Richtoll Pty Ltd v WW Lawyers (in Liquidation) Pty Ltd

[2016] NSWSC 438

Supreme Court

New South Wales

Medium Neutral Citation:	Richtoll Pty Ltd v WW Lawyers (in Liquidation) Pty Ltd [2016] NSWSC 438
Hearing dates:	7.3.2016; 8.3.2016; 9.3.2016; 10.3.2016; 14.3.2016
Date of orders:	19 April 2016
Decision date:	19 April 2016
Jurisdiction:	Common Law
Before:	Hoeben CJ at CL
Decision:	(1) Verdict and judgment for the defendant. (2) The plaintiffs are to pay the defendant’s costs of these proceedings.
Catchwords:	LEGAL PRACTITIONERS – incorporated legal practice – duty to clients – whether general retainer in existence – terms of retainer – asserted breach of retainer – clients suffering large losses as a result of mortgage lending – torts – negligence – duty of care – whether duty of care included passing all information acquired onto clients – operation of s 5O Civil Liability Act 2002 (NSW) - duty and breach – whether duty extended to advising on valuation of security – whether solicitors should have carried out ASIC search shortly before draw down of loan to company borrower – causation – whether alleged breaches of duty and retainer caused loss – whether clients would have made loans regardless of breach of duty – causation not established - contributory negligence – proportionate liability of solicitors.
Legislation Cited:	Civil Liability Act 2002 (NSW) – ss 5B, 5D, 5E, 5O
Cases Cited:	Adeel’s Palace Pty Ltd v Moubarak; Adeel’s Palace Pty Ltd v Bou Najem [2009] HCA 48; 239 CLR 420 AJH Lawyers Pty Ltd v Hamo [2010] VSC 225 Astley v Austrust Ltd [1999] HCA 6; 197 CLR 1 Booksan Pty Ltd, Jaymay Constructions Pty Ltd v Wehbe, Elmir; GIO General Ltd & GIO Workers Compensation (NSW) Ltd v Webhe, Elmir [2006] NSWCA 3 Citycorp Australia Ltd v O’Brien (1996) 40 NSWLR 398 David v David [2009] NSWCA 8 Dobler v Kenneth Halverson; Dobler v Kurt Halverson (by his tutor) [2007] NSWCA 335; 70 NSWLR 151 Dominic v Riz [2009] NSWCA 216 Heydon v NRMA Ltd [2000] NSWCA 374; 51 NSWLR 1 Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10; 247 CLR 613 Kayteal Pty Ltd v John Joseph Dignan [2011] NSWSC 197 Keddie v Stacks/Goudkamp Pty Ltd [2012] NSWCA 254 Kowalczuk v Accom Finance [2008] NSWCA 343; 77 NSWLR 205 Maes Finance Ltd, Mac No 1 Ltd v Sharp & Partners (a firm) [1999] EWHC Technology 209 Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (A Firm) [1979] 1 Ch 384 Minkin v Landsberg (T/A Barnet Family Law) (2015) EWCA Civ 1152 Mortgage Express Ltd v Bowerman & Partners (a firm) [1996] 2 All ER 836 National Home Loans Corp plc v Giffen Couch & Archer (a firm) [1997] 3 All ER 808 Nationwide Building Society v Balmer Radmore (a firm) [1999] All ER (D) 95 Omega Trust Co Ltd v Wright Sun & Pepper (No 2) (1998) PNLR 337 Provident Capital Ltd v Papa [2013] NSWCA 36; 84 NSWLR 231 Rexstraw v Johnson [2003] NSWCA 287 Sydney South West Area Health Service v MD [2009] NSWCA 343 White v Illawarra Mutual Building Society Ltd [2002] NSWCA 164 Winnote Pty Ltd v Page [2006] NSWCA 287; 68 NSWLR 531 Zakka v Elias [2013] NSWCA 119
Category:	Principal judgment
Parties:	Richtoll Pty Ltd – First Plaintiff Ongoing Financial Services Pty Ltd – Second Plaintiff WW Lawyers (In Liquidation) Pty Ltd - Defendant
Representation:	Counsel: Mr AJ Abadee/Mr EWL Anderson – Plaintiffs Mr DA Priestley SC - Defendant   Solicitors: Garland Hawthorn Brahe – Plaintiffs Meridian Lawyers - Defendant
File Number(s):	2010/096258

JUDGMENT

1. HIS HONOUR:

Nature of proceedings

Richtoll Pty Ltd (Richtoll) and Ongoing Financial Services Pty Ltd (OFS) as former clients, sue WW Lawyers Pty Ltd (in liquidation) (WWL), an incorporated legal practice. They seek damages for professional negligence and breach of contract. The plaintiffs were in the business of lending money for investment, secured by real property. OFS retained WWL to provide services in relation to various loans. The nature and scope of the retainer/retainers are in dispute.

2. The claim arises from two transactions. The first in point of time was a loan of $3 million, the security for which was Unit 2, 18 Carlisle Street, Tamarama (the “Tamarama property”). The second in point of time was a loan of $4.5 million to Sanctuary Developments (Australia) Pty Ltd (Sanctuary) which was secured by a second mortgage over partially developed parcels of land at Airlie Beach in Queensland.

Factual Background

3. Unless otherwise indicated, I find the facts to be as follows.

4. OFS was incorporated in May 2007 for investment purposes. It had available to it a sum of $14 million which it intended to use for loans secured by real estate which would produce high rates of return. The position of Richtoll, and why it is a plaintiff in the proceedings, was never explained. No point was taken by the defendant in relation to it. Accordingly, I have treated it as simply an alter ego of OFS. It was accepted by the parties that should OFS be successful, Richtoll would share in that success.

5. The principals of OFS were Mr Christopher Richards (Richards) and Mr James Toland (Toland). They had extensive experience in property development, particularly the renovation of property. It was as a result of their success in this area that OFS had a substantial sum available to it for investment. In the course of this activity, they acquired some general exposure to lending for property redevelopments. This exposure was in the capacity of borrowers and only in respect of mainstream commercial loans. Through OFS they were looking to invest via mortgage lending. At all material times Richards and Toland were directors and shareholders in OFS and Richtoll.

6. Mr Mark Williams, solicitor, (Williams) had set up WWL in 2005, trading under the name of ‘Worthington Willliams Lawyers’. He was the only principal lawyer, although the firm employed solicitors from time to time. From the firm’s inception an acquaintance of Williams, Cumali Arslan (Arslan) commonly known as “Jimmy”, was a director of WWL. Arslan was not himself a lawyer.

7. Williams was admitted to practise as a solicitor in NSW in 1983. He worked as an employed solicitor for White Barnes and Maguire until 1988 when he joined Keast Hussein Williams as a partner. Between 1983 and when he set up WWL his work as a solicitor involved litigation including personal injury, commercial and family law. He developed a knowledge of property and commercial legal practice. He deposed that WWL engaged in commercial law, family law and property law. It performed some work for clients who loaned money secured against property and other assets. WWL ceased to trade and went into administration in November 2009.

8. Since that time Williams has resided in the United Kingdom and has primarily worked as a community worker and cricket coach. He does not hold a practising certificate as a lawyer in either Australia or the United Kingdom. He deposed that he did not hold any records of the files of WWL in relation to the services which it performed for the plaintiffs. His assumption was that the liquidator had taken possession of all files when WWL went into liquidation. He said that he had not kept any computer which contained information relating to the work of WWL and had no access to emails sent and received while WWL was operating.

9. In his affidavit of 25 March 2015 Williams described the relationship between WWL and Arslan as follows:

“9   I first met Cumali Arslan who was known to me as “Jimmy” at some time in the late 1990s as a family law client. Mr Arslan was regularly involved in property development and financing deals through businesses that he operated.

10   Early on in the life of the firm, Mr Arslan commenced to provide business development services to WW Lawyers as he had numerous contacts who were potential clients. Mr Arslan was not formally employed at any time by the firm. He was remunerated for his services by payments to a company he had set up as I recall a company called Unox. Initially these payments were by way of commission related to client referrals to the firm. He was subsequently paid a monthly fee to Unox for a period of time.

11   Over the years from 2006 to 2009 Mr Arslan worked in the offices of WW Lawyers from time to time. After a period of time he took on some office administrative tasks, taking these over from the previous office manager. He represented himself externally with the authority of the firm, as a Business Development Officer of WW Lawyers.

12   Mr Arslan was not, to my knowledge, legally qualified and did not to my knowledge hold himself out as legally qualified or as a practising lawyer or as capable of providing legal services at all. Nor did I or to my knowledge anyone else represent Mr Arslan as having such capacities.”

10. Arslan did not swear an affidavit in these proceedings but provided what was described as an “outline of evidence”, the accuracy of which he confirmed when giving evidence. In that outline, Arslan described his position with WWL as follows:

“4   When WW Lawyers commenced to trade I provided services to the firm mostly in the form of client referrals and some administrative work. The services were provided through a corporate entity of which I was director. I worked out of WW Lawyers’ offices. I was not an employee and was not paid a regular salary.”

There was also in evidence (exhibit 13) an affidavit of Arslan, sworn 4 February 2011, in other proceedings brought by OFS against him (2010/254012). This document was introduced as MFI 8 during the cross-examination of Arslan. It was, however, subsequently read in the defendant’s case. The fact that it predated Arslan’s oral evidence by five years gave the document particular importance.

11. What was said at the initial meetings between Richards and Tolland on the one hand and Williams on the other is in issue. The terms of the retainer/retainers under which WWL performed services for OFS and Richtoll are also in issue.

12. On or about 2 August 2007 Williams met Richards for the first time at a lunch arranged in Sydney. The two were introduced by a mutual contact, Ms Ivy Lee, who was present at the lunch.

13. Richards says that his intention in attending the lunch was to secure the services of WWL to assist in the fledgling mortgage lending business of OFS. He said that he had discussed this possibility with Ivy Lee and that she had suggested that WWL was experienced in the area and was suitable to provide a full suite of services to clients. At par (11) in his affidavit of 27 October 2014 Richards deposed that Williams said:

“My firm is a small firm that specialises in mortgage matters, due diligence, collecting interest payments and all other matters associated with loan transactions… Basically my firm operates as a ‘one-stop’ shop.”

14. In response to a statement from Richards that he was looking for a law firm that would “check out” the borrower, examine their financials, approve the loan and do all the legals, Richards deposed that Williams said:

“It’s exactly what we specialise in … We would handle your matters from the womb to the tomb.”

15. The only other attendees at that lunch who have provided affidavits in these proceedings are Ivy Lee and Williams. In her affidavit of September 2014, Ms Lee gave evidence of a conversation supportive of Richards’ version. In cross-examination, however, it became clear that she was only recalling the general tenor of the discussion. I find that she has no detailed recollection of what was said and in particular, the use of such words as “vetting loans” and “due diligence”. Ms Lee was first asked to recall the meeting in which she had no business interest herself, shortly before preparing her affidavit seven years after the event (September 2014). In cross-examination she conceded that she could not recall what was said at the meeting just the intention of the meeting and her perception of it:

“Like I say I don’t remember exactly the words but I guess when I when I went to do that area of work I guess they were also have to perform the due diligence type of responsibility, I mean that’s my perception. In the funding so I guess our perception is that he will probably be cautious to introduce certain clients that are reliable and responsible. That’s my perception.” (T.120.16)

16. In his affidavit Williams denied that he said that WWL specialised in mortgage management or placement of funds, denied saying that WWL could manage the whole process, denied saying that WWL would be able to vet borrowers and denied saying that WWL would perform “due diligence”. Williams denied saying that WWL was a “one stop shop” and that it would handle matters from “womb to the tomb” and denied that it would collect interest payments. He agreed that he may have said that WWL did have some sources for finding potential borrowers and that it could do the documentation for loans and any enforcement that became necessary.

17. It was Richards’ evidence that because of his inexperience as a lender, he was looking for a law firm which was capable of providing a wide range of services, which would include the identification of investment opportunities, and would perform “due diligence” by which he meant ascertaining the prospective borrower’s servicing capacity and valuing the property that would be the security for the loan. On behalf of OFS he was also seeking that such a law firm would perform associated legal services, which would include the drafting of loan and security documents, as well as the provision of such legal advice as was appropriate to protect its interests. He said that as a result of his discussions with Williams, he believed that WWL would provide such services.

