Australia: Sharp practice is not good practice

In Thiess Pty Ltd (Thiess) v FLSMIDTH Minerals Pty Ltd (formerly FFE Minerals Australia Pty Ltd)1 (FFE), Thynne & Macartney (partner John Moore) successfully conducted a claim by Thiess for the rectification of a side deed based on common mistake.

In ordering the rectification of the side deed as sought by Thiess, the Supreme Court of Queensland made timely observations about the responsibilities of solicitors in marking up amendments to documents during commercial negotiations.

The facts

A dispute arose out of the operation of a major commercial contract which resulted in the commencement of court proceedings. After protracted negotiations extending over several months the parties entered into a settlement deed. Thiess and FFE also entered into a separate side deed the effect of which was the subject of the Supreme Court proceedings.

During the negotiation of the side deed Thiess and FFE were represented by experienced solicitors from national law firms. Thiess and FFE were themselves sophisticated parties with experienced in-house legal counsel.

There were two professional indemnity insurance policies potentially available to FFE to indemnify it against its liability to Thiess in the related court proceedings in which Thiess claimed in excess of $20 million from FFE. The substance of the dispute was the extent to which Thiess' enforcement rights with respect to these two policies of insurance were preserved in the side deed. The first was a policy issued by QBE Insurance (Australia) Limited (QBE) for cover for any one claim limited to $20 million. The second was a follow form policy issued by Liberty Mutual Insurance Company (Liberty) for $40 million for any one claim in excess of the $20 million covered by the QBE policy.

By the side deed it was agreed, in effect, that Thiess would not enforce against FFE any judgement, settlement or order made in connection with the related proceedings, except to the extent that FFE was indemnified by the QBE policy only. Thiess contended this was a mistake and that the common intention, or in the alternative, its intention, was that the limit should be according to the available indemnity under both the QBE and Liberty policies, making in total $60 million of cover. FFE asserted that it, at least, was not mistaken and its subjective intention accorded with the plain meaning of the amended preservation clause which it introduced.

Thiess commenced proceedings against FFE seeking rectification of the side deed on the basis of common mistake or, alternatively, unilateral mistake and other ancillary relief.

During the proceedings both parties adduced extensive evidence of the negotiation and drafting process which resulted in the execution of the side deed.

Various versions of the side deed were exchanged over an extended period. For the first half of the negotiations the draft preservation clause expressly allowed Thiess to recover to the extent that FFE was indemnified under both the QBE and Liberty policies. About mid way through the negotiations and after various drafts of the side deed had already been circulated, FFE's solicitor submitted a further draft of the side deed which made material changes to the operation of the preservation clause. In this further draft the entire preservation clause was underlined, rather than the specific amendments made by FFE's solicitor. The draft side deed was submitted under cover of an email which did not explain or identify the material changes to the side deed and, in particular, the preservation clause.

The effect of the amended preservation clause was to limit Thiess' ability to recover against FFE to the extent that FFE was indemnified by the QBE policy only. At the time of the negotiations the potential claims liability well exceeded the QBE policy limit of $20 million. Accordingly, the proposed amendment to the side deed represented a fundamental change to the previous versions exchanged. Further, the limitation of Thiess' right of recovery to the QBE policy only was at variance with the parties' earlier consensus and with the contractual context in which the parties were operating.

During the proceedings each party called evidence from an independent solicitor as to the proper professional practice required of a solicitor in the process of negotiating and drafting commercial documents and identifying changes thereto. There was a dispute as to whether proper professional practice required a solicitor to identify, by underlining or otherwise identifying, specific changes to previous drafts circulated during negotiations.

Supreme Court says yes to common intention

The court concluded that the common intention of the parties was to preserve Thiess' enforcement rights against both the QBE and Liberty policies and it ordered the side deed to be rectified in the manner necessary to give effect to this intention. It was therefore unnecessary for the court to determine the alternative claims by Thiess.

However the court did observe, in obiter, that the changes proposed by FFE's solicitor to the preservation clause were substantial. By the amended preservation clause, FFE's solicitor "was proposing a markedly different commercial element to the overall settlement."2 In these circumstances, the court considered Thiess' solicitors could reasonably expect their attention to be drawn to the fundamental change by FFE's solicitors to the effect of the side deed.

As the court properly observed in Thiess, professional responsibility mandates that during negotiations, material changes to a commercial document must be specifically identified. This approach is consistent with the readiness of the courts over the past 30 years to impose exacting standards on negotiating parties. It is not unusual that such exacting standards should also be a requirement of professional practice. Thiess is the first case in Australia where this professional practice point came into direct focus and it serves as a timely reminder to practitioners to take care and be diligent in marking up specific changes to documents during negotiations

1 [2010] QSC 006

2 Ibid, para 146

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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