Negligence - duty of care - proximal relationship - reliance on professional advice of person employed by financial adviser.

Trade Practices Act 1974 ss.52, 82

Bennett v. Minister of Community Welfare [1992] HCA 27; (1992) 66 ALJR 550

The Council of the Shire of Sutherland v. Heyman [1985] HCA 41; (1985) 157 CLR 424

Demagogue Pty. Ltd. v. Ramensky [1992] FCA 557; (1992) 110 ALR 608

Natwest Australia Bank Ltd. v. Tricontinental Corporation Limited, Unreported (Supreme Court of Victoria, MacDonald J, 26 July 1993)

Public Trustee's Administrator of the Estate of the Late Peter Saroukas v. Sutherland Shire Council (1992) Aust. Torts Reports 81-149

San Sebastian Proprietary Limited v. Minister Administering the Environmental Planning Assessment Act 1979 [1986] HCA 68; (1986) 162 CLR 340

1. Judgment be entered against the first and second respondents in the sum of $174,564.00.

2. The second respondent pay the costs of the applicants.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

LEE J The applicants who, at the relevant time, carried on business in partnership, ("the partners") seek to recover the amount of the loss or damage they claim to have sustained in consequence of engaging the services of the first respondent ("Bradfield"), a corporation which carried on business as a "financial adviser and management consultant". First, the partners claim relief against Bradfield under s.82 of the Trade Practices Act 1974 ("the Act") alleging that Bradfield's conduct by the acts of the second respondent ("Royce") contravened s.52 of the Act and further claim that under s.75B of the Act Royce was liable as a person knowingly concerned in Bradfield's contravention of the Act. It was also said that Royce, in trade or commerce, engaged in conduct which contravened s.10 of the Fair Trading Act 1987 (W.A.) and that Royce was liable to the partners under s.79 of that Act. The conduct and circumstances said to constitute a contravention by Royce of s.10 of that Act were the acts of Royce on behalf of Bradfield.

2. Second, the partners claim that each of Bradfield and Royce is severally liable to the partners in negligence for advice supplied to the partners by Royce on Bradfield's behalf.

3. Bradfield did not file an appearance and took no part in the proceeding. Royce defended the application.

4. The partners commenced business in partnership at Onslow in the north of the State in or about 1988. In about March 1989 Sweetman, on behalf of the partners, contracted to supply services to the principal contractor engaged to build an oil production plant on Thevenard Island off the coast from Onslow. Sweetman had no trade or professional qualifications but, by experience, had developed the skills of a mechanic. The contract was completed in December 1989 and was a very profitable venture for the partners.

5. At about the time the partnership undertook that contract Sweetman engaged Royce, who carried on business as a chartered accountant, to provide accounting services to the partnership. Between 1978 and 1986 Royce had practised as an accountant at Karratha, a town north of Onslow. He had continued to provide his services to clients in the north-west of the State when he left Karratha and returned to Perth in 1986. Royce made periodical visits to the region to receive instructions and advise clients. Royce instructed the partners how to keep appropriate books of account and provided general accounting advice in respect of the running of the partnership business. Royce also offered to provide advice on "income tax planning".

6. For the year ended 30 June 1989 the net profit shared by the partners was approximately $9,000. The partners had little or no tax to "plan" for in that year but between July 1989 and December 1989 the net profit earned by the business from the Thevenard Island contract exceeded $300,000 and a substantial tax liability for the partners for the income year ended 30 June 1990 was in prospect.

7. In December 1989 Royce ceased practise on his own account. Clients of his business were advised that the practice had been incorporated in the business of "accounting, taxation and financial services" carried on by Bradfield. Royce was a director of Bradfield and held twenty-five per cent of the shares issued by the corporation. In a circular to clients Royce advised Sweetman that clients of Bradfield would have access to a "financial broking" service conducted by Bradfield Financial Services Pty. Ltd. of which Royce was a director and in which he held a twenty-five per cent shareholding.

8. After December 1989 the accounting services formerly provided to Sweetman's business by Royce were provided by Bradfield through Royce.

