Pritchard v DJZ Constructions Pty Ltd

[2012] NSWCA 196

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Pritchard v DJZ Constructions Pty Ltd & Ors; Gilles & Anor v DJZ Constructions Pty Ltd & Ors [2012] NSWCA 196

Hearing dates:

21 and 22 February 2012

Decision date:

28 June 2012

Before:

Bathurst CJ at [1]
Whealy JA at [106]
Barrett JA at [579]

Decision:

1. Each appeal allowed in part.

2. In the event the parties are able to agree on orders to give affect to the conclusions reached in pars [101]-[102] of the Chief Justice's judgment, a draft form of orders should be delivered to the Chief Justice's Associate.

3. In the event the parties are unable to agree on the orders within 14 days, the proceedings are to be remitted to the trial judge for determination of the appropriate orders having regard to pars [101]-[102] of the Chief Justice's judgment.

4. The parties have liberty to file Notices of Motion seeking orders for costs of the appeal within 14 days of the date hereof.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Catchwords:

PROFESSIONS AND TRADES - legal practitioners - professional negligence - breach of retainer - scope of duty - proof of loss or damage - causation - assessment of damages - advocate's immunity.

GUARANTEE AND INDEMNITY - discharge of surety - where security given for guaranteed obligations - whether later covenant affects security so as to discharge guarantors.

Legislation Cited:

- Civil Liability Act 2002 (NSW) - Pt 1A, s 5B, s 5D, s 5E, s 5O, s 34, s 35
- Civil Procedure Act 2005 (NSW) - S 98
- Corporations Act 2001 (Cth) - s 232, s 1305(1)
- Law Reform (Miscellaneous Provisions) Act 1946 (NSW) - s 5
- Trade Practices Act 1974 (Cth)
- Uniform Civil Procedure Rules 2005 (NSW) - Pt 42

Cases Cited:

- Adeels Palace Pty Ltd v Moubarak [2009] HCA 48; 239 CLR 420
- Al-Kandari v J R Brown & Co [1988] QB 665
- Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; 162 CLR 549
- Bennett v Minister of Community Welfare [1992] HCA 27; 176 CLR 408
- Bond v Hongkong Bank of Australia Limited (1991) 25 NSWLR 286
- Capital Brake Service Pty Ltd v Meagher [2003] NSWCA 225
- Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54;174 CLR 64
- Corbett Court Pty Ltd v Quasar Constructions (NSW) Pty Ltd [2008] NSWSC 1163
- Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370
- David v David [2009] NSWCA 8; (2009) Aust Torts Reports 91-993
- DJZ Constructions Pty Ltd v Pritchard [2010] NSWSC 1024
- DJZ Constructions Pty Ltd v Paul Pritchard [2010] NSWSC 1197
- DJZ Constructions Pty Ltd v Paul Pritchard [2010] NSWSC 1472
- Dominic v Riz [2009] NSWCA 216
- D'Orta-Ekenaike v Victoria Legal Aid [2005] HCA 12; 223 CLR 1
- Farrow Mortgage Services Pty Ltd (in liq) v Slade & Nelson (1996) 38 NSWLR 636
- FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 147
- Graham Barclay Oysters Pty Limited v Ryan [2002] HCA 54; 211 CLR 540
- Hall v van der Poel [2009] NSWCA 436
- Hancock v Williams (1942) 42 SR (NSW) 252
- James Hardie & Co Pty Ltd v Wyong Shire Council [2000] NSWCA 107; 48 NSWLR 679
- Heenan v Di Sisto [2008] NSWCA 25
- Heydon v NRMA Ltd [2000] NSWCA 374; 51 NSWLR 1
- Hill v Van Erp [1997] HCA 9; 188 CLR 159
- Holme v Brunskill (1877) 3 QBD 495
- House v R [1936] HCA 40; 55 CLR 499
- Hughes v Western Australian Cricket Association (Inc) (1986) 8 ATPR 40-748
- Integrated Computer Services Pty Ltd v Digital Equipment Corp (Australia) Pty Ltd (1988) 5 BPR 11,110
- James v Surf Road Nominees Pty Ltd [2004] NSWCA 475
- Johnson v Perez [1988] HCA 64; 166 CLR 351
- Keefe v Marks (1989) 16 NSWLR 713
- Knight v FP Special Assets Ltd [1992] HCA 28; 174 CLR 178
- Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; 77 NSWLR 205
- Laresu Pty Ltd v Clark [2010] NSWCA 180; [2010] Aust Torts R 82-068
- Malec v JC Hutton Pty Ltd [1990] HCA 20; 169 CLR 638
- Moy v Pettman Smith [2005] UKHL 7; (2005) 1 WLR 581
- Murphy v Miller [1998] NSWCA 150 (BC9805397)
- Mutual Life & Citizens Assurance Co Ltd v Evatt [1968] HCA 74; 122 CLR 556
- Nikolaou v Papasavas Phillips & Co (No 2) [1989] HCA 11; 166 CLR 394
- Norwest Refrigeration Services Pty Ltd v Bain Dawes (WA) Pty Ltd [1984] HCA 59; 157 CLR 149
- Perre v Apand Pty Ltd [1999] HCA 36; 198 CLR 180
- Polak v Everett (1876) 1 QBD 669
- Port Stephens Council v Theodorakakis [2006] NSWCA 70
- Reinhold v NSW Lotteries Corporation (No 2) [2008] NSWSC 187
- Roads and Traffic Authority (NSW) v Refrigerated Roadways Pty Ltd [2009] NSWCA 263 at [445]; 77 NSWLR 360
- Sellars v Adelaide Petroleum NL [1994] HCA 4; 179 CLR 332
- Strong v Woolworths Ltd [2012] HCA 5; 285 ALR 420
- Sussman and Anor v Symes and Ors (unrep 4 July 1994, McLelland CJ in Eq
- Sydney South West Area Health Service v MD [2009] NSWCA 343
- Sykes v Midland Bank Executor & Trustee Co Ltd [1970] 2 All ER 471; [1971] 1 QB 113
- Tabet v Gett [2010] HCA 12; 240 CLR 537
- Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165
- Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; 165 CLR 108
- Valstar v Silversmith [2009] NSWCA 80
- Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642
- Watkins v De Varda [2003] NSWCA 242
- WCW Pty Ltd v Bolster [1993] FCA (unrep) 06.01.1993
- Wilkinson v Daley [2004] NSWCA 331
- Williams v Frayne (1937) 58 CLR 710
- Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; 216 CLR 515
- Wynn v New South Wales Insurance Ministerial Corporation [1995] HCA 53; 184 CLR 485
- Young v Commissioner of Taxation [2010] NSWSC 288

Texts Cited:

- O'Donovan & Phillips - "The Modern Contract of Guarantee" - English Ed., 2010, p 500
- Rowlatt on Principle and Surety (4th Ed)

Category:

Principal judgment

Parties:

2005/269375
Paul Pritchard t/as Pritchard Law Group (Appellant)
DJZ Constructions Pty Ltd (First Respondent)
Joseph John Gilles (Second Respondent)
Gregory George Eliades (Third Respondent)
David McGovern SC (Fourth Respondent)
Vincent Palmieri (Fifth Respondent)
Palmieri's Developments Pty Ltd (Sixth Respondent)

2005/269375-007
Joseph John Gilles (First Appellant)
Gregory George Eliades (Second Appellant)
DJZ Constructions Pty Ltd (First Respondent)
Paul Pritchard t/as Paul Pritchard Law Group (Second Respondent)
David McGovern SC (Third Respondent)

Representation:

A.J. McInerney, L.T. Livingston (05/269375: Appellant; 05/269375-007: 2nd Respondent)
C.J. Birch SC, M.P. Cleary (05/269375: 1st, 5th & 6th Respondents; 05/269375-007: 1st Respondent)
A. Bell SC, Ms K. Williams (05/269375: 2nd & 3rd Respondents; 05/269375-007: 1st & 2nd Appellants)
S.W. Gibb SC (05/269375: 4th Respondent, 05/269375-007: 3rd Respondent)
Yeldham Price O'Brien Lusk (05/269375: Appellant; 05/269375-007: 2nd Respondent)
Pryor Tzannes & Wallis (05/269375: 1st, 5th & 6th Respondents; 05/269375-007: 1st Respondent)
Sparke Helmore (05/269375: 2nd & 3rd Respondents; 05/269375-007: 1st & 2nd Appellants)
McCabe Terrill (05/269375: 4th Respondent; 05/269375-007: 3rd Respondent)

File Number(s):

2005/269375 2005/269375-007

 Decision under appeal 

Jurisdiction:

9111

Citation:

[2010] NSWSC 1024
[2010] NSWSC 1472

Before:

Schmidt J

File Number(s):

2005/269375

Index

Bathurst CJ	[1]
The initial transaction and the original deed	[2]
The retainer of Mr Pritchard on behalf of DJZ on the original transaction	[7]
The February 2001 deed	[8]
The issues on these appeals arising out of the February 2001 deed	[18]
The August 2003 deed	[22]
The November 2003 sales agreement	[24]
Proceedings against the James guarantors	[26]
Giles Payne and Mr McGovern	[29]
A. The claim against Mr Pritchard arising out of the release of the James guarantors	[51]
1. Did the February 2001 deed operate to release the James guarantors?	[51]
2. Did Mr Pritchard owe a duty of care to warn DJZ of the risk that the entry into the February 2001 deed could have led to the James guarantors being released from liability?	[64]
3. Did Mr Pritchard breach his duty in failing to advise DJZ of the possibility that the February 2001 deed had the effect of releasing the James guarantors?	[73]
4. Causation	[77]
5. Liability in respect of the August 2003 deed	[83]
6. Liability in respect of the November 2003 deed	[84]
7. Damages for the loss of the James guarantees	[85]
8. Other issues	[89]
B. The claims against Mr Pritchard, Giles Payne and Mr McGovern in respect of the costs incurred by DJZ in the claims against the James guarantors	[90]
Other issues	[100]
C. Conclusion	[101]
Orders	[105]
Whealy JA	[106]
The complexity of the litigation	[114]
Parties to the litigation	[118]
Background - a brief statement	[121]
Court of Appeal's decision - factual overview	[142]
The primary judge's reasoning and overview of the facts	[150]
Advocate's immunity	[158]
Causation	[159]
The cross claims and DJZ's case against Giles Payne and McGovern SC	[173]
The case against Giles Payne	[174]
The case against Mr McGovern SC	[182]
Damages	[186]
The various appeals	[198]
Giles Payne's appeal	[201]
Other matters arising on the appeal	[203]
Discussion	[207]
Mr Pritchard	[214]
February 2001 Deed	[223]
Has it been shown that the February 2001 Deed released the James' interests?	[244]
August 2003 Deed	[261]
Causation	[280]
Would DJZ have heeded Mr Pritchard's advice?	[325]
The position of the Christians	[339]
Other issues	[347]
Advocate's immunity	[371]
Cross claim - grounds of appeal	[380]
Mr Pritchard's arguments on damages	[383]
Mr Palmieri and Palmieri Developments' liability to pay costs	[397]
The Giles Payne appeal	[400]
Appeal ground 2 - no encouragement to pursue the James proceedings	[450]
Appeal grounds 3 and 4 - causation	[451]
Appeal ground 5 - apportionment	[461]
Appeal ground 6 - costs of DJZ's claim against Giles Payne	[464]
Appeal ground 7 - costs of Mr Pritchard's cross claim against Giles Payne	[467]
Ground 8 - Mr Pritchard's costs of defending DJZ's claim	[473]
Mr McGovern SC's Notice of Contention	[483]
Mr McGovern's retainer - breach of duty	[502]
Leave to cross appeal	[554]
Damages	[570]
Costs	[575]
Barrett JA	[579]

Judgment

1. BATHURST CJ: The facts of this matter have been set out in detail by Whealy JA and I will not repeat them save to the extent necessary in this judgment.

