Risk Watch: Need to know now? “Last minute” is no excuse for lack of clarity of instructions – By Grant Feary

Need to know now? “Last minute” is no excuse for lack of clarity of instructions

GRANT FEARY, LEGAL RISK COUNSEL, LAW CLAIMS

The recent NSW case of About Life Pty Ltd v Maddocks Lawyers [2021] NSWSC 1370 is of critical interest to all practitioners who deal in commercial matters. The judgment contains extensive consideration of solicitors’ duties when acting in commercial transactions involving “side deeds” and demonstrates the high standard of care imposed upon practitioners, especially where matters are being dealt with urgently.

THE FACTS

The client company (About Life) was successful – to the tune of some $13m – in its claim against the solicitors (Maddocks) who had acted in relation to an assignment of a lease. About Life ran a chain of organic supermarkets but needed, for cash flow purposes, to sell one of its most successful stores (in Double Bay, Sydney). An agreement was reached with a competitor, Harris Farms, for Harris Farms to purchase the Double Bay store and in particular for Harris Farms to take an assignment of the company’s leasehold interest on the Double Bay store. The Double Bay store was in a prime position in a very good shopping centre and the lease of that store was a valuable commodity.

Some three years prior to the transaction in question the company had however granted a right of first refusal (in what was known as a “side deed”) in relation to any assignment of the lease of the Double Bay store to Woolworths. This was part of a separate transaction in which About Life acquired several small grocery stores close to Double Bay owned by a subsidiary of Woolworths.

When dealing with the sale to Harris Farms, representatives of About Life had, unfortunately, forgotten about the Woolworths’ right of first refusal and the solicitors for the company did not seek full and timely instructions as to whether any such right existed. Woolworths found out about the impending sale to Harris Farms and successfully sought an injunction restraining the sale on the basis that they had not been given the chance to exercise their right of first refusal.

The circumstances in which Maddocks acted involved some urgency. Maddocks were instructed on 13 April, 2017 which was the day before the Easter weekend. About Life had received an irrevocable offer from Harris Farms to buy the Double Bay store for $8m, which offer was open for acceptance until 21 April, 2017.

A draft contract prepared by Harris Farms’ lawyers was provided to Maddocks on Thursday 13 April, 2017 however at that time About Life had not yet agreed the purchase price. On 21 April, 2017 (a Friday) Harris Farms agreed to increase the sale price to $10m which price was accepted by About Life. This was communicated to Maddocks by email from About Life at 9:23 am with the sale to proceed that day.

At 4:37 pm on 21 April, 2017 Maddocks sent an email to the directors of About Life regarding changes to be made to the contract which included the following question:

“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 18th 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)