9. By February 1990 Royce had calculated the net profit earned by the partners' business in the first six months of that financial year and by letter dated 8 February 1990 Royce suggested to the partners some methods for reducing the tax liability that would otherwise accrue. Royce stated that the problem facing the partners was "that to reduce tax you have to spend one dollar to save forty-seven cents in tax". Royce further advised "If you went overboard you could borrow (say) $100,000 to invest in tax advantaged products (Pine Trees; Aquaculture; Fruit Trees etc.) and obtain a 100% write off". Royce advised that a lengthy discussion would be required to explain what he had "put together". At that time the projected tax liability of the partners was approximately $160,000.

10. In March 1990 Sweetman met with Royce at Bradfield's offices in Perth to discuss how to reduce the prospective tax liability. Advice on "financial planning" was provided by one Cronin on behalf of Financial Wisdom Limited, a company associated in some manner with Bradfield. Sweetman was advised to invest in an "insurance bond", borrow ninety per cent of the sum invested on the security of the bond and apply the borrowing to various business outgoings. Sweetman was also advised to invest $15,000 in another "insurance bond" and borrow a sum of $45,000 on the security of that bond and invest that sum in property and equity trusts. Twelve months interest on each loan was to be prepaid and treated as an outgoing of the partners' business deductible from assessable income. Sweetman followed that advice. In his evidence-in-chief Sweetman suggested that he had received this advice from Royce and not from Cronin but in cross-examination it appeared to be conceded that the advice had been provided by Cronin.

11. Between March and May 1990 Royce and Sweetman discussed the use of "tax advantaged schemes" to further reduce the partners' tax liability. The tax schemes considered included cattle raising, vineyards, films and pine plantations.

12. In May 1990 Sweetman obtained Royce's advice on acquiring a service station business at Onslow. Royce travelled to Onslow on 24 May 1990 and discussed the affairs of the partnership with Sweetman. Royce advised Sweetman to establish a family trust, the trustee of which, Basefield Pty. Ltd. ("Basefield"), would acquire and operate the service station. Sweetman followed that advice. At that meeting Royce and Sweetman also discussed tax schemes involving cattle and films. At that time the tax scheme preferred by Royce was a cattle raising project but Royce was awaiting a prospectus to obtain more details of the proposal. Royce suggested a plan to reduce the combined taxable income of the partners to $70,000 by borrowing and expending $200,000 on the cattle project subject to Royce obtaining the prospectus.

13. Several days after that meeting Sweetman asked Royce to look at a film project in selecting an appropriate tax scheme in which the partners could participate before 30 June 1990.

14. On or after 20 June 1990 Royce forwarded a memorandum to Sweetman which stated as follows:

"I need to speak to you urgently re Cattle Project -

NO GO!! (No comment!!)

Will need to put you into an alternative

- WINE (NO GUARANTEE)

OR

- FILMS (106% GUARANTEE)

Documents will need to be couriered to you today

for urgent return."

Perhaps several days thereafter Royce forwarded to Sweetman a memorandum which set out the advantages of a "Film Investment". In that memorandum Royce advised as follows:

"If the Film is not successful then over the next 6

years you will be effectively out of pocket $58,995

(refer 'CASH FLOW' attached)

This I suggest is better than paying tax of

$96,500!

The $58,995 out of pocket does not allow for you

wisely utilising the initial tax saving of $96,500 -

this obviously can generate good profits.

In your situation I genuinely believe you should

consider the film option.

If the Film is successful then 'the sky is the

limit'.

...

I will forward prospectus for signing and URGENT

return today. Please phone Sherril as she will

need to sign upon return."

15. The "Cash Flow" referred to was a schedule which set out the outgoings required to be met and the income to be received as guaranteed distributions from the scheme, presumably from the proceeds of contracts already made for the sale of the completed film.

16. The proposal set out in the memorandum required the partners to borrow $200,000 to invest in the film project. It appeared to be an essential part of the advice provided by Royce that any tax scheme expenditure be made with borrowed funds.

