Third issue: causation
73It was common ground that, if Mr Tzovaras had advised Mr Jeandin to seek independent legal advice, and Mr Jeandin had done so, the independent lawyer consulted by Mr Jeandin, acting reasonably and with proper care, would have given advice on the lines of that summarised at [71] above. It was also common ground, that if Mr Tzovaras had been retained, he should have advised Mr Jeandin to the same effect.
74The real issue, as to causation, was whether Mr Jeandin, if given the advice that he should have been given (either by an independent solicitor or by Mr Tzovaras) would nonetheless have made the loan.
The parties' submissions
75Mr Darke accepted that the issue of causation was to be determined by reference to ss 5D and 5E of the Civil Liability Act 2002 (NSW). Those sections read 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").
(2) In determining in an exceptional case, in accordance with established principles, whether negligence that cannot be established as a necessary condition of the occurrence of harm should be accepted as establishing factual causation, the court is to consider (amongst other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party.
(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.
(4) For the purpose of determining the scope of liability, the court is to consider (amongst other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party.
5E Onus of proof
In determining liability for negligence, the plaintiff always bears the onus of proving, on the balance of probabilities, any fact relevant to the issue of causation.
76As to s 5D(1)(a), Mr Darke submitted that Mr Tzovaras' negligence was a necessary condition of the occurrence of harm. He submitted, correctly, that s 5D(1)(a) embodied the "but for" test: see Adeels Palace Pty Ltd v Moubarak (2009) 239 CLR 420 at [45].
77In this case, Mr Darke submitted, the question of causation depended on what Mr Jeandin would have done if Mr Tzovaras had not been negligent (s 5D(3)). In this case, he submitted, one way or another Mr Jeandin would have been given advice along the lines set out at [71] above. Had that happened, Mr Darke submitted, Mr Jeandin would not have entered into the transaction. He submitted that the following factors justified attributing that state of mind to Mr Jeandin:
(1) it was of prime concern to Mr Jeandin, as indeed he had made known to Mr Tzovaras, that the loan be adequately secured;
(2) in circumstances where there was no priority agreement, so that the amount secured by the first mortgage in priority to Mr Jeandin's (unregistered) second mortgage might increase and consume the entire value of the mortgaged property, Mr Jeandin could not be said to be adequately secured;
(3) there was a real risk that Grenfell might take action under its mortgage, to the detriment of Mr Jeandin's interest, because the company was not paying interest under the Grenfell mortgage (and, further, the amount secured by that mortgage was thus increasing in any event);
(4) the Grenfell mortgage was due to expire well before the loan to be made by Mr Jeandin was due to be repaid; in those circumstances, there was a real risk that, if the company could not obtain an extension of the Grenfell loan or refinance it, Grenfell might sell in any event, again to the detriment of Mr Jeandin's interest;
(5) without an independent valuation of the property, and a limitation on the amount that Grenfell might recover in priority, Mr Jeandin could have no idea whether the value of the property (after taking into account the amount for which Grenfell would have priority) was sufficient to secure the loan proposed to be made by him; and
(6) in relation to the proposed transaction with Raptis Group (which had occurred very shortly before the loan to the company was discussed and made), Mr Jeandin had shown himself to be cautious, and had decided not to proceed because Mr Tzovaras clearly had, and expressed, reservations about the proposed investment.
78Mr Curtin submitted that Mr Jeandin would have gone ahead in any event, even had he been given (by an independent solicitor or by Mr Tzovaras) advice to the effect of that set out in [71] above. Mr Curtin submitted that Mr Jeandin had reflected carefully on the commercial aspects of the transaction, and had satisfied himself that it was appropriate to proceed. Mr Curtin pointed, in particular, to the very high return that was expected. The amount payable to Mr Jeandin under the deed of loan, in effect by way of, but as a matter of drafting in lieu of, interest was $750,000.00. As Mr Curtin pointed out, this equated to a return of 33 1/3% on an annual basis. Mr Curtin submitted that the attraction of this return was sufficiently great to justify the conclusion that Mr Jeandin would have gone ahead even if given the appropriate advice.
