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Cite as: December 2012 86 (12) LIJ, p.59

Authority to bind partners and whether solicitors owe a duty of care to advise an executrix and trustee of her potential liability as a partner

Lederberger & Anor v Mediterranean Olives Financial Pty Ltd & Ors [2012] VSCA 262 (unreported, 17 October 2012, No S APCI 2011 0106, Nettle and Redlich JJA and Beach AJA).

The defendant, Mrs Gita Lederberger, was sued by four companies (the plaintiffs/respondents) in her capacity as executrix and trustee of the estate of her late husband. The plaintiffs alleged that they had entered into a number of agricultural contracts for tax purposes with a partnership and Mrs Lederberger was sued as a partner in that partnership. (Between the trial and the appeal, Mrs Lederberger died and the appellants, as executors of her estate, were substituted as appellants.)

The Court of Appeal dealt with a number of issues:

With whom did the respondents contract and could they rely upon post-contractual conduct to determine the identity of the contracting parties?

It was argued that, as the application for entry into the tax effective schemes and loan agreements did not refer to the partnership but to a company, Loaders Traders Pty Ltd, the partnership was not party to any agreement with the respondents.

The Court of Appeal agreed with the trial judge that the identification of the parties to a contract must be in accordance with the objective theory of contract. [19] Looked at in its totality, it was clear that the contracts were between the respondents and the members of the partnership who were to obtain the tax benefit.

Tax returns lodged by the partnership after the making of the contracts indicated that the contracts were in fact made with the partnership. Could this conduct be relied upon to establish the identity of those who were party to the contracts? Post-contractual conduct is relevant to determine whether a contact was made but not on the construction of the contract: see generally the judgment of Heydon JA (as he then was) in Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153, 163-4. In Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154, Campbell JA at [59] had left open the question whether post-contractual conduct relevant to the identity of the parties to a contract might be regarded as relevant to the making of a contract rather than the construction of it. The Court of Appeal said of this, at [30]:

“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, or whether inferences may be drawn from such conduct as to the existence of a subsisting contract. As the respondents did not seek to rely upon such arguments at trial or on appeal, we express no view about them”. [endnotes omitted]

Did Mrs Lederberger’s son, Samuel Lederberger, have actual or ostensible authority to enter into the contracts on behalf of the partnership?

The trial judge had found that Samuel has both implied actual authority and ostensible authority to enter into the contracts on behalf of the partnership.

The appellants argued that the decision to enter into a tax effective scheme was not an act for carrying on in the usual way the business of the partnership and nor had Mrs Lederberger authorised the entry into the tax effective schemes. Reference was made to s9 of the Partnership Act 1958 (Vic) which provides:

“Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.”

The Court of Appeal examined the authorities on s9 and particularly “kind of business”. The partnership business was concerned with the import, wholesale and sale of camping goods. The trial judge had concluded that the maximisation of profit through tax minimisation was incidental to this. The Court of Appeal said, at [56]:

“In our opinion the agricultural tax effective contracts were not business of a kind carried on by the Partnership nor could they be regarded as business carried on in the usual way by the Partnership. The fact that the transactions were for the purpose of ‘maximising business profits’ or ‘reducing a tax liability’ did not render them acts for carrying on in the usual way business of the kind carried on by the Partnership. The test is ‘business of the kind carried on by the firm’ in the ‘usual way’. The agricultural contracts did not satisfy that description.”

The Court of Appeal further concluded that Mrs Lederberger had given no actual or implied actual authority to her son Samuel to enter into the contracts. In her evidence by witness statement she said that she had left the running of the business to her sons. She had signed a trust tax return but said that she did not know anything about the tax benefits claimed in it. She had not been cross-examined.

Had Mrs Lederberger ratified the contracts?

The trial judge had held that, even if she had given no authority to her son to enter into the contracts on her behalf, Mrs Lederberger had ratified the contracts through her signature on the tax return and by taking the benefit of the tax deduction.

The Court of Appeal again noted that there had been no cross-examination in relation to Mrs Lederberger’s witness statement. The Court said, at [80]:

“In our view, particularly in the face of her uncontradicted evidence, no inference of authorisation or ratification could be drawn from the fact that Mrs Lederberger signed the 2006 return. We accept the appellants’ submission that there was a paucity of evidence to establish that Mrs Lederberger had knowledge of the contracts. The acts of the accountant and her son, as agent, in relation to the 2007 return could not constitute ratification by Mrs Lederberger, as principal, of Samuel’s unauthorised acts. Moreover, there was no explanation before the trial judge or this court as to how Samuel Lederberger came to sign the Estate’s 2007 return”. [endnote omitted]

Were the solicitors who acted for Mrs Lederberger in relation to becoming the trustee of her late husband’s estate bound to warn her of the risks involved, namely, personal liability for the debts of the business?

The solicitors had been joined as third parties. The Court of Appeal concluded that counsel for the solicitors had conceded the existence of a duty to warn Mrs Lederberger of the risk of becoming trustee and the breach of that duty. This could not be re-opened on appeal. The Court said that, in any event, there was such a duty. At [100]-[101], the Court said:

“Contrary to submissions which were advanced on behalf of [the solicitors], 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. Accordingly, if, as in this case, 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 – here, obtaining probate and consequently accepting appointment qua trustee as a member of the partnership – the solicitor is bound to go through the contractual documents – here, at least the will read in light of the circumstances which were known to obtain – and explain to the client in terms she is likely to understand the rights and obligations to which it will subject her. [Especially is that so where, as here, the client is inexperienced in the relevant area or the documents are in unusual form.] Furthermore, 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 such 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.”

It is sometimes said that the duty is confined to warning on the hidden pitfalls and legal obscurities of the transaction in view and that a solicitor is not required to offer any advice as to its perceived business efficacy. But it depends on the circumstances of the case. [Where, as here, in the course of performing a retainer a solicitor becomes aware of information which is not confidential and is of potential significance, it is to be expected that the solicitor will draw it to the attention of the client and point out its ramifications”.] [endnotes omitted]

Was the negligence of the solicitors causative of Mrs Lederberger’s loss?

The Court of Appeal referred to ss51 and 52 of the Wrongs Act 1958 (Vic) to which counsel for the solicitors had not referred at trial and to the decision of the High Court in Adeels Palace Pty Ltd v Moubarak [2009] HCA 48; (2009) 239 CLR 420.

The Court of Appeal concluded, at [119]:

“In our view, factual causation was made out. We do not think it was open to his Honour to reject Mrs Lederberger’s evidence that if she had been told that she would be personally responsible for debts of the business, she would not have taken out probate. It follows that, but for [the solicitor’s] breach of duty, Mrs Lederberger’s personal assets would not have been put at risk”.

Again, had Mrs Lederberger been cross-examined, the scope of the duty of care might have been confined.

The appeal was allowed. As Mrs Lederberger (and her estate) had no liability to the respondents, the third party claim was dismissed.



PROFESSOR GREG REINHARDT is executive director of the Australasian Institute of Judicial Administration and a member of the Faculty of Law at Monash University, ph 9600 1311, email Gregory.Reinhardt@monash.edu. The numbers in square brackets in the text refer to the paragraph numbers in the judgment. The full version of this judgment can be found at www.austlii.edu.au.

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