About Life Pty Ltd v Maddocks Lawyers

1. [1]

   HER HONOUR: This is a professional negligence claim against a law firm. About Life Pty Ltd operated a chain of wholefoods grocery stores, including a store in Double Bay close to a Woolworths store. About Life leased the store from the Council of the Municipality of Woollahra. In April 2017, Maddocks solicitors acted for About Life on the sale of the Double Bay store to Harris Farm for $10 million. The sale to Harris Farm was expected to complete by 30 June 2017. The transaction was critical to About Life’s survival, as it was then in financial extremis.

2. [2]

   The deal with Harris Farm was done quickly. Lost in the rush was the fact that Woolworths had a right of first refusal to the premises under a Deed of Agreement with About Life, entered into three years earlier about which About Life’s directors had forgotten. Woolworths came to learn that Harris Farm had agreed to buy the Double Bay store and promptly commenced these proceedings to enforce its contractual rights. About Life did not resist Woolworths’ claim; Harris Farm did. The proceedings were hard fought. Woolworths won: Woolworths Limited v About Life Pty Limited [2017] NSWSC 1117.

3. [3]

   About Life then assigned the lease to Woolworths, for which it received $10 million less Woolworths’ $350,000 costs of the proceedings. The funds were received just before Christmas 2017. By then, the money was ‘too little, too late’. A sustained cashflow crisis had wreaked havoc on About Life’s suppliers, inventory and customers. Despite further financial support from About Life’s founders and the progressive sale of its remaining stores, About Life went into external administration in December 2018, owing $11.8 million. About Life and its directors were also sued by Harris Farm for damages; About Life’s directors settled the claim for $430,000, About Life then being in external administration.

4. [4]

   About Life contends that, had Maddocks performed its retainer with reasonable care and skill, the solicitors would have sought instructions and made enquiries of their client, which would have revealed the existence of the right of first refusal, including by prompting the directors to recall it. About Life seeks damages for loss of the opportunity to use the proceeds of an orderly and uneventful sale to Woolworths at the outset – to pay down debt, recapitalise and move forward as a viable and prosperous business or else to sell the remaining stores – as opposed to the expense, uncertainty and delays which ensued, leading to About Life receiving the proceeds of sale, depleted and six months’ later than it would have. The directors also alleged that Maddocks owed them a duty of care. The directors seek damages, being the $430,000 paid to Harris Farm.

5. [5]

   Maddocks defended the claim on all bases, including that any negligence on its part led to no loss as, given the parlous state of About Life’s business, it was doomed. For the reasons which follow, I have concluded that About Life and its directors are entitled to succeed.

WITNESSES AND DOCUMENTARY EVIDENCE

1. [6]

   About Life relied on the evidence of chairman Michael Green, chief executive officer Tammie Phillips, chief financial officer Robert Ross-Edwards and solicitor Gaurav de Fontgalland. All were cross-examined.

2. [7]

   Mr Green hails from the United States. Whilst it is apparent from the contemporaneous documents that Mr Green was the central character in critical events, he spent relatively little time in the witness box. Mr Green was the chairman of the board and not ‘across the detail’ of aspects of the transaction. Mr Green did not have good recall beyond the documents and did not pretend to. He gave evidence in a precise, fair and calm manner. He was an articulate, careful witness who made reasonable concessions and corrected his evidence where necessary. He appeared honest. I accept his evidence.

3. [8]

   Ms Phillips was cross-examined for five days. Ms Phillips was attentive, alert, smart, thoughtful, careful and precise. On occasion, Ms Phillips made an emotive remark and, on occasion, became distressed, “You have got no idea what it is like to lose a company after you have built it up after 22 years”. I accept that her distress was genuine and the events about which she was speaking were likely traumatic at the time. Ms Phillips’ performance in the witness box deteriorated somewhat on the fourth day, but this was understandable given the prolonged and intense cross-examination.

4. [9]

   It was repeatedly put to Ms Phillips that she was lying. Her affidavits were, in parts, expressed at a high level of generality. Some of the cross-examination turned on subtleties and nuance of language used in her affidavits which was unlikely appreciated by Ms Phillips when she affirmed her affidavits. When compared with the documentary material available at trial, some of what Ms Phillips had said in her affidavits was not accurate; this is more likely referable to incomplete documentation to hand when earlier affidavits were sworn than falsity. Some of Ms Phillips’ affidavit and oral evidence put events in a favourable light which, having regard to the contemporaneous documents, could not be sustained. I expect that Ms Phillips genuinely believed that About Life would have survived and prospered had the sale of the Double Bay store proceeded smoothly having regard to Woolworths’ right of first refusal. Perhaps she was naïve, but I do not consider that Ms Phillips was dishonest or that the challenged portions of her affidavits were “completely false”.

5. [10]

   Ms Phillips appeared commercially astute but obviously relied on solicitors to attend to the legal side of transactions, for example, she did not have a good understanding of the mechanics for exchanging contracts. Ms Phillips struck me as a capable and efficient businesswoman who was straight forward in her dealings with others. Ms Phillips made reasonable concessions and appeared honest and authentic. She generally appeared to understand sophisticated concepts and was overall an impressive witness.

6. [11]

   Mr Ross-Edwards is a chartered accountant. He was perfectly honest and straightforward. He gave evidence in a fair and reasonable manner. Mr Ross-Edwards was obviously unhappy about what had happened to About Life and its business. He appeared to be an ethical, honest and decent person whose evidence I accept without hesitation.

7. [12]

   Mr de Fontgalland was a young, local solicitor who did not profess to have Maddocks’ level of expertise. His approach appeared to be more ‘broad brush’. I do not accept Maddocks’ submissions that his evidence was unreliable, although he may have over-stated the frequency which he had encountered a ‘side deed’ like the one with Woolworths: see [325].

8. [13]

   Maddocks relied on the evidence of a number of witnesses associated with Harris Farm including chief executive officer Angus Harris, chief financial officer James Williamson and Harris Farm’s solicitors on the transaction, Anthony Herro and Vanessa Scrivener of Herro Solicitors. Only Mr Harris was required for cross-examination. No issue of credit arose.

9. [14]

   In addition, Maddocks relied on the evidence of its partners Bronwyn Badcock and Timothy Atkin, of whom Ms Badcock was required for cross-examination. By and large, Ms Badcock did not recall conversations and refreshed her memory from emails and file notes. Ms Badcock was a very nervous witness who gave evidence in an extremely careful, guarded and somewhat defensive manner. Ms Badcock was obviously concerned to ensure that she did not, by her answers, cause difficulties for Maddocks. Ms Badcock was reluctant to make reasonable concessions and, on occasion, gave non-responsive answers to questions which she was apprehensive would not assist Maddocks’ defence of the claim. Ms Badcock volunteered observations she thought would help her and understated her potential failings in performing the retainer. Some of her explanations were difficult to reconcile with the documentary evidence. Given Ms Badcock’s lack of actual recall in any event, I have relied on what the contemporaneous documents reveal in preference to what she said.

Jones v Dunkel

1. [15]

   About Life’s director, Thomas Beecroft, filed affidavits in these proceedings but was not called. Maddocks submitted that the Court should draw an adverse inference from his failure to give evidence, and I readily do so: Jones v Dunkel (1959) 101 CLR 298 at 320-321; [1959] HCA 8 per Windeyer J. As explained in Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11 at [63]: (emphasis added)

2. [16]

   Mr Beecroft’s senior counsel submitted that there was no topic on which Mr Beecroft could give evidence about which there was not already a significant body of evidence. Ms Phillips had already given evidence over a number of days, followed by Mr Green, who was not challenged on the proposition that he had forgotten about Woolworths’ right of first refusal. Mr Beecroft’s evidence would have been ‘more of the same’. Where his affidavits were short but Mr Beecroft had been requested for half a day’s cross-examination, there was a question as to whether the further time involved in his evidence was in proportion to the issues in the case.

3. [17]

   As Parker J recently explained in Trentelman v The Owners - Strata Plan 76700 [2021] NSWSC 155, the Jones v Dunkel inference does not arise from a failure to call merely cumulative evidence; if the party has more than one witness of equal significance, then it is sufficient to call one of them: at [194]-[195]. In that case, Parker J considered that the failure to call a witness appeared “to have been nothing more than a commendable attempt to save time”, there being no reason to think that the witness would have damaged the plaintiff’s case: at [196]. Parker J’s decision was relevantly affirmed on appeal: Trentelman v The Owners – Strata Plan No 76700 [2021] NSWCA 242 at [210]-[214] per Leeming JA (Bell P agreeing at [170]).

4. [18]

   My view of the failure to call Mr Beecroft is not so benign. It is apparent from the contemporaneous documents that, as About Life’s financial troubles deepened, Mr Beecroft became increasingly concerned and critical about the way the company was being run. It is thus appropriate to draw the usual Jones v Dunkel inference. Whilst I infer that Mr Beecroft’s evidence would not have assisted his, or About Life’s case, I do not infer that his evidence would have been damaging: Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 at [232]. Failure to call Mr Beecroft does not detract from findings of fact otherwise established by the evidence: Morley v Australian Securities and Investments Commission [2010] NSWCA 331; (2010) 274 ALR 205 at [634]. Maddocks submitted the inference supported a finding that Mr Beecroft, and thus About Life, was aware of Woolworths’ right of first refusal before exchange of contracts with Harris Farm, to which I will return at [412].

5. [19]

   Maddocks filed affidavits in these proceedings by partner Andrew McNee, who was not called. About Life submitted that I should draw an adverse inference from the failure to call Mr McNee; I readily do so. Aside from the Jones v Dunkel inference, I infer from the contemporaneous documents that Mr McNee was not particularly enamoured with how Ms Badcock had serviced the client, where Mr Green and his company Green Capital Partners Pty Ltd were initially Mr McNee’s clients: see [407], [425]-[426]. Mr McNee’s view, of course, is not well documented nor dispositive.

Documentary evidence

1. [20]

   There was a vast amount of documentary evidence, comprising more than 10,000 pages and innumerable soft copy spreadsheets and financial accounts. Notwithstanding this, there were some problems with the completeness of About Life’s records at trial.

2. [21]

   When About Life went into administration, the directors lost access to the accounting data and shared drive. About Life was in arrears with the providers of its web-based data; the administrator did not maintain those contracts and the information was no longer available. Ms Phillips had made copies of documents which she thought might be relevant to these proceedings, but further documents became relevant. Ms Phillips did not think to ask the administrator for such information when the company came out of administration, “In fact I was happy to never speak to that man again.” Ms Phillips had in fact sent a copy of About Life’s shared drive to the administrator on his appointment, but had forgotten doing so. Ultimately, the administrator produced a copy of the shared drive during the course of the trial, as a consequence of which some of the allegations made by Maddocks against Ms Phillips were withdrawn.

Expert evidence

1. [22]

   Two legal experts gave evidence: Peter Rosier for About Life and Edward Boyce for Maddocks. Both were impressive practitioners. Their experience differed somewhat in terms of the types of transactions on which they had frequently acted: Mr Rosier’s experience roughly correlated to Mr de Fontgalland (albeit with many additional years of experience) whilst Mr Boyce’s experience was closer to that of Ms Badcock. With no disrespect to Mr Rosier, I have generally preferred the views expressed by Mr Boyce as more closely representing the practices of a competent solicitor working on a transaction of this size.

2. [23]

   Finally, two accounting experts gave evidence: Brian Morris for About Life and Tony Samuel for Maddocks. Both were experienced experts who gave evidence in a fair and intelligent manner. Mr Samuel held strong views about the veracity of About Life’s revenue forecasting which, when viewed against all of the evidence, were too harsh. Given the findings of fact which I have made, the financial models prepared by the experts were, to some extent, otiose. I have nonetheless had regard to each model when assessing the value of About Life’s lost chance.

GETTING INTO FINANCIAL TROUBLE

1. [24]

   Maddocks’ performance of its retainer occurred over nine days in April 2017, to which I will return at [193]. The bulk of the evidence, however, concerned the three years leading up to that moment, in part, because that is when About Life gave Woolworths the right of first refusal but, more importantly, because that is when About Life got into financial trouble.

2. [25]

   There is no dispute that About Live got into serious financial difficulty; that is why it decided to sell its “best performing” store. The precise nature and extent of these difficulties were relied upon by Maddocks as supporting a finding that, even if About Life had sold the Double Bay store to Woolworths at the outset, it would have made no difference to About Life’s fate.

3. [26]

   Events before the retainer also reveal the specific attributes of this client, which may not have been fully appreciated by Maddocks when performing their retainer. In particular, as About Life’s financial troubles became acute, it is apparent from the contemporaneous documents that the directors and management were under enormous pressure to deal with a wide range of problems. Their ability to give complete focus and attention to matters of detail was likely significantly compromised. Ms Phillips, in particular, was under huge pressure.

Early corporate history

1. [27]

   In 1996, Ms Phillips and her sister Jodie Stewart opened an organic café, juice bar and grocery store in Rozelle called “About Life”. Ms Phillips and Ms Stewart were both university educated; Ms Phillips had a Bachelor of Commerce. Both had useful career experience before starting the business. In 1998, a catering arm of the business was also established. In 2005, the business moved into larger premises across the street.

2. [28]

   In 2008, About Life opened a second store in Bondi Junction. This was funded by debt and $2 million of private equity. Mr Beecroft and David Thevenon joined the board on behalf of equity investors; both had substantial business experience.

A relationship with the bank

1. [29]

   In 2011, when seeking finance to set up a third store in Cammeray, About Life moved its business to the Commonwealth Bank of Australia. The bank’s Relationship Executive was Joel Morales. The bank’s review of About Life’s financial performance and quality of management was glowing: About Life was considered to have sound growth with robust, experienced and conservative management. Ms Phillips and Ms Stewart were regarded as having deep experience, understanding the critical requirements of operating retail businesses with perishable inventory and possessing enthusiasm for the organic food industry. The skill level of management was assessed as “[v]ery good”, with financial accounts being audited; “forecasts appear well constructed based on sound assumptions especially for a business of this size”.

2. [30]

   The bank noted that the Rozelle and Bondi Junction stores then had a combined revenue of almost $20 million in the 2011 financial year, served over 100,000 customers each month and employed over 100 staff. About Life then planned to open another three to six stores over the next five years across Sydney, in locations strategically located to service customers in the optimal socio-economic demographic who seek out high quality organic produce. Once established, each store was forecast to generate revenue of $10 million per year.

3. [31]

   In December 2012, the Cammeray store opened. The bank adjusted its facilities accordingly, reviewing the business and its management in favourable terms. The bank considered that About Life had the potential to grow diligently and successfully over the short-medium term; “Management have a conservative view on leverage and are proactive in repaying debt facilities with appropriate equity capital from experienced investors who have the expertise to drive business growth.” Ms Phillips was described as “extrem[e]ly knowledg[e]able across her whole business”. About Life had “a history of repaying debt quickly”. In the competitive supermarket industry, two strategies employed by About Life were noted by the bank: offering staple grocery line branded “THE ORGANIC GOOD STUFF FOR LESS”; and offering private label lines, produced by About Life’s kitchen or produced under external contract.

4. [32]

   In the 2013 financial year, the Rozelle catering kitchen was upgraded and expanded. The Rozelle, Bondi Junction and Cammeray stores had combined revenue of over $27 million, with over 150,000 transactions per month and 200 staff.

Mr Green joins the business

1. [33]

   In January 2013, Mr Green moved to Australia with his family. Mr Green was a private equity investor in the United States and a member of the Investment Committee of Oak Hill Capital Partners, of which he was also a partner and where he was responsible for equity investments in excess of $1 billion including an organic food chain with more than 30 stores, a chain of pharmacies with over 250 stores, and a chain of some 60 restaurants, bars and arcades. He has a Masters of Business Administration from Stanford University.

2. [34]

   In March 2013, Mr Green approached Mr Thevenon about investing in About Life and, over the coming months, negotiated the acquisition of some of the private equity investors’ interest. In October 2013, Mr Green circulated an investor presentation, seeking to raise $11 million to acquire a majority interest in About Life. Mr Green’s presentation reviewed the strong growth and profitability of About Life’s three stores and outlined plans to expand the number of stores by potentially 40 more stores across Australian and New Zealand.

3. [35]

   Mr Green raised some $12 million from private investors, which was used to purchase all of About Life’s shares. In November 2013, About Life Investors Holdings Pty Ltd was incorporated to acquire the shares. About Life Investors Holdings became trustee of the About Life Investors Unit Trust. In the result, in December 2013, About Life Investors Holdings entered into a Shareholders Agreement with its shareholders, being now the unit trust (67%), the founders Ms Phillips and Ms Stewart (22%), Mr Thevenon and Mr Beecroft (7%) and others. About Life became the trading company and About Life Investors Holdings the holding company. Mr Green became a director of About Life.

Corporate governance

1. [36]

   In early 2014, About Life established a new board and management structure. It is convenient to describe About Life’s corporate governance arrangements. As mentioned, the directors were now Mr Green, Ms Phillips, Mr Beecroft and Mr Thevenon. Ms Phillips was employed as chief executive officer. Mr Ross-Edwards began working for About Life as chief financial officer and company secretary. Ms Phillips, Ms Stewart and Mr Ross-Edwards managed the business on a day to day basis.

2. [37]

   As chief financial officer, Mr Ross-Edwards worked closely with the company’s directors, managed the accounts and prepared financial reports, including monthly profit and loss statements and budgets for each store. Mr Ross-Edwards was supported by an accounting department which did accounts at the end of each month. He knew trading results within ten working days after the end of the month, “it was normally quicker but … up to ten working days”.

3. [38]

   Mr Green was chairman of the board. The board met every month, generally the third week of the month, when the figures for the previous month were to hand. Prior to board meetings, directors were provided with a board pack which included management accounts for the previous month, prepared by Mr Ross-Edwards. The management accounts included detailed financial information for About Life as a whole, then broken down for each store and the catering business, then the results for each month in the financial year to date with growth separately indicated, followed by a balance sheet, profit and loss statement and charts depicting customer numbers. At each board meeting, the first item of business was the financial results of the preceding month, presented by Mr Ross-Edwards. Attention to this aspect appears to have been thorough. Ms Phillips then gave an operations report. Mr Ross-Edwards took the minutes.

4. [39]

   A forecast was prepared each year and revised from time to time, particularly during the period of financial turbulence with which this case is concerned. When revising budgets, Mr Ross-Edwards replaced the forecast monthly figures with actual results where available, “if I had have known the actual I would have put the actual in.” I will return to the preparation and reliability of these forecasts at [586].

5. [40]

   Documents were stored on a shared drive, so that everyone in the company could access the material. Each employee had access to the shared drive, with different levels of security, and could access the shared drive from their computers or remotely. This subject is relevant to contributory negligence, to which I will return at [557].

Bank review and covenants

1. [41]

   Following the shareholder restructure in December 2013, the bank conducted a detailed annual review of About Life’s financial performance. It is apparent from the review that the bank was impressed with its customer. The bank saw Mr Green’s inclusion on the board as positive, given his experience with large chain stores including an organic grocery chain with 30 stores. Dealings with the borrower were described as “excellent”. All loan facilities and accounts were being conducted “impeccably”. The customer’s diligence with cash flow management was considered evident from its non-drawing of a $1 million facility.

2. [42]

   According to the bank’s review, the 2013 financial year represented a record performance for the business. Management accounts for the first quarter of the 2014 financial year were very promising. Based on these results, “they are on target to achieve and exceed projected revenue growth of 20.6%.” The bank reviewed About Life’s historical financial statements for financial years 2011 to 2013 and its forecast profit and loss models for financial years 2014 to 2016: About Life enjoyed net sales growth of some 30% and a relatively stable gross margin of 41%, considered to illustrate “managements’ ability to control input costs … through strategic alliance with their core suppliers”. The bank noted, “We can take some comfort that such projections are reliable from historic projections and results. Clients have provided the Bank with projections for the last 2 years and they have proven to be reliable when normalised.”

3. [43]

   The bank approved increased funding totalling $7.35 million, including a $2 million loan to fit-out two new stores. About Life was then in negotiations with Woolworths to take over the lease of two Thomas Dux sites in Surry Hills and Double Bay, which the bank described as “highly desirable locations.” The bank considered that financial covenants should be applied to the facility to provide the bank with adequate warning should a credit deterioration occur. The covenants would be set “with ample headroom” and tested quarterly. There were two bank covenants.

4. [44]

   Part of Mr Ross-Edwards’ role was to ensure that bank covenants were adhered to; he dealt closely with the bank, attending all meetings. Each quarter, the bank required a Compliance Certificate to be completed by About Life, confirming that the covenants had been observed. Ms Phillips signed the certificate, which Mr Ross-Edwards forwarded to the bank together with financial reports.

Woolworths’ right of first refusal

1. [45]

   The Deed of Agreement with Woolworths came about because About Life agreed to take over two Thomas Dux stores – Double Bay and Surry Hills – of which the Double Bay store was considered to be the ‘pick of the bunch’. It was initially expected that the Surry Hills store would be assigned first but Woolworths had difficulty assigning the lease (a problem which About Life later encountered itself). The Double Bay store was ready to complete first. The primary purpose of the deed was to make the acquisition of Double Bay conditional upon About Life also taking the Surry Hills store.

2. [46]

   This was Ms Phillips’ first dealings with Woolworths. Mr de Fontgalland acted for About Life on the transaction. On 30 January 2014, Woolworths’ solicitor enquired whether About Life would be willing to grant a right of first and last refusal to Woolworths to take over the lease of the Double Bay premises, should About Life decide at any time in the future to vacate the premises by way of assignment, sublease or otherwise. Mr de Fontgalland sought instructions from Ms Phillips, who enquired “if we were to sell our company (to Coles, ha!) – would [this] be a problem”. Mr de Fontgalland replied, “yes, the right would … be triggered on a change of control (such as a sale to Coles).” Later that day, Ms Phillips sent a further email to Mr de Fontgalland:

3. [47]

   On 4 March 2014, Woolworths’ solicitor circulated a draft document in preparation for a meeting to finalise the document. The document was a Deed of Agreement between Woolworths and About Life in respect of the Double Bay and Surry Hills leases. Clause 2.5 of the proposed Deed of Agreement provided:

4. [48]

   On 5 March 2014, Ms Phillips and Mr de Fontgalland agreed that Mr de Fontgalland would review the documents to discuss; it was not thought necessary to meet with Woolworths and its solicitors. Ms Phillips approved Mr de Fontgalland’s fees for the work of $1,500. Ms Phillips then emailed Mr de Fontgalland:

5. [49]

   It will be observed that Ms Phillips did not perceive any significant issues with Woolworths’ proposed deed, nor wish to engage in extensive negotiations or amendments to the document. Commercial and relationship considerations were paramount. A meeting with Woolworths was not considered necessary. About Life’s solicitor was charging a small fee for, presumably, a small scope of work. It seems unlikely in these circumstances that Ms Phillips spent much time poring over the document. She was interested in doing the deal with a view to doing more deals with Woolworths in the future. It was then thought that Woolworths was thinking of closing down its Thomas Dux operations and there was potential for About Life to take over more stores. Ms Phillips said, “I did see … that this was a very important relationship for our future.”

6. [50]

   Mr de Fontgalland informed Woolworths’ solicitors that a meeting was not necessary; “There do not appear to be any contentious issues, so we shall simply forward you an amended version of the draft Deed of Agreement shortly”. Soon afterwards, Ms Phillips asked Mr de Fontgalland to confirm whether an explanation which she had prepared for her fellow directors was correct, being: (emphasis added)

7. [51]

   Further emails ensued with Mr de Fontgalland, largely focussing on whether Woolworths had a right of first refusal in the event that About Life was sold or had a change of control, as opposed to disposing of the Double Bay store. Mr de Fontgalland confirmed to Ms Phillips, “The only risks are … as you said, if you decide to sell a store to a third party …” Mr de Fontgalland suspected this was a drafting error on Woolworths’ part but, if About Life sought clarification as to whether a change of control triggered Woolworths’ rights, then Woolworths’ solicitors may amend the deed to cover that situation.

8. [52]

   Ms Phillips sent her directors a detailed email explaining changes to the transaction documents which called for their decision. Ms Phillips explained Woolworths’ right of first refusal in similar terms to those approved by Mr de Fontgalland. Ms Phillips reproduced Mr de Fontgalland’s advice on the scope of Woolworths’ rights and the risks inherent in seeking clarification of the clause due to the perceived drafting error. Ms Phillips continued:

9. [53]

   The directors spoke. The directors’ discussion was obviously brief. Some ten minutes later, Ms Phillips gave instructions to Mr de Fontgalland that the directors “agree with the minor change requests”. (About Life requested minor changes to clause 2.5, which are not presently relevant.)

10. [54]

    According to Mr Green, the board concluded that, because it was a right of first refusal relating to the sale or assignment of a specific asset – while they were planning on selling the entire company down the track – it was something that would most likely not come into ‘play’ and therefore was not a significant risk going forward. Likewise, Ms Phillips said that, in 2014, she was not contemplating selling one store but growing the company to 30 stores. Ms Phillips did not consider Woolworths’ request for a right of first refusal to be a contentious issue in the context of the whole transaction, “that negotiation commercially was huge … the first right of refusal, I understand today it seems very amplified. … But if you put context around … that transaction … I would stand by that. It was … low key for me.” That does appear to have been the case.

11. [55]

    Precisely when the deed was executed, or by whom, is not known. On 2 May 2014, Mr de Fontgalland sent Ms Phillips the executed Deed of Agreement for her records. The document was stored on the shared drive with the file name “About Life – Woolworths Deed of Agreement”. Ms Phillips could not recall if it was she who stored the Deed of Agreement on the shared drive; from time to time she stored agreements in a “Company agreements–Contracts–Lease” folder, which is where the Woolworths’ Deed of Agreement was stored, albeit nestled within three further sub-folders.

12. [56]

    On 16 May 2014, About Life entered into a Deed of Agreement for Lease with the Council in respect of the Double Bay site, executed by Ms Phillips and Mr Beecroft. I will return to this document at [280]. Ms Phillips and Mr Ross-Edwards later signed the Double Bay lease, which had a term of 30 years with five options to renew, each for a period of 10 years.

13. [57]

    On 5 June 2014, About Life’s Double Bay store opened “on time and within budget. Sales in the first month were way ahead of target.” About Life’s sales for June 2014 “were the largest month ever, with the opening of Double Bay store”.

Finding new sites and ‘cannibalisation’

1. [58]

   Part of Mr Green’s investor presentation, to raise funds to acquire About Life, proposed to develop a rigorous new store development process and establish more than three new stores each year. To this end, consultants Deep End Services were retained to target potential attractive locations. On 14 February 2014, Deep End produced a Sydney network plan for About Life. In addition to existing stores and the two committed sites at Double Bay and Surry Hills, it was suggested that Pymble and Enmore were suitable locations to establish stores in the short term. The significance of the Sydney network plan is that Maddocks relies on the directors’ non-adherence to the plan as founding a concurrent wrongdoer defence against the directors: see [680].

2. [59]

   Deep End also predicted that the Double Bay store would reduce Bondi Junction’s sales by 20%, while the Surry Hills store would reduce Bondi Junction’s sales by 7% and Rozelle’s sales by 3%. This is referred to as “cannibalisation”, where a new store reduces the sales of existing stores nearby.

3. [60]

   Deep End’s report was given to a property consultant, Hector Abbott, to use as a guide for areas to look into. It is apparent from board packs that the board devoted considerable time and resources to expanding the network of About Life stores. Mr Abbott inspected potential sites, meet with developers and regularly reported to Ms Phillips and Mr Ross-Edwards. Woolworths was regarded as a potential source of sites, both in developments that Woolworths was constructing and for Thomas Dux stores which Woolworths did not wish to pursue. At each board meeting, Mr Abbott’s report was presented and discussed. The board papers now included a spreadsheet, “New Site Review”, containing details of each site then under consideration and the stage of consideration. Soon added was a spreadsheet containing financial metrics in respect of sites under consideration. Ultimately, a “Property” section was added to the board papers.

4. [61]

   In August 2014, the board met. The company was then exploring the possibility of new stores in Mosman and Lindfield. Revenue for the Bondi Junction store had, in July 2014, dropped 12% from July 2013, presumably as a consequence of the opening of the Double Bay store.

5. [62]

   In September 2014, the board meeting noted that net sales for the month were the largest ever, with all stores performing above budget except Bondi Junction (where revenue had fallen by 17% from the previous year) and catering. The board continued to look at potential new stores in Mosman and Lindfield, and to review the site selection process. To some extent, the availability of new sites obviously depended on commercial opportunities which emerged.

6. [63]

   Similar topics were canvassed at the October 2014 board meeting. Bondi Junction’s revenue was about 15% down “due to faster than expected cannibalisation”, and expected to be 20% down by year end. The site selection process was discussed at length and changes made to the site selection criteria which had been developed by Mr Green.

7. [64]

   By the November 2014 board meeting, the Surry Hills store had opened and was “off to a good start, performing above expectations.” Bondi Junction was running “about 20% down, which is faster than anticipated at this stage and has taken another 2-3% hit from Surry Hills.”

8. [65]

   The December 2014 board meeting noted that Surry Hills was continuing to perform above expectation whilst Bondi Junction was running about 18% down. Overall, the company was performing in line with budget and enjoying significantly increased results from the previous year, with EBITDA up 18% from the previous year.

Side Deed for Surry Hills store

1. [66]

   In September 2014, negotiations were underway between Woolworths and About Life’s solicitors regarding assignment of the Surry Hills lease. Amongst the documentation for the transaction was a Side Deed executed by Ms Phillips and Mr Ross-Edwards, likely in September or October 2014. By the Side Deed, Woolworths agreed to pay $50,000 to About Life in consideration for taking the lease.

2. [67]

   It is timely to consider what a side deed is, it being a term which will gain greater prominence in what follows. Whilst a definition is not easy to find in texts or case law, side agreements are usually entered into contemporaneously with a lease and may be employed to contain terms which the parties wish to keep confidential, where the lease is to be registered. Side agreements operate to vary a lease: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 577; [1995] HCA 68.

3. [68]

   Side agreements are usually between lessor and lessee. A common example is a side agreement between the lessor and lessee in respect of incentive benefits. The lease will contain the ‘face rent’ but not the ‘effective rent’, being the rent actually paid taking account of the incentives offered: William Duncan and Sharon Christensen, Commercial Leases in Australia (9th ed, 2020, Lawbook Co) at p 75.

4. [69]

   Mr Rosier said that side deeds began to be used in leasing after the 1987 stockmarket crash, when there was a lot of property for lease in the heart of Sydney and landlords did not wish the incentives offered to tenants, such as significant rent reductions or fit-out, to become known. “[T]his was a matter of common knowledge amongst … property legal professionals and the presence of a side deed or agreement in a leasing transaction was at least from that time something that one would always consider as a possibility.” Mr Rosier said that side deals typically relate to fit-out allowances or rent rebate or occasionally a right of first refusal for the lessee to purchase the premises. Mr Boyce largely agreed with this description, adding that side deeds with third parties (that is, someone other than the lessor or lessee) are not usual.

5. [70]

   Mr de Fontgalland had acted on the sale of retail businesses and the assignment of leases within shopping centres on many occasions. In his experience, it was very common in connection with the sale of a retail business for the landlord to require the tenant to enter into a side agreement that was not registered on the public record.

6. [71]

   The Side Deed between Woolworths and About Life in respect of the Surry Hills lease was not between the lessor and lessee, but between the outgoing and incoming lessee. Whilst it was entitled, “Side Deed”, it was not ‘usual’ as I understand the evidence of these solicitors.

7. [72]

   The Deed of Agreement between Woolworths and About Life in respect of the Double Bay and Surry Hills leases (see [45]) was neither entitled “Side Deed” nor between lessor and lessee. Rather, it was between the incoming lessee and the former proposed lessee (Woolworths had earlier entered into a Development Deed with the Council under which it was proposed that Woolworths would lease the site). The lessor (the Council) was not a party and was, indeed, unaware of the side agreement. It was not ‘usual’ either.

8. [73]

   As will become apparent, Maddocks later asked About Life whether there were any “side deeds” in respect of the Double Bay lease. Whether this would or should have called to mind the Woolworths’ Deed of Agreement is something to be considered in due course: see [374].

Annual bank review

1. [74]

   In January 2015, the bank conducted its annual review of About Life which was, again, positive. Management was considered to have a very good skill level. Cashflow was well managed, with About Life generally maintaining more than $1 million in its bank accounts. The bank had been asked to cancel a $300,000 overdraft, as it had never been used. Of the facilities approved to the company, $2 million had been earmarked for the fit-out of the Surry Hills and Double Bay stores but, instead, About Life had funded this from cashflow.

2. [75]

   The bank remained of the view that the financial accounts and forecasts appeared well constructed based on sound assumptions and generally prepared on a conservative basis. Turnover for the 2014 financial year reached $36.3 million, up from $27.6 million in the previous year. Sales had grown by more than the budget provided to the bank in October 2013. Double Bay and Surry Hills having now opened, the five stores employed more than 300 staff. EBITDA had improved by 21% but, as interest costs had also increased, there was a slight deterioration in the ICR, which was overall still considered very strong. The value of the business was recorded at $6.63 million, which the bank considered to be underestimated.

3. [76]

   In February 2015, the board met and decided to move the kitchen facility from Rozelle to a new kitchen and warehouse facility in Hillsdale. This would allow the business to expand into new stores and warehouse more stock, increasing its gross margin on product lines. The board continued to consider potential new sites, with the assistance of property consultant, Mr Abbott and Deep End. Further network plans were obtained from Deep End for Melbourne and South-East Queensland.

Acquisition of three Thomas Dux stores

1. [77]

   In March 2015, Mr Abbott reported to Ms Phillips and Mr Ross-Edwards that the Director of Property at Woolworths had asked whether About Life would be interested in purchasing the whole Thomas Dux business, while another Woolworths executive said “they are looking to exit a few stores and he would contact me in a few weeks for another discussion.”

2. [78]

   By the April 2015 board meeting, the Bondi Junction store had been refurbished and refurbishment of the Rozelle store was underway. Plans for the new kitchen site in Alexandria were being finalised. It is apparent from the board minutes that this was a busy board undertaking a number of substantive tasks directed towards improving the profitability of existing assets and expanding the business in a considered manner. Work was being commissioned on marketing and improving the margin on product lines, including by improving its supply chain.

3. [79]

   At the May 2015 board meeting, Ms Phillips reported that a new IT systems would be going ‘live’ in June 2015. The proposed new kitchen site in Alexandria had been lost. Searches were underway for a new site. Mr Abbott’s report was tabled, noting that there were extensive discussions underway to potentially take over five to six Thomas Dux stores in Sydney and Melbourne. By June 2015, the Rozelle store had been refurbished but the new IT system was delayed. The board considered Mr Abbott’s report on site selection, noting that discussions were now underway for the possibility of taking over seven stores from Thomas Dux in Sydney and Melbourne.

4. [80]

   In June 2015, About Life approached the bank for bank guarantees for leases for a new store at Balgowlah due to open in August 2015 and a warehouse for the new kitchen. The bank’s review, on 23 June 2015, noted that it had recently completed the March quarterly reporting and confirmed an improving financial profile for the group with sales growth up to 9.8%. “Clients continue to demonstrate well conducted accounts with financial covenants continuing to be met.” In addition, it was noted that the bank would be looking at restructuring the group in the coming months, as the client was reviewing an acquisition of all Woolworths Thomas Dux stores in Sydney and Melbourne:

5. [81]

   By the end of the 2015 financial year, About Life’s five stores generated gross annual revenue of some $51 million and EBITDA of some $4 million. Mr Ross-Edwards said that bank debt was being used to provide working capital when necessary, but the business was generating a substantial cash flow and able to trade with a commercial bill facility of $2.27 million and credit card facilities.

6. [82]

   At the board meeting on 21 July 2015, the new IT system was in the process of being installed, with associated costs and delays. The budget for the 2016 financial year had EBITDA in line with the 2015 year, with additional expenditure on marketing and promotion and additional staff to grow the business. The opening of the Balgowlah store had been delayed.

7. [83]

   On 5 August 2015, Ms Phillips reported to her fellow directors on negotiations for Thomas Dux stores noting, “We have now progressed to a point where we need to make an offer on the deal.” Woolworths was now only prepared to sell three stores, being Lane Cove, Crows Nest and Port Melbourne. Annexed to the email was the site location template, completed for the three stores. Mr Abbott joined the meeting “and gave a thorough update”, including that Woolworths had agreed to accept $3 million for the Crows Nest, Lane Cove and Port Melbourne stores subject to the assignment of leases on the sites. The board decided to prepare heads of agreement and move forward. In addition, the board noted that the opening of a Balgowlah store continued to be delayed, while a site had been secured for the new kitchen in Wetherill Park.

8. [84]

   On 2 September 2015, Woolworths issued an offer to About Life to assign the Thomas Dux premises at Lane Cove and Port Melbourne and facilitate a new lease for the site at Crows Nest for $3 million. On 3 September 2015, Mr Ross-Edwards met with the bank, which was (according to Mr Morales) “more than happy to consider [About Life’s] request to assist with the growth strategy of the business”. It appears that the acquisitions were proposed to be funded by drawing down About Life’s existing facilities, together with additional funding of $4.8 million. On 4 September 2015, About Life accepted Woolworths’ offer to acquire the three Thomas Dux sites for $3 million.

More side deeds

1. [85]

   On 8 September 2015, the board met. The financial position of About Life’s existing business was generally favourable to budget. A lease had been signed for the new kitchen site in Wetherill Park. Ms Phillips informed the board that heads of agreement had been signed with Woolworths. The minutes record:

2. [86]

   On 2 October 2015, Mr de Fontgalland issued a fee proposal to About Life to act on the acquisition of the Crows Nest, Lane Cove and Port Melbourne sites from Woolworths. Mr de Fontgalland’s fee proposal, addressed to Ms Phillips and Mr Ross-Edwards, advised:

3. [87]

   The three side deeds referred to in Mr de Fontgalland’s fee proposal are not in evidence and appear to have fallen by the wayside as transaction documentation progressed. The significance of the reference to multiple side deeds in the fee proposal is, as I understand it, that About Life and, more particularly, Ms Phillips knew about side deeds. I am not sure it made much difference to her state of knowledge on this subject as she did not handle the negotiations with Woolworths for these stores, although was aware that Woolworths requested rights of first refusal. Mr Ross-Edwards was responsible for documenting this transaction; he did not remember the content of the Side Deeds.

4. [88]

   On 24 November 2015, a final draft of the Deed of Agreement between Woolworths and About Life in respect of the Crows Nest, Lane Cove and Port Melbourne stores was circulated to the directors for comment. Mr Thevenon observed:

5. [89]

   In January 2016, Ms Phillips and Mr Ross-Edwards signed a Deed of Agreement with Woolworths in respect of the Crows Nest, Lane Cove and Port Melbourne stores. Amongst the provisions, About Life gave Woolworths a right of first refusal in respect of the three premises, such right to be exercised within 12 months of About Life becoming the lessee.

Bank review and increased debt

1. [90]

   On 14 September 2015, Mr Ross-Edwards supplied the bank with information to support funding for the acquisition of three new stores. Mr Ross-Edwards advised the bank that he expected About Life would breach the leverage ratio from February to June 2016, due to $800,000 which would be spent on start-up and marketing costs for the new stores. He requested that the bank allow About Life a less restrictive covenant from January to September 2016.

2. [91]

   On 7 October 2015, the bank presented its internal credit paper, recommending approval of additional facilities “[b]ased on the company’s sound growth and their robust, experienced and conservative management”. The bank’s view of About Life’s board remained positive; the addition of Mr Ross-Edwards as chief financial officer was considered to have “further strengthened the group in terms of internal governance and financial reporting”. The bank noted, “The quality of the management team is impressive, and the provision of financials and the broader strategy of the business have been well presented to the Bank on a number of occasions.” Management was said to be “relishing independence from their previous key competitor, Thomas Dux, who is now being wound down by Woolworths Ltd. Independence is providing opportunities to pursue growth opportunities, both local and nationwide”. The overall transaction was considered to be “modestly leveraged”. The bank noted that shareholders were not proposing to inject further capital “as they believe the business operation is sound and under leveraged”.

3. [92]

   The bank’s analysis of About Life’s financial information appears detailed: the business was performing well and forecasts were considered reliable as prior year projections had proven to be thus far. Forecasts for the 2017 and 2018 years “appear challenging but not outside the capability of the business given historic performance.” The bank noted that a mild covenant breach may occur in the September 2016 quarter before returning to covenant levels by December 2016. Internal bank approval for About Life’s request for further funding was not immediately forthcoming. Various issues were raised, a meeting held and further information obtained from the customer. Throughout this process, Mr Morales repeatedly expressed “great confidence in the management team” and confidence in About Life’s business model.

4. [93]

   On 20 October 2015, the board met. Fit-out of the new kitchen in Wetherill Park was underway and the new warehouse was expected to be open for business in November 2015. The bank had approved additional facilities to allow completion of the three Thomas Dux stores and the Freshwater store. The board minutes record:

5. [94]

   On 12 November 2015, the bank increased About Life’s loan facilities from some $4 million to $9.7 million. A particular concern for the bank was perfecting its security, as problems had been encountered documenting the bank’s right of entry over leased premises. After meeting with Ms Phillips and Mr Ross-Edwards to discuss this problem, the bank agreed to accept a caveat to protect the bank’s interest, which Mr Morales considered a reasonable compromise given About Life’s “proven reliability, robust business and financial profile”.

6. [95]

   On 17 November 2015, About Life’s auditors, Deloitte, completed their audit for 2015. About Life’s revenue was some $51 million, with profit before tax of some $2.9 million. The company had net assets of some $10 million. The audit report was unremarkable.

New stores and kitchen

1. [96]

   In January 2016, About Life established a 2,400 square metre warehouse and kitchen facility at Wetherill Park, being much larger than the Rozelle kitchen of only 200 square metres. The total cost of the fit-out and plant and equipment was some $2 million. Some 70 staff were employed. The industrial scale of the new facility was intended to support About Life’s plans to expand to 30 stores along the east coast of Australia from Melbourne to Brisbane. Problems were experienced, however, with over-ordering and over-production. The extent of these problems was not appreciated for some time, but resulted in millions of dollars of inventory, and thus, cash being wasted: see further at [400]. This was the first significant problem which impacted About Life’s cashflow.

2. [97]

   In February 2016, Ms Phillips reported to the board on progress with the new sites. The Lane Cove and Port Melbourne sites would be taken over in March 2016, with fit-out to commence. The new kitchen was running well, as was the warehouse, and producing efficiencies. Progress with selecting other sites, and completing documentation on existing sites, was also reported. Ms Phillips reported again to the board in March 2016, with “[a]ll attention … on new store openings.” Fit-out of Lane Cove and Port Melbourne were then underway.

3. [98]

   The Lane Cove store opened on 31 March 2016. The Port Melbourne store opened on 21 April 2016. In May 2016, Mr Ross-Edwards presented the financial report to the board. Cammeray’s revenue was then down by 3.3%, noting “Lane Cove is can[niba]lising Cammeray”. In addition, Ms Phillips presented an update on store openings, advising that Port Melbourne had launched on 21 April 2016, with response to the store being very encouraging. Lane Cove sales had “come off considerably” as senior staff had to be moved to Port Melbourne. The Crows Nest fit-out was progressing on time and expected to open in June 2016. Additional staff had been recruited to purchasing, which had been understaffed as a result of the additional stores. The Crows Nest store opened on 9 June 2016.

4. [99]

   Mr Ross-Edwards said that the same operational formula used by About Life in its existing stores was applied in the new stores. But there were some differences in the demographics and purchasing patterns in the new areas; it took some months for management to develop a proper understanding of those matters. Managers appointed to the new stores were inexperienced in the operation of About Life stores and required considerable assistance and supervision in the early months. One of the issues arising was over-ordering, particularly with fresh food, and this resulted in significant amounts of wastage in the early phase of operation of the new stores. This compounded the wastage of inventory by the new kitchen.

Problems with IT

1. [100]

   Perhaps the biggest problem encountered at this time – in terms of financial impact – was a new IT system. About Life invested $500,000 in a new computer and point of sale scanning system (Bepoz), which was introduced at the Lane Cove store in March 2016 and ‘rolled out’ to all other stores over the next six months. The new IT system was to provide a more sophisticated version of automated replenishment of inventory. However, there were significant issues from the outset such that, for a period of time, the business was not able to operate the system to replenish stock at all. The business had to rely on management, who had not been formally trained in purchasing, to manually place orders. As many of the staff were new to the business, excessive over-ordering and wastage resulted, particularly for the kitchen.