79Further, Mr Curtin submitted, Mr Jeandin knew, from the information that he had been given by Mr Tzovaras, that there was a first mortgage under which $4.1 million was owed. He knew that $625,000.00 of his loan was to be used to pay out another unregistered mortgage, and that $100,000.00 was to be used to pay other creditors. Thus, Mr Curtin submitted, Mr Jeandin should be taken to have known that the company was short of liquid funds, and that, but for the loan, it would not be able to pay pressing debts.
80In this context, Mr Curtin submitted, Mr Jeandin also knew, from the same documents, that the balance of the loan proposed to be made by him would be used as working capital. He submitted that Mr Jeandin should have appreciated from that: first, that it was likely that some of the funds would be used to pay outstanding interest under the Grenfell loan; and, more importantly perhaps, that it was self-evident that the company had no other source of funds.
81In short, Mr Curtin's case on causation was that Mr Jeandin had more than enough information to bring home to him that the there was a substantial element of commercial risk, but that there was a commensurately high commercial return, and that in those circumstances Mr Jeandin would have decided to proceed.
Decision
82It is, I think, open to infer that Mr Jeandin is a successful businessman. He had made one substantial investment in real property in Australia, and had contemplated another. He was in a position to lend the sum of $1.5 million to the company. The purchase price of the Sanctuary Cove property was $1.8 million. The purchase price for the unit proposed to be purchase from Raptis Group was in excess of $1 million.
83I have no doubt that Mr Jeandin was in principle able to assess the commercial aspects of the proposed loan to the company, and to satisfy himself on those aspects. However, any assessment of the commercial aspects of the transaction necessarily assumes an adequate understanding of the degree of risk. That is an issue on which Mr Jeandin had little information (apart from the so-called feasibility study and valuation - I will return to those documents). That is an issue on which, had Mr Jeandin had been given the independent advice required, he would have had much more information.
84Thus, I do not regard Mr Jeandin's assumed commercial experience and sophistication as dictating the answer to the question of causation.
85No doubt, the promised return was high. But it was not put to Mr Jeandin that the return was so high that he was prepared to take the risk that he might lose, not only the promised return, but also part or all of his capital. As I have said, it is clear that security was of importance - in my view, of prime importance - to Mr Jeandin. It is equally clear that an understanding of the issue of security would require some knowledge of mortgages, the Torrens system, priorities (including the doctrine of tacking) and other matters relatively familiar to Australian legal practitioners but not, I venture to think, within the general experience of non-lawyers brought up under the French Civil Codes. Since there is no reason to think that Mr Jeandin had any understanding of those matters (it was not put to him that he did), there is no reason to think that his commercial experience enabled him to make any assessment of the legal considerations that would bear upon the question of security.
86I have said that Mr Jeandin was concerned that the loan should be secure. The evidence on that point has two elements. First, there is Mr Jeandin's decision to withdraw from the Raptis Group investment when Mr Tzovaras expressed reservations. It is important to note that the matter of concern to Mr Jeandin was the extent to which the property would return the income that apparently had been represented, and the extent of the outgoings that would be incurred in the course of ownership. It was the failure of Raptis Group to give any information on those matters that led to the reservations. In that case, Mr Jeandin was not able to make an assessment of the commercial merits of the proposed purchase, and thus decided to withdraw.
87The second aspect of the evidence that bears on this is the statement that Mr Jeandin made to Mr Tzovaras in April 2008. I have set that out at [37] above. In essence, Mr Jeandin said that it was very important that he have a mortgage to secure the loan, and that he would not make the loan unless it was adequately secured. According to him, he was assured by Mr Tzovaras "that his loan would be fully secured". That evidence was not controverted and was not challenged. I accept it.
88Each piece of evidence, taken on its own, suggests that Mr Jeandin was a cautious investor. The first suggests that Mr Jeandin required adequate information to enable him to make an assessment whether or not to proceed. The second suggests that, notwithstanding the attractive return proposed, security was of prime importance to him. Taken together, those two pieces of evidence lead, in my view, to the conclusion that Mr Jeandin would not have proceeded unless, had he been given the advice that he should have been given, the answers to the questions that should have been pursued had shown that his loan would be adequately secured.