18. It is the plaintiffs’ case that not long after the lunch meeting, Richards sent an email to Williams, dated 8 August 2007. Part of that email is missing due to how it was photocopied. The email purported to be sent by Mr Richards and was addressed to “Mark Williams ([email protected]). Vincenza Barbaro was a secretary/paralegal in WWL at that time. The content of the email, allowing for the missing parts, was as follows:

19. (exhibit E(1), p25)

20. Williams denied having seen that email before these proceedings. There are some difficulties with this email which I will discuss in due course.

21. It is common ground that not long after the lunch meeting, there was a meeting at WWL’s offices. This was attended by Richards, Toland, Williams and Arslan. Williams introduced Arslan to the others at this meeting. There is no issue that Arslan was introduced as the “Business Development Manager” of WWL. What was said at the meeting, however, is in issue.

22. Richards in his affidavit of 27 October 2014 says that at that meeting Williams said:

“We are both qualified to introduce investment opportunities, provide legal advice and then package and manage the loans. This is what we specialise in. We can provide you with the full service you are seeking. We source the loans, vet the loans and then do the associated legal documents.”

In his affidavit of 22 October 2014 Toland says that Williams said:

“We source the loans, vet the loans and then do the associated legal documents … Jimmy and I will personally oversee the loan introduction, the borrower’s validity and the legal documentation under the umbrella of WW Lawyers.”

24. Williams denied saying that “we are both qualified”. He denied saying that Arslan had any qualifications. He denied saying that “we were qualified to introduce investment opportunities”. He denied saying that “we could package and manage loans” and denied saying that “we would vet loans”. He deposed that at most he “would only have said we might be able to introduce borrowers”. He agreed that he said that “we could do the work and make sure the security was properly documented”. He made similar denials in relation to the words attributed to him by Toland.

25. Arslan in his outline of evidence said that he did not recall Williams saying that he, or they, would source or vet loans. He recalled little of the meeting in his oral evidence. He did, however, give other evidence as to where responsibilities lay which effectively contradicted the statements of Richards and Toland.

“Q. You told Mr Richards in or about late August 2007 that this company, Global Consultants Pty Ltd was an entity that was under the law firm, WW Lawyers umbrella, you said that to Mr Richards didn't you?

A. Absolutely not.” (T.284.46)

…

Q. I'm just trying to understand what you mean by your understanding as to whether you were legally an employee Mr Arslan, what do you mean by that?

A. Well I was working on my own, I was never doing any WW work, that's why. I was always working on my own.” (T.286.1)

26. In the Third Further Amended Statement of Claim (3rd FASC), the plaintiffs plead that there was a retainer agreement, presumably of a general nature, arising from these events which governed the relationship between the parties thereafter. This is denied by Williams who contends that regardless of the content of these early discussions, WWL was retained on a matter by matter basis only.

27. There are aspects of the pleaded retainer agreement which are significant. It is alleged that “Mr Arslan and Mr Williams (on behalf of the defendant) and Mr Richards (on behalf of OFS), agreed that … Mr Arslan, OFS and the defendant could and would act on behalf of Mr Richards, NSW Historic of their nominee” to provide various services. As pleaded, these assertions create some uncertainty, i.e. that the retainer agreement apparently involved both Arslan and Williams acting in a manner that gave rise to a retainer and that somehow the retainer agreement involved not only that WWL would act on behalf of Richards and OFS but that Arslan, separately, would act on their behalf as well. As pleaded, it is not certain who the client is said to be. Because of the way in which the case was run, however, I have proceeded on the basis that the client was OFS (which includes Richtoll).

28. The services that are said to have been agreed upon as part of the retainer agreement included identifying loan proposals and “good potential borrowers”, included conducting financial and legal due diligence on the borrowers and a number of other services that included drafting documentation, monitoring loans and providing legal and commercial advice. This sets out one of the fundamental areas of dispute in the proceedings. Firstly, there is the dispute as to whether there was any representation or commitment made that WWL would conduct due diligence, vet borrowers and vet any relevant security. Secondly, there is a dispute as to whether and to what extent any representation about Arslan’s relationship to WWL was made. There is also a dispute as to the extent to which, if at all, any conduct or omissions on the part of Arslan might either be attributable to WWL or in some manner constitute a breach of duty or retainer by WWL.

29. I have concluded that the evidence is not capable of establishing any general retainer, let alone the terms of such a retainer. In reaching that conclusion, I have had regard to my assessment of the reliability of the witnesses and my finding that generally speaking Williams and Arslan were more reliable witnesses than Richards and Toland, the reasons for which I will set out in due course.

30. I have also taken into account the following matters. Having regard to the passage of time, and the absence of documentation (except for the disputed email), I have considerable doubts as to the reliability of evidence as to detail from the witnesses who attended those meetings. The result is that there is insufficient evidence to confidently make positive findings as to any such retainer. Moreover, even taking the plaintiffs’ evidence at its highest, no agreement was reached and no terms were settled upon. This is important because normally a general or overarching retainer is a questionable proposition as a matter of law and requires some precision in the evidence if it is to be open as a finding (Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (A Firm) [1979] 1 Ch 384 at 402).

26. Importantly, however, a general retainer in the terms proposed by the plaintiffs is contradicted by events which occurred shortly after the retainer is said to have been entered into. A retainer in the terms proposed by the plaintiffs is contradicted by subsequent correspondence by WWL to the plaintiffs (exhibit 6) and is not supported by any other documents created by either side. In that regard, I refer specifically to the letter from WWL to OFS of 13 August 2007. That letter (which I find was received by Mr Richards on behalf of OFS) is inconsistent with such a general retainer and had there been such a general retainer in place, its receipt by Mr Richards would almost certainly have produced a complaint or some other remonstrance on his part to Williams. There was no such complaint or even a comment in relation to that letter.

27. I have concluded that at these meetings no more was proposed by Williams than that WWL could provide various legal services relating to loans and could assist clients in arranging for third parties (such as Arslan or associated businesses) to source loans. Although Richards denied that Arslan was discussed at the lunch meeting, Ms Lee recalled that he was. Notwithstanding my earlier finding about the reliability of her recollection, it is unlikely that she would have recalled or made reference to that name if it had not been raised during the lunch meeting. It seems likely that Arslan was mentioned as someone who could provide certain services separate from WWL.

28. It follows from the above that I view the email of 8 August 2007 with some suspicion. Its contents are simply too convenient for the plaintiffs’ case. Like the oral assertions of Messrs Richards and Toland, its content is not consistent with correspondence subsequently sent by WWL to OFS and Richards. Oddly it suggests that Arslan was discussed at the lunch meeting, a proposition which Richards denies. The fact that the email was sent to Ms Barbaro at such an early point in the relationship between WWL and OFS is also odd. I am not satisfied the email was sent to WWL. I am also not satisfied that it was received by Williams. Judging from subsequent correspondence, had such an email been received by Williams I am satisfied that he would have responded to it in a way which traversed some of its assertions.

29. In any event, over the following months OFS engaged WWL to provide services with respect to several loans which it made to third party borrowers totalling several millions of dollars, usually for short terms at high interest rates, secured by real property. The plaintiffs sue WWL with respect to two of these loans. I find in accordance with Williams’ evidence that a separate retainer was entered into between WWL and the plaintiffs for each loan transaction.

The Tamarama loan

35. Arslan purchased the Tamarama property in 2003. In 2006 Williams provided legal services in connection with Arslan’s refinancing of his loan with his lender, La Trobe Capital Mortgage Corporation Limited (La Trobe). The Tamarama property was security for a loan from La Trobe in the amount of $1.8 million. Documentation from La Trobe indicated that in August 2007 Arslan was in arrears and had been subject to two late payment fees. At that time the balance of the loan owing was $2 million and La Trobe was taking steps to gain possession of the property as mortgagee (exhibit E1, p427).

36. In May 2007 Arslan procured for himself a valuation of the Tamarama property. The valuation indicated that the property was worth between $2.5 - $2.9 million with the upper figure reflecting a value upon completion of certain improvements. Although the valuation was ordered on behalf of WWL, it is clear from the signature on the requisition for the valuation that it was signed by Arslan. Williams denied having ordered the valuation and denied having seen it before the loan transaction in relation to the Tamarama property was finalised. I accept Williams’ evidence on this issue and am satisfied that he neither ordered the valuation nor saw it before the finalisation of the loan. There was no reason or occasion for him to have seen the valuation and it was not put to him that he had.

37. Richards deposes to a conversation in which Arslan represented that he had conducted his own research into the value of the Tamarama property. In his affidavit of 27 October 2014 Richards said:

“16   … I said: “Have you done the research as to the value of the property?”.

Mr Arslan said: “I have done the research, I have got a valuation up to $3.7 million and once it is renovated it will be up to $4 million, it is a prime development site. I have checked the assets and liabilities of the owners and it is a great deal for OFS.”

“The security is a prestige apartment with potential for capital gain. It is a safe investment, they just haven’t been able to fund the building work. The LVR is 75-80% and the rate is 23% and its short term for capital enhancement. It’s a family property and there will be no problem with repayments. I have viewed a valuation. It is an excellent opportunity.”

I said: “What are the building works?”

Mr Arslan said: “Better access for parking and balconies and some renovations.”

I said: “Okay, if you have done the work on it and you advise it is a good deal, have Mark [Williams] prepare the loan and mortgage documents for James and I to review.”

Mr Arslan said: “That will be done”.”

Richards agreed in cross-examination that, on the basis of that conversation only, he instructed Arslan to have Williams prepare the relevant loan and mortgage documents.

38. The plaintiffs allege that in August 2007 at some time after the earlier meetings at the restaurant and the offices of WWL, Arslan contacted Richards with a proposal for a loan of $3 million by OFS to the owner of the Tamarama property. There is a dispute whether Arslan made it clear to Richards that he was the owner or represented that the owner (and proposed borrower) was merely a relative of his. Richards says that at this time he knew Arslan as “Jimmy” while the subsequently executed loan documentation named Arslan by his proper first name, Cumali.

39. There were three units in the block at Tamarama. Arslan owned the middle unit. It was that unit which secured the loan with OFS. The payment of $57,500 to OFS on settlement represented a pre-payment of interest. The interest rate provided for under the loan agreement was high, being 23% per annum standard rate and a default rate of 28%.

40. There is an issue as to the capacity in which Arslan was acting in his dealings with Richards. Richards asserts that he understood that he was dealing with Arslan in these matters as a part of WWL and not as somebody independent of the firm. In cross-examination the following evidence was given:

“Q. I suggest that you considered that at that time, that's at the time that you had the conversation with him, about Tamarama that you understood that his relationship with WW Lawyers was informal, what do you say to that?

A. Not correct.

Q. You understood that it was something of a consultancy?

A. Not correct.

Q. Have you ever said anything to that effect?

A. I've never been asked.” (T.40.8)

41. In the course of that cross-examination Richards was shown an earlier affidavit which he had sworn in these proceedings on 20 April 2010. His attention was drawn to the following paragraphs in that affidavit:

“5   Jimmy, whilst in his employ at WWL as a Business Development Manager of some sort introduced OFS to the Sanctuary mortgage and their need for funds.

…

21   Jimmy was on an informal arrangement as what I believe to be a consultant and Business Development Manager for WWL.

…

23   I then called Jimmy and we had a discussion and said words to the following effect to each other:

Chris: “I’ve spoken to my business partner James and we have agreed to loan the funds that Highrange requires. Please arrange for Worthington Williams Lawyers to prepare the mortgage documents.”

Jimmy: “OK I will do that. I will also use one of my companies, Global Consultants Pty Limited who provides consultancy services to do the research on the deal and the valuations.”

Chris: “OK I have no issue with that. Please proceed to prepare the documents.””

42. Having been taken to those paragraphs, the following cross-examination of Richards took place:

“Q. At the time that you swore this affidavit you did consider that the arrangement was informal between him and WWL?

A. On this particular loan it's possible.

Q. Mr Richards, are you suggesting that you thought the arrangement was different for this loan than in general terms?

A. At the time I - when we did the other loan it was certainly not the case. This one I just don't - I can't say, I don't recall what circumstances were here. This was another loan.