2. [101]

   In addition, the scanning software did not recognise the barcodes used under the old computer system. This problem was not identified by the supplier and did not become apparent for some months. As a result, some 25% of stock was not properly recorded when scanned at the point of sale, resulting in significant inventory problems for all stores. The customer was charged for the item but the system recorded the item as still being in stock when it had been sold. Staff could not rely on the system to indicate inventory on hand. The problem was eventually identified and rectified in the latter part of 2016. The extent of lost and wasted stock was not quantified until May 2017: see [400].

“Stop & Think”

1. [102]

   On 15 June 2016, in advance of a board meeting, Ms Phillips circulated a document entitled “Stop & Think” for discussion. The document consolidated Ms Phillips’ views with those of Ms Stewart and Mr Ross-Edwards, “largely driven by analysis but also some honest reflecting. I entitled it STOP AND THINK – I don’t think we’ve done a lot of that lately!!”. The six page document contained a frank assessment of all aspects of About Life’s business as it had weathered significant change from the implementation of new IT, opening the new kitchen in Wetherill Park and three new stores. Senior staff were stretched in supporting new stores while other staff struggled to maintain the quality of food services in existing stores. With Port Melbourne being the only store in Victoria, the logistics of ensuring inventory and managing the store were presenting challenges. Ms Phillips expressed concern that customers were declining generally, perhaps due to food service and products being available one week but not the next. New store openings were cannibalising existing stores, with Cammeray down 20%, Rozelle down 10%, and Lane Cove taking 5% from the opening of Crows Nest. Ms Phillips queried whether there was a risk that About Life may breach bank covenants. Ms Phillips posed the general problem of optimising the business for its new size.

2. [103]

   Whilst Ms Phillips was criticised at length during cross-examination for the content of her “Stop & Think” paper, I consider this to have been misplaced. At a period of significant change in the life of the business, a director was raising an alarm – at an early stage – for the board to consider a wide range of issues and concerns. As Ms Phillips put it, “Look Mr Leopold when you sit in a position like mine it is … necessary to admit your mistakes and [to own] them. I mean the only way that you are going to fix the company is to admit the things that have gone wrong. So yes, this paper was a true reflection of what had gone wrong during the growth phase.” Mr Green generally agreed with the concerns identified by Ms Phillips. He did not think there was a quick fix to these problems, which would take months to turn around.

3. [104]

   The board meeting on 16 June 2016 proved a sober affair. For the first time, the sales for all stores were less than that achieved the previous year. Wages were up due to the opening of three new stores. Cashflow was down due to capital expenditure on Port Melbourne and Crows Nest. Ms Phillips presented her “Stop & Think” document. The minutes record:

4. [105]

   Mr Ross-Edwards said the directors shared his concern that About Life might find itself in breach of its bank covenants by the end of June 2016. There was lengthy discussion on the topic. The board agreed to slow immediate expansion plans, make organisational changes and take steps to improve the food service offer. This strategy was expected to reverse the decline in sales, bring wages back into line with historic levels and restore bank covenants.

5. [106]

   Mr Ross-Edwards said About Life’s acquisition of Lane Cove, Port Melbourne and Crows Nest stores, establishment of a new kitchen and warehouse at Wetherill Park and investment in a new IT system for all stores increased bank debt to $12 million. Servicing this debt, together with additional wages and overheads, began to have an impact on cashflow. The impact of these exceptional expenses was compounded by human resources issues related to increasing staff by some 200 staff and the employment of new managers unfamiliar with the business. Management were also concentrating on new, rather than existing, sites. Mr Ross-Edwards said there was no doubt that business struggled with the rapid growth that occurred in 2016.

Covenant breach

1. [107]

   As foreshadowed at the 16 June 2016 board meeting, About Life breached the leverage ratio for the quarter ending June 2016. Mr Ross-Edwards considered that the breach arose because of the additional funds drawn down in the previous three months to fund expansion, with only a limited period of earnings from the new businesses. As soon as he recognised the breach, Mr Ross-Edwards contacted the bank in advance of the formal report date on 15 August 2016 and organised a meeting.

2. [108]

   Mr Beecroft prepared discussion points for the bank. A detailed presentation was prepared, including financial results for the 2016 financial year and the 2017 forecast. Total sales of $81.4 million were forecast for 2017, with a gross profit of $33.9 million and EBITDA of $5 million. Mr Green reviewed the projected sales figures, which he considered reasonable having regard to the “Stop & Think” document; the budget reflected the information then available to About Life, including the problems that had been experienced with opening stores.

3. [109]

   The presentation noted that EBITDA had been below budget that year, with the June quarter being very disappointing largely due to increased costs associated with the opening of three stores. The new stores were performing but below forecast. The budgets for the new stores were optimistic, however, About Life continued to believe that all three new stores would operate profitably and be strong contributors to EBITDA, albeit it may take a bit longer than forecast. Organisational changes and other board initiatives to redress the position were explained. About Life was expected to breach its leverage covenant and sought relief from this covenant for 12 months to give About Life time to implement its plans and grow the new stores. About Life expected to be back within the leverage covenant on a trailing 12 month basis, being 3.5 by September 2016, 3.0 by December 2016, 2.5 by March 2017 and 2.0 by June 2017.

4. [110]

   On 8 July 2016, Mr Green, Mr Beecroft and Mr Ross-Edwards met with bank officers at the Crows Nest store. Mr Morale’s note of the meeting does not suggest that the bank was overly concerned: the client expected to breach the leverage ratio but the issues had been addressed and a request to amend the covenants would be forwarded in due course.

5. [111]

   At the board meeting on 21 July 2016, financial results for the stores for June 2016 were reported to be below budget. Mr Green agreed that every store was then struggling, for reasons which differed for each store. Cammeray was down by 8.3%, with the sales being cannibalised by Crows Nest and Lane Cove. Lane Cove and Port Melbourne sales “seemed to have bottomed”. Mr Thevenon expressed concerns at “out of stocks” and a lack of range in Cammeray and Crows Nest. (Ms Phillips said that ‘out of stocks’ was partly a supply chain issue, as many of About Life’s suppliers were smaller businesses who were unable to keep up with About Life’s growth.) It was reported that the bank had accepted the proposal for covenant relief, subject to final June 2016 numbers and the 2017 budget.

6. [112]

   On 4 August 2016, About Life provided its Compliance Certificate and accompanying financial statements to the bank, reporting that the leverage and ICR had been breached for the June 2016 quarter. On 18 August 2016, the board met. The results for most stores were unfavourable, with Cammeray down 27%, being cannibalised by Crows Nest and Lane Cove. The sales for Lane Cove and Port Melbourne, though, were “starting to grow”. Ms Phillips reported that all new stores had “levelled out and should start growing from here.” Deep End was to “do all new stores including cannibalisation of existing stores.” A revised proposal and budget had been sent to the bank, awaiting its review; the proposal was aimed at giving the business breathing space whilst bringing covenants into line within 12 months.

Revised 2017 forecast

1. [113]

   On 19 August 2016, Mr Ross-Edwards sent Mr Morales a revised presentation and forecast. As a result of the presentation and conversations with the bank, Mr Ross-Edwards said “we revised it down to a more hopefully realistic number”. The revised 2017 forecast now predicted $80 million sales with a gross profit of $33.3 million and EBITDA of $4.7 million. Mr Ross-Edwards agreed that the adjustments proved insufficient.

2. [114]

   Whilst Mr Green did not specifically recall discussion by the board as to the reasonableness and achievability of the revised budget, he expected that there would have been such a discussion, “most definitely”. It was usual for him to ask questions about how the new sales figures had been set for each month, and it was fair to assume that the budget took into account the problems that had been identified over recent weeks. Ms Phillips said, “this was a budget that I put together that I believed was, at that point in time, with the circumstances at that point in time, achievable.”

3. [115]

   Whilst the revised 2017 forecast reduced total sales, gross profit and EBITDA for the financial year, forecast sales for February to June 2017, were higher than sales predicted in the 6 July 2016 presentation. It was suggested to Ms Phillips that she was ‘pumping up’ the figures for the bank. Ms Phillips said “if I prepared the budget I believed that that would have been the case.” When asked what possible basis had emerged to increase the forecast sales for February to June 2017, Ms Phillips said she assumed recovery; the company had been through a growth phase and experienced troubling times so sales forecasts for the beginning of the financial year had been pulled back but “I had every reason to assume recovery because we had the capability to recover, and … I’ve ramped the sales up towards the end of the financial year.” Mr Ross-Edwards said that, at the time, he probably agreed with Ms Phillips’ logic, “if I didn’t, I would have told her”.

4. [116]

   Whilst it is possible that Ms Phillips may have inflated her forecast to appease the bank, it seems unlikely. At this stage, About Life had experienced a series of one-off events which resulted in a substantial increase in debt accompanied by interrupted operations and impacted revenue and expenses. As I read the contemporaneous documents, About Life’s board was concerned to manage these challenges, but there was no sense of panic. Ms Phillips likely did expect that About Life’s revenue would recover and prepared her revenue forecast accordingly.

Bank adjusts covenants

1. [117]

   On 29 August 2016, Mr Ross-Edwards met with Mr Morales to discuss re-setting bank covenants. Mr Morales’ report noted that, notwithstanding the deterioration in the financial metrics of the business, “we are comfortable with the proposal”. The bank’s internal report supported temporary covenant relief for 12 months. The report noted that the covenants had been breached, in large part, by the increase in debt associated with the new store roll-outs, IT system replacement and relocation of the kitchen to Wetherill Park. Whilst traditionally the bank would have preferred the business to consolidate each store individually, acquisition of the stores simultaneously was a requirement of the sale process negotiated with Woolworths.

2. [118]

   On 6 September 2016, a risk officer at the bank approved the amendment of covenants noting that, whilst leverage at that level was “normally too high”, measures had been taken to address the poor performance in the June quarter; the liquidity position of the group was strong enough to carry it forward. Economies of scale were expected to ‘kick in’ with the opening of the additional three stores. The forecast indicated that the business would remain profitable with improving results to exceed historical levels “which should be achievable based on the increased [turnover].” However, the risk officer noted that the matter was “to remain on the Watchlist and noted as high risk until covenants returned to below 2.5x leverage. This is the peak level of our tolerance on covenants and any further breaches will required GCS involvement.” GCS referred to Group Credit Structuring or – as some witnesses referred to it – the “bad bank”.

3. [119]

   Mr Ross-Edwards said Mr Morales never mentioned that this was the bank’s “peak tolerance”. Whilst there was always a chance that, with every breach of debt covenants, About Life would be managed by the “bad bank”, Mr Ross-Edwards did not agree that it was a significant risk, “I have dealt with the bad bank in my consulting role probably in four, in three of the four banks, and actually worked for them as well. So … I didn’t think this was particularly high risk at that stage.” I agree.

4. [120]

   At the board meeting on 8 September 2016, Mr Ross-Edwards presented the financial report. EBITDA was above the revised budget but down on the previous year by 51%. Lane Cove and Port Melbourne sales were above budget and sales were continuing to grow. Ms Phillips reported that all new stores had levelled out and “should start growing from here”. Wages had been cut at all stores. Ms Phillips and Mr Ross-Edwards were spending time bringing inventory back into line.

5. [121]

   On 9 September 2016, the bank advised that it had approved a variation of the loan conditions, permitting the leverage ratio to be 4.0 for the September 2016 quarter, 3.75 for the December 2016 quarter, 3.25 for the March 2017 quarter and 2.50 for the June 2017 quarter. Mr Ross-Edwards said that, About Life’s previous leverage covenant was between 2 and 2.5 “so the bank was very accommodating in allowing a leverage covenant of 4”.

Lack of cashflow and stock

1. [122]

   On 21 September 2016, Ms Phillips sent a concerning email to her fellow directors advising that, as raised at the last board meeting, “cash has started to get very tight”. A number of factors – new IT system that had not performed to requirements, together with new people and rapid growth – had given rise to an inventory problem. “Whilst we are still determining the value in inventory we are over-holding, it is estimated to be around $1 mill.” Further:

2. [123]

   Mr Ross-Edwards explained that the impact of a tight cashflow was that the business could not buy inventory to sell, which affected actual sales.

3. [124]

   Mr Green said the board recognised that the business was struggling; it was appropriate to seek experienced, external help to understand exactly what was going on with the business, how to turn it around, and how much time and capital it would take. In October 2016, the board set up a committee comprising Mr Green and Tristan Kitchener, who had a strong background in fast moving consumer goods and had been brought in to supervise the strategic planning process. Mr Green and Mr Kitchener met with various consultants to assist in remedying the problems with the business. The committee selected consultant Retail Oasis, which made a presentation to the October 2016 board meeting.

4. [125]

   The minutes of the October 2016 board meeting record that the financial performance of older stores was below the previous year whilst some of the new stores were growing. (Ms Phillips added, “There’s nothing shameful about a $6 million month by the way. I mean … our break even point … was $5 million.”) According to the minutes, “Inventory and payables both increased as inventory peaked. A plan has been put in place to reduce inventory and reduce pressure on cash flow”. The revised bank covenant had been met for the September quarter.

A capital raise?

1. [126]

   On 10 November 2016, the board met again. Stores continued to perform, generally, below budget; sales for Port Melbourne were “flat”. Inventory and payables had both reduced. The board agreed to proceed with Retail Oasis. Ms Phillips agreed that the performance of the stores was unfavourable to budget, but noted that it was still a profitable month. By November 2016, however, Ms Phillips considered, “we had weathered the worst of it”, stabilised the business with attention turned to growing the business again. The business, however, needed capital to remain viable. As to this, the minutes record:

2. [127]

   Mr Green said that capital raising was his area; it was not fair to describe the discussions about equity raising at that stage as “embryonic”. He had already been discussing a capital raise with investors, although no decision had been taken as to how much equity to raise, or when, and no formal documentation had been prepared.

3. [128]

   On 18 November 2016, Mr Ross-Edwards circulated to the board a revised forecast, put together with Ms Phillips, for comment and review. Mr Ross-Edwards assumed “we will raise $5 million … in December 2016” to be spent in reducing payables to 45 days, paying down bank debt by $3 million then attending to other matters. On 30 November 2016, Mr Ross-Edwards circulated further revised forecasts to the board. Mr Ross-Edwards explained: (emphasis added)

4. [129]

   Both forecasts proceeded on the basis that $3 million equity would be raised in March 2017. Forecast revenue had now been reduced as a result of Ms Phillips and Mr Ross-Edwards’ review of actual results. The aggressive forecast predicted sales of $73.75 million for the 2017 year, whilst the other forecast predicted sales of $71.8 million. Mr Ross-Edwards considered the latter forecast to be balanced and reasonable.

5. [130]

   Mr Ross-Edwards explained that these forecasts were scenarios for the board’s eyes only. He was trying to work out what needed to be done to avoid a breach of covenant. A possible way of avoiding a breach was to “pump the balance sheet up” with an injection of $3 million equity. Mr Ross-Edwards did not agree that it would be hard to persuade investors to contribute equity when the business was consistently falling short on its forecasts, saying this had only happened in that particular year; until then the business had performed very well.

6. [131]

   The audit of About Life’s accounts was then also underway. On 22 November 2016, Mr Ross-Edwards forwarded the draft audited accounts for the 2016 year to Mr Morales and requested confirmation that, based on the draft accounts, the bank would rollover About Life’s facility at the end of the month. Mr Morales so confirmed. Deloitte’s audit file contains a going concern assessment, which noted the bank’s response. Deloitte observed that, when the company breached its covenants, “the response from the bank was positive and supportive in amending certain covenant calculations on a go forward basis to enable future compliance.” The audit report was, again, unremarkable.

7. [132]

   By December 2016, About Life’s lack of working capital was continuing to adversely impact on cashflow. About ten suppliers had then placed About Life ‘on hold’ but, as About Life had a supply chain of over 200 suppliers, the challenge was to optimise the range in the stores to manage the situation. A more pressing problem was the inability to stock About Life’s private label, which accounted for about 20% of sales. Acquiring private label stock required up-front payment for large quantities, “So [the] private label strategy slowed down and there was some private label lines that were high movers that we had to move to proprietary brands”. As suggested by Ms Phillips in September 2016, it was now necessary for the directors to advance $1 million to the business. Mr Ross-Edwards said these loans were to provide working capital to overcome cashflow issues on an interim basis, to ensure that suppliers were paid on time and shelves properly stocked whilst About Life embarked upon the raising of further capital.

Working with Maddocks

1. [133]

   On 1 December 2016, Mr Green wrote to his directors regarding raising funds from directors by a Shareholder Note; a law firm needed to be retained to draft the document and ensure compliance with the Shareholders Agreement. Mr Green set out the tasks before them:

2. [134]

   Mr Green agreed that both Mr Beecroft and Mr Thevenon were concerned about the viability of the business as it was then in difficulty and performing badly. Mr Beecroft did not have the capital to invest at the time, but ultimately put in $10,000.

3. [135]

   Ms Phillips and Ms Stewart agreed to contribute $600,000, while Mr Ross-Edwards expressed an interest in $50,000. Ms Phillips also pressed for the $1 million loan to be completed the following week “as the faster the business gets the funds the better off we will be.” Ms Phillips also suggested Mr de Fontgalland act on the transaction, rather than Maddocks.

4. [136]

   Mr Green contacted Mr McNee, a partner of Maddocks who practised in corporate mergers and acquisitions, capital raising and the buying and selling of companies and assets. Mr Green had met Mr McNee in 2015 at a private equity conference in Byron Bay, which Maddocks was co-hosting with Grant Thornton. Mr Green was an expert panellist at the conference in relation to retail investments. Mr McNee learnt that Mr Green was a director and chairman of About Life and, after the conference, provided legal services to Mr Green and his company, Green Capital. Mr McNee came to know that Mr Green, through Green Capital, appeared to have invested in a number of businesses in which he was actively involved. Mr McNee thought that Mr Green was a sophisticated businessman, as indeed he was.

5. [137]

   On 1 December 2016, Mr Green informed Mr McNee:

6. [138]

   According to Maddocks’ billing records for the About Life “General Advice” file, on 2 December 2016, Mr McNee received a telephone call from Mr Green and Mr Beecroft regarding the Note. Mr NcNee knew Mr Beecroft to be an investor in About Life and a sophisticated businessman, for whom Mr McNee had previously done commercial transaction work when Mr Beecroft was at Navis Capital. Mr McNee said he needed further documents before Maddocks could provide an advice. Mr Beecroft provided a copy of the Shareholders Agreement and the constitution for About Life Investor Holdings.

7. [139]

   According to Mr McNee’s affidavit, which About Life tendered, Mr McNee recalled that Mr Green told him that About Life had expanded too quickly, was under financial pressure and required capital desperately. About Life was having issues with suppliers, who were not being paid and were refusing to supply. The company was being watched and managed by its bank, and the bank had requested that About Life reduce its exposure. About Life was unlikely to receive a further extension of its bank facilities, was speaking to its bank on a regular basis and required a director or directors to prop it up quickly in the short term. Mr Green did not recall the conversation but agreed that he held most of those opinions at the time.

8. [140]

   I have some hesitation in accepting Mr McNee’s recollection of his conversation with Mr Green in its entirety. Mr McNee was not cross-examined. He made no file note. Mr Green’s general acceptance carries little weight when Mr Green’s recollection was generally imprecise. Mr McNee’s recollection of the conversation does not readily align with the contemporaneous documents and is likely an amalgam of Mr McNee’s recollection of conversations with Mr Green over this period.

9. [141]

   On 5 December 2016, Mr Green circulated a proposed update to investors to his directors for comment, including in respect of capital raising and the Shareholder Note. Ms Phillips reviewed, “it’s accurate, honest – good!”. On 6 December 2016, Mr Green emailed his directors again regarding the investor update, “I have put $3mm to $5mm [for the future capital raise] in order to convey that the performance of the business in the near term can have an impact on the amount raised. I have spoken to almost every single investor already and conveyed that thought so it won’t be a surprise.” Mr Green said he spoke with investors on a regular basis, updating them regularly with the “doom and gloom”. The Capital Raising slide as proposed by Mr Green included:

10. [142]

    To this, Mr Thevenon suggested a different approach, being to defer ascertaining the amount of capital raising until Retail Oasis’ review as capital would be needed to implement the consultant’s recommendations. Further, store expansion should be deferred “until the existing stores are turned around and we have more clarity about the strength of our cash flow and balance sheet”. Ms Phillips said there were different opinions on the board as to the amount of capital which should be raised. The conservative end of the board wanted to raise just what was needed, whilst Mr Thevenon was of the view that, if they were going to do a capital raise then they should do it properly and not go back and ask again.

11. [143]

    On 7 December 2016, Mr Green provided an update to investors, advising that the business had had a very challenging last quarter of 2016 and first quarter of 2017 “and we are working hard through the turn around of the business.” Mr Green provided full details on developments already described in this judgment and what was being done to fix operational issues and increase sales through the larger store base. Mr Green advised investors that new stores and operational shortfalls had stressed the balance sheet. The three stores acquired from Woolworths had been an opportunity to purchase “all three or none at all”. Overall, debt had increased from 30 June 2015 to 30 September 2016 by $6.9 million. Bank covenants had been renegotiated and met for the quarter ending September 2016, but may be breached, hence a bridging loan from the directors of $1 million.

12. [144]

    In the Capital Raising slide, Mr Green proposed that the raising would be between approximately $3 million and $5 million in February 2017. The funds would be used to pay down bank debt and accounts payable from 65 days to 45 days. The rationale for the capital raising was that the business had expanded too quickly, with the “3 or none” purchase of Thomas Dux sites from Woolworths funded with debt only. This would have been feasible if the budget was achieved, however, the combined impact of management dilution and distraction with new store openings, higher than expected cannibalisation, ambitious new store budgets and general economic forces resulted in pressure on debt covenants and days payable.

13. [145]

    On 8 December 2016, About Life entered into a Loan Agreement with the corporate entities of Mr Green, Ms Phillips, Ms Stewart, Mr Ross-Edwards, Mr Beecroft and Mr Thevenon to provide $1 million for general operating costs and to maintain inventory. A board meeting was also held; stores were performing no better. The board discussed a fund raising to be completed by 31 March 2017 with “the final documents to be finalised in January to go [to] shareholders.” Mr Green agreed that by December 2016, none of the investors had committed to the capital raising. Investors had expressed a mixture of opinions but, on the whole, were waiting for a definitive proposal before deciding whether to commit.

Bank review and covenant breach

1. [146]

   On 14 December 2016, the bank completed its annual review of About Life’s facilities. The report noted that the skill level of management had been revised down to “Adequate” as a result of the breach of loan covenants. The report repeated, “This is the peak level of our tolerance on covenants and any further breaches will require GCS involvement.” A careful and detailed analysis of About Life’s financial reports followed, including an assessment of one-off expenses in the 2016 financial year related to new store openings, not to be repeated in the 2017 financial year. The bank derived comfort from this fact, which was said to be credit positive. On 6 January 2017, the bank advised that About Life’s facilities had been rolled over.

2. [147]

   On 24 January 2017, at About Life’s request, Ms Phillips and Mr Ross-Edwards met with the bank to advise that the leverage covenant would be breached for the December 2016 quarter. Mr Ross-Edwards regarded this as a minor breach, arising from a timing error. A payment of some $320,000 went out to suppliers on 31 December 2016 rather than the next working day, which was the commencement of the next quarter. Ms Phillips did not regard the bank’s patience as limited at that point in time, noting that the people from the bank with whom she was meeting were not particularly senior people in the team. Ms Phillips said she did not recall walking into the meeting “with my heart falling out of my chest, hoping that the CBA were going to support us. To me, it was just a commercial meeting we were having with CBA to discuss where we were at. … we know that we’ve got to fix our problem … and we’re going to talk about how we’re going to do that.”

3. [148]

   Following the meeting, bank officer Aemon Elkassem reported: (emphasis added)

4. [149]

   This, of course, was the bank’s summary of the meeting. Mr Ross-Edwards said this was the $5 million equity raising that they had been talking about which he believed was “in train”. Mr Green agreed that, if the bank had been told at the time that investors had agreed to invest $5 million, that would be inaccurate. Ms Phillips said they discussed doing an equity raising for $5 million, but did not recall a discussion as specific as there being an agreement to inject $5 million. Whether the bank’s summary was accurate or not, Mr Ross-Edwards soon advised the bank of the correct position by email (see [156]) and the bank appears to have understood that position (see [159]).

5. [150]

   The tone of Mr Elkassem’s email was far from alarm. Whilst it appears that the bank officers had a lengthy meeting and canvassed subjects of concern, the bank appears to have been satisfied with the information given and explanations proffered.

Further revised 2017 forecast

1. [151]

   Following the meeting, Mr Ross-Edwards forwarded the November 2016 forecast, initially prepared for the board, to the bank, assuming a $5 million capital raising in March 2017. The forecast now predicted $72 million sales with a gross profit of $30 million and EBITDA of $2.4 million. Whilst it was suggested to Ms Phillips that she had thereby sought to mislead the bank, it appears that About Life’s board was in fact working towards a capital raising of between $3 million and $5 million, subject to Retail Oasis’ report as to how much was needed. Ms Phillips did not agree that an equity raising was then unlikely. Ms Phillips and her sister were committed to invest, as was Mr Green, “We were discussing it the whole time … we were certainly participating.” Existing investor Gary Stead was looking to invest about $1 million. Mr Green had a group of American and high wealth Australian investors. Ms Phillips considered that $5 million was what the business was going to raise.

2. [152]

   At the About Life board meeting on 30 January 2017, Mr Ross-Edwards said that the leverage covenant would be breached as at December 2016 “as funds were released prior to end of month by the accountant, despite being instructed not to.” The bank had been informed “and they were understanding and will seek a variation for December 2016”. The board also discussed the results of Stage 1 of the Retail Oasis project, with the next presentation to take place on 16 February 2017. As to fundraising, the minutes record: (emphasis added)

3. [153]

   Mr Ross-Edwards said the capital raising was in the hands of Mr Green and he recorded in the minutes exactly the thoughts which Mr Green expressed at the meeting. It would appear from the minutes that Mr Green was then confident of raising $5 million in equity. Mr Green said, “It was my impression that … they would reinvest, including several of them saying they would reinvest.” He had confidence at the time that raising $5 million should not be a problem.

4. [154]

   This is consistent with Ms Phillips and Mr Ross-Edwards having such a view when they provided the forecast to the bank four days earlier on 24 January 2017, including $5 million equity in March 2017. Ms Phillips considered that the prospects of raising $5 million in capital were high; the people being approached were existing investors so it was not necessary to take the investment proposal to people external to the business.

5. [155]

   Mr Green agreed that it was all but impossible that the capital would be raised by 31 March 2017 if they waited for Retail Oasis’ report. Mr Green agreed that the Retail Oasis report was an important, but not critical, part of the capital raising; it would be better to do a capital raising with the benefit of the Retail Oasis report “if we had the time to be able to wait that long”. A capital raising had been discussed, then it had been discussed to wait for the Retail Oasis report before doing so, “it was a process that ebbed and flowed”. It is also clear from the board minutes that About Life had in mind to discuss any delay in a capital raise which was caused by waiting for the Retail Oasis report.

6. [156]

   On 13 February 2017, Ms Phillips and Mr Ross-Edwards signed a Compliance Certificate for the bank, advising that the leverage ratio had been breached for the December 2016 quarter. In providing the bank with the accompanying financial information, Mr Ross-Edwards also advised: (emphasis added)

First meeting with Harris Farm

1. [157]

   On 13 February 2017, Ms Phillips met with Angus Harris of Harris Farm. Ms Phillips was interested in sounding out opportunities to raise capital. Mr Harris expressed interest in purchasing parts of About Life’s business, principally, the Double Bay and Lane Cove sites.

2. [158]

   Mr Harris had, in fact, identified About Life’s Double Bay store as a key acquisition target for some time. New retail developments in the Double Bay area were rare; major spaces within such developments, as is required for grocery retailers, were highly valuable and sought after. It was Mr Harris who had initiated contact with About Life, through Mr Thevenon, who introduced him to Ms Phillips.

3. [159]

   On 14 February 2017, the bank advised the directors that the bank had decided not to exercise its rights in respect of the breach of the leverage covenant. Further:

4. [160]

   On 17 February 2017, the board met. Stage 2 of the Retail Oasis project was discussed, with the next presentation on 1 March 2017 expected to “represent an exciting opportunity.” The board was now considering getting rid of the Cammeray store. Mr Ross-Edwards was tasked with seeking legal advice about getting out of the lease, and also getting out of the Freshwater lease. There was also a dispute with the Surry Hills landlord, resulting in 50 seats having to be taken out of the café and the menu cut back. As to fundraising, Mr Green told the board “there might be a delay in fund raising so that the Retail Oasis strategy could be included, as it is vital to future direction.”

Ms Phillips takes the blame

1. [161]

   On 20 February 2017, Mr Stead sent a lengthy email to Mr Green expressing his disquiet with the fortunes and direction of About Life. In particular, Mr Stead voiced criticism of Ms Phillips and the board, “I would be interested to participate in … a new funding round, with a new strategy and experienced team to implement it, but have no interest in funding just a recapitalisation proposal.” Mr Green agreed with some, but not other, views expressed by Mr Stead. He did not agree that Ms Phillips lacked ‘hands on’ retail operating experience. Mr Green took Mr Stead’s concerns to Ms Phillips and the management team. On 23 February 2017, Mr Green and Ms Phillips spoke at length, in particular, about her position as CEO.

2. [162]

   On 24 February 2017, Ms Phillips sent Mr Green a reflective email advising that she would be stepping down as CEO:

3. [163]

   Mr Green agreed with Ms Phillips’ assessment of her and her team and that the business needed new leadership. Mr Ross-Edwards did not agree, “She was one of the most competent people I’ve ever worked with. … [T]here were certain areas we needed to probably beef up in the business, but the only reason we couldn’t really [do that at the] time was money.”

4. [164]

   On 27 February 2017, Mr Green suggested to Ms Phillips that they bring in a chief operating officer, noting “You are an inspiration to the business and the people around you. I’d really hate to lose you from the business that you founded.” Ms Phillips remained firm in her decision to step down:

5. [165]

   It is apparent from Ms Phillips’ email that she was then extremely busy meeting the demands of the business, but did not see the business as about to fail. It had a future, but she did not see herself at the helm. What is also apparent is that the private equity investors, represented by Mr Green, Mr Thevenon and Mr Beecroft, appear to have taken charge of About Life’s overall financial predicament, almost without reference to Ms Phillips, who appears to have been subsumed in dealing with the day-to-day operations of the business which were then in a most challenging state.

Pressure mounts

1. [166]

   According to Maddocks’ billing records, on 22 February 2017, the firm received a telephone call from Mr Green regarding fundraising and Class A shares. Maddocks considered the Shareholders Agreement, the constitution and trust deed. On 24 February 2017, an email was sent to Mr Green regarding “pathway to funding and Class A unitholder rights and obligations” and Mr Thevenon, who appears to have been considering resigning. On 6 March 2017, Mr Thevenon resigned as a director. Mr Green agreed that Mr Thevenon resigned because he was not comfortable with his potential liability as a director.

2. [167]

   On 7 March 2017, Mr Green sent a further update to investors. It was now proposed to defer a capital raising until completion of the Retail Oasis report, including implementing the new strategy at the Lane Cove store as a test case. The equity raising would now be in July or August 2017. Mr Green also advised that About Life was working with the bank for a six months’ stay on covenants. Presumably, Mr Green had formed the view that asking investors to commit further capital in the absence of evidence that the new strategy would work would result in insufficient capital being raised at that time. It is not clear that About Life was, in fact, working with the bank for a six months’ stay on covenants. Rather, it appears that the board were endeavouring to redress the state of About Life’s finances before the next covenant breach had to be reported.

3. [168]

   The detailed information provided by Mr Green in his update to investors was not all bad news. Sales were down but declines had stabilised and some product lines had begun to improve. Gross margin was 42%, being above budget and stronger than the previous year as a result of continued development of Private Label offerings and increased purchasing direct from suppliers. The food service and café lines had shown improvement. EBITDA for the quarter was over budget and up from the previous year. Customer satisfaction continued to grow. Operational improvements were expected to be more visible in the third quarter and onwards. Management were considering options to close the Cammeray and Surry Hills stores.

4. [169]

   Significant detail was given on Retail Oasis’ work, the mission being to drive store sales up by 10% in the first full year of implementation. About Life was considered to be best positioned to take the lead as Australia’s number one organic/health supermarket. With the assistance of Retail Oasis, management had identified numerous areas for improvement and a detailed turnaround strategy was being defined, with the Lane Cove store to be used as a testing ground.

5. [170]

   However, Mr Green’s update reported that pressure on the balance sheet continued. The bank had been informed that the company would breach covenants in March 2017. A detailed case for new investment would be provided, with the timing and size of the equity raise to depend on conversations with the bank and the specifics of the turnaround plan. Mr Green appears to have been adopting a ‘holding pattern’ until he had a positive case to present in support of a request for additional investment in the business.

6. [171]

   The next day, on 8 March 2017, Ms Phillips emailed Mr Green and Mr Beecroft, “COST CUTS”, advising:

7. [172]

   Ms Phillips advised that she had made “ruthless” costs cuts for the next three months, focussing the company’s resources on the customer. Wages had been cut by $1 million, including a $100,000 pay cut for Ms Phillips and Ms Stewart. “The team have come together and I believe are united to work with us during this period – nothing has been over dramatized – it is as it is for 3 months, we all have to own this and we need to pull the reigns in. … In the case of all of these providers we are in arrears with, the cash flow affect for these will impact in 2-3 months’ time.” The latter statement proved to be correct.

8. [173]

   Legal costs then being incurred in relation to the Surry Hills dispute were not helping. “Rob has an idea we would like to discuss that if we had immediate access to $1 mill we could look at the possibility of structuring it into the business in such a way that we may not breach our bank covenant”. It is apparent from these and other emails that Ms Phillips was extraordinarily busy attending to a number of difficult problems facing the company at that time and under enormous pressure. Ms Phillips dealt with about 300 emails a day.

9. [174]

   In Ms Phillips’ opinion, the major driver of the profitability of the business was sales, which were a function of customer numbers and basket size. The impact of not having stock to put on the shelves or sub-optimal product was immediately reflected in basket size and a drop in customer numbers. For the business to maintain a full inventory, its suppliers had to have confidence in the business to pay on usual terms. About Life needed to maintain about $800,000 worth of stock at all times in each store and in the kitchen. This meant that at any one time, About Life needed about $6 million inventory. The business needed cashflow and working capital to maintain that level of stock. During 2017, inventory had declined from about $7 million to about $3 million. Ms Phillips believed that this decline was apparent to customers as stock was missing from shelves, and this had an immediate impact on sales and cashflow.

10. [175]

    A number of ‘premium’ suppliers were not prepared to supply at all unless they were paid cash on delivery and, for the most part, About Life was unable to do that. This meant that About Life was unable to stock and sell many of its ‘top line’ and ‘fast moving’ products. In the place of these products, About Life had to supply sub-optimal brands or labels, many of which were ‘slow moving’ and resulted in overstocking of some of these lines. Some of the replacement products were more expensive to purchase, which reduced margins or required the product to be sold at a higher price, with the result that these products also became slow moving and difficult to sell.

11. [176]

    Ms Phillips said the general ‘rule of thumb’ in marketing is that loyal customers will persevere for two or three shopping trips but will then stop coming. About Life’s point of sales data showed a trend of diminished basket size followed by reduced customer sales. Ms Phillips worked at the Rozelle store most days and observed a decline in customer traffic. The store was much quieter and regular customers were not coming in. Customers were asking what was happening and why particular products were not being stocked anymore. Ms Phillips considered that the reputation of the business was damaged by the lack of stock on shelves. Loyal customers went elsewhere, and once their shopping habits changed, it was difficult to bring them back. Ms Phillips believed that this was a self-perpetuating and spiralling phenomena that About Life could not reverse without an injection of capital or support from the bank.

Retail Oasis recommendations

1. [177]

   On 14 March 2017, Retail Oasis presented Stage 3 of its work, being a detailed plan on the way forward. Retail Oasis scored About Life’s stores at 42/100, which Ms Phillips emphasised was a score based on management input alone, that is, management had marked itself at 42/100. “When you bring consultants into your business that’s … what they do with you. They work with you through the things that need improvement in your business so you have to be brave enough to face those, otherwise you don’t bring consultants in.”

2. [178]

   According to Retail Oasis, the stores appealed to customers considered relatively low value and were not located where “Health Indulgents” lived. At least four stores were too close together. Retail Oasis recommended consolidating the business, closing the Surry Hills and Cammeray stores and piloting a new concept in the Lane Cove store before further rollout. Three options were given for the Lane Cove pilot store, ranging in capital expenditure from $626,000 to $1,916,000, suggested to be completed by September 2017.

3. [179]

   Retail Oasis advised that ‘back of house’ processes be significantly improved, including product selection and review. Mr Ross-Edwards did not necessarily agree with this view and considered that About Life’s product range was one of the reasons the business had been so successful and continued for 20 years, “These guys were a bunch of supermarket consultants … which is quite different, because [health food stores are] based on a lot of small suppliers, with very unique product”.

4. [180]

   Nor did Mr Ross-Edwards accept the criticisms of inventory management. Whilst there had been problems with introducing a new computer system, these had been remedied. About Life had employed the best logistics consultant in the country, who went through inventory procedures and corrected them. Some problems with staff had continued until early 2017, but changes had been made to staff and management throughout all the stores to correct these problems, “I knew all the store managers. I used to visit all the stores and I knew them all and I knew exactly how … competent or incompetent they were”.

5. [181]

   Mr Green said he was aware of some of the issues raised by Retail Oasis, did not entirely agree with others, but found some observations to be “an eye opener”. Notwithstanding this, on receiving the Retail Oasis report, Mr Green said “I was pretty confident we could get the capital raising away”.

6. [182]

   On 14 March 2017, the board met. Financial performance of the stores continued to be poor. Ms Phillips queried why inventory had risen so much, noting the problem could be as high as $2 million. Stage 3 of Retail Oasis’ work was discussed, as were the problems with the Surry Hills and Cammeray leases. A meeting was to be organised with the bank as soon as plans were locked in, expected to be at the end of March 2017. As for fundraising, Mr Green reported “cash equity funding at least 3 months away”.

7. [183]

   The business had reached a critical point where, without a breakthrough, the future looked bleak. It can be readily appreciated that the prospect of selling some of About Life’s stores would have presented a convenient, and rapid, alternative to a capital raise in order to address recurring and pending breaches of bank covenants. About Life had not paid Woolworths anything to acquire the Double Bay site. As such, selling the Double Bay store presented a convenient way to raise funds in the short term.

Meetings with Harris Farm

1. [184]

   Mr Green, Mr Thevenon and Mr Stead began having discussions with Harris Farm about acquiring About Life’s businesses and network. It appears that Ms Phillips was not centrally involved, or involved at all, in these negotiations. Discussions were also being had with David Jones.

2. [185]

   On 27 March 2017, Mr Harris met with Mr Green, Mr Thevenon and Mr Stead. Mr Green told Mr Harris that About Life was open to a merger proposal with Harris Farm, but Mr Harris said that the Harris Farm was only interested in purchasing the Double Bay and Lane Cove stores. Mr Harris asked Mr Green whether there were any restrictions on About Life selling the Double Bay and Lane Cove stores to Harris Farm. (Mr Harris knew that Woolworths had participated in the Double Bay development and had read in a newspaper article that the Double Bay store was initially proposed by Woolworths to be a Thomas Dux supermarket. Mr Harris assumed that Woolworths might have assigned the Double Bay lease to About Life.) Mr Harris said to Mr Green, “Really, the only About Life stores that makes sense for us to purchase are Double Bay and Lane Cove and you may not be able to sell those businesses because of your assignment from Woolworths?” Mr Green replied, “We can definitely sell both these stores, there are no restrictions on the leases.”

3. [186]

   Mr Green agreed generally with Mr Harris’ recollection of their discussions, although did not recall Mr Harris making any reference to Woolworths. Mr Green said that, as a consequence of the combined effect of the minor significance he had attached to Woolworths’ right of first refusal at the time, together with the passage of time and his involvement in further major transactions at About Life and other demands of the business, he forgot about Woolworths’ right of first refusal. He genuinely believed that About Life could assign the Double Bay lease to Harris Farm. He was not challenged on this in cross-examination.

4. [187]

   On 10 April 2017, Mr Harris met with Mr Green and Ms Phillips at the Bondi Junction Harris Farm store. Mr Harris made no file note and did not remember precisely what was said. According to Mr Harris, they had a conversation at a café at the front of the store. Mr Harris said that, due to Harris Farm’s commitments that year, they were better off just concentrating on the Double Bay store. Mr Green said, “There is another party also very interested in the Double Bay site. If you want it you will need to pay $10 million as that is what the other party was going to offer.” Mr Harris asked, “Can you sell us just the Double Bay store? Is there any restriction on that?”. Mr Green said, “There is nothing stopping us assigning you the lease over Double Bay.”

5. [188]

   According to Mr Harris, the conversation was one in which only Mr Harris and Mr Green spoke because Mr Green “was the money behind About Life [and] definitely … the one driving the conversation on About Life’s side”. Mr Harris could not recall whether Ms Phillips engaged in this part of the conversation but recalled that she was present.

6. [189]

   In her first affidavit sworn in these proceedings, on 12 November 2018, Ms Phillips then did not recall the precise discussion but did recall that she and Mr Green said that the Double Bay site was available for sale. Ms Phillips did not recall Mr Harris making any reference to Woolworths at the time (nor does Mr Harris suggest that he did). In cross-examination, Ms Phillips said the words described by Mr Harris were not exchanged in her presence. I expect those words were said: in essence, Mr Harris and Ms Phillips did not disagree. Either way, Ms Phillips said that, as a consequence of the minor importance that she attached to Woolworths’ right first refusal when it was initially negotiated, together with her demanding role in events which since occurred and the daily demands of the business which then was under financial stress, she forgot about it when dealing with Mr Harris. Unlike Mr Green, Ms Phillips was challenged on this in cross-examination.

7. [190]

   The meeting appears to have concluded on the basis that Harris Farm would make an offer. Commercial negotiations followed. On 12 April 2017, Mr Harris instructed Herro Solicitors to prepare a contract of sale by which Harris Farm would offer to acquire the Double Bay store for $8 million – being $2 million less than the figure proposed by Mr Green – with the offer to be accepted by 21 April 2017 by returning a signed contract. Harris Farm paid $800,000 into Herro Solicitors’ trust account for a deposit.

Offer from David Jones

1. [191]

   On 12 April 2017 at 4.49 pm, Mr Green received an offer from David Jones to buy the Lane Cove and Double Bay stores. The offer was a non-binding indicative offer to purchase the leasehold interests for $10 million, settlement was to take place 30 days after satisfaction of conditions precedent including a five week due diligence period, the landlord’s unconditional approval of the assignment and subject to approval by David Jones’ board no later than 30 June 2017. David Jones also sought a first right of refusal to take an assignment of lease on any additional About Life store.

2. [192]

   Ms Phillips did not think that About Life was in a position to consider the timeline that the David Jones offer would have taken. Ms Phillips said that David Jones’ offer was important as it gave them leverage in their negotiations with Harris Farm, but she could not say that she read it carefully. “The amount of things that were going on in the business at that time. The amount of things that I was turning my attention to, I can’t say that I would … have sat down and studied … an offer from David Jones that we were using as commercial leverage. … I don’t believe … I … sat down … and laboured over the detail.” Ms Phillips’ evidence reflects what the contemporaneous documents reveal. I do not expect that David Jones’ offer sparked a recollection in Ms Phillips of Woolworths’ Deed of Assignment executed three years earlier.

RETAINER AND PERFORMANCE

1. [193]

   Mr Green considered that the size of the transaction warranted the resources and expertise of a major firm such as Maddocks. He called Mr McNee. According to Mr McNee, Mr Green said that he had done a deal with Harris Farm in relation to the Double Bay store. About Life wanted to keep its plant and equipment from the site. It was a really good deal and he was keen to get it done ASAP. While Mr Green was disappointed that About Life was losing a cornerstone lease (meaning that its size would contract), the cash would be going back into the business and he was excited that About Life would be getting some financial relief. Mr Green does not recall the conversation but agreed that, by and large, these things were in his mind at the time.

2. [194]

   As mentioned at [140], I am hesitant to accept the entirety of Mr McNee’s version of the conversation in the absence of a file note, particularly where some of the matters recalled by Mr McNee do not appear to have been the case at the time. Mr Green had not then “done a deal with Harris Farm” but appears to have been waiting on an offer. About Life’s decisions in relation to plant and equipment did not emerge for several days. It is more likely that Mr McNee’s recollection is an amalgam of conversations had in the early days of the transaction.

