Riz & 1 or v Perpetual Trustee Australia Ltd & 4 ors - [2007] NSWSC 1153 - NSWSC 2006 case summary — Zoe

NSWNSWSC

Riz & 1 or v Perpetual Trustee Australia Ltd & 4 ors

[2007] NSWSC 1153

Supreme Court of NSW|2006-08-17|Before: Brereton J

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Source facts

Court

Supreme Court of NSW

Decision date

2006-08-17

Before

Brereton J

Source

Original judgment source is linked above.

Judgment (114 paragraphs)

[1]

Background 2 Mr Riz came to Australia from Lebanon in early 1977, having married his wife in 1976; she followed in 1981. They have six children, now aged between 6 and 24. Their first language is Arabic, which they speak, but in which they are illiterate. On any view their English is poor, Mrs Riz's moreso than Mr Riz's, although she understands some words and phrases, and he can speak basic English.

[2]

3 It is very difficult to ascertain with precision the events which culminated in Mr and Mrs Riz borrowing from Perpetual and investing in KSE. The evidence of Mr and Mrs Riz was imprecise, to the point of often being very uncertain, and sometimes contradictory, as to the sequence and detail of events. Their evidence manifested confusion and poor recollection of events, and demonstrable errors. While I accept that due allowance must be made for their linguistic difficulties and lack of commercial sophistication, I do not accept that all the deficiencies in their evidence can be so benignly explained. They appeared very guarded, particularly in respect of their financial resources and the status of their relationship (including whether or not they were separated). Given the rate at which they reduced the Citibank mortgage, the circumstance that they had six children to support, the funds available to them from time to time for a deposit on their home and other expenditures, including overseas travel, I am confident that they must have had sources of income that they have not disclosed, and which would have disqualified them from unemployment benefits and required lodgement of tax returns. In my view their evidence is strongly coloured by their perception that they have been let down by many on whom they relied - including those who solicited their investment on behalf of KSE, and Ms Jajoo. They were determined to attribute as much responsibility for their predicament as they could to Ms Jajoo, and this affected the evidence of their son Mohammed also; yet in some respects at least they were demonstrably incorrect in this endeavour. Mohammed was determined to implicate the solicitors in everything that his father had done, including in matters which it is highly improbable if not impossible that DDS had any involvement; in this respect his evidence probably reflects what Mohammed was told in 2004 and subsequently, in connection with the preparation of his affidavit, as distinct from what he recalls of the events of 2001.

[6]

7 The St George loan was serviced in accordance with its terms, but on 3 October 2000, Mr and Mrs Riz completed a refinance with Citibank, discharging the St George loan. The amount of the Citibank facility was $160,000. Mr Riz says that he refinanced because the Citibank loan would be reduced at a quicker rate, apparently thinking that the loan would be paid off in five years, but the documentation in evidence, though not conclusive, suggests that it was a five year interest-only loan, under which the capital was repayable at the end of the five year term. At the time of this refinance, Mr and Mrs Riz remained on Centrelink benefits, and Mr Riz's income from his part-time employment remained about $4,000 per annum. Mr Riz says that no questions were asked by the mortgage broker about his employment or income, and claims that he did not know that Citibank was unlikely to lend him money without knowing those things. A falsified letter from a purported employer for whom he had never worked and with whom he had had no contact was used in connection with the application; Mr Riz denied any knowledge of it, but his attitude to this is illustrated by the following excerpt from his evidence: Q. And you knew from that experience [with St George] that you would need to say something about your employment? A. When you tell someone that you are on Centrelink benefits and you are not working and your money is limited and you have children and it is not possible to get a loan, he tells you, he answers "You don't worry about anything, I will take charge", what would you say to him? Q. Did you know that he was going to tell a lie about your employment? A. No, I don't know. I don't know how he brings the money, how he deals with the banks or what sort of connections he has got, I don't know. 8 The Citibank loan, on which the regular repayments commenced at in excess of $1000 per month, was serviced in accordance with its terms, and in addition significant additional reductions were made - according to Mr Riz, largely from moneys provided by relatives from overseas - so that by September 2001 the balance had been reduced to about $111,000, and the monthly repayments to the high $600s.

[40]

45 As I have foreshadowed, and although at first it seemed that much might depend upon competing versions of events of the consultations of 21 and 25 September 2001, ultimately the submissions on behalf of Mr and Mrs Riz proceeded on the basis of substantial acceptance of the version given by Ms Jajoo and Ms Hannah. This largely relieves me of the need to analyse the competing submissions as to credit. It suffices to say that I am not persuaded that the version propounded by Mr and Mrs Riz, who bear the onus, is more probable than the competing version given by Ms Jajoo and Ms Hannah, particularly having regard to the general difficulties with the evidence of Mr and Mrs Riz to which I have already referred, and to the following matters: + that Ms Jajoo's version is corroborated by Ms Hannah, whose evidence I found convincing, notwithstanding her affiliation with DDS; + that Ms Jajoo's evidence (and also that of Ms Hannah) was consistent with her quite comprehensive contemporaneous file notes, the authenticity of which was not disputed; + the inherent improbability, in that context, of the version advanced by Mr and Mrs Riz that Ms Jajoo merely placed documents in front of them for signature without offering any explanation of them at all; + that despite their denials of being given documents to take away for completion and of understanding what was said, in fact Mr and Mrs Riz must have received and taken away a direct debit request and referee forms and subsequently had them completed and returned, which not only undermines the reliability of Mr and Mrs Riz's recollection, but also demonstrates understanding and compliance with requests made and instructions given in the course of the consultation; + that although Mr Riz asserted that Ms Jajoo told him at the meeting on 25 September 2001 to arrange for an account to be opened in Mohammed's name, such account was in fact opened on 30 August 2001 three weeks before he first met Ms Jajoo, and that while Mr Riz denied having become aware on or about 19 August of a request to bring in a rates notice and receipt, saying that Mary Haider had asked him to do so, the rates were paid on 20 August, the day after Ms Jajoo says she asked for the latest rates notice and proof of payment; + that at one stage Mr Riz asserted that his signature on the discharge authority was forged, a contention which he later abandoned; + that the affidavit and oral evidence of Mr and Mrs Riz included many internal inconsistencies, including frank contradictions of earlier evidence given by them (a far from complete catalogue of instances of this is to be found in paragraphs 26, 27 and 28 of the written submissions of Mr Darke SC, for DDS); + that the recollection of Mr and Mrs Riz was patently not good (instances of which are catalogued in paragraph 31 of Mr Darke's written submissions).