Q. Mr Richards, when you said at paragraph 21 "Jimmy was on an informal arrangement" you were talking about your understanding of his arrangement with WW Lawyers at around that time, correct?

A. Well this was a different loan, and I just can't recall the circumstances of this loan.

Q. You say in paragraph 20 above it "in or around mid to late September 2007 I was approached by Jimmy" do you see that?

A. Yes.

…

Q. Do you think, do you, that your understanding of what the arrangement was changed in between the Tamarama loan and the High Range loan?

A. It was a different loan, I just can't recall the circumstances with it.” (T.41.5 - .31)

43. Apart from that material placing doubt on Richards’ “understanding” of the position of Arslan, Toland’s evidence as to his understanding supported Arslan’s activities being independent of WWL.

“Q. I want to suggest to you that in that meeting, it was made clear to you that Mr Arslan would have one role and the law firm would have another, that is right, isn't it?

A. That would be my understanding, because he is not a lawyer, I was relying on the legal veracity of Mr Williams and the other lawyers associated with the office, and I was relying on Mr Arslan to give good advice in that regard, finding suitable loans.” (T.168.42)

44. Later in his evidence Toland said:

“Q. But you did expect, didn't you, in relation to the loans that OFS made in 2007 that Mr Arslan would charge money in some way?

A. He did when these loans were entered into. He got a fee from it.” (T.171.32)

45. It was evident that OFS understood that Global Consultants Pty Ltd (Global) had been incorporated to provide services in relation to loans, separate from the law firm. Global was incorporated on 24 August 2007 with Arslan as a 50% shareholder and as its director. There was a 50% shareholding by a company controlled by Williams and his wife but the control of Global clearly lay with Arslan. Even though Global was providing services separate from the law firm, there was no change to the arrangements between WWL and OFS as a result of its incorporation.

46. Richards was reluctant to concede any obvious distinction between Arslan’s role and that of WWL. He initially attempted to rely upon the fact that Global was not incorporated at the time of the Tamarama loan, but when it was pointed out to him that no change in WWL’s responsibilities apparently arose from this (i.e. Arslan must have been providing these services, whatever they were, as an individual separate from the law firm from the beginning) he resorted to the proposition that Arslan and Global were operating under “the umbrella” of WWL. There is no support for that proposition in any of the documents and it is contradicted by the letters of limitation of retainer sent by WWL in respect of every loan (exhibit 6).

47. The prevarication of Richards on this issue can be seen in the transcript when he was cross-examined about the contents of paragraph 23 in his affidavit of 20 April 2010, which is set out at [39] - [40] hereof. The cross-examination of Richards on this issue continued as follows:

“Q. You said, "Okay, I have no issue with that", do you see that?

A. Yes.

Q. This is September 2007. That was entirely inconsistent with your understanding of what WW Lawyers were going to provide to your companies in relation to each of these loans, isn't that right?

A. Well, Global was a company set up to handle specifically our loans, that was told to us it was covered by Worthington Williams.

Q. I am suggesting that when Jimmy Arslan said to you that, "Another entity was going to do the research on the deal and the valuations", that was entirely inconsistent with what you expected for your loans, isn't it?

A. Well, I can't recall when Global was set up but I don't think they owned existence on it when Tamarama was going through.

…

Q. That was entirely inconsistent with what you expected at that time still, wasn't it?

A. No, when High - when Tamarama, we were doing the loan with Tamarama, we had an understanding of what the company was going to do, quite specific. This is different to the Tamarama loan.

Q. There was a change, was there?

A. Only that he is saying, it is Global that is doing it here, or I was saying it.

Q. There was some change in your understanding of what WW Lawyers was going to do, was there?

A. No, no, they were still to do the same. Look after our loans.

Q. But now someone else is doing the research work, is that right?

A. Well Global, it is the same, Global is doing it, yes, but our understanding was that Global was doing the work for Worthington Williams or in - they were under their umbrella.

Q. That is not what Jimmy said there at all, is it?

A. Well, that is what he is saying, is that Global was doing the work.

Q. Yes, nothing about under the umbrella or any association with WW Lawyers at all?

A. That was previously discussed about the umbrella of Worthington Williams.

Q. Here he said, you say, "I will also use one of my companies, Global Consultants, who provide consultancy services", that is what he said, isn't it?

A. I don't recall that, but that is there.

Q. Do you doubt the words in your affidavit now?

A. No, if it was said that is there, that is correct.” (T.43.20 - 44.17)

48. While both Richards and Toland used the expression “umbrella” and Richards initially testified that the term had definitely been used in discussions with Williams and Arslan, both conceded that it may not have been an expression that was ever used at the relevant time (Richards T.97.45, Toland T.169.25). Arslan firmly denied it (T.284.49) and it was not put to Williams. There is no basis in the evidence for a conclusion that Williams had anything to do with the activities of Global. Although a company controlled by him was a shareholder in Global, Williams received nothing from it (T.216.49) and there was no suggestion that he did any work in it or for it.

49. As already indicated, the differentiation between the functions performed by Global and WWL was made clear in the letters from WWL to OFS in the case of each loan (exhibit 6). WWL was providing services in relation to the preparation and execution of loan documents whereas Global was providing other services which included sourcing clients who required loans and providing commercial advice in relation to those loans. This is evident when one compares the fees charged by WWL in relation to each loan (which were modest) with those charged by Global which were $10,000 in relation to the Tamarama loan, $39,450 in a matter of Schneller Family Trust Pty Ltd, $10,891 in a matter of Tollan Real Estate Pty Ltd and $230,625 in relation to the Sanctuary Loan (exhibit 1). I find that there was no misapprehension on the part of Richards as to the role of WWL and that of Global. I find that Richards was well aware that when providing commercial advice to him, Arslan was acting either on his own behalf or on behalf of Global or one of his other companies and not on behalf of WWL. I find that Global was not operating “under the umbrella” of WWL. I find that the activities of Global were quite separate to those of WWL.

50. An important document when considering the Tamarama loan is the letter from Williams to OFS of 13 August 2007 to which reference has already been made (exhibit E(1), p 379). It is necessary to set out the letter in full. It is addressed to OFS and to Mr Richards as a director. Mr Richards initially said that he did not receive the letter (Affidavit, 27 October 2014, par 19). In par 3 of his affidavit of 1 September 2015 Richards said that he had no recollection of having received the letter and confirmed that under cross-examination (T.64 - 65).

51. The letter is as follows:

“Re: CUMALI ARSLAN ADVANCE FROM ONGOING FINANCIAL SERVICES

Security: 1/18 Carlisle Street, Tamarama

We refer to our recent discussions.

We confirm that your company has agreed to lend Cumali Arslan a sum of $3,000,000 upon various terms and conditions. We further confirm your instructions for this firm to act on the company’s behalf in respect of preparation of the loan transaction documentation and upon settlement thereof.

Enclosed herewith is a draft of each of the following:

1.   Proposed Loan Agreement, and

2.   Proposed Mortgage

Please contact the writer to discuss same.

We advise that this firm has acted on behalf of The Borrower in various transactions. The Borrower is currently a client of the firm. We have advised him, in writing, that we act on your behalf in respect of this transaction and are unable to advise him in respect thereto. If you have any queries and, in particular, if you have objections to us acting on behalf of the company in respect of this transaction, please immediately advise the writer of same.

We note this firm has not conducted any due diligence in respect of this transaction and is not prepared to take any responsibility in respect thereto. We advise you should rely upon your own enquiries in this regard.

If you have any queries please do not hesitate to contact the writer. Most importantly, kindly advise as to whether the documents enclosed herewith reflect the agreement contemplated.”

52. The letter sets out in clear terms the understanding of WWL as to its retainer in relation to the Tamarama loan, i.e. “We further confirm your instructions for this firm to act on the company’s behalf in respect of the preparation of the loan transaction documentation and upon settlement thereof”. It specifically excluded the carrying out of any due diligence. As already indicated, there was no subsequent complaint or comment by Richards as to that articulation of WWL’s retainer in respect of the Tamarama loan. I find that WWL’s retainer in respect of the Tamarama loan was as set out in that letter.

53. The contents of that letter are to be contrasted with the evidence of Richards in cross-examination that he did not think that he was actually provided with a draft agreement and that he did not recall receiving it:

“Q. But you were provided with a copy of the loan contract at some time before you signed it, correct?

A. The day we were signing it I recall, and it was explained to us by Mark Williams and it was signed.

…

Q. Yes, have you ever complained to anyone that the draft you saw of that contract did not have clause 9 in it but when you came to sign it, it did?

A. Well we didn't really receive a draft, we just were explained by Mark Williams it was a standard document and James and I signed it.

Q. I am just asking you if you have ever complained to that effect to anyone?

A. Only to our lawyers when litigation was started.

Q. That you had seen a draft without clause 9?

A. No, I had never seen a draft. It was explained to Mark - by Mark Williams at the time we signed it, he went through the mortgage document and we signed it.

Q. You say you went through the mortgage document, we are talking about the loan agreement for the moment, he went through that with you, did he?

A. Yes.

Q. He pointed out clause 9 to you?

A. No, no he didn't, he said it was a standard document and that was all we did, we signed it.

Q. When you say he went through it with you then, what did you mean?

A. Well, it was a standard document, it was a standard mortgage document?

Q. What did he do?

A. He showed us where to sign and we signed.

Q. He didn't say anything about the document?

A. Well, he explained it was a mortgage document and he went through what property it was for, et cetera, and then we signed it.” (T.63.31 – 64.22)

54. As claimed in the 3rd FASC and as is clear from the above cross-examination, one of the complaints by OFS is that a clause (clause 9) was inserted into the Tamarama loan agreement without the knowledge and consent of Richards and Toland. Richards’ evidence is that he did not receive a draft of the loan agreement but that he and Toland were invited to sign a document which they had not previously seen and which they did not read at the time they signed it. Toland’s evidence is that he did not sign the loan agreement and that no-one explained it to him, nor was he told about the insertion of clause 9 in it. Implicit in that evidence is that neither Richards nor Toland had any discussions with anyone (including Arslan) concerning the content of the Tamarama loan agreement. Despite his earlier evidence about Williams “going through” the loan/mortgage document, the final position adopted by Richards was that there was no explanation of the loan agreement and that they were simply asked to sign it. This he did without reading it.

55. That last assertion was conceded by Williams who agreed that there was no oral or written advice to OFS, Richards or Toland about the terms or effect of the loan agreement. Whereas in some circumstances that might be an issue, it does not matter greatly in this case since the only clause of which the plaintiffs complain is clause 9.

56. I am satisfied that the letter from WWL to OFS of 13 August 2007 (exhibit E(1), p379-80) was not only sent by WWL but was received by Richards on behalf of OFS. On that issue, I prefer the evidence of Williams to that of Richards. The evidence of Williams is supported by the contents of exhibit 6, which consists of similar “retainer” letters sent by Williams to OFS (Richards) in relation to other loans. The letters follow a generally similar format. It was never put to Williams that he did not send the letter. No reason was put forward as to why, if Williams sent the letter, it would not have been received by Richards.

57. The letter is important in a number of other respects. One of those is the credit of Richards. It places considerable doubt on his evidence as to the content of the conversations with Williams at the lunch meeting and the initial meeting at the offices of WWL. It places in doubt the email of 8 August 2007. It places in doubt his evidence that no draft agreement or mortgage document were sent to him. The fact that there was no response to the letter, nor to the other letters to similar effect in exhibit 6, is consistent with the contents of this letter and those letters being in accordance with Richards’ understanding of the retainers between OFS and WWL.

58. The plaintiffs allege that the whole of clause 9 of the loan agreement was included without any consultation with Richards or Toland. It is common ground, as Williams conceded, that no advice was given by WWL to the plaintiffs, or anyone on their behalf, as to the terms or effect of clause 9. Clause 9 was in the following terms:

“9.1   In the event The Borrower is in default in respect of any payment due under this Agreement for a period of four (4) consecutive months, and The Lender has not exercised its rights under Clause 3 hereof, then The Lender, at its sole discretion, may notify the borrower, in writing, that The Lender requires The Borrower to transfer to The Lender all his right, title and interest in The Security and The Borrower shall so effect such transfer within 14 days of the date of any such Notice.