3. [195]

   At 5.18 pm on 12 April 2017, Mr Green forwarded David Jones’ offer to Mr McNee and Mr Law, noting “FYI – DJ’s NBO. Harris Farms contract to follow once I get it”. (Herro Solicitors was then preparing a draft Contract for the Sale of Business, obtaining a title search and a copy of the registered lease.) According to Maddocks’ billing records, Mr McNee conferred with Ms Badcock and Mr Law. Ms Badcock was a partner at Maddocks who had then been practising law for 20 years, mostly in commercial property transactions including sales and acquisitions of real estate, commercial leasing, property financing, real estate development and infrastructure projects. Before joining Maddocks, Ms Badcock was a partner of Blake Dawson for six years.

4. [196]

   Whilst neither Mr McNee nor Ms Badcock recalled their conversation on 12 April 2017, having refreshed their memory by reference to the email set out at [197], both recalled the conversation in similar terms. Mr McNee told Ms Badcock that Mr Green was a ‘private equity guy’ and client; Mr McNee was the relationship partner for Mr Green and his company, Green Capital Partners. Mr McNee said he needed her assistance with a transaction which was, in essence, an assignment of lease for one of Mr Green’s companies, About Life. The deal needed to be done as soon as possible because About Life was in some financial stress with its bank. Mr McNee apologised for asking her to handle the transactions at such short notice, given the Easter break. He said that Harris Farm would soon be making an offer over the site. Ms Badcock said she was also told by Mr McNee that Mr Green was a sophisticated client.

5. [197]

   The conversation between Mr McNee and Ms Badcock was likely brief as, eight minutes after Mr Green’s email, Mr McNee replied, copied to Ms Badcock:

6. [198]

   The fact that Ms Badcock was described as “the senior partner in the Sydney Property Team” indicated that she possessed speciality skills in property law, which she did. Mr Green had full confidence in Mr McNee’s referral and trusted and relied upon Ms Badcock. Mr McNee’s email contemplated full service, drawing on the firm’s different departments as necessary; it was anticipated that both Ms Badcock and Mr McNee’s teams may provide advice on a Contract for Sale of Business. Ms Badcock understood, when she saw this email, that Mr McNee had told Mr Green that Maddocks would act on the transaction for About Life. Ms Badcock agreed that there was a general retainer to act on the transaction.

7. [199]

   Mr Green replied to Ms Badcock, “I will forward on the contract once my CEO receives the hard copy and can scan it”. Ms Badcock acknowledged Mr Green’s email later that evening. It was now Wednesday evening, with the Easter holidays approaching that weekend.

8. [200]

   Whilst it was apparent from what Mr McNee had told Ms Badcock that the transaction had some urgency to it, it is also apparent from the contemporaneous documents that Ms Badcock and her staff were already heavily committed. Ms Badcock was often in meetings on other matters. Those who rang her appeared, generally, to have left a message. When Ms Badcock arranged for Senior Associate, Suzanne Rizk, to assist on the transaction, Ms Rizk said she was “really jammed.”

13 April 2017

1. [201]

   On the morning of Thursday, 13 April 2017, Ms Phillips scanned the contract prepared by Harris Farm’s solicitors and sent it to Mr Green. Mr Green said he preferred the Harris Farm offer to the David Jones’ offer as it presented more certainty. The David Jones offer had a due diligence period and would be delayed until its board reached a decision on 30 June 2017. Whether About Life would be able to keep trading if it did not get the sale proceeds until after 30 June 2017 was a concern and a factor in his thinking.

2. [202]

   At 9.42am, Mr Green forwarded the contract to Ms Badcock, noting: (emphasis added)

3. [203]

   At 10.00 am, the board met. The minutes record that an offer had been received from Harris Farm for $8 million and Mr Green and Ms Phillips were “to meet with them to try and increase”. As to bank funding, the minutes record, “Meeting organised with bank on 18 April, after new forecast is finished. Forecast to be based on sale of Double Bay to Harris Farm, with possible equity injection later in the year.”

4. [204]

   Of the ‘possible equity injection’, Mr Green said there was a “Plan B” of getting cash from investors. Although he had already told the investors that a capital raising was going to be delayed until July or August 2017, “in situations like this you can always move faster if need be.”

5. [205]

   The minutes also record that the financial performance of the stores continued to be unfavourable to budget. Ms Phillips addressed the meeting on inventory and why it had risen so much, advising “Stores being [a]ffected by out of stocks due to cash flow issues which is effecting sales … Proposed write down inventory at year end, due to waste, shrinkage and slow moving stock expect to be approximately $2.5m.”

6. [206]

   Mr Ross-Edwards considered that the ‘out of stocks’ caused by cash constraints was largely responsible for poor sales results. “[I]t was obvious when you walked into the stores that our out of stocks were hindering our performance because of the blank [shelves] … [I]t was really adversely [a]ffecting … our performance without a doubt. … I walked through the shops every week.” He considered that other factors such as cannibalisation had stabilised, while problems with the IT system and store management had been rectified.

7. [207]

   As to the Surry Hills and Cammeray leases, the minutes record that a determination in respect of the Surry Hills rent dispute was a month away. Mr Ross-Edwards reported that they could not get out of the Cammeray lease as the landlord had sold the premises and was not interested in assigning the lease until settlement in July 2017. About Life had, however, been let out of the Freshwater lease.

8. [208]

   At 11.12am, Mr Green emailed Ms Badcock again, “there are another 80 pages of the document that my CEO has in Sydney. She will drop off the entire package today at your office hopefully in the next couple of hours. Does that work for you?” Mr Green, of course, was in Melbourne.

9. [209]

   That evening, Ms Phillips delivered the contract to Ms Badcock at Maddocks’ offices. There appeared to be a social function in the Maddocks board room. Ms Badcock emerged and met Ms Phillips briefly in the reception area. There was no substantive discussion.

10. [210]

    Ms Phillips was the first person that Ms Badcock had spoken to or met from About Life. All communications with Mr Green until then had been by email. This was also the first time Ms Phillips had directly communicated with Maddocks, which Ms Phillips understood from Mr Green was a reputable law firm. Ms Badcock did not accept that she should have asked Ms Phillips about the background to the transaction, saying she only did this “sometimes”.

11. [211]

    The contract handed over by Ms Phillips comprised:

12. [212]

    Of the standard conditions, clause 10 provided:

13. [213]

    A breach of the warranties in Clause 10 in an essential respect entitled Harris Farm to terminate the contract and recover its deposit and any money paid under the contract: standard conditions, clause 15.2. Clause 10.1.12 gained prominence as events unfolded; obtaining instructions from the client in respect of its ability to give such a warranty could be expected to reveal the existence of the Deed of Agreement with Woolworths.

14. [214]

    At 6.37pm, Ms Badcock sent an email to Mr Green, advising that she had received the original contract signed by Harris Farm and would give him a call on Tuesday to discuss, that is, after the Easter weekend. Further: (emphasis added)

15. [215]

    Ms Badcock thus described the type of legal work she was proposing to do over the Easter weekend. This was the first time “high level comments” was used being, on Maddocks’ defence, the scope of its retainer (at least initially). It is also apparent that Ms Badcock’s review had taken her to the execution page and special conditions. Mr Green replied later that evening at 7.41 pm, repeating the theme of his email at 9.42 am that morning: (emphasis added)

16. [216]

    That is, Mr Green was acknowledging the type of work which Ms Badcock was proposing to do but seeking to focus her attention on the subject of particular interest to him immediately, being risks to completion of the sale. Further, he sought to accelerate the timeline within which this would be forthcoming, given a meeting with investors the next day. Mr Green appeared to accept that, given the Easter holiday, he could not insist on more than what Ms Badcock was prepared to do but nonetheless pressed for the work to be provided more quickly and to address that particular topic. I do not read this email exchange, however, as confining Maddocks’ general retainer to advise on just that subject or at just that level of generality. It is also very clear from Mr Green’s emails to Ms Badcock that About Life needed to complete the deal without complications as it was in serious financial trouble.

17. [217]

    Ms Badcock decided to work back and complete the task that evening. At 8.53 pm, Ms Badcock did a title search on the Double Bay property. Ms Badcock made some notes, entitled “Risks”, indicating that she was focused on the task set for her by Mr Green. It is apparent from her notes that Ms Badcock reviewed, at least, clause 10.1 of the Lease, entitled “Assignment”, and gave consideration to the warranties in standard condition 10.1 of the contract. According to Maddocks’ schedule of professional fees, Ms Badcock spent 1.5 hours on this task. This accords with the contemporaneous documents. At 9.58 pm, Ms Badcock sent an email to Mr Green as follows:

18. [218]

    It is apparent from Ms Badcock’s 2-page email that she had, by then, reviewed the contract and special conditions and had also reviewed the Double Bay lease. Her comments were, as promised, directed to risks posed to completion of the transaction. In particular, Ms Badcock referred to vendor disclosure requirements, noting: (emphasis added)

19. [219]

    The second bullet point is a reference to the vendor warranties under section 52A(2)(b) of the Conveyancing Act 1919 (NSW), which provides that a vendor under a contract for the sale of land shall be deemed to have included in the contract such terms, conditions and warranties as may be prescribed. The applicable regulation at the time was the Conveyancing (Sale of Land) Regulation 2010 (NSW). The warranties were set out in clause 8 and Part 1 of Schedule 3: regulation 16(1), being that, except as disclosed in the contract, the land is not subject to an adverse affectation (including proposals by statutory and local government authorities to acquire an interest in the land, boundary and fencing disputes and encroachments), the land does not contain a sewer vested in a public sewerage authority and the planning certificate annexed to the contract specifies the true planning status of the land: Christopher Rossiter, Principles of Land Contracts and Options in Australia (2003, LexisNexis) at [5.13].

20. [220]

    There are some obvious similarities between statutory warranties given by About Life, entitling Harris Farm to rescind the contract on breach, and warranties in clause 10 entitling Harris Farm to terminate the contract if breached in an essential respect. Ms Badcock agreed that breach of the vendor’s warranties in clause 10 was a risk to completion but did not address this risk in her email. Ms Badcock did not refer to clause 10 at all, nor seek any instructions in respect of the vendor’s warranties there listed. Ms Badcock said “I was focussing on the purchaser’s obligations and rights, under the contract.” This answer is difficult to reconcile with the email as a whole.

21. [221]

    Ms Badcock agreed that, as the promises in clause 10 related to the vendor’s knowledge, it was a matter for the vendor to consider whether it could give those promises and, in particular, whether anything attached to the contract was accurate and complete. Ms Badcock did not agree that she did not have sufficient knowledge to advise on the risks to completion, “these risks to completion would arise with any transaction they would be doing, whether they went with the David Jones offer or the Harris Farm offer, and what I was specifically advising on was anything particular to the Harris Farm offer that would make that transaction potentially not able to complete if that offer was accepted ahead of the other offer.”

22. [222]

    Ms Badcock may have approached the task in that manner, but Mr Green’s emails did not suggest that she do so. Mr Green had not requested advice limited to risks posed by the Harris Farm contract as opposed to the ‘usual contract’. More importantly, Ms Badcock’s approach rather assumed that Mr Green was already familiar with the risks to completion posed by the conditions of the standard form Contract for Sale of Business.

23. [223]

    Shortly afterwards, Mr Green replied, copied to Mr McNee and Mr Law, expressing his appreciation. Mr Green did not agree that he responded to Ms Badcock’s email only with “Thanks!” because he had not decided whether to pursue the deal with Harris Farm and did not want Ms Badcock to do anything other than a high level advice. Mr Green did not agree that he did not want Ms Badcock to incur any costs that could be avoided, “I don’t recall that being an issue.” I infer that Mr Green simply wished to express his gratitude given the lateness of the hour and that Ms Badcock had attended to the agreed task on the eve of the Easter holidays. Mr Green may also have wished to keep Mr McNee and Mr Law ‘in the loop’ by copying them into his email and thereby providing them with Ms Badcock’s advice.

Easter

1. [224]

   The next day was Good Friday. Mr Green forwarded Ms Badcock’s advice to his directors, together with his summary of the salient points.

2. [225]

   On Saturday, 15 April 2017, Mr Green updated Mr Stead and Mr Thevenon on the offers received from Harris Farm and David Jones. Mr Green advised that David Jones had offered $10 million for both Double Bay and Lane Cove subject to successful assignment of the leases, board approval and a 25 day due diligence period; the offer included a first right of refusal. In comparison, Harris Farm had offered $8 million for Double Bay, the offer being “[d]ifferentiated by handing us 2 hard copy signed contracts providing higher degree of certainty”. The preparation of this email – including reference to David Jones’ request for a right of first refusal – did not prompt Mr Green to recall Woolworths’ right of first refusal.

18 April 2017

1. [226]

   On Tuesday, 18 April 2017, Mr Green sent an email to Ms Badcock at 10.21 am, “are you free for a call later today?”. A telephone call was arranged for 2.30 pm. Mr Harris got a call from Mr Green, who said the price offered by Harris Farm was not enough and the purchase price had to be increased to $10 million. Mr Harris said, “If you want us to accept that price, I need you to make a counter-offer in the form of a binding agreement back to us.” Presumably at 2.30 pm, Mr Green and Ms Badcock spoke. Ms Badcock’s file note records that the client was “still commercially negotiating. Trying to get $10m. Will then need some time … to get bank & shareholder approval. Me to order stat. enquiries. We’ll go back to [Harris Farm] with an amended contract as a counter offer.”

2. [227]

   At 3.03 pm, Ms Badcock sent an email to her partner, Mr McNee, “Just got off the phone with Mike Green. Let me know when you’re free and I’ll update you.” Ms Badcock and Mr McNee spoke; Ms Badcock’s notes contain details of the client for the purpose of opening a file. At 3.41 pm, Ms Badcock arranged for a new file to be opened. Ms Badcock set out the scope of work for the file as follows: (emphasis added)

3. [228]

   Maddocks submitted that the scope of work was work which Ms Badcock would be instructed to do if the bank approved the Harris Farm deal, but was not work which she was already instructed to do. I do not agree. As I read it, the scope of work listed tasks, in roughly chronological order, which Ms Badcock and her staff had done, would do next, and expected to do after that. Viewed broadly, the italicised portion of the scope of work were tasks which Ms Badcock had already attended to. The next three identified tasks, “preparing and issuing counter offer; obtaining and reviewing prescribed disclosure materials; preparing an exclusive dealing agreement” were tasks to be done next, as had just been discussed with Mr Green. The following tasks were anticipated, being exchange of contracts, obtaining consent for an assignment of the lease, completion and the like. The description is consistent with a general retainer to act on the transaction.

4. [229]

   Read in this way, it is noteworthy that Ms Badcock considered that she had already “Review[ed] offer to purchase; advis[ed] in relation to contract terms”. It will be seen that the experts agreed that such advice should have enquired as to whether there were any side agreements, but it did not: see [323]. In addition, the tasks now before Ms Badcock extended beyond statutory searches to generally preparing the contract in readiness to be handed over to Harris Farm as a counter-offer.

5. [230]

   Following her conversation with Mr Green, it appears that Ms Badcock assumed that contracts would not be exchanged until the following week. There is no record that Mr Green told her this; I expect Ms Badcock made that assessment based on Mr Green’s description of the state of negotiations with various stakeholders and her experience as to how long it would take for Mr Green to progress these matters. Ms Badcock asked Ms Rizk to assist on the transaction “today just looking at one question, then [the paralegal] can order the searches and it can wait until next week.”

6. [231]

   As to that “one question”, Ms Badcock and Ms Rizk spoke and, according to Ms Rizk’s handwritten file note, Ms Badcock informed her that the new matter concerned the transfer of a 50 year lease. The purchaser had submitted a contract, using a template Sale of Business contract, but had only attached the lease. "Client keen”. Ms Rizk was asked to research the documents which needed to be attached to the contract. At 4.41 pm, Ms Rizk reported the results of her research to Ms Badcock, “I’ve had a quick look through the regulations … and in my opinion we need to attached the prescribed documents … I will ask [the paralegal] to order the prescribed documents ….” Later that evening, Ms Rizk requested the paralegals to do the prescribed searches, “Please do not order any of the leases …”, presumably because a copy of the lease was already annexed to the contract.

7. [232]

   According to Maddocks’ billing records, on 18 April 2017, Mr McNee and Mr Law also reviewed the contract. Mr Law prepared draft comments. At 6.35 pm, Mr Law sent an email to Ms Badcock, copied to Mr McNee, “Please see our draft comments to Mike below in green font. Please let us know if you have any questions.” Mr Law had supplemented Ms Badcocks “high level comments” provided on 13 April 2017 with further draft comments. In particular, further advice was proffered on clause 10 of the Contract for Sale of Business:

8. [233]

   The fact that Ms Badcock’s contemporaries considered it appropriate to provide additional advice to the client is telling. Although it was anticipated that both Ms Badcock and Mr McNee’s teams may advise on the contract (see [198]), Ms Badcock read Mr Law’s email but did not provide the additional advice to Mr Green.

Telling the bank – 19 April 2017

1. [234]

   Mr Ross-Edwards had identified a breach of the leverage ratio for the March 2017 quarter. He arranged a meeting with the bank. On 18 April 2017, Ms Phillips circulated a draft presentation for the bank noting:

2. [235]

   Ms Phillips said the opportunity to sell Double Bay became their answer to bringing capital into the business; it replaced an equity raise. Mr Ross-Edwards said that, at the time, a capital raising was being pursued but it was considered that selling the Double Bay store was a better alternative as “it enabled us to reset ourselves and move on … It was the right decision at that time.”

3. [236]

   On 19 April 2017 at 10.30 am, Ms Phillips, Mr Beecroft, Mr Green and Mr Ross-Edwards met with Mr Morales and risk officer Peter Chapman and presented their update. I expect the fact that all of the directors attended the meeting emphasised the seriousness of the occasion from both the bank and customer’s point of view. About Life’s presentation stated that the third quarter had been “still challenging but stabilising”. The company expected to miss the leverage covenant for the March 2017 quarter, although the company had met its interest and amortisation obligations and expected to continue to do so. Debt reduction was necessary with one near-term option “expected by 30 June 2017” and one medium-term option “by Sept[ember] 2017” available to the business. The presentation explained: (emphasis added)

4. [237]

   As to the reference to an $8 million equity raise, Mr Ross-Edwards said that Mr Green had talked about an initial strong interest from investors in such a raise. It was suggested to Mr Green that equity raising was not a viable option at this point, but he disagreed. Whilst the Retail Oasis report identified a number of challenges with About Life’s business, and although he had already told investors that any capital raising would be delayed until July or August, “These are fluid situations. When times are tough tactics change and equity raisings can be done very quickly, if necessary.”

5. [238]

   Financials were provided to reflect this proposal, comprising About Life’s actual results to March 2017 and forecast results for April, May and June 2017 and the 2018 and 2019 financial years. Mr Ross-Edwards explained the forecast was only intended as a ‘high level’ presentation for discussion. The forecast now predicted $68.5 million sales with a gross profit of $28.5 million and an increased EBITDA of $5.8 million, presumably taking into account the sale of the Double Bay store with an expected profit of $6.9 million. The forecast was based on Retail Oasis’ recommendations. Extracts from the Retail Oasis work were provided, together with details on proposed store closures at Cammeray and Surry Hills.

6. [239]

   A timetable was also set out, being to accept Harris Farm’s offer by 21 April 2017 and commence assignment of the lease, with the sale process to be completed by the end of June 2017. It was proposed to complete the new pilot store at Lane Cove by the end of September 2017 and, by February 2018, to have completed a review of the pilot store and operational improvements and to begin to roll out the new strategy to existing stores. To have adequate time to pursue these options, About Life wished to discuss a waiver of the expected 31 March 2017 covenant breach.

7. [240]

   About Life’s witnesses were strongly criticised in cross-examination for portions of the presentation which were said to over-state the position or proved optimistic. It may be accepted that the directors of About Life were endeavouring to put their case favourably, although I note that the directors did not suggest that the sale proceeds of the Double Bay store may be $10 million, even though they were then hoping to negotiate with Harris Farm to achieve that result. Two topics of the presentation merit consideration.

8. [241]

   From the $8 million sales proceeds of the Double Bay store, it was proposed to pay down debt by $4 million, to bring the leverage covenant down to 2.0, rebalance working capital, and use the remaining capital to rationalise the store base, refocus the business model, improve back-of-house operations and implement the pilot program to drive long term sales and cashflow. Mr Green said that About Life determined that it wanted to pay down $4 million in debt based on its calculations that, if it paid off this amount of debt, it would put them below the debt covenant.

9. [242]

   Ms Phillips said that no one objected or queried the $4 million, or suggested that it would not be sufficient, “the team that we met with that day, which was the team that we’d had a very long relationship with, were accepting of that. … they were very happy to hear that we had a solution to pay them $4 million. … there were a lot of smiles actually, yes.” Mr Ross-Edwards said neither Mr Morales or any other bank staff at the meeting queried or took issue with a proposed repayment of $4 million or suggested that any higher amount was expected by the bank. Although there was another covenant breach looming, “the bank … were very accommodating to our situation because they wanted us to succeed.”

10. [243]

    As to the suggestion in About Life’s presentation that the proceeds of sale were expected by 30 June 2017, Ms Phillips said that the date of 30 June 2017 was one that “we believed was realistic for having funds come in from the sale of Double Bay.” Ms Phillips said 30 June 2017 was not a “hard date” but an indication. Certainly, the contemporaneous documents consistently record that About Life was proceeding on the basis that sale of the Double Bay store would complete by 30 June 2017.

11. [244]

    Ms Phillips said, “I mean the conversations with the bank were give or take. But yes that was the … expected time for that transaction to settle.” She believed that certainty was important to the bank, more than timing “so if that 30 June date had stretched out for two or three or four weeks, I am extremely confident that the bank, having the certainty of that money being repaid on the facility, would have been agreeable to that.” Further, “I'd done a pretty good job of holding the company together through a pretty difficulty time in the months that had preceded that, so I think that if I had to hold it together for a few more weeks before those funds come in, I think I would have had the capability to …. It was a date that we had discussed with [the bank], that was a realistic date, that I expected the Double Bay sale would settle. … If you’re asking me if I was commercially confident that I would be able to manage [a delay in receipt], with the team that I’d worked with at CBA for 20 years, then yes, I believe I would have managed that.”

12. [245]

    Mr Morales’ note recorded the substance of the presentation and, further, “With regards to the covenant breach, this will be cured by the paying down of debt via the sale of Double Bay. This will also rebalance working capital position.” The business had no future commitments to new sites, had been released from the Freshwater site and was investigating the assignment of leases for the Cammeray and Surry Hills sites.

13. [246]

    It appears from Mr Morales’ note that the bank officers apprehended About Life’s financial difficulties and appreciated that About Life was progressing the sale of a major asset with the view of remedying the position in the short term. Mr Morales’ note does not indicate alarm on the bank’s part.

14. [247]

    Mr Green said, “I do remember … the feeling that the meeting had gone well”. As much is recorded in Mr Green’s reports to Maddocks the next morning: see [250]. Ms Phillips said, “they were just very pleased that we had a solution … it was accepted very positively.” Two weeks later, Mr Green reported to investors (see [388]) that the bank was “constructive in the discussions” and agreed not to take action on the breach of debt covenant given the pending Double Bay sale: (emphasis added)

15. [248]

    Mr Green’s contemporaneous report of the meeting with the bank to investors indicates that the bank was then prepared to accept $4 million from the proceeds of sale of the Double Bay store in reduction of About Life’s debt subject, no doubt, to reviewing the position as completion of the sale approached.

16. [249]

    Later that evening, Mr Green sent an email to Ms Badcock asking to catch up the next morning, “I’d like to get back to Harris Farms.” Ms Badcock replied that she would give him a call in the morning, “Sorry I missed your call today.”

20 April 2017

1. [250]

   The next morning, Mr Green spoke with Ms Badcock and Ms Rizk. According to Ms Badcock’s note, meeting “with bank went well. Would like to move forward. Can the contract contain a ‘subject to shareholder approval’ clause so that we can sign?” On 20 April 2017, at 9.24 am, Mr Green sent further instructions to Ms Badcock:

2. [251]

   Ms Badcock and Mr Green spoke again. Ms Badcock’s note records, “Bank has been [very] reasonable. Send an amended contract back to Angus. Right to terminate [without shareholder] approval [within] 2 weeks.” At 10.25 am on 20 April 2017, Ms Badcock emailed Ms Rizk, seeking an update on all statutory enquiries, “chase what we’re waiting on. We’re looking to exchange today or tomorrow.”

3. [252]

   At 10.50 am, Mr Green sent an email to Ms Badcock, Ms Phillips and Mr Beecroft, providing their contact information to each other. Further:

4. [253]

   At 10.51 am, Ms Badcock asked Ms Rizk to chase the remaining prescribed documents. Ms Rizk contacted the paralegal, “Turns out what I thought was meant to be for next week is actually looking to exchange today or tomorrow!” At 12.48 pm, Ms Badcock forwarded the email from Mr Green, with the contact details for Ms Phillips and Mr Beecroft, to Ms Rizk, “I’ll come and see you about this in a few minutes”. At 12.51 pm, Mr Green emailed Ms Badcock:

5. [254]

   At 12.54 pm, Ms Badcock emailed a copy of the contract, without annexures, to Mr Green, copied to Mr McNee, Mr Law and Ms Rizk. Changes to the standard form contract had been made by hand, most notably, the price had been changed to $10 million. In addition, Maddocks had struck through clause 10.1.12, being the vendor’s promise that “anything attached to this contract is accurate and complete.” Ms Badcock said, when preparing the amended contract, she considered the matters raised in Mr Law’s email of 18 April 2017 and, in particular, in response to his comments about clause 10, she deleted clause 10.1.12. She did so because the contract and its annexures had been prepared by Harris Farm and not by About Life. Ms Badcock asked Mr Green to note various matters in respect of the contract including:

6. [255]

   Ms Badcock added, “Once you are happy with the amended terms of the contract, we will arrange for Tammie and Tom to attend our office to sign a counterpart contract” and for the executed contract to be sent to Harris Farm’s solicitor with a view to exchange. Ms Badcock invited Mr Green to call her if he had any questions or wished to discuss the matter, noting she was in a meeting between 2.00 pm and 3.00 pm that day but Ms Rizk could assist during that period if required.

7. [256]

   At 12.56 pm, Ms Badcock emailed Mr Green again, noting that their emails had “just crossed” and advised that she would make the change sought by Mr Green, “Can you please review the other amendments/items in my email?”. Mr Green said that, if Ms Badcock attached a contract with changes marked to her email, then his practice was “most definitely” to have checked the changes. At 1.05 pm, Mr Green replied, “Looks good”, making one correction to the proposed email to Herro Solicitors, seeking an explanation on one matter not presently relevant, and adding “I’d like to have Tammie deliver to Angus if possible as he’s big on ‘certainty’ even if we need to subsequently attach some appendices etc”.

8. [257]

   At 1.20 pm, Mr Green spoke to Ms Badcock and Ms Rizk to provide instructions in respect of the particular matters he had been asked to note in Ms Badcock’s email of 12.54 pm: see [254]. Mr Green asked the solicitors to check certain matters with Ms Phillips. In respect of the lease particulars on page 2 of the contract, Ms Rizk’s handwritten note records “Tammie to confirm”. In cross-examination, Mr Green agreed that the particulars of the lease were more Ms Phillips’ area of expertise than his. It was presumably then apparent, if it had not already been apparent, that Mr Green was not in possession of detailed information in respect of the Double Bay lease. Rather, Ms Phillips was the person to ask.

9. [258]

   According to Maddocks’ handwritten file note, at 1.30 pm, Ms Rizk spoke to Ms Phillips. At 1.31 pm, Ms Rizk emailed Ms Phillips the contract as amended. In respect of the lease particulars on page 2 of the contract, Ms Rizk’s file note records, “[A]ll good”. Ms Rizk noted that Ms Phillips would come into the office at about 3.45 pm to sign the contract. Meanwhile, at 1.33 pm, Mr Green sent an email to Ms Badcock and Ms Rizk advising that Mr Beecroft would arrive at their offices in the next 45 minutes to sign. At 1.43 pm, Ms Rizk replied, “I’ve just spoken with Tammie and she will be coming in to sign at around 3:45pm”.

10. [259]

    At 2 pm, Ms Badcock went into her meeting. Ms Rizk provided the paralegal with the contact information for Ms Phillips and Mr Beecroft. The paralegal prepared verification of identity forms. At 2.25 pm, Mr Green provided Mr Beecroft with Ms Rizk’s contact details, advising that Mr Beecroft would be at their offices in about ten minutes to sign. Whilst Ms Badcock was in her meeting, Ms Rizk sent her an email to check two amendments to the contract, noting that she was going upstairs to meet Mr Beecroft to sign the contract in five minutes.

11. [260]

    At 3.24 pm, Ms Rizk sent the amended contract to Herro Solicitors. Ms Rizk informed Mr Green that the contract had been sent, also confirming that Mr Beecroft had signed the contract and she was expecting Ms Phillips to arrive before 4 pm. Mr Green also forwarded Maddocks’ email to Herro Solicitors directly to Angus Harris noting, “As promised, we have removed conditionality, Tom Beecroft (Director) has signed and Tammie is on her way in to the CBD to sign.” Ms Phillips attended at Maddocks’ offices, where she met two members of staff, presumably Ms Rizk and the paralegal. The attendance was brief. There were no substantive discussion. Ms Phillips was directed to sign documents where indicated and did so.

12. [261]

    At 4.45 pm, Herro Solicitors requested a copy of the prescribed documents to be attached to the contract. The documents were provided by Ms Rizk, apart from the lease, which was already attached to the contract signed by Harris Farm. Later that evening, Herro Solicitors gave advice to Harris Farm in respect of the proposed transaction. In particular:

13. [262]

    Mr Harris instructed Ms Scrivener to include About Life’s equipment list in the contract, as it had potential tax implications for Harris Farm given the demolition of the fit-out. Harris Farm’s chief financial officer, James Williamson, said that Harris Farm intended for the About Life business to cease trading immediately on completion and to completely refurbish the store in a fit out in the style of the Harris Farm brand.

Exchange of contracts

1. [263]

   At 9.23 am on 21 April 2017, Mr Green informed Maddocks, “They accepted! Tammie will reach out to you on a couple of technical points and the beginning of the lease assignment process. Thank you for the excellent and speedy work!” Ms Phillips received a call from Mr Harris and Mr Williamson about the apportionment of the purchase price between goodwill and equipment. At 9.30 am, Ms Phillips emailed Ms Badcock, copied to Mr Ross-Edwards and Mr Green, advising that Angus Harris had just called and said they agreed to the $10 million price “which is great news! Thanks for your swift work on this.” Further:

2. [264]

   That morning, Mr Herro also reviewed the lease carefully, reading it a number of times. It was Mr Herro’s general practice, when acting for a prospective purchaser of a leasehold interest, to call for copies of documents referred to in the lease. He noticed that clause 1.1 of the lease referred to an Agreement for Lease and asked Ms Scrivener to request a copy from Maddocks.

3. [265]

   Mr Herro checked the lease to ensure that there was no other reference to other documents, this being of fundamental importance as landlords could record obligations inside agreements that “run with the land” by referring to the document in the registered lease. According to Mr Herro, this was often done to maintain confidentiality so that a party searching the registered lease could not determine the contents of the side document. He carefully reviewed the lease and was satisfied that, except for the Agreement for Lease, there were no other side documents referred to. If there had been, he would have advised Harris Farm not to proceed until these were thoroughly reviewed as these obligations may “run with the land” and can have very serious consequences. He did not call for side documents that were not disclosed in the lease as any such documents that were not referred to in the registered lease were usually personal to the parties and did not run with the land.

4. [266]

   At 10.57 am, Herro Solicitors sent an email to Ms Badcock referring to a telephone message left at her offices that morning and proposed various amendments to the contract, including:

5. [267]

   Finally, it was proposed to exchange contracts at their offices at 3.30 pm that day. As their client was attending their offices at 11.30 am to sign the contract, Ms Badcock’s response was appreciated as soon as possible. Ms Badcock was then in a meeting and forwarded the letter to Mr Green, advising she would call to discuss the matter shortly.

6. [268]

   According to Ms Scrivener, that morning, Mr Herro and herself had a telephone conference with Ms Badcock, in which Mr Herro said that the vendor’s promise in clause 10.1.12 should be reinstated. Ms Badcock said, “Because the draft contract was provided by your client to my client, we can’t promise that the contract was accurate and complete as I did not prepare it myself.” Mr Herro said, “As you have reviewed it now and made amendments to it, is your client now prepared to make that promise?”. Ms Badcock said, “OK, we can re-instate 10.1.12”.

7. [269]

   According to Ms Badcock, she only said that she would take instructions on this matter and it was not until after she received those instructions from Ms Phillips and Mr Beecroft (see [292] and [294]) that she told Ms Scrivener that the clauses would be reinstated. As I read the differing affidavits, I take Ms Badcock to have indicated that she was agreeable ‘in principle’ to reinstating clause 10.1.12 but, as for each of the suggested amendments to the contract discussed during the conference between the solicitors, this was subject to final instructions from the client.

8. [270]

   At 11.40 am, Mr Ross-Edwards sent an email to Ms Badcock with two spreadsheets entitled “Double Bay FA Register” and “DoubleBay Detailed FA prior to 30062014”. Ms Phillips did not review the asset registers beforehand. Mr Ross-Edwards explained in his email:

9. [271]

   Ms Badcock printed out Mr Ross-Edwards’ email and the attachments. The first spreadsheet provided details of some $1.56 million in fixed assets in summary form, grouped into computer hardware software, furniture and equipment, leasehold improvements and plant and equipment. Some details of assets in each group were provided, together with costs, depreciation start date, net book value and details of disposal.

10. [272]

    The second spreadsheet, listed each leasehold improvement item of plant and equipment separately. Appearing on the first page of the spreadsheet, on line 17 was “DB – Deed of Agreement (Woolworths)”. As I understand the spreadsheet, the item was recorded as having been acquired on 12 March 2014 for $1,500, of which a portion had been depreciated. It would appear that the asset register was an accounting spreadsheet used for the purposes of recording depreciation, now proffered as an equipment list to be used in the contract.

11. [273]

    Ms Badcock’s usual practice when receiving an asset list from a client for the purposes of affixing it to a contract was to very briefly glance or look at the documents to identify that, at least superficially, it appeared to be a list of assets. “I don’t normally read an asset list line by line.” Ms Badcock would then attach it to the contract or send it to the purchaser’s solicitor for review.

12. [274]

    Ms Badcock did not read the attachments to Mr Ross-Edwards’ email in any detail. Ms Badcock said she went through the first spreadsheet and noted that it included four different asset types and made notes on the spreadsheet, generally directed to whether the asset was to be included in the sale. A question mark was written against the computer hardware software category. Furniture and equipment was noted to be in a separate document and “All in?” was written against plant and equipment. Ms Badcock telephoned Ms Phillips and asked some questions, apparently about the first spreadsheet. According to Ms Badcock, Ms Phillips said that all the IT equipment would be removed from the premises, including the software, and would not be included in the contract but all other assets were included in the sale. On the cover email itself, Ms Badcock noted, “IT equipment will be gone – software etc – all software excluded.” They did not otherwise discuss the asset lists.

13. [275]

    The second spreadsheet is unmarked. Neither Ms Phillips nor Ms Badcock noticed the reference to “DB-Deed of Agreement (Woolworths)”.

14. [276]

    At 11.54 am, Herro Solicitors emailed further changes to Ms Badcock. Ms Badcock spoke to Ms Phillips about the changes and recorded Ms Phillips’ instructions on the emails.

15. [277]

    At 1.50 pm, Ms Badcock sent an email to Mr McNee, asking if he was available to discuss a few of the contract amendments, noting “I’ve been in meetings all morning. They are looking to exchange at 3.30 today.” At 1.58 pm, Mr Green responded to Ms Babcock’s enquiry earlier that day about land tax, “Tammie is the best person for this info. I think she’s reached out to you already but let me know if not.”

16. [278]

    At some point, Ms Badcock asked Ms Phillips for the Deed of Agreement for Lease. Ms Phillips said that, to locate the Deed of Agreement for Lease, she did a document search rather than going to the folder on the shared drive containing documents in respect of the Double Bay store. Her search brought up the deed, which she opened to check its contents before attaching to an email to Ms Badcock.

17. [279]

    It was suggested to Ms Phillips that she had in fact gone into the Double Bay folder and “got a terrible shock” when she saw the Woolworths’ Deed of Agreement “and felt it was too late to do anything about it”. Ms Phillips completely rejected this suggestion as outrageous, including the notion that she would put the company in a position to be sued by Woolworths. “I wish I had gone into that folder and found that deed. … Nobody more than me in this room wishes that I had found that first right of refusal.” Ms Phillips said, and I accept, that she always genuinely believed that there was no limitation on About Life’s ability to assign the Double Bay lease to Harris Farm and did not recall Woolworths’ right of first refusal at the time.

18. [280]

    At 2.17 pm, Ms Phillips sent Ms Badcock the Deed of Agreement for Lease between the Council and About Life, the recitals of which noted:

19. [281]

    Ms Badcock agreed that she only asked the client for the Deed of Agreement for Lease because the purchaser’s solicitors wanted to see it. Ms Badcock read the document so she could discuss it with the purchaser’s solicitor if needed. Ms Badcock agreed that it was obvious from the recitals that the grant of a lease to About Life was part of a broader transaction to which Woolworths was a direct party, but did not agree that, when she read the recitals, it was important to make enquiries of her client as to the broader transaction.

20. [282]

    Ms Badcock’s usual practice when receiving an agreement for lease from a client, for the purposes of transferring a lease which had been entered into pursuant to that agreement, was to review the agreement for lease to confirm that there were no ongoing provisions in the agreement that needed to be addressed between the assignor and the assignee of the leasehold interest. Having reviewed the document, Ms Badcock was comfortable that there were no ongoing provisions which would impact upon About Life.

21. [283]

    At 2.37 pm Ms Badcock forwarded the Deed of Agreement for Lease and two spreadsheets containing the fixed asset registers to Herro Solicitors. Ms Badcock advised that it was proposed to attach the fixed asset register ‘as is’ to the contract, but to include a provision that the software was excluded from the sale. As to the request to reinstate Clause 10.1.12 of the standard conditions, Ms Badcock advised:

22. [284]

    Ms Scrivener opened the second spreadsheet but did not notice the line item relating to the Woolworths’ Deed of Agreement. Ms Scrivener received a telephone call from Mr Williamson and read out the totals on the bottom of the spreadsheets. Ms Scrivener forwarded the spreadsheets to Mr Williamson and Mr Harris at 2.41 pm. At about 3.00 pm, Mr Williamson, Mr Harris and Ms Phillips spoke about the two excel spreadsheets. At the time, Mr Harris was driving; he did not have the email open in front of him nor review the spreadsheets. Ms Phillips explained that one spreadsheet was the equipment register up to 30 June 2014 while the other included everything from 2014 to date.

23. [285]

    Mr Harris instructed Mr Williamson to determine, based on the spreadsheets, the value ascribed and the amount to be apportioned to the equipment in the contract. Mr Williamson reviewed the Fixed Asset Register to ensure that the written down value of the assets or rate of depreciation that About Life had applied appeared comparable to the rate of depreciation typically used by Harris Farm. He satisfied himself that the net book value appeared reasonable given About Life’s period of occupation of the premises. He did not review each individual line item but skimmed the large value items by reference to the listed value and then looked at what the description for that line-item was. Mr Williamson did not notice the line-item referring to the Woolworths’ Deed of Agreement. Mr Herro did not read the spreadsheets as Ms Scrivener told him that Mr Williamson had reviewed the equipment list and was happy with it.

24. [286]

    The proposed time for exchange of 3.30 pm came and went. At 3.39 pm, Mr Williamson sent instructions to Harris Farm’s solicitors to amend the allocation of the purchase price, with some $1 million allocated to equipment and the balance to goodwill.

25. [287]

    At 4.37 pm, being an hour after the proposed exchange and toward the end of a day on which Harris Farm’s offer was to expire unless accepted, Ms Badcock sent an email to Ms Phillips, Mr Beecroft and Mr Green attaching a copy of the contract as it now stood, excluding annexures. Ms Badcock advised, “The following changes have been made to the contract since it was signed.” Twelve bullet points followed including: (emphasis added)

26. [288]

    It will be immediately noted that the reference to clause 10.1.2 was a typographical error. The error would have become apparent to someone endeavouring to reconcile Ms Badcock’s comments in the email with the contract itself.

27. [289]

    Ms Badcock’s request for the client to check whether the lease annexed to the contract was the correct lease would not have been straightforward either as the lease annexed to the contract was not attached to the email. Both errors, whilst relatively minor, point to the solicitor now rushing to complete the task at hand.

28. [290]

    The email was sent 23 minutes before the proposed exchange, leaving little time for the reader to digest the information, assuming the recipient read the email the moment it was received. Ms Phillips was then working at her office in the Rozelle store. It was her daughter’s 18th birthday and a drinks function had been arranged at 6.00 pm in Enmore. When Ms Badcock’s email arrived, Ms Phillips was preparing to leave the office. Ms Phillips read the email. It did not trigger her memory of the Woolworths’ Deed of Agreement.

29. [291]

    According to Ms Phillips, as Ms Badcock said in her email that she did not have a problem with the reinstatement of clause 10.1.2 (in fact, clause 10.1.12), Ms Phillips did not worry about it. Ms Phillips had never had an experience where a contract had been amended after she had signed it, so she did not expect that there would be any material changes of significance. Ms Phillips was not expecting to be presented with last minute critical changes to the contract, and Ms Badcock did not present them as such. As a consequence of the timing of the email and the urgency of the requested response – given that Ms Phillips understood that the contracts would shortly be exchanged – Ms Phillips did not think she had to carefully consider or make enquiry as to the proposed changes. She understood from Ms Badcock’s email that she did not consider the proposed changes to be of any great importance and that she was simply seeking confirmation of Ms Phillips’ instructions as to what were routine matters. Ms Phillips did not understand the importance of what she was being asked to confirm or that she should make enquiries to confirm these matters.

30. [292]

    As Ms Phillips had done when looking for the Deed of Agreement for Lease, she did not go into the folder on the shared drive containing Double Bay lease documents but did a search on her computer, “I searched for it. I didn’t go looking for documents, I responded to a request for a document.” At 4.52 pm, Ms Phillips replied, attaching the Double Bay lease, “Agree on all below – please see response regarding lease”. Ms Phillips added to the bullet point in Ms Badcock’s email concerning clause 10.1.2 (sic):

31. [293]

    That is, Ms Phillips specifically addressed Ms Badcock’s queries in respect of the lease and the equipment list, but did not respond to the bracketed text, enquiring whether there were any side deeds or variations. Ms Phillips said that she understood that she was being asked to confirm whether the copy of the lease attached was an accurate and complete copy. “I didn’t see that as advice I guess. I just was reading the question that I was responding to and that was … is this an accurate and complete copy of the lease? I thought that that is what I was responding to. … Nobody more than me wishes that that had triggered something but it didn’t because I understood that question to be is this an accurate and complete copy of the lease? … [T]hat is how I understood that dot point in the 12 points that were presented to us in the final moment to read.”

32. [294]

    At 4.54 pm, Mr Beecroft replied, “I confirm that I consent to the changes outlined in your email.” His response was of a general nature and did not address Ms Badcock’s specific questions. Mr Green did not respond at all.

33. [295]

    At 4.55 pm, Ms Badcock replied, “Thanks Tammie. We’ll print out the version of the lease that you have provided … and attach it to the contract, just to be sure.” Ms Badcock did not agree that it was clear from Ms Phillips’ text that she had not engaged with Ms Badcock’s question or even understood it. Ms Badcock did not press Ms Phillips or Mr Beecroft to squarely respond to her query, nor seek to ascertain whether they understood her query, nor sought to obtain a response from Mr Green.

34. [296]

    At 5.20 pm, Ms Badcock emailed Mr Beecroft, Ms Phillips and Mr Green again, advising further changes sought by Harris Farm, not presently relevant, and sought confirmation whether these final amendments were agreed. “My colleague is on her way to the purchaser’s solicitors office now to exchange contracts, however she will wait to receive confirmation from me that you have authorised these changes before exchanging.” Ms Phillips did not turn her mind to whether there was now further time for her to reflect on the answer she’d given to Ms Badcock in her previous email. “I don’t think I was sitting at my desk waiting for emails. It was a pretty frantic afternoon for me.” At 5.26 pm and 5.39 pm respectively, Mr Beecroft and Ms Phillips advised that the further amendments were agreed.

35. [297]

    At about 6.00 pm, a solicitor from Maddocks’ office attended at Herro Solicitors and they did a ‘page turn’ on the contract to reconcile any differences in the counterparts of the contract to be exchanged. At 6.44 pm, Ms Badcock confirmed that contracts had been exchanged and a deposit cheque for $1 million had been received, with completion to take place 28 days after the landlord provided its consent to the transfer of the lease. “We will be in touch on Monday regarding next steps.”

