A. I. McLean Pty Ltd v Hayson - [2008] NSWSC 927 - NSWSC 2008 case summary — Zoe

NSWNSWSC

A. I. McLean Pty Ltd v Hayson

[2008] NSWSC 927

Supreme Court of NSW|2008-04-30|Before: Bergin J

View original source

At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2008-04-30

Before

Bergin J

Source

Original judgment source is linked above.

Judgment (533 paragraphs)

[1]

Introduction 1 This litigation arises out of the exercise of options by the first plaintiff, A I McLean Pty Limited (AI McLean), pursuant to Investor Option Agreements between it, as Investor, McLean Tecnic Pty Ltd (McLean Tecnic), the second plaintiff, as Covenantor, and companies within the New Zealand Digi-Tech Group of companies, Digi-Tech Equities Limited (DTEL) and Digi-Tech Communications Limited (DTCL). This Court held that the options were not exercised validly: Graham Leonard Brand & Ors v Digi-Tech (Australia) Limited & Ors; Christopher Gerard Kelliher & Ors v Digi-Tech (Australia) Limited & Ors [2002] NSWSC 416 (Einstein J); Digi-Tech (Australia) Ltd v Brand & Five Ors; Digi-Tech (Australia) Ltd v Kelliher & 3 Ors; Kalifair Pty Ltd & 3 Ors v Digi-Tech (Australia) Ltd & 3 Ors; McLean Tecnic Pty Ltd & 1 Or v Digi-Tech (Australia) Ltd & 3 Ors (2004) 62 IPR 184; [2004] NSWCA 58 (the CA Judgment). The plaintiffs were subsequently held liable to pay Digi-Tech (Australia) Limited (DTAL) approximately $30 million: McLean Tecnic & Anor v Digi-Tech & Ors [2005] NSWSC 386 (McDougall J). 2 The investment involved investors purchasing rights to exploit the intellectual property in two products, known as 'Freerider' and 'Terminal Adapter', in Australia under Sale and Purchase Agreements with DTAL (Sale Agreements). Those products were promoted as enabling simultaneous transactions on the Internet. The investment was promoted as tax effective, with tax deductions available for instalments of the purchase price paid over five years. The proposed arrangement was that the investors would license the purchased rights to an Australian-registered company Digi-Tech Software Pty Limited (DTSPL), established by the investors. The investors had the capacity to exit the investment by exercising an option and obtaining financial "assistance" to make the final "balloon" payment by DTEL paying the Covenantor subscription monies for shares in the Covenantor. 3 The original plan was that the investors would enter into one agreement that would encompass both the Terminal Adapter and Freerider intellectual property. It was envisaged that prior to 30 June 1997 the partnership of investors would contain something in the order of forty people, utilising a number of sub-partnerships to accommodate the law that restricted the number of partners to twenty. Late in the afternoon of 30 June 1997 advice was received from a Queens Counsel that the partnership should preferably contain no more than twenty partners. It was this advice that apparently caused the establishment of two partnerships and the division of the intellectual property into two separate licences. The investors then joined in one of two partnerships, the Freerider Partnership or the Terminal Adapter Partnership according to the products in which they had purchased rights. However there were some investors that joined both partnerships. Those investors that joined both partnerships accordingly entered two Option Agreements; one in the Freerider Partnership and one in the Terminal Adaptor Partnership. 4 In this litigation the plaintiffs claim damages from a number of solicitors allegedly retained to exercise the options and in relation to the exercise the options. The plaintiffs allege, inter alia, that each of the solicitors in breach of their retainers and negligently failed to cause the options to be exercised validly. It is claimed that each of the solicitors knew that McLean Tecnic was a member of both partnerships and that they should have recognised that by reason of that membership there would be a breach of the warranties in clause 4.1(a) and 4.1(b) of the Option Agreements at the time of the exercise of the options, rendering the exercise invalid. The plaintiffs allege that all the solicitors failed to recognise this problem and that they failed to comply with their retainers with the plaintiffs and breached their duties of care to the plaintiffs in failing to exercise the options validly. Each of the defendants cross-claims against each of the other defendants and against PCP for contribution and/or indemnity. 5 It is not suggested by any of the solicitors that at the time of the exercise of the options, they recognised that McLean Tecnic's membership of both partnerships would have, or even may have, amounted to a breach of the warranties in clause 4.1(a) and clause 4.1(b) of the relevant Option Agreement. However notwithstanding previous findings by this Court to the contrary there is a claim that the options were exercised validly. It was submitted that this claim is available, because it is based on arguments not previously raised or brought to the Court's attention. The parties 6 AI McLean holds all the issued capital in McLean Tecnic. The sole director of both plaintiffs is Alan Ian McLean (known as Ian McLean). On 19 September 2005 Mr McLean appointed Neil Singleton and Scott Pascoe as Voluntary Administrators of the plaintiffs under Part 5.3A of the Corporations Act 2001 (Cth) (the Act). On 14 October 2005, the creditors of the plaintiffs resolved under s 439C of the Act that the plaintiffs execute Deeds of Company Arrangement under Part 5.3A of the Act. As at 14 October 2005 DTAL claimed to be a creditor of the plaintiffs in the amount of $31,949,347.10. 7 The firms of solicitors sued by the plaintiffs are Harris & Company, the first defendant (Harris & Co), Bartier Perry Lawyers, the second defendant (Bartier Perry), Freehill Hollingdale & Page, the third defendant (Freehills), and Atanskovic Hartnell, the fourth defendant (ANH). Those defendants have cross-claimed against each other and also against Peter Cornelius & Partners, the cross defendant, (PCP) for contribution and/or indemnity. The individual solicitors within the respective defendant firms who allegedly provided the relevant legal services to the plaintiffs are: Ian Smith from Harris & Co; Oliver Shtein from Bartier Perry; Kevin Broadley, Rebecca Davies, the late Mr Chris Tappere and Catherine Rowe from Freehills; and Diana Chang from ANH. The plaintiffs do not sue the cross defendant PCP, albeit that PCP was obviously instructed by the plaintiffs to provide, and did provide, legal services to them in respect of the transactions the subject of this litigation. The solicitor at PCP who provided those legal services was the late Peter Simms. 8 The matter was heard on 28, 29 and 30 April 2008, and 1, 5, 6, 7, 8, 12, 13, 14 and 15 May 2008. Mr B McClintock SC leading Mr B Katekar, of counsel, and (on 13 and 14 May) Mr CH Withers, of counsel, appeared for the plaintiffs; Mr DL Davies SC leading Mr MS White appeared for Harris & Co, Mr JC Kelly SC leading Mr WV McManus, of counsel, and Mr P Arblaster, of counsel, appeared for Bartier Perry; Mr MJ Slattery QC leading Ms R Pepper, of counsel, appeared for Freehills; Mr TF Bathurst QC leading Mr AJ Payne, of counsel, appeared for ANH; and Mr SD Robb QC leading Mr JAN Hogan-Doran, of counsel, appeared for PCP.

[27]

collapses all other agreements. 16 On 1 May 1998 PCP wrote to Mallesons advising that they had met with Mr Urwin and agreement had been reached in relation to the various agreements and settlement was proposed to take place in Canberra the following week. 17 The Digi-Tech parties and the outgoing partners recognised that the Partnership Agreements prohibited Partners from assigning their Partnership Interests to unrelated third parties. They also recognised that the Partnership Agreements prohibited unrelated third parties being admitted as new Partners to the Partnerships. Accordingly the Digi-Tech parties and the outgoing Partners entered into Deeds of Variation to the Partnership Agreements which inserted a new clause 14.4A as follows: Each of [the outgoing partners] may assign its Partnership Interest together with its corresponding shareholdings in DTSPL, its rights and obligations under the Sale Agreement and under the licence agreement with DTSPL, and any receivable owed by the Partnership or DTSPL to that Partner for the time being held byu that Partner to McLean Tecnic Pty Limited. 18 The plaintiffs executed the requisite transaction documents on 4 May 1998 in Canberra pursuant to which McLean Tecnic became a partner of both the Terminal Adapter and the Freerider Partnerships. Commercial disagreement - late 1998/early 1999 19 In late 1998 and early 1999 there was disagreement between the investors and DTAL as to who was responsible for the research and development costs of one of the products. That disagreement was not resolved and relationships began to sour. Terminal Adapter Notices of default - 29 January 1999 20 On 29 January 1999 DTAL issued Notices of Default to the members of the Terminal Adapter Partnership alleging breaches of obligations under the Sale and Purchase Agreements. Those alleged breaches included a failure to make payments pursuant to the Licence Agreement and a failure to provide DTAL with audited financial statements. DTAL required the breaches to be remedied within 30 days of the date of service of the Notice. DTSPL retains Harris & Co 21 In February 1999 Mr Urwin informed Mr Smith that DTAL was alleging that the Terminal Adapter Partnership was in default of its obligations under the Sale Agreement. Mr Urwin advised Mr Smith that the Notices of Default had been served by DTAL and requested Mr Smith to provide some advice to DTSPL in relation to the default notice. 22 On 23 February 1999 Harris & Company provided a letter to DTSPL in relation to the work it was requested to provide and the estimate of the costs of that work. That letter described the work as:

[47]

Freehills Meetings 37 On 26 March 1999 a further meeting at Freehills occurred attended by Mr Smith, Mr Urwin, Mr Brand, Mr McLean and his solicitor Mr Simms, Mr Broadley, Ms Davies and Ms Rowe. The discussion at that meeting included reference to reviewing the Default Notice and a claim for misleading or deceptive conduct. At a further meeting at Freehills on 30 March 1999 with the same attendees, consideration was given to a document prepared by Freehills setting out the alternatives available to terminate the relationship with DTAL and to avoid making the "balloon payment". The options were: (1) to treat the contract as remaining on foot and exercise the option; (2) to treat the termination notice as a repudiatory breach; and (3) to negotiate. At this meeting Ms Davies advised that Freehills saw option (1) as the preferred course. Ultimately Mr Smith was asked to attempt to negotiate further with Mr Reid of DTAL concerning the Termination Notice. 38 At a further meeting on 7 April 1999 at Freehills attended by Mr Broadley, Ms Davies, Ms Rowe, Mr Smith, Mr Urwin, Mr Kelliher and Mr Brand, various alternatives were discussed, including continuation of the relationship with DTAL but under a new agreement. Mr Smith's evidence was that at this meeting he was asked to prepare documents for the assignment of the investors' interests in the Partnerships. Mr Smith's note of the meeting includes a reference to "IMS to prepare assignment docs". Ms Rowe's note of the meeting does not make any reference to that request, rather it states that: "Ian to draft option letters to exercise options on 15th". It does not seem that Mr Smith was asked to proceed further with either assignment or exercising the options because further settlement negotiations were pursued. Freerider Partnership Notices of Default - 8 April 1999 39 On 8 April 1999 DTAL served Notices of Default under the Freerider Sale Agreement. That Notice alleged that the Freerider Partnership was in breach of the Sale and Purchase Agreement in that, inter alia, it had failed to provide audited financial statements of the partnership and DTSPL as required under clause 8.10 of the Sale and Purchase Agreement. There were other alleged breaches including a failure to promote the products and a failure to strictly enforce the Licence Agreement between the Partnership and DTSPL. The Notice required the breaches to be remedied within 30 days from 8 April 1999.

[77]

2.3 Clause 2 Requirements: Exercise of the Option is subject to the following: The following must be complied with in order for the exercise of the Option to be valid: (a) The Option can only be exercised during the Investor Option Period [cl 2.2]. The Investor Option Period is defined in the interpretation clause [cl 1.1]. (b) The Company must be used solely as the holder of equity interests in the Investor Partnership and DTSPL [cl 1.1]. (c) The Investor must not deal with or encumber any of the Company Shares except as contemplated by the Option Agreement [cl 2.2]. (d) The instalments of the Option Fee as set out in the Schedule must have been paid to DTEL [2.2(a)]. Note "Option Fee" as defined in clause 1.1 defines the total option fee instalments which must be paid, determined by when the Option is exercised. (e) There must be no outstanding breach of the warranties and undertakings in clause 4 of the Option Agreement [cl 2.2(c)]. Clause 4 warranties are:- · the nominee company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL; · the Company will not undertake any activity not expressly provided for or contemplated in the Investor Partnership Agreement prior to the expiry of the Investor Option Period. Certain fees etc are excepted; Note: The Investor Option Period currently expires on 31 July 2000, this will require changing. · the Company must have no debt to any person other than the Investor Debt (balloon payment) on the date on which the Option is exercised; · all payments of the Instalment Debt or any other indetedness arising under the Option Agreement must be met by the Company (or guarantor of the Instalment debt as per the Sale and Purchase Agreement) prior to the exercise of the Option; · the Company must not alter its constituent documents or agree to vary terms of the Investor Partnership Agreement without prior written consent of DTCL; and · the Company must comply with all laws relating to administration of the company, including the Corporations Law.

[86]

If our clients are to exercise the Investor Options we seek Senior Counsel's advice on procedures to be followed when exercising the Options. This can be discussed in conference. By way of summary, under the Option Agreement for investor partners who are individuals the investor sets up a nominee company into which the investor transfers all of its equity interests in the Investor Partnership and shareholding in DTSPL in accordance with the Investor Partnership Agreement. These interests include the investor's rights and obligations under the Sale and Purchase Agreement and the Licence Agreement. The Investor Option is the investor's right to require DTEL to subscribe for a number of shares at par in the nominee company equivalent by value to the remaining Investor Debt (ie: the outstanding instalment payments of the purchase price, including the balloon payment). The nominee company and DTEL must then procure that all of the subscription monies are paid to DTAL in payment of the Investor Debt due to DTAL. We seek your advice as to whether, when assigning under clause 20.4(b) of the Sale and Purchase Agreement, it would be better to give a new security or to novate the existing security (or both). In addition, whether Senior Counsel considers that "evidence satisfactory to DTAL that the existing Security granted by the Investor will continue to apply", is a viable third option. The existing Security is by way of Equitable Charge or Mortgage, with the secured property being the investor's equity interests in DTSPL and the Investor Partnership. Under the Option Agreement for investors partners who are body corporates the Investor Option is the investor's right to require DTEL to subscribe for a number of shares at par in that body corporate partner. Mr Ian Smith of Harris and Company, who has been briefed to advise our clients in relation to the exercise of the options, may have some points on which he would like to obtain Senior Counsel's advice in this respect, and which he will address in conference with you tomorrow.

[87]

We look forward to conferring with you on Thursday 19th August. Kevin Broadley and the writer will attend with Messrs Gary Urwin and Ian Smith of Harris and Company, Solicitors who is an investor and has been briefed to deal with the exercise of the options. Mr Peter Simms of Peter Cornelius & Partners represents a major investor Mr Ian McLean and Mr Simms may also attend at the conference. Mr Chris Kelliher is overseas this week and so will not attend. Rebecca Davies of our office is unable to attend. Mr Walker's Advice - 19 August 1999 54 Ms Rowe prepared a file note of the conference with Mr Walker SC on 19 August 1999 which included the following: 1. Exercise of Option and Clause 20.4 of the Sale and Purchase Agreement Senior Counsel was of the view that if the Options were to be exercised then the interests to be transferred to the nominee companies should be assigned in accordance with the relevant Agreements and the Investor Option Notice delivered to DTAL. The Investor Option Notice should be accompanied by a covering letter asking DTAL to elect what form of security they would like to be given as per clause 20.4(b) of the Sale and Purchase Agreement. In an ideal world DTAL will elect what security they want and all will be well. If DTAL reply by saying that our clients cannot validly assign due to the termination of the Terminal Adapter Sale and Purchase Agreement (or the Freerider Agreement) then we should supply one of the securities mentioned in of clause 20.4 (b) accompanied by a letter stating:- · given DTAL's failure to elect their preferred security they have been provided with a security of the investor's choice; · that DTAL cannot refuse to perform the cooperative acts necessary under clause 20.4 (b); and · if DTAL continue to fail to cooperate the Investor Partners will take them as being in breach of contract. This course of action must be rapid. 55 Litigation strategies were also discussed, in respect of which Ms Rowe made the following note:

[93]

I have spoken to Andrew Sneddon and he advises it is necessary for each of the partners to rollover their interests in the Partnership to the one company as opposed to the previous proposal that the individual investors would assign to Suntech or Transpacific and the corporates would assign to a wholly owned subsidiary. The difficulty with this is that pursuant to the Partnership Agreement it would not be possible for the wholly owned subsidiaries to transfer directly to Suntech or Transpacific without the consent of DTAL. Under clause 14.4 of the Partnership Agreement a corporate partner may transfer without consent to: (a) a Wholly Owned Subsidiary of that Partner; (b) a natural person who is the sole shareholder of that Partner; (c) a relative (as defined in s. 9 of the Corporations Law) of the person referred to in (b) above; or (d) a body corporate nominated by a relative referred to in (c) above. Whilst the concept of a relative of a sole shareholder in nominating a company appears devoid of logic, that is what the clause says. The only way I can see it working is for each corporate partner to assign their interest to a Wholly Owned Subsidiary in consideration of the issue of shares in that subsidiary. The corporate partner that assigned would then transfer the shares in the subsidiary to a natural person and a relative of that new shareholder would then nominate pursuant to clause 14.4 (d) either Suntech or Transpacific. The Wholly Owned Subsidiary would then assign to Suntech or Transpacific at the same time as each of the natural investors transferred to Suntech or Transpacific. I have no idea what the tax consequences of the transfer of shares from the corporate partner to the natural person in the Wholly Owned Subsidiary would be. I suggest Andrew Sneddon be asked for his advice about the whole proposal as soon as possible. Please ring me to discuss. Orthoptic Pty Ltd 60 On 20 August 1999 Mr Smith wrote to Mr Werner Bali, an accountant with the firm Rost & Kitchener, who acted as the plaintiffs' accountants. That letter was in the following terms:

[99]

Bartier Perry advice to Mr Brand - 8 September 1999 64 On 30 August 1999 Mr Brand approached Mr Shtein and informed him of the general background of the investment and the dispute that had arisen with DTAL. He advised him of Freehills' involvement and the decision that had been made to exercise the options to "exit the scheme". Mr Brand asked Mr Shtein to act "only in relation to the exercise of the options". It appears that at this time Mr Brand's two companies, Toltex and Divome, had not signed the Sale and Purchase Agreement. The Option Agreements were with the wholly owned subsidiaries, Kalifair and Kalinick. At this stage the plan was to assign Kalifair's and Kalinick's interests to the companies in Mauritius, Suntech and Transpacific. 65 During the time that Mr Shtein was reviewing the documents provided to him by Mr Brand he was informed that Mr Smith had been advising various other Partners in the Partnerships and was himself an Investor Partner. Mr Brand also advised Mr Shtein of a proposal that was being considered by the Partners being advised by Harris & Co to transfer their rights and obligations to a single Mauritius company. Mr Brand asked Mr Shtein to attend a meeting with Mr Smith to "discuss the merits" of that proposal. 66 On 7 September 1999, Mr Smith, Mr Shtein, Mr Kelliher and Mr Brand met at Mr Smith's offices at Harris & Co. Mr Shtein's draft advice to Mr Brand consequent upon that meeting advised Mr Brand that Bartier Perry was not persuaded that Kalifair or Kalinick should transfer their rights as proposed to the companies in Mauritius. Mr Shtein set out the reasons for that advice as: · the last sentence in clause 2.2 of the Option Agreement which forbids dealings in shares in a corporate partner in a way fatal to the exercise of the option; · it amounts to a fresh transaction (with the incurrence of new liabilities) by the assignee; · the possible adverse perception if the transferee is a Mauritius company, as this may be seen as an attempt to avoid liabilities in Australia; · it will reduce flexibility of Kalifair and Kalinick to act independently in any proceedings and to control outcomes; · it entails stamp duty and other expense; · it complicates what is already an extremely complicated situation.