[44]

49 A fortnight later, Mohammed received, into the St George account in his name, the initial payment of $9,555, but that was the only payment received. Mr and Mrs Riz continued to service the Perpetual loan for about a year, they say from funds that they borrowed for that purpose from acquaintances. The case against Perpetual 50 Ultimately, the case for Mr and Mrs Riz against Perpetual was put on the basis of the Contracts Review Act, and unconscionability at general law. 51 Proceedings for relief under Contracts Review Act, s 7, involve two steps. The first is whether the contract was unjust in the circumstances in which it was made, having regard to the factors referred to in s 9. This is a conclusion of fact, albeit one of ultimate fact involving a broadly based value judgment [Antonovic v Volker (1986) 7 NSWLR 151, 154-155 (Samuels JA, Kirby P agreeing); Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256, 270E (Samuels JA); Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41, [34]-[40] (Spigelman CJ), [106]-[111] (Basten JA)]. The second, which arises only if the first is resolved in the affirmative, is whether any and if so what relief should be granted; this involves the exercise of a judicial discretion [Khoshaba, [34]-[36] (Spigelman CJ), [109] (Basten JA)]. 52 In West v AGC (Advances) Ltd (1986) 5 NSWLR 610, McHugh JA (as he then was) explained that circumstances productive of "unjustness" in a contract may be substantive or procedural: substantive unfairness pertaining to the harshness of the terms imposed, and procedural unfairness pertaining to the manner in which the contract was negotiated and formed. His Honour explained (at 620-622): Under s 7(1) a contract may be unjust in the circumstances existing when it was made because of the way it operates in relation to the claimant or because of the way in which it was made or both. Thus a contractual provision may be unjust simply because it imposes an unreasonable burden on the claimant when it was not reasonably necessary for the protection of the legitimate interests of the party seeking to enforce the provision: cf s 9(2)(d). In other cases the contract may not be unjust per se but may be unjust because in the circumstances the claimant did not have the capacity or opportunity to make an informed or real choice as to whether he should enter into the contract: cf s 9(2)(a), 9(2)(e), 9(2)(f), 9(2)(g), 9(2)(i), 9(2)(j). More often, it will be a combination of the operation of the contract and the manner in which it was made that renders the contract or one of its provisions unjust in the circumstances. Thus a contract may be unjust under the Act because its terms, consequences or effects are unjust. This is substantive injustice. Or a contract may be unjust because of the unfairness of the methods used to make it. This is procedural injustice. Most unjust contracts will be the product of both procedural and substantive injustice.

[46]

If a defendant has not been engaged in conduct depriving the claimant of a real or informed choice to enter into a contract and the terms of the contract are reasonable as between the parties, I do not see how that contract can be considered unjust simply because it was not in the interest of the claimant to make the contract or because she had no independent advice. 53 Accordingly, an unjust contract is usually a product of the combination of substantive and procedural unfairness. However, as Spigelman CJ observed in Perpetual Trustee Company Ltd v Khoshaba (at [64]-[92]), each case must depend on its facts; West is now 20 years old and community standards may have changed from those applied in 1986 in West. In a factual context not dissimilar to the present, his Honour rejected (at [66]) the submission that the investment agreement was not part of the "circumstances relating to the contract" within s 7(1), and affirmed that the purpose for which a loan is advanced is a relevant circumstance, and is a concern of a lender because it is usually a material consideration in determining whether the particular borrower is able to service and repay the loan, although the fact that a lender has no involvement in the investment is entitled to significant weight in its favour. His Honour said (at [76]): 76 … Plainly, the conduct, whether by act or omission, of the party resisting a finding of unjustness under the Act is highly relevant, and will often be determinative. However, the scope of relevant circumstances is not confined to what the person resisting an order under s 7(1) did or did not do and knew or ought to have known. The critical phrase in s 7(1) - "the circumstances relating to the contract at the time it was made" - cannot be so limited. Section 9(1) provides that when determining unjustness "the court shall have regard to the public interest and to all the circumstances of the case". Furthermore, s 9(2)(l) includes, as I have noted, amongst the relevant circumstances "the commercial or other setting, purpose and effect of the contract". 77 In the present case, the appellant submitted, correctly in my opinion, that the fact that the appellant had no involvement of any kind in the investment was entitled to significant weight in its favour. 54 His Honour accepted that while Perpetual's lending guidelines were designed for the purpose of protecting the lender and not the borrower, to enable it to assess and minimise its own risk, that did not lead to the conclusion that failure to adhere to its own guidelines was entitled to minimal weight when determining what was just in all the circumstances: The benefit to the borrower from a proper risk assessment may be indirect, because unintended, but that does not mean that it cannot, in appropriate circumstances, be entitled to significant weight in the determination of unjustness. It is clear from the list of factors contained in s 9(2) and (3) of the Act, that a substantial purpose of the legislative scheme is to protect persons who are not able to look after themselves. 55 Spigelman CJ attached decisive weight to the circumstance that the section of the standard form loan application that was intended to state the purpose of the loan was left blank, indicating that Perpetual "was content to lend on the value of the security", a matter entitled to significant weight in the determination of unjustness (at [82]). Perpetual's concomitant failure to verify other details in the loan application reinforced the conclusion that it was prepared to act on the basis of adequate security alone, and although Perpetual was not to be fixed with the knowledge that it might have acquired had its guidelines been observed, "Where the security is the family home of a low income earner and a pensioner, this posture on the part of a lender is entitled to significant weight against the lender in the determination of unjustness". His Honour said: 90 In a tripartite situation such as this, I do not believe that a failure to recommend that a person obtain advice is entitled to significant weight when the advice is relevant to that part of the transaction which does not involve the rights and obligations or interests of the person who is said to have failed to make the recommendation. Even pensioners must take responsibility for their own actions.

[48]

92 The conflicting considerations are finely balanced. Had the appellant or its representatives made any inquiries about the purpose of the loan I would have allowed the appeal. I do not mean to suggest that the appellant had to determine that the proposed investment was reasonable and capable of servicing the loan. It is the indifference, suggesting that the appellant was content to proceed on the basis of enforcing the security, which I find determinative. 56 In considering whether or not the relevant contracts were unjust, it is of course necessary to keep in mind that the contracts in question are the loan and mortgage, and not the investment contract with KSE, although I accept that the purpose of the loan, and thus the investment contract, is a relevant circumstance, as Khoshaba makes clear. In the present case, Mr Leggat SC, for Mr and Mrs Riz, submits that the relevant contracts - the loan agreement and mortgage - were unjust in the circumstances in which they were made having regard to fourteen matters, on each of which I shall comment before endeavouring to synthesise the issues: + Mr and Mrs Riz were "very simple folk"; + They had no financial ability to comply with the provisions of the contracts that required them to make 360 monthly payments each of $1796.61; + They could only repay the loan by selling the family home; + They understood the fundamentals of a mortgage in the sense that if they defaulted they would lose their home; + Perpetual knew that they had no savings and therefore their ability to repay was critical; + Perpetual had information available to it in the latest "partnership tax return" that was relevant to their capacity to repay, in particular that it included partnership income of Mr and Mrs Saddi; + Perpetual chose not to call evidence as to whether it used the Saddi income figure or failed to appreciate its significance; + Perpetual failed to inquire and resolve how it could rely on the direct debit form authorising loan repayments of $10,000 per fortnight when the available financial details demonstrated no capacity to make such payments; + Perpetual failed to comply with provisions of its lending manual in relation to income verification and evidence of income receipt; + Mr Paterson (a lending expert called by Perpetual) gave evidence that compliance with prudent lending practice in relation to tax returns, serviceability ratio and the direct debit request would have resulted in the loan being rejected; + Perpetual knew the loan failed the serviceability test in its lending manual even on the income figures provided; + Perpetual knew it held no certificate indicating that that the borrowers had obtained financial advice; + If financial advice had been obtained, it would have been to the effect that the proposed investment was "too good to be true"; + If such advice had been given, Mr and Mrs Riz would not have proceeded. 57 Mr and Mrs Riz were "very simple folk". Although I accept that Mr and Mrs Riz were commercially unsophisticated, I do not accept that Mr Riz - who was the moving party and had the conduct of the transactions on behalf of them - was naïve. He had previously borrowed funds from financial institutions on three occasions - from the National Bank to finance the purchase of the Beirut Pizza Shop, from St George to finance the purchase of the home, and from Citibank to refinance. The last two involved giving mortgage security over the home. Ultimately it was conceded that Mr and Mrs Riz understood the fundamentals of a mortgage, in that if they defaulted they would lose their home. In my assessment, Mr Riz also knew that he ought not have been able to obtain the loans from St George and Citibank if he was living on Centrelink benefits, and he was at best indifferent to what his agents might say or do on his behalf to obtain loan approvals. It took him some considerable time - perhaps a year - to be persuaded to invest in KSE and to borrow funds for that purpose, and he undertook considerable investigations before deciding to do so. When the investment was made, it was made in the name of their son Mohammed, plainly so that the income received would not affect Mr Riz's social security entitlements; I am unable to accept Mr Riz's professed ignorance as to that being the reason for the arrangement (which, according to his son, he told Mohammed at the time). Nor, in the light of Mohammed's evidence, can I accept that when Mr Riz went to QLS and completed the loan application, he had contemplated investing not $150,000, but only some lesser amount.

