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

[2016] NSWCA 308

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:	Richtoll Pty Ltd v WW Lawyers Pty Ltd (In Liquidation) [2016] NSWCA 308
Hearing dates:	26 October 2016
Decision date:	14 November 2016
Before:	McColl JA at [1] Sackville AJA at [2] Barrett AJA at [89]
Decision:	1. Appeal dismissed. 2. Appellants pay the respondent’s costs of the appeal.
Catchwords:	PROFESSIONAL NEGLIGENCE – causation – solicitor breaches duty to client lending money at very high interest rates on the security of a second mortgage – solicitor fails to conduct search of ASIC Register prior to drawdown – solicitor fails to detect that receivers have been appointed to the borrower – whether primary Judge erred in concluding that the Lender would have proceeded even if it had known of the appointment of receivers
Legislation Cited:	Corporations Act 2001 (Cth), s 471B Civil Liability Act 2002 (NSW), ss 5D, 5E, 5O, 34, 35 Evidence Act 1995 (NSW), s 79
Cases Cited:	A I McLean Pty Ltd v Hayson [2008] NSWSC 927 Badenach v Calvert [2016] HCA 18; (2016) 90 ALJR 610 Chappel v Hart (1998) 195 CLR 232; [1998] HCA 55 Hancock v East Coast Timber Products Pty Ltd (2011) 80 NSWLR 43; [2011] NSWCA 11 HG v The Queen (1999) 197 CLR 414; [1999] HCA 2 Richtoll Pty Ltd v WW Lawyers (In Liquidation) Pty Ltd [2016] NSWSC 438 Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18 UGL Rail Pty Ltd v Wilkinson Murray Pty Ltd [2014] NSWSC 1959 Wallace v Kam (2013) 250 CLR 375; [2013] HCA 19
Texts Cited:	D Byrne and J D Heydon, Lexis Nexis, Cross on Evidence (Australian Ed), Vol 1
Category:	Principal judgment
Parties:	Richtoll Pty Ltd (First Appellant) Ongoing Financial Services Pty Ltd (Second Appellant) WW Lawyers Pty Ltd (In Liquidation) (Respondent)
Representation:	Counsel: A J Abadee; E W L. Anderson (Appellants) D A Priestley SC (Respondent)   Solicitors: Garland Hawthorne Brahe (Appellants) Meridian Lawyers (Respondent)
File Number(s):	2016/144686
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Common Law Citation: [2016] NSWSC 438 Date of Decision: 19 April 2016 Before: Hoeben CJ at CL File Number(s): 2010/96258

Judgment

1. McCOLL JA:   I agree with Sackville AJA’s reasons and the orders his Honour proposes.

2. SACKVILLE AJA:   The appellants, Richtoll Pty Ltd (Richtoll) and Ongoing Financial Services Pty Ltd (OFS) conducted a business of lending money at very high interest rates on the security of real property. In 2007, they were clients of the respondent, WW Lawyers Pty Ltd (in liquidation) (WWL), an incorporated legal practice. The appellants sued WWL for professional negligence and breach of contract.

3. The appellants’ claims arose out of two loan transactions, both of which took place some months before the Global Financial Crisis (GFC) produced a severe downturn in property values in parts of Australia. The primary Judge (Hoeben CJ at CL) dismissed the appellants’ claims and entered judgment for WWL. [1] The appeal relates only to the second transaction, referred to as the “Sanctuary Loan”, which took place in September 2007.

   1. Richtoll Pty Ltd v WW Lawyers (In Liquidation) Pty Ltd [2016] NSWSC 438 (Primary Judgment).

4. Leave has been given to the appellants pursuant to s 471B of the Corporations Act 2001 (Cth) to proceed with the appeal notwithstanding that WWL is in liquidation. The proceedings both at first instance and on appeal have been conducted on WWL’s behalf by its professional indemnity insurers.

5. The Sanctuary Loan involved OFS, but not Richtoll. The primary Judge observed that no explanation had been given for Richtoll being a party to the proceedings. [2] Richtoll need not be referred to further.

   2. Primary Judgment at [4].

OFS’s case

6. On 10 September 2007, OFS entered into a Loan Agreement with Sanctuary Development (Australia) Pty Ltd (Sanctuary), [3] by which OFS agreed to advance $4.5 million to Sanctuary for the term of six months. The advance was to be secured by a second mortgage over partially developed land at Airlie Beach in Queensland (Land). It was a term of the Loan Agreement (cl 3.8) that the appointment of a receiver to Sanctuary was an event of default. In fact, receivers were appointed to Sanctuary on 11 September 2007, the day after the Loan Agreement was executed.

   3. This date is admitted on the pleadings. The Loan Agreement itself bears a date of 6 September 2007.

7. Drawdown under the Loan Agreement took place on 21 September 2007, when OFS paid the sum of $4.5 million to or at the direction of Sanctuary. WWL conducted a search of the ASIC Register prior to the Loan Agreement being executed but did not conduct a second search prior to drawdown. Thus OFS was unaware, when it made the advance to Sanctuary, that receivers had been appointed.

8. Sanctuary went into liquidation on 6 November 2008. Presumably as a consequence of the GFC, the realisable value of the Land proved insufficient to pay out the first mortgage. It was common ground at the trial that OFS lost the entirety of the principal sum it advanced to Sanctuary.

9. OFS’s case, insofar as relevant to the appeal, was that WWL:

• should have undertaken a search of the ASIC Register immediately prior to the drawdown of the loan; and

• having ascertained by the search that receivers had been appointed to Sanctuary, should have advised OFS to terminate the Loan Agreement.

