McCracken & McCracken v Pippett & Anor [1999] VSCA 156

Court of Appeal (Vic)|1999-09-29|Before: CALLAWAY, BATT and CHERNOV, JJ.A.

NEGLIGENCE - Solicitors - Scope of inquiries to be made of solicitor for other parties at settlement - Whether loss caused by alleged breach.

The respondents, Bruce Pippett and Ernst Groenwald, were employed by Thompson Land Ltd. ("the company"), which went into liquidation on 6th September 1990. Earlier that year, on the advice of the appellant firm and counsel, the respondents had taken steps designed to protect their position in that event. Believing that they were likely to be retrenched, they had claimed compensation and threatened to apply to have the company wound up. Their claims were settled on the basis, among other things, that the respondents and an entity associated with another claimant would be paid $80,000 by one Warren Alfred Thompson, a director of and shareholder in the company. Terms of settlement were negotiated and were signed by or on behalf of the respondents, the company, Mr. Thompson and others. They bear date 9th March 1990.

Clause 1 of the terms of settlement contained an agreement by Mr. Thompson to pay $25,000 to Mr. Pippett and $15,000 to Mr. Groenwald by noon on 13th March 1990 "by way of a bank cheque drawn on the personal account of Warren Alfred Thompson and payable to Messrs. McCracken & McCracken, Solicitors for [the other entity], Pippett and Groenwald". Clauses 2 to 6 contained various agreements by the respondents, including a release of their claims against the company and the surrender of credit cards, motor passes, office keys, lift keys, car park keys and any vehicles and car keys belonging to the company which were in their possession. Most of those agreements were expressed to be conditional on payment of the sums referred to in clause 1. In clause 3 the condition was expressly said to be payment of those sums by Mr. Thompson.

The company's solicitors were Messrs. Lander & Rogers. On 13th March 1990 they wrote to Mr. Thompson as follows:

"We refer to the above matter and enclose a copy of the terms of settlement signed by you.

We confirm that the terms require payment of a bank cheque for the sum of $80,000 payable to Messrs 'McCracken & McCracken' [sic] solicitors which is to be paid by no later than midday today. Would you please advise the writer as soon as possible whether there are any keys, cards etc. which any of the above have not as yet returned to you. We will ensure that these are obtained in exchange for the above cheque at settlement.

As discussed, we also enclose a minute of directors meeting whereby the company acknowledges that notwithstanding the terms of settlement naming you as the party making the payment, the company is to indemnify you in respect of that payment. We would suggest that the minute be signed by one of the other directors.

Would you please ensure that the cheque is available for collection from your office by no later than 11.30 a.m. today."

The enclosed minute of directors' meeting recognized that "the payment required to be made by" Mr. Thompson pursuant to the terms of settlement was "payment of a debt properly payable by the company" and resolved that Mr. Thompson be indemnified by the company in respect of any liability that "may arise" out of the terms of settlement or any payment pursuant to them. I do not accept Mr. O'Bryan's submission that significance attaches to the words "may arise". They are just loose drafting.

The respondents attended at the offices of Messrs. McCracken & McCracken and handed over their car keys to Mr. Crawford, the partner in that firm who was handling the transaction. Mr. Crawford then attended at the offices of Messrs. Lander & Rogers. There he dealt with a young woman behind the reception desk but it appears that Mr. McKenzie, the responsible partner, was also present. Neither of the two solicitors had a clear recollection of what occurred, but a bank cheque was handed over. It appeared to comply with the terms of settlement. Mr. Crawford did not recall whether he had inquired as to the source of funds for the cheque. The learned judge found on the balance of probabilities that he did not. That finding was clearly open to her. Mr. Crawford did, however, proffer a receipt written on a McCracken & McCracken compliments slip. It said, "I Alex Crawford acknowledge receipt of Bank cheque for $80,000.00 drawn on W.A. Thompson's personal Account from Lander & Rogers". He requested, and was provided with, a photocopy of the receipt.

The respondents believed that, their $40,000 having come from Mr. Thompson and not from the company, they were protected; but on 27th March 1996 the liquidator of the company brought proceedings in the County Court to recover the sums paid to them as dispositions avoided by s.451 of the Companies (Victoria) Code. The bank cheque had in fact been purchased with company funds. The respondents joined the appellant firm as a third party. Mr. Thompson was also made a party to the proceedings. It is sufficient to say that the liquidator was successful and that Mr. Thompson consented to judgment. All we are concerned with is the claim for professional negligence by the respondents against the appellant. Their claim in contract is statute barred, leaving a claim for tortious negligence. The learned trial judge found that Mr. Crawford did not inquire, and should have inquired, as to the source of funds for the bank cheque and that that breach of duty caused the respondents loss within the limitation period. She gave judgment in their favour.