[56]

65 Perpetual failed to comply with provisions of its lending manual in relation to income verification and evidence of income receipt. In this respect, it was submitted that the undated and unsigned tax returns containing a reference (suggestive of fraud) to different persons, the Saddis, meant that there was no reliable income verification, and that the declaration form ought also to have been a matter of concern, because it was undated, involved no specific adoption of any documents, was not witnessed, contained no reference to which brokers or financiers information had been supplied, disclosed a fax imprint of Sanctuary Windows (an entity which the lender knew had no connection with Mr and Mrs Riz), did not in terms show any connection to any particular loan application, did not relate in terms to any specific documents, was transmitted as page 27 of facsimile transmission of about 90 pages, and contained no indication that its nature or effect was explained to the non-English reading Mr and Mrs Riz. However, I do not accept that there is any significance in the circumstance that the copy income tax returns obtained by Perpetual were unsigned; copy tax returns are usually unsigned (and in these days of electronic lodgement so often are the originals too). There is no significance in the circumstance that the declaration does not refer to a specific broker or financier; the form [see [20]] is a generic one and does not require completion of references to specific brokers or financiers; the circumstance that it does not refer to a specific lender is similarly beside the point. That it is unwitnessed is also of no significance; it contained no provision for attestation, and no-one suggests that the signatures on it are other than those of Mr and Mrs Riz. That it contained a fax imprint of Sanctuary Windows and was transmitted as page 27 of 93 is not suspicious: pages 26 to 93 comprised a fax coversheet from KBL to DMS, the declaration, the loan application and all the supporting documents, including the purported income tax returns; each page bore the imprint "Sanctuary Windows" and the facsimile number 97565707, which KBL's letterhead showed to be KBL's facsimile number. Nor is the circumstance that it bore no indication that it was interpreted or explained to Mr and Mrs Riz: given that it was accompanied by the loan application completed in English and signed by Mr and Mrs Riz there was no reason for DMS to suspect that they did not understand English; there is no evidence that it is ordinary lending practice to require certification that a declaration accompanying a loan application has been explained; and in any event, certification of understanding of the loan contract and mortgage documentation would be required at a later stage. Mr Leggat having abandoned reliance on Mr McCully (whose evidence was substantially discredited), the only expert lending evidence was that of Mr Paterson, who said that having regard to the apparent authenticity of the personal details provided, the history of repayments to Citibank, satisfactory credit references, the absence of other debts, satisfactory valuation, and an acceptable though marginally high debt service ratio, the loan approval accorded with prudent lending practice. He observed nothing in the tax returns as suggesting a need to make further inquiry, given that they were accompanied by a declaration that would result in them being accepted at face value and not scrutinised closely for indicia of fraud. 66 Mr Paterson (an expert called by Perpetual) gave evidence that compliance with prudent lending practice in relation to tax returns, serviceability ratio and the direct debit request would have resulted in the loan being rejected. Mr Paterson's concession to this effect was based primarily on the inclusion in the partnership tax returns of the reference to the Saddi income, which neither he nor Mr McCully had detected, although they were scrutinising the transaction with a far sharper eye than would be expected of a lender's assessor. Neither gave evidence that a lender acting reasonably would have detected that reference, and for reasons explained above (at [65]) I am quite unsatisfied that such a lender would have done so. Insofar as his concession relied on the direct debit request, that was in the context that he maintained that ordinarily a lender would not give close attention to the detail of a direct debit request, but accepted that in the unlikely event that the approving officer (as distinct from an administrative assistant) became aware of a direct debit request so disproportionate to the borrower's apparent circumstances, further inquiries would be indicated. Nonetheless, in upwards of 30 years of lending experience, Mr Paterson had never encountered the situation of a loan not proceeding after approval because of a direct debit authority that might be regarded as too high. I accept that had a lender adverted to the reference to the Saddi income and the direct debit authority, further inquiries would have been indicated. But I do not accept that a lender's failure to detect indicia of a fraud being practiced on behalf of a borrower against the lender, is a circumstance of injustice to the borrower. And I also do not accept that a lender, having approved a loan after taking into account security and serviceability, must in the borrower's interest query an apparently excessive direct debit authority.

[61]

71 In the present case, however, Perpetual did not engage in asset lending. As already explained, on the information presented to Perpetual, the loan appeared serviceable. The loan was not assessed without reference to its serviceability, and prima facie on the material supplied to Perpetual it was serviceable, even without taking into account any investment income. The capacity of Mr and Mrs Riz to service loans was amply demonstrated by their records with St George and Citibank. Although the loan was induced by Mr and Mrs Riz's unrealistic expectation of a high return from their proposed investment, the viability of the loan agreement did not depend on that expectation. Perpetual reasonably assessed the loan, on the material submitted to it, as serviceable. Moreover, even on the true financial position of Mr and Mrs Riz, though it was not known to Perpetual, the loan was not unserviceable if the $150,000 were invested in a conventional investment. It is true that the loan contract was one which Mr and Mrs Riz in fact had little prospect of servicing if the particular investment they had in mind failed, but they ought to have been able to service it if the surplus were invested in an ordinarily prudent investment. Having regard to what Mr and Mrs Riz say were their sources of income, and the performance of their loans with St George and Citibank, and assuming an investment with a 10 percent return approximately, viewed objectively the loan was serviceable. Alternatively, even if the $150,000 were to be invested in a non-income producing asset, it would be represented by a corresponding additional asset. There is no basis for concluding that Perpetual was engaging in "asset lending". The loan contract (as distinct from the KSE investment) was not, viewed objectively (by an observer who, like Perpetual, was aware generally that $150,000 of it was to be invested, but not specifically of the particular proposed KSE investment), an imprudent let alone an improvident transaction.

[63]

73 As Khoshaba establishes, the purpose of a loan is one of the circumstances in which the loan contract is made. A borrower's purpose in obtaining a loan is usually the motive or incentive for a loan transaction. Here, the borrowers obtained a loan for the purpose of an investment in KSE, which they were given to believe would enable them easily to service the loan, a belief that was falsified when KSE subsequently failed. The transaction was induced by the erroneous expectation that the surplus from the loan of about $150,000 could be invested to earn $10,000 a fortnight, but for which Mr and Mrs Riz would not have borrowed from Perpetual at all. Moreover, the loan was obtained only upon a misrepresentation of their financial circumstances, through the falsified income tax returns produced by QLS, without which Perpetual would not have approved the loan. Viewed from the perspective of Mr and Mrs Riz, these are circumstances of unfairness: they have assumed burdensome obligations which they would not have assumed had they not been misled as to the KSE investment, or had false information not been supplied to perpetual by QLS. But there are serious obstacles to concluding that, in those circumstances, the loan contract and mortgage are unjust. 74 I am prepared to accept that procedural unfairness may be sufficient to make a contract unjust, even though its terms are objectively reasonable, if the party claiming relief would not have entered into the contract if properly advised or informed of its legal and practical effect, consequences and risks. However, characterisation of a contract as unjust requires adoption of a more objective view than the subjective perspective of one party to the contract. As McHugh JA said in West (at 622): … a contract will not be unjust against a party unless the contract or one of its provisions is the product of unfair conduct on his part either in the terms which he has imposed or in the means which he has employed to make the contract.