10. OFS argued that if WWL had given proper advice once it ascertained that receivers had been appointed to Sanctuary, OFS would have terminated the Loan Agreement and would not have advanced funds to Sanctuary. OFS therefore would not have lost the moneys it advanced.

11. The primary Judge found that WWL breached its duty to OFS by failing to carry out a search of the ASIC Register shortly before drawdown. [4] His Honour also found that had Mr Williams, the principal of WWL, searched the ASIC Register prior to drawdown, he would have discovered that receivers had been appointed to OFS. However, the primary Judge made no express finding that WWL breached its duty by failing to advise OFS to terminate the Loan Agreement prior to the scheduled drawdown.

    4. Primary Judgment at [245].

12. Although OFS succeeded in establishing that WWL breached its duty of care, OFS’s claim failed on the issue of causation. His Honour considered that if Mr Williams had asked Sanctuary’s solicitors to explain why receivers had been appointed, they would have said (as was the fact) that the appointment related to a single debt which was relatively small compared to the agreed advance. [5] The primary Judge was not satisfied that had WWL searched the ASIC Register, OFS would have terminated the Loan Agreement and refused to proceed to drawdown. Accordingly, OFS had not proved that WWL’s negligence was a necessary condition of the harm it sustained, as required by s 5D(1)(a) of the Civil Liability Act 2002 (NSW) (CL Act). [6]

    5. Primary Judgment at [260].

    6. CL Act s 5D is reproduced below at [14].

13. On the appeal, OFS challenges the primary Judge’s finding on causation. OFS submits that his Honour should have found that if it had been informed of the appointment of receivers to Sanctuary, it would have terminated the Loan Agreement and not advanced the moneys to Sanctuary. In support of this contention, OFS invites the Court to find that WWL breached its duty of care not only by failing to search the ASIC Register, but by failing to give OFS firm advice not to proceed with the Sanctuary Loan. OFS submits that if such advice had been given, as it should have been, OFS would have acted on the advice and avoided the loss of $4.5 million.

The legislation

14. OFS accepts that the question of causation is to be determined in accordance with ss 5D and 5E of the CL Act. These provisions are as follows:

“5D General principles

(1)   A determination that negligence caused particular harm comprises the following elements:

(a)   that the negligence was a necessary condition of the occurrence of the harm (factual causation), and

(b)   that it is appropriate for the scope of the negligent person’s liability to extend to the harm so caused (scope of liability).

…

(3)   If it is relevant to the determination of factual causation to determine what the person who suffered harm would have done if the negligent person had not been negligent:

(a)   the matter is to be determined subjectively in the light of all relevant circumstances, subject to paragraph (b), and

(b)   any statement made by the person after suffering the harm about what he or she would have done is inadmissible except to the extent (if any) that the statement is against his or her interest.

5E Onus of proof

In proceedings relating to liability for negligence, the plaintiff always bears the onus of proving, on the balance of probabilities, any fact relevant to the issue of causation.”

Factual background

15. The following account of key events is based on the primary Judge’s findings and undisputed documentary evidence.

16. OFS was incorporated in May 2007 for investment purposes. Its principals were Mr Richards and Mr Toland. OFS had available $14 million for investment, which its principals intended to use for loans secured by real estate. The object was to produce very high rates of return.

17. Both Mr Richards and Mr Toland were experienced property developers, whose activities had generated the funds available for investment. In their capacity as developers they were familiar with lending for property development.

18. Mr Williams was admitted to practice as a solicitor in New South Wales in 1983. He set up WWL as an incorporated legal practice in 2005. He was the only principal lawyer, but employed solicitors from time to time.

19. In August 2007, OFS received a proposal to lend $3.5 million to Sanctuary for a period of six months. The loan was to be secured on the Land, which was in the process of being subdivided into a large number of lots.

20. On 16 and 17 August 2007, WWL caused searches to be made of Sanctuary on the ASIC Register. These revealed Sanctuary to be registered and self-administered.

21. On 21 August 2007, WWL wrote to Mr Richards of OFS confirming instructions to prepare documentation for a loan to Sanctuary. The letter noted that WWL had not been engaged to perform due diligence for the loan. The letter also included the following:

“1.   LVR [loan to valuation ratio] – does not exceed 80% of the value, as per valuation provided by Pinacle [a broker] of the security property including both the first Mortgage loan and the loan proposed by you. On the basis of the documents provided by Pinacle, after deducting the outstanding amount of the first Mortgage from the valuation of the security, there is a sum of about $5 million in equity left in the security to cover your loan.

2.   No documentation has been provided to assess the Borrower’s ability to service the Loan. However, in this regard, we note that interest for the term of the Loan is being paid in advance from the funds being lent. This of course does not reflect upon the Borrower’s ability to repay the principal within the period prescribed.

The obvious risk whenever the Lender takes a second Mortgage as security is that any equity left in the security may be exhausted by the cost of the first Mortgagee in the event of default by the Borrower on the first Mortgage. However, as there is a risk, this is the reason you are entitled to charge a premium interest rate.” [Emphasis added.]

22. On 29 August 2007, WWL wrote to OFS confirming that the loan to Sanctuary had been approved. The letter noted that there were four charges registered against Sanctuary’s assets, including a charge in favour of a finance company in respect of finance for a boat. The letter stated that the charge over the boat did not “adversely effect [sic] the finance of your loan” as the charge was fixed against the boat, and the chargee could not call in the security property (the Land) to obtain repayment of its debt. The letter also explained that the Land had been subdivided into numerous lots and that the first mortgage had been registered over all lots.

