The appeal of Johnsons on liability
83 The primary judge found that Johnsons had breached its duty of care to the investors in two respects. The first was in proceeding to settlement of the transaction on 14 February 1997 in the absence of express instructions from Rexstraw that he had obtained instructions from the investors to proceed. The second was in proceeding to settlement prior to obtaining the documentation in relation to the Biermann Superannuation Fund. Both of these findings are the subject of challenge.
84 The primary judge found that as soon as Mr Johnson saw the transfer document he realised that settlement should not take place without instructions from the investors. He contacted Rexstraw whose responsibility it was, according to Mr Johnson, to obtain instructions. Having found that at that time Johnsons had no responsibility or right to contact the investors directly, his Honour proceeded in the following terms:
"However, perceiving as he did that the mortgagees' instructions were necessary, he should not have allowed settlement to take place without being sure that Rexstraw had sought and obtained them. He would, in my opinion, have been entitled to rely, without further inquiry or investigation, on what Rexstraw told him if Rexstraw had contacted him and told him to proceed. But he was not entitled, without more, to infer that instructions had been sought and given from the mere receipt by him of a copy of the valuation and an amended statement of Rexstraw's costs to be deducted at settlement. The disparity in the considerations was so great, and the magnitude of the potential losses to the plaintiffs was such as to require more than an inference from such scanty evidence.
In addition, the form of the valuation which he then received in answer to his phone conversation with Rexstraw should have raised in his mind the question whether it was independent, or at least whether the plaintiffs would consider it satisfactory for their purposes. Again, it was not therefore incumbent upon him to investigate the valuation. He was entitled to rely on Rexstraw. But he should not have proceeded to settlement without explicit instructions from Rexstraw to do so.
85 Having said that the above finding was one to which he would have been prepared to come unaided by any expert opinion, the primary judge then referred to the opinion of Mr McGillivray, a Queensland conveyancing solicitor, who opined that a reasonably competent solicitor would have regarded the non-receipt of a specific signal from Rexstraw to proceed "as being sufficient warrant not to proceed to settlement and to advise Rexstraw accordingly". His Honour then found that had Mr Johnson complied with the duty imposed on him the advance would not have been made and the investors would not have lost their investment.
86 The primary judge further found that Johnsons had failed to exercise reasonable care and skill by proceeding to settle without the document needed from the Biermanns to enable the mortgage to proceed to registration without the risk of there being raised a requisition that might not be able to be complied with in due time. He noted that Mr Johnson had agreed in cross-examination that the disclosure of a trust in the mortgage documents required not only the production of the trust deed but also an analysis of it to ensure that the deed would not generate a requisition. He accordingly found that Johnsons had breached its duty of care to the investors by settling without the necessary documents which, had it required their production prior to before settlement, would have caused settlement to be deferred until the necessary evidence was supplied, in which event the transaction would have been cancelled by the borrower, the advance would not have been made and the investors would not have lost their investment. These further findings with respect to Johnsons' breach of its duty of care to the investors were also the subject of challenge.
87 Johnsons submitted that the primary judge erred in holding that it had breached its duty of care in proceeding to settle the transaction without ensuring that Rexstraw had sought and obtained instructions from the investors to do so. It contended that, given that his Honour had found that there was no obligation on Johnsons to directly seek the investors' instructions, it was entitled to leave that task to Rexstraw. Johnsons further argued that, having adverted to the disparity in the purchase price of the two sales disclosed in the transfer document and having referred that matter to Rexstraw, it was entitled, upon receipt of a copy of the valuation from Rexstraw, to be satisfied that any concern as to the adequacy of the security had been dispelled by two things: firstly that Johnsons' valuation on its face revealed the market value of the property; secondly that Rexstraw had referred the valuation to Johnsons without further comment which apparently indicated his own satisfaction with its reliability.
88 Johnsons further argued that the fact that it had received an amended memorandum of costs from Rexstraw with implicit instructions to pay those costs from the proceeds of the loan was another indication that Rexstraw was satisfied that it was appropriate for the settlement to proceed. It submitted that it was unnecessary and even bordering on discourteous to confirm with Rexstraw that specific instructions had been obtained from the investors, given that this was Rexstraw's responsibility and that Johnsons took its instructions from him. Accordingly, Johnsons' response in considering itself instructed to proceed to settlement on 14 February 1997 was, in all the circumstances, reasonable.
89 I have already referred to the sequence of events which occurred on 13 February 1997. Without doubt, Mr Johnson acted properly in noticing the disparity in the purchase prices being paid pursuant to the sales by Mr and Mrs Bartucz to QMS on the one hand and Vorona to QMS on the other. Equally, his conduct in bringing this important matter to the attention of Rexstraw and seeking further instructions was, so far as it went, an appropriate response to his realisation of the importance of the information that he had discovered.
90 It is, however, important to understand that, according to Mr Johnson's evidence in chief, he wished to draw the disparity in the purchase prices to the attention of Rexstraw as he had no instructions from either the investors or Rexstraw as to whether the matters recorded as consideration in the transfer document were acceptable. In cross-examination he acknowledged that the disparity had the potential for real concern. He said, with respect to the contents of the transfer document, that the $250,000 being paid by QMS to Mr and Mrs Bartucz could well have been an undervalue as much as the $695,000 being paid by Vorona to QMS could have been an overvalue. Having acknowledged that it was a matter of potential concern, given that he did not have a registered valuation in his possession, the following exchange took place:
"Q. Are you saying to the court that the only thing you needed to satisfy your concern would be the receipt of a registered valuation?
A. Yes, that would satisfy the concerns about the price differential, or the consideration being shown on the document, yes.
His Honour: Q. Or instructions from the lenders to go ahead, not withstanding?
A. Yes, that as well. Yes, your Honour."
91 He was then referred to his conversation with Rexstraw and agreed that the advice he was giving the latter at the time was that he should contact the investors about the matter. Having agreed that he had no specific recollection of studying the valuation which he had received by fax from Rexstraw, but stating that he had looked at it such that he was aware that it was a valuation of the property at $695,000 from a valuer unknown to him the following exchange occurred:
"Q. Having received the valuation, did that entirely satisfy the concerns that you had raised with Mr Rexstraw, or were you requiring Mr Rexstraw to advise the plaintiffs and obtain instructions from the plaintiffs?
A. I wasn't requiring Mr Rexstraw to do anything, Mr Davidson. I advised him that he should inform the investors with regard to the consideration stated in the transfer by direction.
Q. What I want to clarify with you though, Mr Johnson, was, after you received this valuation, was it still your expectation that Mr Rexstraw would follow your suggestion to contact the investors? Was that still your expectation?
A. I think that, I do, yeah.
Q. So you didn't see the receipt of the valuation as taking away the force of any of your comments that Mr Rexstraw should advise the investors of the two prices?
A. Mr Davidson, in my experience one gives advice on a daily basis to any number of clients, be they solicitors or lay people. What they do with the advice is a matter for them. My expectation I guess was, having brought the matter to Mr Rexstraw's attention, advising him that in my opinion I thought the investors were entitled to be informed, and that in my opinion it was his responsibility to inform them, what he did with that advice was up to him.
Q. You're saying that in terms of your practice, if you hadn't been acting on a retainer from a solicitor, that you'd been acting directly for the clients, this is the sort of matter you would have contacted the clients about directly yourself?
A. I'd feel duty-bound."
92 Mr Johnson's concerns and his acknowledgment that it was necessary that Rexstraw bring the information concerning the sub-sale to the notice of the investors and obtain their instructions with respect thereto is clearly consistent with authority. In Mortgage Express Limited v Bowerman & Partners (1996) 2 All ER 836, a Mr Gilroy, a partner in the defendant firm of solicitors, was instructed to act on behalf of the plaintiff mortgage lending company in respect of an application for a loan of £180,150 by one Mr Hadi, who wished to purchase the property. Mr Gilroy was also instructed to act for Mr Hadi. Enclosed with the plaintiff's letter of instruction was a professional valuation of the property at £199,000. Mr Gilroy became aware that the vendor (Mr Arrach) was himself purchasing the property for £150,000 and was on-selling simultaneously to Mr Hadi. Mr Gilroy drew Mr Hadi's attention to the discrepancies between the two purchase prices and the valuation figure but failed to refer the information to the plaintiff. The plaintiff duly advanced the loan to Mr Hadi, the sales were completed, Mr Hadi defaulted and the property was repossessed and sold for £96,000. Thereafter the plaintiff issued proceedings against the solicitors.
93 It was held by the Court of Appeal that a solicitor who, in the course of investigating title, discovered facts which a reasonably competent solicitor would have realised might bear materially on the valuation of the lender's security or some other ingredient of the lending decision, had a duty to point that out to the client. Although it was a question of fact and degree, in the present case it is impossible to escape the conclusion that, had Mr Gilroy applied his mind to the facts, he would have appreciated that the information in question might have caused the plaintiff to doubt the valuation of the property as security for its loan, and hence his failure to pass the information to the plaintiff was negligent.
94 In the course of his judgment, Sir Thomas Bingham MR said this (at 841-842):
"Mr Gilroy acknowledged that matters might come to the notice of a solicitor in his position which he would be under a professional duty to report to the lender. For example, such a solicitor was not retained to second-guess the valuation on which the vendor was relying, but if he received information of previous transactions so apparently inconsistent with that valuation as to give possible reasons for doubting its reliability that might be something which he should report. Thus, Mr Gilroy accepted that questions of fact and degree would affect the solicitor's duty…….
I would accordingly reject the submission originally made on behalf of the solicitors as to the narrow ambit of the duty, as the judge did, and accept, as I understand her to have done, the submission of Mortgage Express . This was that if, in the course of investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender's security or some other ingredient of the lending decision, then it is duty to point this out."
95 Having noted that Mr Hadi was proposing to buy the property for £220,000, and that the amount of the valuation was £199,000 but that the sub-sale was at a price of £150,000, his Lordship continued (at 843):
"It seems to me clear beyond argument that Mr Gilroy would have failed in his duty to Mr Hadi had he not alerted Mr Hadi to these new facts which had come to his attention, so that Mr Hadi could take such action, if any, as he wished.
It does not follow from that conclusion that it was necessarily Mr Gilroy's duty to pass the information to Mortgage Express . But I think any lender in Mortgage Express ' position would have been greatly concerned to learn of a simultaneous sale at a figure of £50,000 below the valuation on which it was relying and £30,000 below its proposed advance. The transaction might, of course, be explained by special circumstances, but an obvious alternative explanation was that the flat had been significantly over-valued. A moment's reflection would, I think, have alerted Mr Gilroy to this second possibility and to the need to give Mortgage Express the opportunity to review it. In fact, it is clear this second possibility did not occur to Mr Gilroy………I find it impossible to escape the conclusion that if he had applied his mind to these facts he would have appreciated that they might have caused Mortgage Express to doubt the valuation. The contemporary sale at a much lower value is itself evidence of value for Mortgage Express to assess. He should not be too harshly judged for this oversight in the course of a busy and, no doubt, pressured professional life, but if his only client had been Mortgage Express and his only duty had been to them, I find it very hard to think he would not have recognised the need to alert it to these potentially significant facts."
96 After referring to Mr Gilroy's evidence in cross-examination that he should have passed it on had he perceived any cause to doubt the valuation, even if he did not in fact doubt the valuation, Millett LJ said this (at 845):
"It might be thought from that answer that the question which the judge should have asked herself was: 'Would a solicitor of ordinary competence have regarded the information that Mr Arrich was paying only £150,000 for the flat as throwing doubt on the valuation of £199,000?'. That, however, would not, in my opinion, be an accurate formulation of the question. Mr Gilroy was not a valuer and it was not his responsibility to doubt a professional valuation. The question which the judge had to ask herself was whether a solicitor of ordinary competence would have regarded the information in question as information which might cause the plaintiffs to doubt the correctness of the valuation which they had obtained.
The judge, in effect, answered this question in the affirmative. In my judgment, her conclusion is unassailable."
97 It should be noted that Mr Johnson denied in evidence that he had any cause to doubt the valuation. As he had the valuation in his possession (having received a copy from Rexstraw), he considered that he could proceed to settlement. But as Millett LJ pointed out, Mr Johnson was asking himself the wrong question. It was not for him to determine whether the disparity in the purchase price being paid on the sub-sale was such as to throw doubt on Jacksons' valuation. As he acknowledged, it was his intent that Rexstraw would advise the investors of the disparity and would seek their instructions as to whether or not they wished to proceed with the transaction based on, or notwithstanding, the valuation. That was a matter for the investors, with regards to which instructions were required.
98 The difficulty which Johnsons faces on its appeal is that, although Mr Johnson proceeded in accordance with his duty to the investors to require Rexstraw to bring the information to their notice and to seek instructions with respect thereto, he proceeded to settlement without satisfying himself that Rexstraw had done what he had intended him to do. In my opinion, the primary judge was correct in finding that it was a breach of Mr Johnson's duty of care to the investors to proceed to settlement merely on the basis that he had received Jacksons' valuation, without satisfying himself that Rexstraw had provided the information to the investors and that the latter, notwithstanding that information, had instructed Rexstraw that the loan transaction was to proceed. Certainly, it was not open to him to infer that Rexstraw had the relevant instructions simply because he had received from Rexstraw the valuation (in response to his advising Rexstraw that he did not have it) and his amended memorandum of costs.
99 Furthermore, the significant discrepancy between the price being paid pursuant to the sub-sale and that being paid by Vorona, coupled with the fact that the amount being lent by the investors was nearly twice what the purchase price was, in my opinion, so significant that Mr Johnson's precipitous settlement (as I would regard it) of the transaction the following day ought to be judged as bordering on irresponsible, compared to the oversight which the Court of Appeal attributed to Mr Gilroy in Mortgage Express.
100 Even accepting that Mr Johnson was also engaged in "a busy and, no doubt, pressured professional life", the discrepancy in question ought to have caused him to doubt the reliability of the valuation (knowing, as he did, that it was obtained by Hodgson who was the proposed guarantor of the loan) which made it more imperative that he not proceed to settlement without the specific instructions from the investors so to do. In my opinion, his failure in this regard was serious, a matter to which I shall return when dealing with the issue of contribution or apportionment. As Chesterman J observed in C A & M E C McInally Nominees Pty Limited v HTW Valuers (Brisbane) Pty Limited (2001) 188 ALR 439, a case involving a solicitor acting for a lender who had received a valuation which was held to have been prepared negligently and which was misleading and deceptive, (at 454 [60]):
"The solicitor's retainer was to locate safe opportunities for the plaintiff to lend money. Obtaining a valuation of the property to be taken as security was only a part of their obligation under the retainer. The solicitors had a more extensive duty to enquire whether a particular transaction was provident. The valuation obtained was carelessly put together, but the solicitors did not attempt to verify the particular assumptions on which the valuations depending and to which HTW drew attention. Moreover the valuations had been obtained by the vendors of the property which was to be taken as security. One does not need much experience in the law to know that such valuations are likely to inflated and should be scrutinised with particular care ." (emphasis added)
101 It is true that Johnsons' retainer was narrower than that of the solicitors in the abovementioned decision. Nevertheless, his Honour's observations which I have emphasised are, in my opinion, applicable to Mr Johnson given that, erroneously, he considered that he could proceed to settlement merely because he had received a valuation from a valuer unheard of by him and who valued the property at a figure greater than the amount of the loan. It follows that the primary judge was correct in his conclusion that the form of the valuation, which Mr Johnson then received in answer to his phone conversation with Rexstraw, should have raised in his mind the question not only as to whether the valuation was independent but whether the investors would consider it satisfactory for their purposes.
102 It was further submitted by Johnsons that the breach of duty to which I have referred was not causative in any relevant sense, as it was clear from the Rexstraw's evidence that he considered that he had satisfied Mr Johnson's enquiries so that, had the latter sought an express confirmation of instructions to proceed to settlement, those instructions would have been forthcoming. In this regard, the primary judge had said this:
"He, (Johnson) would, in my opinion, have been entitled to rely, without further enquiry or investigation, on what Rexstraw told him if Rexstraw had contacted him and told him to proceed."
103 In my opinion, the primary judge erred in the above passage insofar as he intended to hold that Mr Johnson could have properly proceeded to settlement if Rexstraw had instructed him to do so. One can accept for the purpose of the argument that, had he contacted Rexstraw and asked whether he could proceed to settlement, Rexstraw would have told him to do so. However, in my opinion the obtaining of instructions in those terms would not have discharged of Mr Johnson's duty of care to the investors. He was required to do more than simply ascertain from Rexstraw whether he could proceed to settlement. He was, in my view, required to ascertain from Rexstraw whether he had communicated to the investors the information relating to the disparity of the purchase prices of the sale and sub-sale. Clearly, had he specifically questioned Rexstraw as to whether he had disclosed the discrepancy to the investors and sought the necessary instructions, he would have been informed that he had not. In these circumstances, Mr Johnson would have been in breach of his duty of care to the investors if he had proceeded to settlement simply because he was instructed by Rexstraw to do so. Accordingly, Johnsons' submissions on causation should be rejected.
104 Johnsons further submitted that the primary judge erred in finding that they had failed to exercise reasonable care by proceeding to settle the transaction without the documents needed from the Biermanns to enable the mortgage to proceed to registration without the risk of raising a requisition that might not be able to be complied with in due time.
105 It was submitted that, in the present case, the mortgage was in registrable form, the primary judge having found that there was no defect in the mortgage document itself to impede registration. It was further argued that the fact that the mortgage did not satisfy the DNR requirements in relation to production of the Biermann trust deed or the lodgement of an authority from the beneficiaries authorising the trustees to enter into a contributory mortgage, did not affect the priority of registration of the dealing. There was no reason why the requisition could not be complied with as it eventually was. Accordingly, in the circumstances, it was reasonable for Johnsons to have proceeded to settlement without the documents relating to the trust deed.
106 It was also submitted as a subsidiary argument that as Johnsons (albeit in relation to a different matter) had on 3 February 1997 advised Rexstraw that: "(w)e are required to advise the Department of Natural Resources of the clauses in the Trust Deed which sanction the Trustees entering into a contributory mortgage", Johnsons was entitled to assume that Rexstraw had satisfied himself that the Biermann trust deed did empower Mr and Mrs Biermann as trustees to enter into a contributory mortgage. The problem with this submission is that no evidence was led from Mr Johnson or Ms Harris that either of them had made any such assumption. Accordingly, I am not prepared to accede to that submission.
107 It was not suggested that Johnsons was not aware of the following provisions of the Land Title Practice Manual of Queensland relating to a trustee entering into a contributory mortgage:
" Joint Accounts
………..A contributory mortgage is a mortgage where the mortgage money is advanced by two or more persons separately. A trustee may not be a contributory mortgagee, as the trustee would thereby relinquish exclusive control of the trust property. Therefore, where there is more than one mortgagee and one or more of them are trustees, the mortgage will not be registered unless the trust instrument specifically authorises the investment of trust funds in a contributory mortgage or unless the consents of all the beneficiaries to a contributory mortgage are deposited with the mortgage. Otherwise, separate mortgages must be prepared and lodged for the amount advanced by the trustee/s and the amount advanced by the other mortgagees. Such mortgages may be pari passu.
Mortgage of Land
……….