[65]

76 Moreover, it is clear that parties to a contract are to be treated as responsible for the conduct of those who act on their behalf: thus s 9(2) lists amongst the relevant considerations: (j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act: (i) by any other party to the contract, (ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or (iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract, … 77 The erroneous belief of Mr and Mrs Riz that they would easily be able to service their obligations to Perpetual with income from the KSE investment was not known to, let alone induced by, Perpetual; it was generated by the promoters of KSE. It is true that in this respect unfair tactics were used against Mr and Mrs Riz, but not by or on behalf of another party to the contract; the unfair tactics were used by those promoting KSE, not by persons for whom Perpetual was responsible. Similarly, that their true financial circumstances were not known to Perpetual was due to the conduct of persons acting not on behalf of Perpetual, but on behalf of Mr and Mrs Riz in the transaction, namely QLS. Perpetual indeed submitted that Mr and Mrs Riz were aware of, or at least recklessly indifferent to, the use of false information to support their loan application to Perpetual. Given the use of false employment information to support the applications for finance from St George and Citibank, given Mr Riz's knowledge that in his circumstances he should not have been able to obtain a loan, and given his evidence, referred to in [7] above, about leaving others to obtain finance for him not knowing what they would say, there is considerable force in the submission that he must have appreciated that some irregularity was likely, but I do not found my decision on that basis. Assuming that he did not advert to that possibility, the false information was nonetheless supplied on behalf of both Mr and Mrs Riz, in aid of a loan application that they wished to prosecute.

[66]

78 The evidence does not demonstrate any indifference or recklessness on the part of Perpetual, and I do not accept that, although Perpetual did not know the true circumstances of Mr and Mrs Riz, it ought to have ascertained them, or should be regarded as having been wilfully blind as to the income of its borrowers. As already remarked, there is nothing remarkable, or sinister, about copy income tax returns being unsigned; nor in a tax file number being masked - so much appears no more than a reasonable security precaution; a reasonable lender assessing the loan for serviceability would not necessarily have resorted to the distribution statement in the partnership return so as to discover the reference to the Saddi income; the form of declaration was generic, and unremarkable; that the borrowers had no accumulated savings is unsurprising - many who refinance their home loans have no savings of significance; and the direct debit request was provided at a point in the process where a reasonable lender would not have been influenced by it to decline a loan that had already been approved. The submission that Perpetual ought to have discovered the true position of Mr and Mrs Riz bespeaks an assumption that a lender ought to have a high index of suspicion that its borrower (or agent) is endeavouring to defraud it, and is bound in the borrower's interest to be very alert for such fraud. A prospective borrower is not entitled to expect the lender to be alert for fraud by or on behalf of the borrower; and a lender is not required, in the interests of the borrower, to have a high index of suspicion for fraud by the borrower or the borrower's agent. A lender's failure to detect fraud by or on behalf of a borrower does not weigh significantly in favour of a finding that the consequent loan contract is unjust. To hold that the undetected provision of false information by or on behalf of a borrower to a lender in an attempt to obtain a loan resulted in the loan contract being unjust against the lender would be to invert commonsense, logic and justice, by protecting the wrongdoer against the victim. To grant remedies under the Contracts Review Act on such grounds would be to convert an Act, intended to achieve just results, into an instrument of injustice.

[67]

79 This case has two important features that distinguish it from Khoshaba. First, in Khoshaba, the circumstances that the statement of the purpose of the loan was left blank, and that Perpetual made no inquiry about its purpose, were decisive: Spigelman CJ said that had Perpetual made any inquiries about the purpose of the loan (not extending to determining that the proposed investment was reasonable and capable of servicing the loan) his Honour would have allowed the appeal; and Basten JA observed (at [125]) that had the loan been expressed to be intended for investment purposes, rather than expenditure on consumables, it was at least arguable that it would be self-funding. In the present case, the purpose of the loan - refinance and further investment - was stated, and it was not as if Perpetual was prepared to proceed on the basis that for all it knew the funds would be paid away immediately; Perpetual's state of mind was that Mr and Mrs Riz proposed to refinance and invest the surplus proceeds, which imports the generation of a return and/or the acquisition of corresponding additional assets. Secondly, for reasons already explained, there is no basis for concluding that Perpetual was in this case engaging in "asset lending". 80 In my opinion, therefore, the loan contract and the mortgage were not unjust in the circumstances in which they were made. Mr and Mrs Riz were represented and advised by their own lawyer. Perpetual did not demonstrate the indifference referred to in Khoshaba, and did not engage in asset lending, but assessed the loan having regard to serviceability. On the information available to Perpetual, the loan was prima facie serviceable, even without reference to investment income; bringing ordinary investment income to account would have enhanced its serviceability. Even on their actual financial position, it was serviceable if the surplus was invested in a conventional investment. Although Mr and Mrs Riz were the subject of unfair tactics, those were perpetrated not by or on behalf of Perpetual, but by the promoters of KSE, or by their own agents QLS. The false financial information, without which the loan agreement would not have been approved, was provided to Perpetual by QLS on behalf of Mr and Mrs Riz (although I assume, without finding, that they were unaware of it). For borrowers to obtain a loan by a misrepresentation made on their behalf, even if not known to them, where the lender would not otherwise have approved the loan, does not make the loan contract objectively unjust to the borrowers against the lender. Perpetual was not required to have a high index of suspicion that it was being deceived by QLS acting for Mr and Mrs Riz, and its failure to discover the deception does not make a case of injustice. 81 However, lest I be wrong in the conclusion that the contract was not an unjust one, I will consider the second step, namely the exercise of discretion to grant relief. On the question whether as a matter of discretion relief should be granted, the knowledge of the relevant defendant is highly relevant, although absence of knowledge of the circumstances of injustice is not necessarily decisive against a claim for relief [Khoshaba, [77], [119]; Beneficial Finance v Karavas, 277 (Meagher JA); Nguyen v Taylor (1992) 27 NSWLR 48 (Sheller JA)].

