Roach & Ors v Page & Ors

• 20 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION Professional Negligence List

20950/97 Walter Edward Roach & Ors v Brian John Downey Page t/a Freehill Hollingdale Page & Ors

Judgment No.36 - On a proposed approach 1 His Honour: I reserved judgment in this matter on 10 February 2004. Further written submissions were filed on 10 March 2004 (as was anticipated).

The proposed approach 2 On 7 June 2004 (regrettably, four months after I had reserved judgment and three months after the last of the written submissions were received), I thought it necessary to raise a matter with counsel. My associate wrote to counsel for the parties at my request, as follows. Justice Sperling wishes to have further assistance from counsel on the following aspects of the case, probably by written outline and oral submissions, subject to what counsel may say in that regard. The judge has listed the matter for mention only on Friday 12 June [a mistake for Friday 11 June], at 9.00am to decide on the way forward. If that is not convenient, please advise and another date will be set, at, say, 9.00am on any day in the following week. For the purpose of the questions below, the following assumptions should be made: (a) Subject to proof of loss, the defendants are liable to compensate Winnote in damages for loss of an opportunity to exploit the peat deposit as from 1993 resulting from a failure to obtain exclusive rights in relation to the deposit in 1988. (b) No other plaintiff has a case against the defendants. (c) Following "the Groves transaction" in 1993, the deposit was exploited by Colac Peat (Aust), under the control of Groves, until 30 June 1995. That was at a loss for each of the years ended 30 June 1994 and 1995. (d) On 1 July Colac Peat's interest in the deposit was acquired by PAIL. (e) The deposit was exploited by PAIL, under the control of Groves and two others, from 1 July 1995, until 23 June 1996. For each of the years ended 30 June 1995 and 1996, PAIL operated at a loss. (f) On 23 June 1996, PAL acquired the issued shares in PAIL, recorded in the accounts of PAL for the year ended 30 June 1997 as having been in consideration for an issue of shares in PAL to the value of $2,191,606, allocated, by determination of the directors of PAL, as 50 percent to the cost of the shares in PAIL and 50 percent to the cost of acquiring the mining licence. (g) Thereafter, PAL has operated at a loss. (h) From May 1993 to 18 February 1996, the mining licence obtained by Groves was utilised by the above companies until it was transferred from Groves to PAL on the latter date. That was after PAL had paid $258,000 for settlement of a dispute which had prevented earlier transfer of licence. (i) If Winnote had obtained exclusive rights in relation to the deposit in 1988, "the Groves transaction" would have gone through, with the result that the issued shares in Winnote would have been acquired by Groves in February 1993 or thereabouts. Counsel are invited to correct any errors of detail in the foregoing assumptions when submissions are made at a later time. On the foregoing assumptions - (1) Should it be found that, if Winnote had obtained exclusive rights in relation to the deposit in 1998 and Groves had acquired the shares in that company in February 1993, Groves would have caused Winnote to exploit the deposit under his control, rather than utilising Colac Peat (Aust) as a corporate vehicle? (2) Should it then be found that Winnote suffered no loss in the period May 1993 to June 1996 which would not have been suffered in any event if the correct advice had been given by the defendants; and that it would have suffered the losses sustained by Colac Peat (Aust) under Groves' management in those years? (3) Does the evidence disclose the structure of whatever transaction was involved in the transfer of rights in relation to the deposit from Colac Peat (Aust) to PAIL as from 1 July 1995? (4) Should it be found that the only loss suffered by Winnote as at and from 1 July 1995 is whatever benefit (if any) Colac Peat (Aust) received in that transaction, because that is the only benefit Winnote would have received, at and from that time, out of the interest it would have had in relation to the deposit if the correct advice had been given? (5) If so, how is that loss to be assessed on the evidence, if it can be? And must Winnote give credit for losses incurred by Colac Peat in the years ending 30 June 1994 and 1995? (6) Is Winnote entitled to recover $40,000 for loss of the assumed sale to Groves, notwithstanding that the sale would have been a sale of the issued shares in Winnote and notwithstanding that the payment would have been to Roach Industries for the stockpile? (7) Is there any basis for recovery of $20,000 as damages referrable to release of the guarantee bond? (8) Do the foregoing assumptions affect the submissions made in relation to reliance damages. (9) What other implications in relation to the assessment of damages arise from the assumptions referred to above which may be different from or additional to the way submissions have been put to date in relation to damages? 3 I will call the approach conveyed by these questions, as later elaborated by me, "the proposed approach". It potentially limited the plaintiffs' claim to whatever benefit Winnote would have derived from a mining lease following a sale of the company to Mr Groves in early 1993.

Elaboration of the proposed approach and submissions in relation to the approach 4 On Friday 11 June 2004, the matter was mentioned in court. Mr Rares SC, for the plaintiffs, submitted that I should not entertain the proposed approach on the ground that it did not embody a case put by either party at the trial. It seemed to me, in these circumstances, that it would be best to direct the defendants to submit an outline of argument in response to my memorandum which would establish what position they took with regard to the proposed approach. I gave that direction. 5 On 21 June 2004, my associate, at my request, sent to counsel for the parties a note made by me following the mention on 11 June 2004. The body of the note was as follows. (1) The elements of the offer to Groves could have been better expressed in the email sent before the last mention. Perhaps better stated as follows: a) Transfer of the shares in Winnote for $1 each; b) Purchase of the stockpile (the property of Roach Industries) from Roach Industries for $40,000; c) Groves to pay legal expenses. (2) With the benefit of the short discussion that took place in court on the previous occasion, it may be helpful to elaborate the theme for consideration in the following way. On the assumptions specified - a) But for the defendants' negligence, Winnote would have had an interest in the peat deposit and the company would have been sold to Groves (the hypothetical). b) As it was, Winnote had no interest in the deposit, was not sold to Groves and became defunct (the actual). c) The relevant difference between these two situations has then to be identified. It may be as follows. Has the plaintiff established that Winnote would have been better off (and, if so, to what extent) with the interest in the deposit and being controlled by Groves, rather than not having that interest and going defunct? d) That seems to be the same thing as asking whether the interest in the deposit under Groves' management had a value to Winnote (and if so, what value). e) Another way of looking at it may be to ask which of the following questions is the correct one: (i) Did an interest in the deposit as at 1993 have a value at large (and if so, what value) having regard to a range of possible managements? (ii) Did an interest in the peat deposit have a value in 1993 to Winnote (and if so, what value) under the control of Groves and in the events that would then have happened concerning the exploitation or other utilisation of the interest by Winnote? f) The latter question can perhaps be put another way. Assuming Winnote would have had an interest in the deposit in 1993 but for the defendants' negligence, what benefit (if any) would that have been to Winnote, given that Winnote would, by then, have passed into the control of Mr Groves and given other things that would then have occurred as may be inferred from events that actually occurred? g) To say that an interest in the deposit would have been saleable by Winnote in 1993 may not be relevant if Winnote would not have sold any such interest in 1993. h) To say that an interest in the deposit would have been saleable at that or some later time would be relevant if Winnote would have (might have?) sold the interest at that time. The price that would (might?) have been paid at that time may be known from events that actually occurred. 6 On 19 July 2004, a written submission was lodged on behalf of the defendants. It can be summarised as follows:

(1) Assuming the sale to Mr Groves had occurred, it is not possible to decide whether Mr Groves would have conducted the business of exploiting the deposit through Winnote or through Colac Peat. It was said that any one of the following might have occurred. (a) Mr Groves might have allowed Winnote to retain the exclusive rights which it is assumed Winnote would have acquired in relation to the Colac deposit and may have used Winnote to exploit the deposit. (b) Mr Groves might have transferred those rights to himself and used Winnote to exploit the deposit. (c) Mr Groves might have transferred the rights to another company and used Winnote to exploit the deposit. (d) Mr Groves might have transferred the rights to himself or to another company and not have used Winnote to exploit the deposit.

(2) If, however, it were found that the business would have been conducted through Winnote under the mining lease obtained by Mr Groves or its equivalent, Winnote would have suffered the losses in fact suffered by Colac Peat in the years ended 30 June 1994 and 1995.

(3) The evidence does not disclose the structure of the transaction between Colac Peat and PAIL.

(4) Winnote's loss is not whatever benefit Colac Peat received from the transaction with PAIL because it cannot be decided that the business would have been conducted by Mr Groves through Colac Peat rather than through Winnote.

(5) If one equated Winnote with Colac Peat, there is no loss to Winnote.

(6) There could be no claim by Winnote for $40,000 based on the assumed sale to Mr Groves because that would have been paid to Roach Industries for the stockpile, which it owned. That was a modification of position taken in the defendants' written submissions, Breach of duty etc., paragraphs 76, 78(e) and 79.

(7) There could be no claim by Winnote for $20,000 referable to release of the guarantee bond, because (inter alia) there is no evidence that the bond was called up with consequent loss. (Reference was made to the defendants' written submissions (above) at paragraph 17 in that regard.)

(8) The proposed assumptions do not affect the defendant's submissions in relation to reliance damages.

(9) Assuming negligence, Winnote would have obtained exclusive rights to the deposit in 1988 and Mr Groves would have acquired Winnote in February 1993. There is no evidence that Winnote suffered loss (reliance damages apart) as a result of that negligence, irrespective of whether Mr Groves would have operated the business through Winnote or not.

(10) Assuming Winnote obtained such exclusive rights in 1988 and had then been acquired by Mr Groves in February 1993, one could not decide how Mr Groves would have caused Winnote to deal with those rights. (It may be noted, however, that there is evidence of how Mr Groves in fact dealt with the interest in the deposit which which would, on the relevant assumptions, have passed into his management and control.) 7 On 26 July 2004 my associate, at my request, sent counsel a memorandum by me, the body of which was as follows. Having read the defendants' submissions dated 19 July 2004, I think it best to list the matter for mention only, in order to decide the way forward. The matter will be listed for hearing at 9.15 am on Friday 30 July. If that is not convenient to counsel, a different date can be arranged with my associate. I am on notice that the plaintiffs object to my entertaining the approach presently under consideration. However, subject to anything said to the contrary, I think it would be best if the plaintiffs were, at one and the same time, to make any submissions they may wish to make in that regard and any submissions they may wish to make in answer to the defendants' submissions dated 19 July 2004. If the plaintiffs are content to proceed by filing a written submission at this stage and if counsel agree on a timetable for that, there will be no need for the mention and that can be cancelled through my associate. I have in mind that, if the matter proceeds in the manner suggested above, both sides would have the opportunity at a later time of speaking to the written submissions in court. I enclose a note for discussion relating to the defendants' submissions dated 19 July 2004. If counsel for the defendants wish to supplement their written submissions of 19 July 2004 in response to my note before the plaintiffs respond to the defendants' written submissions, counsel should feel free to incorporate that into any agreed programme. 8 The document sent with that memorandum was a note relating to the defendants' written submissions dated 19 July 2004, the body of which read as follows. (1) Of the four scenarios mentioned in paragraph 7 - calling them (a), (b), (c), and (d) - the first three involve a role for Winnote in relation to ownership of the mining licence and a role for Winnote in relation to exploitation of the deposit. (2) In relation to scenario (a), Winnote retains the mining licence and exploits the deposit. The defendants discuss the implications of this assumption in their written submissions of 19 July 2004. (3) In the case of scenarios (b), (c) and (d): (i) Winnote disposes of the licence at the time of the hypothetical Groves transaction in 1993. Is there any reason to think that would have been for significant consideration, in view of that transaction involving the payment of only $1 each for the Winnote shares which includes control of the licence? (ii) Winnote continues to exploit the deposit, under the management of Groves and then Groves and two others, until when and with what results? Is not the answer "without benefit" whenever Winnote would have ceased to exploit the deposit, whether that was on the sale of the business to PAIL on 1 July 1995, on the transfer of the licence to PAL on 18 February 1996 or on the sale of the business to PAL on 23 June 1996. (4) Scenario (d) involves no role for Winnote. And hence no loss? 9 On 29 July 2004, a written submission was lodged on behalf of the plaintiffs. This was directed to the threshold question as to whether I should entertain the proposed approach which I had posed for consideration. The submission may be summarised as follows:

(1) The proposed approach was outside the pleadings.

(2) The proposed approach was outside the case contended for by either side at the hearing.

(3) The plaintiffs' case might have been conducted differently if the proposed approach had been raised by the pleadings.

(4) It was not the function of the trial judge to raise issues of his own motion which were not raised and explored by the parties at the trial.

(5) It was unfairly prejudicial to raise new issues after - and so long after - the hearing was concluded. 10 On 30 July 2004, the matter was mentioned in court. Counsel for the plaintiffs elaborated the plaintiffs' argument that the proposed approach should not be entertained. The points made are summarised as follows:

(1) The plaintiffs' counsel did not know how they would have run the case if they had been on notice of the approach at the hearing. The case may have been run differently. Other decisions might have been made in relation to the adducing of oral and documentary evidence.

(2) To prepare to meet the point now would require a great deal of work by counsel in refamiliarising themselves with their briefs.

(3) Neither side had advanced a case involving the proposed approach. I take this to mean that the plaintiffs had not sought to make a case that, if Winnote had held a mining lease, it would have been sold to Mr Groves in February 1993 and would then have faired better financially than it actually did; and that the defendants had not sought to make a case that there was no loss because, if Winnote had held a mining lease, it would have been sold to Mr Groves in February 1993 and would have faired no better financially than it actually did.

(4) The expense of re-opening the argument was a serious consideration.

(5) Further evidence might be required. 11 On 6 August 2004, a further submission document was lodged on behalf of the defendants. I summarise that submission as follows.

(1) It was part of the defendants' case at the trial that, if Winnote had acquired a mining lease over the Colac deposit, the Groves transaction would have been completed; and the plaintiffs resisted such a finding. Accordingly, it was said, the proposed approach involved no more than following such a finding through to a logical conclusion.

(2) The proposed approach was covered by the pleadings. Attention was drawn to paragraph 12 of the third further amended statement of claim in which the plaintiffs averred that they suffered loss and damage because they were prevented from continuing their peat extraction operation by Mr Groves obtaining a mining licence. That was denied by the first defendants in paragraph 12 of the first defendant's defence to that pleading. A similar allegation was made against the second defendants in paragraph 18 of the plaintiffs' pleading. The second defendants did not admit that allegation in their defence to that pleading (paragraph 7). Accordingly, it was open on the pleadings for the defendants to contend that any loss suffered by the plaintiffs was limited to the consequences of non-completion of the Groves transaction.

(3) A submission that the Groves transaction would have been completed in any event was put by the defendants at the trial in paragraphs 115-171 of the defendants' written submissions dated 4 December 2003. The plaintiffs responded to the submission in the plaintiffs' submissions in reply, paragraphs 44-56.

(4) In these circumstances, the proposed approach was within the pleadings. It was merely an aspect of an issue fought out at the trial being subjected to analysis. That was not unfairly prejudicial to the plaintiffs. Failure to conduct the plaintiffs case in contemplation of such an analysis could only be the result of oversight or tactical decision. And dealing with the proposed approach would not involve a lot of work, nor an unbalanced imposition on one side rather than the other. 12 On 12 August 2004, a further submission document was lodged on behalf of the plaintiffs. It is summarised as follows.

(1) The plaintiffs did not mount a case that Winnote lost the opportunity of exploiting the deposit under Mr Groves (the implication being that it is irrelevant whether exploitation of the deposit by Winnote under Mr Groves' management would have been profitable to Winnote.)

(2) The defendants' argument in relation to the Groves transaction was value evidence, which was said to cap the plaintiffs' damages, an argument which the plaintiffs disputed as a matter of law on the ground that an unaccepted offer cannot establish value.

(3) The proposed approach was different, namely, that Winnote's loss was limited, not to the proceeds of a sale to Mr Groves, but to the return which Winnote would have received from control of the deposit in the events which would then have occurred after such a sale. 13 On 12 August 2004, my associate wrote to counsel for the parties, at my request, conveying my view that any further submissions on the threshold question should be made orally in court. Counsel advised that they did not wish to add anything to what they had written on that question.

Discussion 14 I have reread the relevant parts of the written submissions provided at the conclusion of the trial and the transcript of oral argument presented at that time. 15 In their written submissions, the defendants argued, at that time, for a finding that the Groves transaction would have been completed but for the defendants' negligence (if negligence were found). As developed in oral submissions, at that time, the finding was said to have two consequences. First, it was said to limit the plaintiffs' claim to what would have been the proceeds of the Groves transaction had it been completed. That was said to be $60,000 or $40,000, depending on whether one took the guarantee into account. 16 Secondly, the defendants submitted, at the conclusion of the trial, that the Groves transaction was evidence of the value of the interest Winnote would have obtained in the deposit but for the defendants' negligence (if they were negligent). With other evidence concerning value, the value of that interest was nil or only nominal. 17 In their written submissions at the end of the trial, as developed in oral argument, the plaintiffs resisted a finding that the Groves transaction would have been completed but for the defendants' negligence. They also argued that the Groves transaction was evidence that the deposit was of some value, providing a legal basis (but not the only basis) for their argument that the plaintiffs had lost an opportunity which, on other evidence, was worth some millions of dollars. (This argument was predicated on the defendants' initial position that the proceeds of a completed sale to Mr Groves would, relevantly, have been $60,000 or $40,000.) 18 In the course of the defendants' submissions relating to the proposed approach, the figure of $60,000 or $40,000 was varied to nil in the event that Winnote was the only plaintiff entitled to claim. The sale would have been a sale of the shares in Winnote for $1 each payable to Mr Roach personally and the sale of the stockpile was to Roach Industries' account. The guarantee, it was observed, was never called upon and hence the reference to it in the Groves transaction was irrelevant. Thus, Winnote would have gained nothing from the proceeds of sale of the company had the Groves transaction been completed.

19 Pursuant to the proposed approach, the defendants now wished to advance the additional argument that, if Winnote is the only plaintiff entitled to claim, the plaintiffs are limited to whatever benefit Winnote would have derived from control of the deposit in early 1993 following completion of the Groves transaction. They wished to say that the plaintiffs have failed to make out a claim for more than nominal damages on that approach because it is not shown that Groves would have conducted the peat business through Winnote. And, if he had done so, that would have been at a trading loss to Winnote having regard to the events which in fact occurred under Mr Groves' management. And it is unknown what, if any, benefit Winnote would have derived from disposal of its interest in the deposit when PAIL became the owner of the business. 20 The proposed approach is comprehended by the pleadings, but required to be pleaded pursuant to Pt 15 r 13(2) because it was an approach liable to catch the plaintiffs by surprise. It was not pleaded. It is better, however, to deal with the question of whether the defendants should be permitted to advance the approach as a matter of fairness rather than on the formal level of an application to amend (which would be decided on that basis anyway). 21 The proposed approach was not in fact anticipated. The plaintiffs and the defendants put their respective cases on a more general plain. The plaintiffs' case at the trial was that, but for the defendants' negligence, the plaintiffs would have had control of the deposit as at and from early 1993. The measure of damages propounded was loss to the plaintiffs of the opportunity to exploit the deposit having regard, in particular, to Mr Roach's business acumen. 22 At the trial, the defendants invoked the Groves transaction. Their case was that, but for the defendants' negligence (if they were negligent), the Groves transaction would have been completed. The plaintiffs would thereby have disposed of their interest in the deposit and the damages would be limited to the proceeds of sale, at $60,000 or $40,000. 23 The proceeds of sale were also, according to the defendants, at the trial, some evidence of the value of the deposit, to be received with other evidence going to value, the totality of which, according to the defendants, indicated that the deposit had no value or only a nominal value. 24 The plaintiffs' response, at the trial, was that there would have been no Groves transaction but for the defendants' negligence because the offer to sell to Groves was actuated by sequelae of the defendants' negligence. 25 The plaintiffs also submitted, at the trial, that the dealings with Mr Groves showed that the deposit had a value and that the loss of opportunity to exploit it was to be assessed having regard to the whole of the evidence which, according to the plaintiffs, showed that the opportunity was worth millions of dollars in actuality. 26 So there was a litigated issue as to whether a sale to Mr Groves would have occurred but for the defendants' negligence. However, neither side addressed a particular feature of the Groves transaction, namely, that the contemplated sale was a sale of Winnote with whatever interest the company had in the deposit, as distinct from a sale of Winnote's interest in the deposit as such. In consequence, neither in the running of the case nor in argument at the end of the hearing, did either side contemplate (nor did I) that it might be found that Winnote was the only plaintiff with a claim against the defendants and that a finding that the Groves transaction would have been completed irrespective of the defendants' negligence might mean that Winnote did not lose an opportunity to exploit the resource as a result of the defendants' negligence. Nor was it contemplated by either side (or by me) that, if Winnote did pass, with control of the deposit, out of Mr Roach's control and into that of Mr Groves, Mr Groves might have elected to utilise Winnote's mining lease in some way other than to the benefit of Winnote. 27 It may be that, if the proposed approach had been pleaded or otherwise made known to the plaintiffs, they would have conducted the case differently. In particular, they might have been in a position to adduce further evidence elucidating how Mr Groves would have dealt with Winnote if the transaction had been completed. They might have been able to elucidate what benefit, if any, would have flowed to Winnote when, as seems likely, the business would have been transferred to PAIL. 28 I also take into account that an additional burden would be cast on the plaintiffs if the proposed approach were now allowed, so long after the hearing. 29 In these circumstances, it would not be fair to allow the proposed approach to be advanced.

Result 30 The proposed approach will not be entertained. 31 However, I take two matters from a rereading of the submissions made at the conclusion of the hearing and from the submissions now to hand in relation to the proposed approach. 32 First, the defendants wish now to submit that, if it is found that the Groves transaction would have been completed but for the defendants' negligence, Winnote would have received nothing by way of the proceeds of that sale so that Winnote cannot have suffered a loss as a result of that transaction not having been completed due to the defendants' negligence. 33 I note that the plaintiffs say the defendants should not be permitted to put that submission at this stage. However, it seems to me, as presently advised, that it is a consideration which necessarily arises when one recognises the actual components in the Groves transaction, including that Winnote would have been sold with whatever interest it had in the deposit and that the payment of $40,000 would have been to Roach Industries' account. 34 Assuming Winnote is the only plaintiff with a claim, that would take away the argument that Winnote suffered some loss from the Groves transaction not being completed as a legal basis for the assessment of damages for loss of an opportunity. (I do not mean to suggest that this is necessarily the plaintiffs' only way into damages.) 35 Secondly, if it is found that Mr Roach and Mr Luscombe would have entered into the Groves transaction in any event and that the transaction would have been completed in early 1993 but for the defendants' negligence, Mr Roach would then have had no further role in the affairs of Winnote. 36 The plaintiffs would not then have the argument that, but for the defendants' negligence, management of the business after early 1993 would have been carried out with the benefit of Mr Roach's commercial acumen. That has an obvious implication in relation to the question of whether the deposit or the opportunity to exploit it had a value and, if so, what value. The continuation of Mr Roach's management skills would not be an assumed fact in relation to that enquiry. 37 It would, however, be permissible to recognise the plaintiffs' case that, if managed in a certain way (such as the way it is said Mr Roach would have managed the business), the business outcomes would have been such and such, as it would be to recognise the defendants' case, that, if managed in another way (as, for example, the way the business has in fact been managed), the outcomes would be different. How those considerations affect the ultimate result (if at all) would remain to be resolved in my judgment in the cause. 38 It seems to me, without the benefit of further argument, that the matters mentioned in paragraphs 31 to 36 above are unavoidable and incontrovertible on the assumptions made in the letter to counsel dated 7 June 2004. However, if either party wishes to be heard further in relation to those matters, arrangements will be made. -oOo-

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