23. WWL then corresponded with Sanctuary’s solicitors. On 6 September 2007, WWL informed the solicitors that there had been changes to the Loan Agreement. The changes increased the loan to $4.5 million, provided for a term of six months, with Sanctuary having an option to extend the term for a further three months. The interest rate was to be 35 per cent per annum, payable in advance. The letter noted that the changes had been proposed by Sanctuary to accommodate the first mortgagee and to ensure that there were sufficient funds to discharge the existing second mortgage over the Land.

24. The Loan Agreement was executed on 10 September 2007. It provided that Sanctuary was to repay the principal sum of $4.5 million on 6 March 2008. Sanctuary was entitled to extend the loan for a further three months, provided it was not in default under the Loan Agreement. As has been noted, the appointment of a receiver to Sanctuary was an event of default, entitling OFS to call up all moneys outstanding.

25. Sanctuary was required to pay six months interest at 35 per cent per annum in advance ($787,500.00). It was also required to pay fees and stamp duty amounting to at least $151,466.00.

26. The appointment of external receivers and managers to Sanctuary on 11 September 2007 was made pursuant to the registered charge over a boat (a 48 foot Ranger Flybridge Cruiser), to which WWL had referred in its letter of 29 August 2007. As that letter pointed out, the charge was enforceable only against the boat and not against the Land.

27. WWL made no further search of the ASIC Register between 17 August 2007 and the drawdown on 21 September 2007. On 21 September 2007, OFS advanced the loan moneys of $4.5 million without having become aware of the receivers’ appointment.

28. WWL informed OFS by letter of 5 October 2007 that the Sanctuary Loan had been settled on 21 September 2007. The letter advised that Sanctuary received $3,530,885.00, the balance of the $4.5 million being disbursed on account of prepaid interest and fees.

29. On about 9 October 2007, Mr Williams became aware that the receivers had been appointed to Sanctuary. He then conducted a search of the ASIC Register. On the following day, Mr Williams wrote an “urgent” letter to Sanctuary’s solicitors stating that the manager of the Sanctuary Loan had been informed that receivers had been appointed “in respect of a default under a Fixed Charge in respect of a boat owned by [Sanctuary]”.

30. The letter stated that the manager of the loan believed that Sanctuary’s solicitors were to pay out the charge from funds held in trust and did not understand why the discharge had not already taken place. WWL’s letter asked for information on a number of matters, including the reason for appointment of the receivers and the steps that the solicitors intended to take to terminate the receivership.

31. Sanctuary’s solicitors replied by email immediately, saying that they were seeking instructions. The email stated as follows:

“I note that the funds are being held in our trust account pursuant to an undertaking given to [the first mortgagee]. The funds will continue to be held until the issues with [the first mortgagee] are resolved including a resolution regarding the boat. We cannot give you a separate undertaking regarding those funds.

Our client is in the process of refinancing the boat which will resolve the ASIC issues. We understand that the refinance in respect of the boat will occur shortly.”

32. WWL wrote again to Sanctuary’s solicitors on 22 and 25 October 2007 demanding that they provide the information previously requested. The letter of 25 October 2007 threatened that in the absence of a satisfactory response, subject to OFS’s instructions, immediate enforcement action would be taken.

33. Sanctuary’s solicitors responded on 29 October 2007, as follows:

“As you are aware the receiver was appointed by CBFC, the financier of a boat owned by the company. We are instructed to advise that the boat has now been sold to a third party conditional only on an inspection of the vessel by the purchasers’ financier (BMW finance). The vessel will be moved to a hard stand in Airlie Beach during the course of this week...

We confirm that we are currently holding in our trust account approximately $295,000.00 which we are advised is sufficient to extinguish the whole of the debt. However our undertaking has been given to the first registered mortgagee that the funds will not be released without their express written authority. The first lender has also been appraised of steps taken by our client to sell the boat, extinguish the charge to CBFC and remove the receiver.”

34. WWL replied the following day indicating that their instructions were not to issue a default notice “[a]t this stage”.

35. In November 2007, WWL corresponded with Sanctuary’s solicitors about the settlement of the sale of certain subdivided lots within the Land.

36. On 6 February 2008, the receivers advised that they would retire by the end of February. The advice stated that the appointment had been in respect of a boat and that the boat had been sold in late 2007.

37. On 11 March 2008, WWL issued a default notice to Sanctuary asserting an event of default under the Loan Agreement, in that the principal sum had not been repaid on 6 March 2008.

38. Negotiations apparently then took place between Sanctuary and the manager of the loan. WWL wrote to Sanctuary’s solicitors on 28 April 2008 enclosing a draft Loan Variation Agreement. On 5 May 2008, WWL confirmed advice to Sanctuary’s solicitors that WWL was prepared to recommend that OFS extend the loan until 6 July 2008 to enable Sanctuary to refinance or sell the Land.

39. On 9 May 2008, WWL forwarded the Loan Variation Agreement to Sanctuary’s solicitors for execution. The Loan Variation extended the due date for payment of the principal to 6 July 2008. Interest accruing from the date of default was to be capitalised and paid on the due date.

40. Sanctuary’s solicitors returned the executed Loan Variation Agreement on 13 May 2008.

41. On 6 November 2008, the Federal Court appointed a liquidator to Sanctuary. At about the same time, WWL went into administration.