89I return to the advice that Mr Jeandin should have been given. First, he should have been advised to obtain an up to date valuation of the property. The only valuation (so called) that he was given was the brief summary, based on expected returns, sent to him by Mr Tzovaras.
90Mr Moses gave unchallenged evidence that standard conveyancing practice would have required an up to date valuation from an independent valuer so that the value of the property to be mortgaged could be ascertained and the equity, after allowing for amounts outstanding under any existing mortgages or other encumbrances, could be ascertained. Mr Moses said that an independent legal practitioner acting reasonably "would have advised..." that the feasibility study and valuation "was relatively worthless as an assessment of the value of the development at the time the loan was made unless it was supported by a comprehensive valuation by an independent valuer". Mr Moses said, further, that if the independent valuer could not properly assess the projections in the feasibility study, Mr Jeandin should have been advised "that independent financial advice be obtained as to these matters". The relevant aspects of Mr Moses' reports were admitted without objection and he was not required for cross-examination.
91The loan was required to fund a subdivision of the property. The return that was expected could come only from sale of the lots in the subdivision. The valuation to be ascribed to the property was dependent on the subdivision being carried through to completion. If, for whatever reason, this did not happen then the security of Mr Jeandin's loan would be imperilled. Further, to the extent that any independent valuation involved assumptions as to sale prices of finished lots, and the time required to sell them, those assumptions would need to be tested.
92Next, Mr Jeandin should have been advised in relation to the first mortgage. That advice should have encompassed the following:
(1) advice on the necessity for Grenfell's consent. Had such advice been given, it would surely have caused Mr Jeandin to give instructions that this consent should be sought. There is no evidence that Mr Tzovaras did so, or that Mr Jeandin was aware of the need to do so.
(2) Advice should have been given to ascertain the state of accounts under the first mortgage. The reason for this is obvious. Without knowing both the value of the land and the amount already secured, it is impossible to assess the value of the security accurately.
(3) Advice should have been given on the complications that could follow from the fact that the Grenfell loan was repayable well before the proposed loan.
93As to the third of those matters: the Grenfell loan was due for repayment a year before the loan proposed to be made by Mr Jeandin would fall due for repayment. Thus, whilst the company was carrying out the subdivision and selling off the subdivided lots, it would be required either to negotiate an extension of the Grenfell loan or to find alternative first mortgage finance. If neither of those things happened, Grenfell would look to realise its security. That would pose an obvious risk to Mr Jeandin. It would bear directly, and adversely, on the sufficiency of the security given to him for his loan, and thus on the safety of his investment.
94The third aspect of the advice that Mr Jeandin should have been given was that he should negotiate and enter into a priority agreement with the first mortgagee. Again, the reason for that is obvious. Unless the amount owing to the first mortgagee is capped, it is impossible to assess accurately the value of the security for a second mortgage advance. Of course, if the first mortgagee (Grenfell) were not willing to enter into a priority agreement, this would be a clear warning signal to Mr Jeandin.
95The fourth topic for advice related to registration. Since it is not suggested that any loss flowed from the failure to register, this can be put to one side.
96Mr Moses pointed out, further, that there had been no searches or inquiries made on behalf of Mr Jeandin, nor requisitions on title. Again, since no loss is alleged to flow from those failures (except to the extent that the question of inquiries or requisitions may cover the dealings with the first mortgagee, Grenfell), there is no need to give further consideration to these matters.
97In my view, if Mr Jeandin had been given the advice that should have been given, he would not have proceeded to make the loan without taking, or causing to be taken, the actions identified in that advice. That is because he could not have been satisfied that there was adequate security for the proposed loan without:
(1) knowing the value of the property, as determined by a valuer independent of the mortgagor;
(2) knowing the likely extent of the amounts owing, or to become owing, to Grenfell under its first mortgage; and
(3) having in place an appropriate priority agreement with Grenfell.
98Until those steps were taken, and their outcomes were known, Mr Jeandin could not have concluded that he would be adequately secured. Nor is there any reason to think that even if Mr Jeandin had appreciated that he might not be adequately secured, he would have ignored this, blinded by the apparently high return on offer. In those circumstances, I conclude, Mr Jeandin would not have proceeded to make the loan.
