You win some, you lose some: a mixed start to 2023 for solicitors’ negligence claims

By Bridget Wall and Madelyne Inch

The Supreme Court of New South Wales and the New South Wales Court of Appeal recently delivered judgment in two cases alleging negligence on the part of solicitors.

In the Common Law Division, the Court gave judgment against the law firm in Lindsay-Owen v HWL Ebsworth Lawyers [2023] NSWSC 68.

In Shoal Bay Beach Constructions No. 1 Pty Ltd v Mark Hickey & the persons listed in Schedule A to the Notice of Appeal trading as Sparke Helmore [2023] NSWCA 23, the Court found in favour of the firm.

The winners

Shoal Bay Beach No. 1 Pty Ltd (the Developer) was the developer of residential properties in Shoal Bay. It retained law firm, Sparke Helmore (the Firm), to advise and assist it in the sale of off-the-plan units in the development. The appellant (Shoal Bay Beach Constructions No. 1 Pty Ltd) obtained an assignment of the Developer’s rights to sue the Firm after the Developer was wound up in insolvency in June 2018.

In the course of selling the units, the Developer entered into two sales contracts for units (for Lots 50 and 52). As was standard in the contracts used by the Developer:

• clause 42.2 entitled either the vendor or the purchaser to rescind the contract by written notice if certain conditions precedent to completion were not satisfied by the ‘Registration Date’; and
• clause 43 enabled the Developer to extend the Registration Date upon giving one month’s notice to an affected purchaser.

On a number of occasions, the Firm had advised the Developer in writing and verbally that, should it wish to excise its rights under clause 43 of the sale contracts, it would be required to give affected purchasers at least one month’s notice. The Firm had provided the Developer various schedules setting out the Registration Dates for certain contracts.

Following a number of construction delays, the Developer was unable to settle on Lots 52 and 50 (whose Registration Dates were 6 and 7 August 2016, respectively). The Developer had also not given the affected purchasers notice under clause 43 of the sales contracts. Each purchaser subsequently rescinded their respective contracts.

At trial, the Developer contended that the Firm had a duty: (1) to advise it of the impending deadlines for the exercise of its rights under clause 43, or (2) to seek instructions before the dates for giving notices arrived.

The primary judge found the Firm had been negligent and had breached an implied term in its retainer to exercise due care and skill. The primary judge awarded the Developer $258,598.40, which reflected her Honour’s finding that the Developer had been contributory negligent (assessed at 30%). Her Honour also declined to award costs in circumstances where the quantum of damages fell well within the jurisdictional limits of the District Court.

On appeal, the Court concluded that the primary judge’s findings on breach were erroneous and that the Developer had been repeatedly advised of the:

• impending Registration Dates for various sales contracts; and
• time limits within which the right to extend the Registration Dates existed.

The Court of Appeal also found that the Firm had been instructed by the Developer to negotiate and advise on the extension of contracts where the Registration Dates fell in June and July 2016, but that there was no evidence to suggest the Firm was obliged to go beyond the Developer’s express instructions to negotiate and advise on all pending sales contracts.

In any event, the repeated provision of advice to the Developer, which confirmed its understanding of clause 43 and its rights to extend the Registration Date, was inconsistent with the primary judge’s finding that the Firm should have reiterated its advice closer to the Registration Dates for Lots 50 and 52.

While the issue was ultimately not relevant, the Court also increased the contributory negligence finding from 30% to 80%. The Court of Appeal does not go into detail as to why it assessed contributory negligence at 80%, other than rejecting the Developer’s submissions that it had instructed the Firm to telephone every week to seek instructions from it about which Registration Dates should be extended.

The losers

In the recent decision of Gregory Hamilton Lindsay-Owen v HWL Ebsworth Lawyers [2023] NSWSC 68, the Supreme Court found against HWL Ebsworth Lawyers (HWLE) on a causation basis.

Mr Lindsay-Owen and Dairycorp Pty Ltd (Plaintiffs) owned a large parcel of land that he wished to sub-divide and develop, for profit. In order to achieve this goal, the Plaintiffs entered into a joint venture agreement (JV Agreement) with a developer. HWLE was retained to advise the Plaintiffs with respect to the development of the land and the preparation of the JV Agreement.

At the time the JV Agreement was entered into, the Plaintiffs had a long standing loan facility connected to the development, with National Australia Bank for about $20 million. The facility was secured against the land. The Plaintiffs alleged they instructed HWLE that a key objective of the negotiation of the joint venture was that the NAB debt was discharged by external loan funds and those funds were to be borrowed by any joint venture.