[75]

91 The remaining complaints against DDS are twofold: + Breach of fiduciary duty, by failing to cease to act for Mr and Mrs Riz, in circumstances that the firm had "multiple allegiances" arising from a complicated web of business and professional associations between them and Mr Suleman. This is put on the dual bases of conflict of duty and duty, and conflict of interest and duty. As to conflict of duty (to Mr Suleman) and duty (to Mr and Mrs Riz), it is said that DDS had an overriding duty of undivided loyalty to Mr and Mrs Riz, which required DDS to cease acting for Mr and Mrs Riz when the firm became aware that the proceeds of the loan were likely to paid to KSE, in circumstances where it was known that the KSE investment was risky, and that Mr and Mrs Riz had not obtained financial or legal advice in relation to it. It is said that DDS had conflicting duties to Mr and Mrs Riz (to warn them against imprudent transactions) and to Mr Suleman (to secure further investment funds). As to conflict of interest (of DDS) and duty (to Mr and Mrs Riz), it is said that, DDS having advanced $170,000 to a Suleman entity, the firm had an interest in Mr and Mrs Riz obtaining the loan, in order to enable them to make a payment to KSE, which would indirectly facilitate repayment of the advance (although there is no suggestion that it was contemplated that it would be repaid from the Riz investment), retain favour with Mr Suleman, and secure his ongoing business; which conflicted with their duty to Mr and Mrs Riz to deter them from imprudent investments. + Breach of their professional duty of care (in tort and/or contract), by failing to cease to act for Mr and Mrs Riz unless and until they had obtained financial advice, or - as refined in the course of submissions - failing at least to warn Mr and Mrs Riz that their proposed investment was imprudent. 92 As ultimately pressed, the submissions for Mr and Mrs Riz implicitly accepted Ms Jajoo's version of events. They focussed on her knowledge that Mr and Mrs Riz intended to invest $150,000 from the proceeds of the loan (after refinancing the Citibank mortgage) with KSE and expected to receive a return of $10,000 a fortnight from that investment. 93 Mr and Ms David, and Ms Jajoo, are of Assyrian decent. A good portion of their clientele, though not the majority, are Assyrians. Ms Jajoo agreed that in 2000 and 2001, everyone in the Assyrian community was talking about Mr Suleman, and she had heard that some of his ventures included investment opportunities which produced high returns. Ms Jajoo explained that although during 2000 and 2001 she handled about 95 matters in which clients invested in KSE, in most cases the intention to invest in KSE did not come to her attention until the time of cheque direction. She explained: I know at the moment it is obvious that all those people invested in some kind of a scheme, but at the time it wasn't like that. It was some people were investing in some kind of an investment. Some people were buying trolley runs, and I would see them in the shopping centres around the area pushing trolleys and managing those. Some people were saying they are in some limousine business with him. Some people were saying they were in, they were in the internet business with him. Some - I really had no idea at the time what people were investing in or what business venture they were entering.

[79]

97 One does not need expert evidence to conclude that the return which Mr and Mrs Riz told Ms Jajoo they were expecting was so extraordinarily high as to strain credulity. Ms Jajoo understood that they were telling her "they are contemplating some kind of a business venture and they will be making enough money out of it to be making repayments of $10,000 every two weeks towards the loan". She thought, "That's a very high return and he should go and obtain some advice in relation to that business venture". Tested, she said that she considered it a "high return" but not absurd, she then conceded that it was a "very high return", but would not adopt "an absurdly, a patently absurdly high return". Then she was asked: Q. In your thirty-one years of life had you ever heard of an investment in New South Wales, Australia, returning something like $260,000 in one year on a $275,000 investment? A. I hadn't looked at investments but I considered this investment as a very high return, a very high risky return. 98 In fact, the investment was $150,000, not $275,000, so the return was even more extraordinary. Subsequently Ms Jajoo gave this evidence: Q. Did it or did it not occur to you that the return being spoken of sounded too good to be true? A. It was a high return. I did not make that assessment, but that was definitely the reason that they should have gone to somebody who should have advised them on that aspect of their transaction, but that didn't affect the transaction that I was advising them on. Your Honour, I need, I wanted to make sure that they could make, or they understood that they had to make the minimum repayments, which were $1,780 I think a fortnight, and if they didn't make those repayments that would be an act of default and they would lose the house. 99 She said that she did not have any understanding as to what the employment of Mr and Mrs Riz was, and did not ask, but "comfortably assumed that there would be some employment for them to be able to obtain a loan". She had no understanding and formed no impression as to their education. She said she formed a view that they both knew that whatever they were getting themselves into had risks, some kind of risks associated with it, like any other business. She said: "On that basis I told them, 'you should go and obtain the advice of somebody who could tell you if there is any risks or not'. Now I was satisfied that they understood that, and they would follow that up at some stage whenever time came for them to enter that business transaction".

[81]

102 It was his opinion that it would not accord with standard practice for a solicitor, having been advised of the nature of an intended investment and the very high returns expected by the client, and having indicated that the firm does not approve of the structure of the investments, to simply make it known to the client that there was a distinct element of risk and that the client should not proceed without obtaining independent advice from an accountant or investment adviser. He opined that in such circumstances it would be standard practice for the solicitor to take additional steps to ensure that the client was independently advised, or to obtain written instructions that the client did not wish to be independently advised despite the solicitor's warning, or to refuse to act. He said that a competent and prudent solicitor following standard practice would be greatly concerned at a client expecting a return of about $312,000 per annum on an investment of $150,000, because such a return was so much higher than prevailing interest rates and prevailing investment returns in 2001. 103 In cross-examination, Mr Fisher accepted that where a solicitor was not retained to advise in respect of a particular transaction and does not assume an obligation to advise on it, the solicitor is not obliged to give advice on that transaction; but he did not accept that a solicitor retained in respect of a loan and mortgage transaction was not obliged to give "financial advice" about it in any circumstances: Well, no. If there was, let's say, an extraordinary interest rate or some other condition of the loan which was out of the ordinary, I would feel it is the responsibility of the solicitor to bring that clearly to his client's attention. 104 However, he accepted that unless the solicitor assumes the responsibility of giving financial advice, the solicitor was under no duty to do so. But while he generally accepted that the scope of the solicitor's responsibility was defined by the retainer, he insisted that this was not always so: But I keep saying there are other factors. If it becomes apparent that what a client is doing is imprudent or unreasonable at some point that solicitor, I believe, has a duty to that client. So that would extend the assumed, the assumed retainer. 105 Elsewhere he said: Q. You would say that in the ordinary mortgage lending situation, where a solicitor acts for the mortgagor and borrower, do you say that the solicitor would be under a duty to advise the client about transactions other than the loan transaction itself? A. No, not to advise the client but to take care for the client. And if it is made known to the solicitor that the client was, say, to engage in an illegal transaction or if the solicitor became, in his judgment, aware that the client was, had diminished responsibility, say, or was doing something extreme it is incumbent on the solicitor to look into that further. 106 In the course of cross-examination about the information which Ms Jajoo had as to the proposed investment and anticipated return, he was asked what he had assumed about the scope of her retainer and answered: I don't know that I had assumed the retainer was extended. But the use of those words to any ordinary reasonable competent solicitor would have the effect of ringing some alarm bells. 107 This was a reference to the anticipated return of $10,000 per fortnight. However, Mr Fisher had some difficulty in formulating what was standard practice for a solicitor confronted by a relatively unsophisticated client in a borrowing transaction when it was intended to apply the proceeds to an investment in respect of which the client harboured what appeared to be totally unrealistic expectations. He said that it would be standard practice "to send that client off for financial advice". When it was suggested that the client might be told "that sounds an impossibly high return, too good to be true, and I would not recommend you go into any such investment", he said "that may be appropriate, but if the client is unsophisticated they may not hear that statement". When asked why they would hear it any better form a financial planner than from a solicitor, he suggested that the different qualifications may be significant, but then added that in this case, a solicitor would be confident that a 200% return was ridiculous and would advise the client not to proceed. 108 I accept that the solicitors' retainer was to advise and act on the loan and mortgage transaction, and that the solicitors were not retained to advise on the proposed investment in KSE. In Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398, 418E-F, Sheller JA, with whom Meagher JA and Abadee AJA agreed, said: In my opinion the difficulties faced by the O'Briens which his Honour considered were so great and, to professional persons, so obvious that a solicitor could not reasonably leave them unstated, did not impose the duty his Honour held Mr Eliades to be under. Stated bluntly, such a duty would require solicitors, retained to act on a purchase or mortgage for their skill in the law, to inform every client for whom they so acted of their views about the financial prospects of the purchase or mortgage where they felt or ought reasonably to have felt that there was risk of loss. One consequence of this would be to require solicitors to give opinions, which they were not qualified to give, with the obvious consequence that if they were wrong and the client had acted on the basis of those views, they would be liable in negligence. For good reason such a proposition is contrary to authority. The solicitor's duty is found in the terms of the retainer and the ambit of any additional assumed responsibility relied upon.