[155]

Also enclosed is a draft letter I propose sending with the Notices of Exercise. I would be grateful for your comments. I propose to send the Notices of Exercise either last thing tonight or first thing on Monday morning. "Run them by" Freehills 90 There is a controversy in relation to whether Freehills was to approve the Notices of Exercise of Option. On the one hand Mr Smith claimed that he understood that Freehills would vet the documents and that he had to "run them by" Freehills for approval prior to sending them to DTEL. Mr Broadley agreed in evidence that at the meeting at Freehills on 15 September 1999 Mr Smith said he would run the option exercise documents past Freehills (tr 639). Mr Broadley said he did not have a clear recollection of the discussion however he did recall Mr Smith asking for "some assistance". He said it was something to do with the exercise of the options and "it seemed that he was wanting it looked at from a litigation point of view" (tr 640). 91 Mr Smith gave affidavit evidence (affd. 10/09/07) that after he sent the Notices to Ms Rowe she subsequently telephoned him and said: "The Notices are okay" (par 62). In evidence-in-chief on 30 April 2008, Mr Smith confirmed that his best recollection was as stated in his affidavit but that there was an alternative that he received a message from his secretary to the effect that Ms Rowe had telephoned and said that the Notices were okay (tr 198). Mr Smith's then secretary, Irene Webber, gave affidavit evidence (affd. 02/05/08) that she was employed at the relevant date and that she recalled undertaking work in respect of the exercise of the Freerider Option at the direction of Mr Smith. However she did not recall speaking to Ms Rowe or any other person from Freehills in connection with the Freerider Option but accepted that it was possible that she did. Her practice was that when she received calls for Mr Smith, she would either transfer them to him or take a message and pass it onto him. This additional evidence from Mr Smith and Ms Webber was given as a result of Harris & Co's lawyers looking at a Freehills' "Prebill" in which there was an entry for Ms Rowe's time on 17 September 1999 as follows: "Perusing facsimile from Ian Smith; telephone attendance on Irene Webber". 92 Ms Rowe denied quite vehemently that she would ever have said to either Mr Smith or Ms Webber that "the Notices are okay". In cross-examination by Mr Davies SC, Ms Rowe agreed that on 16 September 1999 she had a conversation with Mr Urwin and Mr Smith about the calculation of the amount that was to be included in the Notices. Ms Rowe suggested to Mr Smith and Mr Urwin that a clear explanation of the method of calculation should be attached to the Notices and that Mr Smith and Mr Urwin may wish to "run that by Freehills" (tr 695). When it was suggested to her that at the meeting of 15 September 1999 she had said that the options were to be run past Freehills and Mr Walker SC, her evidence was (tr 696):

[231]

The Release 118 A Release was provided to McLean Tecnic by A I McLean in the following terms: RELEASE TERMINAL ADAPTER INVESTOR PARTNERSHIP To: McLean Tecnic Pty Limited In consideration of the payment to us of $10.00 receipt of which we acknowledge, we hereby release you from any claim, obligation or liability except any such claim, obligation or liability which is necessary for the valid exercise of the option under the Digi-Tech Investor Option Agreement to which we are a party. 119 Mr Simms signed the Release as a "duly authorised signatory" for AI McLean. Mr Simms also arranged for the appointment of an alternative director to A I McLean for the purposes of signing the Option Documents in the absence of Mr McLean. 120 On 28 September 1999 Mr Shtein sent a copy of the draft Release for Kalifair and Kalinick to Mr Smith. That Release was in the following terms: DEED OF RELEASE TERMINAL ADAPTER INVESTOR PARTNERSHIP TO: Kalifair Pty Limited Kalinick Pty Limited We hereby release you from any claim, obligation or liability except any such claim, obligation or liability which is necessary for the valid exercise of the option under the Digi-Tech Investor Option Agreement to which you are a party. 121 Mr Smith instructed his secretary, Ms Webber, to "do one of" the Deeds "for each assigning partner addressed to the company they assigned to". No such Release was prepared for A I McLean/McLean Tecnic in respect of the Freerider Partnership. 122 The plaintiffs submitted that it must have been, or certainly should have been, obvious to Mr Smith when he received the draft Release from Mr Shtein, that at the time of the exercise of the Freerider option the previous week there had been no release of McLean Tecnic's indebtedness to A I McLean and thus a breach of the warranty in clause 4(b) of the Option Agreement had occurred. This was not obvious to Mr Smith. Mr Smith did not recall whether Mr Shtein had told him why he thought it desirable for Toltex and Divome to release Kalifair and Kalinick (tr 412). He gave the following evidence (tr 413):

[263]

1379 In my view the defendants' submissions in relation to McLean Tecnic make clear how the purported exercise of two relevant Investor Options failed. The evidence taken from the defendants submissions discloses the following factual history: · McLean Tecnic had investments in both the TA and the FR partnerships. · Its sole shareholder, AI McLean Pty Ltd, had two separate and independent Corporate Option Agreements; one specifically relating to the TA Sale Agreement and the indebtedness owing under that Agreement, and one specifically relating to the FR Sale Agreement and the indebtedness owing under that Agreement. · By an Investor Option Notice dated 20 September 1999, AI McLean Pty Ltd required DTEL to subscribe for NZ$3,776,415.30 of shares in McLean Tecnic [FR TB 6/206] with the resulting subscription monies to be applied by McLean Tecnic to meet its indebtedness under the FR Sale Agreement. · At that date, apart from the other indebtedness discussed above, McLean Tecnic was indebted to DTAL for NZ$19,993,367.85 and AUD$197,352.27 [TB 26/1770] in relation to the TA Sale Agreement. · The purported exercise of the FR Option failed leaving the indebtedness of $3,776,415.30 owing to DTAL. [see FR Defence para 49 (e)(v)] · By an Investor Option Notice dated 28 September 1999, AI McLean Pty Ltd required DTEL to subscribe for NZ$19,993,367.30 and AUD$197,352.27 of shares in McLean Tecnic [TB 26/1770, last page] with the resulting subscription monies to be applied by McLean Tecnic to meet its indebtedness under the TA Sale Agreement. · However, as discussed above, at 28 September 1999 McLean Tecnic was still indebted to DTAL for $3,776,415.30 relating to the FR Sale Agreement. · Accordingly, the purported exercise of the option failed. [see TA Defence para 53 (f) (v)] [I interpolate to note that as the Defendants pointed out, a simultaneous exercise of both options would have avoided this problem. Alternatively, McLean Tecnic could have assigned one of its investments to a sister company. AI McLean Pty Ltd could then have exercised the specific option for each of those companies.] · McLean Tecnic also had an indebtedness to DTSPL at 30 September 1997 as shown by the accounting records of DTSPL at 31 October 1999 [see exhibited 'PC1' to Carter 13 May 2002]. · The indebtedness was for: Purchase and Option fees due September 1999 15,892.95

[267]

Issue 8 199 We repeat that this issue is: "Was the exercise of options for McLean Tecnic P/L invalid because: (a) at the time of exercise in relation to one partnership, it had an existing liability in relation to the other; and (b) it was indebted to DTSPL?" 200 Einstein J answered both questions in the affirmative. 201 The facts that give rise to this issue are the following. McLean Tecnic was an Investor in both the Terminal Adapter and Freerider Partnerships. A I McLean was the sole shareholder of McLean Tecnic. A I McLean had entered into an Option Agreement in regard to the Terminal Adapter Partnership and had entered into another, and separate, Option Agreement in regard to the Freerider Partnership. 202 Clause 2.2 of the McLean Option Agreements provided that the options thereunder might be exercised by A I McLean at any time during the option periods "provided that there is no outstanding breach of the warranties and undertakings in cl 4 of this Agreement". 203 Clause 4.1 of the two McLean Option Agreements provided: "The Investor warrants and undertakes to each of DTAL and DTCL that: (a) the Company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL and the Company will not prior to the expiry of the Investor Option Period undertake any activity not expressly provided for or contemplated by the Investor Partnership Agreement; (b) on the date on which the Investor Option is exercised, the Company will have no indebtedness to any person other than the Company Debt; … 204 On 20 September 1999, A I McLean sought to exercise its Freerider Option Agreement. It required DTEL to subscribe for NZ$3,776,415 worth of shares in McLean Tecnic. At that date, however, McLean Tecnic was indebted to DTAL for NZ$19,993,367 and A$197,352.27 in relation to the Terminal Adapter Sale Agreement. 205 Einstein J accepted Digi-Tech's submission that because, as at 20 September 1999, McLean Tecnic was so indebted to DTAL, the exercise by A I McLean of the Freerider Option Agreement was invalid. The basis of this submission was that, by reason of McLean Tecnic's indebtedness to DTAL in relation to the Terminal Adapter Sale Agreement, the warranty that McLean Tecnic would have no indebtedness other than the Company Debt (cl 4.1(b)) was breached. 206 On 28 September 1999, A I McLean sought to exercise the Terminal Adapter Option Agreement. But, at that time, because of the failure of the exercise of the Freerider Option Agreement, McLean Tecnic was still indebted to DTAL for NZ$3,776,415.30. Accordingly, Einstein J held that A I McLean's exercise of the Terminal Adapter Option Agreement was also invalid as being in breach of cl 4.1(b). 207 Mr Sullivan QC, who together with Mr Stowe, appeared for the McLean appellants, submitted that the judge's construction of the warranty in cl 4.1(b) as to the Company (McLean Tecnic) having no indebtedness to any person other than the "Company Debt", produced an absurdity, and cl 4.1 should be construed so as to avoid that result. 208 Mr Sullivan drew attention to the following definitions. "Company Debt" was defined by the Option Agreements to mean "the proportion of the purchase price payable to DTAL pursuant to the Sale Agreement for which the Company is severally liable less all amounts paid by or on behalf of the Company to DTAL by way of instalment and the instalment debt". "Investor Partnership" was defined in each case as being the Terminal Adapter Partnership and the Freerider Partnership respectively, as was "Investor Partnership Agreement". 209 These definitions indicate that "Investor Partnership" and "Investor Partnership Agreement" are separate concepts for the purposes of the Terminal Adapter and the Freerider Option Agreements. In other words, under the Terminal Adapter Option Agreement, the Investor Partnership was the Terminal Adapter Partnership and Investor Partnership Agreement meant the Terminal Adapter Partnership Agreement. Likewise, under the Freerider Option Agreement, these terms had a similar meaning with "Freerider" being substituted for "Terminal Adapter". 210 A I McLean entered into the two Option Agreements on 4 May 1998. On that date (and thereafter) McLean Tecnic was not incorporated for the sole purpose of making an investment in either the Freerider or the Terminal Adapter Investor Partnership (as required by cl 4.1(a) of the Options Agreements); that is because it had made an investments in both. Thus, on a literal view of cl 4.1(a), there had been a breach of that clause from the very moment the Option Agreements were entered into. 211 Mr Sullivan pointed out further that McLean Tecnic, with the knowledge and concurrence of Digi-Tech, undertook an activity not expressly provided for or contemplated by the Freerider Investor Partnership Agreement, as it undertook the role of a partner in the Terminal Adapter Investor Partnership (and vice versa). 212 He submitted, therefore, that on the construction upheld by the judge, there would have automatically been a breach of the warranty and undertaking in cl 4.1(a) - thus invalidating the exercise of the options under cl 2.2. This invalidation would have been inevitable. On that basis A I McLean never had the benefit of an option that was capable of being exercised. Therein, it was submitted, lay the absurdity. 213 Both Digi-Tech and the McLean appellants accepted that in construing the Option Agreements, due regard had to be paid to the circumstances in which the documents came into being. According to Einstein J: "[T]he events on the evening of 30 June and in the early hours up to about 4.00 am of 1 July were in fact what can only be described as a madhouse of frantic efforts by all who participated to consummate the split transactions being documented literally on the spot under the most considerable time pressure imaginable". (emphasis in the original judgment) 214 Mr Sheahan submitted that regard also had to be had to the fact that the Agreements were structured so that each partnership shared in the income generated by the products of both partnerships. Accordingly, he submitted, each Investor Partnership Agreement should be construed as expressly contemplating that partners might also be partners in the other Partnership that was associated with the scheme. 215 Mr Sheahan submitted that on that basis there would not be a breach of cl 4.1(a) and no absurdity would result. He pointed out that cl 2.2 contemplated that there might be a breach of the warranties and undertakings in cl 4 but, provided the breach was remedied before the option was exercised, the option could be exercised validly. 216 Mr Sheahan submitted that McLean Tecnic could have assigned its rights and duties to two separate but related companies, each wholly owned by A I McLean. Each would then have acquired an interest in only one of the Partnerships, thus satisfying cl 4.1(a). He pointed out that Mr Kelliher was also a partner of both Partnerships and he had exercised his two Option Agreements validly by, prior to the exercise thereof, assigning his two sets of interests to two different companies. Had McLean Tecnic done the same, there would have been no breach of warranty by it. 217 On this basis, Mr Sheahan submitted, A I McLean could have had the benefit of the Option Agreements without words being supplied, omitted or corrected in cl 4.1(a). 218 Mr Sullivan submitted, in reply, that the expression "indebtedness" in cl 4.1(b) of the Terminal Adapter Option Agreement should be construed as "indebtedness other than indebtedness that would satisfy the definition of Company Debt in respect of the Freerider Option Agreement" and, in relation to the McLean Freerider Option Agreement, as "indebtedness other than indebtedness that would satisfy the definition of Company Debt in respect of the Terminal Adapter Agreement." 219 Mr Sullivan accepted that the fairness of the construction for which he contended would be contingent upon construing the Option Agreements so as to make it a condition precedent to the exercise of the option in respect of one Partnership, that McLean Tecnic had paid the option fees (and was not in default in relation to the Instalment Debt) due in respect of the other. As he candidly pointed out, were that not so, it might be open to McLean Tecnic to exercise the option in respect of one Partnership, when there existed default in respect of the payment of the Instalment Debt and non-payment of option fees in respect of the other Partnership. This would have the consequence of requiring DTEL to subscribe in a company which was liable for the balloon payment in respect of the Partnership for which the option was not exercised (where, also, the option fees might be owing and where there might be outstanding amounts in relation to the Instalment Debt). 220 Mr Sullivan submitted that such a result (that is, the construction of such a a condition precedent to the exercise of the option) could be obtained by adding words to two parts of the Option Agreement. Firstly, cl 2.2, he submitted, should read: "Subject to the payment of instalments of the Option Fee ( and other partnership debts ) from time to time as set out in the Schedule …"

[268]