Primary Judgment

42. In concluding that WWL breached its duty of care to OFS, the primary Judge relied on the opinions expressed by two expert witnesses, Mr Rosier and Mr Corkagis, both of whom were solicitors with extensive experience in Property and Finance. Both expressed the opinion that WWL’s failure to conduct a search of the ASIC Register just before drawdown constituted a breach of its duty and retainer. [7] They took into account that the advance was for a large sum of money and that five weeks had elapsed between WWL’s first search of the ASIC Register and the drawdown. [8] In addition, his Honour took into account the relative ease with which a search could have been carried out. In 2007, a search of the ASIC Register could be completed “online and would occupy only a matter of minutes”. [9]

    7. Mr Rosier originally did not consider that a second search of the ASIC Register should have been made, but later modified his view: Primary Judgment at [239].

    8. Primary Judgment at [242].

    9. Primary Judgment at [245]. His Honour rejected a defence by WWL based on s 5O of the CL Act, which deals with the standard of care owed by a person practising a profession: see at [246]-[254]. It is not necessary to consider his Honour’s reasons on this issue.

43. His Honour pointed out that the finding on breach of duty did not conclude the case in OFS’s favour as the issue of causation remained. [10] His Honour identified a number of matters that were significant in relation to causation.

    10. Primary Judgment at [255].

44. First, as soon as WWL became aware of the appointment of the receivers, Mr Williams contacted Sanctuary’s solicitors. He was advised that the appointment related to a debt for a charge arising from a loan for a boat and that the borrower would shortly rectify the situation and the receivers would be withdrawn. This in fact happened, although not until February 2008, the delay apparently being due to procedural steps the receivers were required to undertake. [11]

    11. Primary Judgment at [256].

42. Secondly, the correspondence showed that after the receivership came to light, Sanctuary’s solicitors advised WWL that they held sufficient moneys in trust to discharge the relevant debt and would do so shortly. [12]

    12. Primary Judgment at [257].

43. Thirdly, both experts accepted that the advice Mr Williams should have given, once he learned of the receivership, would depend on the circumstances, including any explanation offered by Sanctuary’s solicitors for the appointment of the receivers. If asked, the solicitors would have said (as they did in fact) that the appointment related to a single, relatively small debt. In the events which occurred, Sanctuary did not default until March 2008. Had the drawdown been deferred pending clearance of the debt which led to the appointment of the receivers, any default would also have occurred later. [13]

    13. Primary Judgment at [259]-[260].

44. Fourthly, OFS conducted a business which involved high interest, short term “mezzanine” lending. OFS’s business model led it to be interested in “acquisition or distressed loans”. In his Honour’s view:

“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 drawdown, although it may have delayed the date on which the drawdown took place.”[14]

14. Primary Judgment at [261].

48. Fifthly, WWL’s letter to OFS of 21 August 2007 confirming instructions to prepare the loan documentation specifically advised that no documentation was available to assess the ability of the borrower to service the loan. The fact that the letter elicited no response from OFS indicated that Sanctuary’s capacity to repay loans “was not of particular moment to OFS”. [15]

    15. Primary Judgment at [262].

49. Sixthly, when OFS was advised that a receiver had been appointed to Sanctuary, it did not call in the loan. Indeed, OFS was prepared to rollover the loan, taking additional security in May 2008, after the receiver had withdrawn and OFS was in default. In his evidence, Mr Richards had trouble even recalling that he had been advised of the receiver’s appointment. Moreover, he had not thought the appointment was a sufficiently serious matter to advise his fellow director, Mr Toland. Mr Richard’s failure to react to the appointment, his inability to recall the details and his failure to inform Mr Toland were:

“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.”[16]

16. Primary Judgment at [266].

50. For these reasons, his Honour concluded that OFS failed to establish causation under s 5D of the CL Act. [17]

Reasoning

17. Primary Judgment at [267].

Principles

51. In Wallace v Kam,[18] the High Court pointed out that a determination in accordance with s 5D(1)(a) of the CL Act, that negligence was a necessary condition of the occurrence of the harm, is entirely factual. The issue turns on proof by the plaintiff of the relevant facts on the balance of probabilities, as required by s 5E. [19] As their Honours explained:[20]

“The determination of factual causation in accordance with s 5D(1)(a) involves nothing more or less than the application of a “but for” test of causation. That is to say, a determination in accordance with s 5D(1)(a) that negligence was a necessary condition of the occurrence of harm is nothing more or less than a determination on the balance of probabilities that the harm that in fact occurred would not have occurred absent the negligence.”

18. (2013) 250 CLR 375; [2013] HCA 19.

19. Wallace v Kam at [14].

20. Wallace v Kam at [16].

52. In a professional negligence claim founded on financial loss caused by negligent advice (or lack of advice), the plaintiff ordinarily must show how he or she would have acted had the defendant not been negligent. Where a defendant is alleged to have failed to provide information or advice that a competent professional would have provided, the plaintiff must show on the balance of probabilities, that had the appropriate information or advice been provided, he or she would have acted in a manner that avoided the loss. [21]

    21. Badenach v Calvert [2016] HCA 18; 331 ALR 48 at [36] (French CJ, Kiefel and Keane JJ); at [95] Gordon J).

53. Section 5D(3)(a) requires the issue to be determined subjectively, in the light of all relevant circumstances. The subjective test prescribed by s 5D(3)(a) reflects the common law. [22] The question is not resolved by determining what a reasonable person would have done in the circumstances. Section 5D(3)(a) directs attention to what the particular plaintiff – in this case OFS – would have done had the defendant not been negligent. However, s 5D(3)(b) of the CL Act renders inadmissible any statement made “by the person suffering the harm” about what he or she would have done if the negligent person had not been negligent, except to the extent the statement is against his or her interest.

