NSWCA confirms counterfactuals are a matter of ‘proving’ the ‘probability’ of causation

By Bridget Wall and Daniel Simpson

The New South Wales Court of Appeal has overturned the judgment against HWL Ebsworth Lawyers in the decision of Bluth v Boyded Industries Pty Ltd. It found the client’s loss wasn’t caused by the breach of duty when the solicitor failed to advise that lodging a caveat (in accordance with their client’s instructions) would entitle the other parties to terminate the deed.

Professional negligence cases often involve an analysis of ‘what would have occurred’ if a firm hadn’t breached its duty of care, known as a counterfactual. In revisiting standard of proof required in a counterfactual, the Court of Appeal has reaffirmed the importance of contemporaneous evidence that rises ‘higher than speculation’ to no less than the balance of probabilities.

Background

Boyded Industries Pty Ltd (Vendor) forms part of the Heartland Group, which owns a series of car dealerships across New South Wales, including a parcel of land described as ‘Auto Alley’ in Parramatta. Between 2015 and 2016, the Vendor sold certain zones of Auto Alley to various corporate entities known as the ‘Gateway Group’ (Purchasers). The Vendor engaged HWL Ebsworth Lawyers (Firm) to act in the sales.

In late 2016, a settlement was reached. The settlement included a notation regarding an agreement involving the sale of the ‘car showroom’. The transaction was to be documented by way of option deed, including a clause that prohibited the Vendor from lodging a caveat.

The Firm acted for the Vendor in the negotiation of the option deed. However, contrary to the notation, it lodged a caveat on 24 July 2018 at the instruction of the Vendor. Subsequently, the Purchaser terminated the option deed on the basis the Vendor breached clause 8(a) of the option deed, which prohibited a caveat to be registered on the title. The Vendor commenced legal proceedings against the Purchaser, challenging the validity of the termination. This was later dismissed.

The Vendor commenced proceedings against the Firm for loss and damage arising from the failure to advise lodging a caveat would entitle the Purchaser to terminate the deed. The Firm conceded it breached its duty of care to the Vendor (which the court noted as ‘entirely appropriate’) by failing to advise the ramifications of lodging the caveat. However, the Firm disputed its breach of duty had caused the Vendor any loss. Top of Form

Primary judgment

The Vendor argued the Firm’s failure to advise on the risks and consequences of lodging a caveat caused it to lose a valuable course of action (the right to be paid $3.5 million) under the option deed once it was terminated. In opposition, the Firm argued the Vendor failed to prove the breach caused any loss, as the evidence didn’t support a finding the Vendor would’ve rescinded the option deed in May 2020.

Following extensive contemporaneous evidence from the Vendor’s director, the court was satisfied the ‘most likely scenario’ was the Vendor would’ve rescinded the deed. It referenced several instances where the Vendor demonstrated its intention to pursue an outcome that was ‘most financially advantageous.’

The court was satisfied the Vendor’s attitude reflected the ‘commercial reality’ and its recognition of the uncertainty of the financial position of the Purchaser, favouring an eventual rescission of the deed.

On the issue of quantifying the loss on the accepted counterfactual analysis, the court found the Vendor’s loss better reflected a loss of commercial opportunity rather than the benefit of an unsecured promise of $3.5 million under the option deed.

Appeal judgment

The Firm appealed the judgment primarily on the basis the trial judge erred in finding the Purchasers ‘had both a willingness and an ability to pay $3.5 million under the option deed.’ This ground was targeted at the heart of the Vendor’s ability to recover the sum under the purported loss of action consequent upon the Firm’s alleged negligence.

The Court of Appeal held the Firm was required to prove ‘some glaring improbability in his Honour’s findings to some compelling inference to which the finding is contrary.’ Specifically, the Firm needed to demonstrate the trial judge's choice regarding the alternative hypotheses (the counterfactuals) was ‘factually erroneous.’

The Firm chose to compare the trial judge’s findings with the available evidence in support of a different conclusion, namely the evidence didn’t support the hypothesis selected by the trial judge. The Firm submitted the Vendor’s willingness to pay was ‘a matter of conjecture’ on the basis the trial judge’s view was formed in absence of any defence to the hypothetical claim. While the Court of Appeal rejected the Firm’s submissions the Purchaser wasn’t willing to pay, it found it had to be accompanied ‘by the ability to pay.’

In turning to the Purchaser’s ability to pay, the Court of Appeal held it was incorrect to find ‘that there was evidence raising higher than speculation or surmise’ the Vendor had the ability to pay. The Court of Appeal considered the evidence concerning the financial position of the Purchaser and found there wasn’t a ‘demonstrated ability to borrow and repay amounts which were owing, thereby negativing any inference that there was an ability to pay debts.’

Regarding the trial judge’s findings, the Court of Appeal found:

• the Vendor’s case was ‘beset by an evidentiary vacuum’;
• the trial judge ‘was too ready to draw the inference of an ability to pay when the material available to him in Boyded’s [Vendor] case did not support it’; and
• based on the available evidence ‘no inferences in favour of the existence of the ability to pay $3.5 million can be reliably drawn on the material that was before his Honour.’

Consequently, the Court of Appeal held ‘the evidence does not support a finding on the balance of probabilities’ the Vendor had the ability to pay the $3.5 million.

The Court of Appeal allowed the appeal and ordered the Vendor pay the Firm’s costs of the appeal.