[82]

109 I accept that the scope of a retainer is of considerable significance in identifying the extent of a solicitor's duty of care. However, the scope of a solicitor's duty of care to a client is not confined to the contract of retainer but may extend in the circumstances of a particular case to require the taking of positive steps, beyond the specifically agreed task or function, where such steps are necessary to avoid a real and foreseeable risk of economic loss being sustained by the client [Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642]. In that case, a solicitor received and acted on instructions, from another client, to mortgage land in which his client Waimond had an interest, for purposes unconnected with and having no benefit for Waimond, where that was a matter of which a clerk in the solicitor's employ had knowledge derived from previous transactions. The Court of Appeal held that when the solicitor had knowledge of a transaction proposed by one client which necessarily carried the risk of loss to the other, there was a breach of duty when he failed to check with the other client or to advise him to seek independent advice before taking a step potentially damaging to those interests. This was so notwithstanding that the solicitor (who acted for the other client) was personally unaware of Waimond's interest, its affairs having been attended to by his clerk. Kirby P said (at 652): Although the contract of retainer will be an important indicium of the nature of the relationship which gives rise to the common law duty of care (as the minority held in Hawkins ) it will not chart exclusively the perimeters of that duty. Deane J pointed out (at 579) that, depending upon the circumstances of the particular case, the duty may require the taking of positive steps "beyond the specifically agreed professional task or function", where these are necessary "to avoid a real and foreseeable risk of economic loss being sustained by the client". 110 Later (at 657) his Honour concluded: When a client retains a solicitor it is entitled to expect that the solicitor will provide attentive advice and be vigilant for the client's interests.

[83]

There is always a risk where the solicitor acts for a number of clients that failings will occur, and assumptions be made, as happened in this case. Usually, there will be no conflict between the interests of the clients. The several clients will act honourably and decently in relation to the others. Where one does not, and this could have been exposed by greater vigilance and diligence it is better that the solicitor should bear the burden of the loss which follows than that the client should do so. This is so because clients go to solicitors and rely upon them for advice expecting that solicitors will act with reasonable care to protect them from foreseeable losses. In the present case, the loss was foreseeable because the solicitor had knowledge of the respective interests of his several clients and the dealing which he arranged on the instruction of two of them had no apparent interest or benefit for the third. The burden which the "positive step" required (namely, of securing instructions) was trivial. The burden of the loss which has accrued to the client from the solicitor's failure to take that step, is substantial. Because I believe the loss would not have occurred had the solicitor taken specific instructions, as reasonable care required, I consider that the want of care caused the loss sued for. 111 Hope AJA concurred with Kirby P, although Mahoney JA dissented. Waimond was referred to in Citicorp v O'Brien, and not expressly overruled or disapproved, but the scope of a solicitor's duty of care as stated by Sheller JA in Citicorp - which limits it to "the terms of the retainer and the ambit of any additional assumed responsibility relied upon" is narrower than that recognised in Waimond. In Waimond, the duty enforced was not one that the solicitor had assumed nor one that the client relied upon. 112 Since Citicorp v O'Brien, different views have been expressed as to the authority of Waimond. In Heydon v NRMA Ltd (2000) 51 NSWLR 1, [145], Malcolm AJA expressed the view that it could not survive Astley v Austrust Ltd (1999) 197 CLR 1, in which the High Court had (at 23) rejected certain of the views of Deane J in Hawkins on which Waimond was founded. However in Curnuck v Nitschke [2001] NSWCA 176, Davies AJA (with whom Meagher JA concurred) held that notwithstanding Astley v Austrust, Waimond v Byrne remained good law: [8] It is one thing to say, where a solicitor has a contractual relationship with a client and where the matter in issue arises within the scope of the retainer, that there will be no difference between the duty of care imposed by the contract and that imposed by the law of negligence. It is another thing to say that, in respect of a matter which is beyond the scope of the contract, a tortious duty of care may not arise from the relationship between the parties. [9] In Australia, there have been several cases where a duty of care has been imposed upon solicitors notwithstanding that the solicitor's retainer did not impose that duty. (See Hawkins v Clayton ; Hill v Van Erp (1997) 188 CLR 159; and Waimond Pty Ltd v Byrne .)

[89]

118 In Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30, Street J (as he then was) held that reading the proposed deed word for word to the client, without giving advice as to whether she should enter the transaction at all or discussing alternative means of arranging her affairs, was inadequate (at 35): Another of the indicia to which reference may legitimately be made in determining the critical issue of whether the plaintiff thoroughly comprehended the transaction, and entered into it deliberately and of her own free will, is the presence or absence of independent advice having been tendered to her. Mr Emanuel was brought into the present transaction with the intention no doubt of his meeting this requirement. I am of the view, however, that such part as he played in connexion with this settlement could not fairly be described as meeting that degree of independent advice that the plaintiff, as a person subject to a relationship of influence, was entitled to receive. Mr. Emanuel was, I accept, most careful to read the document through, and to invite questions of the plaintiff. But it was not textual advice upon the engrossment which was of prime importance in this regard: rather, it was advice upon the more general topic of whether a settlement should be entered into at all, an, if so, the general nature of the settlement, which in my view ought to have been provided for the plaintiff. … 119 In Stivactas v Michaletos (No 2) (NSWCA, 31 August 1993, unreported, BC9301874), Kirby P said that independent advice had to bring home to the client the comparative advantages of the available alternatives: The provision of independent advice is certainly an important ingredient in rebutting a presumption of undue influence although it is not essential. See eg Inche Noriah v Shaik Allie Bin Omar [1929] AC 127 (PC); Union Fidelity Trustee Co of Australia Ltd v Gibson [1971] VR 573 (SC) 577. However, where advice is given, it must be both independent and effective for the purpose of enlivening the client's appreciation of the transaction, its legal effects and the alternatives (if any) which are open to the client. See Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30 (SC), 36. The fatal flaw in the procedures put in place by the appellant, to guard against just the kind of challenge which later eventuated, was the inability of the independent solicitor to establish that he sufficiently drew to the respondent's attention, so that she understood, precisely what she was doing, the alternatives which were available to her in law to effect her wishes, the comparative advantages of those alternatives and that she nonetheless preferred to transfer her properties to the appellant.

