Risk Watch: No fi le notes: A licence to sue? – By Grant Feary

No file notes: A ‘licence’ to sue?

GRANT FEARY, DEPUTY DIRECTOR, LAW CLAIMS

It can be frustrating for Law Claims when inspecting practitioners’ files after a claim has been made to not find proper file notes or letters of advice confirming discussions, especially on critical matters. This is a matter that has been raised again and again, but sometimes it appears the message is not getting through. Just last week one of my colleagues returned from inspecting a practitioner’s file on a new claim matter, lamenting the lack of proper documentation on the file, which may make it more difficult to defend the claim.

Please consider the following… one of the largest claims in the commercial area Law Claims has dealt with in recent years involved a business transaction and ended up in the Full Court of the Supreme Court. The matter ended up costing the PII Scheme hundreds of thousands of dollars in Defence costs, but things could have been different had there been better file notes.

The case is reported as Bannister v Sirrom Enterprises [2016] SASC FC 153 and concerned a sale and purchase transaction in relation to a business building houses out of pre-fabricated, so-called “Smart Panel” systems. The law firm involved was instructed by a Mr Morris (Sirrom, of course, is Morris spelt backwards), who wished to buy into the building business which was then run by a Mr Manson.

The end result of this case was that the firm was ultimately found not to have been liable, but the matter was very costly and took many years to wind its way through the Courts, including a lengthy trial in the District Court where the firm was found to have been liable to Mr Morris in certain respects. It took a difficult and hard-fought appeal before they were found not to have been liable.

What occurred was that Mr Morris and Mr Manson had entered into a Heads of Agreement-type document and Mr Morris had made an initial payment before Mr Morris instructed the solicitors to carry out a due diligence and to prepare the formal documents to complete the transaction. One of the key issues, as it turned out, was whether the business that Mr Morris was proposing to buy into had the relevant Builder’s Licence. This was discussed relatively early on in the solicitors’ engagement, but it was not until the actual day of completion in December 2007 that it became clear that the only Builder’s Licence held in relation to the business was Mr Manson’s personal Builder’s Licence—which was of itself hedged with conditions—and, as is the nature of these licences, unable to be transferred, such that it was of no use or relevance to the ongoing business. The business also involved certain intellectual property licences in relation to the use of the “Smart Panel” systems.

When the lack of an appropriate Builder’s Licence became clear on the day of completion, the solicitors’ advice—in a private session with Mr Morris during the completion meeting—was not to complete at that time and to defer completion until the issue of the licence could be sorted out. Mr Morris did not take that advice, principally because he was keen to proceed and he had paid Mr Manson significant sums already in the interim period—and the transaction was settled on that day.

After a couple of months it became clear that the business was not going well, at least in part because of the lack of the Builder’s Licence. Mr Morris sued, alleging that the solicitors had been negligent in relation to the due diligence.

One of the keys to resolving this mess was to go back to the discussion between the solicitors and Mr Morris relatively early in the engagement. The case for the solicitors was that it had been agreed that Mr Morris and his business adviser, Mr Erskine, (both of whose first names were Peter—“PM” and “PE”) were going to deal with the Builder’s Licence issue. Mr Morris’ case was that it was the solicitors’ responsibility as part of the due diligence process. In the end it came down to one rather cryptic line in a telephone attendance note and the evidence of the solicitors versus the evidence of Mr Morris.

The line in the telephone note was “Licence—PM/PE. No action”. The solicitors said that this was a reference to the Builder’s Licence issue being dealt with by Messrs Morris and Erskine and that the “No action” meant no action by the solicitors. Mr Morris’ case was that the note actually referred to the Intellectual Property Licences relating to the use of the Smart Panel systems, which were to be dealt with by Messrs Morris and Erskine, and that the solicitors were to look at the Builder’s Licence.

After substantial oral evidence and cross-examination at trial, the case put by the solicitors as to the meaning of this note was accepted. It was found that there was a specific limitation on the solicitors’ retainer regarding the Builder’s Licence and therefore the consequences of there not being an appropriate licence should not be visited on them.

It was absolutely crystal clear from all of the four Judges who considered this matter (at Trial and on Appeal) that without a specific limitation on the retainer it would have been part of the duty of a competent solicitor acting in this transaction to deal with the Builder’s Licence issue. The judgment of the Chief