Some good news for directors Law Reporter

The NRMA case sees the court adopt a more constrained approach to the duty of care

While the NRMA case (Heydon & Ors v NRMA Ltd & Ors (2001) 19 ACLC 1) might be regarded by some as perhaps peripheral to directors generally, the implications of the case, following the first unsuccessful attempt to demutualise the NRMA organisation, will be seen by many as an important statement from a quite unusually constituted court on questions of negligence.

It will be recalled that in the judgment at first instance (NRMA Ltd & Ors v Heydon & Ors (1999) 17 ACLC 1079) Giles J, in the New South Wales Supreme Court, held that a number of advisers (two law firms and Dyson Heydon QC) were negligent because they had failed to recognise the impact of an appeal in the Gambotto case (Gambotto & Anor v WCP Ltd & Anor (1995) 13 ACLC 342) in advising on the demutualisation of the NRMA organisation. The judge in effect held that the barrister in particular should have advised his client of the potential impact of an appeal in the Gambotto case (at the time that the demutualisation started no leave to appeal had been granted by the High Court) and followed through with advice in relation to that case.

In the period during which Dyson Heydon (and the law firms) brought their appeal against the decision of Giles J a number of interesting developments had occurred. In the first place Dyson Heydon had been appointed as a member of the New South Wales Supreme Court - a move that was regarded by many as controversial but clearly reflected the reputation that he had built up over the years (notwithstanding the decision of Giles J); furthermore, it was felt by the New South Wales Court of Appeal that a truly independent bench could not be "obtained" in dealing with the appeal. Accordingly, a special court of the New South Wales Court of Appeal was established with the appointment as Acting Justices of the Court of Appeal from other States. The specially constituted court was presided over by Justice David Malcolm (the Chief Justice of the Supreme Court of Western Australia) and he was assisted by Justice Bruce McPherson (a Justice of the Queensland Court of Appeal) and Justice William Ormiston (a member of the Victorian Court of Appeal).

In three lengthy judgments (it is always a pity when judges cannot ensure that a single judgment is written - especially where they agree on the result) the court reversed the holdings of Giles J on the question of negligence. The reasons summarising their conclusions that there was no negligence on the part of Dyson Heydon and the law firms can be summarised in the following manner.

(a) No legal duty to advise on the potential development

In general, there is no obligation for counsel or solicitors to obtain transcripts of special leave applications to the High Court. Heydon was not instructed to advise on the likelihood that the special leave application would be successful or any other details of the potential Gambotto appeal to the High Court. Furthermore, Heydon did not assume a responsibility for making such a prediction. Instead, Heydon supplied a view of the law as it was generally understood to be at the time.

"No doubt an element of prediction is often involved in advising as a barrister; but, when a client asks for an opinion on the law, what is ordinarily meant is the law as it is, and not as it might possibly become some 15 months later (per McPherson AJA at [402])."

Abbott Tout (one of the firms of solicitors originally held liable) was entitled to rely upon Heydon's opinion and the unanimous opinion of the Court of Appeal in Gambotto.

(b) Potential development was not reasonably foreseeable

The occurrence and the result of the Gambotto appeal to the High Court was not considered reasonably foreseeable. This finding was reached by assessing the relevant principles of company law at the time of the advice according to a reasonably skilled and careful practitioner.

"The basis for knowing the risk was tenuous, the likelihood of its coming to pass in a relevant way obscure and its application to the proposed scheme likewise fraught with uncertainty (per Ormiston AJA at [656])."

"... it was highly unlikely that competent counsel and solicitors could have forecast a change of principle so wide as to comprehend and affect the resolutions proposed by NRMA to effect its demutualisation scheme (per Ormiston AJA at [625])."

Another relevant factor was that the general practice of the profession at the time of advice did not involve researching special leave applications to the High Court, nor obtaining copies of the transcript of argument on the appeal hearing prior to giving legal advice.

Furthermore, it was not self-evident at the time of advice that such transcripts were readily available to persons who were not directly involved in the appeal itself.

(c) Knowledge of the advisers

Neither Heydon nor the solicitors knew that the special leave had been granted or that there would be an appeal hearing at all prior to the NRMA incurring the relevant expenditure.