The JV Agreement contained a provision which ultimately called for the Plaintiffs to repay the NAB loan and procure a release of securities from the title when planning approval was obtained (pay-back provision).

When planning approval was obtained, the debt was unable to be discharged in accordance with the pay-back provision. Essentially this meant that the Plaintiffs were forced to sell the land.

The Plaintiffs and the developer disagreed as to the meaning of the pay-back provision, which was very complicated in its construction. This issue was ultimately the subject of other earlier proceedings^[1], in which the Court found that the developer’s characterisation of the pay-back provision was the correct interpretation. The effect being that HWLE did not appropriately draft or negotiate the drafting of the pay-back provision in accordance with the Plaintiffs’ instructions.

The tensions between the Plaintiffs’ instructions to HWLE, and the actual wording and meaning of the pay-back provision was not disputed, as breach was admitted. However, the central question for the Court was whether the breach caused the Plaintiffs’ loss and the quantification of that loss.

Causation

The Plaintiffs argued that they had been deprived of an opportunity to amend the JV Agreement so as to incorporate the fundamental financing requirements advised to HWLE, and that opportunity had some value. To succeed, the Plaintiffs had to establish ‘the Counterfactual‘, namely that:

• they would have amended the draft the JV Agreement to discharge the NAB loan with a joint venture loan;
• those amendments would have been agreed to by the developer; and
• NAB would have agreed to an extension of time to allow the negotiations to happen.

HWLE argued that the Plaintiffs could not establish in the Counterfactual:

• that the developer would have agreed to amend the pay-back provision to conform to the Plaintiffs’ instructions; and
• the consequential losses flowing from the lost benefit of the pay-back provision.

HWLE submitted that the history of protracted and combative negotiations between the Plaintiffs and the developer, together with the complexity of the joint venture, meant that the Plaintiffs could not establish the parties’ hypothetical conduct as a probability. HWLE were ultimately unsuccessful in their defence of this central point.

The Court was satisfied on the balance of probabilities that the Plaintiffs had lost a valuable opportunity to amend the JV Agreement. The Court said that when the relevant breach occurred, and when the subject opportunity was lost, an assessment of the value of the opportunity had nothing to do with the fact that exploitation of the opportunity was impeded by the fractured nature of the relationship between the joint venture parties.

His Honour concluded that the loss of an opportunity to enter an inherently risky venture does not deprive the opportunity of all value, even if its value may be reduced to reflect the existence of a risk.

When assessing the value of the lost opportunity, his Honour discounted the Plaintiffs’ claim by 15% for ‘contingencies and vicissitudes’. As to quantification of damages, his Honour sought the parties’ input, based on his reasons, and will determine the quantum of damages at a later date.

Overall takeaways

Shoal Bay was decided on breach of duty, while Lindsay-Owen turned on causation – an inherently more risky, but not impossible, element of negligence to mount a defence on. In any event, both cases provide some useful takeaway tips:

The Court of Appeal’s decision in Shoal Bay reaffirms two important principles:

• firstly, that a solicitors’ duty of care is coextensive with its contractual duty and that there is no ‘penumbral’ duty requiring a solicitor to go beyond the terms of their retainer in protection of the client’s interest;^[2]
• secondly, that a solicitor is not generally obliged to repeat advice previously given to a client or advise on what a client already knows.^[3]

It is also interesting to see such a high contributory negligence finding in a professional negligence claim. Although the judgment does not ultimately turn on it, and there is little discussion by the Court as to how it has determined such a high finding, it gives confidence that claims against solicitors can be (sometimes significantly) reduced where the client has contributed to their loss.

In Lindsay-Owen, the judgment provides a helpful summary of the principles governing loss of opportunity in professional indemnity cases. What appears clear from the decision is that, when attempting to disprove a counterfactual, without more, a disharmony between the contracting parties to a commercial transaction will not be sufficient to establish that the transaction would not have proceeded.

His Honour reserved his decision on quantum, which is large and one of the main focuses of the expert evidence. It will be interesting to see HWLE’s ultimate exposure, taking into account the 15% risk reduction.

The decision demonstrates that characterising causation is a difficult exercise for the Court and difficult for practitioners to predict when advising on prospects.

[1] Lindsay-Owen V Schofields Property Development Pty Ltd [2014] NSWSC 1177
[2] Heydon v NRMA Ltd [2000] NSWCA 374 at [364] citing Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642; Astley v Austrust Ltd [1999] HCA 6 at [47] and [48]; and Australian Executor Trustees (SA) Limited v Kerr [2021] NSWCA 5.
[3] Yager v Fishman & Co and Teff & Teff [1944] 1 All ER 552.