreement, in the circumstances of this case, where dual membership of the Partnerships had been endorsed by the parties. 296 The plaintiffs had chosen to avoid taking legal advice about the exercise of the options from Mr Smith by choosing to instruct Mr Shtein. Mr Shtein had been the adviser to the plaintiffs in relation to the exercise of the options. Mr Smith had stepped into the breach to complete the documentation when Mr Shtein found that he was over burdened with work and would not be able to exercise both options within the allotted timeframe. The plaintiffs instructions were then split and no solicitor was asked to consider the exercise of the options in both Partnerships, removing the likelihood that dual membership would be seen to be a problem. I do not regard it as reasonable to impose an obligation on Mr Smith/Harris & Co to interrogate the affairs of the plaintiffs to work out whether the release that Mr Shtein sent across amounted to a release of a debt, the existence of which would otherwise have rendered the exercise of the Freerider option invalid. 297 Harris & Co's retainer at the time the Freerider option was exercised was to prepare the documents and carry out the physical steps required under clause 2 of the Option Agreement. It did not include an obligation to review the affairs of the plaintiffs, or investigate whether McLean Tecnic was indebted at the time of the exercise of the option such as to be in breach of clause 4.1(b) of the Option Agreement. Harris & Co/Mr Smith understood their role was so limited and I am satisfied that it was entitled to proceed on that basis. The plaintiffs' cases against Harris & Co will be dismissed. Claims Against Bartier Perry 298 Bartier Perry admitted that it accepted instructions from the plaintiffs to advise them on their rights and obligations in relation to the exercise of the options under the Terminal Adapter Partnership and to draft notices of exercise of option in relation to the Terminal Adapter Partnership. Bartier Perry claimed that on 13 September 1999, and at all material times thereafter, Mr Simms represented himself to Bartier Perry to be both the solicitor for the plaintiffs and the agent for the plaintiffs for the purpose of providing instructions to Bartier Perry and receiving advice from Bartier Perry in relation to the exercise of the Terminal Adapter Option. The evidence establishes quite clearly that Mr Simms was acting in these roles. 299 Bartier Perry claimed that its Retainer was subject to the following terms: (a) that it would not act for or advise the plaintiffs in respect of the exercise of the Freerider Option; (b) that it had not examined and would not be required to examine any documentation relating to the Freerider transaction, the plaintiffs' investment in respect of the Freerider intellectual property or the Freerider Option; (c) that it would deliver any Freerider documentation that had been supplied to Bartier Perry by Mr Simms to Harris & Co without reading or reviewing it or retaining any copies thereof; (d) it would not provide any advice to the plaintiffs in respect of the amount of the option fee or other sums payable by the plaintiffs on or prior to the exercise of the Terminal Adapter Option; (e) it would not review any financial calculations or other financial documentation relating to the plaintiffs' participation in the Terminal Adapter Partnership; and (f) it would not provide any advice to the plaintiffs in respect of the amount of any indebtedness of the plaintiffs. 300 Mr Shtein accepted that he was to provide advice to the plaintiffs and that it was his obligation to address the issue of debt owed by McLean Tecnic. He said that he prepared the Deed of Release as a precaution to effectively close off the possibility of any indebtedness (tr 475). Mr McClintock cross-examined Mr Shtein to suggest to him that documentary material that he had at the time of the exercise of the option would have or should have, alerted him to the fact of indebtedness in McLean Tecnic. The particular letter that Mr McClintock focused upon was a letter from Mr Urwin to Mr Simms dated 24 September 1999 setting out the sums payable by McLean Tecnic, extracted earlier in this judgment. The cross-examination in relation to that letter included to the following (tr 476 – 478): Q. You would agree with me, wouldn't you, that if you had read this letter with any attention you would have seen that Mr Urwin was saying that there was an existing debt owed by McLean Tecnic in respect of Freerider as at 24 September 1999? A. If I read this letter as that the date, I would have said that's what it was saying, yes. Q. It follows that if there was such a debt, there was a live possibility in your mind, Mr Shtein, that option 4.1(b) was breached? A. No, I don't agree with that. I came to finally consider the question – or to get my final instructions on indebtedness on 27 September, and those instructions were that there was no such indebtedness and that the Freerider option has been exercised. Q. Mr Shtein, did you raise, did you, with Mr Urwin or with Mr Simms the contents of this letter? A. I don't know that I would say I didn't raise with them the contents of this letter. I mean, they sent me the letter. Simms sent me the letter and it was put aside for use on 27 September. Q. Mr Shtein, do you mention anywhere in your affidavit raising any query with either Mr Simms or Mr Urwin about the contents of this letter? A. Did I query the contents of this letter with Mr Simms or Mr Urwin? I don't believe so. Q. It follows, doesn't it, that at the time you caused the exercise of the option on behalf of AI McLean and McLean Tecnic, you believed that there was an existing indebtedness, as referred to by Mr Urwin in this letter? A. No. I believed there was no indebtedness. Those were my instructions. Q. Despite the fact that you saw a letter from Mr Urwin dated 24 September that specifically mentioned debts that, you would agree, would be a breach of clause 4.1(b)? A. I had explicit instructions on 27 September that there was no debt. Q. Did you see this letter as comprising any part of your instructions, Mr Shtein? A. By the time I received this letter, I had already seen my retainer as not having to make these financial calculations or review them. Q. Mr Shtein, I'm not asking about making the financial calculations or reviewing them. I'm asking about what this letter told you. This letter told you that there was a breach of clause 4.1(b), didn't it? A. No, it didn't tell me that. Q. Could you explain why, if the contents of the letter are accurate in allowing for the transposition of Freerider and Terminal Adapter, how it did not amount to a breach of clause 4.1(b)? A. Well, I'm not sure why you say it did amount to a breach of 4.1(b). My instructions were to give advice on Terminal Adapter, and those instructions were that there was no indebtedness – that on the morning of the 28th there would be no indebtedness of McLean Tecnic. 301 Mr Shtein agreed that if there were indebtedness at the time of the exercise of the option there would be a breach of clause 4.1(b) and the probable outcome would be that the exercise of the option would fail (tr 478). Indeed, he accepted that clause 4.1(b) indebtedness was something that he had addressed in his letters of advice. He was further cross-examined as follows (tr 480 – 481): Q. You construed the warranty in clause 4.1(b) to mean that McLean Tecnic was not to have any debt other than in respect of Terminal Adapter; that's right, isn't it? A. That's the way I recall it. Q. It would follow, wouldn't it, that a debt in respect of Freerider would be a breach of the clause 4.1(b) warranty; that's right, isn't it? A. That's what the Court of Appeal found. Q. I want your answer, not the Court of Appeal. A. I didn't consider it. Q. You didn't consider it? You say that you did not consider the possibility that a debt owed in Freerider would be a breach of the warranty in the Terminal Adapter Option Agreement? A. Not directly, no. Q. What do you mean "not directly"? Did you consider it at all, or indirectly? A. My instructions were that Freerider had to be exercised first, and my instructions on 27 September were that there was no indebtedness owed by McLean Tecnic other than the company debt in Terminal Adapter. Q. Mr Shtein, this letter comprised part of your instructions, didn't it? A. In a general sense, yes, its part of my instructions. It was faxed to me by a client. Q. Again – I apologise for repeating it – it told you that there was a breach of clause 4.1(b), didn't it? A. If I had read this letter as at 24 September, I would have said that clause 4.1(b) of the Terminal Adapter Option Agreement has arguably been breached, assuming that I knew it was McLean Tecnic that owed the money, which I probably did. Q. It is clearly McLean Tecnic, isn't it, because of the subject that appears at about point three on the page, Mr Shtein? A. I hadn't read the Freerider documents. 302 Mr McClintock suggested to Mr Shtein that the guarantee provided by AI McLean included a guarantee in respect of the balloon payment. Mr Shtein disagreed with that proposition and in fact he had referred to the exclusion of the balloon payment from the guarantee in his advice of 8 September 1999. Mr Shtein was asked whether his view about the exclusion of the balloon payment from the guarantee influenced him in the course of action that he advised the plaintiffs to take in September 1999. He said that "to an extent" it did (tr 487). He was asked (tr 488): Q. Well, to what extent and what effect did it have, Mr Shtein? A. Well, the counterproposal which your clients have been putting, which was also considered by me, was that there ought to be an assignment to a so-called cleanskin, and, in my view, that could have entailed significant liabilities for Mr McLean and for A I McLean. Now, if A I McLean was only ever liable for the instalment debt and not for the balloon, then clearly it would make very little sense to expose Mr McLean and A I McLean to what would for them be a catastrophic liability when, to quote a phrase of Mr Silver's, we could just "kiss off" McLean Tecnic. Q. That being, in fact, a view which you had in respect of the Kalinick Kalifair companies, being the view you were expressing to Mr Silver in that meeting? A. I had that view in relation to all of the – in relation to McLean Tecnic as a corporate investor also. 303 Mr Shtein was cross-examined further as follows (tr 493): Q. What I want to suggest to you overall about these documents, Mr Shtein, is that it is completely plain that if the option was exercised validly, A I McLean escaped liability, but if it wasn't exercised validly or was not exercised at all, it was liable under clause 11.1 for the amounts unpaid under the sale agreement? A. No, I don't accept that. I think the better view is that, under clause 11.1, A I McLean never guaranteed the balloon amounts, and I don't agree with your interpretation of 6.5(b), because I think what they might be talking to in the last line is the nominee company that is put in to the transaction upon the transfer and novation of the liabilities to a nominee by an individual. Q. So what you are saying is, if the option is validly exercised, the nominee company becomes liable for the payments? A. Well, somebody has to have these payments to DTAL accelerated, and if it is a transferring investor, which means that it is an individual, for example, who has assigned to a so-called nominee or cleanskin, then it is that nominee or cleanskin that has to take on the accelerated liability because it is the one that DTAL is supposed to fund to pay that accelerated liability. 