Solicitor not liable to financier client despite breach of duty24 January 2017 | Professional Negligence
The NSWCA upheld the trial judge's decision that a financier failed to prove causation because it would have proceeded with a loan transaction despite its solicitor's breach of duty.
Whether a plaintiff lender established causation, by proving that it would not have proceeded with a loan but for its solicitor’s negligence.
WW Lawyers Pty Ltd (WWL) acted for Ongoing Financial Services Pty Ltd (OFS) in relation to a loan for $4.5 million to Sanctuary Developments (Australia) Pty Ltd (Sanctuary), secured by a second mortgage over land (the Sanctuary Loan). Sanctuary defaulted on the Sanctuary loan, and OFS lost the entirety of the principal sum it had advanced.
The day after the Sanctuary Loan was executed, receivers were appointed to Sanctuary. WWL had conducted a search of the ASIC register before the Sanctuary Loan was executed, but did not conduct a further search prior to drawdown five weeks later by which time the appointment of receivers had been entered on the ASIC register. OFS alleged that WWL breached its duty of care by failing to check the register again before draw-down, and that if it had been advised of the appointment of receivers it would not have loaned the money.
The Decision at Trial
The trial judge found that WWL breached its duty to OFS by failing to search the ASIC register shortly before drawdown. No express finding was made that WWL breached its duty by failing to advise OFS to terminate the Sanctuary Loan. However, OFS failed on causation. The trial judge was not satisfied that OFS would have terminated the Sanctuary Loan and refused to proceed to drawdown if aware of the appointment of receivers because the appointment related to a single, relatively small debt.
The Issues on Appeal
On appeal, OFS challenged the trial judge’s findings on causation.
The Decision on Appeal
The Court of Appeal considered that at it highest, the evidence justified a finding that WWL should have searched the register shortly before the scheduled drawdown, advised OFS of the appointment of receivers, advised it to delay settlement until the circumstances of that appointment had been ascertained, and given advice on the implications of those circumstances.
The Court of Appeal considered that, on this basis, settlement of the Sanctuary Loan may have been delayed pending WWL’s investigations but that there was little doubt that OFS ultimately would have given instructions to proceed. The trial judge’s reasons for concluding that OFS would have proceeded regardless were strongly supported by the objective facts, including the nature of OFS’s business, which involved high interest, short term “mezzanine” lending, with an interest in distressed loans and little account of a borrower’s ability to service or repay the loan; the debt which led to the appointment of the receivers was not large relative to the impending loan; and the appointment of the receivers did not affect OFS’s security. This conclusion was reinforced by (1) OFS’s failure to react when ultimately told that receivers had been appointed; and (2) OFS’s decision to subsequently extend the loan.
Implications for you
This case highlights the importance to a plaintiff to establish causation in professional negligence disputes. A plaintiff must produce sufficient evidence to establish on the balance of probabilities that, in the absence of the defendant’s alleged breach of duty, it would have acted in a manner which avoided the relevant loss.