9.2   In the event The Lender exercises its option pursuant to clause 9.1 hereof, then such transfer shall be in full and final discharge of all obligations of the Borrower under the Agreement.

9.3   The Lender shall be responsible for all costs and stamp duty payable in respect of any transfer effected pursuant to Clause 9.1 hereof.”

59. Williams and Arslan say that the insertion of clause 9 in the loan agreement occurred at the request of Richards. Arslan says that the request for its insertion was made to him by Richards and that he passed that request onto Williams (exhibit 7, par 16). Williams says that both Richards and Arslan specifically requested that clause 9 be inserted in the loan agreement (exhibit 10, p11, par 35). In cross-examination Williams said that after he had been told by Arslan to insert clause 9, he confirmed that instruction by speaking to Richards (T.254.1). Williams said that Richards made it clear to him in discussions at the time that he understood the meaning of clause 9 (T.254.47).

60. Clause 9 is straightforward in its terms and would be readily understood by a literate non lawyer. Richards conceded that he understood the effect of the clause when he read it.

“Q. But you have had plenty of opportunity to read it since then, haven't you?

A. Yes.

Q. You haven't had any trouble understanding it, have you?

A. No.

Q. The effect of it is simple, correct?

A. Yes.

Q. We are talking about clause 9?

A. Yes.” (T.54.36)

61. The effect of clause 9 is fairly simple in mechanical terms. It provided that if the borrower fell into default in respect of repayments for four consecutive months then the lender held a unilateral option to take title to the security property by means of requiring its transfer by the owner/borrower. Such a term had the effect of circumventing the ordinary requirement for a mortgagee lender to follow the process of mortgagee sale to discharge the outstanding debt. It had thereby the potential to save time, effort and cost to the lender in the case of default by the borrower. It also had the obvious potential for financial gain to the lender if at the time of the exercise of the option, the security property was of a market value greater than the outstanding debt.

62. There was, as the experts noted, a notional risk for the lender in sub-clause 9.2 which provided that if such a transfer were effected, it would be in full and final discharge of the borrower’s obligations under the agreement. If the lender exercised the option at a time when the value of the property was less than the outstanding debt, then the lender would ostensibly suffer loss. It was never suggested by Richards that he did not understand this aspect of clause 9. Even then it was only OFS which could exercise the option.

63. In order to understand the events which transpired between the parties relevant to clause 9, it is necessary to say a little more about the Tamarama loan. The transaction settled on 22 August 2007 when the loan monies of $3 million were advanced. On settlement the cheques were drawn as follows:

1. WWL Trust account - $150,000.00

2. WWL - $2,120.00

3. Office of State Revenue - $8,000

4. La Trobe - $1,820,000.00

5. La Trobe - $204,756.80

6. Pocheptsova Olga - $120,000

7. Hansons Lawyers - $2,683.67

8. OFS - $57,500.00

9. Cumali Arslan - $634,849.53

The explanation for those cheques is set out in a three page letter, dated 22 August 2007, from WWL to Richards on behalf of OFS which reported on the settlement of the loan transaction (exhibit E(1), pp240 – 242). Annexed to the letter is a Memorandum of Fees from WWL to OFS in the amount of $2,120 for acting on the loan transaction.

64. I find that Richards requested that a clause in the form of clause 9 be inserted in the loan agreement. It was agreed by the experts that this was an unusual clause. It is a surprising, if not an extraordinary, proposition that any solicitor in a loan transaction would insert an unusual clause in the loan agreement without the consent of the client particularly if he or she did so without explaining the clause. This is particularly so when dealing with a new client. Richards’ evidence of signing the loan agreement without reading it in total reliance upon WWL, is also surprising.

65. The absence of any complaint or even comment by Richards subsequent to the completion of the Tamarama loan transaction tends very much against an acceptance of Richards’ evidence on this issue. On the contrary, subsequent events suggest strongly that not only was Richards well aware of the presence of clause 9, but sought to exploit it in due course.

66. As the experts agreed and as is apparent from the terms of the clause, it favoured OFS. There was only a limited circumstance in which it would favour the borrower, which would have been obvious to Richards. Moreover, the initiative for activating clause 9 was solely in the control of OFS.

67. Finally, there was evidence of Richards requesting the insertion of a similar clause in a later loan agreement. While that later document speaks for itself, the evidence of Richards in relation to it is of importance. It supports the evidence of Arslan and Williams in relation to clause 9 and it provides another indication of Richards’ unreliability as a witness.

“Q. You would, from time to time, instruct WW Lawyers to insert specific types of clauses into loan contracts, wouldn't you?

A. No. …

Q. You never did anything like that?

A. No.

Q. Can you just please turn in the large bundle that you have to page 848, which I think is in number 3? You see at 848 in the plaintiff's tender bundle there is an email from you to Jimmy Arslan dated 25 February 2008, do you see that?

A. Yes, I do.

Q. I suggest that this reflects there, at point 1, you asking for particular clauses to go into legal contracts, do you accept that?

A. I don't recall the clauses.

Q. Yes, but do you accept that it shows you asking for new clauses to go into a contract?

A. If they were relevant to the contract and the conditions of the contract, we would have discussed that.

Q. You were asking for clauses to go into a contract?

A. Well I don't recall what the actual clauses were, if I could see the clauses then I could explain how they were instructed. But if you are doing a contract, you discuss the price or the deposit conditions or whatever it is you are putting in, that is classified, I would imagine, as a clause. …” (T.54.47 – T.55.29)

“Q. Can you see there that you are asking Mark Williams to insert a particular

option clause in a contract?

A. Well, I would more say they are conditions of the contract.

Q. You call it an option?

A. Yes.

Q. Going down in that same email, if your eyes can find the line that starts, "Mortgage money", it is up about seven from the bottom?

A. Yes.

Q. Then the sentence starts, "There will be another clause stating that we can exercise the option at any time and take over the property".?

A. Yes.

Q. You see that?

A. Yes.

Q. That is what you wanted, correct?

A. Yes, yep.

Q. This email records you instructing your solicitors to insert particular types of clauses into contracts, doesn’t it?

A. I think after long discussions with Tony Flighter and that we had agreed on the conditions of where it was heading that was my understanding for the clauses to be put in.

Q. Do you accept now that from time to time, you would instruct your lawyers to insert particular clauses into contracts?

A. Well of course that would have been subject to me discussing it with Mark Williams. …

Q. In any case, when you said, "There will be another clause stating that we

can exercise the option at any time and take over the property", you were telling Mark Williams what should be in there, that wasn't something that he had advised you about, isn't that right?

A. Well, I don't - I mean, we were a second mortgagee, I don't see how we could have taken the property over at any time.

Q. It seems very similar to clause 9 in the Tamarama agreement, doesn't it?

A. Well I would have to see it in context, I mean, it is unfair to sort of say, "Well look, stretch your memory on this and tell us all", I just don't recall the actual context of it. …” (T.56.50 – 58.10)

See also exhibit E(3), p848 and exhibit 11, pp8, 26.

68. The events which transpired between the parties in relation to clause 9 were not uncomplicated, but support the proposition that Richards requested the insertion of clause 9 and in due course sought to activate it until dissuaded by Mr Kendall (Kendall), an accountant retained as a consultant by OFS in late 2007.

69. After the initial drawdown of the $3 million loan, Arslan made no further repayments of principal or interest beyond the pre-payment of $57,500. This failure was perhaps predictable since it was never Arslan’s intention to continue to hold the property and make loan repayments for any significant period of time. When the default occurred, there is no evidence of Richards or OFS taking any action against Arslan immediately, other than engaging Kendall to investigate the position.

70. In about February 2008 Arslan advised OFS that he had located a purchaser for the Tamarama unit. The purchase price was $3 million. Contracts for Sale of the unit at that price were exchanged with this purchaser.

71. Because of Arslan’s default and the existence of clause 9, OFS acquired certain rights. At some point before settlement of the purchase, Richards communicated to Williams and Arslan that as in effect the equitable owner of the unit, OFS did not wish for the sale to proceed. Just why Richards adopted that position is contentious. According to both Williams and Arslan, Richards intervened and requested that the sale contract be rescinded because Richards had decided to attempt to acquire all three units in the block and develop them further, thereby maximising the capital gain.

72. In his affidavit in reply on this subject (1 September 2015) Richards says that the purchaser was in default under the Contract for Sale in not having paid the requisite deposit bond by the required date (which would seem to be true). Richards says that this was of particular concern because Arslan had advised him that the purchaser did not have finance and was looking for vendor finance from the equitable owner, OFS. Richards considered this to be no more than an attempt by Arslan to shift the exposure for his debt onto OFS. In correspondence with OFS, Williams and Arslan note that the failure to pay the deposit bond in time should not have been fatal to the sale proceeding, rather it was the change of heart on Richards’ part only.

73. Richards denied that he had an intention to develop the whole block at the time of rescission but it is clear that he did from the contemporaneous correspondence (exhibit E(3), pp884 and 886). It is also clear from correspondence that despite his oral evidence (T.105), the purchasers were in a position to pay the deposit having earlier handed over cheques which they suggested be banked (exhibit 8, exhibit E(3), pp862 and 869). Both Williams (T.257.37) and Arslan (T.306.12) recalled that this was the case.

74. Despite Richards’ denial, it is apparent that on or about March 2008 Richards requested Arslan to sign a transfer of the Tamarama unit naming OFS as the transferee and the sale price as $3 million. Williams and Arslan were both definite that this occurred in early 2008. Neither had any ongoing reason to lie about this. A contemporaneous email from Arslan to Richards of 25 March 2008 confirms this request and action (exhibit E(3), p886). This was not contradicted by Richards (T.114.12 - .43). The transfer was given to Richards and no copy survives. These actions of Richards are not consistent with those of a person who had clause 9 inserted into the loan agreement without his knowledge and consent.

75. The following extracts from correspondence provide a snapshot of what was happening in relation to the Tamarama property after Arslan had defaulted in his interest repayments and contracts for its sale had been exchanged:

Letter Williams to Richtoll Pty Ltd (Richard and Toland), 3 March 2008.

“… Unit 2/18 Carlisle St, Tamarama

We refer to the telephone conversation between Chris Richards and our Mr Warda today.

We confirm your instructions to rescind Agreements for sale of the abovementioned property on the basis of the failure to pay deposit monies in respect of each sale. These instructions will later modify, in that, queries our Mr Warda as to whether those Agreements could be put “on hold”. We confirm our advice that the latter is not possible but that very comment has made us uncertain as to your instructions.

Shortly after receiving your instructions, we received correspondence from the solicitors for the purchaser. Enclosed herewith is a copy of same. As you will appreciate, that correspondence indicates an intention to rectify the default giving rise to the option to rescind. Accordingly, there may be an argument that you are no longer entitled to rescind but on balance we think that argument will fail.

In the event that the purchasers argued that the rescission was unlawful then they could take action for the specific performance of the Agreements which would involve you in protracted and costly litigation.

Please be aware that you, as effective vendors, are entitled to 0.025% of the deposit in circumstances of rescission. However, as we are not holding any deposit you would obviously have to commence litigation to recover that entitlement which would not be cost effective. If you require us to commence such proceedings, we would require your instructions.

In respect of the Tamarama property, we understood that sale was to effect a repayment of the loan to Ongoing Finance and that the real vendor was selling the property as trustee for that company under what would otherwise be a power of sale but to avoid formal proceedings in that regard. If that Agreement is rescinded then that raises the issues as to the enforcement of the loan and we require your specific instructions in that respect. As we recollect, without specific reference to the Loan Agreement, the lender is entitled to take title to the property if the borrower is in default as defined under the Loan Agreement.

In any case, we would appreciate if you would both contact the writer in order to provide to him your instructions as to rescission. We will not rescind any Agreement unless and until we receive those instructions.

We look forward to hearing from you.

Yours faithfully,

WORTHINGTON WILLIAMS LAWYERS

Mark F Williams

Solicitor” (exhibit 10, pp31-32)

Letter to Directors OFS from Warda,14 March 2008.

“We refer to recent communication.