304 Mr Shtein gave evidence that it did not cross his mind that what was happening or had happened in the Freerider Partnership exercise of option was significant for his work in relation to Terminal Adapter. He agreed that he knew that the Freerider documents were likely to contain similar warranties as those contained in the Terminal Adapter Option Agreement (tr 498). He gave the following evidence (tr 499): Q. Did you address at all the possibility that the participation in the two partnerships could conceivably cause difficulties in exercising the options, Mr Shtein? A. I did consider whether or not there was a breach of clause 4.1(a) as a result of the participation in both partnerships and I dismissed that as being not a correct argument. 305 Mr Shtein actually addressed his thought processes that he had in 1999 in respect of whether there was a breach of clause 4.1(a) of the Option Agreement in his affidavit of 5 September 2007. That evidence was as follows: 81. I considered clause 4.1(a) of the Option Agreement. This could possibly require the objects of a corporate investor partner to be framed as being for the sole purpose of investing in the Terminal Adapter Partnership. Because of this concern I instructed Duncan Bruce to ensure that when the nominee companies of Bartier Perry's individual clients (Messrs Brand, Kelliher, Shorrock and Urwin) were incorporated by the shelf company provider they should be incorporated with the sole purpose objects reflecting the requirements of clause 4.1(a). 82. Whilst risk of a breach of clause 4.1(a) could potentially be addressed by the use of a "sole purpose objects" company, it was not possible for this to be addressed for McLean Tecnic other than by having the Sale Agreement novated to a new company. McLean Tecnic had already been incorporated to a new company. McLean Tecnic had already been incorporated without 'sole purpose objects'. 83. Further, it appeared obvious that to the extent there may have been any breach of clause 4.1(a) by McLean Tecnic investing in Freerider, any such breach had been waived by DTEL and DTCL entering into the Option Agreement whilst allowing McLean Tecnic to enter both the partnerships and by continuing to accept option fees on a quarterly basis over a 2 year period. Alternatively, DTEL and DTCL would be estopped from claiming to the contrary. 306 Mr Shtein claimed in his cross-examination that he had express instructions "not to worry about Freerider". He rejected the suggestion that he did not have those express instructions. He claimed that he had a conversation with Mr Simms in which he advised him that he could not do both of the partnerships; that he had not read any Freerider documents; and that he was not going to keep the documents. He said that he was sending those documents to Mr Smith and Mr Simms instructed him to do that and not to worry about Freerider (tr 533 – 534). Mr Shtein was cross-examined further (tr 534 – 538): Q. You were also aware, weren't you, that if the entity in question had engaged in any transaction, it could involve a potential breach of either clause 4.1(a) or clause 4.1(b)? A. Yes, in general terms, yes. Q. That's what you said on page 10 of the exhibit to your affidavit, isn't it, under the heading "No indebtedness"? A. Yes. Q. The actual words were: If the partner entities have engaged in any transaction it could have given rise to indebtedness A. Yes. Q. You knew that the partner entity, in this case McLean Tecnic, had engaged in a transaction other than Terminal Adapter – that's correct, isn't it? A. Yes. Q. It follows that you knew that that transaction could have given rise to an indebtedness – that's right, isn't it? A. I knew that McLean Tecnic being involved in Freerider could have given rise to indebtedness. … Q. Just going back, though, to address the second sentence which I was asking you about, you were aware, weren't you, that McLean Tecnic had engaged in the Freerider Partnership as well as the Terminal Adapter Partnership? A. Yes, I was – if I had been asked, I would have said, "I'm almost certain that McLean Tecnic is a partner in Freerider". I didn't have the Freerider documents, but I don't deny that it was much, much more likely than not that it was McLean Tecnic. Q. You assumed, didn't you, that there were similar payment provisions – perhaps not in terms of amount, but in terms of the nature of the obligations – in the Freerider documents? A. No, I didn't assume that. My working assumption was that the documents – that the schemes had to be different. Q. You certainly were aware, though, that it was a transaction which could potentially give rise to indebtedness on the part of McLean Tecnic? A. I don't know that I thought about it in exactly those terms. I thought about it in terms of the sole purpose warranty. Sorry, what's the question again? Q. You certainly knew, didn't you, that there was a potential for the McLean Tecnic involvement in the Freerider Partnership to give rise to indebtedness? A. Looking at it now I can see that, yes. Q. And you saw it in September 1999, didn't you? A. I could see then – I accept that one could see that if McLean Tecnic was a partner in the other partnership there could be indebtedness in Freerider, yes. Q. And if that were the case as at 15 September 1999, that would mean, wouldn't it, that there would be a breach of clause 4.1(b) – if there were such an indebtedness? A. Well, you didn't really – you only needed to consider that question as at the date – I only needed to consider that question as at 28 September 1999. I didn't have to consider it at 15 September. Q. Did you give any consideration to the possibility, Mr Shtein, that the existence of the Terminal Adapter debt might cause a breach of the warranties in Freerider on 20 September when Freerider was exercised? A. No, I didn't give any consideration to that. That would have been directly contradictory to my instructions, which was that Freerider was to go first, and that was based on the advice of Mr Walker and Freehills. 307 After further cross-examination Mr McClintock returned to the topic of McLean Tecnic's indebtedness as follows (tr 554 – 558): Q. Mr Shtein, you knew on 28 September these things, didn't you: as at 20 September the Terminal Adapter indebtedness had been in existence – that is, McLean Tecnic was liable for the payments under Terminal Adapter? You knew that, didn't you? A. As at 28 September I knew that the Terminal Adapter indebtedness was payable, yes. Q. And you knew that it had been payable on 20 September, didn't you? A. Yes. … Q. Let's be clear about it, Mr Shtein. You have told us that you knew, of course, that as at 28 September the Terminal Adapter indebtedness was payable by McLean Tecnic to the Digi-Tech companies? A. As at 28 September, I knew there was an ongoing obligation for McLean Tecnic under the Terminal Adapter Sale and Purchase Agreement. Q. And you knew that that ongoing obligation had been in existence as at 20 September 1999, didn't you? A. Yes, I would have known that. If I had been asked, I would have said that. Q. Because it in fact had been in existence at all times since May 1998 when McLean Tecnic came into this deal, up until at least 28 September, when you purported to exercise the option for McLean Tecnic in relation to Terminal Adapter – that is correct, isn't it? A. That is correct. Q. You knew, didn't you, that the Freerider Option had been exercised on or about 20 September 1999? A. On or about. Q. You knew, didn't you, that at the time the Freerider option was exercised, there was a subsisting indebtedness in relation to Terminal Adapter owed by McLean Tecnic, didn't you? A. By inference, possibly. Q. You would certainly have known that if you had addressed your mind to it, wouldn't you? A. If I had addressed my mind to what? Q. If you had addressed your mind to the question of whether the indebtedness in relation to Terminal Adapter was subsisting as at the date of the exercise of the Freerider option, you would certainly have realised, wouldn't you, that it was? A. That would have been addressing my mind to something under the Freerider documents? HER HONOUR Q. No, no, you are just being asked whether you knew that the debt – that is the debt under the sale agreement – by McLean Tecnic was in situ as at 20 September? A. As at 20 September, I could have told someone who had asked that the Terminal Adapter debt was in situ. Q. And that McLean Tecnic owed it? A. And that McLean Tecnic owed it, yes, your Honour. MR McCLINTOCK Q. And that was the approximate date of the exercise of the Freerider option, wasn't it? A. Approximately, yes. Q. It follows that you knew, as at the date of the Freerider option, that there was an existing indebtedness owed by McLean Tecnic in respect of the Terminal Adapter – that's right, isn't it? A. Yes. If somebody had asked me, I would have had to say yes. … Q. Mr Shtein, you have told us that if you had thought about it you would have realised that as at the time of the exercise of the Freerider option there was a subsisting indebtedness in Terminal Adapter owed by McLean Tecnic. You did tell us that, didn't you? A. At the time of the exercise of the Freerider option, there was a subsisting debt in Terminal Adapter. Yes, if I had been asked, I would have said yes. 308 Mr McClintock then put to Mr Shtein the proposition that is contained in paragraph 54(a) and (b) of the plaintiffs' pleading. That cross-examination was as follows (tr 564 – 565): Q. Mr Shtein, you knew that the only method of bringing about the valid exercise of the Terminal Adapter option was to assign pursuant to part 5 of the option agreement, which appears on page 701, to a special purpose wholly owned subsidiary of McLean Tecnic? A. Absolutely not. That wouldn't result in this option agreement being exercised – it would have been some other option agreement. Q. But the consequence would have been that the special purpose company would have complied with the requirements of the option – of the new option, you say – and the debts would have been ultimately put back to DTEL and DTAL? A. Well, you are hypothesising about what – this hypothetical successor option that you say would have been entered into and what would have happened under that. Q. The hypothetical option that you refer to was in precisely the same terms as the option in Freerider? A. No, it isn't, it is in similar terms according to this. 309 Mr Shtein did not accept that the only way to achieve a valid exercise of the option was the method contained in paragraph 54 of the plaintiffs' pleading. As Mr Shtein pointed out, the option was not to be in identical terms but in "similar" terms, whatever that may mean in the circumstances of this case. These uncertainties were compounded by the fact that Mr Reid of DTAL had indicated early in 1999 that the investors' options would not be honoured or accepted. 310 Bartier Perry accepted that its retainer was to advise the plaintiffs in relation to the Terminal Adapter option, to draft the notice of the necessary exercise of the option and to cause that notice to be served in New Zealand. The evidence establishes that on 27 September 1999 Mr Shtein was instructed by Mr Simms that the plaintiffs' payments were "up to date". It was submitted that Bartier Perry did not have a duty to go behind those instructions, still less to review the advice it had been given by Freehills in relation to the timing of the exercise of the Freerider option or to check the work that had been done by Harris & Co. 311 It was submitted that Bartier Perry specifically declined to act for the plaintiffs in relation to the Freerider option because Mr Shtein did not have time to properly consider the documents. It was submitted that the evidence establishes that Mr Simms accepted this limitation on Bartier Perry's retainer. Emphasis was placed on the fact that Bartier Perry was not responsible for the provision of financial information. That was left to Mr Simms and Mr Bali in carrying out the due diligence process. Mr Bali was the accountant who was responsible for the instructions to Mr Shtein that there would be no indebtedness at the time the Terminal Adapter option was exercised. 