The initial transaction and the original deed

1. The background of the proceedings is found first in an agreement reached on 1 July 1999 ("the original deed") to facilitate the acquisition of a real estate agency in the Sutherland Shire of Sydney owned by a company, Chris Burke & Co Pty Ltd, in its capacity as trustee of the Burke Unit Trust. The promoters of the venture were a Mr James and a Mr Christian. The vehicle used for the acquisition of the shares in Chris Burke & Co Pty Ltd and the units in the Burke Unit Trust was a company Surf Nominees Pty Ltd ("Surf") as trustee for the Surf Road Unit Trust ( "SRUT").

1. Messrs James and Christian were unable to fund the purchase themselves and, accordingly, obtained three outside investors to the project, D & A Mortimer Pty Ltd ("Mortimer"), WIT Investments Pty Ltd ("WIT") and the first respondent, DJZ Constructions Pty Ltd ("DJZ"), (collectively called "the investors"). The investors provided the sum of $400,000 to assist with the purchase. The payment obligations were secured by the original deed. The parties to the deed were the investors, a company James Christian Pty Ltd (described as "the Guarantor"), Mr and Mrs James and Mr and Mrs Christian (described in the deed as "the Indemnifying parties"), Cottenham Nominees Pty Ltd as trustee for the M & K Christian Family Trust and New South Head Road Nominees Pty Ltd as trustee for the Janet Margaret James Family Trust (described in the deed as "the unit holders"), and Surf Road Nominees Pty Ltd (described as "the Trustee"). The Schedule to the original deed stated that at the time of execution each of Cottenham Nominees Pty Ltd and New South Head Road Nominees Pty Ltd in their capacity as trustee of the respective trusts, held 13 ordinary units in the Surf Road Unit Trust (in fact these units appear to have been issued on 9 July 1999).

1. The original deed recited the loan of $400,000 made to enable the acquisition to take place and provided for the payment to the investors of what was described as a preferential dividend. Of relevance to the present proceedings are the provisions of cll 5, 6 and 8(2) which provided as follows:

"5.(1) The guarantor, unit holders and the indemnifying parties jointly and severally guarantee:

(a) payment of the IGM bank debt and the Surf Road bank debt;

(b) that the Trustee will pay the preferential distribution to the Investors.

(2) The Indemnifying parties, the guarantor and the unit holders jointly and severally indemnify the Investors for any loss or damage suffered by the Investors should the Indemnifying parties, the guarantor and the unit holders fail to ensure payment of the bank debts and the preferential distributions.

6. The unit holders shall deliver to the Investors' Solicitors Paul Prichard & Co of Suite 2 Bangor, Corner of Menai & Yala Roads Bangor NSW the Certificates for 26 Units in the Surf Road Unit Trust (all of which Units are hereinafter called 'the said Units') as soon as the said Units shall issue in the names of the unit holders to be held by the Investors as security for the obligations of the guarantor, the Indemnifying parties and the unit holders pursuant to Clause 5 hereof ('the obligations') and the unit holders hereby charge the said units with the due performance of the obligations and shall deposit with the Investors' Solicitors Transfers of the said units in blank in respect of the said units duly executed by the unit holders.

...

8.(2) The unit holder hereby charge the said units as foresaid as beneficial owner and sub-section 1(c) of Section 78 of the Conveyancing Act 1919 or any amendment thereof shall be read and construed as if after the words 'contrary to any provision in the conveyance' the words 'or if default be made in the observance or performance of any of the Covenants in the conveyance (namely, this Mortgage) contained or herein implied and on behalf of the Mortgagor (namely, the Investors) to be observed and performed' has been inserted."

1. It is evident from the provisions of cl 5 that the unit holders, in addition to the named guarantor and the named indemnifying parties, guaranteed payment of the preferential dividend and effectively the bank debts. For convenience in this judgment I will refer to Mr James, Mrs James and New South Head Road Nominees Pty Ltd collectively as "the James guarantors".

1. On 9 July 1999, 13 units were issued to each of New South Head Road Nominees Pty Ltd and Cottenham Nominees Pty Ltd, seven units were issued to DJZ, one unit to WIT and two units to Mortimer.

The retainer of Mr Pritchard on behalf of DJZ on the original transaction

1. DJZ was a company controlled by Mr Palmieri. The primary judge noted that the appellant in the first matter (Mr Pritchard) acknowledged that he had been instructed to act for DJZ in relation to the original deed (primary judgment [183]). Whealy JA also reached the same conclusion (judgment [226]). The conclusion of the primary judge on this issue was not challenged on appeal.

The February 2001 deed

1. The venture did not prosper and it was alleged that Mr James and Mr Christian had breached their duties as Directors of Surf Road Nominees and, at least in the case of Mr James, defrauded that company. To resolve these issues and to enable the operating companies to continue to trade, a further deed was entered into. It was common ground that this deed, although undated, was entered into in February 2001 ("the February 2001 deed"). Relevantly, the parties to that deed included DJZ, WIT, Cottenham Nominees Pty Ltd, Mr Christian (described in the deed as Michael), Mrs Christian (described in the deed as Katherine), Mr Palmieri, his wife Mrs Palmieri and Surf Road Nominees Pty Ltd. The James guarantors were not parties to this deed.

1. The deed recited the allegations of fraud made against Mr James and noted that similar allegations had been made against Mr Christian. It contained an acknowledgement that it was in the best interests of the shareholders in Surf Road Nominees Pty Ltd and the unit holders in the Surf Road Unit Trust to release Mr Christian from liability, stated that Mr Christian had disclosed his involvement, and that in consideration of certain payments set out in the deed the parties release Mr and Mrs Christian and Cottenham Nominees Pty Ltd from any liability in respect of the allegations of misconduct and impropriety made against them.

1. The deed also recited default made by the guarantors under the original deed and that the investors were entitled to sell the units in the Surf Road Unit Trust held by New South Head Road Nominees Pty Ltd and Cottenham Nominees Pty Ltd.

1. Recital M to the deed provided as follows:

"M. At the request of Michael, Katherine and Cottenham the parties hereto have agreed, upon the terms hereinafter appearing, to:

(i) to limit their claims against Michael, Katherine and Cottenham pursuant to the Guarantee provisions contained in the July 1999 Deed to $300,000.00; and

(ii) not to exercise any right of sale pursuant to the July 1999 Deed in respect of the Units in the SRUT Trust held by Cottenham."

1. The deed imposed by clauses 1, 2 and 3 an obligation on Mr and Mrs Christian and Cottenham Nominees Pty Ltd to pay $287,500 as a contribution to the capital of the Surf Road Unit Trust, for Mr Christian to realise certain assets and pay $105,000 of the proceeds to Mortimer, $20,000 to Mr Palmieri and pay any balance as further contribution to the capital of the Surf Road Unit Trust.

1. The crucial provisions of the February 2001 deed are cll 5, 6, 9 and 10:

"5. In consideration of the payments to be made pursuant to Clauses 1, 2 and 3 hereof, WIT, DJZ, Cottenham, Michael Christian and Silvano agree not to take any action to sell the thirteen (13) Units in the SRUT held by Cottenham and not to take any action against Michael, Katherine and/or Cottenham arising out of the breach of those parties or any one of them of their obligations pursuant to the July 1999 Deed except as hereinafter appears and the provisions of this Clause may be used as a bar to any proceedings by the aforementioned parties against Michael, Katherine and/or Cottenham but preserving always the rights hereinafter reserved.

6. In consideration of the payments being made to the SRUT pursuant to Clauses 1, 2 and 3 of this Deed:

(a) WIT, DJZ, Cottenham and Silvano agree to waive any right to receive a preferential distribution from the profits of the SRUT as provided in Clause 2 of the July 1999 Deed in respect of any payments guaranteed by Michael, Katherine and/or Cottenham in respect of the IGM bank debt and the Surf Road bank debt referred to in Clause 5(1)(a) of the July 1999 Deed; and

(b) WIT, DJZ, Cottenham, Silvano and SRN agree to limit any claim they or any of them may have against Michael, Katherine and Cottenham in relation to the Guarantee in respect of the Bank Loans referred to in Recital D and H, Clause 1 and Clause 5(i)(a) and the Second Schedule of the July 1999 Deed ('the Bank Loans) to a maximum of $300,000.00 plus bank interest accruing from the date of any default in relation to the said Guarantee by Michael, Katherine and/or Cottenham;

...

9. The portion of the Bank Loans guaranteed by Michael, Katherine and Cottenham must be paid out by these parties for the SRUT at the earlier of:-

(i) the sale or transfer of any Units in the SRUT of Michael, Katherine or Cottenham to a third party, being a party not presently a unit holder of SRUT; or

(ii) the death of Michael; or

(iii) the winding up of the SRUT.

10. If Michael, Katherine and Cottenham fail to expeditiously make the payments in the manner specified in Clauses 1, 2 and 3 hereof (delays beyond the reasonable control of Michael, Katherine and/or Cottenham shall not constitute a failure to act expeditiously on the part of Michael, Katherine and/or Cottenham for the purposes of this clause), WIT, DJZ or SRN shall be entitled to serve a written demand on either of Michael, Katherine or Cottenham requiring compliance with the outstanding obligation to pay within thirty (30) days after the date of service of such notice and if the default has not been rectified within this period then the releases, waivers and restraints contained in Clauses 4, 5 and 6 hereof shall be withdrawn and there shall be deemed to have been no variation of the obligations of Michael, Katherine and/or Cottenham pursuant to the July 1999 Deed."

1. It should be noted in that context that Mr and Mrs Christian and Cottenham Nominees and the James guarantors had jointly and severally guaranteed the payments referred to in cl 5 of the February 2001 deed.

1. The February 2001 deed also contemplated a reorganisation of the Surf Road Unit Trust following the sale of the units in New South Head Road Nominees Pty Ltd. The effect was that if the reorganisation took place DJZ would hold 17 units out of a total of 36 units on issue. In that context cl 15(a) of the deed provided as follows:

"15. The Unit Holders in the SRUT who are a party to this Deed, and SRN agree that:

(a) The Unit Holders of A Class Units shall be entitled to receive a preferential distribution as provided by the July 1999 Deed, as varied by this Deed up to such time as recovery actions against James and the Guarantors have been exhausted but the Unit Holders of A Class Units agree not to claim such a preferential distribution in the event that the recovery actions against James, James' wife and the James Trust are unsuccessful."

1. The significance of this is that it was plainly contemplated that proceedings would be taken by the investors against the James guarantors shortly after execution of the February 2001 deed.

1. Proceedings against the James guarantors under the guarantee were commenced on 8 August 2001. The proceedings were successful at first instance but the judgment of the primary judge was reversed on appeal (see [28] below).

