Successfully proving the causation counterfactual: it’s all in the evidence
By Bridget Wall and Daniel Simpson
In the latest decision on solicitors’ negligence, the Supreme Court of New South Wales in the matter of Boyded Industries Pty Ltd v Bluth & Ors found against a solicitor for failing to advise his client that lodging a caveat (in accordance with their client’s instructions) would entitle the other parties to terminate the deed.
Professional negligence cases against solicitors frequently involve difficult issues of causation, the assessment of loss and what would have happened if certain advice was provided to a client. The decision highlights the importance of contemporaneous evidence to support a hypothetical counterfactual of what would have occurred if certain advice had been given.
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 dispute arose in connection with the sale of the zone known as ‘North and South Land’ and effectiveness of notices to complete issued by the Vendor. Following proceedings in the Supreme Court of New South Wales, a settlement was reached including:
- an order to the effect that the contracts were completed by 15 May 2017; and
- a notation that there was an agreement involving the sale of the ‘car showroom’ (a lot in the Central Land) with the transaction to be documented by way of option deed, including a clause that prohibited the lodgement of a caveat by the Vendor.
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.
On 16 August 2019, the Purchaser terminated the option deed on the basis that 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 that lodging a caveat would entitle the Purchaser to terminate the deed. The Firm conceded that it breached its duty of care to the Vendor (which the Court considered ‘entirely appropriate’) in failing to advise the ramifications of lodging the caveat – specifically, that it would allow the Purchasers to terminate the deed. However, the Firm disputed that its breach of duty had caused the Vendor loss.
The primary issue before the Court was whether the Firm’s breach caused the Vendor any loss greater than a negligible amount.
The Vendor argued that 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 that the Vendor failed to prove that the breach caused any loss as the evidence did not support a finding that the Vendor would have rescinded the option deed in May 2020.
As a starting point, the Court held that the application of a counterfactual analysis was required to prove that the Firm’s breach of duty caused the damage. Specifically, it relied on the established principle in Sellars v Adelaide Petroleum NL and emphasised that the Vendor was required to ‘prove, on the balance of probabilities, that most likely scenario, but for the admitted negligence of the defendant, is that the plaintiff would have rescinded the deed.’
Following extensive contemporaneous evidence from the director of the Vendor, the Court was satisfied that the ‘most likely scenario’ was that the Vendor would have 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 that 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. It added that the objective contemporaneous evidence did not support an extension of the deed indefinitely, rather a view to rescind the deed in the short term.
In rejecting the Firm’s submissions that the Vendor would not have rescinded the deed, the Court held that the attitude and conduct of the Vendor was ‘likely to be the most reliable and informative evidence rather than any reconstruction assembled some years after the event in the context of current litigation.’
On the issue of quantifying the loss on the counterfactual analysis, the Court held 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. It considered an appropriate assessment of the value of the loss was $2 million on account of the likelihood of the claim resolving by way of compromise if a recovery was to proceed.
- In advancing a counterfactual analysis, the Court was concerned with the ‘what if’ and ‘what would have occurred’ scenario if the Firm had not breached its duty of care. The Court did not require certainty, rather that ‘the most likely scenario’ was that the Vendor would have rescinded the contract but for the negligence of the Firm.
- On the evidentiary and factual issues, the Court had a strong preference for contemporaneous evidence over any reconstruction of events done after the fact. This extended to the firsthand attitude and conduct of the Vendor’s directors during the sale.
- In quantifying a loss on a counterfactual analysis, while it may be difficult to assess, that does not mean that a party is only entitled to damages confined to a nominal sum and that the process to determine the amount is ‘a matter of informed estimation’.
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