CONTRACT AND TORT CLAIM

1. [298]

   It is convenient to now consider whether Maddocks’ performance of the retainer amounted to a breach of contract or duty of care.

Scope of retainer

1. [299]

   About Life claimed that, on 12 April 2017, it retained Maddocks to advise and represent its interests in relation to the sale of the Double Bay business and the assignment of the lease to Harris Farm. Further, Maddocks promised as a term of the retainer that a property law partner, Ms Badcock, and a commercial law partner, Mr McNee, would provide all of the services required by About Life in connection with the sale of the Double Bay business and assignment of the lease.

2. [300]

   While there was no written retainer (Ms Badcock did not send a costs agreement to About Life until 26 April 2017, after contracts had been exchanged), Maddocks did not dispute that it was retained but disputed the scope of its retainer. In its defence, Maddocks said there were two retainers. First, on 13 April 2017, About Life retained Maddocks to review Harris Farm’s offer and provide urgent ‘high level’ comments on the “risk to completion”. Second, on 18 April 2017, Maddocks was retained to act for About Life on the exchange of any eventual contract between About Life and Harris Farm. As ultimately put, rather than two retainers, Maddocks submitted that the retainer could be broken into three segments, being part of a continuum. The first segment was to provide ‘high level’ comments. The second segment was to undertake statutory searches (as already noted at [229], any ‘second segment’ went beyond statutory searches). The third segment was to act on the transaction at large.

3. [301]

   Maddocks submitted that Mr Green’s response on the evening of 13 April 2017, “Thank you!”, confirmed that Ms Badcock’s ‘high level’ comments satisfied Ms Badcock’s retainer for the time being, that is, the high level advice was the sole work Ms Badcock was instructed to carry out at that stage. It was said that it would have been unprofessional on the part of Ms Badcock to do anything further on the matter before receiving further instructions from Mr Green; it would over-servicing to further advise or move forward with a contract which the client had not yet decided it wanted to pursue. Maddocks submitted that it was only after Mr Green spoke to Ms Badcock on the morning of 20 April 2017 that Ms Badcock was instructed to do anything more than particular tasks which, up to that point, she had been specifically instructed to carry out: Scottsdale Homes Pty Ltd v Gemkip Pty Ltd [2008] QSC 326 at [90]-[93].

4. [302]

   To this, About Life submitted that it was wrong for Maddocks to suggest that that initial work was intended by either party as an exhaustive performance of Maddocks’ retainer. Ms Badcock specifically said that her ‘high level’ comments would be given in preparation for a telephone call to occur next Tuesday to discuss the transaction. Further work was contemplated next week.

5. [303]

   The emails passing between Mr Green and Maddocks on 12 April 2017 and thereafter were consistent only with the firm being generally retained to act on the transaction, which was still being negotiated when the firm was instructed, presumably not an uncommon occurrence. It was suggested to Ms Badcock that she did not intend her ‘high level comments’ email to be an exhaustive performance or her retainer, which Ms Badcock did not squarely answer but said, when she wrote that email, Maddocks did not have a retainer in relation to the transaction because there was not yet a transaction. She did not agree that Mr McNee’s initial email referred to Maddocks acting on the transaction but took it to mean that she was to review the document received that day. “Our retainer was still … evolving … depending on what they were going to do with the business.” It is not easy to reconcile Ms Badcock’s understanding with the contemporaneous documents; nor did Ms Badcock suggest that she had an actual recollection which was different to what the documents revealed.

6. [304]

   There is no hint in the contemporaneous documents that About Life was cost-conscious about Maddocks’ fees on the transaction, nor any suggestion that Mr Green wished to limit the solicitor’s involvement until final decisions had been made on the sale. In any event, as Mr Boyce agreed, the client’s attitude to costs was not a licence for a solicitor to cut a corner except with express instructions. The scope of work identified by Ms Badcock on 18 April 2017, when opening a file in this matter, was consistent with a general retainer: see [227].

7. [305]

   I do not accept the segmentation of the retainer as advanced by Maddocks. Scottsdale Homes bears little similarity to the case at hand. There, a company employed persons experienced in conveyancing and effecting property transactions and retained the services of a number of solicitors in addition to those of the defendant. The solicitor was not retained to act generally for a company but engaged to perform particular tasks pursuant to particular instructions given from time to time. In Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWSC 438 at [163] (affirmed in Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWCA 308), Hoeben CJ at CL, citing Minkin v Landsberg [2016] 1 WLR 1489 at [38]-[39], said with evident approval:

8. [306]

   Here, no limitation on the retainer was communicated by or to the client. It was a high value transaction of great importance to About Life. Maddocks was simply retained by About Life on 12 April 2017 to act on its behalf on the proposed sale of the Double Bay store to Harris Farm including the assignment of the lease.

Solicitor’s obligations

1. [307]

   The Civil Liability Act 2002 (NSW) applies to About Life’s claims for damages in contract and negligence: section 5A(1). As Leeming JA (with whom Meagher JA agreed at [8]) noted in South Western Sydney Local Health District v Gould (2018) 97 NSWLR 513; [2018] NSWCA 69 at [28]:

2. [308]

   The parties proceeded on the basis that the general duty of care applied. The parties embraced the summary of principles in AVWest Aircraft Pty Ltd v Clayton Utz (A Firm) (No 2) [2019] WASC 306 per Vaughan J at [374]-[399]. The following propositions expounded by His Honour are relevant to the case at hand. At [375]: (footnotes omitted):

3. [309]

   As to the last point, Vaughan J noted that “urgency will not be an answer for all things. … if urgency meant that the solicitor was unable to adequately perform his or her retainer … it would be incumbent on the solicitor to say so and decline the instructions”: at [377]. Vaughan J also observed that the duty of care does not require the giving of advice on matters beyond the limits of the solicitor’s retainer, but “it may be the case … that the solicitor’s retainer extends to giving any advice reasonably necessary to protect the client’s interests in the transaction even where that has not been expressly requested”: at [396]. A solicitor is usually asked to review and prepare amendments to a commercial agreement consistent with what is reasonably necessary to protect the client’s interests: at [399].

4. [310]

   Earlier formulations of these principles are also helpful. In Short v Delaney [1999] NSWSC 1293, Adams J said at [5]:

5. [311]

   The classic formulation in Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384 remains apposite. As a general principle, the duty of a solicitor under a retainer is to protect the client’s interests and carry out the client’s instructions in the matters to which the retainer relates, by all proper means. It is an incident of that duty that the solicitor will consult with the client on all questions of doubt which do not fall within the express or implied discretion left to the solicitor, and to keep the client informed to such extent as may be reasonably necessary: at 409 per Oliver J, citing Groom v Crocker [1939] 1 KB 194 at 222 per Scott LJ.

The expert witnesses

1. [312]

   The Court was assisted by the evidence of two expert witnesses, Mr Rosier and Mr Boyce. Both have practiced in property law over roughly the same period of time. Both have served on various committees of the Law Society of New South Wales charged with accrediting specialists in property law and have variously prepared and marked mock files, assignments, exams including viva voce exams. Both have served on the Property Law Committee of the Law Society and been involved in drafting or re-drawing the standard form contract for sale. Mr Roser also worked on the introduction of the National Electronic Conveyancing Scheme to New South Wales, both on the Law Society and Law Council of Australia’s committees, whilst Mr Boyce sat on the claims committee of LawCover in the 1980s, looking after property law claims. They have both given seminars in the field.

2. [313]

   The experts’ experience differed in that, apart from five years at Baker McKenzie as head of its new property group, Mr Rosier has practised in a small firm whilst Mr Boyce spent his career at Hunt & Hunt, being a larger firm. As a consequence, Mr Boyce has supervised more solicitors over his career than Mr Rosier, and thus has had more exposure to the working practices of other solicitors. Mr Boyce had much greater exposure to larger transactions than Mr Rosier. Mr Boyce had also supervised practitioners in Melbourne and Hobart and so had some knowledge of practice in other jurisdictions. Mr Rosier made plain that his area of expertise was property law and procedure in New South Wales, “the jurisdictions each have very different characteristics and I wouldn’t pretend to understand all of them …”

3. [314]

   As such, Mr Boyce’s practical experience is closer to that of Ms Badcock whilst Mr Rosier’s may be closer to that of Mr de Fontgallant. Consequently, and without any disrespect to Mr Rosier, I have generally deferred to Mr Boyce’s view as to what a skilled property lawyer, exercising reasonable care and skill would have done.

4. [315]

   In addition to the expert witnesses, some evidence was given by Mr de Fontgalland on the subject. By the time of this transaction, Mr de Fontgalland had been a solicitor for 11 years, practising in business and commercial law. Mr de Fontgalland’s legal experience was largely transactional, in small firms. In addition, of course, Ms Badcock gave evidence and, indirectly, so did Mr McNee, Mr Law, Mr Herro and Ms Scrivener by the manner in which they conducted themselves.

5. [316]

   Mr Rosier and Mr Boyce considered Maddocks’ performance of the retainer in four respects, which I will examine in turn.

Obtaining background from the client

1. [317]

   The experts agreed that it would be the usual conduct of a competent solicitor acting for the vendor on a transaction such as this, in 2017, to ascertain the background of the transaction and the commercial objectives of the client, noting that the contract had been prepared by the purchaser’s solicitor, which was unusual.

2. [318]

   Mr Rosier was of the opinion that a solicitor acting on a relatively high-value transaction such as this was obliged to obtain a thorough understanding of the nature of the transaction and the subject matter of the sale. Usual or common professional practice would include enquiring why, three years into a lengthy lease, the client was selling, as the reason for selling may influence the manner in which the transaction is to be conducted and will also give a better understanding of the matters likely to affect the transaction. The solicitor would also seek some of the history of the tenancy.

3. [319]

   Maddocks submitted that it was instructed by Mr Green that the transaction was time sensitive and, in light of the limited scope of the retainer, was not obliged to obtain instructions as to the background to the transaction or the circumstances in which the lease was acquired from Woolworths. In any event, Maddocks submitted that this was done by Mr McNee, who initially spoke to Mr Green on 12 April 2017 (see [193]) and then shared the information obtained with Ms Badcock.

4. [320]

   Even accepting Mr McNee’s recollection of the initial conversation with Mr Green, I do not consider that it fulfilled Mr Rosier and Mr Boyce’s description of the conduct of a competent solicitor obtaining the background of a transaction on which the solicitor was retained to act. The conversation appears to have been very brief. Further, Mr McNee was a corporate partner who was proposing to play a secondary role in the transaction. The property partner was best placed to ask pertinent questions to ascertain relevant background. Ms Badcock did not do this. As the transaction unfolded, Ms Badcock became gradually appraised of the background and commercial objectives of About Life.

Identifying issues and obtaining instructions

1. [321]

   Having ascertained the background of the transaction and the commercial objectives of the client, the experts agreed that it would be the usual conduct of a competent solicitor to identify the key issues in the sale, consider whether these key issues were covered by the contract prepared by the purchaser’s solicitors and obtain instructions on those issues. Mr Boyce agreed that, if a transaction was urgent, there was all the more reason to obtain instructions on these issues as soon as possible as, if instructions were obtained late, things might be lost in the rush.

2. [322]

   Of the ten key issues identified by the experts in a transaction such as this, the following are particularly pertinent:

3. [323]

   Mr Boyce agreed that, in his opinion, the question as to whether there were any side deeds would normally be raised in taking initial instructions and not at the cusp of the exchange of the contract; a solicitor would raise whether there were any side deeds “very early in the piece”. Likewise, in Mr Rosier’s opinion, as the lease was attached to and formed part of the contract, the solicitor would, in usual practice, obtain instructions that the lease was complete in all respects and enquire if there was anything about the lease arrangements which the solicitor needed to know in order to carry out the client’s instructions effectively. This would, in particular, include enquiries as to whether there were any side agreements as, in a commercial transaction of this type, such arrangements are a real possibility and may affect the client’s ability to complete the transaction. Side deals may cause difficulty for the client leading up to, or possibly extending beyond, completion of the sale of a business and associated assignment of the lease of the business premises.

4. [324]

   As earlier mentioned, in Mr Boyce’s experience, side deeds are not uncommon in leases, although side deeds with third parties are not usual. A side deed which conferred on a third party a first right of refusal on any assignment of the lease was most unusual. Mr Rosier did not disagree: while Mr Rosier had encountered rights of first refusal on many occasions, he had never encountered a lease where there was a right of first refusal given to a third party.

5. [325]

   Mr de Fontgalland had advised and acted on the sale of retail businesses and the assignment of leases within shopping centres on many occasions. In his experience, it was very common in connection with the sale of a retail business for the landlord to require the tenant to enter into a side agreement that was not registered on the public record. Further, in Mr de Fontgalland’s experience, it was not uncommon for a third party to require a tenant to enter into a side agreement which provided the third party, for example, with a right of first refusal with respect to the lease. Given that Mr de Fontgalland was the least experienced solicitor to give evidence, it is a little surprising that he had encountered side agreements with third parties whilst Mr Rosier and Mr Boyce had not. Mr de Fontgalland likely overstated the position in this regard.

6. [326]

   Not much turns on the relative rarity of the features of the Woolworths’ side deed if a solicitor’s enquiry of their client as to whether there were any side deeds in relation to the Double Bay lease encompassed such a document. There is no doubt that Ms Badcock did not ask the client about the existence of side deeds until shortly before contracts were due to be exchanged. Whether that was enough, in the circumstances of this retainer, to discharge Maddocks’ duty to their client is a matter to which I will return at [357].

7. [327]

   The experts agreed that it would be the usual conduct of a competent solicitor to establish the position with respect to plant and equipment when taking instructions. Mr Boyce considered that the list of assets to be sold would, in his experience, be done on ‘day one’. Although most vendors have not totally firmed up on what is going to be in the asset register, that clearly had to be identified before exchange as it had to be disclosed in the contract. Mr Boyce and Mr Rosier agreed that obtaining and considering the asset register would not have been left to the cusp of exchange by a solicitor acting with reasonable care.

8. [328]

   The experts also agreed that the item “DB-Deed of Agreement (Woolworths)” was a most unusual item in an inventory of assets. The point on which the experts differed was whether a competent solicitor would have reviewed the two spreadsheets prepared by Mr Ross-Edwards in sufficient detail to notice it.

9. [329]

   Mr Rosier considered it was necessary to consider the asset register to ensure that there was nothing in the list which clearly should not be, but which would be thought by the purchaser to pass with the sale if the list was left as it was. According to Mr Rosier, Ms Badcock, or someone to whom she could delegate the task, should have carefully considered the equipment list. A reasonably competent solicitor ought to have identified “DB Deed of Agreement Woolworths” as an unusual description for an asset which warranted, at the very least, a short enquiry, at least by email, as to what the item was and if it was an asset to pass with the sale.

10. [330]

    Mr Boyce said in his experience this would not usually be forensically examined by the vendor’s solicitor. Solicitors usually treat this as a commercial matter which, as it is supplied by the vendor, would meet the requirements of the vendor and would be examined by a purchaser to establish that it meets its expectations in relation to the transaction. A solicitor would usually have no idea as to what is included in a sale for plant and equipment and relies on the parties to satisfy themselves. This is more particularly so with clients of reasonable commercial sophistication. Mr Boyce did not consider that Ms Badcock had an obligation to go through the list in the circumstances of how it was delivered and the intention with which it was going to be used by the parties. Mr Boyce said that he would not have asked questions about the asset register.

11. [331]

    I am inclined to defer to Mr Boyce’s views as to the practices of a competent solicitor on this subject. As such, although Ms Badcock obtained an equipment list later in the transaction than either expert considered appropriate, failure to do so likely did not make any difference as, even if the equipment list had been obtained earlier, Ms Badcock would not have reviewed it in sufficient detail to reveal the curious entry for the Woolworths’ Deed of Agreement.

12. [332]

    Herro Solicitors did not notice it either, albeit they relied on Mr Williamson’s review and he was only interested in the total value of assets listed for the purpose of securing the most advantageous tax treatment for Harris Farm. Of course, the practices of a competent solicitor, as described by the experts, may yield to the particular features of any given transaction. Here, the only asset which Harris Farm was interested in acquiring was the lease. The other assets in the equipment list were of little interest, save for completing the transaction in a tax effective manner. In these circumstances, Ms Badcock’s examination of the spreadsheets, and the extent to which she obtained obstructions in respect of it, was reasonable.

13. [333]

    Mr Rosier considered that usual practice would have required the solicitor to have conferred at the time of taking instructions so as to be able to fully understand the nature of the transaction into which the client proposed to enter. This was a high value transaction. The term of the lease was lengthy. In his experience, there was a reasonable likelihood that there were side arrangements. It was well worthwhile conferring to make sure that nothing was overlooked and, in usual practice, the solicitor should have taken steps to arrange a conference.

14. [334]

    Mr Boyce did not consider in the circumstances of this transaction that it departed from usual practice not to have a face to face conference with Mr Green. There were extensive emails and a number of telephone conversations. In his opinion, face to face meetings are desirable when the solicitor has not previously acted for the person, as they enable the solicitor to establish the apparent ability of the person and their commercial sophistication to understand the transaction. The solicitors may have achieved the same outcome from telephone conversations with Ms Phillips. The modern practice for solicitors is now dominated by emails, which have altered the conduct of solicitors by having far fewer face-to-face meetings and telephone conversations.

15. [335]

    Mr Rosier said that the opportunity to raise the question about side deals or agreements arose at the beginning of the transaction and, unless there was going to be a face to face meeting so that Ms Badcock could question the client in some detail about the transaction, her “high level advice” email was the appropriate opportunity to raise the question. Ms Badcock’s “high level comments” made no reference to the possibility of any side deals, which may cause difficulty for the client leading up to, or possibly extending beyond, completion. To this, Mr Boyce opined:

16. [336]

    I consider that Mr Boyce’s description of current practices in respect of email and telephone communications with clients, rather than conferences, reflects modern practices, particularly in an urgent transaction. I note, however, Mr Boyce’s hesitation in proceeding in this manner alone where a solicitor has not previously acted for a client. I share that hesitation. Whilst a face-to-face conference may not have been necessary, I consider that a competent solicitor would have arranged a telephone conference to obtain instructions on the key issues in the transaction. Ms Badcock could easily have arranged a telephone conference with Mr Green or Ms Phillips. This was not done at an early stage or, indeed, at all.

17. [337]

    Again, the practices of a competent solicitor as described by the experts may yield to the exigencies of a particular retainer. The late delivery of the whole contract at 6.00 pm on 13 April 2017, being the evening before Good Friday, may well have made it reasonable for a competent solicitor to delay obtaining instructions on key issues until after the holidays but, once work resumed on 18 April 2017, it was incumbent upon a competent solicitor to obtain full instructions on key issues as soon as possible thereafter. There was no suggestion, in the contemporaneous documents, that this transaction would not go ahead. The client was “keen” and “in a bad way” with its bank. The price and terms of the contract were continuing to be negotiated but there was no reason to delay this important task any longer. In failing to do so, Ms Badcock’s performance of the retainer departed from the practices of a competent solicitor. Whether this was causative of any loss depends upon how Ms Badcock otherwise performed the retainer.

Obtaining documents and information

1. [338]

   The experts agreed that, upon obtaining instructions in respect of key issues, a competent solicitor would do searches and obtain documents and information in relation to the proposed transaction. It is convenient to consider the documents and information separately, as the experts differed as to precisely what documents and information should be sought, and what this would have revealed to a competent solicitor. Overall, the experts agreed that Ms Badcock readily identified most of the key issues and undertook the relevant searches and enquiries but disagreed as to whether when this was done accorded with the practice of a competent solicitor, to which I will return at [357].

2. [339]

   The experts agreed that a competent solicitor would do a search of the registered lease. Mr Rosier considered that Ms Badcock departed from usual or common professional practice when she relied, until very late in the transaction, upon the lease provided by the purchaser’s solicitor as being a complete version. Rather, Ms Badcock should have asked the client for a copy of the lease. Mr Boyce does not suggest otherwise.

3. [340]

   The experts agreed that a competent solicitor would peruse the lease to ensure that there were no provisions within the lease that would likely require a separate disclosure to the purchaser. A competent solicitor would note the reference to an Agreement for Lease as a defined term in clause 1.1 of the lease and a reference to a definition of Stage Two Works as having “the meaning given to that term in the Agreement for Lease”. A competent solicitor would obtain a copy of the Agreement for Lease from the client. Mr Boyce said that, where the lease actually identified that there was an agreement for lease it “obviously took the practitioner to the fact that there was a document to be looked at, and yes you would need to look at that pretty much at the same time as you looked at the lease.”

4. [341]

   Ms Badcock did not obtain the Deed of Agreement for Lease on her own initiative but in response to a request from Herro Solicitors. Ms Badcock did not agree that, in order to advise the client in relation to the transaction, it was important to obtain a copy of the agreement for lease at the outset, although it appeared that Ms Badcock clearly wished that she had done so and her continued denial was somewhat hesitant.

5. [342]

   In explaining why she had not requested the document, Ms Badcock said the lease had been on foot for three years and, normally, an agreement for lease came to an end once the lease commenced, “If there are any ongoing obligations, in my experience, they’re not likely to remain on foot for three years.” (Ms Badcock did not suggest in her affidavits that she only read agreements for lease if the lease had been on foot for less than three years.) Ms Badcock took the view that this was more of a risk for the purchaser and it would be a very low risk that there were any ongoing obligations on the vendor. When asked whether she decided to ‘run the risk’, Ms Badcock simply said, “Well, I didn’t ask to see a copy of it at that point in time.”

6. [343]

   According to Mr Rosier, on reading the Deed of Agreement for Lease, a solicitor should in the usual practice have recognised that the existence of the Deed of Agreement for Lease gave rise to a real possibility that there was an agreement, in turn, between the client and Woolworths.

7. [344]

   In contrast, Mr Boyce did not think there was anything in the Deed of Agreement for Lease which would draw the attention of a competent solicitor to any rights held by Woolworths in relation to an assignment of the lease. The mere presence of Woolworths as a lessee of the adjacent “Supermarket Premises” would not, in usual practice, cause a competent solicitor to be concerned that Woolworths would have held rights in relation to the lease. It did not “spring to the reader” that there would be an ongoing obligation between Woolworths and About Life. Mr Boyce did not consider that Ms Badcock would have gone the next step and asked direct questions about the contractual arrangement between Woolworths and About Life. The fact that Herro Solicitors did not ask any questions about it either indicated to Mr Boyce that they came to the same conclusion.

8. [345]

   It was apparent from the recitals to the Deed of Agreement for Lease (see [280]) that the Council had initially granted Woolworths the right the lease the site, but, at Woolworths’ request, the Council had instead granted the lease to About Life. In substance, About Life acquired the lease from Woolworths.

9. [346]

   Herro Solicitors, having reviewed the Deed of Agreement for Lease, did not make further enquiries as to whether there was any ongoing obligations or arrangement with Woolworths in respect of the leased premises. But Mr Herro’s focus was somewhat different: he was concerned to identify obligations that ’ran with the land’ and were enforceable against his client, Harris Farm, who was otherwise a bona fide third party purchaser without notice: see [265]. In that sense, Mr Herro did not want to know if there was a side deed with Woolworths which did not ‘run with the land’.

10. [347]

    In contrast, Maddocks’ focus was to warn its client of any material risk, initiate action or undertake enquiries to protect the client from a real and foreseeable risk of economic loss, that is, to protect the client’s interests. Whether or not a side agreement ‘ran with the land’, About Life may still be affected, at least, by contractual obligations. Thus I do not consider that Mr Herro’s approach to the Deed of Agreement for Lease was indicative of how Ms Badcock should have approached it as a competent solicitor acting for the vendor.

11. [348]

    I note also that Mr Harris assumed, before meeting with Mr Green on 27 March 2017, that Woolworths might have assigned the Double Bay lease to About Life: see [185]. Presumably this is why Mr Harris checked – twice – that About Life was in a position to assign the Double Bay lease at all. Mr Harris formed this assumption because he knew that Woolworths had participated in the development of the Double Bay shopping centre and had initially proposed to use the site for a Thomas Dux supermarket. Whilst Mr Harris gleaned this information from a newspaper article, the recitals to the Deed of Agreement for Lease, in essence, contained the same information.

12. [349]

    Mr Harris was no doubt particularly interested in the site and experienced in transactions of this kind. But he was not a lawyer. Nonetheless, Mr Harris made this assumption based on the same information that was contained, effectively, in the recitals to the Deed of Agreement. I consider that a competent specialist property lawyer, acting to protect their client’s interests, would have considered that further instructions should be obtained from the client as to whether there were any restrictions on About Life assigning the lease, given the preceding transaction involving Woolworths. One must be careful not to view events with hindsight. This is why Mr Harris’ assumption is significant, as he drew that assumption at the time. On this topic, therefore, I have departed from Mr Boyce’s opinion that a competent solicitor would not have been concerned to check whether Woolworths had rights in relation to the lease and agree with Mr Rosier.

13. [350]

    Thus, Ms Badcock should have obtained a copy of the Deed of Agreement for Lease from her client much earlier in the transaction. If Ms Badcock had done so and obtained instructions from the client on key issues, I think it is likely that the circumstances in which About Life acquired the lease, being effectively from Woolworths, would have come up for discussion or comment.

14. [351]

    In the course of such a discussion, a competent solicitor would have posed relevant questions, sought further information as needed and given explanations or advice to prompt the client to obtain the information necessary to ensure that the client’s interests were protected in the proposed transaction. This would likely have led the client to either remember the Woolworths’ Deed of Agreement or examine its records to see whether there was any such agreement, and come upon it.

15. [352]

    Mr Rosier considered that, to be certain that the solicitor had a full and complete understanding of everything of importance affecting the transaction, the solicitors would ask for the client’s authority to discuss the matter with the client’s former solicitor. It was Mr Rosier’s experience that a client’s understanding of the complexities of a situation are often unclear, muddled and sometimes just simply wrong. The former solicitor would be able to provide coherent and meaningful information about the lease transaction in a fashion that the new solicitors would understand.

16. [353]

    Mr Rosier said that, in usual practice, Ms Badcock would have made herself aware as to how sophisticated Ms Phillips was, and when seeking information from Ms Phillips, ensured her communications were tailored to a person who lacked sophistication until Ms Badcock had been able to form a view on the subject. If Ms Badcock formed the view that Ms Phillips’ understanding of the past transactions was inadequate to provide proper instructions, Ms Badcock should have sought information from Mr de Fontgalland.

17. [354]

    There is no doubt that, if asked, Mr de Fontgalland would have assisted. Mr de Fontgalland said that if Maddocks had contacted him – and provided an authority from About Life – he would have informed Maddocks of the Woolworths’ Deed of Agreement, that it contained a right of first refusal in favour of Woolworths, and provided a copy of his file including the deed.

18. [355]

    Mr Boyce considered it extremely unusual to contact a former solicitor on a transaction such as this, unless something specifically arose which could not be answered by the client and for which there may be knowledge or an explanation held by the solicitor. He has never requested information from a former solicitor in his 45 years of practice. Mr Rosier agreed that it was unusual for a solicitor to seek assistance from a former solicitor but had done so a number of times. Mr Rosier assumed there may be a difference in approach between larger and smaller firms in this regard.

19. [356]

    I consider that Mr Boyce’s opinion is more reflective of the practices of a competent solicitor in this regard. It would be unusual for a law firm to request the file of a client’s former solicitor unless there was a particular reason to do so. It would be even more unusual where the transaction was urgent and a former solicitor would be less likely to be able to assist in the time available, noting that it would usually be necessary for a solicitor to retrieve their file in order to assist. I do not consider that Ms Badcock’s failure to make contact with Mr de Fontgalland was negligent.

Seeking instructions before exchange

1. [357]

   The critical point of difference between the experts was whether Ms Badcock’s email sent shortly before exchange was sufficient to discharge Maddocks’ duties to its client. Mr Rosier considered that, having brought many of the key issues to the client’s attention shortly before exchange, the manner in which these issues were raised with the client could not be considered competent legal practice. Ms Badcock failed to ensure that the client was able to give clear, precise instructions, having regard to the proposed time of exchange 23 minutes later. The four questions which she appeared to be asking were: first, whether the lease then annexed to the contract was an accurate and complete copy of the lease (but without providing it to the client so that the client could provide a proper answer); secondly, whether there were any side deeds or variations; thirdly, whether the client was prepared to consent to the warranty given in clause 10.1.12 (being a question Ms Badcock had effectively already answered); and, fourthly, whether the client was prepared to give the warranty in relation to the equipment lease.

2. [358]

   Mr Rosier did not consider that these questions were asked with clarity or in a clear and coherent fashion. Instead, the questions were asked “in a somewhat confused and not particularly interrogative manner” so that the client, clearly happy to see the contract exchanged, was not given a chance to refer Ms Badcock to the Woolworths’ Deed of Agreement, “Ms Badcock appears to have been asking questions which, if answered, in the fashion that she felt appropriate would lead to an exchange of contracts.” Ms Badcock appeared to have been infected by the apparent need for an early exchange.

3. [359]

   Mr Rosier considered that the issues raised, with the possible exception of the question in relation to the equipment lease, should have been raised much earlier, when there was much more time to consider the matters at some leisure so as to avoid overlooking a matter or giving incorrect information. The lateness of the request for information as to whether there were any side deeds, together with the circumstances existing at the time the instructions were requested, rendered the request virtually meaningless. The bracketed text was not highlighted as a different and important question because the request for instructions about side deeds or variations was given as an example only and in the context of the fact that the purchaser had prepared the contract. In seeking instructions from the client about such an important matter, Ms Badcock should have highlighted it as having importance, by asking it as a separate and important question and detailing the reasons why it was important to review such side deals. Unless the importance of the request was clearly stressed in plain clear English and in strong terms, Ms Badcock could not reasonably expect the client’s officers to turn their attention at that late stage to what was not, in the request for instructions, identified as an important detail. Mr Rosier considered that raising the point in the 4.37 pm email was “rather too late” and “buried”.

4. [360]

   In Mr Boyce’s opinion, Maddocks raised the issues with About Life that would be raised by competent solicitors. The fact that some of the issues were raised very late in the transaction was still the usual conduct of a competent solicitor, given the urgency and ongoing negotiations between About Life and Harris Farm. Mr Boyce considered that it was reasonable for Ms Badcock to have sought instruction by email, at 4.37 pm, rather than by telephone calls. Given the positions which Ms Phillips and Mr Green and Mr Beecroft held at the time, unless Ms Badcock had information about, or responses from them which caused her to question their competence, the responses given would have been regarded as reasonably adequate as to any side deeds, having raised the issue with them, without pursuing some form of interrogation to test that recollection.

Submissions

1. [361]

   About Life submitted that Maddocks could not give proper advice about the transaction without first obtaining instructions about the transaction, including the background and information which would identify key issues. Without a full understanding of the transaction, Maddocks would not know what instructions were needed and what matters About Life needed advice about. At no time did Ms Badcock seek instructions from her client about the background to the sale of the lease or explore what issues might be raised by this particular transaction. As to the email sent shortly before exchange, About Life submitted the content of the email was nowhere near sufficient to draw About Life’s attention to the importance of side deeds. By leaving it to the last minute, Ms Badcock exposed the client to the unnecessary risk that an orderly focus on the relevant documentation, including the side deed, would be lost in the rush. Objectively, it was not to be expected that important matters of substance were only now being raised. Ms Phillips and Mr Beecroft did not give the email focussed consideration, as was apparent by their replies. Ms Phillips’ reply did not respond to the real burden of Ms Badcock’s question, which was directed to further documents not disclosed in the register. Ms Badcock ought to have perceived that.

2. [362]

   Maddocks submitted that, whether or not it may have been best practice or ideal to raise the question of side deeds earlier than 21 April 2017, in the context of Maddocks’ retainer, the question was not raised at a particularly late stage and was not ‘too late’: cf Lucantonio v Kleinert [2011] NSWSC 753 at [125]. About Life had time to adequately consider and act upon the advice, including by deferring exchange if necessary. Maddocks submitted that Clause 10.1.12 was ultimately just a warranty and so described by Ms Badcock. There was nothing technically complex about that. It did not involve any complicated question of conveyancing practice. It was a simple matter for any intelligent person, like each of the About Life directors was, to grasp: were there any “side deeds” because, if there were, then the Lease would not be “complete”; and if the Lease was not “complete” then there was a breach of “warranty”. Ms Badcock did not, in all the circumstances, fail to exercise the skill, care and diligence expected of a reasonably competent solicitor in raising the issue of side deeds, as she did, in the 4.37 pm email.

3. [363]

   Maddocks accepted that it was required to enquire as to the existence of any side deeds which may affect the obligations imposed by the lease. This duty, however, did not extend to ‘jogging’ the memory of the client on the off-chance that the client may have once been aware of such a deed but forgotten about it: Yager v Fishman & Co [1944] 1 All ER 552.

Conclusion

1. [364]

   From About Life’s perspective, this transaction was imbued with a sense of urgency and a strong need to not only exchange, but to complete, the transaction without complications. From Maddocks’ perspective, performance of their retainer was also tinged with urgency because it is apparent from the contemporaneous documents that Ms Badcock and her staff were already heavily committed: see [200]. As a consequence, whilst I do not doubt that Ms Badcock endeavoured to meet the competing demands of all her clients, several tasks which a competent solicitor would have attended to when performing this retainer were either done late or not at all.

2. [365]

   As noted at [320], Ms Badcock did not obtain information from the client at the outset as to the background to the transaction and the client’s commercial objectives. Ms Badcock picked this up as the transaction unfolded. Having not met or spoken at any length with a new client on a substantial transaction, Ms Badcock did not have the opportunity to get to know the client and what the client needed. This would have informed her how to attend to the tasks involved in the retainer. Whilst Ms Badcock, as informed by Mr McNee, initially viewed Mr Green as the client’s instructor, she also knew that Ms Phillips was the chief executive officer of About Life. Mr Green was in Melbourne. Ms Phillips presented herself to Maddocks’ offices twice, to deliver the first version of the contract and then to sign the second version of the contract. This was a missed opportunity to speak with Ms Phillips and ensure that the solicitor had the measure of both their client and the task.

3. [366]

   The process of obtaining instructions and background would likely have revealed that at least two things. First, whilst Mr Green instructed Maddocks to act on the transaction and was undertaking the commercial negotiations, he was not, in fact, in possession of a detailed knowledge of the day-to-day operations of the business. That was the province of Ms Phillips. I expect that this fact would have become apparent to Ms Badcock had she sought instructions from Mr Green, as he would readily have volunteered it. This did become plain as the transaction progressed, but Ms Badcock never sought comprehensive instructions from (either) Mr Green or Ms Phillips.

4. [367]

   Second, About Life was a stressed client. Not only was About Life “in a bad way with our bank”, Ms Phillips, in particular, was extremely busy attending to a wide range of tasks to keep the business operational in a cashflow crisis. Ms Badcock’s client was, essentially, distracted.

5. [368]

   Ms Badcock did not, at an early stage, identify the key issues in the transaction and seek instructions from her client, in particular, as to whether there were any side deeds in relation to the Double Bay lease. Nor did Ms Badcock seek relevant documents such as the registered lease, equipment list or the Deed of Agreement for Lease. The experts agreed that this did not accord with the practice of a competent solicitor. As to whether those instructions should have been sought before, in, or soon after the “high level comments” email is not particularly germane. Key issues went unexplored until shortly before exchange of contracts.

6. [369]

   Nor did Ms Badcock review the documents obtained, albeit late, to the requisite standard. Whilst I accept that her cursory review of the equipment list was satisfactory in the circumstances, her review of the Deed of Agreement for Lease was not. Another opportunity was missed to obtain further instructions from the client and thereby protect the client’s interests in the proposed transaction.

7. [370]

   Ms Badcock did ultimately identify key issues in the transaction and seek instructions from the client. There were two problems with the request for instructions, being lateness and clarity. Ms Badcock’s enquiry, nestled within a long email sent shortly before exchange and framed in a way which invited the client to agree with the course which Ms Badcock proposed, did not give a client, who was under a substantial amount of financial and time pressure, the tools that the client needed to understand what was being asked, why it was important, and to give thought to the matter in response to that advice. Ms Badcock’s email assumed a level of knowledge which the client did not necessarily have, and which Ms Badcock had not checked to make sure the client had.

8. [371]

   Ms Badcock considered that she could proceed in this fashion because she assumed that the recipients of the email sent shortly before exchange were sophisticated clients, although agreed that she did not check with the directors whether they had the level of sophistication that she had assumed.

9. [372]

   Whilst there is no doubt that Mr Green was a sophisticated client – at least in respect of private equity and, likely, general commercial concepts – he was not in fact a sophisticated client when it came to conveyancing nor the interstices of the standard form “Contract for the Sale of Business”. Mr Green had lived in Australia (more particularly, in Melbourne) for only four years (Ms Badcock did recall that Mr Green had an accent). Whilst I do not doubt that Mr Green would readily have grasped any explanation proffered by Ms Badcock, the problem appears to have been that Ms Badcock assumed he already knew about the standard conditions of the Contract for Sale of Business but did not check, this being the first time she had acted for Mr Green.

10. [373]

    The fact that Mr Law and Mr McNee – who knew this sophisticated client better than her – thought it appropriate to proffer additional advice was an indication that even this sophisticated client needed more information. In fact, Mr Green had never instructed solicitors on a transaction involving the sale of part of a business. Whilst, over his career, Mr Green had come across rights of first refusal in the context of selling and purchasing businesses, he had not come across a side deed in the context of retail leases and agreements for lease.

11. [374]

    For her part, whilst Ms Phillips was a sophisticated businesswoman, she had not previously retained solicitors to act on the sale of a business and did not have an understanding of the role that solicitors would play when acting on such a transaction. Nor is it obvious that Ms Phillips would have understood Ms Badcock’s reference to “any side deeds or variations” in the email encompassed the Deed of Agreement between About Life and Woolworths. Ms Phillips had not encountered the term ‘side deed’ often in her career and did not agree that it was obvious what a side deed was, “As a lay person to me that’s not obvious.” More often, she encountered “deeds of agreements”. Of course, the title of a document is of little importance; the substance of the document is what matters. As canvassed as [67]-[72], the term ‘side deed’ appears well understood by solicitors practising in property and leasing transactions, but may not be well understood by others. Referring to such a term, without checking that the recipients of the email understood it, posed a risk that the solicitor’s advice may not be comprehended and actioned. The client’s instructions may be inaccurate or wrong.

12. [375]

    Whilst it was not negligent of Ms Badcock to refrain from having a face-to-face conference, at some point Ms Badcock needed to satisfy herself that the client understood the solicitor’s requests for instructions or explanations given. In this case, where the instructions were sought with a short explanation, in an email, the client’s understanding would be demonstrated by giving clear instructions as to whether there were any side deeds in relation to the lease. The fact that Ms Badcock’s email was inadequate to address a key issue and obtain clear instructions is demonstrated by the fact that it was sent to three people, each of whom had been involved in the Woolworths’ Deed of Agreement and each of whom were experienced business people, but none of whom gave a directly responsive answer. Ms Phillips’ answer addressed whether the lease attached to the contract was the registered lease but not whether there were any side deeds. Mr Beecroft did not directly respond. Mr Green did not respond at all. In my view, a competent solicitor would have appreciated that their request for instructions and accompanying explanation had not been understood and would have taken further steps to explain the key issue and obtain proper instructions. In failing to make further enquiries of her client, I consider that Ms Badcock’s performance of her retainer departed from the requisite standard.

13. [376]

    Turning to Yager v Fishman, there a client sued his solicitor for failing to remind him of the date by which he could exercise an option to bring a lease to an end. Du Parcq LJ held at the solicitor was “not bound to supply deficiencies in their client’s memory unless they were clearly requested to do so”: at 558. It might be thought a curious proposition that a solicitor cannot be liable for failing to remind their client of an important date unless the client asks; if the client remembers sufficiently to ask the solicitor to remind them then they probably do not need the solicitor to do so. Solicitors have, of course, been found liable for failing to remind their clients of important dates such as approaching limitation periods (Argyropoulos v Layton [2002] NSWCA 183; (2002) 36 MVR 432 at [55] per Santow JA (Hodgson JA agreeing); Wilson v Rigg [2002] NSWCA 246; (2002) 36 MVR 451 at [18]-[19], [33]-[35] per Giles JA (Santow JA and Foster AJA agreeing)) or failing to remind the client of the date by which funds must be made available to complete a contract for the sale of land (Cadoks Pty Ltd v Wallace Westley & Vigar Pty Ltd [2000] VSC 167 at [139], [140] and [143] per Ashley J).

14. [377]

    It becomes clear on closer inspection. In Yager v Fishman, the client was an experienced businessman who the Court found was well aware of the provisions of the lease, to the solicitor’s knowledge. As Scott LJ observed, the solicitor “was justified in assuming throughout that the [client] was alive to the option terms of the … lease. To my mind any other assumption by [the solicitor] would have been ridiculous”: at 554. Yager v Fishman is generally cited as authority for the proposition that a solicitor is not negligent for failing to repeat advice already given: Scottsdale Homes Pty Ltd v Gemkip Pty Ltd at [96]-[97] per Chesterman J, citing Rupert Jackson and John Powell, Jackson & Powell on Professional Negligence (3rd ed, 1992, Sweet & Maxwell) at [4-106]; Nigam v Harm (No 2) [2011] WASCA 221 at [141] per Newnes JA.

15. [378]

    The problem here is that the advice was only given once, and at the last minute. This case is more akin to Lucantonio v Kleinert, where a solicitor acting for a purchaser gave advice as to how to proceed in the face of a notice to complete served by the vendor. The advice was given the day before a notice to complete was to expire. As Brereton J observed, “Even with a relatively sophisticated client … the solicitor must position the client to deal with the looming crisis. A solicitor acting prudently would have taken steps to ensure that the client was positioned to make the relevant decision at least several days earlier, to permit finance to be arranged, if required …”: at [121]. The solicitor’s advice was “manifestly too late” and “came too late to be acted upon”: at [125]. (This was not an issue on appeal: Lucantonio v Stichter [2014] NSWCA 5 at [53]-[55], [62], [64], [133]-[134], [145].)

16. [379]

    While, in theory, it was not ‘too late’ for About Life to act upon Ms Badcock’s 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. Maddocks thereby failed to discharge its contractual obligations to About Life under the retainer and its duty of care.

MOVING TOWARDS THE FUTURE

1. [380]

   Attention turned to pressing cashflow problems. On 24 April 2017, Ms Phillips sent Mr Green an urgent email requesting that an additional $500,000 be borrowed by a loan note, “Our cash situation is extreme … Issues with cash are compounded and made worse than what the real situation is by rumour and credibility. The supply chain has been difficult … supply chain, competitors and staff talk and I think in general are just fatigued by it … being a realist and immersed in the operation – I don’t believe [news of the sale of the Double Bay store] is going to regain our credibility with staff and the supply chain. Our ability to pay and get our stores stocked is what will re-gain our credibility with these stakeholders – which I do believe once we are in a position to do this we will re-gain relatively quickly.” (According to Mr Ross-Edwards, by April 2017, the relationship with many suppliers had become seriously strained. “We were speaking to them on a daily basis assuring them that the debts we owed would be paid.”)

2. [381]

   Ms Phillips advised Mr Green that accounts payable had been paid down to $6.6 million over the past months “as most suppliers are coming down much harder with us on terms.” There were a number of other outstanding expenses, including legal fees for the Surry Hills dispute, Retail Oasis and IT providers. A $500,000 loan note until settlement of the sale of the Double Bay store would enable major expenses to be paid and the company kept compliant “and tidy up some more suppliers”. Further, whilst Ms Phillips acknowledged the enormous stress of recent events and the relief following the sale of the Double Bay store, Ms Phillips did not think the plans for the next phase were all that considered, noting that there competitors had strategy and capital, “the market has also changed. I do believe we are up against more”.

3. [382]

   Whilst Ms Phillips agreed that her observations presented a fairly grim picture of the financial position of About Life, “but it was all prospect from there, because we had sold Double Bay for $10 million.” Ms Phillips agreed that About Life had underperformed during the period of turmoil, “the market had become more competitive” and “we had to respond to that”. Ms Phillips also considered that there were no direct organised competitors to About Life, which was a large footprint retailer specialising in wholefoods and natural and organic foods and products. Many of About Life’s suppliers were specialised manufacturers and farmers who provided products attractive to About Life’s customers and differentiated About Life as a speciality retailer. The suppliers gave About Life access to smaller and local brands and innovative health and wellbeing products that customers could not get elsewhere.