The issues on these appeals arising out of the February 2001 deed

1. These issues may be summarised as follows:

(a) Was Mr Pritchard retained by DJZ to advise it in respect of the February 2001 deed?

(b) If there was no contractual retainer, did Mr Pritchard owe a duty of care to DJZ to advise it in respect of its entry into the February 2001 deed?

(c) Did the entry into the February 2001 deed have the effect of releasing the James guarantors from their obligations as guarantors under the original deed?

(d) Did Mr Pritchard breach his duty in failing to advise DJZ that this was the effect or possible effect of entry into the February 2001 deed?

1. The primary judge held that Mr Pritchard was neither retained nor owed a duty of care to DJZ in respect of the February 2001 deed (judgment [189]). In these circumstances she was not required to consider the other issues which had been raised. Nevertheless, she did find that the disposal of the Christians' Units breached "the implied obligation to maintain securities for the benefit of all guarantors" (judgment [212]). However, her Honour ultimately concluded that the relevant breach of duty only arose when Mr Pritchard came to advise on a November 2003 sales agreement.

1. The issue in these appeals arises in a somewhat unusual fashion. The primary judge found negligence in failing to advise that the November 2003 sales agreement would operate as a release of the James guarantors and that that was the effect of that agreement. On appeal, Mr Pritchard argued that if there was a release of the James guarantors, it occurred by virtue of the February 2001 deed, in respect of which he owed no duty to DJZ. Therefore, he submitted, even if he was negligent in November 2003, that negligence did not result in any loss to DJZ. DJZ by contrast contended that it had retained Mr Pritchard in respect of the February 2001 deed, and that if it had the effect of releasing the James guarantors the consequent loss which resulted was caused by the negligence of Mr Pritchard in failing to warn of this effect.

1. Whealy JA has concluded (at [242]) that in respect of the February 2001 deed there was an implied term in the retainer with the investors to advise DJZ, or else there was a continuation of the earlier retainer (the retainer in respect of the original deed) with an implied term to advise and warn that the guarantees were threatened by an arrangement with one of the guarantors. However, he concluded that any breach of that retainer had no causative effect because the February 2001 deed did not release the James guarantors.

The August 2003 deed

1. As I indicated, the proceedings against the James guarantors were commenced on 8 August 2001. As the primary judge observed ([171]) the claim brought against Mr Pritchard was based on the drafting of the February 2001 deed and the 2003 sales agreement, not the conduct of the litigation. However, because of the issues raised in Mr Pritchard's appeal against the findings made by the primary judge in respect of his claim against the second and third respondents (the partners of Giles Paine) and the fourth respondent (Mr McGovern SC) and the issues raised in the appeal brought by Giles Paine against DJZ, Mr Pritchard and Mr McGovern, it is necessary to say something about the August 2003 deed.

1. Whealy JA has summarised its contents at [262] of his judgment. He concluded, contrary to the finding of the primary judge (primary judgment [200]), that Mr Pritchard breached a duty owed to DJZ in failing to advise of the possibility that entry into the deed would release the James guarantors (judgment [277]-[278]). However, he found that as a matter of fact the deed never became operative ([308]-[309]).

The November 2003 sales agreement

1. The parties to this agreement were Chris Burke & Co Pty Ltd as vendor and Cottenham Nominees as purchaser. By the agreement Chris Burke & Co Pty Ltd agreed to sell its real estate agency business to Cottenham Nominees Pty Ltd. Mr Palmieri and DJZ guaranteed the obligations of the vendor whilst Mr and Mrs Christian guaranteed the obligations of the purchaser. Clause 25 of the agreement provided as follows:

"25. COURT CASE AGAINST TASS JAMES

25.1 The parties to the Agreement acknowledge New South Wales Supreme Court proceedings 50108 of 2001 ('Supreme Court proceedings') is on foot and involves the parties to the Agreement.

25.2 Subject to the Purchaser paying to Pritchard Law Group the sum of Fifty Two Thousand Dollars ($52,000.00) pursuant to Clause 9.1 and Schedule 11, the Vendor, Vincent Palmieri and Silvano Sicuro acknowledge and agree that they are liable and responsible for all fees, disbursements and any other monies past, present and future owing on any account in respect of the Supreme Court proceedings to the Vendor's Solicitor and any Counsel, Accountant or Expert retained by either or all of the Vendor, Vendor's Solicitor, Silvano Sicuro and Vincent Palmieri and that the Purchaser shall have no responsibility or liability for the payment of any such monies.

25.3 The Vendor, Silvano Sicuro, Vincent Palmieri and DJZ Constructions Pty Limited release the Purchaser, Michael Christian and Katherine Christian from any and all claims, debts, costs, damages, judgments, orders, awards or liabilities they may have or had against the Purchaser, Michael Christian or Katherine Christian arising directly or indirectly out of the Supreme Court proceedings subject to the Purchaser paying to Pritchard Law Group the sum of Fifty Two Thousand Dollars ($52,000.00) pursuant to Clause 9.1 and Schedule 11."

1. It was not disputed by any of the parties to the appeals that the November 2003 deed operated to discharge the James guarantors, nor did Mr Pritchard contend that he did not breach his duty in failing to advise of this possibility. The arguments of Mr Pritchard focused on issues of causation and damages including, as I have indicated, the argument that the guarantors had previously been released by virtue of the operation of the February 2001 deed.

Proceedings against the James guarantors

1. The proceedings against the James guarantors were successful at first instance. The only relevant issue on the appeal was the liability of Mrs James. Mr James was declared bankrupt following the decision at first instance and it appears to be common ground, subject to an overall settlement which occurred in 2005, that Mrs James was the only person who had capacity to meet any of the obligations under the guarantee.

1. The defence raised by the James guarantors both before the judge at first instance and the Court of Appeal focused on the November 2003 deed and not the February 2001 deed. Reliance was placed on cl 25 of the November 2003 deed as constituting a release of the co-guarantors of Mr and Mrs James, Mr and Mrs Christian, from their obligations under the guarantee, as a consequence of which the James guarantors were also released. No reliance was placed on the February 2001 deed.

1. The Court of Appeal upheld this contention but also expressed the view by way of dicta that the February 2001 deed had released the James guarantors: James v Surf Road Nominees Pty Ltd [2004] NSWCA 475. The Court's conclusion was as follows:

"[76] The effect of these provisions, in our opinion, was that the security was to be maintained and that there was no entitlement in the investors, who had the benefit of the security, to dispose of the security other than by way of exercise of their power of sale, or to come to any separate arrangement in respect of the security with one of the security owners to the exclusion of the other. There is nothing else in the provisions of the Deed, in my opinion, that leads to any other conclusion, so that there was, as a matter of construction, an implied covenant to maintain the security. The fact that cl.8 provided that the investors may exercise their power of sale in respect of 'the units or any of them' is simply a recognition that those with the benefit of the security needed only to sell so many of the units as were required to satisfy the loss: see Smith v. Wood at 25. That did not negate or give some different right to the investors other than the right to exercise the power of sale. The security was to be maintained for that purpose and that purpose only, unless and until the principal obligation under the Deed of Guarantee was satisfied.

[77] The investors however, dealt with the securities other than by way of exercise of their power of sale. In the February 2001 Deed, it was agreed that the investors would not exercise any right of sale pursuant to the Deed of Guarantee in respect of Cottenham's units in the Surf Road Unit Trust. In the 5 November 2003 Agreement, the investors agreed to the disposal of those units as part of the sale agreement and not by way of the exercise of the power of sale. There was thus a breach of the implied covenant to maintain the security. In my opinion, the breach first occurred under the terms of the February 2001 Deed, although Mrs. James did not rely upon that breach. But in any event, there was an independent breach arising out of the provisions of the 5 November 2003 Agreement.

...

[79] A creditor is entitled to exercise its rights under the guarantee against one, some or all of the guarantors, or it may have recourse to some or all of the security. A creditor may also exercise a combination of those rights. In doing so, the creditor does not and cannot affect the rights of the guarantors and/or sureties inter se. Those rights include the rights as between the guarantors to seek contribution from the other guarantors and the right of marshalling in respect of the securities. The fact that a creditor, pursuant to and in accordance with the contract of guarantee, exercises a right against one guarantor or one part of the security does not mean the remaining guarantors or the securities are thereby released. In this case, the dealing with the New South Head Road Nominees Units on 22 October 2002 was pursuant to the Deed of Guarantee. Thereafter, whilst the principal obligation remained outstanding, the investors were only entitled to deal with the Cottenham units under the Deed of Guarantee. The fact that they had exercised the power of sale in respect of the New South Head Road Nominees units and could do so in respect of the Cottenham units did not release them from the contractual obligation to maintain the security for the purposes of the Guarantee.

[80] The submission also overlooks the arrangement effected by the February 2001 Deed that the investors would not exercise the power of sale under cl.8 against Cottenham's units. On the respondents' approach, the investors could execute against the New South Head Road Nominees units. They could also come to a separate arrangement not to exercise the power of sale against Cottenham. They could then enter into a separate arrangement not to sue the Christians and as part of that arrangement take the Cottenham units, not in reduction of the guarantee obligations, but in part satisfaction of some other commercial transaction between the parties. The consequence of the foregoing would be that Mrs. James as a joint and several guarantor and New South Head Road Nominees as a joint surety would have no right of contribution and no right to have the securities marshalled. Such a result is contrary to law: see Smith v. Wood at pp. 21-22; Hancock v. Williams & Anor. at 256."

Giles Payne and Mr McGovern

1. Neither Giles Payne nor Mr McGovern advised on the entry into the February 2001 or November 2003 deeds. The basis on which the claims were made against them was that they should have advised DJZ that having regard to the effect of the February 2001 deed and in the case of Giles Payne, the November 2003 deed, the proceedings against the James guarantors would be unsuccessful and should be compromised. This led to claims being made against them as well as Mr Pritchard in respect of the costs incurred by DJZ in the conduct of the proceedings.

1. The primary judge found ([412]) that the costs of conducting the proceedings amounted to $489,022. The claim was for that amount plus interest. She concluded that having regard to the other issues raised in the proceedings, 60 percent of the costs were incurred in relation to the claim against Mrs James. Of those costs she concluded that any liability of Mr Pritchard or Giles Payne in respect of those costs should be reduced by 30 percent due to the contributory negligence of DJZ and that Giles Payne was responsible for 50 percent of the balance of the costs incurred after 12 January 2004 whilst Mr Pritchard was responsible for the balance. The primary judge held that Mr McGovern was not liable as his conduct was not causative of any loss.

1. Mr Pritchard has appealed against the orders of the primary judge in respect each of Giles Payne and Mr McGovern. The grounds of the appeal challenge the contention that the February 2001 deed had no causative effect on any loss suffered by DJZ. As a consequence it is contended that Giles Payne's liability in respect of costs should have commenced in May 2002 rather than 12 January 2004 and that Mr McGovern was liable to make contribution. He also contended that DJZ suffered no loss as the costs were paid by other companies associated with Mr Palmieri rather than DJZ.

1. Giles Payne has appealed against the findings of the primary judge on the grounds that it was no part of its retainer to advise DJZ on this issue and that any breach of retainer was not causative of any loss. It also appealed against certain costs orders made by the primary judge on the assumption that it was otherwise unsuccessful. It also contended that DJZ suffered no loss as the costs were paid by other companies associated with Mr Palmieri, rather than by DJZ.