312 The defendants submitted that as at 28 September 1999, McLean Tecnic was in fact indebted to DTSPL in a number of ways with the effect that the exercise of the options would have failed in any event. The purchase Instalment Debt related to monies owed by McLean Tecnic to DTSPL for the payment of the September 1999 quarterly purchase instalment under the Freerider Sale Agreement in the sum of $12,295.95. The Option Fee debt related to monies owed by McLean Tecnic to DTSPL in relation to the payment of the September 1999 Freerider option fees in the sum of $3,597. From time to time, DTSPL paid various amounts (including Option and purchase Instalments to DTAL and DTEL respectively) on behalf of the Partners and then sought to collect those payments from the Partners including McLean Tecnic. 313 On 20 September 1999 DTSPL sent two cheques to KPMG (as collection agent) in payment of the Freerider Instalments Debts and Option Fees. A schedule attached to the covering letter records McLean Tecnic's contributions as $12,295.95 and $3,597 respectively. On 21 September 1999 DTSPL requested reimbursement from McLean Tecnic of those amounts, totalling $15,892.95 on the basis that the amounts were "now due". DTSPL's financial records as at 31 October 1999 showed that it had not been reimbursed and that McLean Tecnic's outstanding Freerider purchase Option Fees for September 1999 amounted to $15,892.95. The debts were ultimately paid on 4 August 2000 by A I McLean. The subscription debt was an amount payable by McLean Tecnic to DTSPL under clause 2.4(b) of the Partnership Agreement in the sum of $42,827. However DTSPL's financial accounts as at October 1999 show that McLean Tecnic had outstanding share capital relating to the September 1999 capital call in the sum of $42,827. It remained unpaid until 23 November 1999. 314 It was submitted that this was a "sticky" debt in the sense that it would have become a debt of McLean Tecnic's Terminal Adapter assignee, in the event that assignments had taken place in the manner now contended for on behalf of the plaintiffs. In that way the existence of the subscription debt defeats not only the exercise of the options, which did in fact take place, but also any exercise of the options which may otherwise have taken place had the plaintiffs' method of exercise of the options been pursued. It was submitted that the subscription debts stick to the assignee in the following way: (a) under clause 8.14 of the Sale Agreement, McLean Tecnic agreed to make payments in accordance with the Partnership Agreement; (b) under clause 20.4 of the Sale Agreement, McLean Tecnic could only transfer its partnership interest if the assignee company assumed outstanding obligations under the Sale Agreement and the transfer was in accordance with clause 14 of the Partnership Agreement; and (c) clause 14.6 of the Partnership Agreement required the assignee to enter into a deed under which it assumed all the liability of McLean Tecnic under the Partnership Agreement, which included the unpaid capital contribution. 315 Accordingly, it was submitted, that the intended "clean" assignee would still have had a debt (the subscription debt assumed from McLean Tecnic) and would be in breach of the "similar" clause 4.1(b) of the successor option. This sophisticated submission exposes the exquisite complexities of the relationships between the plaintiffs and DTSPL and the Digi-Tech parties. Notwithstanding this debt Mr Shtein was instructed that there was no indebtedness and he was entitled to act on those instructions. 316 The plaintiffs submitted in opening that Bartier Perry's retainer was "to procure the valid exercise of the option. They did not do so. That, itself, is a breach of their contract, the retainer" (tr 103). There was reference in the plaintiffs opening to the following passage of Oliver J's judgment in Midland Bank Trust v Hett Stubbs & Kemp at 433 and 435: It is, I think, important in the instant case to note that it is not a case of the giving of wrong and negligent advice (where the breach of contract necessarily occurs at a fixed point of time) but of simple non-feasance. If one were to seek to write out in longhand the obligations which Mr. Aymere Stubbs senior assumed when he engaged to act in the matter of the grant of the option, they were (1) to draw and have completed a proper and enforceable option agreement which would bind the parties, (2) to take such steps as were necessary and practicable to ensure that it was binding on the land into whosesoever hands it might come before any third party acquired a legal estate, and (3) to carry out his work with the care and skill which a normally competent practitioner would bring to it. 317 Mr Kelly submitted that the plaintiffs' case is to the opposite effect. It is that the option should not have been exercised but instead interests should have been assigned so that some other option could be exercised. It was submitted that Midland Bank Trust Co Ltd v Hett Stubbs & Kemp has no relevant application because the present is not a case of non-feasance in which the plaintiffs allege that the defendants failed to strictly follow a manner and form provision for the exercise of the option. The plaintiffs' case is that the defendants should not have exercised the options at all, even though they were instructed to do so. What the plaintiffs allege the defendants should have done was to advise the plaintiffs to novate their rights and obligations to a newly formed wholly owned subsidiary and cause those companies to exercise the options which arose under the successor option agreements. 318 Bartier Perry criticised the plaintiffs for failing to lead any evidence about the practice of solicitors, in particular the failure to call any evidence of what advice a reasonably skilful, careful and diligent solicitor would have given the plaintiffs in the complex circumstances which prevailed in September 1999. It was submitted that the plaintiffs have not proved that Bartier Perry, or indeed any of the defendants, gave any negligent advice. It was submitted that the duty of a solicitor is to use reasonable skill, care and diligence in the discharge of his or her retainer not to give "correct" advice or to "ensure" any outcome as a result of his or her advice. 319 Heydon v NRMA Ltd (2000) 51 NSWLR 1, referred to earlier in this judgement, involved an action brought by NRMA against a Queens Counsel and two firms of solicitors. The solicitors were retained to advise on the demutualisation of NRMA, which proposal involved changing the company's status to a company limited by guarantee with a share capital and converting the rights of members into an entitlement to shares in the company. A prospectus was issued and sent to members in August 1994. In October 1994 the Federal Court declared the prospectus to be misleading and deceptive and issued an injunction. The solicitors did further work in preparing a supplementary prospectus. Advice had been taken by the company both from the solicitors and the Queens Counsel. The proposal was abandoned in May 1995 following the decision of the High Court in Gambotto v WCP Ltd (1995) 182 CLR 432. 320 NRMA commenced proceedings against the Queens Counsel and the solicitors alleging breach of contract and negligence. It was claimed, inter alia, that the company should have been advised that Gambotto was on appeal to the High Court and, after special leave was granted, that the appeal had reasonable prospects of success. It was further alleged that advice should have been given that there was a real risk that the High Court decision might adversely impact on the proposal. NRMA claimed that had it been so advised, it would have deferred any decision to proceed and would not have "wasted" expenditure in connection with the proposal. The company succeeded at trial and was awarded damages of $21,193,828 plus interest. 321 The Court of Appeal allowed an appeal against the trial judge's decision. The reasoning varied and I have already referred to passages of Malcolm A-JA's judgment. McPherson A-JA expressed the view that a lawyer does not warrant or guarantee the soundness of his or her opinion but only that the requisite degree of skill and care has been used in arriving at it (at 363). Similarly Ormiston A-JA said that the exercise of due care, skill and due diligence did not require practitioners to invariably give the "right advice" to every question raised for their opinion (at 649). 322 The fact that a solicitor may have erred in construing, or in advising on the construction of the document is unlikely to constitute negligence, so long as the construction favoured by the practitioner was a tenable one. In Dunlop v Woollahra Municipal Council [1982] AC 158 the Council was sued for damages alleged to have been incurred by reason of invalid resolutions in relation to building lines and height restrictions that affected the plaintiff's capacity to develop his property. The Council had relied upon its solicitor's advice in proceeding to pass the relevant resolutions. The Privy Council said at 171-172: The council's resolution…was passed on the initiative and advice of their solicitors,…What more could the council be reasonably expected to do than to obtain the advice of qualified solicitors whose competence they had no reason to doubt? It is true that Wootten J. held that the legal advice which the council had received from their solicitors had been wrong; but it is only fair to the reputation of the solicitors, who gave it, to add that until that judgment made the matter res judicata between the parties, the question of law, which turned on the construction to be placed on two clauses in the planning scheme and in particular on whether or not a restriction upon the maximum number of storeys in residential flat buildings was inconsistent with a restriction upon the maximum height above sea level of all buildings, was an evenly balanced one and, in their Lordships' view, to answer it either way at any time before that judgment, could not have amounted to negligence on the part of a solicitor whose advice was sought upon the matter. 