99Mr Curtin submitted that although at one stage Mr Jeandin might have regarded security as his primary concern, nonetheless that attitude might have changed once he became apprised of the extent of the promised return (T67.10). The difficulty with this submission is twofold. First, the evidence that Mr Jeandin did regard security as being of prime concern comes from his conversation with Mr Tzovaras set out [37] above. That conversation occurred after Mr Jeandin had received the material sent to him by Mr Tzovaras (both in English, sent indirectly through Mr Jean; and directly, in French). He had discussed the proposal at length with Mr Tzovaras. No doubt, Mr Jeandin was aware of the return. But it was after he had received that material and had those discussions - that is to say, after he must have become aware of the promised return - that he had the conversation with Mr Tzovaras set out at [37] above.
100The other problem with the submission is that the point was not put to Mr Jeandin. Mr Curtin submitted, I think, that it could not have been put bearing in mind s 5D(3)(a) of the Civil Liability Act . I do not agree. That paragraph does not apply to statements against interest. If the proposition had been put to Mr Jeandin and he had agreed with it, his concession could have been taken into account on the question of causation. Had he rejected it, the inference that is presently available would remain available.
101I accept, as Mr Curtin submitted (see at [79] - [80] above), that Mr Jeandin had sufficient information to bring home to him that the company was short of liquid funds, and that it required the loan to pay pressing debts. That does not seem to me to detract from the importance of security, from Mr Jeandin's perspective. On the contrary, I think, it confirms it. The obvious inference to be drawn from the matters to which Mr Curtin referred is that Mr Jeandin's hopes of repayment of his principal (leave aside, for a moment, the profit share that was promised) depended entirely on the value of his security. Those matters indicate clearly that the company itself had no hope of repaying the amount of the loan except through the sale of the mortgaged property.
102In my view, it is more likely than not that, if Mr Jeandin had been given the advice that he should have been given, he would not have proceeded unless the steps that (he should have been advised) were necessary, were taken; and unless the outcomes were satisfactory. I note that the contrary was not put to Mr Jeandin in cross-examination.
103There was relatively little debate as to what might have happened if Mr Jeandin had been given the advice that he should have been given and if the steps, to which that advice should have been directed, had been carried out.
104There is no evidence that could support a finding as to what Grenfell would have done had it been asked to consent to a second mortgage in favour of Mr Jeandin, and to enter into a deed of priority with him. On one view, it might be thought that Grenfell would have agreed to both these things, on the basis that its prospects of recovering its loan from the company were limited unless the company could obtain funding from some source to complete the development. On the other hand, bearing in mind that the company was struggling to meet its interest liabilities, it is unlikely that Grenfell would have agreed to any limitation on its priority that did not include a substantial buffer to cover possible interest defaults in the future.
105Of course, if there were such defaults, then interest would accrue at the higher rate: stated in the revised offer to be 14.25% per annum. On the varied principal sum of $4.1 million, that would mean a monthly accrual of $48,687.50 interest. On the actual loan balance of $4.248 million, interest at the higher rate would accrue at $50,825.00 monthly.
106It may be thought to have been unlikely that an unfinished development, of the kind being undertaken by the company, would sell in a matter of weeks. Accordingly, it might be thought unlikely that, even if Grenfell were prepared to consent to a second mortgage and to enter into a deed of priority with the second mortgagee, it would do so without stipulating for a substantial buffer over the amount of $4.248 million, to cover potential arrears of interest.
107The latest valuation of the Silver Brumby Estate land was that performed by Mr Whitman on 1 May 2008. That is the best evidence of the then value of the land. The valuation was not available for Mr Jeandin to rely on, because it stated expressly that if it were "to be used for the purposes of obtaining finance then it shall be used for a first mortgage only". Thus, it would have been necessary for Mr Jeandin either to have Mr Whitman reissue the valuation in his favour or to procure a valuation from another valuer. The value ascribed to the land by Mr Whitman in his valuation of 1 May 2008 was $6.35 million. Presumably, if he were to reissue the valuation in favour of Mr Jeandin, he would come to the same conclusion. Since, as I have said, that is the only evidence of the land's value at the relevant time, I can infer that another valuer, instructed in Mr Jeandin's interests, would have reached a similar result.