1. Mr McGovern has cross-appealed on an order for costs made against him by the primary judge. By Notice of Contention Mr McGovern submitted that the primary judge's decision should be affirmed on the grounds that the proper application of s 5B, s 5D and s 5E of the Civil Liability Act 2002 would result in the finding that he was not negligent and there was a lack of causation between the alleged negligence and the loss incurred by DJZ.

1. Giles Payne was first instructed by Mr Palmieri in January 2002 in relation to a misleading and deceptive conduct claim anticipated against Mr James. In May 2002, Giles Payne received an unexecuted copy of the February 2001 deed and was advised that it had been entered into. The evidence of Mr Gilles, the second respondent and partner at Giles Payne, was that he did not consider the February 2001 deed in detail, because it did not appear to affect any right of Mr Palmieri to sue Mr James in respect of misrepresentations (primary judgment [297]), however he conceded under cross-examination that he had appreciated that the February 2001 deed varied rights and liabilities under the original deed, releasing the Christian interests from their guarantees. He said he did not give any consideration to the legal consequences of the February 2001 deed. The primary judge found:

"[299] It is apparent from the evidence of Mr Gilles and Ms Becker, that if there was any doubt as to the terms of the 2001 deed, a solicitor acting competently would have obtained a copy of the executed deed, given that by its terms, it varied the 1999 deed. The 1999 deed lay at the heart of the case being pursued in the Supreme Court proceedings. It was also relevant to the misrepresentation case which Mr Palmieri wanted to pursue, particularly in relation to the question of damages. In advising Mr Palmieri, it is unquestionable that consideration had to be given to the question of whether, and how, the 2001 deed varied the 1999 deed."

1. It is that finding which forms the basis of the contention raised by Mr Pritchard that the liability of Giles Payne arose in May 2002.

1. It should be noted that on 8 March 2002 Mr Pritchard forwarded to Giles Payne various documents including a copy of a brief to Mr Wales SC. The primary judge stated ([301]) the Mr Pritchard had raised a concern in the observations contained in the brief about the impact of the February 2001 deed. Those observations appear to have appended an unexecuted copy of the February 2001 deed, and refer to a "deal" with Michael Christian "whereby [Mr Palmieri and Mr Sicuro] agreed not to take any action against him or his company vehicle and Andy Mortimor's 2 units in the Trust were sold for the cost of his initial acquisition, one unit going to Michael Christian and the other going to Mr Sicuro" (Blue 3247), but otherwise do not raise concerns about the impact of the February 2001 deed. It does not appear that the opinion of Mr Wales was supplied to Giles Payne. That opinion expressed the view that the obligations of the James guarantor survived the release of the "Christian Family interests". His opinion contained the following comments:

"The Release of Mr and Mrs Christian

I have been briefed with a deed (my copy is unsigned and undated) in which makes provision for the release of Mr and Mrs Christian and the trustee of their family trust, Cottenham Nominees Pty Ltd.

In the deed, Mr James C, Mrs James C [sic] and Cottenham agree to pay $287,500 to the Trust and further to pay the proceeds of a particular sale in accordance with the Deed. In return, the other parties to the Deed release Mr Christian, Mrs Christian and Cottenham from all claims arising from Mr Christian's involvement as a director of various companies or as the recipient of funds improperly paid to Mr James C, Mrs James C [sic] or Cottenham from the assets of the Trust or the various companies controlled by the Trust. It is possible that this deed gives rise to arguments on behalf of Mr James against your clients.

The general principle is stated in the following terms in Rowlatt on Principal and Surety, 4th edition, page 184, as follows:

'If a surety, whose liability is an essential condition of the liability of another surety, signs the instrument, but is afterwards released, or becomes entitled to his discharge by virtue of any equitable principle, the other surety is discharged in the same way as if the first had never become bound.'

However, the same principle does not, so far as I am aware, apply to an indemnity, which is a different thing from a guarantee or surety. Clause 5(2) of the Deed of Guarantee provides that 'the indemnifying parties, the guarantor and the unit holders jointly and severally indemnify the Investors for any loss or damage suffered by the Investors should the Indemnifying parties, the guarantor and the unit holders fail to ensure payment of the bank debts and the preferential distributions.' It seems to me that this obligation survives any release of the Christian family interests."

1. On 20 December 2002 Giles Payne delivered a brief to Mr McGovern SC which included instructions to "consider all statements and all supporting documentation" and advise on the prospects of success of claims against the James Family in relation to misrepresentation and any other laws generally. The brief also included an undated unexecuted copy of the February 2001 deed and the pleadings in the Supreme Court proceedings then on foot. Although the defence of the James guarantors denied liability under the guarantee it did not specifically plead that the effect of the February 2001 deed was to release them from their obligations thereunder.

1. In March 2003 Mr McGovern advised that a misrepresentation claim may have prospects of success and should be pursued in the Supreme Court proceedings already on foot, and that DJZ should be separately represented in those proceedings.

1. In a conference on 3 March 2003 between Mr McGovern, Mr Gilles and Mr Palmieri, Mr Palmieri informed Mr Gilles and Mr McGovern that the senior counsel then representing him and the other investors in the proceedings, Mr Alexis SC, had advised that an offer for Mr James to settle on a "walk away basis" should be accepted. The advice was said to have been given on the basis that Mr James was a man of straw. By a letter of 25 March 2003 to Mr and Mrs Palmieri, Giles Payne advised that DJZ's interests were coming into direct conflict with those of the other investors and required separate representation in relation to both the proceedings and settlement negotiations. Giles Payne was instructed to act for DJZ in the Supreme Court proceedings (primary judgment [307]). This altered the nature of the retainer, however it was altered again later when it was decided DJZ would not be separately represented and Giles Payne ultimately never entered an appearance in the proceedings.

1. Mr McGovern was briefed to draft documentation necessary for an application for DJZ to be separately represented, and to pursue misleading and deceptive conduct claims. He advised in writing on 15 April 2003 that the Supreme Court proceedings relying upon the original deed offered the most reasonable prospects of success. A solicitor with Giles Payne, Ms Becker, who had carriage of the Supreme Court proceedings, gave evidence that she understood as of April 2003 that the February 2001 deed had varied the original deed as to the liabilities of the Christian interests (primary judgment [312]). At no point during this time does it appear that the solicitors at Giles Payne or Mr McGovern ever directly considered the impact of the February 2001 deed releases upon the rights of Mr Palmieri or DJZ under the original deed. Her honour the primary judge found:

"[315] ... I am satisfied that at a time when Giles Payne had accepted instructions to separately represent DJZ in the proceedings and was actively pursuing those instructions, that a solicitor acting competently would have ensured that the 2001 deed had not been overlooked by counsel advising on the matters dealt with by Mr McGovern in his written advice. Mr McGovern's omission of any reference to the 2001 deed on its face suggested that a deed which had varied the 1999 deed had been overlooked. A solicitor acting competently, having noticed the omission, would have raised it with counsel."

1. It was decided on 24 April 2003 that DJZ would not be separately represented from Mr Palmieri and the other investors in the proceedings, who were represented by Mr Pritchard, but that Giles Payne would remain on standby, ready to appear, should the need arise.

1. In September 2003, Mr Palmieri sought advice from Giles Payne as to whether, the investors having agreeing in the February 2001 deed not to sue Mr Christian, Mr James would be prevented from succeeding in his claim for contribution from Mr Christian. On 1 October 2003, Giles Payne provided a letter of advice concerning the effect of the February 2001 deed which did not raise the potential difficulties the deed posed for the ongoing litigation. Ms Becker, who drafted the advice, gave evidence that she understood at this point that all parties considered the release contained in the February 2001 deed was a covenant not to sue. She conceded that she did not consider whether the effect of the February 2001 deed could be to discharge the James guarantors from their obligations under the James guarantees. The primary judge also found that Mr Gilles did not consider this issue.

1. On 10 December 2003 Mr Alexis gave oral advice on the possibility that the effect of the February 2001 deed and the November 2003 sales agreement was to discharge the James guarantors from their obligations. The advice was confirmed in writing on 23 December 2003 at the time the proceedings were adjourned part heard before the trial judge. The advice which was delivered to Mr Pritchard contained the following comments:

"On 10 December, 2003 Ms Sainsbury and I conducted a telephone conference with you in relation to the undated Deed (identified as draft 4) and the Agreement for Sale of Business dated 5 November, 2003 an their provisions which may have the effect of releasing Mr and Mrs M. Christian and Cottenham Nominees Pty. Limited from liability as guarantors and indemnifying parties under the Deed of Guarantee and Indemnity dated 1 July, 1999 ('Deed') and thereby discharging the Defendants from the liability claimed against them pursuant to the Deed in the proceedings. Copies of these documents were furnished shortly before the telephone conference.

I note that the Defendants now rely on the undated Deed and the Agreement for Sale as discharging the liability of the Defendants under the Deed: refer to paragraph 5 (e) of the Defence to the Third Further Amended Summons filed in Court on 18 December, 2003.

I note also that your Mr Pritchard acknowledged during the telephone conference that he did not appreciate that the undated Deed and the Agreement for Sale could have this effect on the Defendants liability pursuant to the Deed and that Mr V. Palmieri had not been warned of this consequence before these documents were executed and performed.

To resolve the potential for a conflict of interest, I confirm that I advised Mr and Mrs Palmieri of the existence of a claim against the Pritchard Law Group, in the event of the Plaintiffs or any of them, failing in their claim against the Defendants pursuant to the Deed, on the basis of a finding that the liability of the Defendants was discharged by reason of the undated Deed and/or the Agreement for Sale."

1. Following receipt of this advice Mr Palmieri consulted Giles Payne. The primary judge found that Giles Payne was aware of Mr Alexis' advise about the problem with the Sale Agreement and Mr Pritchard's negligence but was not provided with his written advice. She also found that Giles Payne had received a copy of the 2003 Sales Agreement ([334]).

1. On 22 January 2004 an advice drafted by Ms Becker and settled by Mr Gilles was provided to Mr Palmieri. The letter provided what was described as an overview of the meetings and events which had occurred since 8 September 2003. On the question of whether or not to continue the proceedings the following advice was given:

"You attended our office on 12 January 2004 to discuss the progress of your matter and whether or not we thought you should proceed.

...

Our initial advice was that as you have brought that matter this far, at considerable expense, the expense may very well be thrown away if you were to settle on the terms suggested by James, which were far less favourable than what you require."

And:

"It seems to us that any decision made by you to continue the case will have to be made on the following basis:-

(1) Your own impression of how the case is proceeding, formed by the impressions of your counsel and the instructing solicitor from Paul Pritchard's office; and

(2) Whether or not you think Mr James is likely to agree to your minimum terms of settlement in this matter.

From what you have said, it does not appear that Mr James will agree to your minimum settlement conditions and as such your only other options would be:

(1) to agree to whatever settlement he proposes (subject to reasonable negotiation by your counsel); or

(2) continue with the case and take your chances with the judge.

At this stage, it appears that the bulk of the costs have been incurred by you and on balance, from a costs perspective, you may as well continue with the case."

1. As the primary judge found ([336]), the advice gave no consideration to any potential problems flowing from the February 2001 deed or the November 2003 Sales Agreement. Nor did it deal with the advice of Mr Alexis.

