LSB July 2022 LR

RISK WATCH
“Are you able to confirm that to the best
of your knowledge it [the lease provided to
Maddocks] is an accurate and complete copy
of the lease? (It appears to be, however if for
example there are any side-deeds or variations,
then the document is not ‘complete’).”
The principal director of About Life,
Ms Phillips, read the email at about the
time she was leaving the office to go to her
daughter’s 18 th birthday celebration. The
email did not trigger Ms Phillips’ memory
that in 2014 About Life had in fact entered
into a side-deed with Woolworths which
granted Woolworths a “right of first refusal”
should About Life seek to assign its
leasehold interest in the Double Bay store.
The sale proceeded on the basis that there
were no relevant side-deeds.
Approximately one month later, a
representative of Woolworths asked
Ms Phillips if About Life had sold the
Double Bay store to Harris Farms. This
was when Ms Phillips remembered that
Woolworths had a right of first refusal to
the assignment of the Double Bay lease.
NEGLIGENCE FOUND
The Court found that Ms Phillips’
memory would have been triggered had
proper instructions been taken from
About Life earlier in the transaction rather
than late in the afternoon on the day the
contract of sale was due to be signed. It
was also said by Rees J that
“while, in theory, it was not ‘too late’ for About
Life to act upon [the] request for instruction,
the request was made so late, in urgent
circumstances and inadequately explained such
that it was not understood by the client, and
obviously so. As a consequence Maddocks did
not discharge its duty to the client to protect the
client’s interests in the proposed transaction.”
The Judge was therefore critical of the
rather elliptical way in which the question
of side-deeds was raised, i.e. it was not a
direct question (”Are there any side-deeds?”)
but merely an enquiry as to whether the
entire lease had been provided.
DAMAGES
The damages payable by Maddocks
were assessed at nearly $16m being “the
difference between the trajectory which the company
took, being external administration, and the
trajectory it would have taken if it had entered
into a contract with Woolworths at the outset.
About Life’s damages are the gap between the two
trajectories.”
CONTRIBUTORY NEGLIGENCE
About Life was found to have failed to
take reasonable care of its own interests
because, of course, the Directors – in
particular Ms Phillips – knew of the sidedeed
and had access to it as part of the
company’s records. Rees J assessed the
company’s contributory negligence at 20%.
Her Honour found that where a
company is proposing to sell a substantial
asset it is reasonable for the company’s
officers to check the company’s records
in respect of that asset to ensure that
the solicitor is provided with accurate
and important details about the asset
in question. Her Honour also found
however that where the client is new
to the solicitor, is giving instructions
on an urgent matter of high value and
importance, is stressed and distracted
(as Ms Phillips was found to have been)
the solicitor should bear greater
responsibility to elicit this information.
Maddocks therefore had to bear 80% of
the loss assessed, around $13m.
CONCLUSION
The judgment, although lengthy
(some 736 paragraphs), will repay
careful consideration by all practitioners
especially as regards the duties imposed
on practitioners dealing with urgent
commercial transactions.
One wonders whether the same result
would have been reached by the Court had
Maddocks’ enquiry regarding any sidedeed
been more directly worded and sent
earlier than the “last minute”. I suspect that
even if the Court found a breach of duty
in those (postulated) circumstances, the
assessment of the contributory negligence
would have been much less favourable to
the client company.
The risk management lessons are
therefore to seek full instructions in clear
and direct terms as soon as possible.
Practitioners who are insured with
the SA Professional Indemnity Insurance
Scheme have access to a number of
document packages — including
documents relating to Commercial Leasing
and the Acquisition and Sale of Businesses
— which provide a good starting point
when seeking instructions in commercial
matters. Risk Management Practice
Packages (lawsocietysa.asn.au)
July 2022 THE BULLETIN 33