About Life Pty Ltd & Ors v Maddocks Lawyers [2021] NSWSC 1370 (Rees J)is a recent decision that is of interest to commercial litigators, insolvency practitioners, and litigation funders.
Summary of Facts
The first plaintiff, About Life, conducted a once-profitable wholefood business with a chain of stores and a central warehouse and kitchen in Sydney. In April 2017 it had a cashflow crisis caused by what were found to be one-off factors such as over-ordering and stock wastage attributed to a new IT system.
To cover its cashflow shortfall, it contracted to sell its best performing store to another wholefood business, Harris Farm, with completion on or before 30 June 2017. The timing of settlement was critical to About Life’s survival.
On Thursday 13 April 2017, the day before Good Friday, Harris Farm gave About Life an irrevocable offer to buy the store for $8 million that was open for acceptance until 21 April 2017. Harris Farm provided a standard form contract of business sale with two pages of special conditions. The CEO of About Life, Ms Phillips, delivered the draft contract to Maddocks’ reception. Maddocks had only acted for About Life once before when it had been advising it about a proposed capital-raising from existing shareholders earlier in 2017.
Ms Phillips was, the court found, “under enormous pressure” at this time, dealing with about 300 emails a day trying to keep the business operational in the midst of the cashflow crisis. She was the one director with a detailed knowledge of About Life’s operations, the court found.
On Friday 21 April 2017 Harris Farm agreed to increase the sale price to $10 million by amendment of its offer.
At 9.23am, About Life told Maddocks by email that the sale of the store would proceed that day. Executed documents were proposed to be exchanged at 3.30pm and then at 5pm as solicitors rushed to review them and negotiate amendments about matters such as store inventory.
At 4.37pm, Maddocks sent the three directors of its client an email with 12 bullet points headed “The following changes have been made to the contract…” One bullet point included the question “Are you able to confirm that to the best of your knowledge it 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’).”
When she received the email of 4.37pm, Ms Phillips was preparing to leave her office to attend her daughter’s 18th birthday party. She read the email. It did not trigger her memory that in 2014, About Life had entered a deed with Woolworths in connection with About Life’s takeover of two stores operated by a sub-brand of Woolworth of which Woolworths was divesting itself. She and her fellow directors had totally forgotten that in this deed – a side-deed to the lease by which the Double Bay store was leased from the local council – there was a provision granting Woolworths a “right of first refusal.”
At about 6pm that day, a solicitor from Maddocks attended the office of solicitors for Harris Farm for a final page turn. Executed counterparts and a cheque for the $1 million deposit were exchanged.
At this point, everyone involved was either ignorant of, or had forgotten about, the existence of the side-deed. Ms Phillips evidence about having forgotten was challenged. Her evidence withstood five days of cross-examination out of the 17 hearing days used for the trial.
An electronic copy of the side-deed with Woolworths was saved in the About Life’s shared drive, in the same folder of documents as the lease for the Double Bay Store. But when Maddocks had asked Ms Phillips for a copy of the lease for the Double Bay store, Ms Phillips had searched for the document by name using a search function and emailed it back to Maddocks rather than opening the folder containing it and seeing the side-deed with Woolworths also saved in the folder.
It was only on 23 May 2017, when someone at Woolworths telephoned Ms Phillips and asked her to confirm that About Life had sold the Double Bay store to Harris Farm, that Ms Phillips remembered that Woolworths had a right of first refusal to the assignment of the lease for the store. The court found that this was evidence that if a solicitor at Maddocks had only asked Ms Phillips squarely whether there were any side-deeds in relation to the Double Bay lease she would have remembered the deed with Woolworths and told Maddocks about it. This would have happened, the court found, had proper instructions been taken from About Life earlier in the transaction rather than the matter being raised late on the afternoon before the entry of the contract of sale, and even then only in an email that the court characterised as not giving the client “the tools needed to understand what was being asked” and that “assumed a level of knowledge which the client did not necessarily have, and which [Maddocks] had not checked to make sure the client had.” The court found that “while, in theory, it was not ‘too late’ for About Life to act upon [the] request for instructions, 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.”
On 30 May 2017, Woolworths sued About Life, Harris Farm and the Council (as the landlord) for an interlocutory injunction restraining About Life from assigning the Double Bay lease to Harris Farm and a mandatory injunction requiring About Life to withdraw the request for the Council to consent to the assignment. Woolworths obtained final relief in a judgment on 24 August 2017 and in December 2017 paid About Life $10 million (less its legal expenses) for the assignment of the lease to Woolworths instead of Harris Farm. The court accepted that had Woolworth’s right of first refusal been identified on 21 April 2017, Woolworths would have exercised its right to purchase the business by 27 April 2017, with contracts exchanged by 11 May 2017 and the consent of the council to the assignment given six weeks later, by 15 July 2017. In this counterfactual, About Life would have obtained $10 million on or before 13 July 2017 rather than in December 2017. This earlier payment comprised a valuable commercial opportunity that About Life was deprived of by its solicitor’s negligence.