17. At some time after forwarding that memorandum Royce discovered that participation in the film project was not available to the partners. The pressure was then on Royce to find another tax scheme for the partners. By a facsimile transmitted message on 27 June 1990 Royce advised Sweetman as follows:

"YOU MUST THINK WE ARE IDIOTS - WE ARE STARTING TO

FEEL LIKE IDIOTS]

HOWEVER

i) CATTLE PROJECT - NO GO]]

ii) FILMS - NO GO - CANT (sic) GET

FINANCE

iii) WILDFLOWERS - ALL SYSTEMS GO]

FINANCE OK. INFO ATTACHED

HEREON

I have been up to the Factory and have known the

management of the Promoters for some 5 years.

I believe them to be honest, the investment honest

and every expectation of a good return.

I have today invested in it myself] (after much

deliberation)

Accordingly please sign the Power of Attorney and

Application and Fax back to me.

...

For every $10,000 you invest you should receive

$10,950."

18. Royce proposed to the partners that they pay $170,000 to the Manager of Australian Wildflower Trust to acquire "participation interests" from the trustee of the Trust and that $163,000 of the payment be funded by a borrowing from Equus Financial Services Limited ("Equus"). The loan would be for a term of three years. Royce advised that ninety per cent of the $170,000 contributed would be "a deduction".

19. The "INFO ATTACHED" appeared to be an extract of several pages from material published by a promoter of the scheme and included a schedule headed "Projected Returns" which set out a representation of "Cash Outflows" and "Cash Inflows" and projected impact of taxation on an investment of $10,000 of which $9,000 had been met by borrowed funds.

20. The partners acted as advised by Royce and in due course the partners received the benefit of income tax assessments which made payable amounts of income tax that were substantially less than the tax that would have been payable otherwise.

21. In January 1992 the venture Australian Wildflower Trust collapsed. No income was distributed to the holders of "participation interests" in the scheme.

22. The applicants now claim that the conduct of Bradfield, in recommending investment in the scheme, was misleading or deceptive.

23. The use of investment in Australian Wildflower Trust as a tax scheme had been raised by Royce before he recommended such an investment on 27 June 1990. Sweetman said that Royce had recommended that the partners invest in Australian Wildflower Trust at a meeting held in Royce's office in Perth in the first or second week in June 1990. Sweetman said Royce had said it was "a good investment', with "good people behind it" and "a 50% guaranteed return on your investment". Sweetman said that after making those statements Royce referred Sweetman to Cronin and Cronin had endeavoured to explain to Sweetman how Australian Wildflower Trust tax scheme worked. Cronin had used a white board to show the projected returns for the scheme. Sweetman said he was informed that a prospectus for the scheme was not available at that time. Royce was not present when Cronin and Sweetman discussed the scheme.

24. The case for the partners did not rely on any statements made by Cronin on behalf of Bradfield. In their statement of claim the partners pleaded that Sweetman and Royce met at Royce's office in or about the third week in June 1990 and Royce orally represented, inter alia, that Australian Wildflower Trust "was a reliable investment".

25. Sweetman said that when he met with Royce he had been accompanied by an employee, Carruthers. Carruthers gave evidence that he had been present with Sweetman and Royce at Royce's office in Perth in "June or July" 1990. He stated that his recollection was vague and I did not find his evidence to be of much assistance in resolving the cardinal issues of fact.

26. Royce did not recall any meeting with Sweetman in Perth in June 1990. Although, in an answer to an interrogatory administered before trial, Royce agreed that he had met Sweetman in Perth in "the second half of June 1990", his evidence at trial was that he could not recall meeting Sweetman in that month. No explanation was offered by Royce for the different answer given in response to the interrogatory. On the other hand, it was Sweetman's evidence that the meeting took place in the first or second week of June 1990 and that evidence did not match the contention contained in the interrogatory administered on his behalf.

27. Sweetman said that the meeting took place after the prospect of participating in the tax schemes which involved cattle, wine and films had been considered and rejected. The documentary evidence referred to above shows that circumstance did not occur until 27 June 1990. Sweetman agreed that he did not meet Royce in Perth between 27 June 1990 and 30 June 1990.

28. Sweetman's evidence was a reconstruction of events. He did not claim to have a clear recollection and I do not accept that it represents an accurate account.