Secondly, he submitted that the Schedule should be read as if it contained the following words: " Other Partnership Debts" means such of the amounts set out below which have fallen due at the time of the exercise of the Option : [ Table setting out Option Fees and Instalment Debt due in respect of the other partnership ]" 221 In our opinion, however, Mr Sullivan's solution involves a substantial rewriting of the Option Agreement, does too much violence to the words used, and is unnecessary. The solution proffered by Digi-Tech is reasonable in the context, requires far less change to the ordinary meaning of the words used, and does not result in absurdity (as shown by the example of Mr Kelliher). In our view, Einstein J was justified in preferring the submissions advanced on behalf of Digi-Tech on this issue. 222 Accordingly, we uphold the views expressed by the judge in regard to this aspect of Issue 8 and the arguments of the McLean appellants in this respect fail. 223 Einstein J also found that at 30 September 1997 McLean Tecnic owed DTSPL $58,719.95. This was in respect of $15,892.95 being purchase and option fees due in September 1999 and $42,827 for an unpaid call on capital. It was said that this indebtedness prevented the exercise of the options by A I McLean. 224 The McLean appellants' principal argument on this issue was that this alleged indebtedness was a matter outside the pleadings and was not available for adjudication. 225 Digi-Tech accepted that it did not make specific reference to these two debts in its pleadings. It sought to make its case on accounts put in as exhibits. The existence of the two debts in question was not addressed in oral evidence. The exhibits in question were tendered when dealing with other issues. 226 In the context of this case, with many issues in dispute and thousands of pages of exhibits tendered in evidence, it was important to ensure that the respective cases of the parties were pleaded in such a way that no party could be taken by surprise. We have stressed this in regard to Issue 6. It seems to us that the failure to plead the existence of the two debts must have resulted in surprise and unfairness to the McLean appellants. 227 The judge accepted that the indebtedness existed merely by relying on the documents tendered. It is true that the McLean appellants tendered the documents in question themselves and asserted that they were correct. But the documents were very bulky, and the two items were an infinitesimal part of the information contained therein. Whether or not the documents became evidence for all purposes is not to the point. The significance of the omission to make any reference to the two debts in the Digi-Tech pleadings is that the McLean appellants did not apply their minds to the question whether these particular debts were correctly shown in those documents when they tendered them. 228 The documents were tendered at a time when the McLean appellants did not know that Digi-Tech would try to use the alleged debts to contend that A I McLean had not exercised the Option Agreements validly. The question was simply not canvassed in the course of oral evidence. It received very little attention in closing oral addresses (the McLean appellants apparently did not challenge the $42,827 debt at all). But this was not the only issue in this case which did not receive the attention of counsel in closing. We repeat that, having regard to the complexity and vastness of the issues, that is quite understandable. 229 In these circumstances, it seems to us that it would be unfair and dangerous for factual findings to be made as to the indebtedness of the Mclean Tecnic on the strength of those documents alone. 230 In our opinion, the judge's findings on this issue should be set aside. In our view, however, given the way the issue was dealt with by the parties (with some degree of technical fault on both sides), it would be just to order a re-trial in respect of this issue (that is, whether the indebtedness as now alleged existed at the relevant time).

[283]

151 On 20 September 1999 McLean Tecnic paid the total amount that it was required to pay under the Freerider Option Agreement but because the Terminal Adapter option had not been exercised McLean Tecnic remained liable to pay its instalments as a member of that Partnership. It was therefore in breach of clause 4.1(b) of the Option Agreement. 152 On 28 September 1999 McLean Tecnic paid the outstanding Option Fees and Instalment Debt under the Terminal Adapter Partnership and was released from any debt owed by it to A I McLean on that day. 153 It was submitted that at the time of the exercise of the Terminal Adapter Option on 28 September 1999, the pre-conditions to the valid exercise of each option were met. Notices of Exercise of Option had been delivered and all payments required for the respective exercises of the options had been made. It was further submitted that in circumstances where it was known to each party that McLean Tecnic had invested in both Partnerships and where simultaneous exercise of both options (in the sense of delivering all documents and making all necessary payments at the same time) was not expressly required, such a construction would accord with the objective intention of the parties. 154 It was also submitted that at the time the McLean parties' Terminal Adapter documents were delivered pursuant to clause 2.4 of the Option Agreement the conditions precedent to the operation of clause 2.2 of both the Terminal Adapter and the Freerider Option Agreements were simultaneously satisfied and McLean Tecnic ceased to be in breach of clause 4.1(b) of both Agreements at the same time. Reliance was placed on the submission made by Counsel for the Digi-Tech parties in the Court of Appeal, recorded in the CA Judgment that "cl 2.2 contemplated that there might be a breach of the warranties and undertakings in cl 4 but, provided the breach was remedied before the option was exercised, they could be exercised validly": [215]. It was submitted that on the proper construction of the Option Agreements the plaintiffs exercised the options validly on 28 September 1999 and thus the plaintiffs claims against all defendants must fail. 155 The circumstances in which these Option Agreements came into existence include the fact that it was originally intended that only one partnership would be established for both products. At that time the parties obviously intended that the Investor would be provided with an option to require DTEL to subscribe for shares in the Company thus allowing the Investor to exit from the investment. The only reason that two partnerships were established was to accommodate the advice from the Queens Counsel that the partnership should consist of no more than twenty members. The fact that Digi-Tech accepted McLean Tecnic's membership of both partnerships and received and kept the instalment payments made by McLean Tecnic in respect of both partnerships supports the conclusion that dual partnership was intended and permissible. In the Digi-Tech litigation it was argued that the parties did not intend that a debt in respect of one partnership would amount to a breach of clause 4.1(b) so as to invalidate the exercise of the option in the other partnership. However that construction did not find favour with the Court in the Digi-Tech litigation, and I must accept that the debt in the Terminal Adapter Partnership amounted to a breach of clause 4.1(b) at the time of the exercise of the Freerider option. 156 The deeming provision in clause 2.4 of the Option Agreement identifies the time at which the exercise occurs and refers to only two pre-requisites: the first is the delivery to DTEL of the executed Investor Option Notice and payment of the outstanding amounts of the Option Fee; the second is the delivery of payment of the outstanding amounts of the Instalment Debt to DTAL. There is nothing in the Option Agreement, or indeed in the suite of Agreements, to suggest that the deeming provision in clause 2.4 would be stayed until any breach of clause 4 was cured. Such a stay would create uncertainty both in respect of the deeming provisions in clause 2.4 and clause 2.7(a). The mechanism for exercise of the option was an important matter for all parties. The construction contended for by the defendants would result in a lack of certainty of when the option would be exercised and/or when the parties' rights and obligations would be triggered. I am satisfied that such uncertainty would not have been intended in these complex transactions involving such large amounts of money.

[294]

Paragraphs 54(c) and (d) have been deleted. By those deletions, the plaintiffs allege that the only manner in which the options could have been exercised validly was by McLean Technic first assigning its respective interests under the two partnerships and related agreements to separate nominee companies. This is because of the operation of the "sole purpose" warranty in clause 4.1(a) of each of the McLean Option Agreements. [emphasis added] 164 The plaintiffs therefore contended at trial that the only valid method of exercise of the options was by the plaintiffs assigning McLean Tecnic's interests in each of the Partnerships, its respective shareholdings in DTSPL, and its rights and obligations under each of the Terminal Adapter and Freerider Sale Agreements and Licence Agreements to wholly owned, newly formed subsidiaries incorporated for the sole purpose of making an investment in the respective Partnerships and DTSPL, following which McLean Tecnic would exercise the option rights under the respective successor option agreements as envisaged by clause 5.3 of the Terminal Adapter and Freerider Option Agreements. 165 The plaintiffs did not explore in evidence or explain why they had decided to abandon the alternative methods as pleaded, that is, the exercise of the options on the same day as pleaded in paragraph 54(c) and a single assignment to a nominee as pleaded in paragraph 54(d) endorsed by Einstein J in his judgment in the Digi-Tech litigation (par [1379]). 166 The first step in the "only" method pleaded by the plaintiffs is the assignment of McLean Tecnic's "interest" in the two Investor Partnerships and its respective shareholding in DTSPL. Clause 14.1 and 14.2 imposed restrictions on the "disposition" of McLean Tecnic's "Partnership Interest". "Partnership Interest" was defined as "the equity interest" of McLean Tecnic in the Partnership. Clauses 14.1 and 14.2 of the Freerider Partnership Agreement provided as follows: ` 14. RESTRICTION ON DISPOSITION Transfer of Partnership Interest

[300]

170 The prohibition in clause 20.2 was subject to the provisions of clause 20.4. Clause 20.4 applied when, as the pleaded method required, the Investor transferred its interests in the Investor Partnership and DTSPL pursuant to clause 14 of the Investor Partnership Agreement. Clause 20.4 would have allowed the plaintiffs to transfer their "interest and obligations under the Sale Agreement" to the assignee. 171 The final step in the plaintiffs' pleaded method is the exercise by McLean Tecnic of the "successor option agreement as envisaged by clause 5.3" of the Option Agreement. That successor option agreement would be between DTEL, DTCL, McLean Tecnic as Investor and the newly formed subsidiary company, as the Company. Difference in language 172 The difference in language between clause 14.4 of the Investor Partnership Agreement, in which reference was made to the "transfer" of "rights and obligations under the Sale Agreement", clause 20.4 of the Sale Agreement in which reference was made to the "transfer" of "interest and obligations" under the Sale Agreement, and the plaintiffs pleaded method in which reference is made to "assignment" of "rights and obligations" under the Sale Agreement, was not the subject of separate submissions. In those circumstances I do not need to deal with those differences other than to say that such differences are further support for the observations made in the Digi-Tech litigation in relation to the extraordinary way in which the Agreements were completed and executed. 173 On one view, these differences, and in particular the plaintiffs' choice of language in the pleaded method of "assignment" of "rights" in accordance with the Sale Agreement, as opposed to the "transfer" of "interest and obligations", may suggest that the assignment was prohibited unless DTAL consented to it in writing (cl 20.2). If that is right then the plaintiffs' pleaded method is flawed because it makes no provision for the step of obtaining DTAL's written consent. In addition, the prospect of obtaining DTAL's written consent in the circumstances that pertained in 1999/2000 would, in my view, have been far less than probable. "Sole purpose" 174 In any event, the defendants claimed that there are a number of practical and legal impediments to the validity of the exercise of the options in accordance with the plaintiffs' "only" method as pleaded. That method requires McLean Tecnic, a party to the successor options (as the sole shareholder of the assignee companies), to exercise the successor option. Underlying this pleaded method is the assumption that the successor option agreement would include provisions "similar" to clause 4 of the Option Agreement, in particular the warranty in clause 4.1(a) that the assignee companies would have "been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL".

[304]

(b) it was indebted to DTSPL. 177 Although Issue 8 related to the breach of clause 4.1(b) of the Option Agreements, which was the basis upon which validity had foundered in the judgment of Einstein J, the Court of Appeal referred to the sole purpose provision in clause 4.1(a) in the following way (Mr Sullivan QC appeared for the present plaintiffs who were appellants in the Court of Appeal; Mr Sheahan SC appeared for the Digi-Tech parties, who were respondents in the Court of Appeal): 210 A I McLean entered into the two Option Agreements on 4 May 1998. On that date (and thereafter) McLean Tecnic was not incorporated for the sole purpose of making an investment in either the Freerider or the Terminal Adapter Investor Partnership (as required by cl 4.1(a) of the Options Agreements); that is because it had made an investment in both. Thus, on a literal view of cl 4.1(a), there had been a breach of that clause from the very moment the Option Agreements were entered into. 211 Mr Sullivan pointed out further that McLean Tecnic, with the knowledge and concurrence of Digi-Tech, undertook an activity not expressly provided for or contemplated by the Freerider Investor Partnership Agreement, as it undertook the role of a partner in the Terminal Adapter Investor Partnership (and vice versa). 212 He submitted, therefore, that on the construction upheld by the judge, there would have automatically been a breach of the warranty and undertaking in cl 4.1(a) - thus invalidating the exercise of the options under cl 2.2. This invalidation would have been inevitable. On that basis A I McLean never had the benefit of an option that was capable of being exercised. Therein, it was submitted, lay the absurdity. 213 Both Digi-Tech and the McLean appellants accepted that in construing the Option Agreements, due regard had to be paid to the circumstances in which the documents came into being. According to Einstein J: "[T]he events on the evening of 30 June and in the early hours up to about 4.00 am of 1 July were in fact what can only be described as a madhouse of frantic efforts by all who participated to consummate the split transactions being documented literally on the spot under the most considerable time pressure imaginable". (emphasis in the original judgment) 214 Mr Sheahan submitted that regard also had to be had to the fact that the Agreements were structured so that each partnership shared in the income generated by the products of both partnerships. Accordingly, he submitted, each Investor Partnership Agreement should be construed as expressly contemplating that partners might also be partners in the other Partnership that was associated with the scheme. 215 Mr Sheahan submitted that on that basis there would not be a breach of cl 4.1(a) and no absurdity would result. He pointed out that cl 2.2 contemplated that there might be a breach of the warranties and undertakings in cl 4 but, provided the breach was remedied before the option was exercised, the option could be exercised validly. 216 Mr Sheahan submitted that McLean Tecnic could have assigned its rights and duties to two separate but related companies, each wholly owned by A I McLean. Each would then have acquired an interest in only one of the Partnerships, thus satisfying cl 4.1(a). He pointed out that Mr Kelliher was also a partner of both Partnerships and he had exercised his two Option Agreements validly by, prior to the exercise thereof, assigning his two sets of interests to two different companies. Had McLean Tecnic done the same, there would have been no breach of warranty by it. 217 On this basis, Mr Sheahan submitted, A I McLean could have had the benefit of the Option Agreements without words being supplied, omitted or corrected in cl 4.1(a). … 221 In our opinion, however, Mr Sullivan's solution involves a substantial rewriting of the Option Agreement, does too much violence to the words used, and is unnecessary. The solution proffered by Digi-Tech is reasonable in the context, requires far less change to the ordinary meaning of the words used, and does not result in absurdity (as shown by the example of Mr Kelliher). In our view, Einstein J was justified in preferring the submissions advanced on behalf of Digi-Tech on this issue.

[306]

180 The plaintiffs' also made a submission that "other corporate partners" did "assign down and were found to have validly exercised their options" (tr 112). The defendants submitted that this claim is both legally and factually incorrect and that the plaintiffs have attempted to gloss over the findings of Einstein J. His Honour made no finding or declaration that any corporate partner had validly assigned. Any claims that had been commenced by the corporate investors in the Digi-Tech litigation were all settled after the litigation commenced but prior to judgment. The only declarations as to validity were in relation to a small number of individual investors and their assignees. 181 There were seven corporate partners in the Terminal Adapter Partnership. Five of them were original parties in the proceedings before Einstein J. Two of those parties and their holding company or corporate nominee settled during the course of the proceedings. Einstein J found that the other corporate parties, McLean Tecnic, Kalifair and Kalinick, and their holding companies, did not validly exercise the Investor Option Agreements, but for reasons un-associated with clause 4.1(a) of the Option Agreement. The only findings his Honour made in respect of options that were validly exercised were in relation to three of the individual investors and their assignees, being Messrs Brand, Chambers and Kelliher. 182 There were five corporate partners in the Freerider Partnership. Four of them were original parties in the proceedings before Einstein J. Three of those parties and their holding company or corporate nominee settled during the course of the proceedings. The remaining corporate partner party was McLean Tecnic who, together with A I McLean, were found to have invalidly exercised the Investor Option Agreements. The only findings made by his Honour that options had been validly exercised were in relation to four individual investors and their assignees, being Messrs Kelliher, Smith, O'Loughlin and Whiting.

[309]

187 The plaintiffs next submitted that the defendants have confused motive and purpose. Mr McClintock submitted that there was no question that when the options came to be exercised, the plaintiffs' "motive" was to avoid making the balloon payment, however it was submitted that the purpose of the incorporation of the assignee companies was to make the investment as required, albeit through the pleaded process of assignment. The defendants submitted that the terms of clause 4.1(a) invoke an inquiry about the purpose for which the assignee company would be brought into existence. It was submitted that on the plaintiffs' theory of the case the only purpose the assignee companies serve is to act as a device to facilitate getting the plaintiffs "off the hook". 188 An analysis of the pleaded method provides an understanding of the "purpose" of the incorporation of the assignee companies. "Purpose" is defined as "the reason for which something is done or created or which something exists". "Motive" is defined as, "a reason for doing something, especially one that is hidden or not obvious": The New Oxford Dictionary of English (1998) Clarendon Press, Oxford. The pleaded method requires the assignee companies: (a) to accept the assignment of Mclean Tecnic's interest in the relevant Investor Partnership and its corresponding shareholding in DTSPL; (b) to accept the assignment of McLean Tecnic's "rights and obligations" under the Sale Agreement and Licence Agreement; and (c) to exercise the option that would be included in clause 2.1 of a successor option agreement requiring DTEL to subscribe for Company Shares in the assignee companies. 189 The pleaded method requires the assignment to a wholly owned subsidiary. McLean Tecnic would be the sole shareholder of the assignee companies and would become a party to the similar successor option agreements. The pleaded method requires McLean Tecnic to exercise that successor option to require DTEL to subscribe for shares in the assignee companies to enable the assignee companies to use the subscription moneys from DTEL to make the balloon payment.