    22. See, for example, Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18 at [24] (McHugh J).

54. In A I McLean Pty Ltd v Hayson,[23] a company sought damages for professional negligence. Bergin J stated, without elaboration, that s 5D(3)(b) prevents a director of the company from giving evidence as to what he would have caused the company to do, had it received proper legal advice. [24] In UGL Rail Pty Ltd v Wilkinson Murray Pty Ltd,[25] Ball J expressed doubt as to whether s 5D(3)(b) should be read in this way. His Honour pointed out that the statutory language appears to preclude evidence only from the person actually suffering harm. In a professional negligence suit in which a company is the only plaintiff, it is the company, not its directors, which is alleged to have suffered loss by reason of the defendant’s negligence.

    23. [2008] NSWSC 927.

    24. [2008] NSWSC 927 at [245].

    25. [2014] NSWSC 1959 at [191].

55. During argument on the appeal, the Court inquired whether Mr Richards gave evidence at the trial as to the action he would have taken if OFS had learned prior to drawdown that receivers had been appointed to Sanctuary. The response was that senior counsel for OFS attempted to elicit evidence from Mr Richards on this point, but objection was taken and the questions were rejected. Mr Priestley SC, who appeared for WWL on the appeal, accepted that in these circumstances, no inferences adverse to WWL should be drawn from the absence of evidence from WWL’s directors as to their likely actions, had they been informed of the appointment of receivers, or received advice not to proceed to drawdown.

OFS’s principal contention

56. OFS’s principal argument on the appeal was that the primary Judge asked the wrong question. His Honour asked what Mr Williams himself would have done had he discovered before drawdown that receivers had been appointed to Sanctuary. According to Mr Abadee, who appeared with Mr Anderson for OFS, the proper enquiry was what Mr Williams should have done had he exercised reasonable care in the discharge of his retainer by OFS. If the primary Judge had asked that question, so Mr Abadee contended, his Honour would have proceeded on the basis that WWL should have given firm advice to OFS not to precede with the advance of $4.5 million. Mr Abadee submitted that if such advice had been given, the likelihood is that Mr Richards and OFS would have accepted the advice and terminated the Loan Agreement before drawdown.

57. The foundation for OFS’s argument was that the evidence before the primary Judge supported a finding that WWL’s duty of care was not limited to conducting a search of the ASIC Register and thereby ascertaining that the receivers had been appointed to Sanctuary. The evidence of the two experts, so Mr Abadee argued, demonstrated that WWL, once it had ascertained that the receivers had been appointed to Sanctuary, should have given firm advice to OFS not to proceed to drawdown.

58. Mr Abadee submitted that on a proper reading of the Primary Judgment, his Honour should be understood to have found that WWL’s duty of care required it to give firm advice to OFS to terminate the Loan Agreement prior to drawdown. Alternatively, Mr Abadee invited this Court to make such a finding on the ground that both experts had expressed the opinion that a reasonably competent solicitor in the position of Mr Williams (and WWL) would have given firm advice to OFS to terminate the Loan Agreement.

The proposed finding

59. As the High Court explained in Wallace v Kam, the inquiry required by s 5D(1)(a) of the CL Act is whether OFS has shown, on the balance of probabilities, that it would not have lost its advance of $4.5 million “absent [WWL’s] negligence”. If the primary Judge found, or should have found, that WWL’s duty of care required it to advise OFS not to proceed with the advance, the inquiry mandated by s 5D(1)(a) would have to be undertaken on the (counterfactual) assumption that WWL gave that advice to OFS. To that extent, Mr Abadee’s submissions are correct.

No finding was made

60. In my view, the Primary Judgment cannot be read in the way suggested by Mr Abadee. The only express finding made by the primary Judge concerning WWL’s breach of duty was that it failed to carry out a second ASIC search just before drawdown was scheduled to take place. [26] His Honour did not suggest that the experts, or indeed either of them, expressed the opinion that in the circumstances of the case WWL should have given firm advice to OFS to terminate the Loan Agreement.

    26. Primary Judgment at [245].

61. Mr Abadee was unable to identify any passage in the Primary Judgment that could reasonably be interpreted as a finding that WWL was obliged, once it ascertained that receivers had been appointed to Sanctuary, to advise OFS not to proceed to drawdown. In these circumstances, it is clear that his Honour did not make any such finding.

Should a finding be made?

62. Mr Abadee’s alternative submission took as its starting point Mr Carkagis’ report. Mr Carkagis was asked to assume that:

• WWL’s retainer was limited to preparing the loan documentation and to attend to settlement and all necessary registration arising therefrom, but not to carry out due diligence with respect to the loan;

• a first mortgage to secure a loan of $12 million was in place over the Land; and

• OFS was “providing a second mortgage facility at a high rate of interest, namely a mezzanine facility”.

63. On these assumptions, Mr Carkagis expressed the following opinion:

“due to the risk of OFS lending against a security property that was already encumbered to the extent of $12,000,000.00, in my opinion, a reasonably competent legal practitioner at the time would have advised OFS to carry out a further search of the borrower on the Public Registrar [sic] shortly before settlement of the advance of the funds under the Loan Agreement…[I]f the search revealed the appointment of a Receiver and Manager to the Borrower, a competent legal practitioner operating at the time would have, in the circumstances, advised OFS of such appointment and thereby advise [sic] OFS not to proceed with the loan advance.”