[91]

121 Sheller JA also showed that the impact of the transaction in the context of the client's financial circumstances was an important element of such advice: his Honour, agreeing that the appellant had failed to establish that the respondent was, inter alia, properly advised, cited, with apparent approval, the following passage from the judgment of Waddell J at first instance [Mr Stomo was the solicitor]: He continued: "… There is no evidence that the plaintiff was satisfactorily advised by Mr Stomo in relation to the gift of the two properties to the defendant. His evidence is that he has no recollection of having got her to sign the transfers or of witnessing her signatures, although he agrees that his signature does appear on both documents. A person in the plaintiff's position at that time should have been asked what was the extent of her property and the question of her future care and maintenance should have been discussed and the adviser should have pointed out to her the possible disadvantages of divesting herself of her major assets and relying completely on the defendant and her attention should have been drawn to the possibility that he might die before her, either by accident or from natural causes. She should have been advised that her interests might best be served by dealing with her property by will. …. At the very least, it seems to me that the defendant has not satisfied the Court that the gifts were made as the result of the free exercise of the plaintiff's will. Accordingly, the claim based on undue influence should succeed". 122 A similar view prevails in England. In Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144, Millett LJ explained that the solicitor must not be content to satisfy himself that his client understands the transaction and wishes to carry it out, but must satisfy himself that the transaction is one which his client could sensibly enter into if free from improper influence, and if not so satisfied to advise her not to enter into it: Accordingly, the presumption cannot be rebutted by evidence that the complainant understood what she was doing and intended to do it. The alleged wrongdoer can rebut the presumption only by showing that the complainant was either free from any undue influence on his part or had been placed, by the receipt of independent advice, in an equivalent position. That involves showing that she was advised as to the propriety of the transaction by an adviser fully informed of all the material facts (see Powell v Powell , Brusewitz v Brown , Permanent Trustee Co of New South Wales Ltd v Bridgewater [1936] 3 All ER 501 at 507 and Bester v Perpetual Trustee Co Ltd [1970] 3 NSWLR 30 at 35-36). Some of those cases were concerned with the equity to set aside a harsh and unconscionable bargain rather than one obtained by the exercise of undue influence, but the role of the independent adviser, while not identical, is not dissimilar. The solicitor may not be concerned to protect the complainant against herself, but he is concerned to protect her from the influence of the wrongdoer. The cases show that it is not sufficient that she should have received independent advice unless she has acted on that advice. If this were not so, the same influence that produced her desire to enter into the transaction would cause her to disregard any advice not to do so. They also show that the solicitor must not be content to satisfy himself that his client understands the transaction and wishes to carry it out. His duty is to satisfy himself that the transaction is one which his client could sensibly enter into if free from improper influence; and if he is not so satisfied to advise her not to enter into it, and to refuse to act further for her if she persists. He must advise his client that she is under no obligation to enter into the transaction at all and, if she still wishes to do so, that she is not necessarily bound to accept the terms of any document which has been put before her but (where this is appropriate) that he should ascertain on her behalf whether less onerous terms might be obtained.

[92]

123 Although the statement that the solicitor should decline to continue to act must be treated with caution after Royal Bank of Scotland v Etridge (No 2) [2001] 4 All ER 449, the judgment of the Court of Appeal in Credit Lyonnais was cited with evident approval by the House of Lords in Royal Bank, in which Lord Nicholls, in whose speech all members of the House concurred, explained the obligations of a solicitor giving "independent advice" as including "as a core minimum", not only the nature of the documents and the practical consequences they will have, but the seriousness of the risks involved, which requires the solicitor should discuss the client's financial means, understanding of the value of the property being charged, and whether there are other assets out of which repayment could be made if the husband's business fails, and some discussion of the present financial position (at 469-470): [64] I turn to consider the scope of the responsibilities of a solicitor who is advising the wife. In identifying what are the solicitor's responsibilities the starting point must always be the solicitor's retainer. What has he been retained to do? As a general proposition, the scope of a solicitor's duties is dictated by the terms, whether express or implied, of his retainer. In the type of case now under consideration the relevant retainer stems from the bank's concern to receive confirmation from the solicitor that, in short, the solicitor has brought home to the wife the risks involved in the proposed transaction. As a first step the solicitor will need to explain to the wife the purpose for which he has become involved at all. He should explain that, should it ever become necessary, the bank will rely upon his involvement to counter any suggestion that the wife was overborne by her husband or that she did not properly understand the implications of the transaction. The solicitor will need to obtain confirmation from the wife that she wishes him to act for her in the matter and to advise her on the legal and practical implications of the proposed transaction. [65] When an instruction to this effect is forthcoming, the content of the advice required from a solicitor before giving the confirmation sought by the bank will, inevitably, depend upon the circumstances of the case. Typically, the advice a solicitor can be expected to give should cover the following matters as the core minimum. (1) He will need to explain the nature of the documents and the practical consequences these will have for the wife if she signs them. She could lose her home if her husband's business does not prosper. Her home may be her only substantial asset, as well as the family's home. She could be made bankrupt. (2) He will need to point out the seriousness of the risks involved. The wife should be told the purpose of the proposed new facility, the amount and principal terms of the new facility, and that the bank might increase the amount of the facility, or change its terms, or grant a new facility, without reference to her. She should be told the amount of her liability under her guarantee. The solicitor should discuss the wife's financial means, including her understanding of the value of the property being charged. The solicitor should discuss whether the wife or her husband has any other assets out of which repayment could be made if the husband's business should fail. These matters are relevant to the seriousness of the risks involved. (3) The solicitor will need to state clearly that the wife has a choice. The decision is hers and hers alone. Explanation of the choice facing the wife will call for some discussion of the present financial position, including the amount of the husband's present indebtedness, and the amount of his current overdraft facility. (4) The solicitor should check whether the wife wishes to proceed. She should be asked whether she is content that the solicitor should write to the bank confirming he has explained to her the nature of the documents and the practical implications they may have for her, or whether, for instance, she would prefer him to negotiate with the bank on the terms of the transaction. Matters for negotiation could include the sequence in which the various securities will be called upon or a specific or lower limit to her liabilities. The solicitor should not give any confirmation to the bank without the wife's authority.

[93]

124 The role of "independent advice" in this context includes guarding against improvidence. Such advice is intended, amongst other purposes, to act as a "reality check" in respect of transactions which might be disadvantageous. Although these cases are concerned with what is required in equity to rebut a presumption of undue influence, rather than what the common law stipulates as the measure of reasonable care, the context of the retainer informs the solicitor's duty of care. The nature of a solicitor's obligation to the client in this context is informed by the circumstance that it is usually a third party - typically a financier - that insists that such advice be obtained, and it serves to protect the interests of the third party as well as those of the client: as Lord Nicholls explained in Royal Bank v Etridge (at [64]), while the starting point was the solicitor's retainer, the relevant retainer stemmed from the financier's concern to receive confirmation that the solicitor had brought home to the client the risks involved in the proposed transaction. Courts have repeatedly and stridently emphasised that lawyers who believe that they discharge their duty in that context by merely explaining the legal effect of a transaction are ill informed. Thus in Bester, Street J said (at 36): The need to provide meaningful advice in order to enable an independent choice to be made by a person in the position of the plaintiff is of great importance. The purpose of obtaining advice is to enable the making of an independent choice. It may be that to an informed and intelligent listener advice confined to explaining will enable an intelligent choice to be made to the effect that the document being explained is acceptable to the party being asked to execute it. But the mere fact that a document is explained, and that no questions are asked or criticism made by the party to whom it is being explained, does not tend strongly in favour of the conclusion that this party made a deliberate and intelligent choice to adopt each and every one of the provisions contained in the document. 125 In Credit Lyonnais, Millett LJ said (at [1997] 1 All ER 144, 155-6) (emphasis added): … I should not be taken to accept that it would necessarily have made any difference even if Miss Burch had entered into the transaction after taking independent legal advice. Such advice is neither always necessary nor always sufficient. It is not a panacea. The result does not depend mechanically on the presence or absence of legal advice. I think that there has been some misunderstanding of the role which the obtaining of independent legal advice plays in these cases . 126 In Royal Bank v Etridge, Lord Nicholls - after setting out his "core minimum" requirements - continued (emphasis added): [68] As already noted, the advice which a solicitor can be expected to give must depend on the particular facts of the case. But I have set out this 'core minimum' in some detail, because the quality of the legal advice is the most disturbing feature of some of the present appeals. The perfunctory nature of the advice may well be largely due to a failure by some solicitors to understand what is required in these cases . 127 None of the foregoing authorities was cited in Citicorp v O'Brien. The Court of Appeal should not be taken to have overruled them sub silentio. The continued operation of the principle for which they stand has been recently recognised by Young CJ in Eq in Chandran v Narayan [2006] NSWSC 104: [49] Mr DeBuse truly says that an independent solicitor would have had the obligation not only of explaining what the deed meant, but also of pointing out that Mrs Narayan was not obliged to sign the deed at all and would have put the options in such a way that Mrs Narayan could have assessed them. She could have been told of the options in such a way that she could have worked out that her husband may well have been bankrupt in three months anyhow, so what was the sense of making herself personally liable for the whole debt merely to gain a slight advantage?