1. In this context the primary judge reached the following conclusions:

"[341] I am well satisfied that a solicitor acting competently in the circumstances would have given such advice. A solicitor has a duty to explain risks, even unusual ones, which are reasonably foreseeable (see Macindoe and Anor v Parbery). The reality was that the risks which Mr Alexis had identified as arising from the 2003 sale agreement were known to Gyles Payne [sic], but no consideration was given to them, or the consequences of DJZ not accepting the advice to settle the litigation. One obvious potential consequence related to any claim later made against Mr Pritchard. More directly, no advice was given as to the impact of the agreement on DJZ's prospects in the proceedings and whether, as a consequence, Mr Alexis' advice to settle the proceedings ought to be accepted.

...

[343] I am satisfied on the evidence that a solicitor acting competently, would have identified and advised on the potential problems on which the Court of Appeal's judgment eventually turned. Plainly there were differing views available as to the effect of what had been agreed. The evidence that Mr McGovern immediately appreciated the difficulty which the 2003 sales agreement gave rise to, when the matter was raised with him by Mr Fitzpatrick in December 2003, supports the conclusion that a solicitor acting competently would have identified and advanced on that issue. So does the view which those acting for the James' interests had come to; the view to which Mr Alexis came; and Mr Pritchard's concession that the problems with the 2001 deed and the 2003 agreement were ones which could have been dealt with in drafting the 2003 agreement, had he given the matter any thought. A similar concession was not made by Mr Gilles or Ms Becker as to their own failures. The problem was that like Mr Pritchard, Giles Payne also failed to give the effect of the 2001 deed and the 2003 sales agreement on the guarantees provided by the 1999 deed any thought, despite what they knew of Mr Alexis' advice.

...

[359] Had necessary consideration been given to the 2001 deed and the 2003 sales agreement, it is apparent that quite different advice would have been given by Giles Payne, to that which was given.

[360] ... there must have been a real prospect that [Mr Palmieri] would have accepted advice recommending a settlement, had both Mr Alexis and Giles Payne given DJZ advice as to the difficulties posed for the litigation by the 2001 deed and the 2003 agreement ..."

[361] ... I am satisfied that in advising on settlement in January 2004, Giles Payne was negligent and acted in breach of its retainer, by failing to consider and advise DJZ about the potential impact of the 2001 deed and the 2003 sales agreement on the case it was pursuing in the Supreme Court.

[362] But for the conclusions which I have reached in relation to the fact that the Court of Appeal's judgment did not turn on the 2001 deed, I would have concluded that Giles Payne was earlier partially responsible for the loss suffered by DJZ. ... Given the conclusions which I have reached, that Giles Payne were also responsible for the losses suffered by DJZ from 12 January 2004, in relation to the costs thereafter incurred, must be accepted. I assess their contribution at 50%."

1. The primary judge also found that a competent barrister in the position of Mr McGovern would have called for a complete copy of the February 2001 deed which he, Mr McGovern, conceded was relevant in advising on the misleading and deceptive conduct claims he was asked to consider ([364]). In relation to the advice given by him on 13 April 2003 the primary judge reached the following conclusions:

"[370] Mr McGovern's evidence was that before he provided this advice, he had closely considered the 1999 deed, noting both the guarantee and indemnity and had revisited certain relevant texts and authorities. He also noted that no one had pleaded that the defendants were relieved of their obligations under the 1999 deed, because of the entry into the 2001 deed. It followed, in his view, given affidavit evidence with which he was also briefed, that the claims advanced by the plaintiffs in the proceedings were reasonably arguable. In his opinion, without further amendment of the pleadings, no claim being advanced was doomed. The possibility of pleading amendment to rely on the 2001 deed, was not addressed.

...

[383] Mr McGovern did not consider or advise in relation to any available reliance on the 2001 deed, even though on his instructions a deed in those terms had been entered and it had been considered by Mr Pritchard, that the deed raised a potential problem. Nor did he consider what impact that might have had on the misrepresentation claim. The view which he reached was that the units must have been dealt with by some mechanism other than the 2001 deed, namely the 1999 deed. Neither this assumption, nor the 2001 deed itself, was mentioned at all in Mr McGovern's April advice, nor it would seem at the conference that day, as posing any potential problem, or requiring any further investigation or consideration. Mr McGovern did not even suggest that an executed version of the 2001 deed be obtained, or any other document by which the transaction which he assumed must have occurred by some other means, had been implemented. The advice which he gave Mr Palmieri in conference was directed simply to the operation of the 1999 deed."

1. In these circumstances the primary judge stated that had she concluded that the February 2001 deed had the effect of releasing the James guarantors from their obligations under the guarantee, then the loss suffered by DJZ would have been partly caused by the negligence of Mr McGovern.

1. It appears that prior to Christmas 2003 a solicitor, Mr Fitzpatrick, in the employ of Mr Pritchard asked Mr McGovern whether he would appear for DJZ and Mr Palmieri when the part heard Supreme Court proceedings resumed. Mr McGovern's evidence, accepted by the primary judge, was that Mr Fitzgerald stated that an agreement was entered into in November 2003 under which some of the guarantors were released from their obligations. Mr McGovern commented to Mr Fitzpatrick that that may have released the James guarantors from their obligations under the guarantee (primary judgment [384]).

A The claim against Mr Pritchard arising out of the release of the James guarantors

1 Did the February 2001 deed operate to release the James guarantors?

1. It is important in considering this issue to have regard to the precise effect of the February 2001 deed so far as it concerns Mr and Mrs Christian and Cottenham Nominees. That affect may be summarised as follows:

(a) Clauses 1, 2 and 3 provide for Mr and Mrs Christian to make certain payments (see [12] above). These payments were not payments in discharge of any obligations under the guarantees.

(b) Clause 5 contains an agreement by the investors not to enforce the securities given under the guarantees unless the payments in cll 1, 2 and 3 were not made or if the payment of $300,000 in respect of the bank loan guaranteed under the original deed was not made at the time specified in cl 9. This is the combined effect of cll 5, 6(b), 9 and 10.

(c) Clause 6(b) contains an agreement by the investors to limit their claims against Mr and Mrs Christian and Cottenham Nominees to a maximum of $300,000.

1. In this context it should be noted that the bank debt referred to in cl 5(a) of the original deed totalled $1.344 million.

1. Having regard to these provisions I am unable to agree with Whealy JA that the variation to the original deed made by the February 2001 deed did not operate to discharge the James guarantors.

1. The principles governing the circumstances in which a guarantor is discharged from its obligations as a result of a variation to the principal agreement are well established. In Holme v Brunskill (1878) 3 QBD 495, Cotton LJ stated the principle in the following terms (at 505):

"The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged."

1. In Ankar Pty Limited v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549, the plurality made the following comments (at 558):

"Then it has been said that any departure by the creditor from the suretyship contract 'which is not obviously and without inquiry quite unsubstantial, will discharge the surety from liability, whether it injures him or not, for it constitutes an alteration in the surety's obligations': Halsbury's Laws of England, 4th ed., vol. 20, par. 259. The final clause in the passage quoted from Halsbury indicates that this proposition is founded not so much on cases dealing with a breach of a term in the suretyship contract, as on cases in which conduct on the part of the creditor materially altered the surety's obligations. Such an alteration takes place when the creditor agrees to a variation of the principal contract or to an extension of time within which the debtor may comply with that contract. The creditor's agreement with the debtor thereby alters the nature of the surety's obligations without the surety's consent."

After citing Holme v Brunskill supra, the plurality expressed the principle in the following terms (559):

"According to the English cases, the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety's rights, unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety's risk, e.g., a reduction in the debtor's debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety.

The foundation of the rule is that the creditor, by varying the principal contract or extending time, has altered the surety's rights without consulting it though the surety has an interest in the principal contract, and that the creditor cannot be permitted to do."

1. Their Honours also considered the question whether the equitable rule was subsumed in the general principles of the law of contract and made the following comments (at 561):

"However, the fundamental question still remains: Is the rule of strict construction, derived from the equitable rule which protects the surety from any alteration in its liability, subsumed in the general principles of the law of contract so that the surety may treat itself as discharged from liability if, but only if, the breach is such as to entitle the surety at law to rescind the contract? In truth there is no difference between the equitable rule and the legal rule, as Lord Selborne L.C. pointed out in In re Sherry: London & County Banking Co. v. Terry."

1. Ankar has been consistently applied in decisions of this Court: Corumo Holdings Pty Limited v C Itoh Limited (1991) 24 NSWLR 370 at 380, 382, 404; Bond v Hongkong Bank of Australia Limited (1991) 25 NSWLR 286 at 297, 307; Farrow Mortgage Services Pty Limited (In liquidation) v Slade and Nelson (1996) 38 NSWLR 636 at 649; Valstar v Silversmith [2009] NSWCA 80 at [29]-[30]. It forms the basis of the dicta of the Court in the guarantee proceedings to which I have referred above ([28]).

1. The obligation to maintain security is an incident of this principle. The obligation was explained by Blackburn J in Polak v Everett (1876) 1 QBD 669 in the following terms (at 673-674):

"It has been established for a very long time, beginning with Rees v. Berrington to the present day, without a single case going to the contrary, that on the principles of equity a surety is discharged when the creditor, without his assent, gives time to the principal debtor, because by so doing he deprives the surety of part of the right he would have had from the mere fact of entering into the suretyship, namely, to use the name of the creditor to sue the principal debtor, and if this right be suspended or a day or an hour, not injuring the surety to the value of one farthing, and even positively benefiting him, nevertheless, by the principles of equity, it is established that this discharges the surety altogether. The reason given for this, as stated in Samuell v. Howarth by Lord Eldon, is, because the creditor, by so giving time to the principal, has put it out of the power of the surety to consider whether he will have recourse to his remedy against the principal or not, and because he in fact cannot have the same remedy against the principal as he would have had under the original contract."

1. I have set out what I believe to be the effect of the February 2001 deed above. Clause 5 contains a covenant not to enforce the securities against Mr and Mrs Christian or Cottenham Nominees except if they fail to meet the payments due under the February 2001 deed. The effect would be that these securities would not be available to the James guarantors if they met their obligations under the guarantee and sought to be subrogated to the right of DJZ and the other investors under the mortgage. In these circumstances the effect, in my opinion, was to discharge the James guarantors. The consequences were stated by Dixon J in Williams v Frayne (1937) 58 CLR 710 as follows (at 738):

"If the guarantee is given upon a condition, whether express or implied from the circumstances, that a specific security shall be obtained, completed, protected, maintained or preserved, any failure in the performance of the condition operates to discharge the surety and the discharge is complete."

1. In the present case Mr and Mrs Christian and Cottenham Nominees Pty Ltd were jointly and severally liable to the James guarantors and the other parties referred to in cl 5(1) of the original deed. Clause 6 of that deed imposed an obligation on each of Cottenham Nominees Pty Ltd and New South Head Road Nominees Pty Ltd to deliver their units to be held as security whilst the effect of cl 8(2) was to charge those units in support of the guaranteed obligations. In these circumstances there was an implied obligation to maintain the units as security. An agreement not to take any action to enforce the security, in my opinion, amounts to a failure not to maintain the security in breach of the implied obligation. That was the view expressed by the Court of Appeal in the proceedings brought against the James guarantors: James v Surf Road Nominees Pty Ltd supra at [77] (see [28] above).