Seeking Council consent

1. [383]

   On 27 April 2017, Maddocks requested the Council to consent to assign the About Life lease to Harris Farm. Council asked Harris Farm to complete and return a retail tenancy application form. On 8 May 2017, Maddocks provided the Council with the retail tenancy application form signed by Harris Farm. However, the form was incomplete.

2. [384]

   On 10 May 2017, the property manager at the Double Bay shopping centre requested a meeting at Council chambers with Mr Harris and Mr Williamson to discuss Harris Farm’s plans for alterations to the premises. The meeting was postponed to permit Harris Farm to finalise its plans for Council. On 18 May 2017, Mr Harris met on site with representatives of the Council to discuss Harris Farm’s plans for the site. Ms Phillips said she did the introductions but did not stay for the meeting. Ms Phillips said the Council was supportive of the assignment to Harris Farm and said they would work through it quickly.

Offer from The Natural Grocery Co

1. [385]

   On 26 April 2017, The Natural Grocery Co Pty Ltd submitted a non-binding indicative offer to acquire all of the shares in About Life. The indicative price was $22.5 million, based on the 2017 EBITDA run-rate, and assumed that About Life would be acquired on a debt-free basis. The letter from the chairman of the company noted:

2. [386]

   Prior to receiving this offer, Ms Phillips had provided various financial information to the chairman of The Natural Grocery Co. They had spoken two or three times and discussed a number of questions that the chairman had. The chairman told Ms Phillips that he was preparing his own model, based on the information provided. Ms Phillips had also met with the company’s chief executive officer and chief operating officer on several occasions, including tours of About Life’s stores. Ms Phillips considered that the information she had provided was sufficient for The Natural Grocery Co to make an informed decision about what offer to make, with any offer to be validated by a due diligence process.

3. [387]

   On 28 April 2017, the bank requested a delay of “our meeting over the coming weeks. Just drowning with work at the moment and [Mr Elkassem] is still away”. Ms Phillips informed Mr Morales, “So you know we achieved $10mill on the sale to Harris Farms. Solicitors now working on the lease assignment.” Mr Morales replied, “That will certainly relieve some pressure.” The bank does not appear to have been overly concerned about the company’s financial position at the time, in particular, being comfortable to defer a review of About Life’s position. During the course of the day, a loan agreement was prepared between Mr Green’s company and About Life, providing a short term loan “as a bridge until we get the proceeds of the [Double Bay] sale.”

4. [388]

   On 4 May 2017, Mr Green reported to investors about recent events, noting that the sale to Harris Farm was expected to close “by the end of June 2017”. From the proceeds of sale, $4 million would be used to pay down bank debt, $500,000 to repay Mr Green and a further $1.5 million to pay down Accounts Payable. Mr Green also reported that About Life had been in discussions with The Natural Grocery Co, “We are pursuing this potential opportunity on an expedited time frame and will lay out the potential opportunity vs the stand-alone pathway in a detailed communication as soon as possible”.

5. [389]

   Mr Green also reported to investors that the company had launched a search for a new chief executive officer and was finalising a stand-alone strategy as developed with Retail Oasis. The financial performance of About Life’s stores continued to be poor; “the stores have suffered approximately 10% … declines as a result of sub-optimal inventory levels in the stores.” Inventory of $2.5 million was to be written off “due to multi-year cumulative impact of waste/spoilage and transfer pricing not property written off from book inventory, as identified by new systems”. Surry Hills would be closed effective 30 June 2017 and Cammeray was expected to close by 31 December 2017.

6. [390]

   In May 2017, About Life entered into a payment plan to the Australian Taxation Office. About Life’s tax debt then stood at some $853,000. On 11 May 2017, the board met. The stores continued to perform poorly. Ms Phillips reported that stores were being affected by ‘out of stocks’ due to cashflow issues, which was affecting sales. Ms Phillips was confident that the inventory system was now working. The minutes record the results of the meeting with the bank including, “based on sale of Double Bay to Harris Farm for $10.0 m and repayment of $4.0m in bank loans will not act on March covenant breach.” A further offer had been received from The Natural Grocer Co for the business excluding Double Bay for $12.5 million, “This was rejected but further discussions are to take place.”

7. [391]

   On 12 May 2017, About Life received a third offer from The Natural Grocery Co, taking into account the sale of the Double Bay store. It was now proposed that The Natural Grocery Co and About Life would merge. The Natural Grocery Co would pay $13.5 million for About Life’s shares, with 35% to be paid in cash (some $4.725 million) and 65%. The offer was subject to due diligence and board approval, with a binding share sale agreement to be executed by 30 June 2017. The significance of this offer is that it was relied upon by About Life as an alternative basis for calculating the value of the company in the counter factual, to which I will return at [632].

8. [392]

   Between 12 May 2017 and 23 May 2017, Mr Ross-Edwards and Ms Phillips uploaded documents into a data room for The Natural Grocery Co to undertake due diligence. On 18 May 2017, The Natural Grocery Co began due diligence. The fact that About Life embarked upon the due diligence process suggests that the board was then inclined to accept The Natural Grocery Co’s offer, no doubt subject to further negotiations, rather than continue to operate the remaining stores.

Post-sale forecast

1. [393]

   On 15 May 2017, Mr Ross-Edwards sent the bank a Compliance Certificate and accompanying financial information. Mr Ross-Edwards also sent a revised forecast, which included actual figures for April 2017. The post-sale forecast received a significant amount of attention, as it was the primary basis on which About Life said the company should be valued in the counter factual, and to which I will return at [627].

2. [394]

   The post-sale forecast assumed that bank debt would be reduced by $4.333 million in June 2017 (being $4 million from the proceeds of sale and the usual quarterly loan repayment of $333,333). The $500,000 director’s loan made in April 2017 would be repaid in May 2017 while the $1 million directors’ loan advanced in December 2016 (see [145]) would be repaid in the 2018 financial year. Suppliers would be paid $2.25 million in June 2017, presumably from the proceeds of sale, and a further $3 million would be spent on additional inventory. The post-sale forecast charted the increase in Inventory Days from July 2016 (65 days) to April 2017 (93 days) and forecast a reduction in June 2017 to 60 days. Likewise, Payable Days had increased from July 2016 (57 days) to April 2017 (74 days). It was forecast, in June 2017, to reduce Payable Days to 45 days.

3. [395]

   Whilst Ms Phillips was asked about the post-sale forecast on the basis that it was prepared a little before 15 May 2017, it was forcefully suggested to Mr Ross-Edwards that it was prepared much later. Mr Ross-Edwards recalled waiting on the April actuals to update the forecast. The April actual figures were prepared in the first two weeks of May, “It was standard practice every month, it … very rarely varied.” Mr Ross-Edwards was emphatic that this forecast was not prepared after 30 June 2017, “[W]e were looking at how we were going to progress forward once we received the money from Harris Farm, so I do know that that was in May. And it, it would have had actuals. If I had done that in a later date I would have put actuals all the way through to June. That was my procedure.” I find that the post-sale forecast was prepared in mid-May 2017 in the manner described by Mr Ross-Edwards.

Bank review

1. [396]

   On 16 May 2017, the bank advised that it did not propose to act on covenant breaches but reserved the right to do so should the company fail to apply proceeds from the Double Bay sale to debt reduction before 30 June 2017, or fail to undertake further balance sheet de-leveraging to alleviate and cure covenant breaches moving forward.

2. [397]

   The bank’s covenant monitoring report noted that various factors had resulted in a deterioration of the company’s underlying financial position, including intense competition and discounting in the market, consumer trends and a deflationary environment. As a result, the company had underperformed against the previous period and was well below budget. Whilst About Life continued to meet interest and mandatory amortisation obligations, its results were weak and management had embarked on a debt reduction strategy to align covenants with agreed thresholds. Management had acknowledged the steep earnings decline and completed a comprehensive strategic review with Retail Oasis which recommended the closure of underperforming stores, strengthening the management team and operations, and a new store pilot. In respect of debt reduction strategy, the bank’s report noted: (emphasis added)

3. [398]

   It does not appear that the bank communicated the prospect that $5 million of the Double Bay proceeds of sale would be required for debt reduction. About Life’s contemporaneous documents refer to $4 million only. Ms Phillips did not agree that the bank told her.

4. [399]

   The bank’s covenant monitoring report also saw the closure of poor performing stores as credit positive and took a degree of comfort from the fact that About Life continued to meet its tax liabilities. The bank noted that About Life’s amended forecasts were “underpinned by more conservative assumptions and in our view more accurately reflect the group's current trading position”. The bank had itself run a scenario based on 2017 estimates and, on this basis, proposed to downgrade the group’s credit risk: see [436].

Inventory write-down

1. [400]

   As earlier mentioned, About Life’s new IT system led to significant inventory problems. Mr Ross-Edwards said that the issues which had led to this problem had been identified and resolved during 2016 and, in early 2017, he decided to ‘clean up’ the inventory issues and fix the matter once and for all. In May 2017, physical stocktakes were conducted across all sites.

2. [401]

   A figure of $5,910,364 was established for inventory write-down. This comprised inventory recorded on the old computer system as obsolete, dated or non-existent, amounting to $1.95 million. In addition, $3,960,364 related to inventory that was overstated in terms of its value or existence due to shrinkage (theft) or waste, as a consequence of over-ordering and over-production. Most of this was product manufactured at the new kitchen at Wetherill Park. Mr Ross-Edwards explained that the write-down did not impact cashflow or the viability of the business. The write-down was in respect of stock that did not exist but was still recorded in the system or stock that had been over-valued in the system. There was no need to replace the stock.

3. [402]

   A Deloitte audit workpaper later recorded that the IT problem resulted in significant over-ordering in the first half of the 2017 financial year (being July to December 2016). The situation was perpetuated as a result of a decline in sales, with management being slow to address levels. As the majority of the inventory was produce and of short life, this resulted in significant wastage and general obsolescence. This wastage was not properly reflected in the stock records, resulting in a situation where the Bepoz stock did not correlate to physical holdings. About Life spent several months updating the stock system and changing processes for ordering and processing fresh produce. Mr Samuel identified the over-ordering of inventory as having a significant impact on About Life’s financial performance, financial position and cashflow, as it wasted expenditure. That is doubtless the case. The extent of this problem was not quantified until after the problem had been fixed.

Disaster

1. [403]

   On 23 May 2017, Matthew Franich of Woolworths rang Ms Phillips and asked whether About Life had sold the Double Bay store to Harris Farm. Ms Phillips said they had. Mr Franich asked why she had done that without talking to Woolworths first. Ms Phillips said she did not think that Woolworths would be interested in the store. Mr Franich did not mention Woolworths’ right of first refusal, nor did the conversation prompt Ms Phillips to recall it.

2. [404]

   On 25 May 2017, Mr Franich telephoned Ms Phillips again, with Woolworths’ legal counsel also on the line. They informed Ms Phillips that they had uncovered a right of first refusal for the Double Bay store, and About Life was not in a position to sell the business to Harris Farm. Ms Phillips remembered the right of first refusal as soon as they mentioned it. Ms Phillips immediately called Mr Ross-Edwards and told him about the call from Woolworths. Mr Ross-Edwards said, “I’ll never forget it.”

3. [405]

   Ms Phillips called Mr de Fontgalland and asked whether he remembered something about a deed with Woolworths which gave them a right of first refusal over Double Bay. Mr de Fontgalland said, “Yes, that was a while ago. Woolworths has the first right of refusal to lease the About Life Double Bay premises in a number of circumstances. Why?”. Ms Phillips advised that Woolworths had just told her that they had a first right of refusal over the site and would be applying for an injunction to stop the sale of Double Bay to Harris Farm. This was the first that Mr de Fontgalland had heard of the proposed transaction. Mr de Fontgalland sent Ms Phillips a copy of the document.

4. [406]

   Ms Phillips left an urgent message for Ms Badcock and, by email, forwarded the Woolworths’ Deed of Agreement. Ms Phillips advised that the chief executive officer of Woolworths “has advised they are filing an injunction – attached has surfaced – they do have first right of refusal.” This was the first time Ms Badcock became aware of the Woolworths’ Deed of Agreement. Ms Badcock and Ms Rizk spoke to Ms Phillips soon afterwards. According to Ms Rizk’s notes, “Tammie didn’t recall this agreement … solicitor sent it to her (but she has signed it)”. Ms Phillips told Maddocks that Woolworths did not want the store but did not want Harris Farm in the shopping centre and would probably take the store “just to keep [Harris Farm] out”. Ms Phillips also expressed the view that the Council were not particularly enamoured of Woolworths and “want [Harris Farm] to get in”.

5. [407]

   A letter of demand shortly followed from Woolworths’ solicitors. An undertaking was sought from About Life, failing which legal proceedings would be commenced. Woolworths also sent a letter of demand to Harris Farm and the Council. This was the first that Mr Herro and Ms Scrivener knew of Woolworths’ right of first refusal. Undeterred, later that evening, Harris Farm sent the Council the remaining information to support its application for an assignment of the lease. Later that evening, Mr Green enquired of Mr McNee whether Ms Badcock would be joining them for a conference arranged with Woolworths; Mr McNee replied, “Yes. I made her.”

CAUSATION

1. [408]

   It is convenient at this juncture to consider causation. The question of causation is now guided by section 5D of the Civil Liability Act, which provides:

2. [409]

   The Act retains the two-stage analysis previously found in the general law; the Court is required to determine factual causation and then decide the appropriate scope of the defendant’s liability: AVWest v Clayton Utz at [472]. In substance, factual causation requires the application of the but-for test of causation: AVWest v Clayton Utz at [473] citing Wallace v Kam (2013) 250 CLR 375; [2013] HCA 19 at [14]-[16]. The question of factual causation is to be determined by considering what About Life would have done if Maddocks had not been at fault: section 5D(3)(a), Civil Liability Act. About Life must prove, on the balance of probabilities that, but for Maddocks’ failure to perform its retainer in the manner contended for, About Life would have had a valuable opportunity. That is, was Maddocks’ failure a necessary condition of the occurrence of the harm, being deprivation of that opportunity?

3. [410]

   About Life submitted that a solicitor acting with reasonable care would have obtained full instructions from About Life as to the background to the sale of the lease and explored what issues might be raised by this particular transaction; obtained instructions about whether there were any side deeds relevant to the lease and obtained copies; obtained a copy of the Deed of Agreement for Lease and read it; advised the client to consider each of the warranties about About Life’s knowledge in clause 10 and to provide the solicitor with copies of any documents relevant to those warranties. All of these things would have been done on 13 April 2017 or as soon as possible thereafter, but by no later than the end of 18 April 2017. The Court would be satisfied on the balance of probabilities that, had any of the matters occurred, then the side deed made in March 2014 and Woolworths’ right of first refusal would have come to Ms Phillips’ mind before contracts were exchanged with Harris Farm. Disaster would have been averted.

4. [411]

   Maddocks denied any negligence was causative of harm on, essentially, two bases.

Did Mr Beecroft know?

1. [412]

   First, whilst Maddocks accepted that Mr Green and Ms Phillips had forgotten about Woolworth’ right of first refusal, the same was not accepted to be the case for Mr Beecroft, as he did not give evidence. Maddocks submitted that the state of mind of Mr Beecroft, as a director, was also the state of mind of About Life. Proving that Mr Beecroft had no recollection of Woolworths’ right of first refusal prior to exchange was evidence which “was in the power of [About Life alone] to have produced” and was in no respect a matter of proof which it was “in the power of [Maddocks] to have contradicted”: Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970. The principle was said to be wider than that in Jones v Dunkel. As the Full Federal Court put it in Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88 at [81]-[82]: (emphasis in original)

2. [413]

   Maddocks submitted that the natural inference was that Mr Beecroft could not give evidence that the corporate mind of About Life was not infected by some awareness on his part. To this, About Life submitted there was an obvious inference from all the objective circumstances that no one at About Life remembered, as it would have been completely irrational for them to proceed to breach Woolworths’ right of first refusal. Nor was this a question of attribution of knowledge to a corporation, but a question of causation. Even if Mr Beecroft was well aware of Woolworths’ right of first refusal, this would not detract from a conclusion that, if Ms Badcock had given advice on the subject in a timely and reasonable manner, it would have caused Ms Phillips to recall it.

3. [414]

   An important feature of Coshott v Prentice was that the applicants sought to establish a trust but called little evidence to establish its existence. The same cannot be said here. Whilst Mr Beecroft did not give evidence, and I infer that his evidence would not have assisted About Life’s case, a substantial body of evidence is before the Court. The evidence is that Mr Beecroft was a non-executive director of About Life. He was not involved in the day-to-day management of the business. He was an investor. He participated in board meetings. His knowledge of the details was likely less than Mr Green and, certainly, less than Ms Phillips. If Mr Green and Ms Phillips had forgotten about Woolworths’ right of first refusal, the chances are that he had too.

4. [415]

   In addition, there are numerous references in the contemporaneous documents, in particular, the bank’s regular reports, that Mr Beecroft was an experienced and successful businessman. He enjoyed a good reputation: see [138]. It is inherently unlikely that such a person would remember a vital piece of information but withhold it from his fellow directors and the company’s solicitors. Mr Beecroft was in email communication with Maddocks during the transaction and attended at Maddocks’ offices to sign the Contract for Sale of Business. It is wholly unlikely that he would have kept such a terrible secret and thereby exposed the company, of which he was a director, to harm.

5. [416]

   Finally, there is no hint in the contemporaneous documents, either before or after exchange of contracts with Harris Farm, that Mr Beecroft was aware of Woolworths’ right of first refusal when contracts were exchanged. I find that Mr Beecroft had also forgotten about Woolworths’ right of first refusal at the time of the transaction and was not prompted to recall it by Maddocks.

Would the directors have remembered anyway?

1. [417]

   Second, Maddocks submitted that further enquiries by Ms Badcock would not have caused Ms Phillips, Mr Green or Mr Beecroft to recall the existence of the Woolworths’ Deed of Agreement and provide it to Maddocks, given their failure to recall it notwithstanding Mr Green and Ms Phillips’ meeting with Mr Harris. As to this, About Life submitted that, both in content and context, Mr Harris’ enquiry to Mr Green in Ms Phillips’ presence was far removed from the enquiry which Maddocks would have made had it performed its retainer with reasonable care.

2. [418]

   I agree that there is little to compare the conversations with Mr Harris and those which may have been expected to take place with About Life’s solicitor when taking instructions on key issues in relation to the proposed transaction. It is one thing to discuss the potential sale of a property with an interested purchaser. It is another to discuss the matter, in a confidential setting, with one’s own solicitor who is acting to protect one’s interests and carefully obtaining detailed instructions on relevant matters, pressing where necessary to obtain clear instructions, and providing additional advice and explanation where needed to clarify why the information is sought and precisely what information is sought.

3. [419]

   The fact that Ms Phillips recalled Woolworths’ right of first refusal when squarely asked by Mr Franich of Woolworths suggests that, if squarely asked by Ms Badcock whether there were any side deeds in relation to the Double Bay lease – and explaining, if necessary, what was meant by a “side deed” – Ms Phillips would likewise have recalled it. I am satisfied on the balance of probabilities that, had Ms Badcock either proper instructions from About Life earlier in the transaction or on reviewing the Deed of Agreement for Lease then Woolworths’ Deed of Agreement would have been recalled.

4. [420]

   Failing that, had Ms Badcock properly considered the responses of About Life’s directors to her email sent shortly before exchange, she would have apprehended that they had not understood or addressed her request for instructions and sought to clarify their instructions. Of the three directors, Ms Badcock would most likely have called Ms Phillips, as she had been speaking to Ms Phillips during the course of the day and had presumably come to appreciate that Ms Phillips was the person to ask. Of the three directors to whom Ms Badcock’s email had been addressed, Ms Phillips had given the most responsive answer, albeit that her answer also indicated that Ms Phillips may not have understood the question. If Ms Badcock had called Mr Green instead, he would likely have referred her to Ms Phillips in any event. It is unlikely that Ms Badcock would have called Mr Beecroft as she had not previously spoken to him.

5. [421]

   Having done so, disaster would have been averted. Either Ms Phillips would have recalled the Woolworths’ Deed of Agreement or, if Ms Phillips could not answer Ms Badcock’s question without checking About Life’s records, would have looked in the shared drive and readily located the document: see [668]. If, on finding the document, Ms Phillips had been confused or unclear as to the ongoing significance of the Woolworths’ Deed of Agreement, Ms Phillips could readily have called Mr de Fontgalland, who appears to have been acting for About Life on other matters and been readily available to assist Ms Phillips.

6. [422]

   That is, Maddocks’ failure to perform its retainer to the requisite standard was a necessary condition of the occurrence of the harm, being deprivation of an alleged commercial opportunity. It was not suggested that there was any particular reason why the scope of Maddocks’ liability should not extend to the harm so caused. Thus, causation is established.

THE FALLOUT

1. [423]

   About Life and Woolworths’ lawyers met to endeavour to resolve the matter, without success. Mr McNee suggested that Mr Green meet with Harris Farm and seek to resolve the matter, including any claim for damages which Harris Farm would have against About Life. The meeting with Harris Farm was, according to Mr Green, “quite amicable – they understand there was no ill-intention.” However, Harris Farm wanted the site, “Even brought up buying us. Is that feasible? We told them we have very little time. They understand. … In the meantime shall we talk [voluntary administration] and the potential impact on us as it relates to our shareholders, [Harris Farm] and [Woolworths]?”

These proceedings

1. [424]

   On 30 May 2017, Woolworths commenced these proceedings against About Life, Harris Farm and the Council, seeking 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. As final relief, Woolworths sought an order that About Life assign the lease to Woolworths instead. Darke J granted an interlocutory injunction against About Life and stood the matter over to 2 June 2017. Ms Phillips called the bank and updated Mr Morales on developments, noting that the parties were talking with a view to a quick resolution. Further:

2. [425]

   Discussions ensued between the parties to reach a ‘standstill’ agreement, so that the Council was not deemed to have given consent to the assignment and the parties to the Contract for Sale of Business were not entitled to terminate whilst the proceedings progressed. On 1 June 2017, the Maddocks partner acting for About Life in the proceedings, Mr Atkin, was asked by the parties to agree a position on a relatively minor issue and enquired of Mr McNee whether it was necessary to seek instructions from the client. Mr McNee replied: (emphasis added)

3. [426]

   Later that evening, Maddocks sent Mr Green an invoice to About Life for professional fees in the matter from 13 April 2017 to 31 May 2017. Beyond the fees charged by Ms Badcock for her email advice of 13 April 2017, no further fees were charged in respect of her or Ms Rizk’s time until 27 April 2017 in relation to seeking the landlord’s consent to the assignment of a lease. Nor was any time charged for Mr McNee and Mr Law, aside from preparing board minutes on 20 April 2017.

4. [427]

   Ms Badcock said in cross examination that the bill did not record all the work by her property team and was an error. I infer that the fees were not rendered given recent events and the fees were written off by Maddocks without consulting or informing Ms Badcock. This was likely a decision made by Mr McNee and Mr Atkin, who continued to work for About Life in the weeks which followed. Further, whilst Mr McNee’s earlier email, read in isolation, is ambiguous, when read together with Maddocks’ bill, it is apparent that Mr McNee did not think much of Ms Badcock’s performance of the retainer. In any event, Mr McNee’s views on the subject are not dispositive.

5. [428]

   On 1 June 2017, Mr Green introduced Mr McNee to an insolvency practitioner at Korda Mentha, who was doing some “background work on the situation in case we need to file VA”. On 2 June 2017, the matter was listed for final hearing on 27 and 28 July 2017. After the hearing, Woolworths’ representatives spoke to About Life’s solicitor and offered to resolve the matter on the basis that Woolworths paid About Life $10 million for the Double Bay lease.

Effect on The Natural Grocery Co

1. [429]

   After receiving Woolworths’ letter of demand, Ms Phillips contacted the chairman of The Natural Grocery Co and informed him of developments. Ms Phillips said that they were half way through the due diligence process when the Double Bay sale failed. On 7 June 2017, documents from these proceedings were collated for The Natural Grocery Co’s review.

2. [430]

   As it happened, Maddocks were also the solicitors for The Natural Grocery Co. One of Mr McNee’s partners, Duncan Hall, told Mr McNee that The Natural Grocery Co had an interest in buying About Life and asked whether About Life would have a problem with the firm acting on both sides of the transaction. Mr McNee obtained instructions from Mr Green, who said that he was ‘shopping the market’ as selling About Life, which was struggling financially but still operating, would be getting it ‘out of a hole’ and also be the best option for Mr Green. On 29 May 2017, Mr McNee made the necessary arrangements to put a ‘Chinese wall’ in place at the firm.

3. [431]

   I note from Mr McNee’s conversation with Mr Green on about 29 May 2017 that Mr Green’s preference was to sell the business to The Natural Grocery Co rather than continue to operate the business. Woolworths’ opposition to the sale of the Double Bay store to Harris Farm notified four days’ earlier may well have contributed to Mr Green’s preference.

Effect on suppliers

1. [432]

   Ms Phillips said, whilst she had told suppliers that About Life was currently in the process of re-capitalising and expected money to come in soon so About Life could get payments back on terms, after the sale fell through she and Mr Ross-Edwards contacted About Life’s top 100 suppliers and advised them that the sale of the Double Bay store to Harris Farm was not proceeding. Woolworths was going to take Harris Farm and About Life to court to try and stop the sale from going ahead, which meant that About Life would not be able to pay suppliers’ outstanding invoices as expected. About Life was working on a solution but timing was up in the air. Ms Phillips had been telling suppliers that About Life had a solution and a date for payment, and now did not have either. This is confirmed by Ms Phillips’ email to her directors on 8 June 2017:

2. [433]

   Mr Ross-Edwards described the disruption of the Double Bay sale as a catastrophic event in terms of suppliers, affecting revenue as “we had to tell our suppliers that we were no longer getting that $10 million and … from that point on … they lost all [confidence] because they had no certainty of when they may get paid after that date. … It was in the last week of May that we had to tell them. We had to tell them.” Mr Ross-Edwards said, without exception, the suppliers’ responses conveyed their disappointment and deflation at the news.

3. [434]

   Mr Ross-Edwards said, “As soon as that letter arrived from Woolworths, … that was it.” From then on, suppliers increasingly told About Life that they were no longer willing to supply unless their account was fully paid or unless cash was paid on delivery. Mr Ross-Edwards said sales revenue in June 2017 “fell off the map because of suppliers.”

4. [435]

   Ms Phillips said the court proceedings created further uncertainty; the court proceedings were the subject of enquiry by suppliers in most communications at that time. Ms Phillips believed that the litigation and About Life’s deteriorating cashflow caused suppliers to become sensitive to delays in payment.

Effect on the bank

1. [436]

   On 2 June 2017, the bank reviewed About Life’s position, including with the assistance of risk officer, Mr Chapman. The bank had obtained additional information from the client, being forward quarterly estimates, and had conducted its own sensitivity analysis. Based on this work, bank officers considered that the leverage covenant would be 1.09 for September 2017 and 1.01 for December 2017 whilst the interest coverage ratios would be 6.08 and 7.09 respectively. “This implies adequate headroom under a scenario where we decrease management earnings estimate by 20% and increase interest expenditure by the same margin. Debt is aligned with management estimates within our analysis.”

2. [437]

   Mr Chapman noted that, whilst Double Bay had been the best performing store, the remaining stores generated sufficient EBITDA such that covenants were expected to be easily met after June 2017. “The $5m reduction is agreed as recommended …”. Mr Chapman expected there would be a further breach of covenant in June 2017, with the position to be assessed at that time depending on sale progress. Again, it does not appear that the bank communicated to About Life that it would require $5 million from the proceeds of sale.

3. [438]

   On 8 June 2017, Mr Green informed Mr McNee and Mr Atkin that he had asked the bank for more funds, “The bank said no to more capital.” Ms Phillips also updated Mr Beecroft and Mr Green on her discussions with Woolworths, Harris Farm, the bank and The Natural Grocery Co. As to the bank, Ms Phillips advised:

4. [439]

   Ms Phillips said that she spoke to Mr Morales at the time, and he told her that his team would be fine if the settlement stretched out to mid-August as he did not need to report any covenant breach to head office for the June 2017 quarter until after 14 August 2017, when About Life’s compliance reports were due. Assuming the Double Bay sale had settled by then, he would be reporting the breach to head office but also reporting a significant repayment of the debt and recapitalisation of the business. Ms Phillips’ email confirms that she remained of the understanding that $4 million from the proceeds of sale would be paid to the bank, and Mr Morales had not disabused her of that notion.

5. [440]

   In her email, Ms Phillips also advised Mr Beecroft and Mr Green that The Natural Grocery Co was “across the issues” and continuing with the due diligence – “we are close to the end with it” – with some discussion about the possibility of The Natural Grocery Co buying one or two stores as an asset sale during this period. Ms Phillips considered that there was no doubt that these proceedings would go to final hearing, that the bank would give About Life breathing space to repay the debt, and that $2 million was needed to get the company through this period. Consideration was being given to approaching Woolworths for a loan or selling assets to The Natural Grocery Co.

6. [441]

   On 9 June 2017, Ms Phillips and Mr Ross-Edwards updated the bank. Mr Morales’ note records: (emphasis added)

7. [442]

   Again, it appears from the bank’s note that About Life was minded to accept the Natural Grocery Co’s offer of $13.5 million.

Assistance from Woolworths?

1. [443]

   On 14 June 2017, Harris Farm advised it intended to file a cross-claim against About Life, seeking damages and an injunction restraining About Life from assigning the Double Bay lease to Woolworths. It is reasonably clear that Harris Farm was not interested in damages from About Life but getting the Double Bay site. On 15 June 2017, Woolworths informed Mr Green that it was prepared to offer $11 million for the site. Harris Farm considered that it would succeed at trial whilst Woolworths was desperate to keep Harris Farm out of the site.

2. [444]

   Mr Green reported to Mr Atkin and Mr McNee, “We may need to take this deal and take the risk on [Harris Farm] so we can get the cash into the business to survive.” Mr McNee suggested that About Life seek relief from the bank or agree a process for selling other parts of the business to The Natural Grocery Co or someone else, “I suspect if we pay the bank say $5 million now, and pay them out completely on sale to [The Natural Grocery Co] they will be happy.” It may be that the bank’s expectation to receive $5 million from the proceeds of sale was, by now, apprehended by About Life or its advisers.

3. [445]

   On 16 June 2017, Harris Farm filed a cross-claim against About Life. Mr Atkin spoke with Woolworths’ solicitor, who appeared to be trying to persuade About Life to pay Harris Farm something to make it go away. Mr Atkin said that About Life did not have the financial ability to do so. They discussed “the impending insolvency”, agreeing that, if About Life went into voluntary administration, the Council would terminate the lease. Woolworths were then considering advancing $3 million to $4 million to About Life. Mr Atkin advised that About Life “currently has the insolvency practitioners with them giving advice and drafting the appointment resolution. About Life [is] not going to last much more than a couple of days …”.

4. [446]

   On 16 June 2017, Mr Green advised that one of his investors was working on an emergency rescue package which, at least, would give About Life “a bit of backbone in our conversation with [The Natural Grocery Co] on Monday”. For a brief moment, on 16 June 2017, Woolworths agreed to advance $4 million to About Life and pay $12 million for the Double Bay lease. The offer was withdrawn the next day. Mr Green noted, “We’re now back to considering either a purchase of a few assets (won’t work because they would cherry pick the best and leave us with an even bigger problem) or a purchase of the whole company.” On 19 June 2017, The Natural Grocery Co made a revised offer, reduced by some $4 million and insufficient to pay the bank debt. Mr Green continued to negotiate with Woolworths.

5. [447]

   On 20 June 2017, the board met. Mr Beecroft had resigned as a director. The board discussed a capital inflow of $2.3 million to pay statutory obligations of $1.379 million and suppliers of $900,000. Discussion took place as to how to communicate with the bank going forward, including if they required more than $6 million to be paid down. Preparation for voluntary administration was underway, should the company need to take that route. Five parties were listed as having an interest in providing future funding for the business. A potential exit by selling the business to The Natural Grocery Co was also listed as an option. Later that day, Woolworths advised that it was no longer interested in acquiring About Life but was concerned to avoid the company going into voluntary administration. Woolworths was considering providing finance to About Life to avoid that happening.

Post-disaster forecast

1. [448]

   In support of About Life’s request for an advance of $4.75 million from Woolworths, on 21 June 2017, Ms Phillips sent Woolworths a cash flow forecast to 31 December 2017, noting that “March 2017 was when sales started to steadily decline due to stock issues from cash flow”. As Ms Phillips explained in her email, the forecast assumed it would take six months to get sales back to April 2017 trading figures, “We was not assuming full recovery of sales until 2018”. The forecast assumed that About Life would be “back on terms with suppliers within 30 days, from receipt of funds”. Ms Phillips advised Woolworths that the same forecast had been sent to Korda Mentha, who were preparing for voluntary administration.

2. [449]

   The post-disaster forecast gained prominence as it was relied upon by Mr Samuel as a more realistic predictor of the company’s future performance. To this suggestion, Ms Phillips said these cashflows were prepared in an acute situation, with meetings being held at Korda Mentha’s offices with the chief financial officer for Woolworths, trying to work through a solution on how the business could survive through this period of litigation. I will return to this at [611].

3. [450]

   On 25 June 2017, Mr Green updated Mr Stead and Mr Thevenon. He was meeting with The Natural Grocery Co the next morning, with the offer moving “from equity to cash to entice us into a deal … He really wants to do a deal. We’re also going to discuss quick sale of Lane Cove.” Mr Green was then meeting with the bank in the afternoon to request further funds, but was not optimistic. Mr Green’s efforts with an investor to provide a rescue package had been unsuccessful, “They just declined based on the uncertainty of the timing of the $10mm payment and the uncertainty of the damages claims … This week I will go broader with the shareholders to update them and seek advice and capital”. David Jones was also “coming back this week with interest and valuations on stores they may want. … [T]hey can get us capital very quickly. They are desperate for locations …”.

Move to the “bad bank”

1. [451]

   On 23 June 2017, About Life made its quarterly loan repayment to the bank of $333,333, but from a bank account which then had no funds.

2. [452]

   On 26 June 2017, Mr Green, Ms Phillips and Mr Ross-Edwards met with Mr Morales and sought $4 million to allow the business to continue to trade. According to Mr Morales’ notes, the hearing in these proceedings was scheduled for 28 July 2017, “Sales proceeds from either stakeholder will fund inventory, salaries, creditors and repay ~$5m of CBAs debt.” As I read this note, the client was then proposing that some $5 million of the sales proceeds would be paid to the bank, rather than acknowledging any bank requirement already communicated. The bank was also told that the company was also in final negotiations with The Natural Grocery Co for the sale of the business, with a revised offer of $9 million of which only $4.75 million would be available in cash. Mr Morales’ file note concludes, “Discuss position with internal stakeholder for a way forward,” this being a reference to the “bad bank”.

3. [453]

   Following the meeting, Mr Ross-Edwards forwarded the post-disaster forecast to Mr Morales. Mr Green reported to Mr Stead and Mr Thevenon that the bank was considering a bridge to get the company a deal with The Natural Grocery Co, “Hard to assess likelihood but they are taking it to head office.” The Natural Grocery Co increased its offer slightly.

4. [454]

   On 27 June 2017, Mr Morales provided his colleagues with a range of documents in advance of a conference, noting that a credit downgrade would be discussed in conjunction with a transfer to the “bad bank”. The bank’s internal report, on 28 June 2017, considered that About Life was unable to service the $4 million funding sought, and there was a distinct possibility that the business would default within a year if the deficiencies were not corrected in the short term.

5. [455]

   A further meeting with the bank was arranged for 30 June 2017, this time held at the “bad bank” in the city. Jonathan Clement, executive director of the Credit Structuring Department, attended. As Mr Green described it, the bank would have a “[b]ig team including our relationship folks, the credit guy and bad bank.” Ms Phillips understood that the “bad bank” had become involved because About Life could no longer give the bank certainty on being able to pay down the facility, unlike the certainty available in the weeks prior, “It seemed pretty obvious to me.”

6. [456]

   At the meeting, Mr Green requested $1.3 million to support About Life until the Double Bay sale finalised. Following the meeting, Ms Phillips emailed Mr Morales advising that funds were needed by 10 July 2017, “Concurrently we are exploring options to raise equity. Further we believe that [by] continuing to re-negotiate our supplier agreements we could do this for $2million.” Mr Morales sought clarification, as only $1.3 million had been mentioned at the meeting. Ms Phillips replied that $1.3 million would suffice; some $600,000 was needed to deal with superannuation and rent on the Surry Hills store, with the balance of the funds to be used to pay suppliers. Further:

7. [457]

   Following the meeting, the bank downgraded About Life’s credit rating in light of the company’s advice that it needed $1.3 million within the next seven days, with the prospect of needing further funds in the coming month, failing which directors would place the company into voluntary administration. In addition, investors were reportedly unwilling to commit further funds due to potential future litigation “and an apparent lack of confidence in the business in the medium [term]”. There was also a lack of clarity about the sustainability of the business model and an ability to restore profitability.

8. [458]

   The bank appointed McGrath Nicol as Investigating Accountants to advise if there was a rationale to provide funding. Management of About Life’s account with the bank was transferred to the “bad bank”. Mr Ross-Edwards thereafter dealt with Mr Clement. Mr Ross-Edwards and Ms Phillips attended monthly meetings with Mr Clement and his team. About Life received no further financial support from the bank.

9. [459]

   Mr Ross-Edwards understood that the failed sale of the Double Bay store and the commencement of these proceedings adversely affected About Life’s relationship with its bank. Whilst the bank had been prepared to condone some covenant breaches on the basis that payment from the Double Bay sale was anticipated in June 2017, when it became apparent that the payment would not be received in June and there was uncertainty as to when it would be received, Mr Ross-Edwards understood the bank’s attitude to change.

Founders advance funds

1. [460]

   On 2 July 2017, Mr Green advised Mr Stead that he was working on a backup plan, “Tammie may be willing to step up with cash to match bank and induce them to participate.” On 4 July 2017, Mr Green updated Mr Stead, noting that there was not much good news “other than Tammie considering a rescue financing terms TBD …”. Mr Green recounted the events leading to these proceedings, noting in respect of Woolworths right of first refusal, “Management had no recollection of that clause, the Board did not recall that clause and our lawyers missed that clause.” Given these proceedings, “This means that, while we will definitely get $10 million for the DB lease from either [Woolworths] or [Harris Farm], we don’t know when we will receive that capital, and will encounter severe cash flow shortages while this is getting sorted out”. After the hearing on 26 and 27 July 2017, either side had a right to appeal, which could take a further three to six months. The loser would pursue a damages claim against About Life. Whilst About Life had been negotiating with both sides “so that we can access the $10 million with an agreed damage amount to the losing side, but both parties are adamant that they have a strong claim and will not settle.”

2. [461]

   Mr Green also advised that The Natural Grocery Co had “tried to use this situation to their advantage and have dramatically dropped their offer from $13.5 million to $9 million” but, when taking into account the different structure of the revised offer, it was more like $6.5 million. The board had been “desperately pursuing a number of options to get capital into the business” including an advance from Woolworths of $4 million on the $10 million, extensive discussions with Harris Farm on the same basis “which came to nothing”, the sale of the whole company to Woolworths, the sale of selected leases to David Jones and discussions with the bank about further funds, with the bank to advise its decision on 10 July 2017, “They have stated they would like to help us, but we are not optimistic …”.

3. [462]

   On 5 July 2017, Ms Phillips, Mr Ross-Edwards and Mr Green met with the bank. The post-disaster forecast was discussed: $2 million was needed to allow the business to continue until the end of August 2017, after which an injection of capital of $4 million from the sale proceeds of the Double Bay store would be required. Whilst the cash flow indicated that $4 million would be paid to the bank as debt reduction, “Client was advised that the Bank will likely want to retain the remaining $6m of proceeds as debt reductions”. The bank was advised that Ms Phillips and Ms Stewart were raising $2 million equity, whilst Mr Green was trying to raise a further $2 million equity to match this contribution. Mr Green also advised that, if the court case had a positive outcome, “then he may be able to get support from his investors for further capital.” In addition, “Surry Hills landlord rental payment of $297k was made from a loan from Tammie & Jodie thus allowing that store to continue to trade.”

4. [463]

   On 7 July 2017, Mr Green updated his investors, including on “a possible $2mm rescue package from the Founders” to be used for compliance payments and critical supplier accounts payable. This amount was not considered adequate to fund operations past August 2017. Mr Green’s presentation also contained details on the company’s financial performance, noting that sales trend declines had stabilised “until cash flow constraints impacted stocking levels in April and May”. The retail customer count and average basket had decreased in May 2017, “also indicative of inadequate stocking due to cash flow constraints.”

5. [464]

   On 10 July 2017, loan agreements were entered into between About Life and Ms Phillips and Ms Stewart for $2.3 million. Ms Phillips and Ms Stewart approached Mr Green to match their contribution. Instead, he transferred a significant portion of his shares in the company to them, so that Ms Phillips and Ms Stewart obtained a majority interest in the company. The money was applied to compliance obligations and payment of $1.1 million to suppliers. This was not sufficient to pay all suppliers in arrears or normalise trade terms.

6. [465]

   McGrathNichol also produced a draft discussion paper, identifying two key risks: the ability to increase sales once outstanding creditors had been paid and stock levels restored; and, the outcome of the sale of the Double Bay store noting “there remains significant uncertainty around the identity of the ultimate purchaser and the actual timing of settlement (given the current proceedings on foot and the opportunity for an appeal).”

7. [466]

   On 13 July 2017, Mr Morales met with About life and was informed, “Tamm[ie] and Jodie have injected $2.3m into respective business. Source of funds from refinancing home loans with Westpac.” Woolworths was then proposing to inject $2 million capital but investors wanted to bind Ms Phillips not to waive any claim that About Life may have against Woolworths. Unsurprisingly, Woolworths would not do a deal that involved About Life retaining the right to sue it. Mr Morales’ note also records that About Life was continuing to look at getting out of the Cammeray lease but would keep the Surry Hills store if the Double Bay store closed; if the Double Bay store continued to operate then About Life would look to exit Surry Hills.

8. [467]

   Ms Phillips said it was decided that the Surry Hills store should be retained as About Life was closing down an Eastern Suburbs store, being the Double Bay store. Mr Ross-Edwards said that, after settling the dispute with the landlord, the board decided to keep the Surry Hills store going as it was going to be extremely difficult to assign the lease. Keeping both stores open was also relevant for the offer from The Natural Grocery Co, which included those sites.

9. [468]

   On 14 July 2017, Harris Farm served its evidence, including Mr Harris’ affidavit. This prompted Woolworths’ solicitor to contact Mr Atkin, as Woolworths had until then been advancing a case that Harris Farm had pursued the acquisition of the Double Bay site either knowing, or being wilfully blind, to the existence of Woolworths’ right of first refusal. Woolworths wanted to know if About Life had mentioned the right of first refusal to Harris Farm at any stage. In response to this inquiry, Ms Phillips promptly replied “I can only speak for myself and I did not mention [it] … as far as I know nobody had recall of it”.

10. [469]

    On 20 July 2017, the board met. The stores were continuing to perform poorly. The bank had suggested that $6 million of the proceeds of sale pay down debt. All offers of The Natural Grocer Co had been refused, with dialogue still open if it was prepared to substantially increase its offer.

11. [470]

    On 21 July 2017, Mr Atkin recommended that About Life brief senior counsel and actively defend Woolworths’ claim by disputing the validity of the right of first refusal. Ms Phillips replied that, from her perspective, “there are too many commercial reasons to not do this”. Woolworths was still reviewing funding About Life’s employee obligations and working actively with McGrathNicol to verify analysis of cash flow; if Woolworths won then About Life was in a strong position to sub-lease the site to operate a store at Double Bay; “Quite frankly pissing of[f] [Woolworths] when you don’t need to seems like retail suicide”; further, practically speaking, About Life did not have the resources.

12. [471]

    On 26 July 2017, the hearing commenced before Emmett AJA. About Life was excused from appearing. During the course of the day, the bank provided its consent to the change in shareholder structure following Ms Phillips’ and Ms Stewart’s proposal to inject $2.3 million in equity. (I note that, as documented, the funds advanced by Ms Phillips and Ms Stewart were not equity, but further debt.) Provided the capital was provided in the next seven days, the bank was also prepared to allow the company to redraw the June 2017 principal reduction in the sum of $333,333 (dealing with the loan repayment referred to at [451]) and waive future debt repayments until the earlier of 31 October 2017 or completion of the sale of the Double Bay business. “The bank is yet to decide whether it will require the full net sale proceeds to be applied towards debt reduction.” The bank reserved its rights on continuing failures to comply with debt covenants.