1.   Loan to Tamarama:

As per your instructions, the contract has been rescinded, we have had severe protest from the purchasers of the said property including the two properties in Point Piper, to the extent that caveats were issued by the purchasers across all three properties. These caveats were only then lifted after our law firm had various discussions, also, when Mr Arslan conferred directly and privately with the purchasers. …” (exhibit 10, p33)

Letter to Directors OFS, 20 March 2008.

“We refer to an email we have today received from Chris Kendall ("Chris K").

Enclosed herewith is a copy of that email for easy reference.

We note the writer had a telephone conversation with Chris Richards ("Chris R") on 6 March, 2008, where it was agreed that whilst this firm was authorised to liaise with Chris K in respect of loans made by Ongoing Financial Services Pty Ltd (“Lender") we are uncertain as to whether those instructions extended to taking instructions direct from Chris K in respect of action to be taken on any loans. We would appreciate if both Chris R and James Toland ("'James") would clarify that position, in writing, so that we certain from whom our instructions are to be given.

During the course of that telephone conversation, Chris R dictated a letter to this firm stating that all correspondence and documents were to be sent to him at his email address and his business address in Maitland. This was to avoid duplication, as has occurred in the past, and so that all documents were stored in one place. That letter was to state that if Chris K or James wanted documents they were to first ask Chris R before making any request to this firm. We did not receive that letter. Please clarify, in writing, to whom correspondence and documents are to be sent.

In respect of the progress of each loan, and with particular reference to the email of Chris K enclosed herewith, we advise/comment as follows:-

1.    We assume the instructions from Chris K are as a result of a Schedule recently forwarded to Chris K by Cumali Arslan ("Arslan") as to the position of each loan. We understand that Schedule to be correct. We would appreciate if you would clarify as to whether those instructions do arise from that Schedule. This law firm also forwarded that Schedule on 14 March, 2008. This is important so that we are all aware of the basis of your instructions. This letter should be read in conjunction with that Schedule and our letter of 14 March, 2008.

…

8.   Loan to Arslan:

We confirm the instructions of Chris R, during his telephone conversation with the writer on 6 March, 2008, and before, as follows:-

(a)   An Agreement for Sale of the security was entered into for $3 million. You instructed us to rescind that contract, together with two other contracts. That Agreement was entered into Arslan, as Vendor, and he confirmed that the rescission should take place as he held the property on trust for the Lender. Accordingly, the Agreement was rescinded and the purchaser appears to have accepted the rescission. We did not provide you with any advice as to whether the rescission was appropriate but only carried out your instructions to do so. You appeared to be under the impression that the Loan would not have been paid out in full. This is perhaps so from the sale price but this does not mean the sale would have completed in the absence of further payment. We were only informed that this was your impression on 6 March 2008, after the rescission had been effected.

(b)   The Lender does not wish to take enforcement proceedings at this stage.

(c)   The Lender was prepared to hold onto the security, albeit in the name of the Borrower on trust for the Lender, because it was of a view that the property could be developed and a financial gain thereafter achieved.

(d)   In order to maximise the development potential, the Lender was to liaise with Arslan as to acquiring al apartments on the site.

We note that you were to confirm these instructions in writing but as yet we have not received same. Until we receive your instructions in writing we will take no further action. We understand that you have today given instructions to Arslan to undertake certain tasks. Accordingly, we understand you may not be in a position to instruct us to take action, if any, until those tasks are completed.

…

WORTHINGTON WILLIAMS LAWYERS

Mark F Williams” (exhibit 10, pp36, 37, 39, 40)

Letter to Directors OFS from Williams 28 March 2008.

“We refer to our letter of 20 March, 2008, a copy of which we herewith enclose.

We have not heard from you direct in respect thereto.

By way of update, we advise as follows: …

7.   Loan to Arslan:

We are awaiting your instructions as per our abovementioned letter.

We also note that we have not received instructions from you in respect of matters referred to in our abovementioned letter for the general conduct of loans (we refer to paragraphs 3 and 4 of our abovementioned letter). Please respond thereto.

We look forward to hearing from you.

Yours faithfully,

WORTHINGTON WILLIAMS LAWYERS

Mark F Williams” (exhibit 10, p43)

76. Kirath Ramrakha (Ramrakha), an employed solicitor with WWL, gave evidence that Richards again sought a transfer from Arslan in mid 2009. Richards denies this but there is little reason to doubt the independent witness. It was not put to Ramrakha that he was lying or mistaken (T.315). The evidence revealed that Ramrakha swore an affidavit and provided a letter statement (exhibit 9) to the same effect in 2010. It is clear that the transfer was discussed between them from an email of 24 July 2009 (exhibit 2) yet Richards would not admit that this was so (T.122.30).

77. The context in which this evidence is important is that OFS alleges that as a result of the inclusion of clause 9 in the Tamarama loan agreement, it suffered loss in the form of the unpaid loan principal and legal costs in the dispute with Arslan. Evidently no steps had been taken to register the transfer provided in early 2008. In this regard, the 3rd FASC pleads:

“At various stages in 2008 to 2010, Mr Arslan purported to exercise the option clause so as to limit his liability under the Tamarama Loan Agreement.” (3rd FASC, par (19)).

This allegation appears to misunderstand the effect of clause 9 in that the only person who could exercise it was OFS. In any event, the plaintiffs’ evidence seems to deny that anything was done by anyone to effect a transfer. The only evidence to the contrary is that called on behalf of the defendant which makes it clear that Richards on behalf of OFS was the moving party.

78. There is an issue concerning whether a representation as to the value of the Tamarama property was made by another employed solicitor of WWL. Richards gave evidence that before the execution of the loan documentation, he spoke to John Warda (Warda), a solicitor then in the employ of WWL. He says that Warda said to him:

“I have sighted the valuation and it is in excess of $3.7m. I have also searched the titles and they are fine.” (exhibit E(1), p9, par (18))

In response to a question from Richards as to whether he was satisfied with the valuation, Warda is reported to have said that he was.

79. Warda was employed at WWL from December 2005 until February 2009. During that time he conducted work on a number of the OFS loan files within the WWL office. He died in May 2011. No allegation that Warda had made any representation about the value of any security property was made until affidavits were filed on behalf of the plaintiffs in October 2014.

80. In his affidavit (par (13)) Toland made a similar allegation against Warda. At around the same time, Warda is supposed to have said to Tolland words to the general effect:

“… I have seen valuations which support the 80:20 LVR. The Loan Agreement has the standard terms for such agreements and like all Loan Agreements it is in your favour as the lender.”

81. In response to these allegations against Warda, Williams in his affidavit set out his experience with Warda as an employed solicitor over the relevant period. Ramrakha also provided an affidavit making similar observations about Warda’s character and general practice as a solicitor.

82. Williams says that although Warda was in his late 30’s, he was inexperienced and that he (Williams) firmly instructed him that if a client sought his advice he should check with Williams first and so far as he was aware, Warda followed that instruction. Williams says that at no time did he ask Warda to consider or provide any services or advice as to the value of a security property and that he was not aware that Warda had been asked to provide such advice. Williams says that in his experience it would be particularly out of character for Warda to have expressed any view about financial rather than legal matters to a client. Williams said:

“… I found him to be adverse to expressing his own opinions and making his own decisions in his practice.” (exhibit 10, p19, par (98)).

83. Ramrakha in his affidavit (25 May 2015) says that he never became aware of Warda providing advice in any matter concerning the valuation of real property, including the valuation of real property used as a security. He was unaware of Warda having conducted any financial investigation or providing advice in respect of either the Tamarama loan or the Sanctuary loan.

84. I have concluded that these allegations against Warda are not true:

1. On the plaintiffs’ case, no such valuations existed. The highest valuation for the property existing at the relevant time put the property in a range of between $2.5 and $2.9 million. Arslan recalled a higher valuation which has not been produced (T.292.41).

2. The statements attributed to Warda by both Richards and Toland are not merely statements of his opinion but definitive as to having personally sighted the relevant valuation. Since there is no evidence of such another valuation being in existence, it is implicit in the evidence of Richards and Toland that Warda was untruthful in the representations which he made.

3. On the evidence of Williams and Ramrakha it was out of character for Warda to make such statements, be they reckless or untrue, in a professional context.

4. No motive for Warda to have made false statements about the security property appears in the available material. There is no suggestion that he had any financial incentive in the loans proceeding. He was merely an employed solicitor of the firm. The legal costs payable to the firm as a result of the Tamarama plus Sanctuary loan transactions were modest.

5. In early iterations of the Statement of Claim, such misrepresentations had been specifically attributed to Arslan alone. Nothing was said about Warda in any context until the service of the plaintiffs’ affidavits in October 2014. When this was put to Richards in cross-examination, he was not able to recall the content of the earlier Statements of Claim. Accordingly, it is unclear when and in what circumstances the plaintiffs became aware of Warda’s death and his consequent unavailability to refute any misrepresentations attributed to him.

6. In the case of both the affidavit of Toland and that of Richards, these conversations with Warda are recounted selectively in isolation and in the absence of evidence of any other contact or communication with Warda. For reasons which I will elaborate both Richards and Toland were defensive witnesses with somewhat selective memories and had a tendency to avoid answering questions directly and fashioning answers to assist the plaintiffs’ case.

7. Importantly, neither Richards nor Toland was able to deal in any convincing way with questions as to the circumstances in which they came to believe that what Warda had told them was wrong or what they did about it (T.51.45, 52 and 185). In the case of Toland his answers were unresponsive and evasive (T.179-182). If their evidence on this issue is correct, then Warda knowingly made false statements to them about the valuation of the Tamarama property. Despite this, there is no suggestion that they raised this issue either with Warda or Williams or even discussed the matter between themselves (T.159, 184). It is not without significance that these alleged misrepresentations were conveniently made to both Richards and Toland by Warda in relation to the two loans in dispute but not in relation to other loans.

85. There is an issue as to whether Arslan disclosed to Richards and Toland that he was the owner of the Tamarama property and therefore the borrower. Richards and Toland say that they were not aware of this and that they had been positively misled by Arslan when he told them that the property was owned by a relative of his. Arslan was definite in his affidavit (exhibit 13), “outline of evidence” (exhibit 7) and in his oral evidence that he made it clear that he was the owner.

86. Richards was cross-examined by reference to email correspondence between him and “Jimmy” Arslan which also bore the email stamp “Cumali Arslan”. Richards’ explanation was that he had not and would not have seen that email stamp because he relied upon his secretary to both read and reply to emails on his behalf after he had dictated the content.

87. Williams in his affidavit said:

“Certainly in all my dealings with Chris Richards in relation to that loan he never suggested anything to make me think that he was not aware that the borrower was Jimmy Arslan himself” (exhibit 10, p14, par (51)).

88. His evidence at trial was:

“Q. You don't identify in this letter the name of the borrower as Jimmy Arslan, do you?

A. No.

Q. This is the Jimmy Arslan whom you say you'd previously acted?

A. Yes.

Q. In your affidavit, Mr Williams, you say that Mr Richards had never suggested anything to indicate that he was unaware that Jimmy Arslan was the borrower; do you remember saying that in your affidavit?

A. I think I do, yes.

Q. But if you believed that Mr Richards knew that Jimmy Arslan was Cumali Arslan, why didn't you refer to Jimmy's name in this letter?

A. That's - his real name is Cumali Arslan. That's his name. He's known as Jimmy, but that's his name Cumali Arslan.

Q. It's the position, isn't it, that at no time prior to 22 August 2007 did you take any steps to disclose to Mr Richards that Jimmy Arslan was the borrower?

A. We had discussions about it.

Q. I put to you Mr Williams that in those discussions you didn't identify that it was Jimmy Arslan who was the borrower did you?

A. I would disagree with that.” (T.249.35 - 250.7)

89. It seems somewhat farfetched that neither Richards nor Toland associated Cumali Arslan with “Jimmy Arslan”. On that issue, it is not clear from the evidence of Williams that he had in mind a specific occasion when he told Richards or Toland that Cumali Arslan and Jimmy Arslan were the same person. Rather the effect of his answers is that his recollection at trial was that this must have been so because of the discussions which took place. The more likely scenario is that set out in Williams’ affidavit, i.e. that in his dealings with Richards nothing was said which alerted him to the fact that Richards might have had a misunderstanding as to who the owner of the Tamarama property was. As a result there was no occasion for him to specifically raise that issue.