[315]

194 The construction of the provisions of the suite of Agreements in the assessment of whether the pleaded method would have effected a valid exercise of the options, must be sensible and businesslike, however it must be kept in mind that strict adherence to the "only" manner pleaded in paragraphs 54(a) and (b) would be required. Part of that strict adherence includes the requirement that there be no breach of clause 4.1(a) of the successor option agreement at the time of the exercise of the option. The strictness with which the provisions of clause 4 of any successor option agreement would have to be adhered to at the time of the exercise of the option in the pleaded method, is evidenced by the approach adopted by the Court in the Digi-Tech litigation. Notwithstanding the parties' clear intention that the plaintiffs be permitted to invest in both Partnerships, the exercise of the option was held to be invalid by reason of the indebtedness caused by that dual membership. 195 It is necessary to construe the terms of the "similar" clause 4.1(a) in the context that compliance with it would be a pre-requisite to the valid exercise of the successor option agreement. The analysis by the defendants has focused on the subjective purpose of McLean Tecnic in complying with the requirement to incorporate a subsidiary and become the sole shareholder of that subsidiary pursuant to the pleaded method. I do not think it is helpful to construe the clause in the context of a comparison of "purpose" and/or "motive". That seems to me to cloud the real issue for consideration in construing the clause. 196 I will assume for the purpose of this analysis that the warranty in a successor clause 4.1(a) would be that the assignee subsidiary "has been incorporated for the sole purpose of making an investment". A "sole" purpose is the "one and only" purpose: The New Oxford Dictionary of English. It is necessary to decide whether the assignee's "sole purpose" would be to make the investment. The plaintiffs' purpose in establishing or incorporating the company is not relevant, nor is the plaintiffs' motive in establishing or incorporating the company. It is true that assignment pursuant to of clause 5 of the Option Agreement, if validly completed, would give to the plaintiffs a full release from the obligations under the Investor Partnership Agreement and the Sale Agreement. However that is the effect of assignment. 197 I agree with the plaintiffs' submission that it would appear that the commercial rationale for the "sole purpose" warranty was to ensure that when the plaintiffs received the intellectual property back, it would be unencumbered. The fact that the making of the investment by the assignees had the consequence of extracting the plaintiffs in the way described above, does not mean that their incorporation was for that "purpose". The context in which the term "sole purpose" is found in clause 4.1(a) - referring to the future activity of the company - supports the conclusion that the relevant inquiry is directed towards the purpose of the company's incorporation rather than the purpose of the party responsible for that incorporation. The purpose, indeed the sole purpose, of the incorporation of the assignee subsidiary was for it to make the investment. 198 The submission made by the defendants in support of its attack on the validity of the pleaded method included the submission, as referred to above, that the sole purpose in the putative assignees was to exercise the options and obtain relief from the trap into which the plaintiffs had been drawn. That seems to me to inappropriately combine separate steps in the pleaded method. Firstly it is not the exercise of the options pursuant to which the plaintiffs would obtain the relief, but rather the assignment. Secondly, notwithstanding the exercise of the successor option agreement, the subsidiary assignee would remain as a Partner in the "investment", but with a restructured capital base. DTEL would become a shareholder of the subsidiary assignee although it is not clear what percentage of shareholding McLean Tecnic would maintain in the subsidiary assignee, once DTEL was deemed to have taken up its shares. 199 I am not satisfied that under the pleaded method, the assignee subsidiary companies would be in breach of the sole purpose warranty in the "similar" clause 4.1(a) of the successor option agreement. Other impediments 200 There were a number of other matters raised by the defendants as "impediments" in the pleaded method. These additional matters, if accepted, would not invalidate the exercise of the option in the pleaded method but are matters to be taken into account in determining whether such a method could realistically have been implemented at the relevant time. At this point I will consider them generally rather than as they relate specifically to the individual cases against each of the defendants.

[319]

By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. 202 The defendants also submitted that assignment of McLean Tecnic's rights under the Freerider and Terminal Adapter Sale Agreements to wholly owned subsidiaries required delivery of a deed by those subsidiaries to DTAL by which the subsidiaries bound themselves to perform the obligations of McLean Technic under the respective Sale Agreements (cl 20.4(a)). Entry into such deed would also have been exposed to the claim that it was an insolvent transaction under the Corporations Law. A director who caused the subsidiary to execute such a deed contemplated by clause 20.4(a) would be exposed to possible liability for breach of the duty to prevent insolvent trading imposed upon directors by s 588G. 203 The defendants submitted that the plaintiffs' only attempt to identify a person apparently willing to expose himself or herself to the risk of personal liability under s 588G for the balloon payment was to refer to steps taken by Mr Urwin in relation to individuals and corporate investors separate to the plaintiffs' interests. It was submitted that the Court is invited to infer, in the absence of evidence on the topic from Mr McLean or Mr Urwin, that Mr Urwin would have been so willing. It was submitted it is one thing for Mr Urwin to agree to act as an officer for individuals and corporate investors that he had personally introduced to a failed investment; but quite another for him to agree to act as an officer of companies associated with Mr McLean/the plaintiffs who entered the scheme a year later, acting upon the advice of his own advisers and not in reliance upon advice from Mr Urwin. It was submitted that the plaintiffs' invitation to infer such an outcome is an impermissible appeal to hindsight. 204 Mr Urwin gave evidence but was not cross-examined by the plaintiffs to suggest that he would have been willing to act as a director of an assignee subsidiary company as contemplated in the pleaded method. It was submitted that the plaintiffs' failure to ask this question in cross-examination allows the Court to comfortably conclude that the answer to the question would not have assisted the plaintiffs' case.

[321]

206 The defendants also submitted that the entry into the deed contemplated by clause 20.4 of the Sale Agreement by the assignee subsidiary would have been: (a) an uncommercial transaction within the meaning of s 588FB of the Corporations Law; (b) an insolvent transaction within the meaning of s 588FC of the Corporations Law; and (c) a voidable transaction within the meaning of s 588FE of the Corporations Law. 207 A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction having regard to: (a) the benefits (if any) to the company of entering the transaction; (b) the detriment to the company in entering into the transaction; (c) benefits to other parties respectively; and (d) any other relevant matter: s 588FB(1). In Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363, the Full Court of the Federal Court said that the Court must consider each of these matters and reach a conclusion as to whether a reasonable person in the company's circumstances would not have entered into the transaction. These circumstances include the state of knowledge of those who were relevantly the company's directing mind. If the Court concludes that a reasonable person in the company's circumstances would not have entered into the transaction, then the transaction is uncommercial. Such a transaction will be liable to be set aside or varied as a voidable transaction in certain circumstances as prescribed. It was submitted that this was a real risk in the circumstances that pertained in September 1999. 208 Section 588FC outlines the circumstances under which a transaction is an insolvent transaction. It provides that it is an insolvent transaction if it is either an unfair preference or uncommercial transaction of the company and: (a) the transaction is entered into or given effect at a time when the company is insolvent; or (b) the company becomes insolvent because of matters including entering the transaction or a person giving effect to that transaction.

[324]

211 The defendants submitted there was a significant uncertainty that DTEL and DTCL would have been able to discharge their resulting obligations to subscribe for sufficient shares in McLean Tecnic or in a special purpose company established by McLean Tecnic, totalling A$23,980,467.83. It was submitted that no reasonable person would have been prepared to accept the position of a director of the assignee subsidiary with such attendant uncertainties and that there is no evidence of any persons who were willing to accept the position. A further submission was made that the benefits (if any) to the assignee subsidiary of entering into such an assignment were far outweighed by the risks of the assignee subsidiary having entered into an uncommercial transaction, an insolvent transaction or a voidable transaction. Finally it was submitted that the assignee subsidiary would have become insolvent or that there was a real risk of its insolvency as a result of the transaction such that it would have been an unfair preference or uncommercial transaction. 212 The complexity of the proposed assignment and the dangers inherent in such a transaction also included the prospect of the assignee company being obliged to pay the balance of the purchase price to DTAL without the benefit of a successor option and thus any "assistance" from DTEL. 213 The plaintiffs submitted that a director would only have contravened s 588G if there were "reasonable grounds for suspecting that the company is insolvent, or would so become insolvent". There would be no liability if the director had reasonable grounds to expect, and did expect, that the company was solvent at the time a debt was incurred: s 588H. 214 The plaintiffs also submitted that under the pleaded method the director of the assignee subsidiary would have been reasonably entitled to expect: (i) that the assignee subsidiary would be entitled under the successor option agreement to exercise its option and thus avoid liability to make the balloon payment; (ii) that even if the exercise of the option was disputed by the Digi-Tech parties, a court would ultimately have enforced its right to exercise the option; and (iii) if, for whatever reason, the exercise of the option failed, the guarantee under the Sale Agreement would have remained in place such that the plaintiffs and not the assignee subsidiary would have been liable for the balloon payment. Accordingly it was submitted that the director would have had reasonable grounds for believing that the assignee subsidiary could pay its debts as and when they fell due for the simple reason that it would never have incurred any debt or if it did, responsibility for payment would have been that of the McLean Parties as principal debtor. It was submitted that the director, properly advised, would not have had any concern about s 588G liability. 215 The plaintiffs submitted that even if there were liability under s 588G, the director would have been afforded the protection of s 1318 of the Corporations Law. That section would provide the so-called "protection" to the director of the assignee subsidiary where it could be shown that it would be unjust and oppressive not to excuse that director from liability: Daniels v Anderson (1995) 37 NSWLR 438 at 524-525. This submission has no force in the absence of evidence as to: the possible identity of the person who may have been willing to take on the directorship of the assignee subsidiary; the qualifications and background of that person; and the particular circumstances to be considered as a basis for the exercise of the court's discretion under s 1318: Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430 at pars [139]-[184]. 216 Mr McClintock submitted that it is obvious that if the plaintiffs had been advised that this was the only method to adopt to avoid "losing everything" they would have taken that advice and assigned their rights in the respective Partnerships. I am not satisfied that it is obvious at all. There was no evidence from which I could be satisfied that that any person would have been willing to serve as director of a subsidiary assignee in the circumstances with the prospects of breaches of the Corporations Law. Indeed in the absence of cross-examination of Mr Urwin I could not be satisfied that he would have been so willing.

[326]

No successor option agreement 218 The defendants submitted that as a matter of practicality, from September 1999 until the end of the Option Period, the plaintiffs and the Digi-Tech parties were in dispute, with litigation pending and thereafter commenced. It is also to be remembered that the circumstances at the time included that the Digi-Tech parties were claiming that the balloon payments of NZ$57,341,995 and NZ$17,461,332 were due and payable as the result of the termination of the Sale Agreements. The Digi-Tech parties were also claiming that there was no option to be exercised because the agreements had been terminated. 219 It was submitted that had the plaintiffs purported to assign their rights and obligations, as pleaded, a successor option agreement would not have been concluded. This submission has force. Mr Reid had already advised that the Digi-Tech parties would be resisting the exercise of the options that were in place. Correspondence from Blakes had made it patently clear that the Digi-Tech parties were not going to entertain any suggestion that the options had been validly exercised. It is hardly likely that a change in attitude would have occurred and either DTAL would have provided its consent to allow assignment under clause 20.2, if such consent were necessary, and it is also unlikely that DTEL and DTCL would have agreed to the terms of a successor option agreement. 220 Clause 5.3 of the Option Agreement provided that DTEL and DTCL "each agree" that they would enter into a "similar agreement" with the assignee (and the sole shareholder of the assignee) "to permit the assignee to require DTEL to assist the assignee to meet its assigned obligations under the Sale Agreement". The original Option Agreement was between DTEL, DTCL, A I McLean, as Investor, and McLean Tecnic, as the Company. DTEL granted to McLean Tecnic "the right to require DTEL to subscribe for Company Shares". On one view of the provisions of clause 5.3 of the Option Agreement it would appear that the successor option is to be granted to the assignee company directly rather than to McLean Tecnic as the sole shareholder of the assignee. However if that were so there would seem to be no need for Mclean Tecnic to be a party to that agreement. This is just one aspect of the uncertainty that flows from such a provision.

[331]

226 It is true that in Boland v Yates Property Corporation Pty Limited (1999) 74 ALJR 209 at 219, par [45], also cited by Malcolm A-JA in Heydon v NRMA at [149], Gleeson CJ referred to the fact that the trial judge relied not only upon the evidence of the experts but upon her own opinions and judgment in reaching the conclusions about the alleged negligence of lawyers in that case. However that was not an endorsement of trial judges applying, carte blanche, their own opinions and judgments about the conduct of lawyers in professional negligence suits in the absence of expert evidence. 227 It is usual in suits against lawyers against whom charges of negligence are made, to provide those lawyers in the process of a fair trial, with the opportunity to challenge the evidence that is claimed to establish: (a) the circumstances and particular conduct relied upon; (b) the standard of conduct or care expected of the lawyer in the particular circumstances; and (c) that the lawyers conduct fell below the requisite standard. If it is only the trial judge's opinion and/or judgment that fixes the standard against which the conduct is to be measured, the lawyers against whom the proceedings have been brought will not have the opportunity to explore and/or challenge the opinion and will not be aware of the opinion prior to the delivery of judgment. 228 It will depend on the circumstances of the particular case. There may be straightforward cases in which there is no issue between the parties that expert evidence needs to be called. However where it is an issue, as is the case here, it is necessary to assess whether the plaintiffs have discharged the onus of establishing: the scope of the duty of care; the requisite standard of conduct or care against which the defendants' conduct is to be measured; and whether the defendants' conduct fell below that standard. In the present case it will be necessary to assess whether the evidence is capable of establishing the standard of conduct or care that would have been expected of each of the defendants in their particular roles in the transactions/litigation in 1999/2000 and whether that conduct fell below that standard. 229 A solicitor's duty in exercising an option may in part depend upon whether there was a practice within the profession in relation to the exercise of options of the kind in question at the time. In Tonitto v Bassal (1992) 28 NSWLR 564, Sheller JA, with whom Handley JA and Hope A-JA agreed, said at 574: It is generally accepted that effectual exercise of an option requires strict adherence to the method prescribed in the instrument creating the option: see Greig and Davis, The Law of Contract (at 307).

[336]

233 The passage of Oliver J's judgment in Midland Bank Trust v Hett Stubbs & Kemp cited by Kirby P at 653 also included the following (at 402 of Oliver J's judgment): The extent of the legal duty in any given situation must, I think, be a question of law for the court. Clearly, if there is some practise in a particular profession, some accepted standard of conduct which is laid down by a professional institute or sanctioned by common usage, evidence of that can and ought to be received. 234 I agree that the scope of the duty in this case can be decided without expert evidence. The scope was to exercise reasonable skill and care in the provision of the legal services the defendants were instructed to provide. The legal services the defendants were instructed to provide can be ascertained without expert evidence. The question of whether expert evidence was necessary to establish the standard of care or conduct against which each of the defendants' conduct is to be measured is more complex. 235 The plaintiffs submitted that this Court can conclude, without expert evidence, that if asked to advise in respect of and execute, an option on behalf of a client, a commercial solicitor would have: (a) read the documents; (b) brought his or her mind to bear on the contractual requirements for valid exercise in light of the known circumstances; and (c) advised his or her client of those requirements and taken the necessary steps to ensure compliance with them. It was submitted that in the present case, that meant ensuring there were no breaches of clause 4 of the Option Agreement and if there were any breaches of clauses 4.1(a) and/or 4.1(b), pursuing the method as pleaded in paragraphs 54(a) and (b) of the amended pleading. 236 It will be necessary to deal with this issue when considering each of the claims against each of the defendants that their conduct was in breach of their retainers and their duty of care, however the plaintiffs did not call any evidence from either a lawyer, expert in the field of commercial transactions and/or commercial litigation in the relevant period 1999/2000 or otherwise, as to what a diligent and competent lawyer would have been expected to have done in the complex circumstances that pertained at the relevant time in respect of the roles of each of the defendants. These are matters left for the Court to work out without the benefit of any expert evidence except of course the evidence from the solicitors who are the subject of the plaintiffs' claims. 237 The defendants also submitted that it is significant that the plaintiffs failed to call their principal, Mr McLean, to prove that the plaintiffs probably would have assigned their rights in the manner pleaded. The plaintiffs attempted to resist an adverse inference being drawn from the absence of any evidence from Mr McLean by reliance upon the evidence of Professor Richard Mattick, a consultant clinical psychologist. Professor Mattick's reports (Ex B & Ex C) included opinions in relation to Mr McLean's memory. In paragraph 13.9 of Exhibit B Professor Mattick wrote:

[349]