The breach of duty, as argued on appeal, relates to the inquiries which, it is said, Mr. Crawford should have made at settlement to ensure that the bank cheque had been purchased using Mr. Thompson's own funds. It is sufficient to notice three possibilities. The first is that Mr. Crawford was not under any obligation to inquire as to the source of funds. The second is that his obligation was simply to ask Mr. McKenzie whether, in the words of the terms of settlement, the bank cheque proffered at settlement had been drawn on Mr. Thompson's personal account. The third, for which Mr. O'Bryan contended, is that his obligation was to ask whether Mr. McKenzie had satisfied himself as to the source of funds otherwise than by simply relying on his instructions.

I shall assume, without deciding, that Mr. Crawford was obliged to ask Mr. McKenzie whether the bank cheque had been drawn on Mr. Thompson's personal account. I do not accept that he was under an obligation to ask Mr. McKenzie whether he had personally satisfied himself that that was so, with all that that implies in terms of Mr. McKenzie's professional responsibilities and insurance. I shall first explain why I do not accept Mr. O'Bryan's submission on that point and then turn to the issue of causation.

Neither of the expert witnesses at the trial said that that was a solicitor's duty in such circumstances. Mr. Browne said that, on the assumptions that he was asked to make, a reasonably prudent solicitor would have inquired where the funds came from. If possible, he would also have inspected documents such as the bank requisition. Mr. Masel said that it was usual professional practice to ensure that the documents proffered at settlement were on their face in accordance with the terms of settlement. He thought it would be imprudent for a solicitor to look behind the documents in a case such as the present unless he or she had reason to suspect that they might not be in order. Quite apart from that evidence, it is clear to my mind that Mr. Crawford had no right or duty to ask Mr. McKenzie whether he had personally satisfied himself as to the source of funds. If the respondents desired and could negotiate that kind of protection, there could have been a clause in the terms of settlement requiring the bank cheque to be accompanied by a certificate signed on behalf of Messrs. Lander & Rogers or a letter from the bank. Mr. O'Bryan pointed out that no such argument had been deployed below and submitted that, if it had been, the claim in negligence against the appellant firm would have been broadened to encompass the terms of settlement. The consideration to which I have adverted is not, however, an example of a party's changing its case on appeal. It is simply another reason, together with the expert evidence, for rejecting counsel's submission.

The next question is whether the respondents' loss would have been averted if Mr. Crawford had asked Mr. McKenzie whether the bank cheque had been drawn on Mr. Thompson's personal account. Counsel for the appellant dealt with that question as follows in her final submissions to the learned judge:

"If we take the worst case scenario and assume that Mr Thompson did intend to deceive the defendants, then it is most unlikely that Mr McKenzie, and through him Mr Crawford, would have been told that the source of the funds was not the personal account. So that if the inquiry was made, and the reason we are here, by [sic] Mr Thompson, then any inquiry would have led to an assurance that the source of the funds was in compliance with the settlement terms. Alternatively, if the funds were negligently drawn on the company's account instead of Mr Thompson's account, then it is still most likely that the mistake would not have been discovered before settlement, and any direct inquiry by Mr Crawford, either of Mr Thompson himself or of Mr McKenzie, would have led to him being assured that the cheque was tendered in full compliance with the settlement terms. Either way, any direct question as suggested by the expert Browne, the likelihood that such a question would have uncovered the problem which materialized later is remote. So that even if Your Honour concludes there was a breach of duty in failing to make any inquiry, and I submit to you that the court should find that any inquiry was in fact made by the tendering of the receipt, that even if Your Honour was against me on that, nothing flows from the failure to make an inquiry." (Emphasis added.)

A little later, counsel turned to submissions which she expressly located under the rubric of causation. They were to the effect that, even if Mr. Crawford had discovered that the bank cheque had not been purchased with Mr. Thompson's own funds, that would not have improved the respondents' position. Her Honour rejected those submissions and concluded that a causal link was established between failure to inquire and loss. She overlooked the earlier submission (no doubt because of the structure of counsel's argument) and accordingly made no finding as to what would have happened if the inquiry had been made; but it is clear from the letter set out in [3], the enclosed minute of directors' meeting and his evidence that Mr. McKenzie would have said either that he did not know or that he assumed or believed that the bank cheque was in accordance with the terms of settlement. Had Mr. Crawford then refused to settle, he might well have put his clients in breach and at risk of losing the benefit of the terms that had been negotiated.