1. It was suggested that these principles do not apply because the security had no value, and that this was evidenced by the recitals to the February 2001 deed. Recital K of the February 2001 deed states: "As a result of the alleged fraudulent behaviour of James the net asset value of the SRUT is minimal, or it is possible that the Units therein have a nil value". The possibility that the security required to be maintained was at a particular point in time of no value does not mean that there was not an obligation to maintain it. (See the passages from Holme v Brunskill and Ankar Pty Ltd v National Westminster Finance (Australia) Limited cited at [55]-[56] above.)

1. Although I accept that standing alone the balance of cl 5 may be construed as a covenant not to sue and hence not operate as a discharge of the debt: Hancock v Williams (1942) 42 SR (NSW) 252, it must be read in the context of cl 6(b) of the February 2001 deed which limits the right of the recovery of the bank debt to $300,000. This, in my opinion, in the context of a joint and several guarantee, constitutes a material variation of the contract such as to discharge the James guarantors. In this regard cl 10 of the February 2001 deed recognises the fact that this has been a variation of the obligations of Mr and Mrs Christian and Cottenham Nominees Pty Ltd, as does Recital M to that deed.

1. It follows, in my opinion, that the effect of the February 2001 deed was to release the James guarantors for liability under the guarantee.

2 Did Mr Pritchard owe a duty of care to warn DJZ of the risk that entry into the February 2001 deed could have led to the James guarantors being released from liability?

1. Whealy JA in his judgment ([241]-[243]) has held that there was either an implied term of the retainer with the directors of the investor companies to advise and warn DJZ of the risk or there was a continuation of the earlier retainer with an implied term to advise and warn that the guarantees were threatened by an arrangement with one of the guarantors.

1. I am unable to agree that Mr Pritchard could be found liable on the basis of the implied retainer found by Whealy JA. If the relevant retainer was with the directors, it was not one on which DJZ could sue. It was not argued that it was the beneficiary of the contractual rights conferred on the directors by virtue of the retainer: Trident General Insurance Co Limited v McNiece Bros Pty Limited [1988] HCA 44; (1988) 165 CLR 108 at 121-122, 135, 148-149, or was otherwise entitled to sue on the contract. Further, it seems to me that at least as a matter of contract the retainer in respect of the original deed which had concluded some 18 months earlier could not be held as a matter of contract to extend to advising DJZ on the February 2001 deed.

1. That is not the end of the matter. In my opinion Mr Pritchard owed DJZ a duty of care in tort to advise it of the risk of the loss of the benefit of the James guarantees. As I have indicated, proceedings against the James interests were in contemplation at the time the February 2001 deed was executed (see [16]-[17] above). In these circumstances, it would be reasonably foreseeable to a competent solicitor in the position of Mr Pritchard that entry into a deed which would operate as a release of the James guarantors would cause loss to DJZ. In that regard I agree with what was said by Whealy JA at [241].

1. Reasonable foreseeability of course is not enough to impose a duty in the present case. However, as with the beneficiary in Hill v Van Erp [1997] HCA 9; (1997) 188 CLR 159, DJZ was vulnerable in the sense that it was unable to protect itself from the consequences of Mr Pritchard's want of reasonable care: Perre v Apand Pty Limited [1999] HCA 36; (1999) 198 CLR 180 at [118]; Graham Barclay Oysters Pty Limited v Ryan [2002] HCA 54; (2002) 211 CLR 540 at [84], [149]; Woolcock Street Investments Pty Limited v CDG Pty Limited [2004] HCA 16; (2004) 216 CLR 515 at [80].

1. Although Mr Pritchard in his written submissions referred to the possibility of there being inconsistent obligations, this does not negate the existence of the duty: Watkins v De Varda [2003] NSWCA 242 at [147], particularly having regard to the fact that each of the relevant parties to the February 2001 deed had proceedings against the James guarantors squarely in mind. Further, no suggestion was made that DJZ or Mr Palmieri should seek separate advice from the other parties to the deed.

1. Imposing a duty of this nature on Mr Pritchard does not lead to indeterminate liability or interfere in any way with the autonomy of Mr Pritchard in performing his functions under the contractual arrangement he had with the directors. In these circumstances and in circumstances where a competent solicitor would have foreseen the risk, in my opinion, Mr Pritchard owed DJZ a duty to advise it of the risk that the entry into the February 2001 deed posed to the James guarantees.

1. This is not a case involving what has been described as a penumbral duty, namely, a duty to advise a client in respect of matters arising outside the scope of a retainer: Waimond Pty Limited v Byrne (1989) 18 NSWLR 642 discussed in Heydon v NRMA Limited [2000] HCA 374; (2000) 51 NSWLR 1, Kowalczuk v Accom Finance Pty Limited [2008] NSWCA 343; (2008) 77 NSWLR 205, David v David [2009] NSWCA 8 and Dominic v Riz [2009] NSWCA 216. Rather, the issue in the present case is whether a duty can be owed to a third party in circumstances where a similar contractual retainer exists between solicitor and client. In my opinion, it can: Hill v Van Erp supra particularly at 233-234; Al-Kandari v J R Brown & Co [1988] QB 665 at 675; Watkins v De Varda supra at [147]. Such duty was owed in the present case.

1. Thus far I have dealt with the matter without reference to the Civil Liability Act 2002. However, for the reasons I have given above, the risk in my opinion was foreseeable, not insignificant, and a reasonable person in the position of Mr Pritchard would have taken precautions to avoid the risk, namely, by warning DJZ that entry into the February 2001 deed could operate as a release of the guarantors.

1. So far as s 5B(2) is concerned, there was, in my view, every probability that the harm would occur if the care was not taken, the release of the James guarantors was serious and the burden of taking precautions by giving a warning relatively insignificant. Further, there is social utility in ensuring that legal practitioners act competently.

3 Did Mr Pritchard breach his duty in failing to advise DJZ of the possibility that the February 2001 deed had the effect of releasing the James guarantors?

1. Whealy JA (at [240]-[243]) has concluded that Mr Pritchard breached his duty in failing to advise that the release of the James guarantors was a possible effect of the February 2001 deed. I agree with him but would add the following.

1. It is contended by Mr Pritchard that there was no expert evidence to support the proposition that a solicitor, as a matter of proper practice, would advise of the risk. I agree that such evidence would have been both relevant and admissible particularly having regard to the provisions of s 5O of the Civil Liability Act 2002. However, the absence of evidence does not preclude a finding of negligence. As was pointed out in Waimond v Byrne supra at 654, in those circumstances it falls to the Court to provide its definition of the scope of the duty of care: see also Hayden v NRMA supra at [143]-[155].

1. Further, it was contended by Mr Pritchard that the issue of breach of duty was not put to him in respect of the February 2001 deed. I do not agree. He was cross-examined extensively as to whether he was retained by DJZ and acknowledged that DJZ had no other solicitor (T 264-268). He conceded he did not turn his mind to the question of whether the February 2001 deed could have had the effect of releasing the James parties (T 271). He conceded that it was present in his mind in January 2001 that an action against the James guarantors was a matter upon which he may have had to give advice in the near future (T 272). He admitted he knew that the February 2001 deed varied some of the provisions of the original deed (T 275). He conceded that at the time the proceedings against the James guarantors were commenced, it was his responsibility to advise if there was anything in the February 2001 deed that might affect their prospects of success (T 275). He admitted in the context of the later deeds when he accepted he was acting for DJZ that he had a duty to advise if there was anything in the August 2003 deed that might affect the plaintiff's prospects of success (T 276).

1. In these circumstances, in my view, where the question of Mr Pritchard's liability in respect of the February 2001 deed was in issue, the matters relevant to that issue were sufficiently put to him.

4 Causation

1. Whealy JA has analysed the question of causation extensively in his judgment ([280]-[324]). He identified (at [296]) two questions that needed to be answered on the balance of probabilities, first, whether but for the negligence of Mr Pritchard the releases would not have occurred and, second, whether DJZ would have sought to act on non-negligent advice and change the terms of the deed. He concluded that if those questions were answered in the affirmative, the measure of damages being the prospect of avoiding the loss could be assessed by reference to the possibilities.

1. Although I agree generally with the analysis of Whealy JA, it seems to me that it was necessary for DJZ to establish on the balance of probabilities first that but for the negligence of Mr Pritchard there would have been an opportunity to have the February 2001 deed amended to avoid the consequence of the release of the James guarantors. That is in effect the approach Whealy JA took to the first question posed by him, notwithstanding his formulation of it (see [319] of his judgment). Subject to that I agree with his analysis on what he described as the first question in pars [307]-314] of his judgment.

1. The second matter required to be established on the balance of probabilities is whether Mr Pritchard would have sought to take advantage of the opportunity and sought to amend the deed to avoid the consequence of the James guarantors being released. Whealy JA has analysed this in pars [325]-[336] of his judgment. I agree with that analysis so far as it relates to the November 2003 deed.

1. Whealy JA has concluded that his analysis was also appropriate to the February 2001 deed if contrary to his views it was causative of the loss ([243]). I agree but would add the following comments.

1. To avoid the loss of the James guarantees, two matters had to be attended to. First, the securities had to be maintained. That was in the interests of DJZ and there was no reason for it to object. Second, the February 2001 deed had to be drafted in such a way to avoid the consequences that it did not constitute a material variation of the contract of guarantee. This could have been achieved by a covenant not to sue conditional upon Mr and Mrs Christian and Cottenham Nominees Pty Ltd making the payments in cll 1, 2 and 3 of the February 2001 deed and paying $300,000 to the banks referred to in the February 2001 deed if and when demand was made for that amount or if the circumstances referred to in cl 9 of the original deed occurred. That would not affect the guarantors' right to contribution and would not adversely affect the position of DJZ. There seems to me to be no real reason to suggest that DJZ would not have taken the opportunity to have the February 2001 deed amended particularly when an action on the James guarantees was in contemplation.

1. In these circumstances, the negligence of Mr Pritchard in relation to the February 2001 deed did cause DJZ to suffer loss.

5 Liability in respect of the August 2003 deed

1. I agree with the conclusions of Whealy JA ([261]-[279]) as to Mr Pritchard's negligence in respect of the August 2003 deed. I also agree with his conclusion ([308]-[309]) that this negligence had no causative effect.

6 Liability in respect of the November 2003 deed

1. Had I not been of the view that the right to proceed against the James guarantors had been lost as a result of the entry into the February 2001 deed, I would have concluded for the reasons given by Whealy JA, that the November 2003 deed operated as a release of the guarantors, that Mr Pritchard was negligent in failing to advise that this was the possible effect and would have agreed with his Honour's conclusions on causation.

7 Damages for the loss of the James guarantees

1. The first issue in considering the quantum of such damages was whether or not Mr and Mrs Christian and Cottenham Nominees would have entered into a deed of the nature of that to which I referred above. Whealy JA has analysed this issue in relation to the November 2003 deed ([339]-[346]) and I agree with that analysis.

1. For similar reasons I conclude that the probability of Mr and Mrs Christian and Cottenham Nominees Pty Ltd entering into a deed containing a covenant not to sue rather than a release would be around 80 percent. I do not think that any additional discount should be given in relation to the prospect of Mr and Mrs Christian and Cottenham Nominees not agreeing to the maintenance of the securities. This is for two reasons. First, they joined in a deed stating that the securities were of little value (Recital K to the February 2001 deed) and, second, there was in any event an obligation in the deed to ultimately restructure the Surf Road Unit Trust such that Cottenham Nominees Pty Ltd would hold 12 out of 36 units.