This represented the entirety of Mr Carkagis’ reasoning process to support his opinion.

64. Two points should be made about Mr Carkagis’ evidence. The first is that the only reasoning justifying his opinion appears to have been his assessment that OFS was at “risk” because it was lending against a security property already encumbered to the extent of $12 million. It is difficult to see how Mr Carkagis could give an unqualified opinion that WWL should have advised OFS not to proceed with the advance without reference to the other circumstances of the case. The report made no reference to such matters as the value of the Land offered as security, the extent of Sanctuary’s equity in the Land after allowing for the first mortgage, the circumstances leading to the appointment of the receivers pursuant to the charge, the amount required to satisfy the charge and the commercial experience and objectives of OFS’s principals. The report did not attempt to explain why (if it was the case) none of these matters had any bearing on the nature of the advice WWL was bound to give OFS once WWL discovered that receivers had been appointed.

65. The second point is related. In order for Mr Carkagis’ opinion in his report to carry probative weight, the report should have identified the assumptions underlying the opinion. Unless an expert report identifies the assumptions on which it is based, it is not possible to determine whether the evidence adduced in the case provides a proper foundation for the opinion expressed by the expert.

66. On one view, Mr Carkagis’ report, insofar as he opined that WWL should have advised OFS to terminate the Loan Agreement prior to drawdown, was not admissible. The absence of a reasoning process supporting Mr Carkagis’ opinion, and the failure to identify the assumptions on which the opinion was founded, may well have justified the primary Judge rejecting the tender of the report, had an objection been made. [27] However, since no issue has been raised on the appeal as to whether the report should have been admitted into evidence, it is not necessary to consider the question further.

    27. See Evidence Act 1995 (NSW) s 79; HG v The Queen (1999) 197 CLR 414; [1999] HCA 2 at [41] (Gleeson CJ); Hancock v East Coast Timber Products Pty Ltd (2011) 80 NSWLR 43; [2011] NSWCA 11 at [73]-[77] (Beazley JA, Giles and Tobias JJA agreeing); D Byrne and J D Heydon, LexisNexis, Cross on Evidence (Australian Ed), vol 1 (at Service 189) [29075].

67. Leaving aside the question of admissibility, in my opinion Mr Carkagis’ report carried little probative weight on the critical question of whether WWL, in the particular circumstances of this case, should have advised OFS to terminate the Loan Agreement prior to drawdown. The absence of a reasoning process, and the failure to identify the assumptions underlying Mr Carkagis’ opinion deprived the opinion of any significant evidentiary value on that question.

68. In any event, the evidence before the primary Judge was not confined to Mr Carkagis’ report. When all the evidence is considered, it is strongly against the proposition for which Mr Abadee contended.

69. Contrary to Mr Abadee’s submission that Mr Rosier expressed an opinion to the same effect as that of Mr Carkagis in the latter’s report, Mr Rosier’s view was different. Mr Rosier said that if Mr Williams had ascertained before drawdown that Sanctuary was in external administration, he should have advised OFS of that fact and sought instructions from OFS as to whether it wished to proceed with the transaction. In forming this view, Mr Rosier took into account that both Mr Richards and Mr Toland had been successful property developers who used their business skills to accumulate some $14 million in investment funds. Mr Rosier also said that WWL would have been entitled to bear in mind, in fulfilling its retainer, that Mr Richards and Mr Toland had an “appetite for risk sufficient to want to lend at very high interest rates”. In short, Mr Rosier’s view was that WWL was entitled to assume that the principals of OFS were “sophisticated business men…experienced in the property development business”.

70. Mr Carkagis and Mr Rosier expanded on the opinions expressed in their reports when they gave oral evidence in conclave. Perhaps not surprisingly, Mr Carkagis modified the views he had previously expressed. In substance, he agreed with Mr Rosier that the advice WWL should have given, once the existence of the receivers had been ascertained, would depend upon the particular circumstances that came to light. This appears from the following passage in the transcript of evidence: [28]

    28. Black at 342-343.

“PRIESTLEY:   But then, Mr Carkagis, [your report] goes on and says, “And thereby advise OFS not to proceed with the loan advance”. You see that?

WITNESS CARKAGIS: Yes.

PRIESTLEY:   What I want to suggest to you is that the advice [sic] that a solicitor should give in prudent practice to a client in those circumstances would depend on all the circumstances, and it may not be as simple as do not proceed at all. Do you agree with that?

WITNESS CARKAGIS: No. If I saw an appointment of receiver of something on the search to indicate a default before a default has occurred, I would advise the client not to proceed.

WITNESS ROSIER:   Yes, I think that’s right, but you might qualify it by saying you may want to investigate it; I’m going to hold off settlement at this stage until I hear from you. Rather than give absolute advice, you’d say would you like to have a look at this and determine whether or not there’s some reasons behind it, rather than just simply saying I advise you not to proceed. You’d say it but you would say it with a qualification.

WITNESS CARKAGIS: I’ll add to that. If in the circumstances you advise the client of the appointment and the client indicates they’re either aware or weren’t aware but let’s investigate it, to take Mr Rosier’s point, then you would do what you’re told and go and investigate. There might be, for example, a reason why a receiver could retire in the circumstances of a bank appointment, of getting paid out. So you could ask for investigation if that was your instruction.