Mr. O'Bryan relied on the fact that there had been little investigation below as to what Mr. McKenzie's reply would have been and no finding by the learned judge, but I do not think that that avails his clients. The burden of proof was on them to show a causal link between the alleged breach of duty and the loss that they suffered. Counsel said that Mr. McKenzie might well have been prepared to make inquiries and that the settlement would not have fallen through. The company was, for example, anxious to stave off the threatened winding up proceedings. If, however, the causal link was to be established in that way, it was for the respondents to lay the required evidentiary foundation. They did not do so, because their argument at trial was similar to that on appeal, namely that Mr. Crawford should have asked Mr. McKenzie whether he personally knew the source of funds. There being no finding by the learned judge, we must look at the evidence as the parties adduced it. In my opinion the evidence does not show that the answer to the question I am assuming that Mr. Crawford should have asked would have averted their loss. Indeed similar considerations suggest that the same result would follow even if a personal assurance had been asked for and declined.

That being so, the decision of the High Court in Sellars v. Adelaide Petroleum N.L. [1994] HCA 4; (1994) 179 C.L.R. 332 does not assist the respondents. I accept that all they were required to prove was that a breach of duty on the part of the appellant caused the loss of a commercial opportunity which had some value: see 355 per Mason, C.J., Dawson, Toohey and Gaudron, JJ. Had it been necessary to decide the point, I should also have accepted that the respondents did lose a commercial opportunity of that kind. They could, for example, have renegotiated the terms of settlement. They could also have sued Mr. Thompson personally. (There was no evidence as to his net worth, as distinct from the net worth of the company, except that he became bankrupt in February 1992. Compare Perri v. Zaitman [1984] VicRp 22; [1984] V.R. 314 at 317-318.) My conclusion on causation is, however, that the putative breach of duty did not cause any loss at all. The required causal link was simply not established. The quantification of the loss is a separate question but that, too, need not be considered. It appears in any event that the case was fought on an all or nothing basis below.

I would therefore allow the appeal, set aside paragraphs 2, 3 and 7 of the judgment given on 11th May 1998 and in lieu thereof order that there be judgment for the appellant in the third party proceeding. Counsel should be invited to make submissions as to any consequential orders, for example in relation to paragraph 6(a) of the judgment below, and costs.

I concur in the judgment of Callaway, J.A. save that I prefer to express no opinion as to whether the respondents lost a commercial opportunity which had some value.

I have had the advantage of reading the draft reasons for judgment of Callaway, J.A. I agree with his Honour that the appeal should be allowed and that orders should be made as suggested by him.

I assume, without deciding, that Mr. Crawford was under an obligation to inquire of Mr. McKenzie before taking the bank cheque whether it had been purchased with the funds of Mr. Thompson. For the reasons given by Callaway, J.A., Mr. Crawford was under no obligation to ask Mr. McKenzie whether he had personally satisfied himself that that was the position. Given the evidence to which Callaway, J.A. has referred, had Mr. Crawford asked the question which I have assumed he was under an obligation to ask, the probable reply would have been either that Mr. McKenzie did not know or that he believed that the bank cheque was purchased with the funds of Mr. Thompson, or both. Notwithstanding any of those answers, Mr. Crawford would probably have been obliged to complete the settlement. There was no right given to the respondents by the terms of settlement to withhold the settlement until they or their solicitors were satisfied that the bank cheque was acquired in accordance with the agreement. Thus, if Mr. Crawford received any of the above answers, he could not have properly insisted that settlement be postponed until he, on behalf of the respondents, satisfied himself that the bank cheque relevantly accorded with the terms of settlement. If the settlement had proceeded, however, the respondents would have been in no different position than the one they found themselves in after the settlement that took place where no inquiry was made by their solicitor as to the sourcing of the bank cheque.

It follows that, as a matter of common sense, it could not be said that failure by Mr. Crawford to act in accordance with the obligation which I have attributed to him, was a cause of the loss suffered by the respondents. For reasons given by Callaway, J.A., Sellars v. Adelaide Petroleum NL [1994] HCA 4; (1994) 179 C.L.R. 332 does not assist the respondents on this point.

For these reasons, I agree that the appeal should be allowed.

At a glance

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Judgment (26 paragraphs)

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