245 On the premise that the Act does apply to these proceedings, s 5D(3)(b) would have rendered inadmissible any evidence from Mr McLean about what he would have caused the plaintiffs to do if the solicitors had advised them to pursue the pleaded method. However that section would not affect any evidence that may have been called from the Digi-Tech parties as to what they would have done in respect of a successor option if the plaintiffs had assigned their rights. The context 246 It is very important to consider the question of whether the defendants should have realised that McLean Tecnic's membership of both Partnerships would have caused a breach of clause 4.1(a) or clause 4.1(b) of the Option Agreement at the time of the exercise of the option without the luxury of calm retrospective analysis. It is also necessary to consider the defendants' failure to advise the plaintiffs to follow the pleaded method in that same context. It is essential to consider the defendants' conduct in the circumstances in which they found themselves in the latter part of 1999 and, in the case of ANH, up to 31 July 2000. 247 Those circumstances included: (a) the negative and/or hostile attitude of Mr Reid of DTAL advising that at no stage would any exercise of the options by the Partners be recognised; (b) the real commercial problems with the "products" that were the subject of the investment; (c) the purported termination of the Terminal Adapter Sale Agreement in early April 1999; (d) the lengthy negotiations between March and August 1999 to attempt to reach a commercial settlement with the Digi-Tech parties; (e) the serving of a termination notice in respect of the Freerider Partnership Sale Agreement in early September 1999; (f) the differing views expressed by Senior Counsel, junior counsel, solicitors and Dr Carter as to whether it was possible to assign rights in the circumstances of the Terminal Adapter termination and the Freerider termination notice; (g) the numerous Partners seeking advice in respect of both the attempted commercial settlement with the Digi-Tech parties and generally how to protect themselves from having to pay the balloon payment in circumstances where the tax effectiveness of the investment was not certain; (h) the numerous people advising the plaintiffs without precise delineation of their roles, including accountants, solicitors and counsel; (i) DTSPL's instructions to assign to companies in Mauritius; (j) serious concerns about the process of assignment as identified by Mr Shtein in the letter of advice to Mr Brand on 8 September 1999; (k) the abandonment of the plan to assign to the Mauritian companies; (l) Senior Counsel's advice to exercise the Freerider Option forthwith; (m) the plaintiffs changing position in respect of instructions given to Harris & Co in August 1999, withdrawing instructions from Harris & Co in September 1999 and instructing Bartier Perry because of a perceived conflict of interest and then in September 1999 instructing Bartier Perry to re-instruct Harris & Co when work and/or time constraints prevented completion of documentation within the required time frame; (n) Mr Simms advising the plaintiffs at all times and being present at numerous meetings representing the plaintiffs: and (o) the constant consideration that complex multi-party litigation was pending and then commenced. 248 When the plaintiffs decided to make the investment and took the assignment from the outgoing partners in May 1998, the Digitech parties and the outgoing partners realised that they had to amend the respective Partnership Agreements to allow for assignment to third parties. It was not merely utilising the machinery within the Partnership Agreement. The Digitech parties had to actually turn their minds to amendments to enable the plaintiffs to become members of both Partnerships. All parties, including the Digi-Tech parties, were fully aware that the plaintiffs were members of both Partnerships. The plaintiffs paid the Instalments as required and the Digitech parties accepted the payment of those instalments. It is clear to me that everyone was lulled into the secure and comfortable position that dual membership of the Partnerships was permitted and condoned. The plaintiffs own choices (with the assistance of Mr Simms) of disparate and peripatetic instructions also meant that no single lawyer was required to consider the exercise of the options in both Partnerships. The complex transactional documents to be considered and advised upon combined with the abovementioned factors greatly reduced the likelihood that possible breaches under clause 4.1(a) and clause 4.1(b) by reason of that dual membership at the time of the exercise of the options would have been recognised. 249 In the absence of any evidence from the plaintiffs in respect of the standard of care and/or the expectation of what a prudent and competent solicitor would have done in the particular circumstances of each of the defendants' retainers, it is permissible to make the following observations. The plaintiffs were provided with legal services, either individually or by reason of their membership of the Partnerships, by numerous, highly qualified and experienced commercial lawyers. Those lawyers included Mr Simms, Mr Smith, Mr Shtein, Mr Broadley, Ms Davies, Mr Tappere, Dr Carter, Ms Chang, Mr Jackman and Mr Walker SC.

[351]

Harris & Co 252 There is no issue that Harris & Co's retainer by DTSPL included a term that it would advise the Terminal Adapter Partnership in relation to the Default Notice issued by DTAL on 29 January 1999. There is also no issue that in providing that advice, Harris & Co was required to exercise all reasonable skill and care as solicitors in undertaking the work. It is obvious that Harris & Co were instructed from time to time to provide additional legal services. 253 Freehills were instructed in March 1999 within weeks of the Harris & Co retainer letter of 23 February 1999 without any consultation or prior notice to Harris & Co. Unfortunately there was no clear express demarcation of the work and/or advice to be provided by these two firms in early 1999. Freehills' retainer, as accepted by them in their letter of 19 March 1999, refers to a much broader role than Harris & Co of advising the Partnership "in relation to its involvement in arrangements with Digi-Tech Australia". 254 The plaintiffs claim that the description of Harris & Co's role in the Observations of the Brief from Freehills to Mr Walker SC of 18 August 1999 was an accurate description of the Harris & Co retainer. That description was that Mr Smith/Harris & Co had been briefed "to advise our clients in relation to the exercise of the options". Those Observations were provided to Mr Smith prior to it being sent to Mr Walker and he did not correct or change the description of his role as recorded by Ms Rowe. The plaintiffs also rely upon the description of Harris & Co's role in the DTSPL letter to investors dated 18 August 1999. That letter described the role of Harris & Co as having been briefed by DTSPL "in relation to the final form of documentation required to complete the processes described" in that letter. That letter also stated that Mr Smith was liaising with Freehills and Mr Walker SC. 255 The plaintiffs claim that the Harris & Co retainer included a term that they would prepare documentation for the plaintiffs to execute and "thereby validly exercise the option rights under the Freerider Option Agreement". They claim that Harris & Co had an obligation to advise the plaintiffs, either directly or through their agents or other solicitors, of any material risks that the manner in which the option rights pursuant to the Freerider Option Agreement were exercised may be invalid. There is also a claim that Harris & Co had an obligation to advise the plaintiffs on all appropriate steps to overcome any such risks, and to prepare documentation for execution on behalf of the plaintiffs consistently with such advice. 256 Harris & Co deny that the retainer included a term requiring advice to be given to the plaintiffs on the manner in which they were to exercise the option so as to achieve a valid exercise of option. The Amended Commercial List Response filed on 13 May 2008 sought to limit Harris & Co's obligations in contract and in tort to preparing the documentation for the exercise of the option without any obligation to advise the plaintiffs on the method by which the option could be exercised. Harris & Co claimed that Mr Urwin retained the firm to provide legal services to DTSPL to prepare documents for a number of investors, including the plaintiffs, for the purpose of exercising the Freerider Option Agreement and to send those documents, once finalised to DTEL. It claimed that it was instructed to prepare the documents in accordance with the instructions and advice of other legal advisers retained by DTSPL. It also claimed that from 8 September 1999, Mr Smith was aware that Mr Shtein did not agree with his views as to the manner in which the investors in the Partnerships were to assign their interests to other entities prior to exercising the option rights. 257 Harris & Co relied heavily on the communications between Mr Smith and Mr Simms on 9 September 1999. Mr Smith gave affidavit evidence (10/09/07 - par 52) that on 9 September 1999 Mr Simms telephoned him and asked him whether he had seen Mr Shtein's advice to Mr Brand dated 8 September 1999 and what he thought about it. Mr Smith's evidence was that he informed Mr Simms:

[354]

[Mr Smith] has just been retained to draft the documents and is not offering advice to individual partners on this. He understands that all the partners have got some form of separate legal and/or accounting advice. 261 I have dealt earlier with the discussion on 15 September 1999 at Freehills' office at which it was suggested that Mr Smith "run past" Freehills the documents relating to the exercise of the option. As I have already said, the matter that was to be "run past" Freehills/Ms Rowe was the inclusion of the appropriate explanation in the Notices, rather than having Freehills assess whether the notices would effect a valid exercise of the option. Harris & Co denied that the plaintiffs instructed or relied upon the firm to provide them with any advice in relation to the method by which the option rights were to be exercised. They also denied that they were instructed by Bartier Perry to provide any legal services to the plaintiffs other than the preparation of the documentation. 262 Harris & Co claimed that at all relevant times from about March 1999 onwards it was aware that Freehills was acting on behalf of DTSPL and the plaintiffs and providing them with advice in relation to the exercise of the options and generally in relation to the dispute between the investor partners and DTAL. It also claimed that Freehills had briefed Mr Walker to advise on issues including the exercise of the options and that Bartier Perry had been retained by investors in both Partnerships to provide advice as to the proper exercise of the options. Harris & Co claimed that on 8 September 1999, DTSPL received advice from Bartier Perry that a pre-condition to the valid exercise of the options was that an investor must have no indebtedness other than the debt owing under the relevant Sale and Purchase Agreement. This was advice contained in the letter to Mr Brand that was provided to Mr Simms. Harris & Co claimed that on and from 15 September 1999 it was aware that Bartier Perry was acting for the plaintiffs in relation to the option agreement save that it was instructed to prepare and issue, after approval by Freehills, the necessary documentation in order to exercise the Freerider option. 263 Harris & Co denied that it had an obligation to make all appropriate enquiries of the plaintiffs to ascertain: (a) whether, as at 20 September 1999, McLean Tecnic had been incorporated for the sole purpose of making an investment in the Freerider Partnership and DTSPL; and (b) that it had not undertaken any activity not expressly provided for or contemplated by the Freerider Partnership Agreement so as to comply with the warranty in clause 4.1(a) of the Option Agreement. Harris & Co also denied that it had an obligation to make enquiries of the plaintiffs to ascertain whether as at 20 September 1999, McLean Tecnic did not have any other indebtedness, so as to comply with the warranty in clause 4.1(b) of the Option Agreement. It was submitted that its role was to create documents in accordance with the requirements of the Option Agreement and not to advise on, or repeat others' advice on, the requirements for a valid exercise of the option. 264 Prior to 20 August 1999 Mr Urwin put a proposal to Mr Smith whereby individual investors would assign their interests to the companies in Mauritius and corporate investors would assign their interests to wholly owned subsidiaries. As instructed by Mr Urwin on behalf of DTSPL Mr Smith prepared draft assignment documents. However when Mr Smith received a copy of Mr Shtein's advice to Mr Brand dated 8 September 1999 he accepted that there was a problem "in terms of the option" and he accepted that corporate investors' assignments to wholly owned subsidiaries would amount to fresh transactions with the incursion of new liabilities by the assignee (tr 202). Mr Smith also appreciated at the time he read Mr Shtein's advice on 8 September 1999, that DTAL had already called a default in relation to the Terminal Adapter Partnership and was claiming that the whole of the balance of the purchase monies, amounting to many millions of dollars, had already become due and payable. He appreciated that upon novation by a corporate investor to a wholly owned subsidiary, that subsidiary would be stepping into the debt in relation to which DTAL was claiming that monies were immediately due and payable. He appreciated that the practical effect of the corporate investor assigning to a wholly owned subsidiary would be that the director or directors of any such subsidiary would be placed in a position where they would be at personal risk of becoming liable for the debt as a consequence of insolvent trading (tr 203 - 204). 265 The issue of possible liability for insolvent trading was certainly a matter that weighed on Mr Smith's mind against the prospect of any assignment path being pursued by a corporate investor (tr 204). He accepted that all the points made by Mr Shtein in his advice of 8 September 1999 were good reasons to doubt the wisdom of going down any assignment path. He agreed that he had read the Freerider Option Agreement and the Terminal Adapter Option Agreement a number of times prior to September 1999 and in September 1999 gave his "closest consideration" to them (tr 209). He assumed that having read those documents at that time, it was his understanding that the effect of an assignment by a corporate investor to a wholly owned subsidiary under each of the Option Agreements would be to bring into existence a new option agreement with the assignee standing in place of McLean Tecnic (tr 209). 266 Mr Smith was cross-examined in relation to the letter he wrote to Mr Urwin dated 17 August 1999, headed "Digitech Assignments", extracted earlier in this judgment. Mr Slattery QC cross-examined Mr Smith about the letter as follows (tr 220): Q. You appear to be offering views here which would appear to cover both the Freerider and Terminal Adapter products; is that right? A. Yes.

[361]

Q. Before I go to some items of detail, I'm just wanting to put this to you, Mr Smith: although you have characterised the request in your affidavit as, "could you set out for me the relevant provisions in the agreements", you appreciated that what you were doing was giving advice to Mr Urwin beyond a bare summary of the contents of the agreement? A. No, I was setting out the relevant provisions. 267 Mr Smith agreed with Mr Slattery that he was offering an opinion in the letter about whether or not each of the investors would need to have a corporate nominee appointed (tr 221). He was a little resistant to the suggestion that he was providing legal advice, but ultimately agreed that he was (tr 222; L1-20). Mr Smith was referred to DTSPL's letter dated 18 August 1999 in which it was recorded that Harris & Co/Mr Smith, had been briefed by DTSPL and was liaising with each of Freehills and Mr Walker SC "in relation to the final form of documentation required to complete the processes described". Mr Smith agreed that this was an accurate description (tr 223). I am satisfied that this concession does not mean that Mr Smith accepted that he had been instructed to advise the plaintiffs on the method by which the plaintiffs could exercise the options validly. The plaintiffs had their own lawyers, Mr Simms and later Mr Shtein to provide that advice. 268 Mr Smith gave evidence that the reason a Mauritius based company was chosen was to avoid the prospect of directors of the assignee companies being liable for insolvent trading under the Corporations Law if they had defaulted on obligations owed to DTAL. Mr Smith did not think that it was necessary that the companies be based in Mauritius; rather they just had to be outside the jurisdiction of the application of the Corporations Law. He agreed that he did not tell Ms Rowe, Mr Broadley or anyone from Freehills about the Mauritian proposal. He also said that he did not recall informing Mr Walker about it (tr 236 - 237). He agreed that he decided he did not need to trouble Freehills about it at that stage (tr 237). 269 Mr Slattery cross-examined Mr Smith about the Observations in the Brief to Mr Walker in which Mr Smith's role was described as having been briefed to "advise our clients". The following evidence was given (tr 239 - 240):

[417]

Q. And that tells you now, as you sit in the witness box, that there was a breach in respect of clause 4.1(b)? A. I'm aware of that, yes. 282 When Mr McClintock suggested to Mr Smith that his task was not restricted to simply copying out the exercise of option documents from the back of the Option Agreement and sending it off to DTAL, Mr Smith said that it is what he believed his task was because there was not time to do more (tr 402). Mr McClintock suggested to Mr Smith that it was always his intention to assign the plaintiffs' interest in the Freerider Partnership to Orthoptic and that he simply ran out of time to do it. Mr Smith denied this. I do not accept that Mr Smith always intended to assign McLean Tecnic's rights to Orthoptic, nor do I accept that the time constraints prevented Mr Smith from assigning McLean Tecnic's rights to Orthoptic. This was a company incorporated at a time when the Mauritius proposal was still on foot. I am satisfied that when that proposal was abandoned as a result of Mr Shtein's advice to Mr Brand it was no longer a corporate vehicle considered to be of use in the exercise of the option. 283 Mr Smith gave evidence that when he received a copy of the Deed of Release from Mr Shtein and instructed his secretary to prepare a similar Deed for each of the corporate entities, it did not occur to him that there may be a problem because such a Deed had not been completed in respect of, and at the time of the Freerider exercise of options. He accepted that if he had become aware of a difficulty with the exercise of the options he had an obligation to alert his clients to that difficulty. His evidence was that he did not become aware of any problems with the exercise of the options until Einstein J delivered his judgment. 284 Mr Smith was not asked by the plaintiffs, Mr McLean or Mr Simms to provide the plaintiffs with advice on the steps that needed to be taken to exercise the options validly. The plaintiffs instructed Mr Shtein at Bartier Perry to provide that advice because the plaintiffs were concerned that Mr Smith may not have been in a position to provide impartial advice because he was an investor in one of the Partnerships. 285 Mr Smith's role from February 1999 to October 1999 varied from his initial instructions to provide advice on the default notice; to negotiating directly with Mr Reid of DTAL in trying to reach a commercial settlement for the Partnerships and DTAL; to preparing documentation for assignment at the time it was planned to assign corporate investors rights to companies in Mauritius; to preparing the notices to exercise the option. I do not accept that the ambit of Harris & Co's retainer can be properly measured by the statements made by Ms Rowe in her Observations in the Brief to Mr Walker. Although it is true that Mr Smith did not correct the Observations when it referred to his role as advising the clients on the options, I do not accept that this was his role at the time of the exercise of the Freerider Option. Mr Simms was the plaintiffs' solicitor and he attended various meetings and instructed Bartier Perry to provide advice to the plaintiffs on the exercise of the options. It was Mr Shtein who was instructed not only to advise on the options but to prepare the option documentation. It was only when Mr Shtein concluded that he was over burdened with work and would not be able to exercise the options within the required timeframe, that Mr Smith was asked to prepare the documents for the plaintiffs to exercise the option in the Freerider Partnership. 286 The letter from Mr Shtein/Bartier Perry to Mr Smith/Harris & Co on 16 September 1999 confirmed that Mr Smith would be "acting on behalf of" the plaintiffs "in respect of the exercise of the options relating to the FreeRider Partnership". Mr Smith had informed Ms Rowe on 14 September 1999 that he had "just been retained to draft the documents" and was "not offering advice to individual partners". He also informed her that he understood that "all the partners" had some form of "separate legal and/or accounting advice". It is also clear that at this time Mr Smith understood that Ms Rowe would review the documents that he prepared and although he may have had a different view of the purpose of that review, it was limited to the adequacy of the explanation relating to the calculation in those documents. It was in these circumstances that Mr Smith received the letter from Mr Shtein of 16 September 1999 to act on behalf of the plaintiffs "in respect of the exercise of" the Freerider Options. 287 Harris & Co submitted that where the plaintiffs had gone to Bartier Perry because of a perceived conflict of interest it would not be lightly inferred that Mr Smith's retainer was any wider than the drafting of documents for the exercise of the option. In this regard reliance was placed on the following passage of the judgment of Lightman J in Dean v Allin & Watts [2001] 2 Lloyd's Law Reports 249 at 259:

[418]

In a situation such as the present where (to the knowledge of both parties) a solicitor is retained by one party and there is a conflict of interest between the client and the other party to a transaction, the court should be slow to find that the solicitor had assumed a duty of care to the other party to the transaction, for such an assumption is ordinarily improbable. But the special circumstances of a particular case may require a different conclusion to be reached. 288 I am not satisfied that there are any special circumstances which would impose on Mr Smith/Harris & Co an obligation to provide advice in relation to the steps to be taken to validly exercise the option when the plaintiffs had specifically instructed Mr Shtein to provide that advice because of Mr Smith's perceived conflict of interest. Harris & Co relied upon Imbrahim v Pham [2007] NSWCA 215 (paras [28], [62]-[63], [109]-[110] and [205]) in support of the proposition that Mr Smith did not owe a duty of care to advise the plaintiffs on the matters now complained of or other matters associated with the exercise of the option. The portions in Imbrahim v Pham relied upon by Harris & Co are not really of any assistance. That case was decided on its facts, as this must be. 289 Mr Smith was not advising the individual partners on the legal and/or accounting aspects of the exercise of the options. Mr Smith was preparing the documentation for the Partners. When Mr Shtein, with Mr Simms' approval, instructed Mr Smith to "act for the plaintiffs" I am satisfied that the ambit of Mr Smith's/Harris & Co's retainer was limited to the preparation of the documents in line with his role in respect of the other Partners. He was not instructed to investigate the affairs of the plaintiffs or to enquire as to the compliance with clause 4 of the Option Agreement. The plaintiffs expressly abandoned any such implied instructions when they withdrew their instructions because of Mr Smith's perceived conflict of interest. The peripatetic nature of the plaintiffs' instructions ensured that the complexities of the situation were compounded. 290 The plaintiffs alleged that Harris & Co were in breach of their duty of care to the plaintiffs by failing to deal with the issue that membership of both Partnerships meant that the warranty in 4.1(b) was breached. Harris & Co submitted that Mr Smith only commenced to act for the plaintiffs on the exercise of the Freerider option on 16 September 1999 and was not instructed to provide any advice about rights and obligations associated with the exercise of the option because that advice had already been provided by both Freehills and Bartier Perry. It was submitted that Mr Smith was engaged in very urgent circumstances where Mr Shtein was unable to assist. It was also submitted that the urgency of the situation is a matter to be taken into account when assessing whether a solicitor is negligent. In this regard reliance upon the following portion of Young AJA's judgment in Macidone v Parbery (1994) Aust Torts Rep 81-290 at 61,543:

[420]

However, it is relevant to take into the factual mix when making an assessment as to whether in any particular case a solicitor was negligent, that he was under pressure of time. 291 DTAL had served a Termination Notice in respect of the Freerider Partnership on 7 September 1999 that was to expire 10 working days from that date. The advice given by Mr Walker was that the Freerider Option should be exercised prior to the expiry of the period under the Termination Notice. Although the Notice was dated 7 September 1999 Mr Smith was not instructed until Thursday 16 September 1999 with Notices having to be served by the following Monday 20 September 1999. It has to be remembered that Mr Smith was also completing the documentation including deeds of assignment for a number of other investors. 292 Harris & Co also submitted that had Mr Smith advised that assignment was the only way to avoid the indebtedness problem, a very real question would arise as to whether the plaintiffs would have followed that advice. It was submitted that it was only during the previous week that Mr McLean had retained Bartier Perry to advise him and the plaintiffs in relation to the exercise of the options and had received a copy of Mr Shtein's advice to Mr Brand dated 8 September 1999 advising strongly against assignment. 293 The plaintiffs also submitted that Mr Smith should have been aware by 28 September 1999 that the exercise of the Freerider option on 20 September 1999 might have been invalid after he learned of the possibility of intercompany debt and because releases had been forwarded to him by Mr Shtein. The plaintiffs claim that Mr Smith/Harris & Co breached their duty of care to the plaintiffs by failing to warn them of the possibility of the invalidity of the exercise of the Freerider option. 294 In Bell v Peter Browne & Co (1990) 2 QB 495 Mustill LJ, in agreeing with Nicholls and Beldam LJJ that the appeal should be dismissed, said at 512-3: Certainly, a solicitor may have a continuing retainer from his client, and no doubt there are retainers which require the solicitor to be constantly on watch for new sources of potential danger and to take immediate steps to nip them in the bud. … The proposition entails that the defendants have two duties, one express and the other implied. The express duty would be to perform the task for which they were retained and paid, namely to put into effect in a legally appropriate manner the informal arrangement between the plaintiff and his wife. The second duty, implied and presumably gratuitous, and commencing immediately after the last moment when a careful solicitor would have taken the necessary steps to formalise and protect his client's interests in the future proceeds of sale, would be to exercise continuing vigilance to discover any mistake which they, themselves, might have made, and then to busy themselves in putting it right. Evidently this obligation would continue up to, but not beyond, the time when the mistake became irretrievable. I find it impossible to imply such a strange obligation from the mundane facts of the present case; and equally improbable to suppose that if it did exist the obligation would be broken at any time other than the time when the mistake should have been discovered and put right; namely, straightaway. To my mind the solicitors were employed to complete the transaction, and to complete it within the appropriate time. No more than that. 295 To apply Lord Mustill's reasoning to the present facts, there would need to be an implied obligation for Harris & Co to re-check the work it had done at various times until ANH were instructed to commence the litigation. In the absence of any expert evidence as to what a reasonable solicitor would have done, I am of the view that such an obligation does not arise in the circumstances of this case. If Harris & Co were provided with information that should have alerted them to the possibility that the exercise of the option they had effected, or thought they had effected, may be invalid then their obligation was to advise the client at that time of such prospect. The mere fact of Mr Shtein sending the draft release to Mr Smith would not reasonably alert a solicitor in Mr Smith's position to the prospect of a breach of clause 4.1(b) of the Option Agreement, in the circumstances of this case, where dual membership of the Partnerships had been endorsed by the parties. 296 The plaintiffs had chosen to avoid taking legal advice about the exercise of the options from Mr Smith by choosing to instruct Mr Shtein. Mr Shtein had been the adviser to the plaintiffs in relation to the exercise of the options. Mr Smith had stepped into the breach to complete the documentation when Mr Shtein found that he was over burdened with work and would not be able to exercise both options within the allotted timeframe. The plaintiffs instructions were then split and no solicitor was asked to consider the exercise of the options in both Partnerships, removing the likelihood that dual membership would be seen to be a problem. I do not regard it as reasonable to impose an obligation on Mr Smith/Harris & Co to interrogate the affairs of the plaintiffs to work out whether the release that Mr Shtein sent across amounted to a release of a debt, the existence of which would otherwise have rendered the exercise of the Freerider option invalid. 297 Harris & Co's retainer at the time the Freerider option was exercised was to prepare the documents and carry out the physical steps required under clause 2 of the Option Agreement. It did not include an obligation to review the affairs of the plaintiffs, or investigate whether McLean Tecnic was indebted at the time of the exercise of the option such as to be in breach of clause 4.1(b) of the Option Agreement. Harris & Co/Mr Smith understood their role was so limited and I am satisfied that it was entitled to proceed on that basis. The plaintiffs' cases against Harris & Co will be dismissed. Claims Against Bartier Perry 298 Bartier Perry admitted that it accepted instructions from the plaintiffs to advise them on their rights and obligations in relation to the exercise of the options under the Terminal Adapter Partnership and to draft notices of exercise of option in relation to the Terminal Adapter Partnership. Bartier Perry claimed that on 13 September 1999, and at all material times thereafter, Mr Simms represented himself to Bartier Perry to be both the solicitor for the plaintiffs and the agent for the plaintiffs for the purpose of providing instructions to Bartier Perry and receiving advice from Bartier Perry in relation to the exercise of the Terminal Adapter Option. The evidence establishes quite clearly that Mr Simms was acting in these roles. 299 Bartier Perry claimed that its Retainer was subject to the following terms: (a) that it would not act for or advise the plaintiffs in respect of the exercise of the Freerider Option; (b) that it had not examined and would not be required to examine any documentation relating to the Freerider transaction, the plaintiffs' investment in respect of the Freerider intellectual property or the Freerider Option; (c) that it would deliver any Freerider documentation that had been supplied to Bartier Perry by Mr Simms to Harris & Co without reading or reviewing it or retaining any copies thereof; (d) it would not provide any advice to the plaintiffs in respect of the amount of the option fee or other sums payable by the plaintiffs on or prior to the exercise of the Terminal Adapter Option; (e) it would not review any financial calculations or other financial documentation relating to the plaintiffs' participation in the Terminal Adapter Partnership; and (f) it would not provide any advice to the plaintiffs in respect of the amount of any indebtedness of the plaintiffs. 300 Mr Shtein accepted that he was to provide advice to the plaintiffs and that it was his obligation to address the issue of debt owed by McLean Tecnic. He said that he prepared the Deed of Release as a precaution to effectively close off the possibility of any indebtedness (tr 475). Mr McClintock cross-examined Mr Shtein to suggest to him that documentary material that he had at the time of the exercise of the option would have or should have, alerted him to the fact of indebtedness in McLean Tecnic. The particular letter that Mr McClintock focused upon was a letter from Mr Urwin to Mr Simms dated 24 September 1999 setting out the sums payable by McLean Tecnic, extracted earlier in this judgment. The cross-examination in relation to that letter included to the following (tr 476 - 478):

[474]

Q. The hypothetical option that you refer to was in precisely the same terms as the option in Freerider? A. No, it isn't, it is in similar terms according to this. 309 Mr Shtein did not accept that the only way to achieve a valid exercise of the option was the method contained in paragraph 54 of the plaintiffs' pleading. As Mr Shtein pointed out, the option was not to be in identical terms but in "similar" terms, whatever that may mean in the circumstances of this case. These uncertainties were compounded by the fact that Mr Reid of DTAL had indicated early in 1999 that the investors' options would not be honoured or accepted. 310 Bartier Perry accepted that its retainer was to advise the plaintiffs in relation to the Terminal Adapter option, to draft the notice of the necessary exercise of the option and to cause that notice to be served in New Zealand. The evidence establishes that on 27 September 1999 Mr Shtein was instructed by Mr Simms that the plaintiffs' payments were "up to date". It was submitted that Bartier Perry did not have a duty to go behind those instructions, still less to review the advice it had been given by Freehills in relation to the timing of the exercise of the Freerider option or to check the work that had been done by Harris & Co. 311 It was submitted that Bartier Perry specifically declined to act for the plaintiffs in relation to the Freerider option because Mr Shtein did not have time to properly consider the documents. It was submitted that the evidence establishes that Mr Simms accepted this limitation on Bartier Perry's retainer. Emphasis was placed on the fact that Bartier Perry was not responsible for the provision of financial information. That was left to Mr Simms and Mr Bali in carrying out the due diligence process. Mr Bali was the accountant who was responsible for the instructions to Mr Shtein that there would be no indebtedness at the time the Terminal Adapter option was exercised. 312 The defendants submitted that as at 28 September 1999, McLean Tecnic was in fact indebted to DTSPL in a number of ways with the effect that the exercise of the options would have failed in any event. The purchase Instalment Debt related to monies owed by McLean Tecnic to DTSPL for the payment of the September 1999 quarterly purchase instalment under the Freerider Sale Agreement in the sum of $12,295.95. The Option Fee debt related to monies owed by McLean Tecnic to DTSPL in relation to the payment of the September 1999 Freerider option fees in the sum of $3,597. From time to time, DTSPL paid various amounts (including Option and purchase Instalments to DTAL and DTEL respectively) on behalf of the Partners and then sought to collect those payments from the Partners including McLean Tecnic. 313 On 20 September 1999 DTSPL sent two cheques to KPMG (as collection agent) in payment of the Freerider Instalments Debts and Option Fees. A schedule attached to the covering letter records McLean Tecnic's contributions as $12,295.95 and $3,597 respectively. On 21 September 1999 DTSPL requested reimbursement from McLean Tecnic of those amounts, totalling $15,892.95 on the basis that the amounts were "now due". DTSPL's financial records as at 31 October 1999 showed that it had not been reimbursed and that McLean Tecnic's outstanding Freerider purchase Option Fees for September 1999 amounted to $15,892.95. The debts were ultimately paid on 4 August 2000 by A I McLean. The subscription debt was an amount payable by McLean Tecnic to DTSPL under clause 2.4(b) of the Partnership Agreement in the sum of $42,827. However DTSPL's financial accounts as at October 1999 show that McLean Tecnic had outstanding share capital relating to the September 1999 capital call in the sum of $42,827. It remained unpaid until 23 November 1999. 314 It was submitted that this was a "sticky" debt in the sense that it would have become a debt of McLean Tecnic's Terminal Adapter assignee, in the event that assignments had taken place in the manner now contended for on behalf of the plaintiffs. In that way the existence of the subscription debt defeats not only the exercise of the options, which did in fact take place, but also any exercise of the options which may otherwise have taken place had the plaintiffs' method of exercise of the options been pursued. It was submitted that the subscription debts stick to the assignee in the following way:

[478]

It is, I think, important in the instant case to note that it is not a case of the giving of wrong and negligent advice (where the breach of contract necessarily occurs at a fixed point of time) but of simple non-feasance. If one were to seek to write out in longhand the obligations which Mr. Aymere Stubbs senior assumed when he engaged to act in the matter of the grant of the option, they were (1) to draw and have completed a proper and enforceable option agreement which would bind the parties, (2) to take such steps as were necessary and practicable to ensure that it was binding on the land into whosesoever hands it might come before any third party acquired a legal estate, and (3) to carry out his work with the care and skill which a normally competent practitioner would bring to it. 317 Mr Kelly submitted that the plaintiffs' case is to the opposite effect. It is that the option should not have been exercised but instead interests should have been assigned so that some other option could be exercised. It was submitted that Midland Bank Trust Co Ltd v Hett Stubbs & Kemp has no relevant application because the present is not a case of non-feasance in which the plaintiffs allege that the defendants failed to strictly follow a manner and form provision for the exercise of the option. The plaintiffs' case is that the defendants should not have exercised the options at all, even though they were instructed to do so. What the plaintiffs allege the defendants should have done was to advise the plaintiffs to novate their rights and obligations to a newly formed wholly owned subsidiary and cause those companies to exercise the options which arose under the successor option agreements. 318 Bartier Perry criticised the plaintiffs for failing to lead any evidence about the practice of solicitors, in particular the failure to call any evidence of what advice a reasonably skilful, careful and diligent solicitor would have given the plaintiffs in the complex circumstances which prevailed in September 1999. It was submitted that the plaintiffs have not proved that Bartier Perry, or indeed any of the defendants, gave any negligent advice. It was submitted that the duty of a solicitor is to use reasonable skill, care and diligence in the discharge of his or her retainer not to give "correct" advice or to "ensure" any outcome as a result of his or her advice. 319 Heydon v NRMA Ltd (2000) 51 NSWLR 1, referred to earlier in this judgement, involved an action brought by NRMA against a Queens Counsel and two firms of solicitors. The solicitors were retained to advise on the demutualisation of NRMA, which proposal involved changing the company's status to a company limited by guarantee with a share capital and converting the rights of members into an entitlement to shares in the company. A prospectus was issued and sent to members in August 1994. In October 1994 the Federal Court declared the prospectus to be misleading and deceptive and issued an injunction. The solicitors did further work in preparing a supplementary prospectus. Advice had been taken by the company both from the solicitors and the Queens Counsel. The proposal was abandoned in May 1995 following the decision of the High Court in Gambotto v WCP Ltd (1995) 182 CLR 432. 320 NRMA commenced proceedings against the Queens Counsel and the solicitors alleging breach of contract and negligence. It was claimed, inter alia, that the company should have been advised that Gambotto was on appeal to the High Court and, after special leave was granted, that the appeal had reasonable prospects of success. It was further alleged that advice should have been given that there was a real risk that the High Court decision might adversely impact on the proposal. NRMA claimed that had it been so advised, it would have deferred any decision to proceed and would not have "wasted" expenditure in connection with the proposal. The company succeeded at trial and was awarded damages of $21,193,828 plus interest. 321 The Court of Appeal allowed an appeal against the trial judge's decision. The reasoning varied and I have already referred to passages of Malcolm A-JA's judgment. McPherson A-JA expressed the view that a lawyer does not warrant or guarantee the soundness of his or her opinion but only that the requisite degree of skill and care has been used in arriving at it (at 363). Similarly Ormiston A-JA said that the exercise of due care, skill and due diligence did not require practitioners to invariably give the "right advice" to every question raised for their opinion (at 649). 322 The fact that a solicitor may have erred in construing, or in advising on the construction of the document is unlikely to constitute negligence, so long as the construction favoured by the practitioner was a tenable one. In Dunlop v Woollahra Municipal Council [1982] AC 158 the Council was sued for damages alleged to have been incurred by reason of invalid resolutions in relation to building lines and height restrictions that affected the plaintiff's capacity to develop his property. The Council had relied upon its solicitor's advice in proceeding to pass the relevant resolutions. The Privy Council said at 171-172:

[490]

Before this particular case against the solicitor would have been established, the appellant would have had to prove first, that as a result of the solicitor's failure to give the advice, it lost an opportunity to seek warranties that would have provided it with protection in the events which have happened; secondly, that it would have accepted that advice; thirdly, that it would have required such warranties from the vendors; and fourthly that either the vendors would have agreed to warranties in a form that would have given the appellant a right of action against them in the events which have now happened or, if they had refused to do so, that the appellant would not have signed the contract: see Norwest Refrigeration Services Pty Ltd v Bain Dawes (W.A.) Pty Ltd (1984) 157 CLR 149 at 172 - 173. Even if a negligent failure to advise can be established, a failure to prove these matters does not merely deprive the appellant of an entitlement to limited damages for the loss of the chance of obtaining protective warranties; it means failure to establish the cause of action. 326 In Gore v Montague Mining Pty Limited [2000] FCA 1214, counsel elected not to call the sole director and shareholder of the respondent company to give evidence notwithstanding that he was in court throughout the hearing and no explanation was offered. At [32], the Full Federal Court agreed with the trial Judge's finding that: "In that situation it should be inferred that [the director's] evidence would not have assisted [the company's] case; in particular, his failure to contradict versions of conversations given by [the solicitor] means I should accept those versions, they not being inherently improbable: see Jones v Dunkel (1959) 101 CLR 298. I do so". 327 It was submitted that s 5D(3) of the Act does not excuse the plaintiffs from calling direct evidence from Mr McLean, in relation to other matters of importance, for example, the reason for the incorporation of Orthoptic. It was submitted that in the absence of direct evidence from Mr McLean or Mr Reid, the plaintiffs' claim must fail unless the Court is prepared to draw inferences from other evidence about the actions the plaintiffs and the Digi-Tech companies would have taken. However, it was submitted that the plaintiffs have failed to adduce evidence, or sufficient evidence, for the necessary inferences to be drawn. 328 Mr Shtein recognised the possibility of invalidity of the exercise of options by reason of a breach of clause 4.1(b) of the Option Agreement. He was instructed that at the time of the exercise of the option there was no indebtedness. As I have said he was entitled to accept these instructions and proceed on that basis, but took the extra precautionary step of preparing the Release of any debt. His analysis and advice was a most tenable approach. To my mind, far from acting negligently, Mr Shtein took careful and diligent steps throughout his retainer and acted according to the standards of care and diligence of a solicitor practising in this area in 1999. 329 The plaintiffs' cases against Bartier Perry will be dismissed.