108It is immediately apparent that there was not sufficient equity in the land to secure both the principal sum proposed to be advanced by Mr Jeandin and the promised return of $750,000.00. The total to be repaid to Mr Jeandin under the deed of loan was $2.25 million. The amount owing to Grenfell was $4.248 million. The total of those amounts is $6.498 million.
109Thus, on any view, the second mortgage (assuming consent) and assuming a deed of priority that limited Grenfell's priority to, (in round figures, $4.25 million) would protect at most the capital to be advanced by Mr Jeandin. And it would only do so if Grenfell required no buffer, or a buffer of no more than about $500,000.00, for contingencies such as arrears of interest until the principal sum, together with arrears of interest, could be repaid.
110I should note that Mr Whitman's valuation expressed the view that, once sales had got to a certain point, the Grenfell loan would be paid out, the interest expense would finish, and the project would become "self-funding". The point at which those things might happen was not identified in the body of the report. It may have been identified, and the underlying reasoning exposed, in the schedules of workings. But those schedules were not in evidence. Thus, the point at which the ongoing interest expense (see at [105] above) might drop is not identified. Of course, if the development were sold incomplete (see at [115] below), this would have no practical consequence in any event.
111I accept that the question of causation is to be determined subjectively, according to what Mr Jeandin himself would or would not have done. But in this case, it is to be determined by reference to his statement, made prior to the events of breach and loss, that he needed to be adequately secured. Whilst he did not say what he meant by adequate security, it seems to me that the foregoing analysis of the figures indicates, objectively, that the proposed second mortgage could not stand as adequate security for the loan and profit share in any event. Nor could it stand as adequate security for the principal to be lent unless Grenfell's priority rights were limited in the way that I have indicated.
112It seems to me that if adequate advice had been given, and followed through, the outcome (in so far as what I have said offers any guide to that outcome) is unlikely to have provided assurance to Mr Jeandin that he would be adequately secured.
113In this context, Mr Darke submitted (T75.40):
... when one starts talking about a selling period of 12 months or 18 months to the, borrower who is unable to pay interest, plus the costs of selling, it would have to be very generous lender to allow any sort of priority to Mr Jeandin which would have adequately secured $1.5 million.
114As will be apparent from what I have said, I think that this submission is correct. It encapsulates, concisely, but accurately, the real difficulty in concluding that Mr Jeandin was offered anything remotely approaching adequate security for the loan that he was asked to make.
115Added to all this is the complication to which I have referred to already: namely, that Grenfell's loan would fall due for repayment before the loan to be made by Mr Jeandin. If Grenfell declined to extend its loan, and realised its security to recover the amount owing to it (by hypothesis, at a time when the development was incomplete or when sales had not progressed), the prospects of the second mortgage security having any value at all were, at best, minimal. That conclusion follows, a fortiori , if there were a premature sale occasioned, prior to the due date for repayment, by some other breach (such as repeated failure to pay interest).
116To some extent, the analysis in the preceding twelve paragraphs may be superfluous. I have found, in substance, that Mr Jeandin would have accepted the advice that should have been given to him, by requiring the steps the subject of that advice to be carried out before he lent any money. He was not given any advice, and thus had no opportunity to require those steps to be carried out. But to the extent that the question is raised of what would have happened had those steps been carried out (and it may be raised at [33] of the outline written submissions provided for LawCover by Mr Curtin and Mr Arblaster at the conclusion of the evidence), those paragraphs go as far, I think, as the evidence permits in establishing what "third parties would probably have done". To explain that somewhat cryptic reference, paragraph [33] reads:
33. That is, assuming Tzovaras was required to give the advice Moses sets out in his reports, there is no evidence as to what the plaintiff or third parties would probably have done.
117I repeat that, by the time Mr Curtin came to address, the assumption with which that paragraph commences had been conceded (see what I have said at [6] above).
118In those circumstances, I conclude that the question of causation should be resolved in favour of Mr Jeandin.