29. I am satisfied that Australian Wildflower Trust would have been referred to as a possible tax scheme in meetings held between Sweetman and Royce some time before June 1990 and perhaps at a meeting held in early June 1990 but the evidence contained in relevant documents suggests very clearly that Royce had given priority to other schemes and that any discussion of the wildflower scheme by Royce would have been in general terms without a statement upon the reliability of the investment and without a recommendation that it was, therefore, the scheme in which to invest. It was not until urgency arose in late June after other more favoured schemes had fallen away that Australian Wildflower Trust was put forward by Royce to Sweetman as an appropriate tax scheme.

30. It is likely, however, that there were telephone conversations between Royce and Sweetman in addition to the messages transmitted by facsimile in late June 1990, as the need to find a tax scheme became more pressing, and it is probable that Royce made statements in those communications about the prospect of participating in Australian Wildflower Trust.

31. In the absence of any clear evidence of the content of such telephone conversations between Royce and Sweetman in the latter part of June 1990 it could not be concluded that Royce, on behalf of Bradfield, made the oral statements pleaded in the statement of claim as being made at a meeting between Royce and Sweetman held in the third week in June 1990.

32. The conduct of Bradfield to be considered, therefore, is the recommendation to participate in Australian Wildflower Trust contained in the memorandum forwarded to Sweetman on 27 June 1990 and Bradfield's failure to qualify the advice it had provided in relation to the use of that investment as a tax scheme.

33. The question whether Bradfield engaged in conduct in commerce that was misleading falls to be answered by examining the statements made by Royce in that memorandum and by considering whether to avoid Sweetman being misled by those statements Bradfield should have made it known to Sweetman that it had limited knowledge of the worth of the wildflower project and that it had not applied its professional skill to assessing the extent to which there was a risk that no income would be derived to offset the funds expended on the scheme.

34. The statement by Royce that he had "been up to the factory" and had known the "management of the promoters for some 5 years" and his statement that he believed the promoters and the investment to be "honest" and that he had every expectation of a "good return" suggested that Royce had undertaken, at least, some rudimentary investigation of the worth of the project offered for investment.

35. In fact, the "factory" referred to was the property of an agent to be engaged to sell the wildflowers produced by Australian Wildflower Trust and had no relevance to any assessment of the worth of the project. The "management of the promoters" had no connection with, or relevance to, the management or conduct of Australian Wildflower Trust. Royce's statement that he believed the investment to be "honest" suggested that as an experienced accountant he had formed a view upon the feasibility of the project as set out in the prospectus Royce had examined. The prospectus was not forwarded to the partners for their consideration before the investment was recommended.

36. The further statement that "for every $10,000 you invest you should receive $10,950" gave the impression that Bradfield, through Royce, had formed that opinion in relation to the project by the use of his experience and qualifications. In fact, Royce was repeating a forecast made by a promoter of the so-called "product". The statement made by Royce in the memorandum gave no indication that Royce was conveying the view of an unqualified and interested party and presented no disclaimer as to the formation of any opinion by Royce as to the prospect of the distribution of income from Australian Wildflower Trust.

37. Those statements in combination with Bradfield's failure to advise that no investigation had been undertaken to assess the reliability of the promoter's forecast meant that Bradfield did engage in conduct in commerce that was misleading. (See Demagogue Pty. Ltd. v. Ramensky (1992) 110 ALR 607 per Gummow J at pp 616-619.) If Bradfield had advised Sweetman of the limited assessment it had made of the prospects of Australian Wildflower Trust, it is likely that the partners would have been aware that borrowing the sum of $163,000 to expend on "participation interests" in the scheme involved joining a speculative venture and a risk that the partners would be out-of-pocket in a sum substantially greater than the amount that would be payable if the impending tax liability were paid in full.