90. In any event, the real issue is not whether Arslan in fact sought to mislead Richards and Toland as to the ownership of the Tamarama property, but whether Williams knew that this had taken place and that Richards and Toland misunderstood who the owner was.

91. There is no evidence that Williams knew (if such were the case) that Arslan had misled Richards and Toland as to the identity of the owner of the Tamarama property. There is no evidence that Williams knew that Richards and Toland were acting under a misunderstanding as to who the owner of the Tamarama property was. Williams’ evidence is to the contrary. There was no occasion identified in the evidence when that information or misunderstanding would have been conveyed by either Richards or Toland to Williams. Nothing was put to Williams to suggest or identify a particular occasion when he should have clarified the question of ownership of the Tamarama property.

92. On that state of the evidence, there was no obligation on the part of Williams to bring to the attention of Richards and Toland that the owner of the Tamarama property and Jimmy Arslan were the same person. In the absence of any evidence that Richards and Toland were unaware of that fact, Williams was entitled to assume that they were so aware and conduct himself accordingly. There is nothing in the letter of 13 August 2007 which is factually incorrect, or that was misleading on this issue. It is a formal letter. The registered owner of the property was Cumali Arslan and that is the person to whom reference is made.

93. Taking those matters into account and also the adverse view which I have formed as to the reliability of the evidence of Messrs Richards and Toland, I find that there was no obligation on the part of Williams to specifically point out to Richards and Toland that the owner of the Tamarama property was the person they knew as Jimmy Arslan. Moreover, the absence of evidence of any complaint by Richards or Toland to Arslan or Williams that they had been misled as to the ownership of the Tamarama property tells against them being so misled.

94. There was an issue at trial as to whether Williams acted for Arslan as well as for OFS in relation to the Tamarama loan.

95. In the letter of 13 August 2007 Williams asserted that the borrower in respect of the Tamarama land was a client of WWL but that he had advised the borrower that in this transaction WWL was acting for OFS and was unable to provide the borrower with any advice in relation to the transaction. That is in accord with the evidence of Williams at trial. The plaintiffs submit that the documentation makes it clear that WWL was acting on behalf of the borrower and that this evidence of Williams is false. The documentation to which reference is made comprises the letter from Hansons (the solicitors for La Trobe) of 15 August 2007 (exhibit E(1), p 427) and the filing of the discharge of the La Trobe mortgage and the registration of the OFS mortgage.

96. These documents do not establish that WWL was acting for Arslan in relation to the Tamarama loan. The letter from Hansons of 15 August 2007 is readily explainable by the fact that WWL had acted for Arslan in 2006 in the loan by La Trobe. Hansons may have assumed that this was still the case. The registration of the discharge of the La Trobe mortgage and of the OFS mortgage were steps which WWL would have to have taken in any event to protect the position of OFS in relation to the loan. It is likely that Arslan acted for himself in this transaction.

97. Because Arslan was in regular contact with Williams and was from time to time passing on instructions which he received from Richards, he would have told Williams, how apart from the discharge of the La Trobe loan, he wished the cheques to be drawn. It is also clear from the WWL letter of 22 August 2007 (exhibit E(1), p240) to Richards that OFS also had a say in how the cheques were to be drawn in that $57,500 was to be paid to OFS as the first interest instalment, $8,000 was to be paid to the Office of State Revenue for stamp duty and $150,000 was to be held in trust in respect of construction costs (I assume for the extra work to be carried out on the Tamarama property). In those circumstances, I am not satisfied that WWL was acting for Arslan in relation to the Tamarama loan. I accept the evidence of Williams on that issue and the assertion to that effect in the letter to OFS and Richards of 13 August 2007.

98. At this stage, I should say something further about my assessment of the reliability of the principal witnesses in this matter.

99. I found Richards to be an unconvincing and unsatisfactory witness. Richards was evasive in his responses and regularly took refuge in non-committal answers, i.e. “It’s possible”. His responses to whether or not he had received the letter from WWL of 13 August 2007 and the other letters comprising exhibit 6, were particularly unconvincing. These letters were clearly sent by Williams and the contrary was never put to him. They were clearly received by Richards. His answers ranged from “possible” to “highly possible”, but never “yes” or “no”. These responses were not candid. Similarly, in relation to the invoices issued by Arslan on behalf of Global (exhibit 1), Richards refused to say whether or not he had received them (T.103.15). Other areas where his responses were inconsistent with unchallenged or incontrovertible evidence have been referred to earlier in this judgment. I found Richards to be an unreliable witness.

100. That unreliability carries over to Richards’ evidence that he was inexperienced as a lender and relied entirely upon Williams or Arslan (said by Richards to be acting on behalf of WWL or under its umbrella) for advice as to what transactions and loans should be entered into by OFS. My assessment of Richards as he gave evidence is that he is an astute businessman who was well aware of the need to obtain valuations which showed that loans to be made by OFS were adequately secured. That conclusion is consistent with the documentary evidence. I accept the evidence of Arslan that the sort of loans that OFS through Richards was intending to make were those where the money advanced was adequately secured, i.e. asset lending (exhibit 13, par (8), T.284.20). Whether or not the borrower had the capacity to make the high interest payments which those loans imposed was of less importance to Richards than the value of the property which could be sold in the case of default. Richards’ conduct in relation to the Tamarama loan and his reluctance to take action against Arslan as the defaulting borrower, provides support for that conclusion.

230. The plaintiffs submit that by Williams’ own admission his failure to undertake a further ASIC search was inadvertent rather than a deliberate exercise of professional judgment. The plaintiffs submit that the defence in s 5O does not apply to conduct of that kind. The plaintiffs submit that the use of the word “acting” in the section implies that certain actions were taken after consideration. It follows, so the plaintiffs argue, that the s 5O defence is not made out.

231. In relation to causation, the plaintiffs submit that the evidence of Richards and Toland made it clear that the capacity of borrowers to service loans was a matter of significance to them. In support of that submission, the plaintiffs rely upon T.91 – 94, T.152, T.172 – 173. (By way of interpolation, T.91 – T.94 does not provide any support for that submission. On the contrary the effect of Richards’ evidence in those pages was to say that he relied entirely upon WWL to make inquiries to that effect and at T.94.9 he agreed with the cross-examiner’s proposition that he was not concerned whether or not the borrower had the capacity to repay the loan. Similarly, no support for that proposition is provided by T.152. The evidence of Richards went no further than to say that when he learned that a receiver had been appointed to Sanctuary, he was concerned but could not explain why he was concerned.)

232. At T.172 – T.173 Toland’s evidence contradicted that of Richards, to which reference has just been made. It was his evidence that he and Richards insisted on documentation being sent to them which they then examined in order to decide whether they should make the loan.

“Q. Mr Toland can you remember an occasion when you were told something about a borrower that led you to be cautious and to say we shouldn't go ahead with the loan, or are you just making that up?

A. That is - no it is not making it up, it would be discussions with Mr Richards. He would have the information sent to his office and I would be in his office, I was not in Worthington Williams office, I was in our office in Maitland and we would discuss documents that would be sent to us and I would look at this the loans. I can recall definitively rejecting at least three of these particular things, and said, "Let's not proceed with them".

…

Q. You don't say anything about any concern about any borrower?

A. But the reality is that you were given information, and you back a judgment by the information. The LVR was part of that information, but if you were given further and better particulars they help you to make a judgment. Sometimes you got further and better particulars, how many other loans did they have, what was their current status, just anything that might give you an indication as to whether or not the loan was a good one or a bad one.

…

HIS HONOUR: Q. Mr Toland if I've understood you correctly when you had these discussions with Mr Richards Mr Richards would provide you with information, did he, about the borrowers, how many loans they had, matters of that kind?

A. Whatever information was given to us in relation to a loan would be part of what we would discuss. We don't - we didn't always get a lot of information, but sometimes there'd be additional information, and occasionally it might have been that even Mr Arslan was a bit cautious about it, he said consider these matters and that would be part of why we would choose to reject it.” (T.172.43, T.173.12, T.173.40)

237. The plaintiffs submit that whatever the failings of Richards and Toland in managing the business which they embarked upon, they were on behalf of the plaintiffs looking to enter loan transactions in which the borrower was viable in terms of repayments. The plaintiffs submit that there is no substance in the suggestion that the fact of a receiver having been appointed to Sanctuary Developments would not have been a matter of concern or consequence to them. The plaintiffs submit that the inclusion in the loan agreement with Sanctuary of a provision that the appointment of receivers constituted an event of default entitling OFS to call in the loan demonstrated the significance placed by OFS on the question of the status of the company borrower and its capacity to service its repayment obligations. (That last submission is of little weight. The provision relating to the appointment of receivers is a standard provision which appears in just about every loan agreement entered into by a company as borrower.)

238. The plaintiffs rely upon the evidence of the experts as to what a reasonable solicitor would have done in response to learning of the appointment of receivers before the advance of loan moneys. The plaintiffs note that both Messrs Rosier and Carkagis gave evidence that a competent solicitor would have advised OFS not to advance the moneys at that point and that the money should not be advanced until such time as inquiries had been made with the borrower’s solicitors and satisfactory explanations and assurances had been provided as to the viability of the loan. The plaintiffs submit that the negligence of Williams prevented the making of such inquiries. The plaintiffs submit that acting rationally and prudently in their own interests and on the provision of hypothetical competent advice from their solicitor but for the negligence of Williams, OFS would not have advanced the loan moneys on 21 September 2007 or at all.

239. The plaintiffs submit that on this issue it is not open to WWL to rely upon the explanations and self-serving statements by Sanctuary’s solicitor about its financial position on the issue of causation. The plaintiffs submit that to do so was to engage in hindsight reasoning. The plaintiffs submit that whatever the borrower did or said it could do after the advance of the moneys on 11 September 2007 was with the benefit of the additional $4.5 million which would have been enough money to, among other things, pay off the debt owing on the boat.

Consideration

240. It should be noted that the allegations in the 3rd FACS in relation to the assessing the value of the security property in relation to the Sanctuary loan have been abandoned. The issue which remains is WWL’s failure to search the ASIC register just before the loan moneys were advanced so as to discover that Sanctuary had a receiver appointed at the time.

241. The plaintiffs’ expert, Mr Carkagis, originally said in his report only that a search should have been conducted “shortly before” the loan moneys were due to be drawn down. He refined this in the joint report and in his oral testimony to immediately before. Having discussed the matter with Mr Carkagis, and having thought carefully about it, Mr Rosier agreed with that approach in the joint report and in his oral evidence.

242. WWL did conduct the relevant search on 16 August 2007 and again (for a reason not explained) on 17 August 2007. At that time the register revealed no appointment of a receiver to the company. The receiver was not appointed until 11 September 2007 and 10 days later, the loan moneys of $4.5 million was advanced, i.e. the receiver was appointed 25 days after the last search and the loan moneys were advanced five weeks after the last search.

243. The first question is whether the failure to conduct a further search before the draw down constituted a breach of duty and of retainer.

244. In their oral evidence, Messrs Rosier and Carkagis justified their conclusion on the basis that this loan was for a large sum of money and because five weeks had passed between the last search and the draw down.

245. I found both experts to be impressive. Their expertise was unquestioned. Most particularly, they appeared to be doing their best to provide assistance to the Court in relation to their areas of expertise. Of the two experts, Mr Rosier was perhaps more prepared to consider alternative scenarios. That, however, is not to in any way discount the opinion of Mr Carkagis. I found their opinions on this issue to be compelling and persuasive. They also accorded with common sense.

246. Despite these matters, the defendant submits that the Court should decline to find that the failure to search just before the loan draw down constituted any breach of duty or retainer. In support of that submission, the defendant relies upon the following matters:

1. The task of searching the ASIC register was not subject to any express retainer. On that issue the defendant noted that Mr Carkagis had said that in some cases clients might do that work themselves.

2. Even if a search of the ASIC register was included in the retainer, a preliminary search as occurred here satisfied the duty and the retainer.