[491]

Freehills 330 Freehills' retainer letter of 19 March 1999, addressed to Mr Urwin as the director of the "Terminal Adapter Partnership" refers to the firm advising "in relation to" the Terminal Adapter Partnership "involvement in arrangements with Digi-Tech Australia". There is no documentary evidence establishing that Freehills was advising individual partners. From time to time representatives of the Partnerships attended meetings both at Freehills and with counsel. Freehills claims that at all times its retainer was limited to advising on issues common to all Partners in the Partnerships. That included the procurement of stamp duty advice and from time to time advice on strategic issues concerning the common interests of the Partners, for instance, the advice that was sought from Mr Walker SC, from Professor Carter, and Mr Jackman. Advice was also sought in respect of the effect of the Termination Notice and whether or not the Sale Agreements could be treated as remaining on foot. 331 In opening the plaintiffs' case against Freehills, Mr McClintock submitted that Freehills was specifically retained to advise the Partners how to bring about the exercise of the options and specifically to advise on the effectiveness or efficacy of the exercise notices (tr 73). Freehills submitted that this statement in opening is broader than the way the plaintiffs pleaded their case against Freehills. The pleaded case against Freehills alleges that on about 16 August 1999 Freehills met with and advised members of the Partnerships and their principals, including Mr McLean, on issues including time, drafting and logistics associated with the exercise of options under the various Investor Option Agreements and compliance with the warranties under those agreements such as to effect a valid option exercise (par 132(d)). The pleaded claim alleges that Freehills liaised with Harris & Co in relation to the preparation of the final form of documentation required to effect the exercise of the options; sought and obtained advice from Mr Walker SC for the purpose of advising the plaintiffs on or about 19 August 1999, including the procedures to be followed in the event that the investors exercised their option rights; in September 1999 prepared a detailed report on the operation of the option agreements including the identification of the warranties which had to be complied with in clause 4 of the Agreements; advised the Partners in the Freerider Partnership and their covenators, including the plaintiffs, that they should exercise their option rights within the ten day working period from 7 September 1999; and advised the Partners, including the plaintiffs, whether the relevant Sale Agreement had to be on foot at the time the options were exercised (par 132). 332 The plaintiffs also claimed that from 14 September 1999 Freehills sought to confine the scope of the retainer in certain respects in that Freehills would not consider any issues relating to the exercise of the options "on behalf of any individual partners" (par 133). This contention recognised the letter of 14 September 1999 and the plaintiffs then alleged that despite the purported confining of the scope of the retainer (par 134):

[516]

HER HONOUR: He has accepted that he was. THE WITNESS: Well, if I may, your Honour, I was about to qualify that answer? HER HONOUR: Yes, Mr Broadley. THE WITNESS: It seems, from this note, that certainly the author, Catherine Rowe, believed that presumably she and I had been told that Kelliher and McLean were the only investors who were members of both partnerships. I don't remember seeing as document, and I haven't seen it recently, I don't think, for whatever reason, so it takes me a little by surprise, but -- MR McCLINTOCK: Q. I didn't mean to take you by surprise. I didn't mean to interrupt you either. If you want to read it -- A. No, I see what it says. I have no recollection of any of that, but if it is true that this contemporaneous document was given to me and I read it, then I would have known what you have just said. Unfortunately, I don't have any recollection of it at all and I don't want to invent. 339 It is not surprising that Mr Broadley would find it difficult to remember whether he was aware of this specific matter, nearly 9 years later, as he sat in the witness box. At the time this file note was made the parties were trying to negotiate a commercial settlement of the dispute with DTAL. The file note does not record any discussion about the dual membership of the Partnerships but rather notes it as a fact. I think it is probable that both Mr Broadley and Ms Rowe were aware that the plaintiffs were members of both Partnerships. That membership did not alert them to the possible breach of clause 4.1 (a) and/or 4.1 (b) of the Option Agreements. 340 The plaintiffs advanced the following propositions in respect of the alleged breach of retainer and breach of duty of care by Freehills: (a) Freehills sought advice from Mr Walker SC, for the purposes of advising the plaintiffs, and did so advise them, on the steps required to validly exercise their option rights under their Option Agreements; (b) Freehills accepted the obligation to advise the Partnerships on issues as may have affected the Partnerships as a whole; (c) among the issues that affected the Partnerships as a whole was the impact, if any, on the exercise of the option rights under the Option Agreements, should any Partner be a member of both Partnerships; it is claimed Freehills simply overlooked this issue; (d) Freehills addressed matters pertaining to individual classes of Partners, such as Toltex and Divome, who had not executed the relevant transaction documents; (e) Freehills accepted that it was part of their obligation, whether under their retainer or as part of their duty of care, to warn their clients of any circumstances which gave rise to a foreseeable risk of economic loss being sustained by those clients, in so far as those matters related to, among other things, the exercise of options by those clients; (f) Freehills advised on 19 September 1999 that the Freerider options should be exercised prior to 21 September 1999; (g) Freehills knew that the Terminal Adapter options would be exercised later, although prior to 30 September 1999; (h) it was within the scope of the Freehills retainer to consider the position of those Partners who were members of both partnerships (being the plaintiffs and Mr Kelliher) as to whether the proposal for the sequential exercise of the option rights gave rise to a foreseeable risk of economic loss, and if so, to advise what steps should be taken to avoid such a risk; (i) Freehills breached that duty; and (j) alternatively on 15 September 1999, Freehills accepted the responsibility to review the manner in which Harris & Co and Bartier Perry were proposing to exercise the Freerider and Terminal Adapter options, before the options were exercised. It was claimed that the plaintiffs relied on Freehills to do this, and were never informed that Freehills did not do so in breach of their duty of care to the plaintiffs. 341 Freehills submitted that at all relevant times the plaintiffs retained and were advised by Peter Simms from PCP in relation to the transactions. It was submitted that commercial advice as to the exercise of the options was provided to the plaintiffs not by Freehills, but by Harris & Co and Bartier Perry. It was submitted that Freehills did not receive instructions from individual investors, specifically the plaintiffs, as to how they should take the steps necessary for each investor to exercise the options. It was submitted that Freehills was entitled to assume that the individuals had received full and proper advice at the time of their investment. Freehills relied upon the communications between PCP and Freehills, in particular the telephone conversation between Mr Simms and Ms Rowe on 9 September 1999, in which Mr Simms advised that the plaintiffs were obtaining independent legal advice concerning the exercise of the options. 342 Freehills submitted that the claims against it rest on a number of misconceptions about its role in the transaction giving rise to the proceedings. The first misconception is that Freehills was retained to act for either of the plaintiffs about their particular circumstances or affairs in relation to the exercise of the options. The second misconception is that Freehills was retained to advise on effecting the exercise of the options. The third misconception is that Freehills was retained to supervise and co-ordinate the exercise of the option agreements. 343 Freehills was retained in the period March to October 1999. It is Freehills' case that its retainer was limited to advising the Partnerships and not the individual Partners. It was submitted that a number of factors support this claim. Firstly, selected representatives of the Partnerships attended conferences with Freehills and Counsel and they were invited to do so as representatives of the Partnerships. Secondly, the advice given, for example in relation to withholding tax, was given to the Partnerships as a whole as an issue of common concern to all Partners and not to individual Partners. Thirdly, reports on conferences were given to the Partnerships as a whole through the selected Partnership representatives. Fourthly, no individual Partner's separate circumstances became the subject of an opinion from counsel during the whole of the retainer period. Fifthly, when asked on occasions to provide advice in relation to and for the benefit of specific partners, for example Mr Brand and Mr Cussens, Freehills declined to do so. It was submitted that Freehills was rightly conscious that to act for an individual on their separate affairs in relation to the Partnerships could lead to a conflict of interest which would require it to cease to act. 344 Freehills emphasised the terms of the telephone conversation between Ms Rowe and Mr Cussens recorded in Ms Rowe's file note as follows:

[520]

Ian Smith said that he understood that Freehills were taking care of the litigation side of things whereas he was undertaking the documentation and other things associated with the exercise of the Investor Options. I confirmed that this was what had been decided at the meeting on Monday 16th. 347 Freehills claimed that Ms Rowe's response to Mr Smith as recorded in this file note was an "affirmation" that Freehills understood the division of functions and further that the division of functions was what had been defined by the clients to Freehills on 16 August 1999 at the meeting involving Mr Urwin and others. 348 Freehills submitted that the discussion of the scope of Freehills' retainer at the meeting of 15 September 1999, and the contents of the letters of 14 September 1999, were nothing more than a formalisation of the scope of retainer that had been agreed and understood since March 1999. It was submitted that the lack of controversy about the contents of the letter of 14 September 1999, in which Freehills refers to the scope of its retainer, suggests that both Harris & Co (Mr Smith) and Bartier Perry (Mr Shtein) accepted that the letter objectively defined the limits of Freehills' retainer and that they were prepared to continue to pursue their own areas of responsibility. 349 I have already found that the suggestion for the notices of exercise of option being "run past Freehills" was for the limited purpose of checking whether there was an adequate explanation in relation to the calculation. The letter of 14 September 1999 made very clear that Freehills did not act for individual parties in considering their particular separate interests and circumstances. Another matter that supports a finding that the Freehills retainer was limited to acting for the Partnerships was the fact that it was not involved in the detail of the preparation of or actual exercise of the option. Indeed at the meeting on 15 September 1999 Mr Urwin reported to the meeting that the Freerider assignments had already been completed and there was an intention to exercise the options the following day. 350 Freehills also points to the discussion between Bartier Perry and Mr Simms when Bartier Perry was retained to exercise the options for the plaintiffs. There is no mention of any role that Freehills were to supervise or co-ordinate any of the work that was done by Bartier Perry. It was Mr Simms who was acting on behalf of the plaintiffs who decided to "sub-contract" the work of the exercise of the option to Bartier Perry. Freehills took no part in that retainer. 351 On 17 September 1999 Mr Smith sent the letter to Freehills that is referred to earlier in this judgment together with Investor Option Notices for ten investors, eight of whom were individual investors and two of whom were corporate investors. No Notices in relation to the plaintiffs were attached to that letter; indeed there was no reference to the plaintiffs or the name McLean in the draft letter that was attached to it. As I have already said the process of sending the Notices to Freehills was for the limited purpose of Ms Rowe looking to see whether they included an adequate explanation of the calculation. 352 The other important aspect of the content of the letter of 17 September 1999 is that nothing was put before Freehills on that occasion which identified assignment or the lack thereof by McLean Tecnic to an assignee company. The complete absence of any mention of the plaintiffs in this letter is significant. The plaintiffs claim that Freehills ought to have known that there would be a breach of clause 4.1(b) of the Option Agreement, alternatively Freehills ought to have known and advised of the risks of indebtedness and the risks of a Court finding the exercise invalid. There was nothing in this correspondence that would have alerted Freehills to the matters pleaded against it. For all Freehills knew the plaintiffs may have been receiving other advice about the exercise of options, in addition to whatever assistance they were receiving from Harris & Co and Mr Simms. Mr Smith accepted in his evidence that he could draw no comfort whatsoever from any advice from Ms Rowe about the selection or otherwise of assignees of the McLean parties (tr 282); Freehills could not advise him about the McLean entities (tr 281); and Ms Rowe was never going to comment upon nominee companies to which the McLean entities may assign or the way in which the plaintiffs were going to exercise their options (tr 282). 353 The letter from Bartier Perry to Freehills on 22 September 1999 suggested that if there was any aspect of the documents that were enclosed that concerned Freehills or they thought affected the anticipated litigation they should contact Bartier Perry. That letter confirmed that Bartier Perry was acting for the plaintiffs. Mr Broadley was absent from the office at the time the letter was received; Ms Rowe had limited recollection of receiving the letter; the late Mr Tappere dealt with the letter on its receipt on 23 September 1999. Mr Tappere left a message for Mr Shtein that there were issues in relation to Freehills' capacity to respond to the letter of 22 September 1999. Mr Tappere's note records that when Mr Shtein returned his call, he advised that Freehills was considering its position and in consequence could not respond in substance to the letter. Mr Shtein's note confirmed that Freehills could not consider the documents until it considered its position in the matter. Freehills did not consider those documents prior to the exercise of the option and no follow up was sought by Bartier Perry. Freehills' retainer ceased on 24 September 1999. Any work performed by Freehills after that was performed in the context of ensuring an efficient transfer of the retainer to ANH. 354 I am satisfied that Freehills were not retained to give individual advice to the plaintiffs. Freehills' retainer was to advise the Partnerships. Its duty of care owed to the plaintiffs was co-extensive with its obligations under its retainer. It did not include a duty to advise the plaintiffs individually; or a duty to supervise and co-ordinate the exercise of the options by Harris & Co and Bartier Perry. 355 It was submitted that the limited nature of Freehills' retainer is significant insofar as the general principle is to be applied that a solicitor when acting for a client does not owe a duty to third parties or to another party to the transaction. In this regard Freehills relied upon the following portion of Gummow J's judgment in Hill v Van Erp (1997) 188 CLR 159 at 236-237 (footnotes omitted):

[521]

In White v Jones the Vice-Chancellor illustrated this basic proposition by contrasting cases such as that before him with various examples. These illustrated such propositions as that the solicitor for the vendor does not normally become subject to a duty of care to the purchaser. The solicitor acting for a party who is engaged in "hostile" civil litigation owes a duty to the client and to the court but normally does not owe any duty to the opponent of the client. Reference might also be made to Sutherland v Public Trustee . The plaintiffs were the step-children of the testator. They had been residuary beneficiaries under his earlier will. He had firmly made up his mind to make a will which excluded them and left his entire estate to his wife who, in the event, predeceased him. Relatives of the testator, other than his step-children, then took on intestacy. The solicitor who drew the will had raised with the testator the possibility of intestacy on the prior death of his wife, but the testator would not countenance inclusion of any gift over. The New Zealand Supreme Court held that there was no duty of care on the part of the solicitor to persons who the testator had deliberately refused himself to nominate. 356 Freehills conceded that while a solicitor may be liable for advice or information given to a non-client where the solicitor is aware that the advice or information will be relied upon by the third party, it must be nevertheless reasonable in the circumstances for that person to so rely: Tepko Pty Ltd v Water Board (2000) 206 CLR 1 at 16-18 par [47]-[49], 23-24 par [75]-[79] and 46 par [139]; Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1. It was submitted that in the present case it was not reasonable for the plaintiffs to rely on advice emanating from Freehills as to the correct exercise of the options, particularly in circumstances where: (a) Freehills did not possess the requisite material personal to the plaintiffs to so advise; (b) Freehills was not being kept informed as to what steps the plaintiffs were taking in attempting to effect the exercise of the options; and (c) other specialists were advising the plaintiffs on the exercise of the options. There is a further important matter upon which Freehills rely. It was submitted that Mr McLean was an experienced businessman who was represented by his own solicitor, Mr Simms, thus further circumscribing Freehills' duty. In this regard reliance was placed on the following passage of the judgment of McPherson A-JA in Heydon v NRMA Ltd at 118 par [363]:

[523]