1. In these circumstances I agree with Whealy JA that a discount of 20 percent should be allowed for the possibility that Mr and Mrs Christian and Cottenham Nominees Pty Ltd would have declined to enter into a deed which would not have the consequence of releasing the James guarantors.

1. The primary judge found that the total liability of Mr Pritchard in respect of the loss of the James guarantees totalled $542,882.13 (judgment of Whealy JA at [187]). Taking into account the discount for the possibility that Mr and Mrs Christian and Cottenham Nominees Pty Ltd would not sign the deed and that full recovery from Mrs James would not be possible, Whealy JA has discounted those damages by 30 percent ([570]-[571]) and substituted an amount of $380.017. I agree with this ultimate conclusion although I have reached it by a somewhat different route.

8 Other issues

1. The other issues raised in this aspect of the Pritchard appeal may be summarised as follows:

(a) The effect of the settlement which took place in 2005. I agree with Whealy JA ([369]) for the reasons given by him that it was not necessary to take this settlement into account in assessing damages.

(b) Advocates immunity. I agree with the analysis of Whealy JA ([371]-[379]). Further, there does not appear to me to be any basis for concluding that Mr Pritchard was entitled to such immunity at the time of the February 2001 deed.

B The claims against Mr Pritchard, Giles Payne and Mr McGovern in respect of the costs incurred by DJZ in the claims against the James guarantors

1. As I pointed out in par [30] above, the primary judge found that the costs of conducting the proceedings amounted to $489,022. She concluded that 60 percent of the costs were incurred in relation to the claims against Mrs James and that any liability of Mr Pritchard or Giles Payne in respect of the costs should be reduced by 30 percent due to the contributing negligence of DJZ. No appeal has been brought from those conclusions.

1. None of these matters were adverted to by Mr McGovern in his advice, nor his chronology, nor in the notes he took with such care.

1. Thus, it may also be stated that the burden of taking precautions to avoid the risk of harm was a very slight one indeed. It was not complex. Nor was it difficult. The burden involved was of little moment, when considered against the possibility and inherent seriousness of financial harm, if reasonable care were not exercised. As I have said, the question for determination was not whether Mr McGovern SC made an error that was obvious or blatant, but rather whether he failed to exercise reasonable care and skill in the provision of professional advice (Heydon v NRMA Ltd [2000] NSWCA 374; 51 NSWLR 1, at [146] per Malcolm AJA), or whether he failed to exercise the degree of skill and care that is to be expected of persons practising in his area of expertise: Heydon at [362] per McPherson AJA. It must be concluded that there was a reasonable probability that harm would occur if care were not taken. Thus the considerations in s 5B(2)(a) of the Civil Liability Act weighed in favour of a finding that a reasonable person in the position of Mr McGovern SC would have taken proper precautions against the risk of harm.

1. I do not consider that there was any other aspect of s 5B that her Honour ought to have considered. The fact that she did not express her findings in terms of s 5B did not, for the reasons I have already given, suggest error. Moreover, her Honour's findings in relation to Mr McGovern need to be seen in the light of the fact that she had, throughout a long and complex judgment, already dealt with a range of negligence issues when considering the case against both Mr Pritchard and Giles Payne. When her Honour's reasons are read fairly as a whole, and in the light of the manner in which Mr McGovern conducted his case, it is clear that, in substance, her Honour correctly analysed such of the considerations required by s 5B of the Act as were relevant to the issues, notwithstanding the absence of express reference to those provisions in her reasons for judgment.

1. There was one further liability matter argued by Mr Gibb. This related to causation. Mr Gibb argued that Mr Pritchard had not proved, that if Mr McGovern had advised DJZ that the Equity proceedings should not be pursued, DJZ would then have given up its claim on the guarantee and not wasted money on costs in those proceedings. Mr Gibb argued that Mr Pritchard had failed to prove, on the balance of probabilities, that had Mr McGovern warned DJZ as pleaded, this would have prevented DJZ incurring that loss. It is perhaps unnecessary to make a concluded finding on this point since I have earlier found that it has not been shown that the February 2001 Deed was causative of the loss.

1. However, the primary judge was satisfied that "there must have been a real prospect" that Mr Palmieri would have accepted advice recommending settlement, had both Mr Alexis SC and Giles Payne given advice concerning the difficulties posed for DJZ's litigation as at the end of 2003. The position as at the earlier period of time - April 2003 - was that Mr Palmieri had stated that the advice given to him by Mr McGovern was important in determining what action he should take in respect of the Supreme Court proceedings: Black, 200. In that regard, he stated that he followed not only Mr McGovern's advice but also the advice provided by Giles Payne. Mr Palmieri had said that when he was obtaining advice from Giles Payne, and Mr McGovern SC in March 2003, he placed trust and confidence in them as his legal advisers; and that he gave close consideration to Mr McGovern SC's written advice when it was given in April 2003: Black, 192. Consequently, there was a body of evidence before the primary judge which supported a finding that Mr McGovern SC's advice would have been heeded by Mr Palmieri.

1. Mr Gibb (as did Dr Bell on behalf of Giles Payne) placed reliance upon the statement made by Mr Palmieri in cross examination to the effect that, if Giles Payne had advised him that the Supreme Court proceedings were "hopeless", he did not know what he would have done. I have already dealt with this matter when evaluating one of the grounds of appeal relied upon by Giles Payne. In relation to the present submission, I would merely repeat that the primary judge was entitled to weigh this evidence against the other evidence and the probabilities, having regard to the commercial context, as her Honour did at [360].

1. In the circumstances, however, it is unnecessary for me to make any further comment about this particular argument.

1. I am satisfied that the contentions raised by Mr McGovern in his Notice of Contention should not be upheld.

Leave to cross appeal

1. There is one final matter urged by Mr Gibb on Mr McGovern's behalf. Mr Gibb sought leave to cross appeal against the costs order made against his client. There was no objection to leave being granted, and the only remaining issue is whether the order should be made.

1. The particular order about which complaint is made arose out of the primary judge's decision to order that Mr Pritchard pay 65% of DJZ's costs as agreed or assessed, subject, relevantly, "to orders 8 and 9".

1. Orders 8 and 9 were in these terms:

"[8] The costs incurred by the plaintiff as a result of having to engage new solicitors, occasioned by the withdrawal of the second and third defendants from representing it in these proceedings: ... are not to be included in the costs payable pursuant to order 7; and ... are to be paid by [Giles Payne] as agreed or assessed.

[9] The costs incurred by the plaintiff as a result of having to engage new senior counsel, occasioned by the withdrawal of [Mr McGovern] from representing it in these proceedings: ... are not included in the costs payable pursuant to order 7; and ... are to be paid by [Mr McGovern] as agreed or assessed."

1. Her Honour's reasoning that Mr Pritchard should pay 65% of DJZ's costs was, in part, based on the fact that DJZ had brought two claims and failed in one of them. It had, however, succeeded on the major claim, hence the proportion selected.

1. Her Honour took into account in reaching this decision that there had been cross claims brought by Mr Pritchard against both Giles Payne and Mr McGovern and that, as a consequence, DJZ had joined Giles Payne and Mr McGovern as defendants to their proceedings. The primary judge determined that, as DJZ had succeeded in its claim against Giles Payne, Giles Payne should pay the costs of DJZ but took the view that, in addition, Giles Payne should bear the additional costs incurred by DJZ as a result of having to engage new solicitors when they had to withdraw. The basis of this discretionary exercise was the failure on Giles Payne's part to identify its conflict at an earlier stage than the point in the trial when their possible negligence was raised by Mr Pritchard.

1. In relation to Mr McGovern, he succeeded against Mr Pritchard on the cross claim against him. In addition, he succeeded in defeating the claim brought against him by DJZ. This resulted in orders for costs in favour of Mr McGovern against DJZ, and against Mr Pritchard on an indemnity basis. However, as with Giles Payne, her Honour determined that Mr McGovern should bear the additional costs incurred by DJZ as a result of its having to engage new senior counsel when Mr McGovern had to withdraw from the proceedings. Her Honour added:

"In my view DJZ should not have to bear the costs resulting from Mr McGovern's failure to earlier identify his conflict."

1. Mr Gibb's complaint is, first, that his client was not given notice that he was likely to be the subject of a costs order made; and secondly that, in any event, the order made was not warranted.

1. In my opinion, there is no substance in the first point. As Mr Pritchard has correctly pointed out in his submissions, there was no denial of natural justice or procedural fairness in the circumstances where Mr Pritchard's motion of 25 November 2010 sought orders that the costs payable by Mr Pritchard to DJZ not include any fees incurred to, or charged by, Mr McGovern, and that DJZ not be entitled to recover such fees from Mr Pritchard. In addition, Mr Pritchard made detailed written submissions in support of those orders focussing on the nature of Mr McGovern's conflict of interest flowing from the findings made by the primary judge in her principal judgment.

1. It is clear that all other parties, including Mr McGovern, either filed written submissions on costs or at least had the opportunity to do so. The primary judge conducted a hearing in relation to these issues on 9 December 2010, at which Mr McGovern was represented by senior counsel and resisted orders in the terms sought by Mr Pritchard.

1. As it happened, the primary judge in her reasons for judgment given on 17 December 2010 declined to make an order against Mr McGovern of the breadth sought by Mr Pritchard. Instead, the primary judge concluded that it was appropriate to make a narrower order such that DJZ would not have to bear the costs resulting from the failure of Mr McGovern to earlier identify his conflict. It is necessary to recall that her Honour had made previous findings in her principal judgment which determined that Mr McGovern had failed in his duty to DJZ in failing to advise upon matters which were closely related to the matters which DJZ, when represented by Mr McGovern in the proceedings, alleged amounted to negligence on Mr Pritchard's part.

1. In relation to the second argument, Mr Gibb submitted that the orders were in fact made under s 99 Civil Procedure Act 2005. In so far as the order had been made against a lawyer in a civil case, there was no finding of a serious dereliction of duty, or of any of the matters required as a threshold to the application of s 99. Mr Gibb argued that findings of this kind were required before an order could be made under s 99 against a lawyer.

1. Further, Mr Gibb argued that, until Mr Pritchard sought to raise the new defence, there was no issue in the proceedings, and none foreshadowed, about whether the advice Mr McGovern had earlier given to DJZ had caused it harm. Thus, it was argued, there was no actual or potential conflict of interest until the matter was raised by Mr Pritchard.

1. In my opinion, Mr Gibb's second argument has not been made good. The primary judge did not make any order against Mr McGovern under s 99 Civil Procedure Act. I would accept, as Mr McInerney argued, that the order made arose under the Court's general discretion to order costs under s 98 of the Act. The order made against Mr McGovern was made in his capacity as a party to the proceedings, not in his capacity as a (former) legal representative of DJZ, although it recognised as a relevant discretionary matter the role he had earlier played.