38. Where conduct said to have occasioned loss consists of a failure to attach appropriate qualifications to advice or information supplied, or a failure to disclose that an opinion provided is based on less than reasonable grounds, proof of a causal connection between that conduct and the loss allegedly sustained by reason of that conduct will rest upon evidence which shows, on the balance of probabilities, what steps the aggrieved party would have taken had there been adequate disclosure of those matters. (See: Bennett v. Minister of Community Welfare [1992] HCA 27; (1992) 66 ALJR 550 per Gaudron J at p 554; Public Trustee's Administrator of the Estate of the Late Peter Saroukas v. Sutherland Shire Council (1992) Aust. Torts Reports 81-149 per Gleeson CJ at p 61,141; Natwest Australia Bank Ltd. v. Tricontinental Corporation Limited, Unreported (Supreme Court of Victoria, MacDonald J, 26 July 1993 pp 89-90.)

39. If Sweetman had been informed by Bradfield that the scheme involved the risk that if the venture did not generate income the partners would have to repay the sum borrowed from other sources in an amount greater than the impending tax liability and that the likelihood of the occurrence of that event had not been assessed by Royce, would it have made any difference to the partners' decision to participate in Australian Wildflower Trust in the manner suggested by Royce?

40. Sweetman answered in the negative when asked in examination-in-chief if he would have invested in the wildflower scheme if Royce had not referred the investment to him and "said what he said". In cross-examination Sweetman said that the partners "were hoping to get an income" from the scheme and not just a tax benefit. He said "it is all part of the package but it wasn't a matter of throwing money away". In re-examination he was asked -

"If you had known in June of 1990 that there was a

significant risk that the venture would fail and

you would get nothing back what would your attitude

have been to the investment?"

...

"There would have had to have been another way around

it. There would have had to have been something

else - $170,000 - you couldn't risk that sort of

money - not in my position."

But the whole tenor of Sweetman's evidence was that something had to be done "to get rid of the tax problem". I have no doubt that had Sweetman been advised on 27 June 1990 that investment in the wildflower scheme was only as good as the unknown ability of the venture to generate sufficient income for the investors or, in the event of insufficient sales of wildflowers, the unknown ability of the Marketing Manager to pay to the Contractor funds from which a sufficient return could be distributed to investors, the action of the partners would not have altered. The partners would have participated in the scheme to obtain the taxation advantage, being prepared to bear the risk that the scheme would produce no income. Sweetman was desperate to reduce the tax liability of the partners, no other tax scheme was available and, therefore, "another way around it" did not exist. At that time the risk of the venture collapsing would not have been regarded by Sweetman as a reason not to enter the scheme. Sweetman would have regarded that risk as limited given the advantage he attributed, according to his evidence, to the involvement of "Waldecks Nurseries" in Australian Wildflower Trust by the supply of experience and financial strength. I am satisfied that the partners would have considered that no other course was open and that investment in the scheme represented an acceptable risk in the circumstances. Had Sweetman been presented with advice that investment in the wildflower scheme was speculative, the partners would still have made the same commitment to the scheme.

41. I am unable to conclude that misleading conduct by Bradfield as described above was the cause of loss suffered by the partners. It follows that any claim against Royce under s.79 of the Fair Trading Act 1987 (W.A.) must also fail and it is unnecessary to examine the latent issues present in such a pleading, in particular whether it may be said that the acts of a person through which a corporation, in trade or commerce, engages in conduct can be, without more, evidence of that person, in trade or commerce, engaging in conduct. (See: Concrete Constructions (N.S.W.) Pty. Limited v. Nelson [1990] HCA 17; (1990) 169 CLR 594 per Mason CJ, Deane, Dawson, Gaudron JJ at p 604, per Toohey J at p 614.)

42. However, the alternative pleading that Bradfield and Royce each owed a duty of care to the partners, and were liable in negligence for their respective breaches of those duties, has a broader foundation than the pleading of contravention of the Act in this case and the pleading in negligence did not stand or fall with the pleading of misleading conduct. It was not submitted by Royce that a duty of care was not owed by him in the circumstances nor was it submitted that the circumstances described involved a right of action for breach of contractual duty rather than an action in negligence for a breach of duty of care standing outside the contract for the delivery of professional services. (See: Hawkins v. Clayton (1988) 164 CLR 539 per Deane J at pp 582-587). I am satisfied that apart from the duty of care owed by Bradfield, Royce had a continuing duty of care to the partners as clients of Bradfield to provide his professional services in a manner which involved the exercise of diligence and the performance of professional skill reasonable to expect from a person of his experience in his profession in those circumstances. Royce, although employed by Bradfield, maintained a relationship with the partners similar to that existing when Royce was carrying on business on his own account. There was no division amongst several employees of Bradfield of the services provided to the partners. The relationship Bradfield had with the partners was the relationship that Royce had established with those clients.