13. [472]

    On 28 July 2017, the hearing concluded. As the hearing had been expedited, About Life’s solicitors hoped that the Court would hand down judgment within the next month or so. The capital injection from directors was received and applied to reduce creditors. On 17 August 2017, the board met. Sales “have finally stabilized, admittedly on a low base”. The directors’ loans of $2.3 million had “gone a long way to correcting supply issues … Expect to start building slowly in August 2017. The board was now considering a claim against Maddocks and awaiting the judgment of Emmett AJA, “both sides think it is very close. There is no indication of timeframe.” An offer had been received from Woolworths to provide interim funding of employee costs until settlement of the Double Bay sale, subject to waiving any right to sue Woolworths. Mr Green was to seek the consent of investors to this approach. (Consent was not forthcoming and thus nor was $2 million from Woolworths.)

Judgment

1. [473]

   On 24 August 2017, Emmett AJA gave judgment in favour of Woolworths: Woolworths Limited v About Life Pty Limited [2017] NSWSC 1117. As such, About Life was not entitled to assign the Double Bay lease to Harris Farm unless it had first offered to assign the lease to Woolworths on equivalent terms and Woolworths had rejected that offer. His Honour directed Woolworths to bring in short minutes to give effect to the judgment, including directions for the further conduct of the proceedings.

2. [474]

   On 25 August 2017, Mr Atkin informed Ms Phillips and Mr Green of the import of the judgment, noting that Harris Farm had until 22 September 2017 to lodge an appeal and, if an appeal was brought, a decision would not be known for another three to six months, “The current state of limbo would remain during that time.” If agreement could not be reached by the parties on the appropriate orders to be made following his Honour’s judgment, then Emmett AJA would hear argument in the second week of September 2017. On 30 August 2017, Maddocks ceased acting for About Life in these proceedings.

3. [475]

   On 4 September 2017, About Life met with the bank. In advance, Mr Ross-Edwards provided a presentation concerning the way forward. The expectation was that Harris Farm would not appeal and About Life would complete the sale of the Double Bay store by 11 October 2017, being 28 days after the Court made final orders. About Life then expected to enter into a sub-lease of the site and continue to operate at Double Bay, with a three year lease being discussed with Woolworths. About Life also intended to sue Maddocks for damages.

4. [476]

   Once sale of the Double Bay store was completed, the choice was to either rebuild the business or sell to The Natural Grocery Co. The presentation reviewed both options. Either way, bank approval was sought to delay loan repayment until 15 October 2017, with repayment of $4 million rather than $6 million, to enable flexibility to remodel the stores “[o]r based on performance ability to draw down the $2 million, when we hit a[n] agreed running rate.” As a preliminary position, and subject to credit approval, the bank advised About Life that it would be willing to consider a position where $6 million was applied to debt reduction, $2 million was released to the company and $2 million was held in set-off to be released to About Life in 12 months if trading was satisfactory, otherwise, the monies would be applied to permanent debt reduction. About Life advised that it required the whole $4 million to remain competitive, with $2 million to be spent on trade creditors and inventory and $2 million on improvements to the business. A meeting was to be held in early October 2017 to attempt to agree on a strategy going forward.

5. [477]

   On 14 September 2017, Emmett AJA made orders giving effect to his Honour’s judgment, including that About Life and Harris Farm pay Woolworths’ costs of the proceedings, save for the issue as to whether Harris Farm had actual or constructive notice of Woolworths’ right of first refusal. About Life immediately offered to assign the lease of the Double Bay premises to Woolworths for $10 million, which offer was promptly accepted. Mr de Fontgalland acted on the transaction. Negotiations ensued in respect of a sub-lease. On 22 September 2017, Mr de Fontgalland requested the Council to consent to an assignment of the lease to Woolworths.

6. [478]

   On 27 September 2017, the “bad bank” presented its strategy paper, recommending extending the annual review date to 30 November 2017 to allow time to review the borrower’s position and agree on a way forward. Much turned on whether About Life could secure a sub-lease of the site. On 29 September 2017, contracts were exchanged with Woolworths. The Council’s solicitor advised that the consent period would not commence until certain breaches had been attended to by About Life.

7. [479]

   By 13 October 2017, About Life had attended to a list of breaches raised by the Council. On 16 October 2017, Mr de Fontgalland sought confirmation from the Council’s solicitor that consent would be forthcoming. Ms Phillips also spoke with Council regarding progress. Council wished to know Woolworths’ medium and long term plans for the site, on which the Council’s consultants would then advise. “According to them the consent period will not start until they are satisfied on this point …” Ms Phillips stressed to Council that About Life needed to settle on the transaction in order to obtain funds to pay its bank and invest in the business. Ms Phillips reported to Woolworths, “I actually am not confident with how much longer CBA are going to give us …” Woolworths replied that they were equally keen to conclude the transaction and would meet with the Council as a matter of urgency.

8. [480]

   On 20 October 2017, Harris Farm filed an amended cross-claim against About Life, adding Ms Phillips, Mr Green and Mr Beecroft as cross-defendants. Harris Farm sought to recover $588,000 from the directors, being its costs and liability for costs to Woolworths.

9. [481]

   On 27 October 2017, the Council requested an audit turnover certificate for About Life, which was provided by Deloitte on 30 October 2017. A meeting with Council was arranged on 30 October 2017. As Ms Phillips reported events to Mr Morales the next day, it was a very long but productive session. “The outcome was particularly good for us as Woolworths agreed with Council to give About Life a 3 year fixed term, with no break clause. We now are going to be secure in Double Bay for 3 years – which is quite a remarkable outcome for us … In terms of timing – all is being documented by solicitors this week. Woollahra Council require no other information from Woolworths and have indicated that they will sign the deed to consent once all that was agreed on yesterday is papered.” However, Woolworths now sought a three month bank guarantee. Ms Phillips sought the bank guarantee, of some $270,000, from the bank. Mr Morales replied that this was “great news … Almost there!”

10. [482]

    On 9 November 2017, the board met. It was then expected that the bank would require $7.5 million from the proceeds of sale of the Double Bay store, with the remaining debt to be paid over five years. Mr Ross-Edwards said this was a further change in the bank’s position as the new arrangement did not allow for the possibility of any redraw of the facility. By allowing the balance of the facility to be paid over five years, this enabled About Life to keep some stores and continue to trade.

11. [483]

    On 17 November 2017, About Life filed a cross-claim against Maddocks. The audit of the company’s accounts was then underway but never completed.

12. [484]

    Although About Life continued to try and close the Cammeray store, and made many attempts to do so, this could not be achieved. Mr Ross-Edwards said that Cammeray proved an extremely difficult store to dispose of. Cammeray continued to be a store that About Life intended to close.

13. [485]

    As to why About Life did not ultimately execute Retail Oasis’ recommendation to close the Cammeray and Surry Hills stores, Ms Phillips explained that circumstances changed. The Retail Oasis recommendations had been made before the sale of the Double Bay store. Whilst the board was keen to close Cammeray and Surry Hills, the ramifications of closing either store proved significant and the decision to close the stores changed. As to why the board did not adopt and implement each of Retail Oasis’ recommendations, Ms Phillips said, “it is very common … to take on some recommendations [made by consultants] and not others. Let’s face it, otherwise you’d have consultants running companies.” The Lane Cove pilot never got started, “these wasn’t the funds to do it”.

Paying Woolworths’ costs

1. [486]

   Mr de Fontgalland said the costs of these proceedings were a ‘line item’ in commercial negotiations on foot with Woolworths at the time. Mr de Fontgalland was aware that Emmett AJA had made costs orders in these proceedings, but does not appear to have been familiar with the terms of the costs order made, in particular, that the costs order had been made against About Life and Harris Farm. On 17 November 2017, Mr de Fontgalland advised Woolworths’ general counsel that About Life was amenable to paying Woolworths’ costs of these proceedings from the settlement monies for the Double Bay sale and requested details so that costs could be agreed. Woolworths advised that its costs of these proceedings were $421,372.71, its costs of obtaining consent from the Council were some $15,000 and its costs of the proposed loan to About Life were some $77,000. In total, Woolworths’ costs were $514,483.98 and, “we would expect to recover $400,000 – let’s discuss and aim to reach agreement on the amount in short order so as not to delay settlement.”

2. [487]

   Mr de Fontgalland sought further detail as, in order for About Life to recover Woolworths’ costs from Maddocks or About Life’s insurer, the costs needed to reflect what an assessor might calculate them to be. Further detail was provided. Woolworths assumed that its costs of the proceedings would be discounted by 25% by a costs assessor and thus Woolworths would recover $202,471.10 in respect of its solicitor’s fees and 100% of its disbursements, less the costs attributable to the constructive notice issue. Rather than conduct a line-by-line analysis, Woolworths’ offer of $400,000 (which also included the costs of obtaining Council consent and the proposed loan) was still considered to be some $40,000 less than what Woolworths would recover on an assessment.

3. [488]

   On 24 November 2017, Mr de Fontgalland advised Woolworths’ general counsel that About Life was amenable to paying $400,000 from the settlement proceeds of Double Bay, with $325,000 to be allocated to Woolworths’ costs of the litigation and $75,000 allocated to Woolworths other costs, the intention being that the litigation costs were separately identifiable to facilitate recovery of those costs by About Life from third parties. I will return to this topic at [641].

4. [489]

   On 1 December 2017, the Council consented to the assignment of the Double Bay lease to Woolworths. By 7 December 2017, the terms of the Deed of Consent to Assignment and Variation of Lease had been agreed and signed by the Council, About Life and Woolworths. Settlement was then arranged with the Commonwealth Bank for 12 December 2017, when the deed of consent was exchanged and the sale from About Life to Woolworths settled.

5. [490]

   Woolworths withheld $470,000 from the $10 million sale price for its costs. The balance was paid to the bank which applied $7.5 million to debt reduction and held the remaining net proceeds of sale, being $1.887 million, on deposit. These funds were released to About Life to be used to pay out and close the credit card ($315,000), superannuation and PAYG obligations ($949,000) and accounts payable ($623,000). Some $150,000 was paid to McGrathNicol. There was some additional legal fees to pay. The bank removed the loan covenants, replaced with a single EBITDA covenant of $150,000 per quarter, “Should the Borrower fail to meet this covenant it is likely that the Bank will ask the Borrower to repay their loan facilities.”

6. [491]

   According to Mr Ross-Edwards, About Life received the net settlement proceeds on the last working day before Christmas 2017. The funds were immediately required to meet various compliance obligations including superannuation, wages and other outstanding debts. There was no money left for working capital to enable About Life to restock or re-establish its inventory. Due to the bank’s repayment requirements, Mr Ross-Edwards considered that About Life had no option but to sell its remaining stores and the kitchen at Wetherill Park.

7. [492]

   On 21 December 2017, the board met. Ms Phillips reported, “The business is really struggling at these sales levels. Many suppliers are getting fatigued, payments will go out to suppliers in the last two weeks of December, as soon as CBA release funds. … The cash flow show[s] that the business will need assistance by end of February at latest.” Another offer to purchase the business had been received from The Natural Grocery Co and negotiations were expected to start with another interested purchaser after Christmas “ready for a quick deal”.

8. [493]

   In January 2018, Ms Phillips met with The Natural Grocery Co’s chairman and chief executive officer to discuss the possibility of selling the assets of the remaining stores. On 18 January 2018, a non-binding indicative offer was received from The Natural Grocery Co, offering to buy the remaining assets in two tranches. The first tranche comprised the assets used in the operation of the Double Bay, Lane Cove and Crows Nest stores for $4.075 million. In a second tranche, an offer was made to enter into an option agreement whereby The Natural Grocery Co would have the right to acquire all of the shares in About Life based on an agreed pricing mechanism, with the option to be exercised between 1 September 2018 and 31 August 2019. The Natural Grocery Co indicated that the price it was willing to pay for all of the shares in About Life as part of the second tranche was $8.8 million. In February 2018, the bank indicated its strong support for this sale structure. Ms Phillips said the first tranche would leave About Life with four stores and the kitchen and an opportunity to return the business to profitability.

9. [494]

   On 13 April 2018, Woolworths and About Life entered into an occupation licence for the Double Bay store. Ultimately, Woolworths allowed About Life to continue to operate the Double Bay store for six or seven months. Ms Phillips said that, if the sale of the Double Bay store to Woolworths had proceeded without a court case, she believed there were good prospects that About Life would have been able to negotiate a long-term lease with Woolworths and continue to operate the Double Bay store, noting that Woolworths had earlier relinquished control of the site by allowing About Life to take over the lease for a lengthy period, which in her opinion, indicated that Woolworths had no plans for the site before these proceedings.

10. [495]

    In April 2018, About Life prepared to complete the first tranche of asset sales to The Natural Grocery Co but, before exchange, the bank advised that it had decided to close all of About Life’s banking facilities and intended to withhold $2.5 million of the $3 million sales proceeds and apply $1 million to repay a bill facility and equipment leasing facilities, with $1.5 million to be held in escrow as security for remaining bank guarantees. Negotiations followed but, ultimately, the proceeds of sale of the Crows Nest, Bondi Junction and Lane Cove stores was used to repay the bank and tax obligations. The proposed second tranche did not proceed as About Life’s financial position was such it could not wait for the option to be exercised.

External administration

1. [496]

   By June 2018, About Life had four stores – Cammeray, Rozelle, Port Melbourne and Surry Hills – and the kitchen. Ms Phillips considered it obvious that the business could not survive without a further injection of working capital. There was no opportunity to raise funds. The businesses in all stores had deteriorated to such an extent that there was no realistic opportunity to sell them. Ms Phillips considered that there was no option but to sell the assets and relinquish the leases on the best possible terms. About Life obtained a report from an insolvency practitioner as to its options.

2. [497]

   By August 2018, Woolworths had advised that it would be terminating the occupation licence of the Double Bay store on 30 September 2018. In October 2018, About Life sold the Rozelle store to Woolworths for $921,000. The Australian Competition & Consumer Commission had to be satisfied as to the transaction and so the transaction did not complete until December 2018. In November 2018, About Life sold the kitchen for $1.875 million. By the end of November 2018, About Life had used the proceeds of sale of its remaining assets to repay the bank in full.

3. [498]

   About Life was unable to sell the Cammeray or Surry Hills stores. The leases were surrendered and inventory moved to the Rozelle store. About Life forewent the bank guarantees for these leases; from earlier sales, the bank already held the cash to cover some $600,000 guarantees. On 13 December 2018, About Life vacated the Cammeray store and returned the key. The final transaction was the sale of the Port Melbourne store, which was a lease assignment and sale of inventory for about $80,000. There was no payment for the lease assignment.

4. [499]

   On 17 December 2018, About Life went into voluntary administration, having repaid the bank in full and all wages and employee entitlements. According to a Report on Company Activities and Property completed by Ms Phillips, About Life had net liabilities of $11.8 million.

5. [500]

   In April 2019, About Life entered into a deed of company arrangement. In September 2019, Harris Farm executed a Deed of Settlement and Release with About Life and its directors in respect of Harris Farm’s claim for damages on the basis that the directors would pay $430,000. The settlement sum was paid; the directors now seek these monies from Maddocks under their cross-claims.

6. [501]

   In Mr Ross-Edwards’ opinion, About Life’s financial position deteriorated significantly as a result of the failed Double Bay sale. The business was denied necessary working capital. About Life’s business was heavily reliant on its supply chain. The business needed to maintain adequate inventory for all stores and the kitchen. It needed cashflow and working capital to maintain that level of stock. He considered that About Life’s dramatic deterioration in sales coincided with the inability to get working capital from the Double Bay sale. He also considered that the reputation of the business was damaged by the lack of stock on shelves. The litigation also gave rise to uncertainty and potential liabilities. This excluded raising funds from investors or other lenders as the business was too risky to lend to.

LOSS OF A CHANCE

1. [502]

   About Life claims to have suffered financial losses due to the delayed receipt of the proceeds of sale of the Double Bay business, which increased its indebtedness and deprived it of working capital and the ability to repay debt or comply with bank covenants. About Life was unable to inject capital into its business at a critical time or repay debt to the bank. About Life failed to comply with its bank covenants and lost the support of the bank. About Life lost the opportunity to attract investors to provide working capital due to the uncertainty associated with these proceedings. About Life was unable to pay its suppliers, who were insisting upon cash on delivery or short payment terms. About Life lost customers as a consequence of dwindling or sub-optimal product on the shelves of its stores. This ultimately led to the demise of the business and insolvency, resulting in About Life entering into voluntary administration on 17 December 2018, with the costs associated with external administration. About Life was also liable to pay Woolworths’ costs of the proceeding and to pay its own costs of defending Harris Farm’s cross-claim.

2. [503]

   On being satisfied that About Life would have contracted to sell the Double Bay store in an orderly way and thereby avoided the litigation, delay and costs, the quantum of its loss was said to be the value of the lost chance of future profitable trading or the chance of selling the business while it still had value. It was submitted that About Life was entitled to compensation unless the Court found that the prospect of further profitable trading, or the chance of selling the business while it still had value, was fanciful.

3. [504]

   Maddocks denied that its actions led to About Life’s demise, pointing instead to a range of pre-existing financial problems documented in About Life’s board minutes and management reports, including a longstanding lack of working capital, over-expansion, deteriorating sales performance and systemic problems with About Life’s business model as identified by Retail Oasis. (Mr Ross-Edwards said that, if About Life had each of the problems asserted by Maddocks, “I wouldn’t have been at the company …”)

Principles

1. [505]

   The principles regarding compensation for a loss of chance to pursue a commercial opportunity are well established. There are three steps: Masters Home Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88; (2017) 372 ALR 440, Santamaria, Ferguson and Kaye JJA at [411]. First, was there a chance? The plaintiff must prove on the balance of probabilities that, absent the negligent conduct, there was some prospect of success. As explained in Sellars v Adelaide Petroleum (1994) 179 CLR 332; [1994] HCA 4 at 355 per Mason CJ, Dawson, Toohey and Gaudron JJ:

2. [506]

   Notwithstanding the demarcation between proving that there is some chance and ascertaining the value of that chance, “it will usually be the same body of evidence that tends to establish both the existence of a loss and the amount to be recovered”: Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Ltd [2018] 2 Qd R 584; [2017] QCA 254 at [28] per McMurdo JA (Philippides JA and Boddice J agreeing) citing Sellars at 364 per Brennan J.

3. [507]

   As to the identification of the commercial opportunity, the relevant opportunity is the opportunity to make a profit: see also Principal Properties at [21]. As McMurdo JA clarified (in terms redolent of Brennan J in Sellars at 364) at [23]-[24]:

4. [508]

   Second, has the opportunity been lost, that is, would the plaintiff have pursued it? Where realisation of the chance depends on a plaintiff's own decision to take it up, the plaintiff must also establish on the balance of probabilities that it would have been taken up: Doolan v Renkon Pty Ltd (2011) 21 Tas R 156; [2011] TASFC 4 at [60] and [66] per Crawford CJ, Blow and Porter JJ; Olympic Holdings Pty Ltd v Lochel [2004] WASC 61 at [121]-[123] per McLure J.

5. [509]

   Third, what amount should be awarded having regard to the prospects of success if the opportunity had been pursued. The Court must value the lost opportunity by reference to the degree of probability that the events posited by the plaintiff would have occurred, provided that the probability is not so low (less than one per cent) as to be speculative or so high (more than 99 per cent) as to be practically definite: Malec v JC Hutton Pty Ltd (1990) 169 CLR 638; [1990] HCA 20 (per Brennan and Dawson JJ at 639 and Deane, Gaudron and McHugh JJ at 642-3); Berry v CCL Secure Pty Ltd [2020] HCA 27; (2020) 381 ALR 427 at [36] per Bell, Keane, Nettle JJ; Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158 at [154], [203] per Payne JA (White and McCallum JJA agreeing).

6. [510]

   When considering the probabilities and possibilities, the Court ordinarily takes a “broad brush approach”: Nikolaou v Papasavas, Phillips & Co (1989) 166 CLR 394 at 404; [1989] HCA 11 per Wilson, Dawson, Toohey and Gaudron JJ. The analysis does not lend itself to hard and fast rules: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 119; [1991] HCA 54 per Deane J. However, as Barrett JA (Leeming JA agreeing) cautioned in Thompson v Schacht [2014] NSWCA 247; (2014) 53 Fam LR 133 at [76]:

7. [511]

   An example of the Courts’ approach in applying a discount which reflects the prospects of success is Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187, where Hungry Jack sought damages for the loss of an opportunity to expand its business. Hungry Jack’s chairman gave evidence that, in the absence of Burger King’s conduct, Hungry Jack would have opened 17 new restaurants every year. Sheller, Beazley and Stein JJA noted at [596]: (emphasis added)

8. [512]

   In a case where the Court has found that a client has lost a valuable opportunity due to the negligence of the solicitor, the Court tends to assess the damages generously given that it was the solicitor’s negligence “which has lost [the client] the chance of succeeding in full or fuller measure”: Sharif v Garrett & Co [2002] 1 WLR 3118 at [18] per Tuckey LJ and [39] per Simon Brown LJ (Chadwick LJ agreeing with each).

The lost chance

1. [513]

   About Life submitted that the lost chance bore “haunting similarity” to Sellars v Adelaide Petroleum, where Adelaide Petroleum was under financial pressure and had two alternatives, being to enter into a transaction with Poseidon or Pagini. Because of unlawful conduct, it contracted with Poseidon. That contract fell over and Adelaide Petroleum then contracted with Pagini but on less favourable terms than if it had contracted with Pagini at the outset. Whilst the Court found that there was only a 40% chance that a contract with Pagini at the outset would have been completed, this was dealt with by an appropriate discount. Here, About Life submitted that the valuable commercial opportunity was a clean, early contract with Woolworths. The Court would be satisfied on the balance of probabilities that, in the absence of Maddocks’ negligence, About Life would have offered the Double Bay store to Woolworths on the same terms as Harris Farm and that Woolworths would have accepted that offer. Beyond that were matters of possibilities and probabilities as to how About Life would have fared.

2. [514]

   Maddocks accepted that, in the counter factual, there was a 100% chance that About Life would have had a clean contract with Woolworths. But this was not the “lost chance”; it was the chance to avoid entering administration and continuing as a company of some value. Maddocks contended that, from at least April 2017, About Life was in a position in which entry into administration would have occurred in the near term regardless of the sale of the Double Bay store.

3. [515]

   The question is whether About Life has shown some loss or damage by demonstrating that Maddocks’ wrongful conduct caused the loss of a commercial opportunity which had some value (not being a negligible value). The classic case of Sellars v Adelaide Petroleum NL might be thought to resemble this case, being the loss of an opportunity to have entered into an agreement with a third party (Woolworths) on the more favourable terms that would have been achieved but for the defendant’s wrongdoing (being on terms devoid of the uncertainty, delay and additional costs attended by the contract with Harris Farm): Talacko v Talacko [2021] HCA 15; (2021) 389 ALR 178 at [42] per Kiefel CJ, Gageler, Keane, Gordon, Edelman, Steward and Gleeson JJ.

4. [516]

   However, as pleaded, About Life’s loss was, in essence, the difference between the trajectory which the company took by reason of entering into the Harris Farm contract and the trajectory the company would have taken if it had entered into a contract with Woolworths at the outset. The pleading lists a number of differences between these trajectories, including a “loss of opportunity to stabilise and improve the profitability of the Business with the injection of capital from the sale of the Double Bay Business and to then expand and increase the profitability of the Business with that injection of working capital”.

5. [517]

   Having regard to the pleading, I consider that Maddocks’ formulation of the lost chance is preferable, with modification. It is necessary for About Life to establish that the commercial opportunity of a clean, early contract with Woolworths had some value (not being a negligible value) such that, had About Life followed the counter factual trajectory, it would have survived. That is, it is not sufficient for About Life to prove, on the balance of probabilities that, if given the chance, it would have entered into a contract with Woolworths. Rather, About Life has to prove on the balance of probabilities that, had it done so, there was a chance that the company would have had value.

6. [518]

   As will become apparent from my review of the experts’ work on how About Life would have fared in the counter factual, I am satisfied on the balance of probabilities that that there was a chance that About Life would have stabilised and improved the profitability of its business with the injection of capital from the Double Bay sale and then expanded and increased the profitability of its business: see [578]-[606]. Put the other way (noting that About Life and not Maddocks bears the onus), I have not concluded that About Life had no chance of doing so and would certainly have gone into administration.

7. [519]

   As to the second step, there is no doubt that About Life would have taken the chance if proffered. The balance of this judgment is largely dedicated to the third step, being the amount that should be awarded having regard to the prospects of success if that opportunity had been pursued, that is, the degree of probability that the counter factual posited by About Life would have occurred. Before turning to the differing approaches of the accounting experts to this question, it is timely to consider the components of the counter factual.

THE COUNTER FACTUAL

1. [520]

   About Life says that if Maddocks had performed its retainer and discharged their duty of care, Ms Phillips would have recalled and produced the Woolworths’ Deed of Agreement from her own records or from Mr de Fontgalland’s file. Woolworths’ right of first refusal would thus have been revealed, and About Life would have offered the Double Bay store to Woolworths instead of entering into a contract with Harris Farm. Assuming that Maddocks had properly identified the existence of Woolworths’ right of first refusal in a timely way, the likely date on which About Life would have made an offer to Woolworths in accordance with the Harris Farm offer was around 20 April 2017, being the date that About Life signed the contract with Harris Farm.

2. [521]

   Maddocks did not dispute that, if Woolworths’ right of first refusal had been revealed on or around 20 or 21 April 2017, About Life would have offered the Double Bay store to Woolworths for $10 million on the same terms as the contract exchanged on 21 April 2017.

When would Woolworths have exercised its right of first refusal?

1. [522]

   About Life says that Woolworths would have exercised its right of first refusal and offered to purchase the Double Bay store and lease for $10 million, and About Life would have accepted that offer. As to how long it would have taken Woolworths to accept the offer, the time in which Woolworths could either accept or refuse was not specified in clause 2.5 of the Deed of Agreement. As such, Woolworths had to exercise its right within a reasonable time. In the circumstances of a take-it-or-leave-it offer on definite terms, About Life submitted that a reasonable time would have been seven days. Whilst accepting that Woolworths would have needed some time to familiarise itself with the position, where it took Woolworths a week after confirming that the sale was to occur (23 May 2017) to commence these proceedings (30 May 2017), it was appropriate to allow no more than one week for Woolworths to accept the offer, being 27 April 2017.

2. [523]

   Maddocks submitted that a reasonable time-frame was 21 days as any offer would be made ‘out of the blue’. Woolworths would need to consider its position and obtain legal advice on clause 2.5 of the Deed of Agreement and the terms of the proposed contract. Woolworths would need to consider whether it wished to take back the Double Bay store as that price and, if it did, what it would do with the store. Woolworths would presumably need to discuss this with consultants. Maddocks pointed to the fact that, when Woolworths learnt of the contract between About Life and Harris Farm, it initially took the position that Woolworths was entitled to an assignment of the Double Bay lease for no consideration; it was only after a month that Woolworths offered to purchase the Double Bay store on the same terms as About Life’s contract with Harris Farm.

3. [524]

   There can be no doubt, from the intensity of negotiations that ensued between each of Woolworths and Harris Farm with About Life during the course of these proceedings, that the Double Bay lease was a valuable asset (see [158]), readily saleable for $10 million, indeed, Woolworths was prepared to pay more if need be. Whilst Woolworths would likely have been a little surprised to be asked to pay $10 million for a lease which it had initially assigned to About Life for nothing, I do not think it would have taken Woolworths long to decide that it would exercise its right of first refusal. Even if Woolworths had no particular interest in using the site itself, it was clearly interested in not having Harris Farm as a neighbour. As Ms Phillips told Ms Badcock on 25 May 2017 – shortly after speaking to Woolworths – Woolworths did not want the store but did not want Harris Farm in the shopping centre and would probably take the store “just to keep [Harris Farm] out”.

4. [525]

   Where About Life was keen to stay in the premises as a licensee, there was not much for Woolworths to decide other than whether it was prepared to pay $10 million to have the occupant of the site of its choosing. With Harris Farm standing ready to take the site, this decision would have been easy to make. Seven days was sufficient. In the counterfactual, Woolworths would have exercised its right of first refusal by 27 April 2017.

5. [526]

   The parties agreed that it was likely that contracts would have been exchanged 14 days later, being the same period between acceptance of the offer and exchange as actually occurred on the Woolworths’ transaction. This seems reasonable. On my calculations, contracts would have been exchanged on 11 May 2017.

When would Council have given consent?

1. [527]

   Noting that, on the counter factual, the Harris Farm transaction would have been aborted and there would have been a delay associated with changing purchasers, About Life submitted that consent would have been sought from the Council on the day that Woolworths accepted the offer. The position would have been more urgent by then. There would have been an opportunity, during the seven days in which Woolworths considered the offer, to obtain the relevant information to request consent. Further, whilst it ultimately took Council 70 days from the date on which consent was sought to provide its consent, About Life submitted that there were a number of things occurring in that period which would not have occurred on the counter factual. The period would have been shorter on the counter factual, say 65 days, resulting in an assumed date upon which Council consented of 2 July 2017.

2. [528]

   Maddocks submitted that there was no reason why the Court would infer that the Council would have provided its consent in less than nine weeks from exchange.

3. [529]

   In determining how long it would have taken the Council to give consent on the counter factual, it is relevant to consider the progress of About Life’s request for consent for both the Harris Farm and Woolworths’ contracts. About Life’s request for consent to assign the lease to Harris Farm was, in essence, a fresh, clean request unsullied by the complexities which followed in these proceedings. About Life’s request to assign the lease to Woolworths was, of course, a request to assign to the party to which the Council would, in the counter factual, be asked to consent but at the outset. Useful evidence may be gleaned from both applications.

4. [530]

   Turning first to the Harris Farm contract, as noted at [383]-[384], consent was sought on 27 April 2017. Harris Farm was a new tenant to the shopping centre. Harris Farm had to complete a tenancy application form (which was initially incorrectly completed and had to be re-submitted). The contemporaneous documents record that, as Harris Farm had incorporated a special purpose vehicle to acquire the Double Bay store, the Council sought further information to satisfy itself that those who stood behind the company would provide financial surety for the prospective tenant.

5. [531]

   Harris Farm planned to gut the store and install a new fit out. To this end, Harris Farm had to prepare plans for the proposed works. The first site meeting with the Council had to be postponed as the plans were not ready. The contemporaneous documents record that the Council and Harris Farm then spent some time ‘to and fro’ addressing different aspects of Harris Farm’s proposed refurbishment of the site. According to the minutes of the meeting held on 18 May 2017, when Mr Harris asked how long approval would take, a Council representative advised that it would take two weeks from the date when all required information was provided. The Council acknowledged that “the last of the information requested by Council was provided by [Harris Farm] to the [shopping centre] manager on Friday 26 May 2017.” That being the case, the Council’s consent would likely have been forthcoming by 9 June 2017, being six weeks after the request was made.

6. [532]

   Turning to the Woolworths contract, the request was made on 22 September 2017. Consent was given on 1 December 2017, being ten weeks later. This process progressed somewhat differently to the process involving Harris Farm. First, my impression from reviewing the contemporaneous documents is that, by reason of the events which led to these proceedings, the Council was not entirely pleased to discover that the entry of Harris Farm into the shopping precinct had been de-railed by Woolworths’ right of first refusal contained in a side deed with About Life. As Ms Phillips reported to Ms Badcock on 25 May 2017, “Council hate [Woolworths]. Want [Harris Farm] to get in.” Woolworths had sent the Council a letter of demand and joined it as a defendant in these proceedings. Whilst the Council did not take an active role in the proceedings, it is apparent that the Council was less than thrilled.

7. [533]

   Following Emmett AJA’s judgment, the Council retained a major law firm to act on the transaction. The history of the matter appears to have increased the significance of the transaction from the Council’s perspective, with an accompanying increase in attention to detail and firm negotiations which may not have been the case in the counter factual. The Council appears to have made Woolworths ‘work’ to gain Council’s consent, including extracting assurances “that the proposed business will be monitored and supported at the highest level within [Woolworths], and that the necessary resources will be provided to ensure ongoing success.” On 17 October 2017, following a conversation with the Council, Ms Phillips reported that the Council was “firm that they intend to stand strong on the point that they need to know what Woolworths’ medium to long-term plans are for the site. Specifically they said they planned to ask to see the concept with a ten year plan financially modelled that they would then put to their consultants for advice … according to them the consent period will not start until they are satisfied on this point.” It is, of course, possible that the Council would have sought to be satisfied in the same manner on the counter factual but, as a matter of impression, how the application for consent unfolded in reality is not necessarily how it would have unfolded in the counter factual.

8. [534]

   Second, by the time the Council’s consent was sought for assignment of the lease to Woolworths, About Life was in default under the lease, with outstanding payments and certifications for heating, ventilation and fire safety. Such breaches do not appear to have been raised when Maddocks earlier sought Council’s consent to the assignment of the lease to Harris Farm. These defaults took time to rectify.

9. [535]

   Having regard to these matters, I consider that the time which the Council took to give consent to the assignment of the lease to Woolworths was longer than it would have taken the Council to give its consent, had it been asked for consent at the outset, and significantly so. I note also that some of the steps in the process which detained Harris Farm may not have affected an application for consent to assign the lease to Woolworths, if made at the outset. Woolworths was not a new tenant to the shopping centre and, likely, would not have encountered the delays associated with a tenancy application form or establishing the backing of a special purpose vehicle. Construction plans would likely not have delayed matters either as, more likely, Woolworths would have had no immediate plans for the site other than ‘business as usual’, with About Life continuing to trade in the premises under a licence.

10. [536]

    For the Harris Farm contract, consent was sought a week after exchange of contracts whilst, for the Woolworths contract, consent was sought a week before contracts were exchanged. On the counter factual, I consider it reasonable that Council’s consent would have been sought on or immediately after exchange of the Woolworths’ contract, that is, 11 May 2017. I consider that consent would almost certainly have been given six weeks later, that is, by 15 June 2017. In addition, given that the steps in the process which detained Harris Farm would likely not have detained Woolworths, it is also quite possible that the Council would have provided its consent within four weeks, that is, by 1 June 2017. I have, however, used the longer timeframe in what follows.

When would the proceeds of sale have been received?

1. [537]

   Under both the Harris Farm and Woolworths’ contracts, settlement was required to be “no earlier” than 28 days from Council consent. In fact, the Woolworths contract was completed 11 days after Council consent. Whilst there was no contractual obligation on Woolworths to settle earlier than 28 days from Council consent, it is apparent that Woolworths was amenable to assisting About Life financially, if need be, and there is no reason to think that Woolworths would have insisted on the 28 day completion period if About Life had requested that settlement take place earlier, for example, because its bank was insisting on payment.

2. [538]

   If the proceeds of sale were received 28 days after 15 June 2017, then About Life would have received the funds on 13 July 2017. I consider it likely that Woolworths would have provided the funds earlier if need be, including by 30 June 2017, but in any event I am satisfied that the bank would have been content to wait until 13 July 2017 without taking further action. It is apparent from the evidence that About Life had a good relationship with its bank. Notwithstanding significant challenges faced in the months leading up to the sale of the Double Bay store, Ms Phillips and Mr Ross-Edwards would have navigated this short delay with relative ease: see [244].

How much would the bank have taken?

1. [539]

   About Life submitted that $4 million of the proceeds of sale would have been required by the bank to retire debt, with the balance used as working capital to stabilise the business and improve its profitability; the first mention of $5 million came shortly after the bank was informed of these proceedings. Maddocks submitted that the bank would have required $5.33 million, including the missed loan repayment in June 2017.

2. [540]

   It is not entirely clear when the bank formed the view that it should require $5 million of the proceeds of sale. The covenant monitoring report referred to at [397] was, as a file, created on 17 May 2017. The report referred to the proceeds of sale being received “before the end of June 2017”, being referred to elsewhere in the report as being “in the next few weeks”. This would be consistent with the report being prepared in early June 2017. However, the report makes no mention of the fact that the orderly completion of the sale had been disrupted by Woolworths’ right of first refusal. The bank became aware of this on 30 May 2017 and thus the report was most likely prepared before that date. That is, the bank formed the view that it would require $5 million before becoming aware of problems with the seamless completion of the sale.

3. [541]

   Thus, although the bank approved the $5 million reduction on 2 June 2017 (see [437]), being after it became aware that there was an issue with the sale to Harris Farm, the recommendation was made before this problem arose. I consider that the bank would have sought $5 million from the proceeds of sale in the counter-factual. As much as anything, the bank appears to have chosen the figure of $5 million as being 50% of the proceeds of sale, it having earlier expected to receive $4 million from an $8 million sale.

4. [542]

   I expect that the bank’s requirement would have come as something of an unwelcome surprise to About Life and would have been the subject of further negotiations between the bank and its customer. If About Life had been able to make a good case as to why it needed more of the proceeds of sale to improve its business going forward, I expect that the bank would have been receptive. The covenant monitoring report noted, “Whilst acknowledging debt reduction is important, the underlying strategy of the group and the focus to earnings accretion is paramount.” That is, the bank considered it more important to ensure that About Life could go forward and prosper (and thereby repay its indebtedness) than for the bank to retrieve any particular sum such as 50% of the process of sale.

5. [543]

   I consider it likely in the counter factual that the bank would have compromised on the amount it required from the proceeds of sale, for three reasons. First, the relationship between About Life and the bank appears to have been good. Second, such discussions would have been had with Mr Morales and Mr Chapman rather than the ‘bad bank’, to which About Life was only referred on 30 June 2017 after the failed sale. As Mr Ross-Edwards described it, there was a big difference between being managed in the local business centre with referral to Group Credit Structuring and having 100% of your affairs managed by the “bad bank”.

6. [544]

   Third, and perhaps most importantly, in the counter factual, About Life would be proposing to continue to operate the Double Bay store and enjoy the associated revenue stream: see [494]. As Mr Chapman observed on 2 June 2017, when approving the $5 million reduction in debt from the proceeds of sale, “Double Bay has been the best performing store”. Likewise, on 27 September 2017, the bank’s strategy paper noted that earnings from the Double Bay store were considered critically important to the group’s profitability. In the counter factual, the continuation of the Double Bay store would have significantly enhanced About Life’s ability to generate revenue and meet bank covenants, reducing the bank’s risk and thus the need to reduce debt from the proceeds of sale.

7. [545]

   Against this, the post-sale forecast assumed that bank debt would be reduced by $4.333 million in June 2017. As noted at [451], on 23 June 2017, About Life made a loan repayment to the bank of $333,333, but from a bank account which then had no funds. Would this have happened in the counter factual? Actual sales for June 2017 were $1.28 million less than the post-sale forecast, and the worst month for the year by far. On Maddocks’ case, this was because About Life’s forecasts were wholly unreliable. I consider it more likely that this reflected the impact of the disrupted sale of the Double Bay store on cash flow, suppliers, inventory and customers. Against this, I note Ms Phillips’ observation at [172]. In the counter factual, About Life may have generated sufficient sales to pay this debt instalment from ordinary cashflow.

8. [546]

   From the range of amounts which the bank would require from the proceeds of sale in the counter factual – being from $4 million to $5.33 million – I consider the mostly likely result to be that About Life would have compromised with the bank on reducing term debt by $4.5 million from the proceeds of sale but also paid the loan repayment from the proceeds of sale. That is, $4.833 million would have been required by the bank, leaving $5.167 million to attend to other matters.

What other monies had to be paid from the proceeds of sale?

1. [547]

   The experts agreed that $56,000 should be deducted from the Double Bay proceeds of sale as costs associated with the sale in the counter factual. This leaves $5.223 million remaining from the proceeds of sale.

2. [548]

   It will be recalled that, on 28 April 2017, Mr Green advanced $500,000 to About Life, to be repaid from the proceeds of sale of the Double Bay store: see [387]-[388]. A similar loan would have been needed in the counter factual “as a bridge until we get the proceeds of the [Double Bay] sale.” I consider it would have been repaid from the Double Bay proceeds in the counter factual. This leaves $4.723 million remaining from the proceeds of sale.

3. [549]

   Maddocks submitted that a number of other payments would need to be made from the proceeds of sale including for upcoming payments under the ATO payment plan, overdue Surry Hills rent, Mr de Fontgalland’s outstanding fees in relation to the dispute with the Surry Hills landlord and the Lane Cove pilot store.

4. [550]

   As to the Lane Cove pilot, the post-sale forecast anticipated that this expenditure would be incurred in the 2018 financial year but did not identify precisely when. There is no suggestion in the contemporaneous documents that it was envisaged that any amount payable for the Lane Cove pilot store would have come directly out of the proceeds of sale. (As I understand it, Mr Samuel only took it out of the proceeds of sale as, if it had come out of any other month on his calculations, that month would have been cashflow negative.) I expect that About Life would have put stabilising its supply of stock and a potential sale of its remaining assets to The Natural Grocery Co ahead of capital expenditure on the Lane Cove pilot. I accept that it would have needed to tackle this project reasonably promptly thereafter as both the bank and the investors were expecting that the Retail Oasis recommendations would be implemented as a way of turning the company around if About Life did not sell its remaining assets to The Natural Grocery Co.

5. [551]

   As to the other amounts, Mr Ross-Edwards said that the Surry Hills rent, superannuation and tax payments were taken into account in the board forecasts. Thus, About Life submitted that it was not appropriate to include these items as deductions from the sale proceeds.

6. [552]

   The post-disaster forecast recorded unpaid Surry Hills rent of $297,005, which About Life proposed to pay in the week ending 2 July 2017. Legal expenses of $46,475 were proposed to be paid in two instalments in the week ending 30 July 2017 and 6 August 2017 (This appears to have been Mr de Fontgalland’s fees for acting in the dispute with the Surry Hills landlord). Instalments due under the ATO payment plan were recorded for payment on dates according to the payment plan, as was a superannuation catchup payment of $314,434. These debts are not readily identifiable in the post-sale forecast. Presumably this is because, by 22 June 2017, About Life’s cash flow problems were such that it could not attend to regular expenses budgeted in the post-sale forecast.

7. [553]

   Whether these debts would have gone unpaid in the counter factual is uncertain. I have proceeded on the basis that these debts would have been paid from ordinary trading results rather than the proceeds of sale. I have treated the loan repayment differently (at [546]) as the cumulative expenditure of the loan repayment, rent, compliance payments and legal fees is such that, even taking into account the likely higher June 2017 revenue in the counter factual, I consider it unlikely that all of these bills could be paid from ordinary trading revenue.

8. [554]

   One point on which both experts ultimately agreed was that no tax would be payable on the profit of the sale of Double Bay due to tax losses. As such, on my calculations, $4.723 million remained from the proceeds of sale.

How much was needed to pay suppliers?

1. [555]

   About Life submitted that $2.2 million needed to be paid to suppliers to restore trading terms, whilst Maddocks submitted that $4.825 million was needed.

2. [556]

   The post-disaster forecast included an Accounts Payable aging summary as at 16 June 2017, totalling $4.825 million. Suppliers were grouped according to days payable. Vendors with 30 days payable then totalled some $3 million; 40 days payable totalled $610,000; 45 days payable were some $900,000 and weekly suppliers were some $330,000. Mr Samuel proceeded on the basis that this would need to be paid from the net proceeds of sale. (On my calculations, this would basically exhaust the proceeds of sale, leaving only $119,000.) In doing so, Mr Samuel had regard to the payment terms on invoices rather than the Payable Days of 45 days in the board forecast for June 2017 or commercial arrangements described by Mr Ross-Edwards and Ms Phillips.

3. [557]

   Mr Ross-Edwards strongly disputed Mr Samuel’s calculation that, as at 30 June 2017, About Life owed over $1 million to suppliers who had supplied on a cash on delivery basis this figure “I have no idea where Mr Samuel got this information. … he didn’t know every supplier intimately, and some people may have had 30 days on their invoice, but … we normally paid on a 45 day basis. It … varied … enormously ….” Mr Ross-Edwards did not agree that all suppliers who had supplied more than 45 days previously would have been paid from the proceeds of sale.

4. [558]

   Mr Ross-Edwards agreed that he would possibly have paid debts that had been outstanding for more than 60 days “I would have looked at every supplier individually … this is not an exact science. … obviously I would have paid the older ones, but there may have been some of those people who were [in] dispute … I would have paid the amount required to bring them back [in] terms …”

5. [559]

   Mr Morris took another course. Mr Morris increased the payment to trade creditors from the $2.25 million in the post-sale forecast to $3.2 million as the $2.25 million was based on outstanding creditors of $7.5 million while trade creditors as at 30 June 2017, according to the draft 2017 financial statements prepared by Deloitte, were some $8.1 million. With this increased payment of suppliers, trade creditors at 30 June 2017 were the equivalent of 45 days of cost of sales, which was consistent with board forecasts.