1. Further, I do not consider that Mr Gibb's final point should succeed. I would respectfully suggest that it was based upon too narrow a premise. As stated, Mr Gibb argued that no potential conflict of interest could arise until the moment Mr Pritchard sought to raise a defence asserting negligence on the part of the barrister. In my opinion, Mr McGovern should have seen from the outset that, at the very least, he might be called as a witness in the proceedings or have been the subject of criticism. A potential for conflict clearly existed. There is no need for me to recount the circumstances that led to the 2001 Deed and Mr McGovern's role in relation to the advice he provided concerning the Supreme Court proceedings. These matters were inextricably interwoven with the issues which ultimately determined the Equity proceedings in favour of Mrs James. In my opinion, there was a basis for the orders made by the primary judge relating to Mr McGovern.

1. I am not satisfied that her Honour's discretion miscarried. Nor am I satisfied that the order she made was infected by appellable error of the kind identified in House v R.

1. I would propose that leave be granted but that the cross appeal be dismissed.

Damages

1. I have earlier held that Mr Pritchard's appeal against DJZ should succeed on a limited basis, namely, a reduction in the damages to be allowed by the primary judge for item 2 of the schedule of damages. Her Honour took as the measure of damages for this item the judgment sum of $355,870 ordered by Einstein J in favour of DJZ, plus interest of $187,012, a total of $542,882.13. I have, however, found that there were two probabilities of significance that had to be assessed. I determined that each probability should be assessed at 80%. The two probabilities should be combined in order to value the loss of the chance: Malec v JC Hutton Pty Ltd at 644-646. The result is a figure of 64%. While absolute mathematical precision is not required in the area of hypothetical evaluation, the ultimate question is the possibility or probability of DJZ recovering the Einstein J judgment from Mrs James with the evaluation of all relevant contingencies being taken into account in that regard: Malec at 640 per Brennan and Dawson JJ, later adopted in Wynn v New South Wales Insurance Ministerial Corporation [1995] HCA 53; 184 CLR 485, at 499. I would conclude, examining the question from a detached viewpoint, that the overall probability should be held to be 70%.

1. In respect of item 2, DJZ is entitled to recover 70% of $542,882.13, namely, $380,017 (rounded down).

1. Item 4 of the schedule of damages related to the costs of the proceedings against Mr and Mrs James. The base figure was $489,022 plus interest. The primary judge allowed a proportion of these - 60% - and then reduced the resultant figure by 30% to represent the area of DJZ's responsibility for the damages suffered after 18 December 2003 in relation to those costs. The figure thus produced was apportioned equally between Mr Pritchard and Giles Payne.

1. I have concluded that there was no error in relation to this aspect of the assessment of damages.

1. The parties will be required to bring in Short Minutes to reflect the final figure for damages in accordance with the findings I have made. There should be appropriate components of interest against each of the defendants found liable.

Costs

1. Mr Pritchard has failed in his appeal against DJZ, save and except for the reduction in damages. He has failed in his appeal against each of Giles Payne and Mr McGovern SC. Giles Payne has failed in its appeal against the primary judge's decision. None of the contentions - save for that raised by DJZ against Mr Pritchard - have been upheld. Broadly speaking, the challenges to factual findings by the primary judge have been unsuccessful. No basis has been established for disturbing the various costs orders made below, with the exception of the costs consequences that may flow from allowing the damages appeal in part.

1. The parties are urged to confer immediately to ascertain whether agreement can be reached in relation to the outstanding costs issue, and to prepare Short Minutes to reflect the ultimate costs position.

1. If agreement cannot be reached, written submissions should be lodged within forty-eight hours by each party in contest.

1. The final costs issue reserved related to the prospect that an order might be made against Mr Palmieri and Palmieri Developments Pty Ltd. In view of the findings I have reached, it is unnecessary to consider that matter further.

1. BARRETT JA: I have read in draft the judgments prepared by the Chief Justice and Whealy JA. Their Honours have reached different conclusions on three matters.

1. In the discussion that follows, I adopt abbreviations and definitions used by Whealy JA, including those in the dramatis personae at the start of his judgment.

1. I consider first the question whether the February 2001 Deed had the effect that New South and Mr and Mrs James were freed from the obligations they had assumed under the 1999 Deed of Guarantee.

1. By virtue of the 1999 Deed of Guarantee, D & A Mortimer, WIT and DJZ had the benefit of a charge (or, as it was when the deed was executed, an agreement to give a charge) over 26 units of the Surf Road Unit Trust, 13 held by Cottenham and 13 held by New South. Cottenham and New South each gave security over the units held separately by it. The three chargees (D & A Mortimer, WIT and DJZ) held the charge as security for moneys the payment of which was guaranteed by James Christian, Cottenham, New South, Mr and Mrs James and Mr and Mrs Christian, all of whom were accordingly subject to joint and several liability for those moneys.

1. The situation was thus one in which each of two of the entities subject to joint and several liability as guarantors - Cottenham and New South - made its own property available as security for the liability of all of the guaranteeing entities.

1. Clause 8 of the 1999 Deed of Guarantee conferred on the chargees a contractual power of sale in respect of the 26 units that were the charged property.

1. By clause 5 of the February 2001 Deed, two of the three entities by which the charge was held (WIT and DJZ) made a promise to other parties to that deed

"not to take any action to sell the thirteen (13) Units in the SRUT [Surf Road Unit Trust] held by Cottenham and not to take any action against Michael [Mr Christian], Katherine [Mrs Christian] and/or Cottenham arising out of the breach of those parties or any one of them of their obligations pursuant to the July 1999 Deed except as hereinafter appears ..."

1. The other parties to the February 2001 Deed (and accordingly the recipients of the promise of WIT and DJZ) included some but not all of the entities subject to the joint and several liability created by the 1999 Deed of Guarantee. Cottenham and Mr and Mrs Christian were parties but New South, James Christian and Mr and Mrs James were not. The effect and operation of clause 5 were therefore consented to by Cottenham and Mr and Mrs Christian but not by New South, James Christian and Mr and Mrs James.

1. By virtue of the first part of the extract from clause 5 I have quoted, WIT and DJZ put themselves into a position where they could be enjoined from exercising, "except as hereinafter appears", the contractual power of sale that the 1999 Deed of Guarantee made available in respect of the 13 trust units held by Cottenham. Because the power of sale belonged to all of D & A Mortimer, WIT and DJZ and was exercisable only by their concerted action, the promise made by two meant that the power could not be exercised otherwise than consistently with the clause 5 constraint.

1. Having regard to clause 10, The effect of the "except as hereinafter appears" qualification was that the constraint would cease to apply if Cottenham and Mr and Mrs Christian failed to make payments required by clauses 1, 2 and 3 of the February 2001 Deed itself - being, as Bathurst CJ points out, payments that would not operate in satisfaction of the joint and several liability for which the charge had been given.

1. It may be that the effect of the first part of the clause 5 promise - the part relating to exercise of the contractual power of sale - was not to bring about a release of the obligations of the non-assenting guarantors by operation of the general law principles to which Bathurst CJ and Whealy JA refer. I say this because unavailability to the chargees of the ability to realise and enforce the security by sale of 13 of the charged units in exercise of the contractual power would not affect the status and continuing effectiveness of the security as a security. It would only mean that realisation and enforcement had to be by way of resort to less efficient and more cumbersome remedies (that said, however, there would be a question whether the first part of the clause 5 promise would attract an unfavourable exercise of discretion by a court invited to make an order for sale, being the most efficacious of the curial remedies).

1. But clause 5 went further. It precluded "any action against" all or any of Cottenham and Mr and Mrs Christian "arising out of the breach of those parties or any one of them of their obligations pursuant to the July 1999 Deed except as hereinafter appears ...". WIT and DJZ thus created a situation in which they could be enjoined, during an indeterminate period, from every form of "action against" all or any of the named parties that breach of a provision of the 1999 Deed of Guarantee put at their disposal. All conceivable methods of enforcing the charge affecting the 13 trust units held by Cottenham - indeed, of obtaining satisfaction of any kind in consequence of breach of a provision of the 1999 Deed of Guarantee - were thus relinquished, in the sense that the exposure of WIT and DJZ to injunction to restrain their joining in any action to enforce the charge or obtain other satisfaction meant that the necessary concerted action of D & A Mortimer, WIT and DJZ could not be taken.

1. Bathurst CJ quotes the following observation of Dixon J in Williams v Frayne [1937] HCA 16; (1937) 58 CLR 710 at 738:

"If the guarantee is given upon a condition, whether express or implied from the circumstances, that a specific security shall be obtained, completed, protected, maintained or preserved, any failure in the performance of the condition operates to discharge the surety and the discharge is complete."

1. The joint and several nature of the liability undertaken by James Christian, Cottenham, New South, Mr and Mrs James and Mr and Mrs Christian through the 1999 Deed of Guarantee and the provisions of that deed with respect to the charge over the 26 trust units make it plain that each party who undertook the liability did so on an implied condition that the security constituted by the charge would be protected, maintained and preserved for the benefit of all of them. That condition was no longer satisfied once WIT and DJZ accepted the contractual constraints of clause 5 of the February 2001 Deed.

1. On the question whether the execution of the February 2001 Deed caused New South and Mr and Mrs James to be freed from the obligations they had assumed under the 1999 Deed of Guarantee, I have therefore reached a conclusion corresponding with that of Bathurst CJ. Those parties were no longer bound when the August 2003 Deed was executed.

1. I turn to the second matter. There is a difference of opinion between Bathurst CJ and Whealy JA as to the time at which Giles Payne failed in its duty to advise. I agree with Whealy JA that Giles Payne was under the continuing obligation referred to at [441] of his judgment, that is, an obligation to draw the attention of DJZ to the potential problem arising from the February 2001 Deed. And, having regard to what I consider to have been the true effect of the February 2001 Deed on the obligations created by the 1999 Deed of Guarantee, I agree with Bathurst CJ that it was therefore incumbent upon Giles Payne to give that advice as soon as it had received a copy of the February 2001 Deed and had had a reasonable opportunity to digest and understand its content - that is, in May 2002. In light of the finding of the primary judge (which, like both Bathurst CJ and Whealy JA, I consider to be correct) that such advice - and a recommendation to settle the proceedings accordingly - would have been accepted if given at that time, the breach of duty by Giles Payne must be seen as having occurred in May 2002, with consequences to which Bathurst CJ refers.

1. The third matter to which I desire to make particular reference is the source and precise nature of Mr Pritchard's duty to warn DJZ of the risk that the February 2001 Deed might have had the effect of releasing New South and Mr and Mrs James from their guarantee obligations. Because of the apparent absence of a retainer of Mr Pritchard by DJZ (as distinct from directors of that company), Bathurst CJ's analysis and conclusion (at [65] to [72]) are, in my respectful opinion, to be preferred; but I note that nothing of substance turns on the choice between the two possible analyses in this particular case.

1. In relation to the balance of the substantive issues arising, I agree with Whealy JA and with the additional comments of Bathurst CJ at [74], [75], [76], [81], [82], [86], [98] and [99] of his judgment. The result, in terms of damages and quantum should be as stated by Bathurst CJ at [101] and [102].

1. As to the costs orders made by the primary judge, the fact that the outcome on appeal is confined to a revision of quantum means that the "event", for cost purposes, remains. The costs orders made at first instance should therefore also remain. As to the costs of the appeals, I agree that the matter should be reserved for future submissions and decision.

1. The appropriate disposition overall is that proposed by the Chief Justice at [105].

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Decision last updated: 28 June 2012