323 As I said a number of times, in the present case, there was no expert evidence of relevant practice, taking into account all the circumstances that prevailed at the relevant time. Those circumstances were extremely complex. This was recognised by Mr Shtein and the plaintiffs and Mr Simms were advised of the risks relating to the exercise of the options, and indeed in relation to the prospects of success in achieving a resolution of the dispute with the Digi-Tech parties. This advice was given by Mr Shtein, inter alia, in a conversation which took place on 15 September 1999 in the presence of Mr Brand. That conversation was in the following terms: Shtein: These warranties in the option agreement are problematic. The parent company warrants that there is no breach of any laws relating to the administration of the investor partner including the Corporations Law. There is a wide range of legal obligations to which investor companies could be exposed. All I can suggest is that I do a check list of the main Corporations Law responsibilities. Then there are the warranties about sole purpose and no indebtedness. As you know, entry into any transaction, or any tax, duty or other liability could mean there has been a breach of these warranties. The withholding tax issue is one example. Simms or Brand: An investor can transfer to an affiliate. That might solve some of the warranties. Shtein: That is a possible course, but novation is a complex procedure which carries risks and uncertainties of its own. Simms or Brand: Also, how would it fit in with the litigation and the misleading conduct claim? It will mean that the new company has to purchase the technology, knowing how bad it is. There is an argument for novation for the individuals who have no alternative, but it's different for the corporate investors. Its discretionary in their case. How can they claim they have been misled if they enter into a fresh and discretionary purchase? What would the new company be taking on? Digi-Tech say that all the purchase money is now owed under the Sale Agreement as a result of termination. That liability could fall onto the new company. And Digi-Tech won't honour the option, let alone write a new one that can be used for the new company. We think Digi-Tech has started this fight and purported to terminate the Sale Agreement because they can't honour the option. We think their objective is just to sue the investors for whatever they can get from them under the documents. Shtein: Perhaps the worst problem with novation is insolvent trading liability. This could extend up the chain to the owners as well as the directors of the new company. Simms or Brand: There are risks all around. There is going to be major litigation. We are going to apply to have the Sale Agreement set aside. There are going to be arguments about termination, about the documents, about the options, the guarantees, the novations, the products, the warranties and so on. Simms: McLean Tecnic will be a plaintiff but is otherwise dispensable as far as McLean is concerned. It is more important that no action is taken which exposes Ian or A I McLean to greater liability, or which prejudices the litigation strategy. Shtein: I can't see the merit in assignment to a new company, for the corporate investors. 324 Mr Brand gave evidence in these proceedings and was not cross-examined on this conversation. It was not suggested in the present litigation that this conversation did not occur. 325 In WCW Pty Limited v Bolster & Co [1993] FCFCA, 6-01-93, unreported, the Full Court of the Federal Court observed at paragraph 15: Before this particular case against the solicitor would have been established, the appellant would have had to prove first, that as a result of the solicitor's failure to give the advice, it lost an opportunity to seek warranties that would have provided it with protection in the events which have happened; secondly, that it would have accepted that advice; thirdly, that it would have required such warranties from the vendors; and fourthly that either the vendors would have agreed to warranties in a form that would have given the appellant a right of action against them in the events which have now happened or, if they had refused to do so, that the appellant would not have signed the contract: see Norwest Refrigeration Services Pty Ltd v Bain Dawes (W.A.) Pty Ltd (1984) 157 CLR 149 at 172 – 173. Even if a negligent failure to advise can be established, a failure to prove these matters does not merely deprive the appellant of an entitlement to limited damages for the loss of the chance of obtaining protective warranties; it means failure to establish the cause of action. 326 In Gore v Montague Mining Pty Limited [2000] FCA 1214, counsel elected not to call the sole director and shareholder of the respondent company to give evidence notwithstanding that he was in court throughout the hearing and no explanation was offered. At [32], the Full Federal Court agreed with the trial Judge's finding that: "In that situation it should be inferred that [the director's] evidence would not have assisted [the company's] case; in particular, his failure to contradict versions of conversations given by [the solicitor] means I should accept those versions, they not being inherently improbable: see Jones v Dunkel (1959) 101 CLR 298. I do so". 327 It was submitted that s 5D(3) of the Act does not excuse the plaintiffs from calling direct evidence from Mr McLean, in relation to other matters of importance, for example, the reason for the incorporation of Orthoptic. It was submitted that in the absence of direct evidence from Mr McLean or Mr Reid, the plaintiffs' claim must fail unless the Court is prepared to draw inferences from other evidence about the actions the plaintiffs and the Digi-Tech companies would have taken. However, it was submitted that the plaintiffs have failed to adduce evidence, or sufficient evidence, for the necessary inferences to be drawn. 328 Mr Shtein recognised the possibility of invalidity of the exercise of options by reason of a breach of clause 4.1(b) of the Option Agreement. He was instructed that at the time of the exercise of the option there was no indebtedness. As I have said he was entitled to accept these instructions and proceed on that basis, but took the extra precautionary step of preparing the Release of any debt. His analysis and advice was a most tenable approach. To my mind, far from acting negligently, Mr Shtein took careful and diligent steps throughout his retainer and acted according to the standards of care and diligence of a solicitor practising in this area in 1999. 329 The plaintiffs' cases against Bartier Perry will be dismissed. Freehills 330 Freehills' retainer letter of 19 March 1999, addressed to Mr Urwin as the director of the "Terminal Adapter Partnership" refers to the firm advising "in relation to" the Terminal Adapter Partnership "involvement in arrangements with Digi-Tech Australia". There is no documentary evidence establishing that Freehills was advising individual partners. From time to time representatives of the Partnerships attended meetings both at Freehills and with counsel. Freehills claims that at all times its retainer was limited to advising on issues common to all Partners in the Partnerships. That included the procurement of stamp duty advice and from time to time advice on strategic issues concerning the common interests of the Partners, for instance, the advice that was sought from Mr Walker SC, from Professor Carter, and Mr Jackman. Advice was also sought in respect of the effect of the Termination Notice and whether or not the Sale Agreements could be treated as remaining on foot. 331 In opening the plaintiffs' case against Freehills, Mr McClintock submitted that Freehills was specifically retained to advise the Partners how to bring about the exercise of the options and specifically to advise on the effectiveness or efficacy of the exercise notices (tr 73). Freehills submitted that this statement in opening is broader than the way the plaintiffs pleaded their case against Freehills. The pleaded case against Freehills alleges that on about 16 August 1999 Freehills met with and advised members of the Partnerships and their principals, including Mr McLean, on issues including time, drafting and logistics associated with the exercise of options under the various Investor Option Agreements and compliance with the warranties under those agreements such as to effect a valid option exercise (par 132(d)). The pleaded claim alleges that Freehills liaised with Harris & Co in relation to the preparation of the final form of documentation required to effect the exercise of the options; sought and obtained advice from Mr Walker SC for the purpose of advising the plaintiffs on or about 19 August 1999, including the procedures to be followed in the event that the investors exercised their option rights; in September 1999 prepared a detailed report on the operation of the option agreements including the identification of the warranties which had to be complied with in clause 4 of the Agreements; advised the Partners in the Freerider Partnership and their covenators, including the plaintiffs, that they should exercise their option rights within the ten day working period from 7 September 1999; and advised the Partners, including the plaintiffs, whether the relevant Sale Agreement had to be on foot at the time the options were exercised (par 132). 332 The plaintiffs also claimed that from 14 September 1999 Freehills sought to confine the scope of the retainer in certain respects in that Freehills would not consider any issues relating to the exercise of the options "on behalf of any individual partners" (par 133). This contention recognised the letter of 14 September 1999 and the plaintiffs then alleged that despite the purported confining of the scope of the retainer (par 134): (a) Freehills was aware that McLean Tecnic was one of only two partners in the Terminal Adapter and Freerider Partnerships that were a member of both partnerships; (b) McLean Tecnic was by far the most substantial investor among the investors in those partnerships; (c) on or about 17 September 1999 Freehills received and reviewed drafts of ten Notices of Exercise of Option for certain investors in the Freerider partnership and assisted in the calculation of the "Company Debt" to be identified in each notice; (d) in about September 1999 Freehills advised the partners in the Freerider Partnership that the instalment due on 30 September 1999 should be paid at the time of the exercise of the option; (e) on about 22 September 1999, Freehills received from Bartier Perry and reviewed draft documentation to effect the exercise of the option in the Terminal Adapter Partnership; and (f) on about 1 October 1999 Freehills wrote to the solicitors for DTAL on behalf of the Partners in both Partnerships asserting that there were no undischarged liabilities of any of the partners such as to prevent the valid exercise of their respective option rights. 333 The plaintiffs contended that at all material times Freehills knew that the plaintiffs required legal advice in relation to all the relevant agreements and the correct interpretation and implementation of those agreements. They also alleged that Freehills knew by at least 28 September 1999 that the plaintiffs were relying on Freehills to advise them on the appropriate means of exercising the option rights under the Freerider Option Agreement "in co-operation with" Harris & Co. They contended that by 28 September 1999 Freehills knew that the plaintiffs were relying on Freehills to advise them on the appropriate means of exercising the option rights under the Terminal Adapter Option Agreement "in co-operation with" Bartier Perry. Finally it was alleged that by 28 September 1999 Freehills knew that when the Freerider Option was exercised on 20 September 1999 McLean Tecnic had not discharged its separate indebtedness to DTAL in relation to the Terminal Adapter Sale Agreement. There is an alternative claim that by that date Freehills ought to have known that the indebtedness had not been discharged and ought to have known that there was a material or significant risk that the exercise of the options were invalid or that the Court would find such exercise as invalid (par 138-140). 334 The plaintiffs claim that Freehills' retainer included the following terms (par 141): (a) that they would advise the plaintiffs in relation to their involvement in arrangements with DTAL, including its rights and obligations under each of the option agreements. (b) that they would advise the plaintiffs in relation to the requirements for a valid exercise of the option rights under each of the option agreements. (c) that they would advise the plaintiffs, either directly or through their agents or other solicitors: (i) of any material risks that the manner in which the option rights pursuant to either of the option agreements was exercised, or was proposed to be exercised, may be invalid, or may be held by a Court to be invalid; and (ii) of all appropriate steps to overcome any such risks; and (iii) so as to ensure that documentation was prepared, by Freehills or by Harris & Co or by Bartier Perry, for execution on behalf of the plaintiffs, consistently with such advice. (d) that in advising the plaintiffs, and in preparing any such documentation, or when ensuring that such documentation was prepared, Freehills would exercise all reasonable skill and care, and make all inquiries and investigations, as a reasonably prudent and competent solicitor in a city commercial firm would make. (e) that Freehills would take all reasonable steps required to gain an understanding of the operation of the two option agreements. (f) that Freehills would review the documentation under which the exercise of the option rights under each of the option agreements was sought to be effected in or to determine whether the attempted exercise of those option rights were valid, or would be held by a Court to be valid. 