6. [560]

   The contemporaneous documents assist in determining to what extent Accounts Payable had to be paid down in order to restore supply. In 2013, the bank noted that About Life had some 165 suppliers, with terms for non-perishable goods ranging from 60 to 90 days, whilst perishable goods ranged from 14 to 21 days. “Majority of suppliers are paid within 60 days indicating a positive cash flow cycle, which is the norm for retail/grocery industry.” In January 2015, the bank noted that payables had increased slightly from 56 day to 65 days, “Generally fresh produce is 7-14 days, with grocery items up to 90 days. Aged listing is attached, confirming c. 63% is 30 days, and 29% is 60 days.”

7. [561]

   On average, About Life paid its suppliers on 47 days in the 2014 financial year, increasing to 50 days in 2015 and 53 days in 2016. In the 2017 financial year, this increased to 61 days. Ms Phillips said the increase reflected the cashflow difficulties that About Life was increasingly facing. It also indicates the suppliers’ tolerance on trading terms: even in ‘good’ years, on average, suppliers were paid 47 days or 50 days, being more quickly than industry norms (according to the bank).

8. [562]

   In Mr Green’s update to investors in December 2016, Mr Green advised, “We … need to pay down days payable outstanding from 63 days to normal 45 days.” In Mr Green’s update to investors on 4 May 2017, he proposed to use $1.5 million from the proceeds of sale to “bring inventory back to optimal levels to drive sales.”

9. [563]

   The post-sale forecast, prepared in mid-May 2017, assumed that some $2.25 million of the proceeds of sale would be applied to reduce debts owed to suppliers and reduce Payable Days from 72 days to 45 days. It is reasonable to proceed on the basis that this recorded Mr Ross-Edwards’ considered estimate as to how much needed to be paid to suppliers. This is consistent with Mr Ross-Edwards’ evidence that, in April 2017, he had calculated the figure needed to bring suppliers back within trading terms as being about $2.2 million and thought it was approximately the same figure as at 30 June 2017.

10. [564]

    On 17 August 2017, board minutes record that the $2.3 million injected by the founders had “gone a long way to correcting supply issues with out of stocks. Also payment plans with suppliers and constant dialogue has stabilised supply for most suppliers … expect to start building slowly in August 2017. However, additional funds required before all suppliers are on terms.” This supports Mr Ross-Edwards’ estimate that $2.2 million would be sufficient to resume supply, noting that not all of the $2.3 million injection was used for Accounts Payable. According to a presentation to the bank on 4 October 2017, since the injection of $2.3 million, Accounts Payable had been paid down by $1.4 million, with payable days improved from 56 to 48 days. Approximately 80% (or 182) of supplies were either in terms or had been receptive to payment plans and were supplying About Life without interruption. A further 26 suppliers continued to limit credit and reduce trading terms, resulting in interruptions to their supply.

11. [565]

    The evidence indicates that About Life was aiming to reduce Accounts Payable to 45 days. There was flexibility in that figure, being the extent to which suppliers were prepared to tolerate late payment before resuming or continuing supply. Mr Samuel agreed that, if Ms Phillips and Mr Ross-Edwards had agreed commercial terms to which he was not privy, then they were in a better position to know what those terms were, however, “the consequence … is that the other funds that are being shown as being overdue will effectively get kicked down the road to the next month. You have to deal with them the next month. … So you need another two million in surplus funds to be able to settle it the following month.”

12. [566]

    I consider that Mr Morris’ approach is preferable to Mr Samuel, as being more reflective of About Life’s operations. It may be, however, that the Accounts Payable grew higher in June 2017 that it would have in the counter factual. As mentioned, About Life’s revenue for June 2017 were $1.28 million less than the post-sale forecast, and the worst month for the year by far, likely reflecting the impact of the disrupted sale of the Double Bay store on cash flow, suppliers, inventory and customers. About Life had less funds to pay its suppliers during that month than may have been the case in the counter factual. Again, I note Ms Phillips’ observation at [172].

13. [567]

    The fact that the post-sale forecast amount of $2.25 million was a sensible estimate of the funds needed to pay down Accounts Payable is borne out by the fact that paying down these accounts by some $1.4 million, using part of the $2.3 million advanced by Ms Phillips and Ms Stewart, appears to have largely restored supply.

14. [568]

    Taking each of these matters into account, I have rounded Mr Morris’ figure down to $2.7 million as being the amount which needed to be paid to suppliers to restore supply to the stores. On my calculations, this would leave $2.023 million from the proceeds of sale.

How much was needed to restock the stores?

1. [569]

   Ms Phillips said that, once suppliers were within trading terms, About Life would place orders for new inventory on regular trading terms, which were between 30 and 60 days. The new inventory would be paid for in, say, 30 to 60 days’ time. Inventory would be increased at the same run-rate as sales. Mr Ross-Edwards said the credit terms on which About Life traded with most of its suppliers allowed for payment of products to be deferred until ‘end of month plus 30 days’. In some cases, it was ‘end of month plus 45 days’. This meant that for products purchased at the beginning of the month, payment was not due for between 60 and 75 days. Mr Ross-Edwards considered that these credit arrangements represented an important source of finance for the business. As I understood it, About Life would thus not need to spend money on new inventory from the proceeds of sale.

2. [570]

   There is support for this evidence in the contemporaneous documents. In October 2015, when asked by the bank as to how inventory for the new stores was to be funded, Mr Ross-Edwards advised the bank, “Inventory is pretty much funded by supplier terms for a new store, with large suppliers we normally negotiate extended term for initial inventory.” Mr Morris said that numerous business types operate with such “negative working capital”, particularly businesses that are able to generate cash quickly by selling products or services to customers before they have to pay their suppliers or employees. Negative working capital is often a positive attribute for a business as it means the business can fund its operations by effectively borrowing from its suppliers. Supermarkets are one such industry; Woolworths and Coles have significant negative working capital.

3. [571]

   Whilst About Life’s reputation with suppliers had been damaged, Mr Ross-Edwards said, “I will say one thing about suppliers in my 35 years, as soon as you pay them, your reputation returns and they are very happy once you … have paid.” This is consistent with Ms Phillips’ observation to Mr Green on 24 April 2017 that, once About Life was in a position to pay suppliers and re-stock its stores “we will re-gain [credibility] relatively quickly.”

4. [572]

   However, Mr Morris had been asked to assume that About Life would have purchased an additional $3 million of inventory at the end of June 2017 in order to restock stores. This assumption is consistent with the post-sale forecast. On Mr Morris’ calculations, About Life would have been in a position to make this level of purchases and, if required, could have paid suppliers for that inventory before the end of July 2017.

5. [573]

   Mr Samuel considered that additional inventory of $4.239 million would need to be purchased, because inventory would also be needed for the Double Bay store, which was not included in the post-sale forecast. On the counter factual, About Life would continue to run that store under a licence. The figure for Double Bay inventory was calculated by Mr Morris, and adopted by Mr Samuel, based on the cost of sale at Double Bay store in the 2018 financial year and allowing for 60 Inventory Days. This seems reasonable.

6. [574]

   On my calculations, About Life would have had $2.023 million to pay for new inventory, rather than the $3 million assumed in the post-sale forecast (without Double Bay) or $4.239 million (with Double Bay). Using the latter figure as more reasonable, About Life had half the funds needed to replenish the shelves to support the financial performance of the company post-sale. Whether About Life would have been able to achieve a similar result based on trading terms alone is doubtful. About Life’s financial performance post-sale would likely have been less in the post-sale forecast. That is, About Life had a chance of trading profitably; a discount rate can be used to reflect the possibilities and probabilities of doing so with less inventory than forecast.

7. [575]

   The parties agreed that, in the counter factual, Ms Phillips and Ms Stewart would have been prepared to provide $2.3 million to About Life. That is a reasonable assumption, noting that the founders advanced these funds after the disaster, when the company was in crisis, and thus may be expected to have advanced the same funds in the counter factual. As a presentation to the bank on 4 October 2017 observed, “the owners of the business … put up funds at a very precarious time and back[ed] themselves, while others [with] a lot more means backed away.”

8. [576]

   Taking this into account, About Life would have had $4.323 million at its disposal, being sufficient to pay for the additional inventory including the Double Bay store. Whilst the founders did not advance the $2.3 million until July and August 2017, there is no particular reason why they could not have done so earlier if need be, the funds being raised by mortgages on their homes. As I have proceeded on the basis that Surry Hills rent, superannuation and tax payments itemised in the post-disaster forecast would have been paid with ordinary revenue in the counter factual, the whole advance would have been available for inventory if need be. I am mindful, however, that both experts have factored in the $2.3 million advance in their models and, if the funds were advanced earlier to acquire new inventory, then the funds would not be advanced twice.

Future equity raise?

1. [577]

   I consider that there was also a chance that About Life could have raised additional equity. Whilst Mr Thevenon, Mr Stead and Mr Beecroft appear to have become disillusioned with the company before the failed sale, it remained possible that Mr Green could have raised further equity from his group of American and high wealth Australian investors: see [237]. Mr Green was confident throughout – even when the crisis was at its worst – that he could raise equity if need be: see [153], [181], [204], [237]. This prospect would obviously have been enhanced if About Life was able to use the proceeds of sale to restore the stores’ shelves, patronage and performance.

Future performance

1. [578]

   Ms Phillips considered that, if the Double Bay store had been sold to Woolworths at the outset, there was no reason why About Life’s stores and its catering division could not have been returned to a level of profitability commensurate with the 2016 financial year. Ms Phillips set out her forecast of anticipated growths in revenue in the 2018 financial year, totalling $63.5 million. Further, Ms Phillips believed that there was no reason why the business would not have continued to expand in New South Wales, Victoria and Queensland with equity funding, returning increased annual revenue and EBITDA. Mr Ross-Edwards did not agree that the continued downgrades to revenue forecasts throughout the 2017 financial year signalled that any recovery by About Life would be very slow, “With the right capital, I don’t agree.” Much then turns on the post-sale forecast and its reliability.

2. [579]

   The post-sale forecast predicted sales as follows:

3. [580]

   Mr Ross-Edwards, in collaboration with Ms Phillips, prepared the sales forecasts, which took into account a proposed upgrade to sites and initiatives to boost sales. When asked what analysis was carried out in respect of the forecast increase in revenue, Mr Ross-Edwards said they looked at past performance, the fact that they had just been through the worst financial year that the company had ever had, the fact that the business was cash-strapped and lacked stock throughout the year “and when you look at those numbers and go back and then reproject, that number … had validity.” Mr Ross-Edwards disagreed that there was no real basis for such a forecast; the problems which the business had experienced by reason of its rapid expansion had been substantially resolved. This meant that “whatever we did, programs that were put in place could have a positive effect”.

4. [581]

   The post-sale forecast proceeded on the basis that About Life would retain the Surry Hills and Cammeray stores. This was not what Retail Oasis had recommended, being recommendations which the board had earlier decided to implement. Mr Ross-Edwards said, by then, the board had decided not to close the Surry Hills and Cammeray stores. Whilst, the board minutes did not formally record such a decision, the fact that a decision was taken not to close the Surry Hills and Cammeray stores, at least for the time being, is corroborated by their inclusion in the post-sale forecast. Ms Phillips said that the board did not have a strategy for how to execute the closure of those stores, “it would be misleading to have taken them out [of the forecast], if we didn’t have a strategy for how we were going to close them.” In reality, the board did not have much choice in the matter as the landlords of both stores simply would not agree to About Life’s various proposals to ‘get out’ of those leases, as is well documented in the contemporaneous records. As Ms Phillips explained, closing stores was as problematic as opening them.

5. [582]

   The forecast sales revenue for the Lane Cove store was significantly higher than that predicted by Retail Oasis. Sales were forecast to increase from $6.1 million in 2017 to $9.9 million in 2018, being a 62% increase. This far exceeded Retail Oasis’ projected increase in sales, on implementation of Scenario 2, of 15%. Ms Phillips did not agree that this forecast increase was untenable. The uplift predicted by Retail Oasis did not take into account the closure of the Double Bay store, which would have the consequence that Lane Cove would become the prime store in the About Life group. The Double Bay store’s management team would be moved to Lane Cove, where there had been management issues. Executives, even up to Ms Phillips’ level, would also be actively involved in the store as the pilot store. Ms Phillips considered forecasts to be “an achievable target, and I stand behind that.”

6. [583]

   Mr Ross-Edwards said that Ms Phillips put the forecast together, “[I]t made sense to me at the time. … [I]t’s not untenable in my opinion. … the assumption sounded reasonable at the time.” Further, “I was happy with that … Lane Cove was a very underperforming store … so changes to it could have had a very rapid response …” Mr Ross-Edwards said he would have looked at the assumptions of high growth at the time and given them thought, “based on that store … it’s possible that it was quite achievable.”

7. [584]

   Mr Samuel considered the post-sale forecast was optimistic and unreasonable, given the performance of the stores and catering in the 2016 and 2017 financial years. When actual results for May and June 2017 were taken into account, Mr Samuel considered that the forecast increases in sales and EBITDA were very unlikely to eventuate. The force of this observation is diminished given events which unfolded in late May 2017 and June 2017, which may not have occurred in the counter factual. As Mr Ross-Edwards put it, a “catastrophic event” happened the week after the post-sale forecast was promulgated.

8. [585]

   The experts agreed that they had seen nothing that would cause them to think that the forecasts were deliberately overstated or inflated. There is no reason to doubt that the forecasts were Ms Phillips and Mr Ross-Edwards’ genuine formulation, after consideration, of how About Life’s business would trade following the sale of the Double Bay store and the deployment of the net proceeds of sale and other company resources to the remaining stores. Whether those forecasts can be relied upon, or should be adjusted in any quantification of damages is the issue.

9. [586]

   Mr Samuel considered that About Life’s forecasts were unreliable. In making this assessment, Mr Samuel analysed the forecasts, and revised forecasts, during the 2017 financial year. From July to September 2016, actual EBITDA was relatively consistent with the forecast but, from October 2016 on, EBITDA was consistently less than forecast. From December 2016 on, monthly forecast revenue and EBITDA was significantly reduced each month in the management accounts. Despite regular revisions of the 2017 budget, About Life continue to perform under budget. Mr Samuel also observed that revenue for 2015 was 4% below budget and revenue for 2016 was 3% below budget. He concluded that About Life consistently failed to meet budgeted performance and About Life was unable to budget with any degree of accuracy.

10. [587]

    Mr Ross-Edwards strongly disagreed with Mr Samuel’s opinion that About Life’s financial forecasts were too optimistic. About Life submitted that, in relation to 2015 and 2016 financial years – noting that the revenue forecast was broadly accurate – the expenses must have been inaccurate to produce inaccurate EBITDA forecasts for those two years. Both years had one-off increases in expenses caused by the expansion of the business by the acquisition of sites, being expenses which would not be replicated in ordinary circumstances.

11. [588]

    The evidence as to how About Life’s forecasts were prepared every year indicated that it was a time-consuming process. Ms Phillip prepared forecast sales and wages. Mr Ross-Edwards reviewed Ms Phillips’ sales forecasts “for trends more than anything else”. Mr Ross-Edwards provided the remaining items in the forecasts. Mr Ross-Edwards said that he considered the forecasts to be realistic. He prepared the forecasts in consultation with Ms Phillips. He did not at any time seek to overstate the position.

12. [589]

    When preparing forecast sales, Ms Phillips used historical data as the starting point, then reviewed the strategies in place for the next period. Ms Phillips said, “There are a lot of considerations when you are putting sales forecasts together. … [P]reparing sales forecasts for stores that don’t have history does present … obviously greater challenges than stores where you have a lot of history, a lot of data to work with”.

13. [590]

    Bearing in mind that a forecast is a prediction about the future, and to that extent is bound to be inaccurate to some extent, About Life’s forecasts appears to have been generally good predictors of financial performance of the business. The bank certainly formed this view in 2011 (see [29]), in 2013 (see [42]), in 2015 (see [75], [92]) and in 2016 (see [118]). The bank was a sophisticated consumer of financial material and scrutinised the forecasts in the course of its annual review and when considering applications for additional finance or covenant breaches. The bank also reviewed the post-sale forecast, which it considered was “underpinned by more conservative assumptions and in our view more accurately reflect the group's current trading position”.

14. [591]

    For the 2014 financial year, according to Mr Ross-Edwards, forecast revenue for the 2014 financial year was some $32 million. Actual revenue was over $36 million, being 12% above budget.

15. [592]

    For the 2015 financial year, revenue was less than had been budgeted, by $2 million, where revenue had been forecast to increase from some $36 million in 2014 to $53 million in 2015. Mr Ross-Edwards said that, if forecast revenue was adjusted for the late opening of the Surry Hills store, then the forecast was some $35 million such that actual revenue was 2.2% below budget.

16. [593]

    That is, whilst About Life had forecast an increase in revenue of 46%, only 40% had been achieved. Similarly, EBITDA had been forecast to increase from $3.3 million in 2014 to some $5 million in 2015. Rather than the forecast increase of 52%, an increase of 21% in EBITDA had been achieved. Given the growth which had been achieved, however, it is unlikely that anyone was complaining.

17. [594]

    For the 2016 financial year, forecast revenue was $57 million, being a more modest 12% increase on 2015 revenue. As it turned out, actual revenue for the 2016 financial year was over $59 million, being 3.7% above budget.

18. [595]

    For the critical 2017 financial year, Mr Ross-Edwards prepared the forecast in April 2016. Total sales of $81.4 million were forecast, with a gross profit of $33.9 million and EBITDA of $5 million. This represented a 38% increase in revenue on 2016 revenue. Mr Ross-Edwards said revenue projections were buoyed by the successful opening of the Lane Cove and Port Melbourne stores. He considered that those stores commenced trading very well and had high expectations for the new Crows Nest store. He was also expecting that the opening of the new kitchen and warehouse facility at Wetherill Park would contribute to the financial success of the business.

19. [596]

    Mr Ross-Edwards said the original budget had the new stores starting earlier than they actually did, Crows Nest had only been operating for two weeks and the extent of cannibalisation of existing stores had not been anticipated. He did not then anticipate the extent of the problems that About Life would encounter as a result of its rapid growth, nor the significant failure of the new IT system.

20. [597]

    As the financial year unfolded, budgeted and actual revenue for the first quarter, being July to October 2016, roughly aligned. The gap between forecast and actual revenue widened in the second and third quarters and increased from 26% below budget to 38% below budget in the final quarter ending June 2017. Ms Phillips accepted that her forecasting efforts in the 2017 and 2018 financial years were not accurate; 2017 “was a very, very difficult year”.

21. [598]

    Mr Samuels’ criticism is largely based on the period from October 2016 to June 2017. The 2017 financial year included a series of events which might be considered outside About Life’s ordinary business; it was not surprising that a forecast prepared before the events manifested themselves proved well ‘off the mark’. Preparing forecasts in that year which proved to accord with actual results would have been difficult.

22. [599]

    Nor do I consider that Mr Ross-Edwards and Ms Phillip can be criticised, as I understand that they were, for regularly revising the forecast when they formed the view that things had changed and the current forecast was no longer a reasonable predictor of financial performance. Mr Ross-Edwards explained that each forecast was based on assumptions and, as the months moved by and cash and capital raising was pushed back, then assumptions changed and forecasts were missed. Mr Ross-Edwards agreed that this forecast proved to be optimistic. “[T]hey were done [on] assumptions at the time … based on … whatever … was happening at that time and they were the best at that time … they proved not to be accurate. And circumstances changed dramatically over that time. And that is why we sold the Double Bay store.”

23. [600]

    In the result, I consider that the post-sale forecast can be used as a basis for considering About Life’s performance in the counter factual, with adjustments (if possible) to reflect the findings of fact I have made and discounted to reflect the possibilities and probabilities.

24. [601]

    Having analysed About Life’s stores’ revenue, EBITDA and customers, Mr Samuel said that the commencement of About Life’s decline appears to have been in about July 2015. After this, About Life was having difficulty meeting its short-term liabilities (having regard to its current, or working capital, ratio). It became predominately funded by creditors and bank borrowings rather than shareholders. Thereafter, each store’s EBITDA, customer numbers and customer basket sizes generally declined.

25. [602]

    Mr Samuel observed that there was a working capital deficit of $5.3 million as at 30 June 2016, where negative working capital indicates that a business cannot cover its current liabilities from its current assets. About Life’s inventory balance had increased to $8.1 million. Although the extent of inventory write-offs caused by the defective Bepoz system were not then appreciated, Mr Samuel says that, if the inventory write-off attributable to the 2016 financial year is taken into account, About Life’s reported 2016 EBITDA of $2.5 million would have been eliminated, and a negative EBITDA would have been reported instead. Mr Samuel said that EBITDA was the best indicator of cashflow, “if that’s negative, it says at an operating level you’re making a loss.”

26. [603]

    Mr Morris did not agree that there was a general decline in each store’s EBITDA from July 2015. Mr Morris agreed that About Life had negative working capital, and its working capital ratio deteriorated particularly during 2016 and 2017, but did not agree that About Life had to have positive working capital to be in good financial health: see [570].

27. [604]

    Mr Samuel has undertaken a very detailed review of About Life’s financial statements and management accounts, and its historical performance to 30 June 2017. That is only part of the picture. Other parts include the people and events which produced those figures, and which I have endeavoured to summarise in this judgment. Mr Samuel was not asked to consider, or make assumptions, as to whether the events were recurring, the problems had been fixed or the people were able to manage the business better going forward.

28. [605]

    Having now reviewed a vast amount of evidence on the events which unfolded, I consider that About Life was a company with an experienced and responsible board of directors and competent management. Corporate governance was sound. Financial management was attentive. When new investors joined the company, About Life developed ambitions to expand more aggressively. In 2016, it took on three stores in quick succession while also establishing a new kitchen/warehouse facility and implementing a new IT system. A large amount of one-off expenses occurred. Management was stretched. The new IT systems wasted a large amount of precious cash, the full extent of which was not appreciated at the time.

29. [606]

    But these were not recurring problems. By June 2017, these problems had been identified and either dealt with or were in the process of being dealt with: see [126], [180], [206], [580]. To the extent that Ms Phillips may not have been able to manage About Life’s larger business going forward, steps were underway to recruit a new chief executive officer: see [389]. Further, whilst the contemporaneous documents make several general references to increased competition in the market in which About Life operated (see [91], [381]-[382], [397]), there is insufficient evidence to conclude that there was any material change such that the business was doomed to fail. That is, I do not consider that About Life’s business was such that it had no chance of trading profitably going forward.

VALUE OF LOST CHANCE

1. [607]

   How then does one value the loss of chance? It is necessary to understand the experts’ models to assess whether the models can incorporate the findings I have made or otherwise assist in determining the probabilities or possibilities in the counter factual.

Experts’ models

1. [608]

   Mr Morris initially estimated the value of About Life’s lost chance using the post-sale forecast as a basis for predicting About Life’s financial performance in the counterfactual. It will be recalled that the post-sale forecast was prepared on the basis that About Life would receive $10 million from the sale of the Double Bay store by 30 June 2017 of which $4 million would be paid to the bank, $2.25 million would be paid to supplier to reduce debts, operation of the Double Bay store would cease from 1 July 2017 and About Life’s remaining stores would be re-stocked for $3 million. Directors’ loans would be repaid by $500,000 in May 2017 and a further $1 million in 2018. Significant savings would be achieved in the operation of the kitchen in Wetherill Park by reducing labour costs by almost half in the 2018 financial year.

2. [609]

   As the last matter, Mr Samuel cited the forecast reduction in kitchen expenses as “an example of unreasonably optimistic forecasting”. Ms Phillips explained that, in June 2017, the project manager employed to establish the kitchen facility came to an end of his short-term contract, which reduced the kitchen costs by some $180,000 a year.

3. [610]

   Mr Samuel considered that About Life’s forecasts were so unreliable that the adjustments made by Mr Morris to the post-sale forecast did not provide a proper basis for About Life’s financial performance in the counter factual, as the forecast sales for 2018 and 2019 remained. Mr Samuel made further adjustments to the post-sale forecast as adjusted by Mr Morris. He replaced the Double Bay store’s forecast 2018 sales with its actual 2017 sales, re-calculated forecast 2018 and 2019 sales based on the implied percentage increases in the board forecasts and adopted the forecast weekly revenue in the post-disaster forecast, which forecast revenue to 31 December 2017. Mr Samuel assumed even sales for the rest of the financial year and adjusted inventory purchases and trade creditors accordingly.

4. [611]

   Whilst I agree that Mr Morris’ assumption that sales occurred evenly in each month of the 2018 and 2019 financial years is not how sales would have occurred – sales had seasonal variations, at least – adopting figures from the post-disaster forecast is not a good predictor of sales in the counter factual either. The context in which Ms Phillips provided the post-disaster forecast to Woolworths, Korda Mentha and the bank was in a financial emergency. In the month which followed discovery of Woolworths’ right of first refusal, the evidence suggests that the position with About Life’s suppliers materially deteriorated with consequential effects on revenue. It may well have taken more to retrieve the position than if suppliers had been amenable to continuing to trade with a definite payment in view from the proceeds of sale of the Double Bay store.

5. [612]

   In addition, Mr Samuel assumed the bank would require $5.333 million from the proceeds of sale, $4.825 million would be paid to suppliers and $1 million would be used for the Lane Cove pilot store. In Mr Samuel’s first report, he calculated that the proceeds of sale would not have generated any surplus to be used to restock shelves or restructure the business. Thus, About Life’s trading results in the counterfactual would have been worse as the business would no longer have enjoyed revenue from the Double Bay store. Lost revenue from the Double Bay store exceeded the additional interest which About Life paid the bank while waiting for the net proceeds of sale. Thus, About Life suffered no, or minimal, loss in the counterfactual.

6. [613]

   On receipt of Mr Samuel’s report, Mr Morris re-visited his work and adjusted the post-sale forecast to better reflect events which About Life say would have occurred.

7. [614]

   As already mentioned, on Mr Morris’ calculations, About Life would have had some $2.6 million of cash at 30 June 2017, after paying the bank and reducing creditors. Mr Morris concluded that, if About Life had traded consistently with his adjusted forecast, About Life would have had sufficient financial resources to reduce its indebtedness to the bank by $4.3 million, reduce its indebtedness to trade creditors to an amount equivalent to 45 days of cost of sales, and continue to maintain trade creditors at that level; to purchase additional inventory and restock stores to carry inventory equivalent to 60 days of cost of sales by the end of July 2017 and maintain that level of inventory to pay other creditors and maintain those liabilities at levels consistent with those at 30 June 2016; to fund capital expenditure that was included in the board forecasts, including on the Lane Cove store; and to make the ongoing quarterly repayments to the bank. Whilst About Life would, on occasion, continue to breach bank covenants until December 2017 by reason of the company’s extremely poor performance in the 2017 financial year, About Life would have complied with bank covenants thereafter.

8. [615]

   In Mr Morris’ opinion, About Life’s loss was the difference between the value of the business as a going concern, assuming that it traded in accordance with the adjusted forecasts, compared with the actual value of About Life when it went into administration. Mr Morris acknowledged that his calculation of loss had not been discounted to reflect the risk that About Life would not have operated consistently with his adjusted forecast, regarding this as a matter for the Court.

9. [616]

   If About Life traded consistently with Mr Morris’ adjusted forecast then About Life’s business would have been valued at $18.7 million as at 30 June 2019, being the amount determined by the capitalisation of About Life’s future EBITDA of $4.4 million and applying a multiple of 4.25. He assumed that About Life would have been capable of maintaining that level of EBITDA in the 2020 financial year. Mr Morris projected that About Life’s net debt as at 30 June 2020 would have been $2.6 million, resulting in a net value of About Life’s business of $16.1 million. In fact, when About Life went into administration, its liabilities exceeded its assets by $11.8 million. Accordingly, Mr Morris assessed About Life’s loss as the difference between these two outcomes, being $27.9 million.

10. [617]

    In determining the appropriate multiple by which to capitalise About Life’s future maintainable EBITDA, Mr Morris took into account the two offers made by The Natural Grocery Co, one before and one after the sale of the Double Bay store, and calculated the EBITDA multiple implicit within those offers, being between 4 and 4.7. He also had regard to Deloitte’s valuation considerations during the 2017 audit, being 4 and 4.5 times EBITDA while McGrathNicol considered a generic range of multiples of three to five times. Mr Morris considered an EBITDA multiple of 4 to 4.5 times EBITDA to be appropriate and adopted the mid-point. (As to an appropriate multiple, I note that, in December 2016, the bank used a multiple of 4.0.) As to the discount rate to be used, Mr Morris used 15% having regard to the offers made by The Natural Grocery Co and Harris Farm but making allowance for the premium in these offers referable to the Double Bay store.

11. [618]

    Mr Samuel considered that estimated profits for financial years 2018 on should be adjusted to represent the best estimate of the most likely outcome, then discounted to 30 June 2017 – being the date when the hypothetical financial results first differ from the actual results – at an appropriate discount rate to allow for the time value of money and the risks inherent in earning the forecast profits. Mr Samuel did not commit to a more suitable discount rate, but ventured that 20% may be more appropriate. Court interest may then be calculated from the date of loss to the present day.

12. [619]

    With the further adjustments made in Mr Samuel’s second report, his forecast resulted in About Life having a positive cash balance in July 2017 but a negative cash balance in August and September 2017. Thereafter, the cash balances remained negative for the December 2017 and March 2018 quarter, before returning to a positive cash balance as at 30 June 2018 and a negative cash balance as at 30 June 2019. Maddocks contended that, in the counter factual, About Life would have continued to breach its covenants and the bank would have exercised its rights arising from such breaches.

Submissions

1. [620]

   About Life submitted that there was evidence that the bank either was, or may have been, willing to accept that the profit on the Double Bay sale be recognised in calculating the leverage ratio, as it had in 2016. Mr Green’s contemporaneous investor update reported, “the bank will recognise the one-time gain in EBITDA for Q4 FY17 as a result of the gain on the sale of the DB store, which will benefit the rolling EBITDA figure and effectively give us 12 months with substantial headroom on our covenants”. As such, it was submitted that Mr Samuel’s calculations on bank covenants could be put to one side as he has not recognised the profit from the sale of the Double Bay store in his calculations.

2. [621]

   About Life submitted that the actuals for at least June 2017 do not properly reflect the counter factual. That is because it is clear that the prospect of the litigation itself and the dispute with Woolworths had an adverse impact on the relationship with suppliers. About Life submitted that the use of an appropriate multiplier in itself factors in the risk that the company will not perform as forecasted. The Court could adopt an approach of further discounting the $18.7 million figure by 23.5%, which would lead to a reduction of $4,394,500.

3. [622]

   Otherwise, About Life submitted that its loss may be calculated by reference to the non-binding indicative offer made by The Natural Grocery Co in May 2017, being an offer allowing for the sale of Double Bay for the shares in About Life of $13.5 million, on a debt free basis. The net debts as at 30 June 2017, according to Mr Morris, were $4,315,308. It was appropriate to allow for a reduced discount for the lost chance on this scenario, as there were fewer contingencies associated with chance of selling the business for the amount offered by The Natural Grocery Co than in continuing to conduct the business.

4. [623]

   Maddocks submitted that the chance About Life said that it had lost was no greater than about 5%. Maddocks submitted that there was a real issue in valuation methodology in relying upon conditional non-binding indicative offers: Yakiti Pty Ltd v MacDonald [2019] NSWSC 1772 at [197]. As to About Life’s net debt, Maddocks submitted that the net debt of $2.6 million used by Mr Morris included $1.011 million of cash, being the projected cash position at 30 June 2019 and $3.471 million cash as at 30 June 2020. Even if it were correct to add the 2020 financial year (which it was submitted it was not because Mr Morris had already valued About Life at 30 June 2019 and adding EBITDA for the 2020 financial year was double counting) then those cash flows would need to be discounted because the earnings were not certain. Maddocks submitted that the reduction for net debt was at least $6.044 million (when the 2020 financial year cashflows were removed) and probably closer to $6.5 million.

Conclusion

1. [624]

   As to when damages should be assessed – being as at 30 June 2020 (Mr Morris) or 30 June 2017 (Mr Samuel) – damages for torts or breach of contract are generally assessed as at the date of breach. As Mason CJ explained in Johnson v Perez (1988) 166 CLR 351 at 355-356; [1988] HCA 64:

2. [625]

   In Ng v Filmlock Pty Ltd (2014) 88 NSWLR 146; [2014] NSWCA 389, Gleeson JA (with whom Tobias AJA agreed) noted that the general rule may give way to another approach where the plaintiff has acquired an asset which would not otherwise have been acquired and the asset is not readily marketable at the time of acquisition: see Vieira v O’Shea [2012] NSWCA 21 at [45]. However, Gleeson JA observed at [59]:

3. [626]

   As I understand it, Mr Morris calculated loss as at 30 June 2020 for convenience, being one month before preparation of his second report. That is not sufficient reason to calculate loss at that date. Further, it involves making further assumptions as to how About Life would have performed beyond the post-sale forecast, which makes the figures for 30 June 2020 less dependable in circumstances where the figures being considered are large and a sound foundation is important. I am uncomfortable going beyond the post-sale forecast, which extended until 30 June 2019 and itself involved an element of speculation which will need to be adjusted by an appropriate Sellars discount.

4. [627]

   Based on Mr Morris’ model, About Life’s EBITDA for 30 June 2019 was $4.42 million. Using Mr Morris’ 4.25 multiple, the value of About Life was then $18.785 million. About Life’s net debt was forecast to be $6.044 million (having removed the cashflow forecast for the 2020 financial year). The net value of About Life as at 30 June 2019 was therefore $12.741 million. Discounted to 30 June 2017 using Mr Morris’ 15% per annum discount rate (which I have compounded monthly), the value of About Life in the counter factual was $9.456 million. Using Mr Samuel’s suggested discount rate of 20% per annum (compounded monthly), About Life’s value was $8.569 million.

5. [628]

   If I use Mr Samuel’s spreadsheet, forecast EBITDA for 30 June 2019 was $3.808 million. Using Mr Morris’ multiple of 4.25, About Life was worth some $16.184 million. About Life’s net debt, as forecast by Mr Samuel, was $7.517 million, leaving About Life with a net value of $8.667 million. Discounted to 30 June 2017 using a 15% per annum discount rate (compounded monthly), About Life’s net value was $6.433 million. Using a 20% per annum discount rate (compounded monthly), About Life’s net value was $5.829 million.

6. [629]

   Despite effort, I have not been about to re-run the experts’ financial models with the different figures which follow from the findings I have made. Presumably, this is why the authorities suggest that the Courts take a ‘broad brush’ approach. I am inclined to use Mr Morris’ model, as I am discounting the loss of chance as posited by About Life, as in Burger King v Hungry Jack’s where Hungry Jack’s evidence as to how it would have grown absent Burger King’s conduct was used as a basis for the Court’s calculations, discounted to adjust for “the degree of the decision-maker's confidence in that best estimate”: at [596].

7. [630]

   The post-sale forecast may not have been achieved as insufficient funds were available from the net proceeds of sale to acquire new inventory identified by management as needed, unless the founders’ advance of $2.3 million was also used (which is taken into account elsewhere in the models). I note also the general ‘rule of thumb’ in marketing explained by Ms Phillips: loyal customers will persevere for two or three shopping trips but will then stop coming. Given the lack of stock in About Life’s stores for several months leading up to the replenishment of stock, additional time may have been needed to tempt shoppers to return: see [176].

8. [631]

   I note that, when About Life considered Woolworths’ revenue figures for the three Thomas Dux stores, About Life reduced those figures by 20% when deciding how much it was prepared to pay for the stores: see [80]. Likewise, the bank reduced About Life’s forecast revenue figures by 20% when considering the post-sale forecast: see [436]. I consider that it is appropriate to apply a higher discount, given that the new inventory identified in the post-sale forecast as necessary to drive revenue was, in part, not available on the counter factual. Overall, I have applied a Sellars discount of 40% to the value of About Life in the counter factual, being $5.67 million.

9. [632]

   A useful check on my assessment is the amount which The Natural Grocery Co may have been prepared to pay for About Life’s business before disaster struck. In Yakiti v MacDonald, Hamill J noted that the conditional nature of a non-binding indicative offer made in that case meant that it provided a valuation that was of very little probative value. There, the offer was “conditional on a number of imponderable and disputed circumstances” including that the purchaser hoped to re-brand the businesses whilst the vendor’s parent company in the United States would not permit re-branding: at [197]-[198].

10. [633]

    This was unlike an offer considered by the Court of Appeal in MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167; [2004] NSWCA 451. There, Spigelman CJ (Mason P and Hodgson JA agreeing) observed that an offer by a purchaser “is not only relevant it is highly probative. Indeed, whilst allowing for the possibility of further bargaining, it is difficult to conceive what better evidence there could be. Expert evidence may establish that such an offer is inadequate but, unless there are special considerations, the offer clearly establishes a floor”: at [97].

11. [634]

    Here, I consider that the non-binding indicative offer made by The Natural Grocery Co after it was informed that the Double Bay store had already been sold is indicative of value. Whilst the offer was subject to due diligence, it was not “conditional on a number of imponderable and disputed circumstances”. The Natural Grocery Co non-binding indicative offer of $13.5 million assumed that About Life would be acquired on a debt free basis with a normal level of working capital (to be agreed). Debt included bank debt, finance leases, GST and any tax payable, other interest bearing debt and entitlement / bonus accruals for staff. As Mr Samuel analysed this offer after allowing for About Life’s debts, the price was $5.64 million. From the offer price of $13.5 million, Mr Samuel deducted bank debt of $6.215 million (term debt, credit cards and equipment leases), tax liabilities of $681,000 (PAYG and GST) and employee and superannuation liabilities of $964,000. Mr Morris did not comment on this calculation. As I understand it, Mr Samuel took About Life’s board pack for March 2017, containing its actual results, and reduced bank debt by $4 million to reflect the intended repayment following the sale of the Double Bay store. On the counter factual, I have concluded that About Life would more likely have reduced its bank term debt by $4.5 million such that the indicative price was $6.14 million.

12. [635]

    One could apply a Sellars discount to this figure, on the basis that following due diligence, The Natural Grocery Co would have made a lower offer or withdrawn altogether. The purchase price was based on the 2017 EBITDA run-rate excluding Double Bay based on About Life’s financial results to March 2017. The actual results for May and June 2017 were worse, albeit not necessarily worse, or as worse, in the counter factual. Likewise, About Life may have negotiated a higher figure. It ought not be forgotten that David Jones had also expressed an interest in About Life’s stores. These sites clearly had value to other retailers (see [450]), which is perhaps not surprising when one considers the time and effort expended by About Life in establishing these stores itself: see [59], [694]. Overall, I have applied a Sellars discount of 10% to this figure, being $5.526 million. This figure need not be further discounted as it was an offer made at the time of breach, with a view to executing a share sale agreement on 30 June 2017.

13. [636]

    By April or May 2017, the investors’ preference appears to have been to sell About Life’s remaining stores – if a suitable price was negotiated – rather than press on. Whilst Ms Phillips appeared more inclined to re-build and expand the business, the founders were minority shareholders and, for the right price, would not have been unhappy if the remaining assets were sold and, indeed, would have had little choice in the matter. In the counter factual, I consider it more likely that About Life would have accepted The Natural Grocery Co’s offer subject to endeavouring to increase it by further negotiation.

14. [637]

    Whilst there is an element of uncertainty in how About Life would have performed in the counter factual, there is no uncertainty as to how About Life in fact performed, going into administration on 17 December 2018 with net liabilities of $11.8 million. Thus, whilst it is appropriate to discount this figure to reflect the time value of money and thus compare ‘apples with apples’ as at 30 June 2017, the discount rate will necessarily be less. I have used the Reserve Bank cash rate plus 2%, being 3.5% per annum (compounded monthly). The value of About Life as at 30 June 2017, as events in fact unfolded, was -$10.37 million.

15. [638]

    Maddocks submitted that, in order to calculate About Life’s loss of chance in accordance with the principles in Sellars, the Court would need to add the value of About Life in the counter factual – either based on its future performance or the offer from The Natural Grocery Co – to About Life’s losses at the date of administration and then estimate About Life’s chance of achieving the benefit of both avoiding the administration losses and realising the value in the company. To the extent that Maddocks suggested that there should be two Sellars’ discounts, it is not clear why this is so. Self-evidently, if About Life continued to trade and prosper then it would not have gone into external administration.

16. [639]

    About Life is entitled to such damages as will put it in the position it would have been in had Maddocks done what they should have done. About Life lost a chance which had real value because the prospect of a successful outcome was substantial rather than speculative. It was lost by Maddocks’ conduct. About Life’s damages are 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.

17. [640]

    Using $5.526 million as the value of the lost chance, being the effective sale price to The Natural Grocery Co less a 10% Sellars discount, the difference between the counter factual and About Life’s actual fate as at 30 June 2017 is $15.896 million.

WOOLWORTHS’ COSTS

1. [641]

   About Life also claimed loss comprising its liability for Woolworths’ costs of the proceedings. Maddocks submitted that there was no basis to award damages for the $325,000 paid by About Life to Woolworths in respect of Woolworths’ costs of the proceedings. Of this sum, some $11,600 was said to relate to Woolworths’ costs of obtaining Council approval for the assignment of the Double Bay lease (being 75% of $15,139 and adding $286.47, reflecting how the settlement figure of $325,000 was said to be calculated). While About Life made a commercial decision to pay those costs, the costs were not referable to Emmett AJA’s orders and not recoverable from Maddocks. The Court would not conclude that the remaining $313,000 represented Woolworths’ recoverable costs in the Woolworths Proceedings. There was said to be an onus on About Life to prove the reasonableness of its commercial compromise with Woolworths: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; [1998] HCA 38 at [6] per Brennan CJ; see also at [35], [38]-[41] per McHugh J; [70] per Gummow J, [99(1)] per Kirby J and [129]-[136] per Hayne J. Alternatively, Emmett AJA’s costs orders provided that About Life and Harris Farm were jointly liable to pay Woolworths’ costs. As such, Maddocks could only be liable to pay half at most. Using a broad-brush approach, the Court could not be satisfied that any sum greater than $100,000 is payable.

2. [642]

   About Life submitted that Maddocks had not pleaded a failure to mitigate and that it would be unfair to allow Maddocks to argue such a defence. Further, and in any event, the settlement was said to be reasonable especially given the predicament that About Life was in at the time. It was submitted that the settlement reflected “a perfectly rational and reasonable approach”.

Consideration

1. [643]

   As to Maddocks’ maths, it is not clear why $11,640.72 of the $325,000 is not referrable to About Life’s liability under the costs order made by Emmett AJA. Mr de Fontgalland’s email of 24 November 2017 stated that $325,000 of the total payment to be made by About Life would be allocated “to Woolworths’ costs of the litigation”. As Latham CJ explained in Visbord v Federal Commissioner of Taxation (1943) 68 CLR 354 at 370-371; [1943] HCA 4, “The debtor has the right when he makes a payment to appropriate the money to any of the debts owing to his creditor as he pleases, and, if the creditor takes the money, he is bound to recognize this appropriation”: at 370-1. Further, at 371: (emphasis added)

2. [644]

   Costs of litigation that are reasonably incurred in an attempt to reduce losses caused by wrongdoing are a head of loss: Talacko v Talacko at [60] per the Court, following Gray v Sirtex Medical Ltd (2011) 193 FCR 1; [2011] FCAFC 40. In Gray v Sirtex Medical at [26], the Court held that a correct statement of the law was that expressed in Berry v British Transport Commission [1962] 1 QB 306 by Devlin LJ at 321, being: (emphasis added)

3. [645]

   Unity Insurance is not applicable. In Unity Insurance, an insured sued its insurer and insurance broker, where the broker had negligently failed to fully disclose the insured’s claims history to the insurer when arranging the policy. On making a claim on the policy, the insurer refused to pay the full amount which would have been payable under the policy if not for the non-disclosure. The insured settled its claim against the insurer and sued the broker for the balance. The majority held that the insured’s damages were the difference between what it would have recovered under the policy the broker ought to have arranged and the amount recovered under the settlement with the insurer, as long as the settlement was reasonable. It was not necessary for the insured to prove that the insurer was in fact liable under the policy for the full amount claimed, but simply to prove that the insured had made a reasonable settlement with the insurer: Rail Corp of New South Wales v Fluor Australia Pty Ltd [2009] NSWCA 344 at [100] per Macfarlan JA (Allsop P and Hodgson JA relevantly agreeing).