3. Both experts accepted that when to search the register and whether to conduct a further search were matters for a value judgment on the part of the solicitor and that there was not any clear obligation (T.332.13).

4. While both experts said that they did their best to avoid the application of hindsight, it was inevitable that hindsight would play a part given that a receiver had in fact been appointed within the five week period between the last search and the loan draw down.

5. Although Mr Carkagis did not agree, Mr Rosier accepted that this was a borderline case. In that regard, Mr Rosier would not have conducted a further search had the draw down occurred on 6 September as originally planned (i.e. three weeks after the last search).

247. Subject to the s 5O CLA question, I have concluded that WWL was in breach of its duty and its retainer by the plaintiffs in not carrying out a further ASIC search just before the loan draw down. In reaching that decision, I have relied upon the expert opinion of Messrs Rosier and Carkagis. I have taken into account the basis for their conclusion, i.e. the size of the loan and the amount of time which had passed since the previous search. I have also taken into account the relative ease with which such a search can be carried out. A search of the ASIC register can be done online and would occupy only a matter of minutes.

248. As indicated, the defendant relies upon s 5O CLA which provides a defence to professionals if they can demonstrate that irrespective of whether the Court might be inclined to objectively consider the conduct to be negligent, it was widely accepted by peer professional opinion as competent practice among solicitors at the time.

249. Section 5O provides:

“5O Standard of care for professionals

(1)    A person practising a profession (a professional) does not incur a liability in negligence arising from the provision of a professional service if it is established that the professional acted in a manner that (at the time the service was provided) was widely accepted in Australia by peer professional opinion as competent professional practice.

(2)    However, peer professional opinion cannot be relied on for the purposes of this section if the court considers that the opinion is irrational.

(3)    The fact that there are differing peer professional opinions widely accepted in Australia concerning a matter does not prevent any one or more (or all) of those opinions being relied on for the purposes of this section.

(4)    Peer professional opinion does not have to be universally accepted to be considered widely accepted.”

250. WWL relies upon the following evidence to make out its defence under s 5O CLA:

“PRIESTLEY: Is it fair to say Mr Rosier at the time that you were expressing that opinion it seemed to you from what you knew about the circumstances of this case that it might well have been reasonable professional practice not to have conducted a search?

WITNESS ROSIER: Yes. I'm sort of driven back to section 5O of the Civil Liability Act and that phase widely accepted which I think it is capable of a number of interpretations but you can certainly say widely accepted doesn't mean a majority and widely accepted doesn't mean all, and it may not mean a majority, it just means that there's a substantial body of opinion in the profession even though there may be an argument on the other side of efficient, so I mean I'm inclined to the view that there could well be many people in my profession who have a large volume of experience in this sort of work who would say, "no, I just wouldn't have done the second search" and so I accept that that's a possibility. I just formed the view after discussion with Mr Carkagis that this was probably a case where you probably would have done one. …

PRIESTLEY: Do you have any other comment on what Mr Rosier just said?

WITNESS CARKAGIS: No.

HIS HONOUR: What about the 5O point just unless there's any misunderstanding, do you agree with what Mr Rosier said about 5O?

WITNESS CARKAGIS: I can't disagree with it.

PRIESTLEY: Mr Rosier, it's certainly capable of being expressed as a borderline case?

WITNESS ROSIER: Yes, I think so. I mean the fact that I shouldn't stand here and hold myself as the ..(not transcribable).. by virtue and determining such matters but the fact that I changed my mind indicates that certainly I do regard it as a borderline case.

PRIESTLEY: Mr Carkagis do you accept that description or not?

WITNESS CARKAGIS: No, it's not a borderline case.” (T.33.34 – T.335.23)

“PRIESTLEY: Mr Rosier, does that mean that some reasonably competent solicitors might not have conducted a search in this case and yet not departed from proper practice?

WITNESS ROSIER: Well I think I've really answered that when I raised the question of section 5O, yes. I think there is an arguable case that it's not a departure from common practice or usual practice not to have done one and I'm a bit driven to the view that the - that sometimes solicitors do these things not so much because they think that it's a particularly prudent thing to do and usual practice but rather to avoid what - exactly what we're doing here today. And, you know, you don't necessarily always achieve a particular result by doing something, nor even expect to achieve one but you do it as a matter of course as a risk management tool.

HIS HONOUR: Self-protection?

WITNESS ROSIER: Self protection, your Honour, yes.

PRIESTLEY: There's another expression for it, your Honour.

WITNESS ROSIER: Protecting your backside, your Honour.

WITNESS CARKAGIS: I don't disagree. I'll just qualify. Some client have certain procedures and practices which we must follow, and that gives us an out in the sense that if they say don't do another search because we will do it and we won't even tell you, then we don't do it. If in the circumstances where a client is relying on a solicitor to do a certain job and doesn't have certain practices and procedures but relies on the solicitor's practices and procedures, and in the circumstances of certain cases such as this, in the terms of those points raised before, sorry, in A to E, in that question, then it would be my view that in that last sentence, you should have carried out a search.

HIS HONOUR: What about the section 5O point? I raised it with you earlier. What you're saying now is slightly different. Lest there be any argument later, what is your view on that? Would there be still a substantial group of solicitors who, if they didn't carry out that second search, would be regarded as usual practice, without necessarily being a majority?

WITNESS CARKAGIS: Yes, I'll have to agree with that. There are practitioners out there who fall within that category.” (T.337.49 – T.338.38)

251. The defendant relies upon the following observations by Giles JA (with whom Ipp and Basten JJA agreed) in Dobler v Kenneth Halverson; Dobler v Kurt Halverson (by his tutor):

“103 For s 5O, the question is not necessarily one of preferring A’s evidence of acceptable professional practice to the evidence of B. If B’s evidence supports the manner in which the defendant acted, the question is whether there is established a professional practice widely accepted by (rational) peer professional opinion. If A and B both gave their evidence as evidence of whether the manner in which the defendant acted accorded with professional practice widely accepted by (rational) peer professional opinion, the question will be one of preferring A’s evidence to that of B, but otherwise it will be one of acceptance of B’s evidence, its weight and what it establishes. The conceptual distinction must be made, although in the acceptance of B’s evidence and its weight regard to the evidence of A is likely to remain relevant.” (emphasis added)

252. The defendant submits that both experts gave evidence which satisfied the statutory test in s 5O so that there was little scope for a contrary finding. In making that submission, the defendant accepts that the number of cases in which this defence might succeed in the face of a preliminary finding of breach of duty might be limited but that this was such a case. The defendant submits that the unchallenged expert opinion established that a significant proportion of WWL’s professional peers would have accepted at the relevant time that it was competent practice not to search the ASIC register again in the 10 days before draw down. WWL submits that while a court could apply its own judgment to matters of competent legal practice, it should be cautious in doing so in cases where there was expert opinion and a specific mode of practice was under consideration. WWL submits that there was no scope for the application of s 5O(2) whereas subsections (3) and (4) were important and should be applied.

253. I am of the opinion that WWL has not made out a defence under s 5O. I have reached that conclusion on the basis of my analysis of the expert evidence upon which the defendant relies. The evidence does not establish that in 2007 it was widely accepted in Australia that competent practice on the part of a solicitor was not to search the ASIC register again in the last 10 days before the draw down of a loan.

254. The evidence of Mr Rosier at T.334 goes no further than to say “I’m inclined to the view that there could well be many people in my profession who have a large volume of experience in this sort of work who would say “no, I just wouldn’t have done the second search” and so I accept that’s a possibility.” (emphasis added) What Mr Rosier is saying is that it is possible that there was a large group of solicitors who held that view. He is not stating it as a fact. Accordingly, Mr Carkagis’ inability to disagree with Mr Rosier on this matter was to recognise that possibility not to confirm it as fact (T.335.11). This was made clear at T.335.23 when Mr Carkagis refused to accept that this factual circumstance was a “borderline case”.

255. Similarly, the evidence of Mr Rosier at T.338.3 is in terms of there being an “arguable case” about it not being a departure from common practice not to have done such a search. That does not go far enough to satisfy the requirement of s 5O. Even the subsequent agreement of Mr Carkagis at T.338.37 does not go far enough. It goes no further than asserting “there are practitioners out there who fall within that category”.

256. It follows that the evidence relied upon by the defendant is not sufficient to establish “that it was widely accepted by peer professional opinion as competent practice” in the profession in 2007 not to carry out a second search in the ten days before the draw down of the loan. It also follows therefore that in relation to this part of their claim the plaintiffs have established breach of duty/retainer on the part of WWL.

257. That does not end the matter. There remains the issue of causation. I have concluded for the reasons which follow that the plaintiffs have not established causation in relation to that breach of duty in respect of the Sanctuary loan.

258. As soon as WWL became aware of the appointment of the receiver, they made inquiries of the solicitors for Sanctuary seeking to clarify the position. They were advised that the appointment related to a debt for a charge arising from a loan for a boat only and that the borrower would shortly rectify the position and the receiver would withdraw. This in fact happened, although not until February 2008. The reason for the delay is not fully explained, although the correspondence suggests that some of the delay was due to the various procedural steps which the receivers were required to take in order to withdraw.

252. The correspondence reveals that shortly after the appointment came to light, the solicitors for Sanctuary advised WWL that they held sufficient moneys in trust to discharge the relevant debt and would do shortly. This was confirmed by the liquidator in due course (exhibit E(1), p 267; E(3), p 822).

253. Williams’ evidence was that if he had become aware of the appointment of the receiver before draw down, he would have raised this in the first instance with Sanctuary’s solicitors and then reported to his client.

“Q. Had you learnt about the appointment of the receiver to this borrower in the period from 11 September, being the date that the receiver was appointed, to 21 September, which was the date to ask you to accept that the moneys were advanced to the borrower, what would you have told Mr Richards, or informed Mr Richards?

A. I don't know whether I would have informed Mr Richards immediately. During - if we'd found out during that period I probably would have been in contact with the solicitors for the proposed borrower immediately and then I would have gone back to Mr Richards with that information, I think. So I probably would have told him that, yes, the company was in receivership and but I would have had the knowledge of what the solicitor told me from the proposed borrower. What I'm saying my first point of call would have been the solicitor for the proposed borrower and then my second point of call would have been Chris.” (T.269.15)

261. Williams was definite that what he would have told Richards would depend upon what he had been told by the solicitors for the borrower. Both the expert solicitors accepted that the advice which Williams should have given at that stage would depend on the circumstances including what the borrower said about the matter as Williams himself thought (T.269.34), T.270.15, T.274.38).

262. The evidence reveals relatively clearly that the borrower’s solicitors, if asked, would have said that the appointment related to a single debt which was not large relative to the impending loan. In those circumstances, the plaintiffs have not established that but for the failure to search the loan would not have gone ahead. Default did not occur until March 2008. If the draw down of the loan had been deferred pending the clearing of the debt which led to the appointment of the receiver, any default would also have occurred later.

263. This is particularly so if regard is had to the nature of the business being conducted by OFS, i.e. high interest, short term “mezzanine” lending, the relevance of which Mr Rosier refers to in his report at some length. As both Williams and Arslan said and which I have accepted, OFS was expressly interested in acquisition loans or distressed loans. Because OFS had already decided to enter into this loan transaction, short term difficulties such as that which led to the appointment of the receiver, would be unlikely to have discouraged OFS from continuing with the loan draw down, although it may have delayed the date on which the draw down took place.

264. It is not without significance that the WWL letter of 21 August 2007 (exhibit E(1), p 237, exhibit 6) specifically advised OFS that no documentation was available to assess the ability of the borrower to service the loan. The fact that that letter was received without comment by OFS is yet another indication that the borrower’s capacity to repay loans was not of particular moment to OFS. This is so even though Toland said that he would be greatly concerned if such a letter were received by OFS. The fact is that numerous such letters (exhibit 6) were sent without any reaction from OFS.

265. Richards was cross examined in relation to the letter of 21 August 2007 at T.148 – 149. The answers are instructive:

“Q. I suggest to you that it [interest] was just over $130,000 a month, does that sound about right?

A. It could be right, yes.

Q. Again, in relation to this loan, you made no inquiry whatsoever of anyone as to this borrower's capacity to repay the loan, did you?