335 The plaintiffs relied upon the evidence given by Mr Broadley in cross-examination in relation to the advice sought by Freehills from Mr Walker SC as follows (tr 625-626): Q. You would agree with me, wouldn't you, that you were there seeking advice which you proposed to pass on to the individual investors in the partnerships; that's correct, isn't it? A. Ultimately, yes, but Mr Urwin, the managing director in the partnerships, would have been the person who would have given the first report as to what happened at the 18 August meeting. I can't recall what other reporting was done, but there was probably some reporting done. … Q. … You understood this document to be Freehills seeking advice on behalf of certain clients, didn't you? A. Yes, of the partnerships, yes, and the company. Q. The clients you refer to are, in paragraph 5, the investors in the Freerider and/or Terminal Adapter Partnerships; that's correct, isn't it? A. Yes. Q. In paragraph 6 you say: If our clients are to exercise the Investor Options … Do you see that? A. Yes. Q. The "clients" you were referring to there were the investors who had the options, weren't they? A. Yes. Q. When you were seeking this advice from Mr Walker, you intended to pass that advice on, either directly or through the conduit of Mr Urwin, to those investors, didn't you? A. Yes. Q. You knew that they would take that advice – that is, the advice given by Mr Walker, passed on by you – in making decisions about what they were going to do, didn't you? A. Yes. Q. You knew that they would rely upon the quality of the advice, both of Mr Walker and Freehills, in making decisions about how they would go about exercising the options, didn't you? A. Yes. 336 Mr Broadley also gave the following evidence in relation to the advice sought from Mr Walker SC in relation to assignment under clause 20.4 (b) of the Sale Agreement (tr 627-628): Q. When seeking this advice from Mr Walker, Mr Broadley, you knew that what the investor partners wanted to do was to exercise the options so as to get out of the business relationship that they had with Digi-Tech? A. By 19 August, yes. Q. The advice that you were seeking there that you have told us you knew would ultimately be taken into account by the investors was directed towards that end, wasn't it? A. Yes. Q. You would agree with me, wouldn't you, that Freehills had undertaken an obligation to advise the individual partners on the methods of exercising the options; that's correct, isn't it? A. At a general level, yes. Q. What do you mean by "a general level", Mr Broadley? A. There were about six agreements involved here, and at least four of them had something to say about exercise of options. So it was necessary for a lawyer acting for one of the members of the partnership to take instructions and have in mind the requirements, both of the client and of the structures that the client had set up and what it had been doing with the company, and so on, and then there were about 20 steps for forming companies and writing letters and giving notices, and so on which then had to take place. So, as I understand it, the object of the discussion was not to go into all of that detail, but, rather, to deal with it on a level which applied to the partners as a whole, leaving then their individual solicitors, with the help of their accountants, to make decisions about what happened after that. I'm sorry for the length of the response, but that is what I believe I had in mind at the time. 337 The plaintiffs claim that both Mr Broadley and Ms Rowe knew that McLean Tecnic was a partner in both partnerships and that this ought to have alerted them to the breaches of clause 4.1 (a) and 4.1 (b) of the Option Agreement. It was submitted the contents of Ms Rowe's file note of the meeting of 16 June 1999 establish that knowledge. That was a file note of a meeting between Mr Broadley, Ms Rowe and Mr Urwin, which included the statement: "Kelliher and McLean are the only investors who are members of both partnerships" (Ex J). 338 Prior to being shown that file note Mr Broadley was asked whether he was aware in 1999 that the plaintiffs were partners in both partnerships. Mr Broadley said that he may have been so aware but he could not recall (tr 632). Mr Broadley was then shown the file note and the following occurred (tr 633): Q. You would accept that that was something you were aware of from that time on, Mr Broadley? A. Yes -- MR SLATTERY: I object. It doesn't necessarily follow from this document that he was aware of it. HER HONOUR: He has accepted that he was. THE WITNESS: Well, if I may, your Honour, I was about to qualify that answer? HER HONOUR: Yes, Mr Broadley. THE WITNESS: It seems, from this note, that certainly the author, Catherine Rowe, believed that presumably she and I had been told that Kelliher and McLean were the only investors who were members of both partnerships. I don't remember seeing as document, and I haven't seen it recently, I don't think, for whatever reason, so it takes me a little by surprise, but -- MR McCLINTOCK: Q. I didn't mean to take you by surprise. I didn't mean to interrupt you either. If you want to read it -- A. No, I see what it says. I have no recollection of any of that, but if it is true that this contemporaneous document was given to me and I read it, then I would have known what you have just said. Unfortunately, I don't have any recollection of it at all and I don't want to invent. 339 It is not surprising that Mr Broadley would find it difficult to remember whether he was aware of this specific matter, nearly 9 years later, as he sat in the witness box. At the time this file note was made the parties were trying to negotiate a commercial settlement of the dispute with DTAL. The file note does not record any discussion about the dual membership of the Partnerships but rather notes it as a fact. I think it is probable that both Mr Broadley and Ms Rowe were aware that the plaintiffs were members of both Partnerships. That membership did not alert them to the possible breach of clause 4.1 (a) and/or 4.1 (b) of the Option Agreements. 340 The plaintiffs advanced the following propositions in respect of the alleged breach of retainer and breach of duty of care by Freehills: (a) Freehills sought advice from Mr Walker SC, for the purposes of advising the plaintiffs, and did so advise them, on the steps required to validly exercise their option rights under their Option Agreements; (b) Freehills accepted the obligation to advise the Partnerships on issues as may have affected the Partnerships as a whole; (c) among the issues that affected the Partnerships as a whole was the impact, if any, on the exercise of the option rights under the Option Agreements, should any Partner be a member of both Partnerships; it is claimed Freehills simply overlooked this issue; (d) Freehills addressed matters pertaining to individual classes of Partners, such as Toltex and Divome, who had not executed the relevant transaction documents; (e) Freehills accepted that it was part of their obligation, whether under their retainer or as part of their duty of care, to warn their clients of any circumstances which gave rise to a foreseeable risk of economic loss being sustained by those clients, in so far as those matters related to, among other things, the exercise of options by those clients; (f) Freehills advised on 19 September 1999 that the Freerider options should be exercised prior to 21 September 1999; (g) Freehills knew that the Terminal Adapter options would be exercised later, although prior to 30 September 1999; (h) it was within the scope of the Freehills retainer to consider the position of those Partners who were members of both partnerships (being the plaintiffs and Mr Kelliher) as to whether the proposal for the sequential exercise of the option rights gave rise to a foreseeable risk of economic loss, and if so, to advise what steps should be taken to avoid such a risk; (i) Freehills breached that duty; and (j) alternatively on 15 September 1999, Freehills accepted the responsibility to review the manner in which Harris & Co and Bartier Perry were proposing to exercise the Freerider and Terminal Adapter options, before the options were exercised. It was claimed that the plaintiffs relied on Freehills to do this, and were never informed that Freehills did not do so in breach of their duty of care to the plaintiffs. 341 Freehills submitted that at all relevant times the plaintiffs retained and were advised by Peter Simms from PCP in relation to the transactions. It was submitted that commercial advice as to the exercise of the options was provided to the plaintiffs not by Freehills, but by Harris & Co and Bartier Perry. It was submitted that Freehills did not receive instructions from individual investors, specifically the plaintiffs, as to how they should take the steps necessary for each investor to exercise the options. It was submitted that Freehills was entitled to assume that the individuals had received full and proper advice at the time of their investment. Freehills relied upon the communications between PCP and Freehills, in particular the telephone conversation between Mr Simms and Ms Rowe on 9 September 1999, in which Mr Simms advised that the plaintiffs were obtaining independent legal advice concerning the exercise of the options. 342 Freehills submitted that the claims against it rest on a number of misconceptions about its role in the transaction giving rise to the proceedings. The first misconception is that Freehills was retained to act for either of the plaintiffs about their particular circumstances or affairs in relation to the exercise of the options. The second misconception is that Freehills was retained to advise on effecting the exercise of the options. The third misconception is that Freehills was retained to supervise and co-ordinate the exercise of the option agreements. 343 Freehills was retained in the period March to October 1999. It is Freehills' case that its retainer was limited to advising the Partnerships and not the individual Partners. It was submitted that a number of factors support this claim. Firstly, selected representatives of the Partnerships attended conferences with Freehills and Counsel and they were invited to do so as representatives of the Partnerships. Secondly, the advice given, for example in relation to withholding tax, was given to the Partnerships as a whole as an issue of common concern to all Partners and not to individual Partners. Thirdly, reports on conferences were given to the Partnerships as a whole through the selected Partnership representatives. Fourthly, no individual Partner's separate circumstances became the subject of an opinion from counsel during the whole of the retainer period. Fifthly, when asked on occasions to provide advice in relation to and for the benefit of specific partners, for example Mr Brand and Mr Cussens, Freehills declined to do so. It was submitted that Freehills was rightly conscious that to act for an individual on their separate affairs in relation to the Partnerships could lead to a conflict of interest which would require it to cease to act. 344 Freehills emphasised the terms of the telephone conversation between Ms Rowe and Mr Cussens recorded in Ms Rowe's file note as follows: I said we understood that we believe that we were acting for the investor partnership as a whole and that information was being provided to smaller investors by Chris Kelliher and Gary Urwin. 345 Freehills emphasised the content of the file note made by Ms Rowe of the meeting on 16 August 1999 which included the following: Ian Smith/Gary Urwin are to draft documents and make all arrangements for the exercise of these options. Graham Brand stated that the smaller investors were prepared to follow whatever decision was taken by the investors present at this meeting. The clients acknowledge that exercise of the Option would in all probability mean that any deal with Optus would be lost. 346 The fact that Freehills offered to bring specific questions to the attention of Mr Walker required the solicitors executing other retainers to specifically draw to the attention of Freehills and Mr Walker matters upon which they wanted advice. The following portion of Ms Rowe's file note of her conversation with Mr Smith on 18 August 1999 was emphasised: Ian Smith said that he understood that Freehills were taking care of the litigation side of things whereas he was undertaking the documentation and other things associated with the exercise of the Investor Options. I confirmed that this was what had been decided at the meeting on Monday 16th. 347 Freehills claimed that Ms Rowe's response to Mr Smith as recorded in this file note was an "affirmation" that Freehills understood the division of functions and further that the division of functions was what had been defined by the clients to Freehills on 16 August 1999 at the meeting involving Mr Urwin and others. 348 Freehills submitted that the discussion of the scope of Freehills' retainer at the meeting of 15 September 1999, and the contents of the letters of 14 September 1999, were nothing more than a formalisation of the scope of retainer that had been agreed and understood since March 1999. It was submitted that the lack of controversy about the contents of the letter of 14 September 1999, in which Freehills refers to the scope of its retainer, suggests that both Harris & Co (Mr Smith) and Bartier Perry (Mr Shtein) accepted that the letter objectively defined the limits of Freehills' retainer and that they were prepared to continue to pursue their own areas of responsibility. 349 I have already found that the suggestion for the notices of exercise of option being "run past Freehills" was for the limited purpose of checking whether there was an adequate explanation in relation to the calculation. The letter of 14 September 1999 made very clear that Freehills did not act for individual parties in considering their particular separate interests and circumstances. Another matter that supports a finding that the Freehills retainer was limited to acting for the Partnerships was the fact that it was not involved in the detail of the preparation of or actual exercise of the option. Indeed at the meeting on 15 September 1999 Mr Urwin reported to the meeting that the Freerider assignments had already been completed and there was an intention to exercise the options the following day. 350 Freehills also points to the discussion between Bartier Perry and Mr Simms when Bartier Perry was retained to exercise the options for the plaintiffs. There is no mention of any role that Freehills were to supervise or co-ordinate any of the work that was done by Bartier Perry. It was Mr Simms who was acting on behalf of the plaintiffs who decided to "sub-contract" the work of the exercise of the option to Bartier Perry. Freehills took no part in that retainer. 351 On 17 September 1999 Mr Smith sent the letter to Freehills that is referred to earlier in this judgment together with Investor Option Notices for ten investors, eight of whom were individual investors and two of whom were corporate investors. No Notices in relation to the plaintiffs were attached to that letter; indeed there was no reference to the plaintiffs or the name McLean in the draft letter that was attached to it. As I have already said the process of sending the Notices to Freehills was for the limited purpose of Ms Rowe looking to see whether they included an adequate explanation of the calculation. 352 The other important aspect of the content of the letter of 17 September 1999 is that nothing was put before Freehills on that occasion which identified assignment or the lack thereof by McLean Tecnic to an assignee company. The complete absence of any mention of the plaintiffs in this letter is significant. The plaintiffs claim that Freehills ought to have known that there would be a breach of clause 4.1(b) of the Option Agreement, alternatively Freehills ought to have known and advised of the risks of indebtedness and the risks of a Court finding the exercise invalid. There was nothing in this correspondence that would have alerted Freehills to the matters pleaded against it. For all Freehills knew the plaintiffs may have been receiving other advice about the exercise of options, in addition to whatever assistance they were receiving from Harris & Co and Mr Simms. Mr Smith accepted in his evidence that he could draw no comfort whatsoever from any advice from Ms Rowe about the selection or otherwise of assignees of the McLean parties (tr 282); Freehills could not advise him about the McLean entities (tr 281); and Ms Rowe was never going to comment upon nominee companies to which the McLean entities may assign or the way in which the plaintiffs were going to exercise their options (tr 282). 353 The letter from Bartier Perry to Freehills on 22 September 1999 suggested that if there was any aspect of the documents that were enclosed that concerned Freehills or they thought affected the anticipated litigation they should contact Bartier Perry. That letter confirmed that Bartier Perry was acting for the plaintiffs. Mr Broadley was absent from the office at the time the letter was received; Ms Rowe had limited recollection of receiving the letter; the late Mr Tappere dealt with the letter on its receipt on 23 September 1999. Mr Tappere left a message for Mr Shtein that there were issues in relation to Freehills' capacity to respond to the letter of 22 September 1999. Mr Tappere's note records that when Mr Shtein returned his call, he advised that Freehills was considering its position and in consequence could not respond in substance to the letter. Mr Shtein's note confirmed that Freehills could not consider the documents until it considered its position in the matter. Freehills did not consider those documents prior to the exercise of the option and no follow up was sought by Bartier Perry. Freehills' retainer ceased on 24 September 1999. Any work performed by Freehills after that was performed in the context of ensuring an efficient transfer of the retainer to ANH. 354 I am satisfied that Freehills were not retained to give individual advice to the plaintiffs. Freehills' retainer was to advise the Partnerships. Its duty of care owed to the plaintiffs was co-extensive with its obligations under its retainer. It did not include a duty to advise the plaintiffs individually; or a duty to supervise and co-ordinate the exercise of the options by Harris & Co and Bartier Perry. 355 It was submitted that the limited nature of Freehills' retainer is significant insofar as the general principle is to be applied that a solicitor when acting for a client does not owe a duty to third parties or to another party to the transaction. In this regard Freehills relied upon the following portion of Gummow J's judgment in Hill v Van Erp (1997) 188 CLR 159 at 236-237 (footnotes omitted): In White v Jones the Vice-Chancellor illustrated this basic proposition by contrasting cases such as that before him with various examples. These illustrated such propositions as that the solicitor for the vendor does not normally become subject to a duty of care to the purchaser. The solicitor acting for a party who is engaged in "hostile" civil litigation owes a duty to the client and to the court but normally does not owe any duty to the opponent of the client. Reference might also be made to Sutherland v Public Trustee . The plaintiffs were the step-children of the testator. They had been residuary beneficiaries under his earlier will. He had firmly made up his mind to make a will which excluded them and left his entire estate to his wife who, in the event, predeceased him. Relatives of the testator, other than his step-children, then took on intestacy. The solicitor who drew the will had raised with the testator the possibility of intestacy on the prior death of his wife, but the testator would not countenance inclusion of any gift over. The New Zealand Supreme Court held that there was no duty of care on the part of the solicitor to persons who the testator had deliberately refused himself to nominate. 356 Freehills conceded that while a solicitor may be liable for advice or information given to a non-client where the solicitor is aware that the advice or information will be relied upon by the third party, it must be nevertheless reasonable in the circumstances for that person to so rely: Tepko Pty Ltd v Water Board (2000) 206 CLR 1 at 16-18 par [47]-[49], 23-24 par [75]-[79] and 46 par [139]; Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1. It was submitted that in the present case it was not reasonable for the plaintiffs to rely on advice emanating from Freehills as to the correct exercise of the options, particularly in circumstances where: (a) Freehills did not possess the requisite material personal to the plaintiffs to so advise; (b) Freehills was not being kept informed as to what steps the plaintiffs were taking in attempting to effect the exercise of the options; and (c) other specialists were advising the plaintiffs on the exercise of the options. There is a further important matter upon which Freehills rely. It was submitted that Mr McLean was an experienced businessman who was represented by his own solicitor, Mr Simms, thus further circumscribing Freehills' duty. In this regard reliance was placed on the following passage of the judgment of McPherson A-JA in Heydon v NRMA Ltd at 118 par [363]: …A lawyer is not normally required to warn experienced business clients of the possibility that his opinion, though firmly held, may not in fact prevail. 357 It was submitted that the plaintiffs have not sufficiently demonstrated any known reliance by them on Freehills to provide the advice asserted to justify the somewhat ambulatory scope of the duty of care Freehills is said to have owed them. Unless Freehills was furnished with all of the plaintiffs' material, thereby allowing it to advise upon and co-ordinate the correct exercise of the plaintiffs' options, it was submitted it could not be seriously contended that Freehills had assumed such a duty: Notaras v Sly and Weigall (2005) 12 BPR 23,765 at 23,787 par [121]-[122]. 358 The suggestion that Freehills negligently or in breach of its retainer failed to advise the plaintiffs as to the correct method of exercising their Option Agreements, or failed to supervise or co-ordinate those who were advising on the valid exercise of the Option Agreements, is submitted to involve litigation conducted "impermissibly" through the "prism of hindsight": Rosenberg v Percival (2001) 205 CLR 434 at 441-442 par [16] per Gleeson CJ. It was submitted that Freehills properly performed its retainer and did not breach any duty of care owed to the plaintiffs. It was submitted there was no failure on Freehills' behalf with respect to any advice given by it once the factual circumstances of the role in the events leading up to the handover to ANH are properly analysed. 