43. That relationship was proximate in nature in that the partners relied on Royce for the use of his professional skill in delivering advice, in particular in relation to matters of taxation, and Royce was aware of that reliance. The services undertaken to be provided to the partners included advice on the minimization of income tax, on the manner of operation of tax schemes, on the suitability, or otherwise, of particular tax schemes to the partners' circumstances and on the care of financial matters arising from the conduct of the partners' business. The circumstances in which the provision of those services was undertaken included knowledge that the partners, in particular Sweetman, had limited experience in commercial matters and no experience in the manner of operation of tax schemes or in the assessment of the degree of risk involved in participating with borrowed funds in speculative schemes.

44. It was plainly foreseeable that economic harm could be suffered by the partners if the advice supplied to them in such matters did not result from the use of the degree of skill reasonable to expect from a person in that profession with that degree of experience. Therefore, it followed that Royce and Bradfield each owed a duty of care to the partners. (See: Council of the Shire of Sutherland v. Heyman [1985] HCA 41; (1985) 157 CLR 424; San Sebastian Proprietary Limited v. Minister Administering the Environmental Planning Assessment Act 1979 [1986] HCA 68; (1986) 162 CLR 340 at pp 353-355 per Gibbs CJ, Mason, Wilson, Dawson JJ)

45. Pursuant to the duties of care owed by Royce and by Bradfield it was incumbent on Royce and Bradfield to refrain from suggesting tax minimization procedures to the partners unless Bradfield and Royce were satisfied that participation in such a scheme provided a prospect of financial advantage for the partners and, if participation in a tax scheme presented the risk that substantial financial disadvantage could be suffered, to refrain from suggesting participation in such a scheme unless the full extent of the risk had been explained to the partners.

46. In breach of that duty the proposal to invest in Australian Wildflower Trust was put before Sweetman by Royce without assessing what the likelihood was that financial disadvantage could be suffered by the partners if they participated in the scheme. The breach of duty of care involved more than a failure to warn of the possibility of economic harm being suffered by participating in a speculative venture. The breach involved a failure to refrain from making any recommendation to participate in the tax scheme before carrying out the necessary assessment of the extent of the risk involved.

47. According to the prospectus issued for Australian Wildflower Trust a wildflower farm had been established in the wheatbelt area of Western Australia in 1983. It was said that since the establishment of the farm substantial volumes of flowers had been harvested and sold on European and Japanese markets.

48. The prospectus offered "investors the opportunity to carry on the business of growing wildflowers by entering into a Lease and Management Agreement for a specific area ('Lot') of a floriculture farm". For each Lease and Management Agreement in respect of a Lot a sum of $10,000 was payable for lease and management fees. Of that sum a "Contractor" was entitled to receive forthwith $9,000 to pay the fees of the "Project Manager" and "Marketing Manager" for the first year of the scheme. The Lease and Management Agreement was for a term of eight years and after the first year of the scheme the fees and charges of the "Contractor" and of the "Contractor's" delegates, including the "Project Manager" and the "Marketing Manager", were to be met from the proceeds of sale of wildflowers. No income was to be distributed to investors until the completion of the second year of the scheme. In the event that insufficient income was received from the sale of wildflowers for a return to be distributed to investors, the Marketing Manager agreed to pay the Contractor sufficient funds to enable $5,000 per Lot to be distributed to investors.

49. It can be seen that the enterprise would have to trade profitably immediately if the scheme was to continue beyond the first year unless the Marketing Manager was of sufficient financial strength to carry the entire scheme thereafter.