A. Personally, no.

Q. You didn't ask Mr Williams to investigate that matter in this loan?

A. Yes, that was their job. …

Q. You didn't specifically ask Mr Arslan to investigate the borrower's capacity to pay at all either, did you?

A. Well, Mr Arslan was involved with investigations on behalf of Worthington Williams and Global.

Q. You were told things about the value of the security, weren't you?

A. Yes.

Q. You were told things about the LVR, loan value ratio?

A. Yes. …

Q. But you were never advised at any time by anyone, anything about the borrower's capacity to pay, do you accept that?

A. Well, we didn't need to. That was what we expected them to do for us.

Q. Can we take it from that answer that you do accept that you were never told anything about that matter by anyone?

A. We were never told that they were not good potential borrowers, no.

Q. You were told that they had the capacity to repay it, were you?

A. Well we weren't told either way.

Q. You never discussed the subject of credit worthiness in relation to this loan with anyone before it occurred, did you?

A. With Jimmy Arslan, yes.

Q. You discussed credit worthiness did you?

A. Well he had said to me that they there were LVRs, they'd investigated this, investigated that and in his opinion Worthington Williams it was a worthwhile loan.

Q. Have you set out the relevant conversations in your affidavits?

A. Not such I don't believe, no. But it was a flow on from Tamarama right through; I mean we didn't need to reinvestigate our original instructions. Nor did they come back to us with a guide as to each loan; it was just the day it was set up that they were our original instructions on day one. We had no reason to doubt they weren't performing these duties.

Q. To be clear your evidence now is that there was no discussion with Arslan about this specific loan, or this borrower, is that right?

A. No.

Q. That is your evidence, is it?

A. Yes.”

266. Despite being advised of the appointment of the receiver shortly after it came to light (exhibit E(1), p 261) OFS declined to call in the loan and avoid further risk (exhibit E(1), p 264). Indeed OFS was even prepared to roll over the loan taking further security in May 2008 (exhibit 10, p 105). By this time the receiver had withdrawn and Sanctuary had already defaulted under the loan in March 2008. Not only is it clear that OFS elected to take no action upon learning of the appointment of the receivers but far from recalling any feelings of alarm himself, Richards had trouble recalling being so advised at the time.

“Q. Do you remember discussing with Mr Williams the fact that a receiver had been appointed to the borrower, Sanctuary Developments, at some time after the loan was drawn down?

A. Yes, I think we were told about it, or we'd heard about it.

Q. Mr Williams rung you up, did he, and said there's been a receiver appointed to Sanctuary Developments?

A. I don't recall.

Q. But you had some discussion in which you learnt that fact, is that right?

A. After the loan had gone out.

Q. Yes, shortly after, does that sound right?

A. I couldn't remember.

Q. You discussed with him what should be done, correct?

A. I don't recall.

Q. You gave him instructions as to what he should do about that matter?

A. I don't recall.

Q. He advised you that it constituted a default of the loan agreement for the borrower to have a receiver appointed didn't he?

A. I don't recall. …

Q. This is after you found out that a receiver had been appointed, shortly after the loan --

A. I gave him instructions after we found out they were in default. I don't recall about the receiver.

Q. I thought you just answered one of my questions a moment ago that you remembered discussing with him the fact that a receiver had just been appointed is that not right?

A. After the event.

Q. Yes, it can't have been before it happened --

A. But I don't recall instructions as to what to do about it.

Q. You don't remember giving him any instructions as to what to do about the fact that a receiver had been appointed?

A. I don't recall, no.

Q. I suggest to you that you did give him some instructions, you don't deny that?

A. If I could have evidence of that, and read it, I'll familiarise myself with that.

Q. Without any evidence in front of you do you deny it?

A. I don't recall it.

Q. I suggest to you that you did not in those instructions suggest that he try and call in the loan, that is, seek repayment of the principal?

A. No, I don't recall that.” (T.150.12 – T.151.17)

267. Having been told about the appointment of a receiver, Richards apparently did not think it was sufficiently serious to advise Toland.

“Q. Do you recall being advised by anyone shortly after the loan moneys were drawn down in the Sanctuary loan that a receiver had been appointed to the borrower?

A. That became apparent after the event, yes.

Q. Who told you?

A. It was in discussions with Mr Richards.

Q. When?

A. It was actually sometime after the event. So we really didn't discover it until quite late.

HIS HONOUR: Q. What exactly do you mean by that? You said that on a number of occasions. You really need to be a little more specific of this area. The loan or the payment was made in September 2007?

A. Yes.

Q. As far as I can see from documents, Mr Richards at least was told in October of 2007 of that. When did you find out?

A. When the loan was in default and only after the event.

Q. You were not told in October 2007?

A. No, never.

PRIESTLEY: Q. When you say default, in answer to his Honour's questions, you mean default in the nature of failure to repay interest on time?

A. As the loan was failing, then that evidence came out that there'd been a matter of a boat and that there was a mortgagee in possession.” (T.205.8)

268. The failure of Richards to react to a notice that a receiver had been appointed or to even recall any details about that occasion and the apparent failure on his part to say anything about it to Toland is inconsistent with a finding that it is likely on balance that OFS would not have proceeded with the loan had it been advised of the appointment of a receiver. It is also clear from the correspondence and the evidence, both oral and by way of affidavit of Richards and Toland, that OFS never queried WWL as to why the appointment of the receiver had not been discovered before the draw down of the loan. This only appears to have become an issue in the course of the trial after the joint experts’ report with its change of position by Mr Rosier in respect of questions 8 and 8A became available in early March 2016.

269. For these reasons, I have concluded that the plaintiffs have failed to establish causation under s 5D CLA.

270. It follows from the above findings and analysis that there should be a verdict for the defendant. If, however, I am wrong in my conclusions it is necessary to deal with the defendant’s defences of contributory negligence and proportionate liability. In each case the defendant bears the onus of proving the defence.

Contributory negligence

271. If it becomes necessary to consider contributory negligence in relation to each of the impugned transactions, i.e. the Tamarama loan and the Sanctuary loan, it can only be because liability has been found against the defendant. Implicit in such a finding is an acceptance of most of the plaintiffs’ evidence and the rejection of a significant part of that called on behalf of the defendant.

272. In relation to the Tamarama loan, the following particulars of contributory negligence have been pleaded:

“16.5.1   Failing to enquire as to and/or consider who the actual owner of the Tamarama Property was;

16.5.2   Failing to inquire as to and/or consider adequately or at all the terms of the Tamarama Loan Agreement prior to entering into it;

16.5.3   Instructing the Defendant to insert the Option Clause;

16.5.1   Entering into the Tamarama Loan Agreement without having carefully considered the value of the security property;

16.5.2   Advancing loan monies to the borrower without having carefully considered the value of the security property;

16.5.3   Failing to enquire as to and/or consider whether adequate valuations had been obtained in relation to the Tamarama Property;

16.5.4   Failing to enquire as to and/or consider the Burgess Rawson Valuation Report;

16.5.5   Failing to instruct the Defendant and/or Mr Arslan to obtain a valuation report and/or another valuation report to the Burgess Rawson Valuation Report;

16.5.6   Causing or allowing the Option Clause to be exercised, or be purported to be exercised, if either occurred;

16.5.7   Failing to enforce its rights as lender against the borrower under the Tamarama Loan Agreement, adequately or at all;

16.5.8   Failing to enforce its rights as mortgagee against the mortgagor under the Tamarama Security mortgage, adequately or at all;

16.5.9   Failing to seek legal advice from the Defendant, or any other lawyer, in a timely fashion or at all, as to its rights under the Tamarama Loan Agreement and the Tamarama Security mortgage;

16.5.10 Failing to follow any legal advice it did receive.”

273. It is not appropriate, given the detailed analysis (and findings to the contrary) set out above to deal with each of the particulars of negligence. I propose, therefore, to deal with this issue in general terms only.

274. It is the plaintiffs’ case that OFS relied entirely on WWL to make appropriate investigations and advise on the adequacy of the security for the Tamarama loan. It relied upon WWL to assess the capacity of the borrower to service the loan. On the basis that these allegations were made out, there was still on the evidence before the Court a surprising lack of engagement by the plaintiffs with these issues, in particular checking the valuation or valuations in relation to the Tamarama property and making no inquiries concerning the capacity of the borrower to service the loan. At the very least, one would have expected either Richards or Toland to have sighted any valuation evidence which supported the large loan amount.

275. There is also the failure to either read or respond to the WWL letter of 13 August 2007 which in terms expressly restricted the retainer and excluded due diligence. On the plaintiffs’ case this was contrary to an earlier agreement and their understanding of what WWL was retained to do.

276. Taking those matters into account, together with the additional matters raised in the particulars of contributory negligence which have not otherwise been canvassed, I would assess the contributory negligence of the plaintiffs at 50% in respect of the Tamarama loan.

277. The particulars of contributory negligence alleged by the defendant in respect of the Sanctuary loan are:

“25.1   Failing to enquire and/or consider the valuation documentation relating to the security referred to in paragraph 28 of the SFASOC;

25.3   Entering into the Sanctuary Loan Agreement without having carefully considered the value of the security property;

25.4   Advancing loan monies to the borrower without having carefully considered the value of the security property;

25.5   Failing to enquire as to and/or consider whether adequate valuations had been obtained in relation to the security property;

25.6   Failing to enquire and/or consider the status of Sanctuary Developments prior to advancing the loan;

25.7   Failing to instruct the Defendant and/or Mr Arslan to enquire about the status of Sanctuary Developments prior to advancing the loan, including whether or not it was in receivership.”

278. As a result of concessions made at trial, particulars 25.1, 25.2 and 25.7 have no application.

279. The failure to respond to the letter from WWL of 21 August 2007 is even more significant in the circumstances of the Sanctuary loan. Accepting as I must for the purposes of this exercise, that negligence has been established against WWL, one has to balance the causal potency and relative culpability of a failure to conduct a search of the ASIC register shortly before the draw down of the loan with a failure to properly investigate the value of the security offered and the capacity of Sanctuary to service the loan.

280. I have concluded that in relation to both those matters, the fault element is more heavily weighted against the plaintiffs than it is against the defendant. I would assess contributory negligence in the Sanctuary loan matter at 65% against the plaintiffs and 35% against WWL.

Proportionate liability

281. The defendant in its Defence pleads that if it is found liable to the plaintiffs, its liability must be determined pursuant to Part 4 of the CLA. In that regard, WWL asserts that Global and Arslan are concurrent wrongdoers within the meaning of s 34 CLA in relation to the plaintiffs’ claim against it. The defendant submits that its liability is limited by s 35 CLA to an amount reflecting that proportion of the damage or loss that the Court considers just, having regard to the extent of the defendant’s responsibility for the damage or loss.

282. The precise allegations made against Global and Arslan are that they were negligent, in breach of their retainer, or guilty of misleading and deceptive conduct. As a result they were responsible for causing loss and damage to the plaintiffs.

283. For this defence to be successful, findings would have had to have been made that the actions of Arslan and of Global were in no way the actions of WWL. Those findings have in fact been made. Findings have also been made that insofar as the Tamarama loan is concerned if Arslan did make false representations concerning the value of the property or as to its ownership, the fact of those misrepresentations was not known to WWL.

284. In relation to the Sanctuary loan there was a paucity of evidence as to the actions of Global given the confined nature of the allegations made against WWL. The only evidence emerges from the contents of WWL’s letter to OFS of 21 August 2007. That letter makes it clear that another organisation, Pinacle, had performed due diligence in respect of the property and that Global had then checked the results of that due diligence exercise on behalf of OFS. The potential deficiencies in that process were identified in the letter.

285. If as seems likely Global erred in its assessment of the viability of the security offered, I would assess its liability in that regard as equal to that of WWL. It follows that I would apportion liability as between Global and WWL for the Sanctuary loan loss on that basis.

286. It should be kept in mind that the above conclusions in respect of contributory negligence and proportionate liability are only made on a contingent basis, i.e. in the event that my primary findings as to no liability on the part of WWL are set aside.

287. Accordingly, the orders which I make are as follows:

1. Verdict and judgment for the defendant.

2. The plaintiffs are to pay the defendant’s costs of these proceedings.

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