HIS HONOUR: That would involve talking to the other solicitor and saying what’s the story.

WITNESS CARKAGIS: Saying what’s the story; are we going to get rid of this guy [the creditor] and give him some money and therefore save the company.

WITNESS ROSIER:   I agree with that, your Honour.

PRIESTLEY:   Mr Carkagis, to be clear, you are fairly firm that the client, if you became aware that from a search, the client should be advised to hold off on settlement, certainly?

WITNESS CARKAGIS: Absolutely.

WITNESS ROSIER:   Yes.

PRIESTLEY:   But then what happens after that by way of advice depends on the circumstances.

WITNESS ROSIER:   Yes.

WITNESS CARKAGIS: Yes, I’ll agree to that.” [Emphasis added.]

71. There is no basis in the evidence for this Court to make a finding that a reasonably competent practitioner in Mr Williams’ (and WWL’s) position, having ascertained that receivers had been appointed to Sanctuary, should have advised OFS to terminate the Loan Agreement and not to advance the sum of $4.5 million to Sanctuary. At its highest, the evidence justifies a finding that WWL, in discharge of its duty of care to OFS, should have:

• searched the ASIC Register shortly before the scheduled drawdown;

• advised OFS that the search revealed that receivers had been appointed to Sanctuary;

• advised OFS to delay settlement until the circumstances leading to the appointment of the receivers had been ascertained;

• determined what the circumstances were;

• offered advice on the implications of those circumstances; and

• sought and acted upon instructions from OFS.

The counterfactual

72. Mr Abadee submitted that even if this Court is not prepared to find that WWL should have advised OFS to terminate the Loan Agreement, nonetheless the primary Judge should have found that if WWL had not been negligent, OFS would not have proceeded to drawdown and therefore would not have lost the sum of $4.5 million. This submission should be addressed on the assumption that WWL would have taken the steps outlined in the previous paragraph. On that basis, settlement of the Sanctuary Loan may have been delayed pending WWL’s investigations. But there can be little doubt that once the investigations were complete, OFS would have given instructions to proceed to drawdown notwithstanding that receivers had been appointed to Sanctuary. [29]

    29. Primary Judgment at [261].

73. The primary Judge did not address the precise counterfactual I have identified, but he did consider a very similar hypothesis. His Honour gave very cogent reasons for concluding that OFS, had it been informed of the appointment of receivers to Sanctuary, nonetheless would have proceeded to drawdown. In part, his Honour was influenced by his assessment of the evidence given by Mr Richards and Mr Toland (taking into account that no adverse inference can be drawn against them for not saying – or being permitted to say – what they would have done if told that receivers had been appointed). More importantly, the objective facts strongly support his Honour’s finding as to the likely response of OFS to the receivers’ appointment.

72. An important element in the primary Judge’s reasoning was the nature of OFS’s business, which involved high interest, short term “mezzanine” lending. His Honour adopted Mr Rosier’s description of OFS’s business model as one that relied on charging borrowers very high rates of interest without taking account of their ability to service or repay the loan. His Honour also took into account that Mr Williams himself gave evidence that OFS was interested in distressed loans, since the borrowers were prepared to pay the high interest rates OFS required.

73. The primary Judge found that if Mr Williams, prior to drawdown, had asked Sanctuary’s solicitors to explain the appointment of the receivers, it is likely that they would have told him that the appointment related to a single debt which was not large compared with the proposed advance. If, however, WWL had acted with reasonable care, Mr Williams would have obtained considerably more detailed information about the circumstances which led to the appointment of the receivers. Mr Williams’ letter of 29 August 2007 to Mr Richards drew the latter’s attention to the registered fixed charge secured against the boat owned by Sanctuary. The letter specifically noted that the charge did not affect OFS’s security over the Land. As the primary Judge found, it was a very simple matter for Mr Williams, once he learned of the appointment of the receivers, to search the ASIC Register to determine who had appointed the receivers. Had he searched the ASIC Register, it would have become apparent that the receivers had been appointed pursuant to the fixed charge over the boat. The ASIC Register would also have revealed (if Mr Williams did not already know) that the charge in respect of the boat concerned a loan to Sanctuary of $280,000.00 plus interest.

74. The primary Judge described the debt which led to the appointment of the receivers as “not large relative to the impending loan”. [30] A more significant comparison is between the debt, and the value of Sanctuary’s equity in the Land at the time the Loan Agreement was entered into. OFS had received two valuations in respect of what was described in the valuations as Lot 64 on Survey Plan 160961, comprising 51.75 hectares. This description was consistent with the Land identified in WWL’s letter of 21 August 2007 as the subject of OFS’s second mortgage. The first valuation, as at September 2006, valued the Land at $22.1 million on an “as is” basis. The second valuation, as at April 2007, appears to have valued the Land, with development approval for subdivision, at $17.325 million.

    30. Primary Judgment at [262].

75. Whatever the precise significance of these valuations, WWL’s letter of 21 August 2007[31] expressly addressed the value of Sanctuary’s equity in the Land. The letter stated that, upon the basis of documents provided by the broker, after deducting for the amount of the first mortgage from the valuation of the Land, “there is a sum of about $5 million in equity left in the security to cover your loan”.

    31. See above at [21].

76. The information that WWL should have communicated to OFS prior to drawdown was that the receivers had been appointed to Sanctuary in respect of a debt of $280,000.00 (plus interest) that was secured by a charge over a boat. WWL should also have advised (as it did before the Loan Agreement was executed) that the charge over the boat did not affect OFS’s security over the Land.