(d) Negative implications arising from imposing such a duty

The primary concern was the delays resulting from lawyers' attempts to discharge this duty.

"... [it would] very often impose quite considerable delays in giving advice, frequently with paralysing effects on business and commercial activity that depended on it (per McPherson AJA at [388])."

"The law is constantly being changed, and business activity would soon come to a halt if legal advice had to be deferred until all change had ceased (per McPherson AJA at [390])."

(e) Inconsistency with the approach of the courts

The imposition of such a duty is inconsistent with the approach of the courts. The courts apply the law according to present principles, even when informed of pending legislation which may affect the outcome of proceedings before them if passed.

"Courts of law ... can only act upon the law as it is, and have no right to, and cannot, speculate upon alterations in the law that may be made in the future (Ramsay v Aberfoyle Manufacturing Co (Australia) Pty Ltd (1935) 54 CLR 230, 253 per Starke J)."

I have set out some of these matters, although they apply basically to professional people, because they will create a base against which the duties of directors and other non-professionals who are also required to exercise a standard of care may be measured. It is highly unlikely, as a result of this decision, that the already onerous obligations on directors and others in a position of a fiduciary relationship to shareholders (and others) will be unduly extended.

It is unknown at this time whether special leave to appeal the decision in the NRMA case has been sought from the High Court. It would not surprise if special leave was sought and it would also not surprise if the High Court granted special leave to appeal in light of the significance of the issues that are raised by the NRMA case.

The critical lessons from the decision in so far as directors are concerned is that they will not have to bring to their position skills greater than the skills that are brought to that position by an ordinarily skilled person exercising and professing to have such skills. This was clearly enunciated by the High Court of Australia in an earlier decision of Rogers v Whitaker ((1992) 109 ALR 625). While the Rogers case dealt with a doctor, the following statement from the decision can be applied equally to other professional persons including directors who may regard themselves as being in effect part of a profession.

"The law should recognise that a doctor has a duty to warn a patient of material risk inherent in the proposed treatment; a risk is material if, in the circumstances of the particular case, a reasonable person in the patient's position, if warned of the risk, would be likely to attach significance to it or if the medical practitioner is or should reasonably be aware that the particular patient, if warned of the risk, would be likely to attach significance to it."

So, if shareholders of a company (or the company itself) are warned of risks in the context of an investment the directors are recommending, they will have to measure those risks in the context of the position of the company and the warning that is provided to it. Of course, each case will depend on its own facts and the nature of the issues raised. But the effective result of these cases, in particular the NRMA case, is that we are likely to see (unless there is a decision from the High Court to the contrary) a more conservative approach to some of these issues than has been expected as a result of other decision which have continually raised the spectre of a higher standard of care.

In addition to the Gambotto liability issue (that is whether the lawyers concerned should have followed the fate of the High Court litigation in the Gambotto case) there were also other issues raised on the alleged negligence of the advisers. Were they negligent in failing to advise that there was a risk of an injunction being granted restraining the distribution of the relevant prospectus because the description of the shares to be offered to the policy-holders were described as "free shares"?

That is an issue which was the subject of separate litigation in the Full Federal Court (Fraser & Anor v NRMA Holdings Ltd & Ors (1995) 13 ACLC 132). In that case the Full Federal Court concluded that the prospectus had been misleading because it used the expression "free shares" and failed to make it clear that valuable rights were being given up by the policy-holders in accepting the shares. The use of the expression "free shares" was controversially held to amount to misleading and deceptive conduct.

There was also a further claim that the lawyers had failed to adequately identify the possible disadvantages of the demutualisation proposal and in that sense the prospectus was misleading.

The Court of Appeal found that Heydon was not liable because he had not been instructed to advise in relation to these issues at all. Furthermore, the court held that neither firm of solicitors was liable because it was reasonable for them to reach the view that the use of the term "free shares" was not misleading. Furthermore, the court held that the relevant lawyers were not liable for failing to go into more detail of the disadvantages of the demutualisation scheme. The opinion of the members of the Court of Appeal was that the prospectus contained enough information to enable the members of the NRMA Association to make up their minds on those issues. Accordingly the appeals were upheld. The NRMA has brought a special leave application in the High Court.

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