359 It was submitted that prior to the exercise of the options, the plaintiffs had been expressly warned that they could not have any indebtedness. This was advice given by Mr Shtein, firstly through the copy of the letter to Mr Brand and secondly through the direct advice to the plaintiffs. Indeed the plaintiffs' solicitor Mr Simms advised Mr Shtein that there was no indebtedness. It is also the case that advice had been given by Mr Shtein in respect of the clause 4.1(a) warranty. It is very difficult in those circumstances to understand what more Freehills should have done with the material that they had been given prior to the exercise of the options. 360 Freehills correctly identified that the plaintiffs' cases proceed on the assumption that Freehills failed to perform a duty to provide advice to each investor, specifically the plaintiffs, as to whether the options had been validly exercised bearing in mind the warranties in clause 4.1 of the Option Agreement. Freehills submitted that such advice was never sought from Freehills by either of the plaintiffs. Emphasis was also placed on the fact that Freehills took no active part in drawing up or settling the Notices to Exercise the options or in supervising or co-ordinating that exercise. Further Freehills had no knowledge of the quantum of debts that may have been payable by individual investors in respect of the Partnerships at the time of the exercise of the options. It had no knowledge of the financial affairs or the corporate history of either of the plaintiffs. It had not been furnished with documents permitting it to reliably undertake tasks for which such knowledge would be a prerequisite. To the extent that from time to time Freehills responded to issues raised by individual investors, they were raised as common concerns to all of the investor partners in the partnership and therefore it was appropriate for Freehills to advise on them within its retainer. Additionally Freehills submitted that the plaintiffs did not lose their opportunity to exercise the options by reason of any conduct of Freehills. Freehills' retainer ceased on 24 September 1999 and the option exercise period did not expire until 31 July 2000. 361 Freehills were not retained by the plaintiffs. Freehills' retainer by DTSPL was carried out with care and diligence. Freehills did not agree to supervise the work of Harris & Co or Bartier Perry. Freehills were not instructed to advise the plaintiffs how to ensure the option was exercised validly. The plaintiffs' claim against Freehills will be dismissed. Atanaskovic Hartnell (ANH) 362 ANH's retainer commenced on about 29 September 1999 after the exercise of the plaintiffs' options. The plaintiffs conceded in opening their cases that ANH was not retained in relation to the actual exercise of the option, "to actually do it or advise about it" (tr 107). Mr McClintock submitted that ANH was liable in three ways: (1) ANH specifically agreed to advise in relation to the validity of the exercise of the options (tr 6,92-93); (2) there was an "explicit and oral retainer" to provide advice in relation to the validity of the exercise of the options arising from a disputed conversation between Ms Chang and Mr Shtein on 12 October 1999 (tr 6,94); and (3) it was (tr 6,94): …implicit in any litigation solicitor's retainer that that solicitor will make an assessment of the strength of his or her client's case – and in this case become familiar with the documents and with the potential risks to the client and advise the client of those matters. If it becomes apparent to the solicitor that there is a risk that the client is going to lose but that there is a way that that consequence could be avoided, in this case by re-exercising the options, the solicitor has an obligation to advise the client to that effect. 363 ANH submitted that this last proposition amounts to no more than a contention that if ANH happened to notice that there was a risk that a client could be unsuccessful in litigation, which risk could be avoided, ANH should have told the client about that risk. It was submitted that that was the effect of the cross-examination recorded at paragraph 5.7 of the plaintiffs' closing submission which was in the following terms: 5.7 As to the scope of her obligations under the retainer, Ms Chang made the following concession in cross-examination: (a) if she had come to the conclusion prior to 31 July 2000 that there was an issue with the validity of the exercise of the options by A I McLean, she would have informed the client of that issue (tr 763). (b) Ms Chang was retained to conduct the litigation, and in that capacity she was required to advise the client as to what the prospects of the litigation were (if asked). To that end, it was part of her obligation to form an assessment of the strength of her client's case, and if she formed the view that the case was hopeless, she was bound not to proceed with it, and to inform the client of those difficulties (tr 764). 364 It was submitted that it appears that the plaintiffs' central claim against ANH is that there was an implied term to review the exercise of the option rights under each of the option agreements to determine whether the attempted exercises of those option rights were valid. 365 It is not disputed that ANH did not notice the relevant risk, that is the breaches of 4.1(a) and/or 4.1(b). ANH relied upon the following passage from Malcolm A-JA's judgment in Heydon v NRMA at 103 par [309]: It is one thing for counsel to notice some incidental point outside the scope of his brief and draw attention to it. It is quite another thing to impose upon counsel a duty of care to advise on some matter which is beyond the scope of the brief or retainer. 366 It was submitted that this passage is a complete answer to the plaintiffs' claim in respect of ANH's retainer. The express terms of ANH's retainer was set out in letters dated 29 September 1999, 14 October 1999 and 17 December 1999. As those letters make clear ANH was retained by 23 plaintiffs in matter 50169 of 1999 (the Terminal Adapter proceedings) and 33 plaintiffs in matter 50087 of 2000 (the Freerider proceedings) to conduct litigation. It was submitted that ANH was not retained to provide advice about the exercise of the options held by the various investors as that advice had already been given by other solicitors. None of the Investors who retained ANH ever asked Ms Chang to review or add to the work and advice that had been provided by Bartier Perry and Harris & Co on the exercise of the options. 367 It was also submitted that neither Mr McLean nor Mr Simms, who were the only people who ever gave ANH instructions directly on behalf of the plaintiffs, ever asked Ms Chang to review or add to the work and advice provided by Bartier Perry and Harris & Co on the exercise of the options. The fact that ANH was retained by a number of Investors is important when considering the scope of its retainer and what was required to satisfy that retainer. Although the various Investors that retained ANH had some commonality, there were many differences. A litigation committee was formed to instruct ANH and the plaintiffs gave a written authorisation to ANH to accept instructions from that committee. 368 ANH submitted that the underlying transactions the subject of the litigation involved highly commercially sophisticated clients who had each previously obtained separate legal advice in respect of the very matter about which it was then said ANH should advise upon. As with any other commercial contract when construing the terms of ANH's retainer, it is necessary to consider not only the text, but also the surrounding circumstances known to the parties and the purpose and objective of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 par [40]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462 par [22]. The plaintiffs do not contend that they ever instructed ANH to consider whether or not the options had been validly exercised. No express term to that effect is alleged. The plaintiffs attempted to rely upon the words within the retainer letters, "advise you generally", for the purpose of submitting that ANH was retained to consider whether or not the options had been validly exercised and to provide advice thereon. 369 It is appropriate to say something about the practice of solicitors in 1999 and 2000 who were practising as commercial litigators These observations are not based on any evidence that was before me (because, at the risk of repetition, the plaintiff did not call any such evidence), but on matters of practice able to be gleaned from statutes, Practice Notes and the authorities. The conduct of solicitors at that time was regulated by the Legal Profession Act 1987. Under that Act Ms Chang had an obligation not to commence any proceedings in which there was a "claim for damages" unless she had reasonable grounds for believing, on the basis of provable facts and a "reasonably arguable view of the law" that the claim had reasonable prospects of success: s 198L(2). It seems to me that, although strictly speaking, the claim for a declaration in relation to the validity of the exercise of the options did not fall within the definition of "claim for damages" in that section, Ms Chang had a professional obligation not to commence proceedings that had no reasonable prospects of success. 370 In 1999/2000 the practice of the Courts, and thus the practice of the profession, was heavily affected by the need to ensure that commercial litigation was conducted in a cost-effective manner, obviously guided by the dictates of justice. It was during this period that the courts made clear that litigation was to be conducted on the real issues between the parties and that such issues needed to be identified at an early stage. The commercial litigator was required to establish at an early stage, by the process of the pleadings and particulars, what the real issues were between the parties and respond to those issues by the gathering of evidence to prove the cases on the real issues as established. There was a clear obligation on solicitors to expose their clients' cases avoiding any prospect of an "ambush". Practice Note 100 governing commercial litigation in the court in which the Digi-Tech litigation occurred, made this very clear. Later authorities recognized that the "culture" had changed to reflect such a practice: Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116, in particular, per Young CJ in Eq at [45] – [46]. 371 Ms Chang's obligation was to ensure that her clients, the plaintiffs, as well as all the other plaintiffs for whom she acted, were provided with careful and competent advice in the context of the commercial litigious environment in which she was providing legal services. 372 It is accepted by ANH that its retainer required it to consider the defences filed by the defendants (the Digi-Tech parties) in the Digi-Tech litigation. A most important aspect of that matter is that the Digi-Tech parties had asserted that the options had not been validly exercised and had provided reasons for that assertion. None of the reasons referred to the clause 4.1(b) indebtedness point prior to 31 July 2000. It was only when the defence was filed in September 2000, after the Option Period had expired, that the point was identified. As I have already said the claim of invalidity based on a breach of clause 4.1(a) was not raised and was eschewed by Senior Counsel for the Dig-Tech parties in the Court of Appeal in that litigation. 373 It was conceded, appropriately so, that it was an implied term of ANH's retainer that it would exercise reasonable skill and care as solicitors in relation to the matters covered by the retainer. However the plaintiffs allege that it was an implied term of ANH's retainer that it would review the exercise of the option rights under each of the plaintiffs' Option Agreements to determine whether the attempted exercise of those option rights were valid (par 160(c)). The plaintiffs bear the onus of establishing that the term should be implied by meeting the well-known test articulated in BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-283: that it must be reasonable and equitable; it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; it must be so obvious that it goes without saying; it must be capable of clear expression; and it must not contradict any express term of the contract. 