50. In February 1989, April 1989 and June 1989 1,547 Lots had been made available on similar terms under three previous prospectuses. The prospectus stated that no "activity" had been undertaken pursuant to the previous prospectuses and, therefore, no accounts had been prepared. The prospectus did not disclose what part of the wildflower farm established in 1983, and business conducted thereon, was comprised in the 3,047 lots offered under the four prospectuses or whether the investors under the prospectuses would be in competition with the operator of the established farm. The prospectus did not disclose how any business that had been conducted on the wildflower farm had performed since commencement in 1983 and up to and after the issue of the first prospectus in 1989.

51. No enquiries were made by Royce or Bradfield to ascertain whether the wildflower farm had been operated as a profitable enterprise since 1983 and to satisfy themselves that the enterprise proposed in the prospectus would be likely to produce income for the subscribers of funds under the four prospectuses.

52. In adopting the representation made by the promoter of the wildflower scheme as to income to be received by an investor under the scheme Royce and Bradfield appear to have made no enquiry of the promoter as to the foundation for the promoter's predictions.

53. The prospectus stated that no crop insurance would be taken out as the "Manager" of the venture considered the risk to be minimal. In the course of the trial an issue was raised that failure of the venture was due in part to unforeseen events such as damage caused to the first crop by frosts and additional costs incurred in marketing the wildflowers. However, the real issue was if Royce and Bradfield had made appropriate enquiries what assessment could they have made of the level of risk to which their clients would be exposed by investing in the venture. The evidence before the Court suggested that neither Royce nor Bradfield could have been satisfied that the risk for the partners of being out-of-pocket substantially more than the amount of the tax benefit to be obtained by subscribing funds to Australian Wildflower Trust would be no higher than a minimal risk.

54. No doubt, with the end of the financial year imminent, Royce felt obliged to present a proposal to the partners having undertaken to advise the partners how they could minimize, by use of "tax planning", what would otherwise be a substantial tax liability. One by one the tax schemes which, upon examination, appeared to Royce to be preferred were not available and by the end of June 1990 Australian Wildflower Trust appeared to be the scheme remaining. Before suggesting to the partners that they borrow $163,000 and apply the borrowed funds to an expenditure in Australian Wildflower Trust, Royce, in providing his professional advice that they act in that way, should have satisfied himself that borrowing that sum and participating in the scheme would not expose the partners to a financial position less favourable than that which would result from paying the amount of income tax that would otherwise be assessed.

55. On the state of knowledge Royce then held Royce could not have recommended to the partners that they undertake the borrowing of the sum of $163,000 for the purpose of applying that sum to Australian Wildflower Trust. The combination of the limited knowledge held by Royce, the failure of Royce and Bradfield to undertake enquiries and the failure to assess the extent to which the partners risked suffering financial harm meant that the recommendation that the partners invest in the scheme was not consistent with observance of the duties of care owed by Royce and Bradfield. Had Bradfield and Royce met the duties of care owed by them expenditure on Australian Wildflower Trust could not have been recommended in the terms set out in the memorandum forwarded to the partners on 27 June 1990. I am satisfied that if the duties of care had not been breached in the manner described, the partners would have been advised that no plan to further reduce tax for that income year could be provided, the wildflower project would not have been put before them and the partners would not have invested in that venture. It follows that the difference between the expenditure incurred on the scheme and the amount of tax that would have been payable otherwise was a loss sustained by the partners which flowed from the negligence of Royce and Bradfield.

56. I now turn to the calculation of the loss sustained by the partners.

57. The financial statements for The Kevin Sweetman Family Trust for the year ended 30 June 1991 show that at that date Basefield was indebted to the partners in the sum of $133,592. It appears from the financial statements for the following year that from 1 July 1991 Basefield discharged that debt by assuming so much of the partners' liability to Equus as was represented by that amount and treated the equivalent proportion of the interest paid to Equus as interest paid by Basefield on a borrowing used to acquire the business and as an outgoing of the business conducted by Basefield.

58. The partners remain liable to Equus for the whole of the sum borrowed and seek to recover that sum as part of the loss suffered, notwithstanding that they have a right to be indemnified in respect of part of that debt. Presumably, Basefield will acknowledge as a debt due to the partners the amount of the benefit received by Basefield by the partners discharging their debt to Equus.