77. In the circumstances I have outlined, bearing in mind that the appointment of the receivers did not affect OFS’s security interest in the Land, and that OFS was to receive six months interest in advance calculated at 35 per cent per annum, it was clearly open to the primary Judge to infer that neither Mr Richards nor Mr Toland would have given instructions to terminate the Loan Agreement. The evidence does not justify this Court being satisfied on the balance of probabilities that OFS, had it been advised of the receivers’ appointment, and of the circumstances leading to the appointment, would have terminated the Loan Agreement prior to drawdown.

78. In reaching his conclusion, the primary Judge took into account the conduct of Mr Richards and OFS after Mr Williams informed Mr Richards that receivers had been appointed to Sanctuary. Mr Abadee objected to these matters being taken into account because the conduct did not occur at or about the same time the breach of duty took place. The authorities he cited do not establish that conduct occurring after the defendant’s breach of duty cannot be taken into account in determining what the plaintiff would have done had the defendant not been negligent. [32] No doubt caution must be exercised in extrapolating from the plaintiff’s conduct after a breach of duty has taken place, in determining what the plaintiff would have done had the defendant not been negligent. In a case involving a solicitor’s breach of duty to a client, the client’s conduct after the breach has occurred, depending on the circumstances, may provide cogent evidence of what the client was likely to have done if the solicitor had not been negligent.

    32. See, for example, Chappel v Hart (1998) 195 CLR 232; [1998] HCA 55 at [32-64] (McHugh J dissenting as to the result).

79. In the present case, Mr Richards’ failure to react when told that receivers had been appointed to Sanctuary, and OFS’s subsequent decision to extend the loan, reinforced the primary Judge’s conclusion that he could not be satisfied that OFS, had it been given proper advice about the appointment of receivers, would have terminated the Loan Agreement. While I would have reached the same conclusion regardless of the events occurring after September 2007, there was no error in his Honour taking these matters into account.

80. I do not think there is any force in Mr Abadee’s submissions that the primary Judge failed to appreciate that once OFS proved that WWL had breached its duty of care and OFS suffered a loss, an evidentiary onus was placed on WWL to point to other evidence suggesting that there was no causal connection between the breach of duty and the loss. [33] WWL adduced a substantial body of evidence suggesting that if WWL had not been negligent, OFS nevertheless would have proceeded with the Sanctuary Loan and as a result lost the principal sum advanced to Sanctuary. Once that evidence was adduced, it was for OFS to satisfy the primary Judge on the balance of probabilities that with the benefit of proper advice it would not have proceeded with the Sanctuary Loan. [34]

    33. Chappel v Hart at [34] (McHugh J, dissenting but not on this point); Rosenberg v Percival at [88] (Gummow J).

    34. CL Act s 5E.

81. For these reasons, OFS’s challenge to the primary Judge’s findings on causation fails. The appeal must therefore be dismissed.

Contributory negligence and proportionate liability

84. The primary Judge noted that it was unnecessary to consider WWL’s defence that OFS had been contributorily negligent in failing to make adequate inquiries about the value of the Land and Sanctuary’s status before entering into the Loan Agreement. Nonetheless, his Honour briefly addressed the contention and concluded that the “fault element [was] more heavily weighted against” OFS than WWL. [35] His Honour said that he would have assessed contributory negligence in relation to the Sanctuary Loan at 65 per cent against OFS and 35 per cent against WWL.

    35. Primary Judgment at [278].

85. The primary Judge also briefly addressed WWL’s contention that Global Consultancy Pty Ltd (Global) (not a party to the appeal) was a concurrent wrongdoer within the meaning of s 34 of the CL Act. On this basis, WWL submitted to his Honour that WWL’s liability was limited by s 35 of the CL Act to an amount reflecting that proportion of the damages or loss that the Court considered just, having regard to the extent of WWL’s responsibility for the loss or damage.

86. The primary Judge observed that there was a paucity of evidence as to the role played by Global in relation to the Sanctuary Loan. Even so, his Honour thought it likely that Global erred in its assessment of the “viability of the security offered”. He determined Global’s liability to be equal to that of WWL and, on that basis, would have apportioned liability equally between Global and WWL. [36]

    36. Primary judgment at [283].

87. Since I have upheld the primary Judge’s conclusion on causation, it is not necessary to consider OFS’s grounds of appeal challenging the findings on contributory negligence and proportionate liability. OFS made only brief submissions on these issues and, in particular, did not canvass in any detail the evidence bearing on them. In these circumstances, I do not think that the Court should attempt to resolve the factual issues presented by these grounds of appeal.

Orders

88. The appeal must be dismissed. The appellants must pay the respondent’s costs.

89. BARRETT AJA:   I agree with Sackville AJA and would add only this. The case below seems to have been conducted on an implicit assumption that, because Sanctuary had “gone into receivership” and become subject to “external administration” it had suffered the relegation of management, loss of independence and serious commercial blow associated with the commonplace case where a receiver is appointed out of court under a charge affecting the whole of a company’s property, assets and undertaking, including the goodwill of its business. Thought patterns relevant to cases of that kind permeated the cross-examination and the evidence of the expert witnesses. The fact that inquiries would have disclosed the situation to be one in which an external party had become receiver of a single chattel which stood as security for a relatively modest sum emphasises that discharge of the solicitor’s duty involved the making of such inquiries and the tendering of advice based on the results of them, rather than some kind of standard reaction to a generic circumstance.

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Endnotes

Decision last updated: 14 November 2016