By the time About Life received payment of the net proceeds in December 2017 (indeed on the last business day before Christmas), the $10 million was, the court found, “too little too late”. The prolongation of the cashflow crisis had “wreaked havoc on About Life’s suppliers, inventory and customers” and caused so great a deterioration in its relationship with its hitherto-supportive bank that the bank demanded the majority of the $10 million be used to repay debt, whereas in July 2017 it would have been prepared to take less. In December 2018, About Life was placed into voluntary administration with net liabilities of $11.8 million.
The measure of damages in negligence for loss of chance
The court described the appropriate measure of damages as “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.”
Conveniently for the assessment of damages, on 12 May 2017, About Life had received a merger offer from Natural Grocery Co that took into account the sale of the Double Bay store and priced About Life at $5.64 million after allowing for its debts. The offer was subject to due diligence so in assessing damages, the court applied a discount of 10 per cent to reflect the possibility that following due diligence, the offer could have been withdrawn or a lower one substituted. The court took About Life’s net liabilities of $11.8 million upon its administration in December 2018 and applied a compounding discount rate of 3.5% monthly to arrive at a figure of negative $10.37 million as at 30 June 2017. It found that the “difference between the counter factual and About Life’s actual fate as at 30 June 2017 is $15.896 million.” Notably, the court calculated compensable loss not merely by reference to the destruction of the company’s positive value until it entered administration but included the company’s debts at the point of its administration on a net basis in its calculation. This is orthodox in principle however is sometimes overlooked by advisors evaluating prospective claims.
About Life’s contributory negligence
About Life was found to have failed to take reasonable care of its own interests in the circumstances because, with a copy of the side-deed with Woolworths available on its shared drive to which everyone in the company had access, “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.” The solicitors were found to “bear greater responsibility to illicit this information, should [the] client fail to volunteer it”, particularly given that “the client is new to the solicitor, giving instructions on an urgent matter of high value and importance, and […] is stressed or distracted, as this client was.” The court compared the relative importance of Maddocks Lawyer’s actions with those of About Life and reduced the damages for loss of chance by 20 per cent, to $12,716,800.
Claims and Cross-claims involving About Life’s directors
Maddocks joined About Life’s directors as concurrent wrongdoers on the ground that they had breached their directors’ duties by not exercising reasonable care and diligence in that they failed to examine the company’s records and find the copy of the side-deed before instruction Maddocks. The court held that the “factual matrix for About Life’s contributory negligence and the proportionate liability claim against the directors coincide and no further deduction from About Life’s damages should be made on this account.” It was also alleged against the directors that they had breached their directors’ duties by adopting a flawed expansion plan and contributing to About Life’s cashflow problem. The court dismissed this allegation by applying the principle explained in Daniels v Anderson (1995) 37 NSWLR 438 and other cases that “directors must be allowed to make business judgments and business decisions in a spirit of enterprise untrammelled by the concerns of a conservative investment trustee […] Great risks may be taken in the hope of commensurate rewards.”
Harris Farm sued About Life and its directors for damages in relation to the business sale that could not be completed. It claimed its costs of resisting Woolworth’s successful application to enforce the performance of the side-deed. After About Life was placed into administration, its directors settled the claim against them by paying Harris Farm $430,000. (The court’s reasons do not mention whether Harris Farm went on to lodge a proof of debt in the administration of About Life.) About Life’s directors cross-claimed for this amount as a cost that they had reasonably incurred in an attempt to reduce losses caused by Maddocks’ negligence. The court found that Maddocks’ duty of care extended to About Life’s directors based on a multi-factorial approach set out between paragraphs 712 and 723 of the judgment. It applied the same 20 per cent deduction for contributory negligence.
Misleading and deceptive conduct
The court found Maddocks liable to About Life and to its directors for misleading and deceptive conduct, in that its advice was apt to mislead them about the client’s legal rights. Its advice was misleadingly incomplete, the court held, due to omissions such as not mentioning the importance of ensuring that there was no other document, apart from the lease document, which may limit or encumber About Life’s capacity or authority to assign the lease. No additional damages were awarded because the compensable loss overlapped with the other amounts awarded.
Jurisdiction
Notably, a prospective claimant in similar circumstances to About Life could elect to commence its claim in the Federal Court of Australia rather than a state court given the availability of a cause of action under the Australian Consumer Law, part of a Federal statute.