374 It was submitted that the proposed term is not necessary to give business efficacy to the contract; the contract is clearly effective without it. It was also submitted that on no view is the proposed implied term so obvious that it goes without saying. If the content of the proposed implied term had been raised with the other fifty Investors who had retained ANH, it is far from obvious that other Investors would have been prepared to pay ANH to conduct specific enquiries into the plaintiffs' position. It was submitted that this is particularly so in circumstances where the plaintiffs now allege that the implied term for which it contends is to investigate matters outside the pleaded and particularised case that was then being conducted in the Digi-Tech litigation. 375 It appears that the plaintiffs allege that, rather than simply accepting that the matter alleged by the Digi-Tech parties in the Digi-Tech litigation was the cause of the invalidity of the exercise of the options, ANH had a brief and a duty to search for any other aspects of the exercise of the option that could conceivably give rise to invalidity. This seems to me to be somewhat absurd in the circumstances of ANH's retainer. It could hardly be said that the implication of the particular term is necessary for the reasonable or effective operation of the retainer in the circumstances of the case. The alleged implied term fails the BP Refinery test. 376 Even if a term were to be implied into the ANH retainer that it was required to review the exercise of the option having regard to the claims made by the Digi-Tech parties in the Digi-Tech litigation, ANH discharged their obligation in this regard. It carefully considered the matters allegedly invalidating the exercise of the options identified by the Digi-Tech parties and formed reasonable or certainly tenable conclusions about them. 377 It was submitted that even if the Court were to conclude that ANH's retainer required it to reconsider the legal advice given to the plaintiffs by other firms about the exercise of the options and to advise the plaintiffs, independently of any claim in the litigation, to re-exercise the options in the way now asserted to be the only way the options had been exercised, there is no evidence that a reasonably competent solicitor in the position of ANH who had been asked to advise the plaintiffs in this way should have concluded prior to 31 July 2000 that the only method of properly exercising the options is the one belatedly suggested by the plaintiff in paragraphs 54(a) and 54(b) of its pleading. It was not suggested to Ms Chang in cross-examination that she should have given advice to re-exercise the options in the way the plaintiffs now say was the only way the options should have been exercised. ANH made the following powerful submission: The importance of the failure of the Plaintiffs to lead evidence, including expert evidence, is highlighted by their reliance upon hindsight reasoning, and their failure to lead any evidence whatever to challenge the conclusion the subject of advice from Mr Shtein to the McLean parties in 1999 that there was a likely breach of the Corporations Act involved in any assignment by McLean Tecnic to a 'cleanskin' company (a fundamental step in the Plaintiffs' suggested method of exercise). If the 'only' method by which the options could have been exercised was not on the evidence available to these Plaintiffs without breach of the law or an unacceptable risk of such breach, then it was not a breach to fail to advise that this course be followed. Any duty owed in contract (or tort) by the Fourth Defendant to advise the McLean parties did not extend to proffering advice that would involve the McLean parties in a breach of the Corporations Law in force at the relevant time. 378 Ms Chang conducted the investigations she considered to be necessary for the purposes for which she had been retained, namely to commence litigation against the Digi-Tech parties. ANH relied heavily on the fact that the basis on which the exercise of the options was found to be invalid did not form part of the claim until after the option period had expired. Emphasis was placed on the function of pleadings stating with sufficient clarity the case that must be met: Banque Commerciale SA (in Liq) v Akhil Holdings Ltd (1990) 169 CLR 279 at 286. It was submitted that pleadings serve to ensure the basic requirements of procedural fairness and to define the issues for decision. By informing the scope of material relevant to both pre-trial preparation and the conduct of the trial itself, particulars are intended to reduce costs by assisting the parties to avoid incurring expense in preparing to meet issues that may never be put. It was submitted, and I accept the submission, that ANH properly considered the pleadings and particulars and responded to the case it had to meet. 379 ANH submitted that it has taken the plaintiffs' legal representatives many years to determine that there was only one method by which (they say) the options could have been exercised. It was noted that the plaintiffs' present solicitors also acted for the Digi-Tech parties from a time well prior to when ANH was retained. They did not identify what they now contend should have been obvious to Ms Chang in 1999 until April 2008. 380 It was further submitted that even if the Court were to conclude that ANH's retainer required it to re-consider the legal advice previously given to the plaintiffs by other firms about the exercise of the option, there is no basis on the pleaded case for finding a breach of that retainer. It was submitted that after many years of litigation about the Option Agreements and associated documents, it was only in April 2008 that the plaintiffs asserted for the first time that there is now only one way in which the options could be validly exercised. 381 The assertion by the plaintiffs in the present proceedings is that it should have been obvious to a reasonably competent solicitor in Ms Chang's position in 1999 and 2000 that the plaintiffs' options had not been validly exercised in September 1999 and that advice should have been given to the plaintiffs to engage in the only method now pleaded. ANH submitted that those submissions should be rejected. ANH submitted that no such suggestion was put to Ms Chang in cross-examination. That is true. ANH also submitted that no expert evidence supporting such a conclusion was led by the plaintiffs. That is true. It submitted the Digi-Tech parties never took the position in the Digi-Tech litigation that the option agreements had not been validly exercised for the reasons now advanced by the plaintiffs, ie the only method theory. That is true. It submitted that despite the years that the plaintiffs' legal representatives have had to consider this issue, it was only three weeks prior to trial that they appreciated for the first time that, in their view at least, there was only one method to exercise the options validly. That is true. ANH also submitted that there is evidence in the proceedings of the matters taken into account by Mr Shtein in advising the plaintiffs in September 1999 against assignment which was not shown in cross-examination or by other evidence to be incorrect, let alone negligent. That is true. 382 It was submitted that Ms Chang's failure to proffer the suggested advice in relation to the pleaded method was not negligent or in breach of ANH's retainer. In final written submissions ANH made the following submission, which I regard as a sensible and accurate exposition of the reality of the situation as it pertained in 1999 and 2000: A competent solicitor who had been asked to consider this question at the time would, on the evidence, have advised that what the Plaintiff says is the 'only' method by which the options could have been exercised was not available to these plaintiffs without breach of the Corporations Law or an unacceptable risk of such breach. Any duty owed in contract (or tort) by the Fourth Defendant to advise the McLean Parties did not extend to proffering advice that would involve the McLean Parties in a breach of the Corporations Law in force at the relevant time or an unacceptable risk of such breach. Competent advice given at the time, rather than in hindsight, would have recognised that engaging in the [method] and re-exercising new options, thereby abandoning the option exercises of September 1999 was likely to put the plaintiffs in a worse position than the one they faced between October 1999 and 31 July 2000. 383 ANH, as all other defendants, submitted that the plaintiffs' case fails because of the failure to call expert evidence. In the absence of such evidence the plaintiffs effectively asked the Court to conclude that it was plain and obvious on the face of the Option Agreements that they had not been exercised validly, notwithstanding that: the counter-party to the Digi-Tech litigation was not at that time asserting the grounds of invalidity now relied on by the plaintiffs; at least one of the grounds of invalidity (breach of clause 4.1(a)) now relied on was never picked up by the counter-party to the litigation or by the Court in the Digi-Tech litigation; and it apparently took almost a decade of litigation and consideration for the plaintiffs' legal representatives to conclude that there was but only one means of exercising the options validly. 384 ANH submitted that the Court would not reach the serious conclusion that ANH breached its retainer or failed to act with reasonable care and skill on the basis of an inference that the plaintiffs ask the Court to draw about matters not put to Ms Chang and in the absence of any expert or other evidence supporting such a conclusion. 385 I am of the view that Ms Chang/ANH discharged their duties of care to the plaintiffs appropriately and carefully and acted in accordance with their retainer. Ms Chang carefully reviewed the claims of invalidity made by the Digi-Tech parties and sought appropriate particulars of the claims to enable her to act in this careful and competent manner. It was not part of ANH's retainer or its duty of care during the period up to 31 July 2000, to search for possible forms of invalidity that were not the subject of the litigation and formed no part of any brief or instructions to advise. To impose such a duty or obligation on a commercial litigator in the position in which ANH was placed would be to impose a counsel of perfection inconsistently with the law of professional negligence: Hicks v Roberts (1977) 16 ALR 466 per Barwick CJ at 469; Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 per McHugh J at 586. It would have been inconsistent with the practice of commercial litigators at that time. 386 The plaintiffs' claims against ANH will be dismissed. 387 The plaintiffs' claims having failed against all defendants, there is no occasion to consider the cross-claims. The cross-claims will be dismissed. Conclusion 388 The plaintiffs' claims against all defendants will be dismissed. The cross-claims will be dismissed. The parties are to bring in short minutes reflecting this outcome together with agreed orders as to costs. The matter is listed at 9.15 am in the Motions List on 26 September 2008 for that purpose and to hear any argument if the parties are unable to agree on appropriate costs orders. ********** 11/09/2008 - amendment of counsel's name - Paragraph(s) 8 12/09/2008 - spelling error "gaurantee" to "guarantee" - Paragraph(s) 29 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.