59. Interest was paid to Equus each month between September 1990 and May 1992 pursuant to the terms of the loan. Since May 1992 only one monthly payment of interest has been paid. The partners have sought to recover the whole of the interest paid to Equus including interest paid after 1 July 1991, notwithstanding that 80 per cent of the interest paid from that date was paid by Basefield as an outgoing of the business conducted by Basefield. There was no evidence that the debt due by Basefield to the partners accrued interest before it was discharged by Basefield.

60. It follows that the amount of interest payments sought to be recovered by the partners ($68,419) must be reduced by the amount paid by Basefield ($29,074).

61. Similarly, the calculation of the tax benefit received by the partners must be recalculated for the year ending 30 June 1992. In the calculation provided in evidence the assumption was made that the tax benefit received by Basefield for the interest payments paid by Basefield to Equus was a benefit received by the partners individually and, therefore, that the tax benefit received by the partners in the year ending 30 June 1992 was $9,107. If the tax benefit received by Basefield is excluded from that calculation, the net tax benefit received by the partners for the year ending 30 June 1992 by reason of participation in the wildflower scheme was $584 for Sweetman and $113 for Mrs Sweetman, a total of $697. The total tax benefit received by the partners by reason of participation in the wildflower scheme, therefore, was $79,851.

62. However, the partners must also give credit for the use of the sum gained in tax benefits. To the seven months ending 31 March 1991 the tax benefit in hand ($74,968) exceeded the amounts expended by them ($8,500 deposit, $23,798 interest) by $42,670. For the year ending 31 March 1992 the tax benefit in hand ($42,670 plus $4,186) exceeded the interest expended ($13,891) by $32,965. For the year ending 31 March 1993 the tax benefit in hand ($32,965 plus $697) exceeded the interest paid by the partners ($1,655) by $32,097.

63. A reasonable sum to allow for the opportunity to use that benefit to date would be approximately $7,500.

64. The amount outstanding on the Equus loan to 11 October 1993 was said to be $212,759.18. Since 22 May 1992 interest has been charged at a rate of 24.9 per cent at a daily charge of $111.12. If interest were paid when it fell due the rate of interest charged would be 21.9 per cent. The last interest payment made to Equus was on 8 December 1992 for the payment due on 22 June 1992 and apart from that payment interest has been allowed to accrue.

65. The evidence was sparse as to the reason for the cessation of payments of interest and no evidence was provided by the partners in respect of any attempt to obtain other finance to replace the Equus loan when the payment of interest ceased in 1992. There was no evidence to explain what attempt was made to prevent a higher rate of interest being applied by Equus. It cannot be said to be obvious that participation in the tax scheme was in itself the cause of the partners' inability to avoid incurring interest at the higher rate. The tax benefits obtained by participating in the scheme more than offset the outgoing required to meet interest charges on the sum borrowed. The loss suffered, therefore, should only include interest calculated at the lower rate payable under the agreement, 21.9 per cent.

66. No explanation was offered as to why Basefield did not continue to make regular payments of interest after May 1992 and it must be assumed that if the partners recover the full amount of interest due to Equus since that date Basefield will give a credit in its taxation return for the taxation year ended 30 June 1994 if it has claimed as an outgoing in the taxation year ended 30 June 1993 liability for interest said to have been incurred in that financial year.

67. Having regard to the high rate of interest that has continued to apply throughout, substantially above market rates, the partners, by the date of trial, had had reasonable time in which to mitigate that accruing liability and I consider the calculation of a reasonable sum as the loss of the partners for which Royce and Bradfield should be liable would exclude any interest accruing after 22 November 1993.

68. The sum to be recovered by the partners is as follows:

Amounts expended: $ 8,500 (deposit)

39,345 (interest paid)

Liabilities incurred: 500 (fee to discharge

loan)

163,000 (amount of loan

borrowed from Equus)

50,570 (interest payable to Equus

at 21.9% between 22 June

1992 - 22 November 1993)

261,915

Less: 79,851 (taxation benefit received)

7,500 (use of taxation benefit

received)

$174,564