4. [646]

   Whilst the settlement in Unity Insurance was in respect of the insurer’s potential liability, the position is different where a plaintiff has settled an existing liability. As Macfarlan JA explained in Rail Corp v Fluor at [102]:

5. [647]

   Likewise, in Yokogawa Australia Pty Ltd v Alstom Power Ltd [2009] SASC 377; (2009) 262 ALR 738, the plaintiff sued a subcontractor for breach of contract which caused delays under the head contract. The plaintiff settled the delay claim with the head contractor and sought to recover the monies from the subcontractor. Kourakis J considered, albeit in the context of client legal privilege, that, as pleaded, the plaintiff was entitled to compensation for the liability it had incurred. At [126]:

6. [648]

   Here, About Life had an existing liability to pay Woolworths’ costs. The reasonableness of the sum reached to discharge that liability is not in issue. Whilst Maddocks submitted that Mr de Fontgalland undertook the negotiation without reference to the costs orders made by Emmett AJA and without asking for any evidence to test the reasonableness of Woolworths’ contentions regarding its costs, these matters go to whether About Life failed to mitigate its loss, rather than whether Maddocks’ conduct was causative of About Life’s loss. A defendant is required to plead the positive facts relied upon for a failure to mitigate defence: In the matters of Earth Civil Australia Pty Ltd, RCG CBD Pty Ltd, Bluemine Pty Ltd, Diamondwish Pty Ltd and Rackforce Pty Ltd (all in liq) [2021] NSWSC 966 at [546]-[549] per Ward CJ in Eq. Maddocks has not so pleaded and fails on this ground alone: Earth Civil at [549].

7. [649]

   In any event, as canvassed at [486]-[488], About Life’s negotiation of Woolworths’ costs of these proceedings was reasonable. The relevant principles were summarised by Vaughan J in AVWest Aircraft at [661]-[662] (citations omitted):

8. [650]

   First, the suggested discount on Woolworths’ actual legal costs of these proceedings, being 25% of its solicitor’s costs, appears reasonable. Mr de Fontgalland could have called for Woolworths’ legal bills and satisfied himself that the amounts cited by Woolworths in the negotiations were correct and identified areas where costs may be further negotiated down but the overall reduction of 25% likely accorded with the experience of both practitioners in costs assessments.

9. [651]

   Second, whilst the costs order was made against both About Life and Harris Farm, About Life was then being sued by Harris Farm for damages including its costs of defending the proceedings brought by Woolworths. Whilst About Life could have said it would only pay half of Woolworths’ costs of the proceedings, no-one suggests that About Life had any defence to Harris Farm’s cross-claim for its share of those costs. By agreeing to pay Woolworths’ costs of the proceedings in toto, About Life was effectively paying Harris Farm’s share which it was obliged to pay in any event.

10. [652]

    Finally, About Life was then endeavouring to obtain a licence from Woolworths to continue to operate the Double Bay store, and to finally complete the sale. It might be thought foolish to imperil the substantial income stream from continuing to operate the Double Bay store, or from the proceeds of sale, by pressing for, likely, modest further reductions on Woolworths’ costs incurred in these proceedings. About Life is entitled to the $325,000 in costs plus interest.

CONTRIBUTORY NEGLIGENCE

1. [653]

   Maddocks alleged contributory negligence on the part of About Life, through its directors, Mr Beecroft, Ms Phillips and Mr Green, under section 9 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW) and section 5S of the Civil Liability Act. Maddocks contended that About Life contributed to its loss as About Life: failed to comply with the right of first refusal; failed to inform Maddocks of the existence of the right of first refusal; made misleading statements to Harris Farm and Maddocks to the effect that there were no side deeds or impediments to About Life assigning the lease to Harris Farm; failed to carefully consider and heed Maddocks’ advice in the email sent shortly before exchange; failed to provide a reasonably accurate response to that email; failed to make reasonable inquiries before responding and failed to alert Maddocks to the fact that further time was needed to provide a reasonably accurate response to Maddocks’ email at 4.37 pm on 21 April 2017. Further, About Life failed to put in place a system to ensure that the side deed could not reasonably be overlooked, either by noting the existence of the side deed on About Life’s copies of the lease or by prominent file notes on all files relating to the lease.

2. [654]

   Maddocks submitted that About Life failed to take precautions against the risk of harm that eventuated by reason of Maddocks’ breach of duty. Such failures were negligent, as they amounted to a failure to apply the standard of care of a reasonable person in the position of About Life by reference to what About Life knew or ought to have known (namely, the existence of the Woolworths’ Deed of Agreement): section 5R. Maddocks submitted that About Life’s failure was causative of its loss, whether the section 5D approach to causation or the “common sense” approach set out in March v E & M H Stramare Pty Ltd (1991) 171 CLR 506; [1991] HCA 12 applies, as to which there is debate: Coles Supermarket Australia v Bridge [2018] NSWCA 183 at [31].

3. [655]

   About Life’s negligence was said to be a necessary condition of the occurrence of harm, because had those failings not occurred and reasonably careful steps had been taken to put adequate systems in place then, on the balance of probabilities, the right of first refusal would have been identified and About Life’s loss avoided. It was appropriate for the scope of About Life’s liability, by way of contributory negligence, to extend to the harm so caused as About Life was a large company that ought to take reasonable steps to protect itself from harm, and given that the existence of the right of first refusal was wholly within About Life’s knowledge and not within that of Maddocks, and the steps that could have been taken by About Life to prevent harm were not onerous. Maddocks submitted that the Court should reduce any damages owed by Maddocks to About Life by something approaching 100% and not less than 70% in the circumstances.

4. [656]

   About Life submitted that, in assessing whether this is in truth a departure from the exercise of reasonable care by About Life, it is important to appreciate that sections 5B and 5C Civil Liability Act apply: Verryt v Schoupp [2015] NSWCA 128 at [27]. That is, in order for any of these asserted failures to amount to a breach of About Life’s duty to exercise reasonable care, the Court would have to find that not remembering the existence of the right of first refusal before exchange was a failure on the part of About Life to take reasonable precautions. In circumstances where About Life contends that part of the exercise of reasonable care by Maddocks would have required it to take proper steps which would have led to the right of first refusal being identified in the course of the retainer, About Life contended that none of these matters put by Maddocks against it were “reasonable precautions” for the purposes of section 5B; there was no departure by About Life from the standard of reasonable care in respect of any of these matters. About Life submitted that, if there was an apportionment of liability to About Life for contributory negligence, it should be no more than 10%.

Consideration

1. [657]

   The principles governing a defence of contributory negligence are derived from section 9 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW), read together with sections 5R and 5S of the Civil Liability Act. In summary, the principles that are applicable in determining whether a person has been negligent also apply in determining whether the person who suffered harm has been contributorily negligent in failing to take precautions against the risk of that harm: section 5R. Accordingly, questions of culpability are to be assessed by reference to sections 5B and 5C: Verryt v Schoupp at [27]. A claim may be reduced by reason of a claimant’s failure to take reasonable care to such an extent as the Court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage: section 9. The reduction may amount to 100% of the claim, if the Court thinks it just and equitable to do so: section 5S.

2. [658]

   The test for contributory negligence is stated in Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6, where Gleeson CJ, McHugh, Gummow and Hayne JJ explained at [30]: (footnote omitted)

3. [659]

   In Podrebersek v Australian Iron & Steel Pty Ltd [1985] HCA 34; (1985) 59 ALJR 492, Gibbs CJ, Mason, Wilson, Brennan and Deane JJ explained (at 493):

4. [660]

   The High Court continued in Podrebersek explaining the nature of the apportionment task (at 494):

5. [661]

   I do not consider that About Life or its directors were negligent for failing to recall something. Nor did Ms Phillips or Mr Beecroft make misleading statements to Maddocks to the effect that there were no side deeds, in their responses to her email sent shortly before exchange. Ms Phillips and Mr Beecroft simply did not respond to Ms Badcock’s question on that subject. It is true that the three recipients of Ms Badcock’s email could have taken more time to consider each of the 12 questions posed in that email and undertaken further enquiries, including by reference to About Life’s records, other members of staff and Mr de Fontgalland. But in the circumstances in which the email was sent, already canvassed at [370]-[374], I do not consider that About Life or its directors failed to take reasonable care by failing to make such enquiries. Nor was it negligent to fail to tell Maddocks that more time was needed to consider Ms Badcock’s email in circumstances where the email itself did not sufficiently identify the information sought, its significance or that it warranted more time to consider.

6. [662]

   The more significant allegation concerns corporate memory, in particular, document storage and retrieval. Ms Phillips said that she managed the risks posed by Woolworths’ right of first refusal by explaining the risk to the board at the time and filing the document. As already noted, About Life’s documents, including the Woolworths’ Deed of Agreement, were stored on a shared drive to which the company’s employees had access. There were over 200,000 documents on About Life’s shared drive. Documents on the shared drive were sorted into folders, although Ms Phillips said, “it wouldn’t have been me that would’ve sorted the documents.”

7. [663]

   The Woolworths’ Deed of Agreement was stored in the “Double Bay” folder, which was a sub-folder of the “Retail leases” folder, which was a sub-folder within the “Stores leases” folder, which was a sub-folder within the “Company agreements–Contracts–Lease” folder, which was a sub-folder within the “Finance” folder.

8. [664]

   Ms Phillips said that she went into the folders on the shared drive quite frequently, “I went into multiple folders in multiple locations multiple times a day.” However, when Ms Phillips was asked, during the course of the transaction, for the Deed of Agreement for Lease and for the registered Double Bay lease, Ms Phillips located the documents by a document search, rather than by going to the folder on the shared drive: see [278], [292].

9. [665]

   It was suggested to Ms Phillips that she should have changed the file name of the document to highlight its importance to someone looking for documents in the Double Bay folder. However, Ms Phillips said that she did not, during the transaction, ever go back and look for any documents in relation to the lease. “So even if I had big warning signs on that document, I didn’t remember the document and nothing triggered me to remember the document, so even if the document was in size 72 font, I wouldn’t have found the document.”

10. [666]

    Mr Ross-Edwards was the company secretary. In transactions concerning About Life’s stores, Mr Ross-Edwards ensured that agreements and deeds were recorded in About Life’s system. Documents were filed in his office and on the shared drive. He did not believe there would be any chance that documents would be overlooked. However, when the Woolworths’ Deed of Agreement was executed, Mr Ross-Edwards had only recently joined About Life and was acquainting himself with the business. He did not see, nor hear of, the Woolworths’ Deed of Agreement at the time.

11. [667]

    Mr Ross-Edwards later filed the registered Double Bay lease in the shared drive in the Double Bay lease folder, where he said there were quite a few documents (by my count, there would have been some 15 documents in the folder at the time). However, the Double Bay lease was not registered until April 2015, being almost a year after the Woolworths’ Deed of Agreement had been signed. Any obvious connection between the two documents may have been lost with the effluxion of time. Similarly, on receipt of the signed Deed of Agreement in respect of the Crows Nest, Lane Cove and Port Melbourne stores, together with a deed for assignment and variation of lease for the Lane Cove premises, Mr Ross-Edwards read and filed the deeds in his office and on the shared drive. He minuted that the documents had been signed.

12. [668]

    When disaster struck, in the course of his telephone conversation with Ms Phillips, Mr Ross-Edwards searched the shared drive and immediately found the Woolworths’ Deed of Agreement in the Double Bay folder. This was the first time that Mr Ross-Edwards had seen or heard of the document. It was obvious to him that any deed or agreement relating to the Double Bay premises would be stored in a particular folder on the shared drive in accordance with the systems set up by the company. Ms Phillips also then did a search of the shared drive and found the Woolworths’ Deed of Agreement, and said she knew exactly where to find it.

13. [669]

    Mr Green did not turn his mind to whether About Life’s management had put in place a system to ensure that Woolworths’ right of first refusal was not forgotten. He expected that management would put such a system in place, but could not say whether he had assumed management had done so. Mr Green did not consider at the time whether management would put in place a system to remind itself of the existence of such rights in order to manage the risk associated with them. He did not recall discussing this with Ms Phillips or anyone from management.

14. [670]

    Mr Green was the chairman of the board and left storage of the company’s records to management, which was reasonable for him to do. Mr Green does not appear to have been familiar with how the records were stored, nor to have given the matter much thought, but one would not necessarily expect the chairman of the board to involve himself in this aspect of the company’s operations.

15. [671]

    The allegation of contributory negligence is, in short, that About Life should have ascertained the position before, or during, Maddocks’ retainer and volunteered the information which a solicitor, obtaining instructions in accordance with their duty, would have ascertained. Whilst this may be thought to defeat the purpose of instructing a solicitor, the question is whether About Life failed to take reasonable care of its own interests in the circumstances.

16. [672]

    When embarking upon this transaction, About Life considered that it was of sufficient size and importance to retain a larger law firm than its usual local solicitor, Mr de Fontgalland. About Life retained a specialist property lawyer, being a senior partner of the firm. About Life made its officers available to provide instructions and was a responsive client. There can be no doubt that, if asked, About Life’s officers would have speedily retrieved the Woolworths’ Deed of Agreement.

17. [673]

    Whilst it was suggested to Ms Phillips that she had “miserably failed” as chief executive officer in being aware of the company’s important contractual obligations, Ms Phillips replied “if I had acted for myself on this transaction, then yes I think I would be sitting here saying I … personally miserably failed. But I engaged a professional to assist me with that.” Ms Phillips said that when the sale of the Double Bay store was being negotiated “I had many things on my mind”. Ms Phillips relied upon About Life’s lawyers to advise her as to the risks associated with the contracts being entered into and as to the enquiries that should be made before entering into a contract.

18. [674]

    Whilst About Life was entitled to rely on Maddocks to perform its duty, About Life may share responsibility for what happened by failing to take reasonable care for the safety of its assets and interests. There was no expert evidence as to whether About Life’s record keeping systems were deficient or not. The evidence of Ms Phillips and Mr Ross-Edwards indicates that About Life had an adequate system for keeping records such that employees could readily access documents on the shared drive, without the need to locate the hard copy in Mr Ross-Edwards’ office. The problem here was that no one looked in the shared drive before giving instructions to Maddocks, nor as the transaction unfolded.

19. [675]

    True it is that Maddocks did not obtain full instructions from the client to prompt the records to be searched. But 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 reason why About Life stored the documents on the shared drive at all was because the documents were correctly identified as significant to the ownership and operation of its stores. By failing to check this collection of documents when instructing Maddocks to act on the transaction, I consider that About Life failed to take reasonable care for the safety of its assets and interests.

20. [676]

    I do consider, however, that Maddocks bore the greater responsibility to illicit this information, should its client fail to volunteer it. This is particularly important where the client is new to the solicitor, giving instructions on an urgent matter of high value and importance, and where the client is stressed or distracted, as this client was. By comparing the relative importance of the acts of Maddocks and About Life in causing the damage which ensued, I consider it appropriate to reduce the damages payable by Maddocks to About Life by 20%. This reduces the damages for a loss of chance to $12,716,800 and for Woolworths’ costs to $280,000.

CONCURRENT WRONGDOERS

1. [677]

   Further, Maddocks says that About Life’s claim is apportionable for the purposes of Part 4 of the Civil Liability Act 2002 (NSW) and directors Ms Phillips, Mr Beecroft and Mr Green are concurrent wrongdoers in that they failed to discharge their obligations as directors by exercising reasonable care and diligence. Each of Ms Phillips, Mr Beecroft and Mr Green were concurrent wrongdoers, such that Maddocks’ liability is limited to an amount reflecting that proportion of the damage or loss claimed that the Court considers just, pursuant to section 35(1) of the Civil Liability Act.

2. [678]

   Maddocks acknowledged that there was the potential for overlap between the contributory negligence and concurrent wrongdoer defences. A plaintiff who is contributorily negligent cannot, at the same time on the basis of the same facts, be a concurrent wrongdoer under section 35 of the Civil Liability Act: Golledge Pty Ltd v Ballard (2012) 82 NSWLR 231; [2012] NSWCA 376 at [15], [128]-[132]. However, Maddocks contended that About Life was contributorily negligent while the directors were concurrent wrongdoers and the factual matrix for the contributory negligence and proportionate liability claim did not coincide. Deductions for both defences may be warranted, although if the Court found that the defences were made out by reference to the same conduct on the part of the directors, then Maddocks’ liability should not be reduced by reference to both defences, as to do so would “involve an inequitable double discount of the damages by reason of the same acts and omissions” and would therefore “not, to use the word used in s 35(1)(a) of the CLA … be just”: Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110 at [100]-[101] per Macfarlan JA, McColl AP and White JA agreeing, reasoning by analogy with Daniels v Anderson (1995) 37 NSWLR 438, see at [102].

3. [679]

   First, it was said that the directors failed to inform Maddocks of the existence of the right of first refusal, even when asked explicitly on 21 April 2017, or to inform Harris Farm that About Life did not have an unfettered right to assign the lease, or to offer the Double Bay lease to Woolworths. For the reasons set out at [662]-[676], About Life’s directors did not take reasonable care for the safety of About Life’s assets and interests as they failed to examine About Life’s records in relation to the Double Bay lease before instructing Maddocks. However, I consider 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.

Breach of directors’ duties

1. [680]

   Second, Maddocks contended that the directors breached their duties under section 180(1) of the Corporations Act 2001 (Cth), and at equity and common law, to exercise their powers and discharge their duties with reasonable care and diligence. Maddocks says that the directors adopted a flawed expansion plan, acquiring stores without complying with Deed End’s recommendations (which cannibalised About Life’s existing stores), amongst other problems. About Life’s decided to acquire the three Thomas Dux stores in the absence of a report from Deep End on the proposed stores.

2. [681]

   Whether a director has exercised reasonable care and diligence is an objective test; the question is what an ordinary person with the knowledge and experience of the director might be expected to have done in the circumstances if they were acting on their own behalf and involves balancing the risk of harm and potential benefits to the company: Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450. As McDougall J put it in Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) [2007] NSWSC 124; (2007) 63 ACSR 1, the mere foreseeability of harm does not of itself dictate that the question must be answered adversely to the directors; it is necessary to balance risk and reward or, more accurately, to be satisfied that the directors, acting reasonably and in the best interests of the company and employing their individual knowledge and skills and taking account of relevant circumstances, did so: at [1437]. As Ipp J put it in Vrisakis at 449:

3. [682]

   In Daniels v Anderson, Clarke and Sheller JJA observed at 501:

4. [683]

   Whilst there is no doubt that About Life’s acquisition of three new stores within a short timeframe presented significant challenges to the business, in particular, because it occurred at the same time as other challenges to the business including the installation of a new IT system and the establishment of a new kitchen and warehouse facility, there is no evidence – in particular, no expert evidence – to suggest that, in making this decision, the directors of About Life breached their directors’ duties to exercise reasonable care when making decisions in the best interests of the company.

5. [684]

   As to the fact that the three new stores were not in suburbs identified in Deep End’s Sydney network plan, Mr Green said he had reviewed Deep End’s network plan and it appeared reasonable, “Internally the network plan moved around depending on availability of sites in areas [identified by Deep End] and nearby areas, but it was a fluid plan.” In addition to the Sydney network plan, About Life developed site selection criteria, for which Mr Green was responsible.

6. [685]

   As part of acquiring new sites, Mr Green expected that each potential new site would have a site review package prepared by Deep End, “Ideally, yes …”. However, it is apparent the About Life had developed internal models as well. Ms Phillips said that Mr Thevenon ran a consulting company which had done feasibility studies for About Life. Having gone through a number of feasibility projects with Deep End, About Life also created its own feasibility model, “we did build our own model internally for feasibility which was used for determining … the suitability of future sites for the business.” Ms Phillips said that this model was really no different to a full due diligence report. Mr Ross-Edwards prepared the feasibility study; Ms Phillips considered him to be “very capable and … they were credible models.”

7. [686]

   In her affidavits, Ms Phillips said that About Life had a full due diligence report prepared for all sites it acquired. In cross-examination, Ms Phillips explained that some of these reports were About Life’s internal feasibility model. It was suggested that her affidavit was a lie to cover up her “shocking mismanagement”. Whilst Ms Phillips’ affidavit could have been clearer, she did not state that the “full due diligence report” obtained for new sites was obtained from an external consultant such as Deep End. I do not find that Ms Phillips lied.

8. [687]

   About Life did not acquire a full report from Deep End on the proposed acquisition of three stores. Mr Green said that the Thomas Dux stores were in desirable areas according to Deep End’s analysis, although the particular suburbs had not been identified by Deep End. The internal feasibility model was used and the results discussed at board level. Mr Green agreed that the company had not invested in studying the effect of cannibalisation, although “[w]e did study the erosion ourselves but [did not hire] an outside party.”

9. [688]

   Ms Phillips considered that, by virtue of the fact that these were Thomas Dux stores, the sites were already serving a customer in About Life’s demographic. The stores were in prime locations and had been fitted out to Woolworths’ specification, which cost significantly more than About Life’s fit-outs. The leases had been negotiated by the Woolworths’ property team, who were in a stronger negotiating position with landlords to arrive at favourable terms. Ms Phillips refuted any suggestion that these sites were a bad decision. “I had 22 years’ experience in the business. We had a lot of experience around the board. We had a feasibility model. We had an experienced management team. I can’t say that I think that Deep End’s recommendations should be considered to be superior to what our decisions were. … consultants can provide input and information to assist you with your decision making, but that doesn’t mean that that’s the booklet that you walk around with and say, ‘We could only do this.’ … I just couldn’t be critical of the site selection.”

10. [689]

    Ms Phillips said that cannibalisation was an expected part of opening new stores, however, the fact that the Double Bay store was expected to cannibalise Bondi Junction did not mean that About Life would not have made the commercial decision to open Double Bay. Bondi Junction had annual revenue of $13 million, which was reduced by 20% due to cannibalisation. But Double Bay quickly became a $12 million store so, commercially, the Double Bay store was still a good decision.

11. [690]

    Mr Ross-Edwards regarded this as a unique opportunity to purchase established stores in enviable locations with existing fit-outs. About Life would only need to spend about $500,000 on each store to complete the fit-out. If the business had attempted to establish the stores as ‘greenfield’ sites, each fit-out would have been about $3 million. He considered there was an opportunity to establish three stores with a costs saving of some $6 million.

12. [691]

    The 8 September 2015 minutes record that Deep End was to look at the effect of cannibalisation of the Cammeray store by the new Crows Nest store. Mr Green said this was something that he thought needed analysis, with the study directed to how About Life would manage Cammeray going forward rather than deciding whether or not to go ahead with the deal with Woolworths in respect of Crows Nest. “[I]t was a package deal with the three stores, and at that point, we were focused on the impact on Cammeray for budgeting purposes”.

13. [692]

    It was suggested to Ms Phillips most forcefully that the board had resolved to get a full due diligence report from Deep End in respect of the acquisition of the Crows Nest store and its impact on Cammeray “and you countermanded that unilaterally”. As Ms Phillips ultimately recalled it, the board did not so resolve – certainly the minutes do not record such a resolution – nor did she overrule any such resolution. In any event, as will be seen, Deep End did express its view on this subject. On 7 October 2015, Deep End provided its comments on further work to be done. Deed End noted: (emphasis added)

14. [693]

    Ms Phillips said the Crows Nest site was a very superior site to Cammeray, in a prime location. Previously, a Macro Wholefoods store had successfully operated there; About Life had looked at acquiring the site previously and undertaken due diligence. Crows Nest was then Thomas Dux’s best performing store. Although it affected the Cammeray store more than was expected, predicting the actual degree of cannibalisation would not have affected About Life’s decision to acquire the Crows Nest store.

15. [694]

    The board was not without experience, having operated the business for nearly 20 years. The board had, with the assistance of Deep End and Mr Abbott, been endeavouring to acquire new sites for 18 months but had yet to open a new store. The stores offered by Woolworths were perceived to have significant advantages, both in terms of location and existing fit-out such that the ‘package deal’ was overall considered to be in the best interests of the company. Even if that decision was wrong – and it is not clear that it was wrong – I am not satisfied that the directors breached their duties to About Life when making that decision.

Misleading and deceptive conduct

1. [695]

   Third, Maddocks contended that Ms Phillips and Mr Beecroft’s responses to Maddocks email of 4.37 pm on 21 April 2017 amounted to misleading and deceptive conduct in contravention of section 18 of the Australian Consumer Law. The representations were made “in trade or commerce”, being made in connection with the sale of the Double Bay store and, thus, in connection with the implementation of a commercial transaction: Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 at 604; [1990] HCA 17. The representations were said to be misleading because there was, in fact, a side deed and Ms Phillips had not made enquires other than identifying the Double Bay registered lease while Mr Beecroft made no enquiries. Neither said they needed more time. Maddocks relied on the representations to its detriment. Ms Phillips and Mr Beecroft were said to be liable under sections 236 or 237 of the Australian Consumer Law for damages or compensation to About Life, such loss or damage being the amount of the liability which Maddocks had to About Life. Ms Phillips and Mr Beecroft were “concurrent wrongdoers” and any damages awarded against Maddocks should be reduced accordingly, with by far the lion’s share of the responsibility attributed to About Life.

2. [696]

   For the reasons set out at [375]-[379], I do not accept that the damages payable by Maddocks should be reduced on this account.

EQUITABLE SET-OFF

1. [697]

   Maddocks claimed to be entitled to an equitable set-off in respect of the liability About Life had to Maddocks by reason of misleading or deceptive conduct on the part of About Life through the conduct of Ms Phillips and Mr Beecroft as its agents. Maddocks was said to be entitled to an equitable set-off because its claim against About Life was intimately connected with About Life’s claims against it: AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705 at 710-712. As I am not satisfied that there was misleading and deceptive conduct by Ms Phillips and Mr Beecroft, this claim fails.

DIRECTORS’ CROSS CLAIMS

1. [698]

   The directors brought claims against Maddocks in negligence and for misleading and deceptive conduct, seeking by way of damages the $430,000 paid to Harris Farm. Maddocks denies that it owed the directors a duty of care or engaged in misleading and deceptive conduct. Alternatively, contributory negligence was pleaded and an equitable set-off said to arise by reason of the directors having engaged in misleading and deceptive conduct in their responses to Maddocks’ 4.37 pm email.

Negligence

1. [699]

   The directors claim that, in the performance of Maddocks’ retainer with About Life, Maddocks owned the directors a duty of care arising out of the proximity of relationship between Maddocks and the directors, their reliance upon Maddocks to properly advise them and to perform the retainer so that they were not personally exposed to any liability in connection with the transaction, the directors’ vulnerability arising out of the reliance upon Maddocks, and the foreseeability of the risk that the directors may have a liability to Harris Farm if Maddocks did not properly perform their retainer. As a result of Maddocks’ breach of their of care, the directors suffered loss being the $430,000 owed to Harris Farm.

2. [700]

   The directors accepted that the issue is whether a duty of care arose. The directors submitted that, in circumstances where Maddocks was advising About Life about the Contract for Sale of Business, including the warranties in clause 10, it was reasonably foreseeable that the contract may give rise to the directors becoming liable, and thus Maddocks’ duty extended to the directors. Whether Harris Farm’s cross-claim against the directors was meritorious or not, the directors were exposed to potential liability, which was resolved by paying $430,000 in settlement of Harris Farm’s claim.

3. [701]

   While solicitors have been held to owe a duty of care to the directors of their corporate clients by reference to special features of the solicitor/director relationship (Dual Homes Victoria Pty Ltd v Moores Legal Pty Ltd (2016) 50 VR 129; [2016] VSC 86 at [135]), Maddocks submitted that there were no such feature here. The directors had not demonstrated any vulnerability as each could have taken advice elsewhere, or asked Maddocks to act for them: Brownie Wills v Shrimpton [1998] 2 NZLR 320 at 326. It was said that Maddocks could not act for About Life and its directors as a conflict of duty arose as the directors may have breached their duties to the company. As Kenny J observed in Carey v Freehills [2013] FCA 954; (2013) 303 ALR 445 at [312], in Hill v van Erp (1997) 188 CLR 159; [1997] HCA 9, “the High Court emphasised the coincidence of interest between the client and the beneficiaries” in finding such a duty was owed by a solicitor. The directors’ contention as to the existence of a duty of care was said to require a radical expansion in the scope of the duty of care solicitors owe in acting for corporate clients. In addition, Maddocks submitted that any damages awarded would be subject to a very significant reduction for contributory negligence on the part of the directors.

4. [702]

   The starting point is Hill v van Erp, where the High Court held that a solicitor owed a duty of care to the client testatrix’s beneficiaries. As Brennan CJ explained at 167: (footnote omitted)

5. [703]

   As the Chief Justice observed, testators seek the assistance of a solicitor to make their intentions effective. There was no reason to refrain from imposing a duty of care on a solicitor to those who may foreseeably be damaged by carelessness in performing the retainer. Where the solicitor failed to use reasonable care in carrying the client’s instruction into effect, resulting in a loss of a testamentary gift intended to be given to a beneficiary, it was reasonable that the solicitor was liable in damages to the intended beneficiary: at 167-168.

6. [704]

   More recently in Badenach v Calvert (2016) 257 CLR 440; [2016] HCA 18, the High Court held that a solicitor did not owe a duty of care to the intended beneficiary where the Will gave effect to the client’s instructions but made no provision for the client’s daughter, of whom the solicitor was unaware. The daughter brought a claim for provision, which depleted the estate. The beneficiary sued the solicitor, alleging the solicitor had failed to advise the client in respect of such a claim. The Court held that no duty was owed as the interests of the client and the intended beneficiary were not coincident. As French CJ, Kiefel and Keane JJ observed, the duty owed by the solicitor to the intended beneficiary in Hill v van Erp “had its source in the solicitor’s obligations arising from the retainer between the solicitor and her client … the interests of the testatrix and the intended beneficiary in those intentions being carried into effect were relevantly the same. Recognising a duty to the intended beneficiary would not involve any conflict with the duties owed by the solicitor to her client, the testatrix”: at [18].

7. [705]

   As to whether a solicitor acting for a company may owe a duty of care to its directors, in Brownie Wills v Shrimpton a firm of solicitors acted for a company borrowing money from a bank. The bank required the firm to obtain personal guarantees from the directors of the company. The company defaulted on the loan and the bank obtained judgment against the directors. One of the directors, after settling his liability with the bank, brought a negligence suit against the solicitors for failing to advise him that the liability under the guarantee was joint and several. The Court of Appeal of New Zealand held that the firm did not owe a duty of care to the directors. Gault and Blachard JJ (Tipping J agreeing) explained at 326:

8. [706]

   Such a claim was considered arguable in Johnson v Gore Wood & Co [1999] PNLR 426, where the Court of Appeal agreed with the primary judge’s assessment, “if the facts alleged in the statement of claim are proved, it may well appear at the end of the day that [the director’s] personal affairs and his business dealings were so intimately intertwined that it is quite possible that [a solicitor] … would not distinguish between [the director] and his company. The solicitor would know the advice which he was giving would be relied on for the guidance of the whole since the parts could not sensibly be separated. The incremental development [in the law] is not great, provided that the development is limited to special circumstances of this description”: at 440. The special circumstances (assumed to be the facts for the purpose of a strike out application) were that the solicitor had acted for the director in relation to his other businesses, was familiar with the director’s personal financial position and had knowledge of both the director’s financial position and of the use to which he was putting the advice in the regulation of his own affairs: as summarised by Kenny J in Carey v Freehills at [330].

9. [707]

   Similarly, albeit in the context of an application to restrain a company’s solicitor from acting for the company’s sole director and shareholder, Mr Suckling, Riordan J observed that, while the solicitor was retained by the company, he owed duties to Mr Suckling in circumstances where he and the solicitor had become firm friends over many years and Mr Suckling was the alter ego of the company: ACN 092 675 164 Pty Ltd v Suckling (2018) 56 VR 448; [2018] VSC 620, following Macquarie Bank Ltd v Myer [1994] 1 VR 350 at 359 per J D Phillips J (Eames J substantially agreeing).

10. [708]

    The issue was considered by Kenny J in Carey v Freehills in the context of a claim that a company’s solicitor owed a duty of care to the majority shareholder of the company. The general approach in determining whether a solicitor owes a duty of care to a third party was explained at [311]-[317]: (citations omitted)

11. [709]

    Her Honour also observed, as a general proposition, that the law of negligence resisted the extension of a solicitor’s duty of care beyond a client company to its shareholders or other related entities, although it could not be said such a duty would never exist: at [323]. Johnson v Gore Wood was distinguished as the majority shareholder had no pre-existing client relationship with the solicitor in his personal capacity. The solicitor did not have any intimate, detailed and long-running knowledge of the shareholder’s financial affairs: at [331]. “Rather, whether or not a duty arises will depend on the totality of the circumstances in which the advice was sought and provided”: at [336]. On applying the multi-factorial approach, her Honour found there was no duty of care owed by the solicitors to the shareholder.

12. [710]

    Finally, in Dual Homes Victoria Pty Ltd v Moores Legal Pty Ltd, a company was served with a statutory demand. On the advice of a solicitor, the company applied to set it aside but outside the statutory time limit. The application was withdrawn on the condition that the company pay the creditor’s costs. The creditor served a further statutory demand for the same debt. The company failed to comply with the demand and the presumption of insolvency arose. The creditor then applied to have the company wound up. The solicitor did not appear at the hearing and the company was wound up in insolvency, despite the fact that the solicitor was aware that the company had more than $3 million in assets and could have proven the company’s solvency at the hearing.

13. [711]

    The company and shareholders sued the solicitor for the expenses incurred on the company’s behalf while the company was in liquidation. Dixon J held it was unnecessary to determine whether the duty of care owed by the solicitor extended to the shareholders as well, as the company was entitled to recover the losses with which it could reimburse the shareholders: at [131]. Obiter, Dixon J held that the solicitor owed a duty of care to the shareholders at [135]: (footnotes omitted)

14. [712]

    Having regard to the case law, the following matters are relevant to whether Maddocks owed a duty of care to About Life’s directors in the circumstances of this case.

15. [713]

    First, Maddocks did not have an intimate, detailed and long-running knowledge of the directors’ financial affairs, unlike in Johnson v Gore Wood. Mr McNee had acted for Mr Green and his companies in the past, but the extent of their dealings is not clear. Mr McNee had also worked with Mr Beecroft before on a transaction involving Navis Capital. However, when considering whether the circumstances giving rise to a duty of care, I consider that the focus must be on what Ms Badcock knew about these gentlemen rather than another partner of her firm; Ms Badcock had never dealt with them before. Ms Phillips had not dealt with Maddocks before. A duty of care would not arise by reason of Maddocks’ previous dealings with the directors.

16. [714]

    Second, Maddocks’ conduct did not demonstrate an assumption of responsibility, with known reliance, by the directors.

17. [715]

    Third, the client’s interests – which Maddocks was retained to protect and advance – were the same as the client’s directors. About Life’s interests required that the Contract for Sale of Business be completed, and that the risks to completion be identified and either eliminated or reduced. About Life’s interests were receiving the proceeds of sale as soon as possible, undiluted by the effects of delay or expenses caused by unidentified or unmanaged risks to completion. The interests of the company and its directors in the solicitor’s instructions being carried into effect were relevantly the same.

18. [716]

    To the extent that directors may have been negligent by failing to examine the company’s records before or during the course of giving instructions to the company’s solicitors, both About Life and its directors shared a common interest in expunging such negligence by investigating About Life’s right to assign the lease and providing proper instructions before contracts were exchanged. As such, recognising a duty to the directors would not involve any conflict with the duties owed by the solicitor to the company: Badenach v Calvert at [18]. The interests of the company and its directors in the solicitor discharging her obligations by obtaining proper instructions were coincident.

19. [717]

    True it is that the directors could also have asked Maddocks to act for them on the transaction, although it is not clear why the directors would have thought it necessary to have legal representation. Indeed, if it had occurred to the directors that they may need to retain a solicitor, for example, because the directors may be exposed to a claim for a breach of their duties for failing to ascertain About Life’s ability to sell the Double Bay store, then that thought-process would probably itself have elicited Woolworths’ Deed of Agreement. The same sequence of events would likely have occurred if Maddocks had suggested that the directors may wish to consider retaining a solicitor to act for them on the transaction in the circumstances.

20. [718]

    Fourth, as to potential indeterminacy of liability, the directors’ potential liability to Harris Farm was the same as the company’s potential liability. By its cross claim, Harris Farm sued About Life for breach of contract and representations made by Mr Green and Ms Phillips in the meetings with Mr Harris and in the contract. As against the directors, Harris Farm contended that the directors were knowingly involved in About Life’s representations.

21. [719]

    Harris Farm contended that the directors were liable for representations constituted by the Contract for Sale of Business. Harris Farm pointed to the fact that the contract was signed by Ms Phillips and Mr Beecroft. Further, each of Mr Green, Mr Beecroft and Ms Phillips read and approved the final version of the contract. All knew and intended that the final version of the contract would be provided to Harris Farm for execution. By clause 10 of the contract, About Life was to promise at completion that the business and the lease were not subject to any charge, encumbrance, lease, mortgage, security interest or other liability or security. In those circumstances, Harris Farm contended that Ms Phillips, Mr Green and Mr Beecroft each represented that the lease was able to be assigned, subject to the consent of the Council, and no person had or would have an interest in the lease that would prevent or inhibit the assignment to Harris Farm. Obviously enough, any representations said to have been made by the directors by signing the contract or endorsing its provision to Harris Farm had also squarely been made by About Life.

22. [720]

    Harris Farm’s damages claim was the same against the company and directors. If About Life had paid damages to Harris Farm, then the directors would not have had to pay additional damages; About Life would have been entitled to recover such damages from Maddocks.

23. [721]

    The fact that the directors settled Harris Farm’s claim and could not look to the company to reimburse them is referable to timing issues. About Life went into external administration. Harris Farm could not press its claim against the company and was limited to recovering damages from the directors. But for the fact that About Life was in external administration – a state of affairs to which Maddocks contributed in no small way by its performance of the retainer – the directors could have looked to the company to reimburse them for the settlement monies paid to Harris Farm, and the company could have sued Maddocks for the monies. Recognising a duty of care by Maddocks to the directors does not expose Maddocks to greater or unlimited liability.

24. [722]

    Having regard to the multi-factorial approach described in Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258, it was foreseeable that About Life’s directors may be exposed to a claim by the purchaser if the Contract for Sale of Business made representations which proved incorrect and should not have been made. The directors were vulnerable in the sense that they were unable to protect themselves from the consequences of Maddocks’ want of reasonable care in acting for About Life on the transaction. Ms Badcock undertook the task of protecting About Life’s interests, including by identifying and managing the risks to completion and thus had control of managing the risks posed by giving warranties which should not have been given, including obtaining proper instructions from About Life’s officers (the directors) as to whether About Life could give such warranties. The directors could not choose whether to take on the liability to which they were exposed by the warranties in the contract, unlike Brownie Wills v Shrimpton where the directors could have declined to provide guarantees to the company’s bank.

25. [723]

    As such, I find that Maddocks owed a duty of care to About Life’s directors in the circumstances of this case, which duty was breached and led to a claim being made against the directors by Harris Farm. It was not suggested by Maddocks that the directors’ settlement of that claim was unreasonable and thus this component of the directors’ cross claim against Maddocks succeeds. Any damages payable by Maddocks to the directors must also be reduced by 20% by reason of directors’ contributory negligence. Thus, Maddocks is only obliged to pay $344,000.

Misleading and deceptive conduct

1. [724]

   The directors claim that Maddocks engaged in misleading or deceptive conduct by omitting to advise them directly or via About Life of various matters including what should have been apparent from the Deed of Agreement of Lease, the importance of ensuring that there was no other document which may limit or encumber About Life’s capacity or authority to assign the lease, and suggesting lines of enquiry which might be pursued to ascertain the existence of any such impediment.

2. [725]

   I did not have the benefit of written or oral submissions from the directors on this claim, and am tempted to treat it as not pressed. As Mr Beecroft did not give evidence, I will regard his claim as abandoned, there being no evidence that he relied on any such conduct. Nor is it strictly necessary for me to consider this claim as the directors are already entitled to these damages in negligence.

3. [726]

   Maddocks denied this claim, submitting that the conduct was not “conduct” for the purposes of section 18 of the Australian Consumer Law. Section 4(2) of the Competition and Consumer Act 2010 (Cth) provides that a reference to “engaging in conduct shall be read as a reference to doing or refusing to do any act”, and further that “a reference to refusing to do an act includes a reference to: (i) refraining (otherwise than inadvertently) from doing that act.” Mere inadvertence did not invoke section 18 of the Australian Consumer Law. Where Maddocks was ignorant of Woolworths’ right of first refusal, the failures relied upon by the directors were not “conduct” in the sense of Maddocks advertently refrained from taking the particular steps. A representation by silence could not succeed unless there was a duty to speak: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. There was no duty to speak to the directors. Even if the directors’ claims had substance, they would be subject to a very significant reduction for contributory negligence.

4. [727]

   Essentially two questions arise for decision. First, the identification of the relevant “conduct”. Second, whether that conduct was misleading and deceptive. In Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd [2011] WASCA 76; (2011) 248 FLR 193, McLure P explained at [65]-[66];

5. [728]

   This was followed in Johnson v Mackinnon [2021] NSWCA 152, where Brereton JA (Macfarlan JA and Simpson AJA relevantly agreeing) observed at [254]:

6. [729]

   In the context of a solicitor’s advice, in Paltos v Bartier Perry Pty Ltd [2020] NSWSC 705, Rothman J observed, “the Court looks at the whole of the conduct said to be provided purportedly in satisfaction of duties established by the Retainer and determines whether that advice was misleading or deceptive, because, on the claim of the plaintiff, it omitted advice”: at [59]. In that case, Mr Paltos, a partner of a law firm, suffered two strokes which impaired his ability to work. The partnership agreement included a put option, entitling a partner to require the other partner to purchase their share of the partnership in limited circumstances relating to ill-heath. Given Mr Paltos’ health, he may have been entitled to exercise the put option if, due to his illness, he was unable to work for at least six months.

7. [730]

   Mr Paltos became involved a dispute with his partner. Mr Paltos engaged solicitors to advise with regard to the partnership and the demands made by his partner. The firm advised Mr Paltos that “the put options do not help [you, Mr Paltos]”. When this advice was given, the time for Mr Paltos to be entitled to exercise the put option had not arisen. The partnership was dissolved and receivers appointed without Mr Paltos having exercised the put option.

8. [731]

   On appeal in Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158, the Court of Appeal affirmed the primary judge’s finding that the advice was misleading and deceptive. Payne JA (with whom White and McCallum JA agreed) explained at [90]-[91]: (emphasis added)

9. [732]

   Here, the relevant conduct was the provision of legal advice, which may have been incomplete as to the rights and obligations of About Life. It was not mere inadvertence. It is only necessary to establish a deliberate omission “where the actual conduct together with all the relevant surrounding circumstances are (objectively) incapable of giving rise to the misleading or deceptive contextual conduct complained of”: Johnson v MacKinnon at [254]. Legal advice which is literally correct may be misleading and deceptive if it is apt to mislead the client as to the nature of the client’s legal rights.

10. [733]

    Although Bartier Perry concerned a claim brought by a client against his solicitor, a solicitor may be liable to persons other than the client for misleading and deceptive conduct. For example, in Argy v Blunts (1990) 26 FCR 112, the vendor’s solicitors prepared a contract for the sale of land. They omitted to include a page of the planning certificate which would have revealed that a portion of the land was zoned so as to prohibit building within it. Hill J held that the vendor’s solicitor was liable to the purchasers in misleading and deceptive conduct. His Honour explained at 132:

11. [734]

    His Honour relevantly concluded at 133:

12. [735]

    Thus, the fact that the directors were not clients of Maddocks does not preclude Maddocks from being liable to the directors in misleading and deceptive conduct.

13. [736]

    Ms Badcock gave no advice to About Life on the Deed of Agreement for Lease. Ms Badcock did give advice, by her email sent shortly before exchange, including on the warranty in clause 10.1.12 and the matter of side deeds. The problem with Ms Badcock’s email advice was not what was said – which was strictly correct – but, given the circumstances in which it was sent, being shortly before exchange, the lack of information about what was being asked (including elaborating on what was meant by a ‘side deed’), why it was important, and the need (to borrow a phrase) to “STOP AND THINK”. Thus, were it necessary to decide, I would find that Maddocks were liable to Mr Green and Ms Phillips for misleading and deceptive conduct.

ORDERS

1. [737]

   For these reasons, I make the following orders:

   1. (1)

      Judgment in favour of the cross-claimant, About Life Pty Ltd, against the cross-defendants in the sum of $12,716,800 together with interest from 1 July 2017.

   2. (2)

      Judgment in favour of About Life Pty Ltd against the cross-defendants in the sum of $280,000, together with interest from 13 December 2017.

   3. (3)

      Cross-defendants to pay the cross-claimants’ costs of the second cross-claim.

   4. (4)

      Judgment in favour of the cross-claimants, Tammie Phillips, Michael Green and Thomas Beecroft, in the sum of $344,000, together with interest.

   5. (5)

      Cross-defendants to pay the cross-claimants’ costs of the third, fourth and fifth cross-claims.

   6. (6)

      Grant liberty to the parties within 14 days to notify any errors or omissions.

   7. (7)

      In the event that any party seeks a variation of costs orders, direct: