Lederberger & Anor v Mediterranean Olives Financial Pty Ltd & Ors [2012] VSCA 262 (17 October 2012) : Contract, parties conduct, partnership

October 25, 2012 |

The Court of Appeal in Lederberger & Anor v Mediterranean Olives Financial Pty Ltd & Ors [2012] VSCA 262 considered issues of partnership, a solicitors duty to a client and the identity of parties to a contract.

FACTS

Hirsch Lederburger established Loaders Traders Pty Ltd  in the late 1950s.  In his will he left the third of his business to each of his son Israel,  Samuel and on trust in the estate with income to go to his wife, Mrs Lederberger. In 2000 Mrs Lederberger retained the third party to advise an act for her in proving the will of her late husband and obtain a grant of probate. In 2003 Samuel bought Israel’s share of the business. The will was proven on September 2003 and Mrs Lederberger became executrix  and sole trustee of her husband’s estate [4]. To minimise exposure to the debts of the business a partnership was established in 2003, Loaders Manufacturers and Traders (“Loaders Manufacturers”). Loaders Traders was a bare trustee for the partners of which Mrs Lederberger was one. The primary business activity was importing wholesaling and selling of camping goods[5]. Through Samuel, Loaders Manufacturers entered into a tax effective scheme, the Blue Gum scheme, [9] and the Mediterranean Olives Project [10]. Partners claimed and received reductions in the taxable income in 2006 and 2007 [11].

DECISION

The Honours identified the issues, at [3], as

  1. with whom did the respondents contract
  2. could the respondents rely upon post-contractual conduct to determine the identity of the contracting parties?
  3. if the members of the partnership were the contracting parties, did Samuel Lederberger have actual or ostensible authority to enter into the contracts?
  4. whether the  contracts involved carrying on in the usual way business of the kind carried on by the partnership?
  5. whether the partners had provided authority to enter into the contracts pursuant to powers of attorney?
  6. if Samuel Lederberger had acted without authority, had Mrs Lederberger ratified or impliedly sanctioned the investments?
  7. was the trial judge able to make adverse findings of fact  which were contrary to the facts set out in a witness statement which had  not been the subject of cross examination?
  8. was the third party obliged to advise the widow as to the risks associated with becoming the trustee of her husband’s estate?
  9.  if the third party was breached its duty, was it causative of her liability to the respondents?

Identity & post contractual conduct

The Appellants contended that the trial judge erred in holding that the partners or Mrs Lederberger had entered into the contracts.  While their Honours rejected this ground they undertook a review of the law as to the methodology in determining the identity of a party to a contract and the admissibility of evidence, stating:

  1. Identification of the parties to a contract must be in accordance with the objective theory of contract;  the conclusion of a reasonable person, with the knowledge of the words and actions of the parties communicated to each other, and the knowledge that the parties had of the surrounding circumstances; [19]
  2. there needs to be consideration not only of the text of the documents, but also the surrounding circumstances known to the parties and the purpose and object of the transaction which includes  knowledge of the genesis of the transaction, the background, and the context in which the parties are operating; [19]
  3. post contractual conduct is not admissible on the question of what a contract means as distinct of whether it was formed; [26] & [27]
  4.  Where there is an issue as to whether a particular person was a party to a contract, further questions may arise as to whether it is permissible to have regard to subsequent conduct, as constituting an admission by conduct as to the parties’ rights,[26] or whether inferences may be drawn from such conduct as to the existence of a subsisting contract.[27]

 Ostensible Authority

The second limb of section 9 of the Partnership Act effectively states the common law doctrine of ostensible authority [40].  The court framed the question as being:

in investing in the tax effective agricultural contracts, Samuel Lederberger was carrying on in the usual way business of the kind carried on by the firm. If he was, his mother as trustee of the Estate would then be bound by the terms of the contracts.

 Regarding the applicable principles the Court stated:

  1. a partner has ostensible authority to act as an agent for other partners but that authority is limited to conducting business of a kind usually carried on by the firm; [41]
  2. determining what “business of the kind carried on by the firm” involves an objective consideration of the facts.  It is more general than the business that is actually carried out by the firm but it must come within the scope of the kind of business carried on by the partnership; [42]
  3. even if the act is within the scope of the partnership’s business it will not bind co partners where the partners and mode of conducting the business is so unusual or extraordinary as to the outside his or her authority; [45]
  4. for an act to be usual by a firm it must be usual for that firm to perform even if there is no necessity for that specific act to be undertaken in order to carry on that type of business. [49]

Their Honours found that entering into agricultural tax effective contracts was not the business of a kind undertaken by the partnership.  Even though the transactions were to maximise business profits or reduce tax liabilities that did not render them as carrying on in the usual way the business of the partnership. [56]

Actual authority

Mrs Lederberger’s evidence was that she allowed Samuel to run the business and took no part in its conduct.  No actual authority was given by her to anyone else.  The issue was whether actual authority can be implied by other means [60].  In that context their Honours stated:

  1. actual authority may be implied, in which case extrinsic evidence is admissible to establish the conduct of the parties in the circumstances of the case to determine the nature of the agency relationship; [61]
  2. actual authority is binding as between the company and the agent and also between the company and others whether they are within company or outside; [62]
  3. implied authority can be inferred from the context of financial decisions of great significance to the company whee a principal has deferred decision making to that agent; [63]
  4. an inference that actual authority has been conferred depends upon what has been permitted to happen without demur.  It will not be open from conduct of which the partner was wholly unaware and which she has no reason to suspect or anticipate. [68]

Ratification

The trial judge found that even if Samuel acted without necessary authority Mrs Lederberger had subsequently ratified any unauthorised entry into the contracts.  Their Honours disagreed, stating that while ratification can be inferred from silence or acquiescence the evidence must establish that the principal had full knowledge of all the material circumstances in which the unauthorised transactions were made and thereby consciously sanctioning agents unauthorised act. Silence or acquiescence will not constitute ratification absent proof of knowing except on sufficient to be treated in equity as an assent to what would otherwise by an infringement of rights. [74]

 Mrs Lederberger’s evidence in chief was constituted by her witness statement. Senior counsel at trial had made a forensic decision not to require Mrs Lederberger, then an elderly lady, to attend for cross- examination. Their Honours found that in the Respondents inviting the trial judge to draw inferences from other facts which were inconsistent with her evidence and to draw inferences that she had ratified the contracts Mrs Lederberger was denied any opportunity to respond to any of those matters. [79] Their Honours noted that while a failure to comply with the rule in Browne v Dunn does not preclude the tribunal of fact from relying upon any evidence affected by the breach of the rule, the breach should be taken into account in assessing the evidence on the issues to which the breach relates.  Their Honours stated that “..there is no indication in the reasons for judgment that any allowance was made for these matters. Rather, in drawing the inference of ratification the trial judge attached no or little weight to her unchallenged evidence in chief.”

The trial judge found that Mrs Lederberger’s failure to amend the 2006 trust tax return once she knew the scheme was unsustainable [81].  That was insufficient.  Their Honours held it was not possible to establish from the evidence to establish that she had full knowledge of the partnership’s involvement tax effective scheme and acquiescence to it. [82]

Third party claim

It was not in issue that Mrs Lederberger, an elderly Polish lady with no prior business experience, retained Sterling & Sheink and that it was an implied term of their retainer that they would perform the retainer with due care and responsibility. Sterling & Sheink knew of the facts and circumstances and yet did not advise her  that, if she obtained probate of the will, she would thereby expose herself to personal liability for the debts of the business [84].

The relevant test was section 51 of the Wrongs Act which applies a two part test of causation applies to all claims for damages for negligence regardless of whether the claim is brought in tort, contract, under statute or otherwise. [90]  The appeal was decided on the basis of Sterling Sheinks concession that it owed Mrs Lederberger a duty of care. The court drew a distinction between the concept of foreseeability in the identification of duty  from foreseeability in the determination of causation stating at [97]:

At common law, foreseeability involves an abstract and, in a sense, ‘undemanding test of foreseeability which imports broad considerations of ‘principle and policy’, ‘the totality of the relationship between the parties’ the ‘fact-value complex’ and ‘questions of fairness, policy, practicality, proportion, expense and justice and ultimately, in England although not in terms in Australia, the identification of what is ‘fair, just and reasonable’. With causation, foreseeability directs attention to the ‘Shirt calculus’ and, therefore, ultimately to an analysis which is distinctly more precise and fact specific.  These considerations are in effect now codified in Division 2 of Part X of the Wrongs Act.

Regarding the duty owed by a solicitor to his or her client their Honours stated:

  1. it has long been accepted that a solicitor should make clear to his client the legal effect of a step which the client is proposing to take;[100]
  2. if a solicitor is retained generally to act in a client’s interests in relation to a transaction into which the client is proposing to enter the solicitor is bound to go through the contractual documents and explain to the client in terms he/she is likely to understand the rights and obligations to which it will subject him/her.  That is especially so where the client is inexperienced in the relevant area or the documents are in unusual form; [100]
  3. Even where a client is not lacking in sophistication, but the relationship between the solicitor and the client is one which suggests that the client is reliant on the solicitor for advice as may be required, there is a duty on the solicitor to give that sort of advice and it may arise whether or not the advice is specifically sought; [100]
  4. whether the duty is  confined to warning on the hidden pitfalls and legal obscurities of the transaction in view and does not include advising on its perceived business efficacy depends on the circumstances of the case. Where in the course of performing a retainer a solicitor becomes aware of information which is not confidential and is of potential significance the solicitor is expected to  draw it to the attention of the client and point out its ramifications.[101]

Their Honours found that it was reasonable “..to require that Sterling & Sheink have had in contemplation the risk to Mrs Lederberger of being held personally liable for the debts of the Business and, therefore, they were under a duty to warn her against it.”[105] Their Honours found the factual causation was made out.  [119] While the question became moot as a consequence of the appeal being successful their Honours stated, at [123]

“..it is sufficient for the purposes of this case to say that if we had found that Mrs Lederberger had a liability in respect of the transactions the subject of this proceeding, then she would have been able to recover damages in respect of that liability from Sterling & Sheink because the damage claimed was within the scope of liability of the solicitors having regard to the content of the duty of care owed by them to Mrs Lederberger.”

ISSUE

This broad ranging decision undertook a detailed analysis of actual and ostensible authority in the context of the partnership law.  The analysis made clear that the limits to the authority of a partner, actual or ostensible, to act on behalf of a partnership are circumscribed by the nature of the business of the partnership.  Even then contracts which may broadly relate to the partnership’s business but which are out of the ordinary should not be executed without referring their details back to the partnership.  The decision also makes clear that the scope of a solicitors duty to advise a vulnerable client or where the it is clear that the client is reliant on the advice is broad.  That has very significant implications for legal representatives advising clients in commercial transactions, estate planning and property developments.  There may be a need to look beyond the “black letter” implications of a contract and a need to advise on the quality of the deal or arrangement itself, not just the quality of the legal work that went into it.  The decision is also a salient and abiding lesson in respecting the rule in Browne v Dunn.

 

 

 

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