359 It was submitted that prior to the exercise of the options, the plaintiffs had been expressly warned that they could not have any indebtedness. This was advice given by Mr Shtein, firstly through the copy of the letter to Mr Brand and secondly through the direct advice to the plaintiffs. Indeed the plaintiffs' solicitor Mr Simms advised Mr Shtein that there was no indebtedness. It is also the case that advice had been given by Mr Shtein in respect of the clause 4.1(a) warranty. It is very difficult in those circumstances to understand what more Freehills should have done with the material that they had been given prior to the exercise of the options. 360 Freehills correctly identified that the plaintiffs' cases proceed on the assumption that Freehills failed to perform a duty to provide advice to each investor, specifically the plaintiffs, as to whether the options had been validly exercised bearing in mind the warranties in clause 4.1 of the Option Agreement. Freehills submitted that such advice was never sought from Freehills by either of the plaintiffs. Emphasis was also placed on the fact that Freehills took no active part in drawing up or settling the Notices to Exercise the options or in supervising or co-ordinating that exercise. Further Freehills had no knowledge of the quantum of debts that may have been payable by individual investors in respect of the Partnerships at the time of the exercise of the options. It had no knowledge of the financial affairs or the corporate history of either of the plaintiffs. It had not been furnished with documents permitting it to reliably undertake tasks for which such knowledge would be a prerequisite. To the extent that from time to time Freehills responded to issues raised by individual investors, they were raised as common concerns to all of the investor partners in the partnership and therefore it was appropriate for Freehills to advise on them within its retainer. Additionally Freehills submitted that the plaintiffs did not lose their opportunity to exercise the options by reason of any conduct of Freehills. Freehills' retainer ceased on 24 September 1999 and the option exercise period did not expire until 31 July 2000. 361 Freehills were not retained by the plaintiffs. Freehills' retainer by DTSPL was carried out with care and diligence. Freehills did not agree to supervise the work of Harris & Co or Bartier Perry. Freehills were not instructed to advise the plaintiffs how to ensure the option was exercised validly. The plaintiffs' claim against Freehills will be dismissed. Atanaskovic Hartnell (ANH) 362 ANH's retainer commenced on about 29 September 1999 after the exercise of the plaintiffs' options. The plaintiffs conceded in opening their cases that ANH was not retained in relation to the actual exercise of the option, "to actually do it or advise about it" (tr 107). Mr McClintock submitted that ANH was liable in three ways: (1) ANH specifically agreed to advise in relation to the validity of the exercise of the options (tr 6,92-93); (2) there was an "explicit and oral retainer" to provide advice in relation to the validity of the exercise of the options arising from a disputed conversation between Ms Chang and Mr Shtein on 12 October 1999 (tr 6,94); and (3) it was (tr 6,94):

[527]

It is one thing for counsel to notice some incidental point outside the scope of his brief and draw attention to it. It is quite another thing to impose upon counsel a duty of care to advise on some matter which is beyond the scope of the brief or retainer. 366 It was submitted that this passage is a complete answer to the plaintiffs' claim in respect of ANH's retainer. The express terms of ANH's retainer was set out in letters dated 29 September 1999, 14 October 1999 and 17 December 1999. As those letters make clear ANH was retained by 23 plaintiffs in matter 50169 of 1999 (the Terminal Adapter proceedings) and 33 plaintiffs in matter 50087 of 2000 (the Freerider proceedings) to conduct litigation. It was submitted that ANH was not retained to provide advice about the exercise of the options held by the various investors as that advice had already been given by other solicitors. None of the Investors who retained ANH ever asked Ms Chang to review or add to the work and advice that had been provided by Bartier Perry and Harris & Co on the exercise of the options. 367 It was also submitted that neither Mr McLean nor Mr Simms, who were the only people who ever gave ANH instructions directly on behalf of the plaintiffs, ever asked Ms Chang to review or add to the work and advice provided by Bartier Perry and Harris & Co on the exercise of the options. The fact that ANH was retained by a number of Investors is important when considering the scope of its retainer and what was required to satisfy that retainer. Although the various Investors that retained ANH had some commonality, there were many differences. A litigation committee was formed to instruct ANH and the plaintiffs gave a written authorisation to ANH to accept instructions from that committee. 368 ANH submitted that the underlying transactions the subject of the litigation involved highly commercially sophisticated clients who had each previously obtained separate legal advice in respect of the very matter about which it was then said ANH should advise upon. As with any other commercial contract when construing the terms of ANH's retainer, it is necessary to consider not only the text, but also the surrounding circumstances known to the parties and the purpose and objective of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 par [40]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462 par [22]. The plaintiffs do not contend that they ever instructed ANH to consider whether or not the options had been validly exercised. No express term to that effect is alleged. The plaintiffs attempted to rely upon the words within the retainer letters, "advise you generally", for the purpose of submitting that ANH was retained to consider whether or not the options had been validly exercised and to provide advice thereon. 369 It is appropriate to say something about the practice of solicitors in 1999 and 2000 who were practising as commercial litigators These observations are not based on any evidence that was before me (because, at the risk of repetition, the plaintiff did not call any such evidence), but on matters of practice able to be gleaned from statutes, Practice Notes and the authorities. The conduct of solicitors at that time was regulated by the Legal Profession Act 1987. Under that Act Ms Chang had an obligation not to commence any proceedings in which there was a "claim for damages" unless she had reasonable grounds for believing, on the basis of provable facts and a "reasonably arguable view of the law" that the claim had reasonable prospects of success: s 198L(2). It seems to me that, although strictly speaking, the claim for a declaration in relation to the validity of the exercise of the options did not fall within the definition of "claim for damages" in that section, Ms Chang had a professional obligation not to commence proceedings that had no reasonable prospects of success. 370 In 1999/2000 the practice of the Courts, and thus the practice of the profession, was heavily affected by the need to ensure that commercial litigation was conducted in a cost-effective manner, obviously guided by the dictates of justice. It was during this period that the courts made clear that litigation was to be conducted on the real issues between the parties and that such issues needed to be identified at an early stage. The commercial litigator was required to establish at an early stage, by the process of the pleadings and particulars, what the real issues were between the parties and respond to those issues by the gathering of evidence to prove the cases on the real issues as established. There was a clear obligation on solicitors to expose their clients' cases avoiding any prospect of an "ambush". Practice Note 100 governing commercial litigation in the court in which the Digi-Tech litigation occurred, made this very clear. Later authorities recognized that the "culture" had changed to reflect such a practice: Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116, in particular, per Young CJ in Eq at [45] - [46]. 371 Ms Chang's obligation was to ensure that her clients, the plaintiffs, as well as all the other plaintiffs for whom she acted, were provided with careful and competent advice in the context of the commercial litigious environment in which she was providing legal services. 372 It is accepted by ANH that its retainer required it to consider the defences filed by the defendants (the Digi-Tech parties) in the Digi-Tech litigation. A most important aspect of that matter is that the Digi-Tech parties had asserted that the options had not been validly exercised and had provided reasons for that assertion. None of the reasons referred to the clause 4.1(b) indebtedness point prior to 31 July 2000. It was only when the defence was filed in September 2000, after the Option Period had expired, that the point was identified. As I have already said the claim of invalidity based on a breach of clause 4.1(a) was not raised and was eschewed by Senior Counsel for the Dig-Tech parties in the Court of Appeal in that litigation. 373 It was conceded, appropriately so, that it was an implied term of ANH's retainer that it would exercise reasonable skill and care as solicitors in relation to the matters covered by the retainer. However the plaintiffs allege that it was an implied term of ANH's retainer that it would review the exercise of the option rights under each of the plaintiffs' Option Agreements to determine whether the attempted exercise of those option rights were valid (par 160(c)). The plaintiffs bear the onus of establishing that the term should be implied by meeting the well-known test articulated in BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-283: that it must be reasonable and equitable; it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; it must be so obvious that it goes without saying; it must be capable of clear expression; and it must not contradict any express term of the contract. 374 It was submitted that the proposed term is not necessary to give business efficacy to the contract; the contract is clearly effective without it. It was also submitted that on no view is the proposed implied term so obvious that it goes without saying. If the content of the proposed implied term had been raised with the other fifty Investors who had retained ANH, it is far from obvious that other Investors would have been prepared to pay ANH to conduct specific enquiries into the plaintiffs' position. It was submitted that this is particularly so in circumstances where the plaintiffs now allege that the implied term for which it contends is to investigate matters outside the pleaded and particularised case that was then being conducted in the Digi-Tech litigation. 375 It appears that the plaintiffs allege that, rather than simply accepting that the matter alleged by the Digi-Tech parties in the Digi-Tech litigation was the cause of the invalidity of the exercise of the options, ANH had a brief and a duty to search for any other aspects of the exercise of the option that could conceivably give rise to invalidity. This seems to me to be somewhat absurd in the circumstances of ANH's retainer. It could hardly be said that the implication of the particular term is necessary for the reasonable or effective operation of the retainer in the circumstances of the case. The alleged implied term fails the BP Refinery test. 376 Even if a term were to be implied into the ANH retainer that it was required to review the exercise of the option having regard to the claims made by the Digi-Tech parties in the Digi-Tech litigation, ANH discharged their obligation in this regard. It carefully considered the matters allegedly invalidating the exercise of the options identified by the Digi-Tech parties and formed reasonable or certainly tenable conclusions about them. 377 It was submitted that even if the Court were to conclude that ANH's retainer required it to reconsider the legal advice given to the plaintiffs by other firms about the exercise of the options and to advise the plaintiffs, independently of any claim in the litigation, to re-exercise the options in the way now asserted to be the only way the options had been exercised, there is no evidence that a reasonably competent solicitor in the position of ANH who had been asked to advise the plaintiffs in this way should have concluded prior to 31 July 2000 that the only method of properly exercising the options is the one belatedly suggested by the plaintiff in paragraphs 54(a) and 54(b) of its pleading. It was not suggested to Ms Chang in cross-examination that she should have given advice to re-exercise the options in the way the plaintiffs now say was the only way the options should have been exercised. ANH made the following powerful submission:

[528]

The importance of the failure of the Plaintiffs to lead evidence, including expert evidence, is highlighted by their reliance upon hindsight reasoning, and their failure to lead any evidence whatever to challenge the conclusion the subject of advice from Mr Shtein to the McLean parties in 1999 that there was a likely breach of the Corporations Act involved in any assignment by McLean Tecnic to a 'cleanskin' company (a fundamental step in the Plaintiffs' suggested method of exercise). If the 'only' method by which the options could have been exercised was not on the evidence available to these Plaintiffs without breach of the law or an unacceptable risk of such breach, then it was not a breach to fail to advise that this course be followed. Any duty owed in contract (or tort) by the Fourth Defendant to advise the McLean parties did not extend to proffering advice that would involve the McLean parties in a breach of the Corporations Law in force at the relevant time. 378 Ms Chang conducted the investigations she considered to be necessary for the purposes for which she had been retained, namely to commence litigation against the Digi-Tech parties. ANH relied heavily on the fact that the basis on which the exercise of the options was found to be invalid did not form part of the claim until after the option period had expired. Emphasis was placed on the function of pleadings stating with sufficient clarity the case that must be met: Banque Commerciale SA (in Liq) v Akhil Holdings Ltd (1990) 169 CLR 279 at 286. It was submitted that pleadings serve to ensure the basic requirements of procedural fairness and to define the issues for decision. By informing the scope of material relevant to both pre-trial preparation and the conduct of the trial itself, particulars are intended to reduce costs by assisting the parties to avoid incurring expense in preparing to meet issues that may never be put. It was submitted, and I accept the submission, that ANH properly considered the pleadings and particulars and responded to the case it had to meet. 379 ANH submitted that it has taken the plaintiffs' legal representatives many years to determine that there was only one method by which (they say) the options could have been exercised. It was noted that the plaintiffs' present solicitors also acted for the Digi-Tech parties from a time well prior to when ANH was retained. They did not identify what they now contend should have been obvious to Ms Chang in 1999 until April 2008. 380 It was further submitted that even if the Court were to conclude that ANH's retainer required it to re-consider the legal advice previously given to the plaintiffs by other firms about the exercise of the option, there is no basis on the pleaded case for finding a breach of that retainer. It was submitted that after many years of litigation about the Option Agreements and associated documents, it was only in April 2008 that the plaintiffs asserted for the first time that there is now only one way in which the options could be validly exercised.

[530]

A competent solicitor who had been asked to consider this question at the time would, on the evidence, have advised that what the Plaintiff says is the 'only' method by which the options could have been exercised was not available to these plaintiffs without breach of the Corporations Law or an unacceptable risk of such breach. Any duty owed in contract (or tort) by the Fourth Defendant to advise the McLean Parties did not extend to proffering advice that would involve the McLean Parties in a breach of the Corporations Law in force at the relevant time or an unacceptable risk of such breach. Competent advice given at the time, rather than in hindsight, would have recognised that engaging in the [method] and re-exercising new options, thereby abandoning the option exercises of September 1999 was likely to put the plaintiffs in a worse position than the one they faced between October 1999 and 31 July 2000. 383 ANH, as all other defendants, submitted that the plaintiffs' case fails because of the failure to call expert evidence. In the absence of such evidence the plaintiffs effectively asked the Court to conclude that it was plain and obvious on the face of the Option Agreements that they had not been exercised validly, notwithstanding that: the counter-party to the Digi-Tech litigation was not at that time asserting the grounds of invalidity now relied on by the plaintiffs; at least one of the grounds of invalidity (breach of clause 4.1(a)) now relied on was never picked up by the counter-party to the litigation or by the Court in the Digi-Tech litigation; and it apparently took almost a decade of litigation and consideration for the plaintiffs' legal representatives to conclude that there was but only one means of exercising the options validly. 384 ANH submitted that the Court would not reach the serious conclusion that ANH breached its retainer or failed to act with reasonable care and skill on the basis of an inference that the plaintiffs ask the Court to draw about matters not put to Ms Chang and in the absence of any expert or other evidence supporting such a conclusion. 385 I am of the view that Ms Chang/ANH discharged their duties of care to the plaintiffs appropriately and carefully and acted in accordance with their retainer. Ms Chang carefully reviewed the claims of invalidity made by the Digi-Tech parties and sought appropriate particulars of the claims to enable her to act in this careful and competent manner. It was not part of ANH's retainer or its duty of care during the period up to 31 July 2000, to search for possible forms of invalidity that were not the subject of the litigation and formed no part of any brief or instructions to advise. To impose such a duty or obligation on a commercial litigator in the position in which ANH was placed would be to impose a counsel of perfection inconsistently with the law of professional negligence: Hicks v Roberts (1977) 16 ALR 466 per Barwick CJ at 469; Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 per McHugh J at 586. It would have been inconsistent with the practice of commercial litigators at that time. 386 The plaintiffs' claims against ANH will be dismissed. 387 The plaintiffs' claims having failed against all defendants, there is no occasion to consider the cross-claims. The cross-claims will be dismissed.

Parties

Applicant/Plaintiff:

A. I. McLean Pty Ltd

Respondent/Defendant:

Hayson

Legislation Cited (2)

Corporations Act 2001(Cth)

Trade Practices Act 1974(Cth)

Cases Cited (32)

CITATION : A. I. McLean Pty Ltd v Hayson [2008] NSWSC 927 This decision has been amended. Please see the end of the judgment for a list of the amendments.

Banque Commerciale SA (in Liq) v Akhil Holdings Ltd (1990) 169 CLR 279 Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1 Bell v Peter Browne & Co (1990) 2 QB 495 Booksan Pty Ltd v Wehbe [2006] NSWCA 3 Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209 BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Brand v Digi-Tech (Australia) Ltd [2002] NSWSC 416 Chappel v Hart (1998) 195 CLR 232 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Daniels v Anderson (1995) 37 NSWLR 438 Dean v Allin [2001] 2 Lloyd's Law Reports 249 Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184; [2004] NSWCA 58 Dunlop v Woollahra Municipal Council [1982] AC 158 F & D Normoyle Pty Limited v Transfield Pty Limited (2005) 63 NSWLR 502 Gore v Montague Mining Pty Ltd [2000] FCA 1214 Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 CASES CITED : Heydon v NRMA Ltd (2000) 51 NSWLR 1 Hicks v Roberts (1977) 16 ALR 466 Hill v van Erp (1997) 188 CLR 159 Imbrahim v Pham [2007] NSWCA 215 Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430 Macidone v Parbery (1994) Aust Torts Rep 81-290 McLean Tecnic v Digi-Tech [2005] NSWSC 386 Midland Bank Trust v Hett Stubbs & Kemp (1979) 1 Ch 384 Notaras v Sly and Weigall (2005) 12 BPR 23,765 Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 Rosenberg v Percival (2001) 205 CLR 434 Tepko Pty Ltd v Water Board (2000) 206 CLR 1 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 Tonitto v Bassal (1992) 28 NSWLR 564 Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 636 Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 WCW Pty Ltd v Bolster & Co, unreported, FCFCA, 6 January 1993

(1990) 169 CLR 279

(1999) 48 NSWLR 1

(1999) 74 ALJR 209

(1977) 180 CLR 266

(1998) 195 CLR 232

(1991) 24 NSWLR 1

(1995) 37 NSWLR 438

(2004) 62 IPR 184

(2005) 63 NSWLR 502

(2002) 211 CLR 540

(2000) 51 NSWLR 1

(1977) 16 ALR 466