[95]

129 In this case, it was or ought to have been plain to Ms Jajoo that Mr and Mrs Riz were putting their home at risk for the purpose of raising funds for an investment in respect of which they had expectations that objectively were absurd, such that (as Ms Jajoo conceded) it appeared to involve a very high risk. In my view, it was insufficient to tell Mr and Mrs Riz that she was not advising on the proposed investment (or anything else to do with Mr Suleman) and that they should seek and obtain legal and financial advice elsewhere, yet continue to act on and facilitate the loan transaction, all the moreso where, as I have concluded, it ought to have been evident that they did not appreciate the importance of obtaining such advice and did not intend to do so. What was required was advice that firmly brought home the apparent improvidence of the proposed investment. I would not go so far as to hold that Ms Jajoo was on that account alone bound to cease to act, but in my view reasonable care required that she bring home to her clients forcefully the improvidence of their proposed course. That might have been achieved by forceful oral advice, or preferably by insisting on written instructions to proceed notwithstanding. If because of a conflicting duty to Mr Suleman Ms Jajoo could not give that advice, then she ought to have declined to act further; I do not accept that a solicitor acting as she was on a loan transaction can avoid the consequences of what would otherwise involve a conflict of duties by disavowing responsibility to give advice which she was otherwise bound to give, on the topic which would otherwise give rise to the conflict - here, the apparent improvidence of the proposed investment. In any event, more than mere advice to obtain independent advice was required. In my opinion the minimum requirement was forceful advice to bring home the improvidence of the transaction, and that did not occur. It follows that Ms Jajoo was in breach of her duty of care.

[97]

131 In Ibrahim v Pham [2007] NSWCA 215, Mr and Mrs Ibrahim were members of the Assyrian community and became interested in investing in KSE. After making enquiries they were told that they would receive a fortnightly return of $1,350 for ten years on a $50,000 investment in a trolley collection business. Such a return, although very high (70%), falls far short of the return that Mr and Mrs Riz told Ms Jajoo they expected ($12,000 per fortnight on $150,000, in excess of 200%). In rejecting the argument that if Ms Jajoo had been the only solicitor who owed a duty of care to Mr and Mrs Ibrahim she would not have breached it, Campbell JA (with whom Hodgson and Santow JJA agreed) said (at [205])(emphasis added): By contrast, in the present case Ms Jajoo was in no specially privileged position for being able to provide advice about the investment contract. She specifically made clear that she was not undertaking the task of advising on the investment contract, and recommended that the Appellants seek advice from others on that topic. The task that she undertook, of advising only on the loan contract and mortgage, was a comparatively routine type of legal work, and was accomplished in a single conference. She had no reason to believe there was any unusual financial risk concerning the investment. The purpose of entering the loan and mortgage would not be frustrated if Ms Jajoo did not advise on the investment contract. … 132 The evidence before me is not the same as the evidence in Ibrahim. There does not appear to have been any suggestion in Ibrahim's case that Ms Jajoo should have appreciated that the Ibrahims had unrealistic expectations as to the return they would gain and thus their ability to service the loan. It does not appear that the Ibrahims informed Ms Jajoo of the return they expected, but if they had, though apparently very high, it would not have been nearly so alarming as that expected by Mr and Mrs Riz. Campbell JA expressly recorded that Ms Jajoo had no reason to believe there was any unusual financial risk concerning the investment. And, the Ibrahims disclosed not only that they knew the investment was a "big risk", but said "even if we're gambling we don't care".

[98]

133 In David v David [2007] NSWSC 855, Patten AJ accepted (at [138]) that nobody in DDS could properly act for a client in relation to any transaction with Mr Suleman or his companies, as a conflict of interest would immediately arise. However, his Honour held that three particulars of negligence that asserted, in effect, that Ms Jajoo should have given advice to the plaintiffs against the proposed investment in KSE (including that the scheme was unsustainable), needed only to be stated to be rejected, as giving such advice would be in breach of the fundamental duty of confidence owed to Mr Suleman; and that the fourth particular, that DDS ought to have declined to act upon finding out that the client proposed to invest in the scheme, should also be rejected as no conflict of interest was involved in the solicitor acting only in the refinancing of the plaintiffs' mortgage. In David v David, it does not appear that Ms Jajoo had any information that provided reason to think that unusual financial risk was associated with the proposed investment, whereas in the case of Mr and Mrs Riz, the facts are different: the knowledge of the high risk implicit in the extraordinary interest rate was derived from Mr and Mrs Riz, independently from any information that Ms Jajoo might have had access to in confidence. To my mind, the disclosure to Ms Jajoo by Mr and Mrs Riz that they were expecting a return in the order of 200% per annum, and intended to use that return to service the loan, is a striking factual distinction of the present case from Ibrahim v Pham and from David v David. 134 If I were unable to distinguish David v David on the facts, I would with the greatest respect differ from his Honour's conclusion, that the circumstance that giving the relevant advice would involve breach of a duty of confidence to Mr Suleman, meant that negligence could not be established. Obligations of confidence or loyalty to one client do not extinguish or reduce duties of care owed to another, and in particular do not entitle a solicitor to refrain from using all his or her knowledge for the benefit of the other; it is precisely because a conflict (of duty to one client and duty to the other) can arise in such circumstances that the solicitors' only resort may be to cease to act, and to "send the client away". Thus in Waimond, Kirby P said: The proposition can be tested this way. Had there been no other clients connected with the Oatley property who retained the respondent, but only the appellants, can it seriously be suggested that Mr Flanagan, being informed of a proposed mortgage would not have considered it to be his duty immediately to secure the instructions of the appellants? Of course he would have done so to protect the interests of the appellants. It was no less his duty to do so because the solicitor concurrently had retainers to act for Grady Paris and, later, CAGA. The acceptance of those retainers did not authorise a neglect of his duty, owed independently, to his clients Waimond and Mr Wong. 135 And Hope AJA said (at 663-4): Assuming, as Campbell J did for the purposes of dealing with the submissions made for Waimond, that Byrne should be deemed to have had notice of Waimond's interest in the land through its interests in the Syndicate, the question arises as to what the duty of a solicitor is in such a case. To take a hypothetical example, what is the duty of a solicitor who acts for both trustee and beneficiary and is told by the trustee that he proposes to do something which is in breach of the trust. In my opinion he clearly has a duty to warn the trustee that his proposed action would be a breach of the trust, but what further action he must take may depend upon the nature of the proposed action and on the terms of his retainer. In a case where the breach is the borrowing of money on trust property for the purposes of the trustee and not for the purposes of the trust, what are his duties to his beneficiary/client? Where he has no retainer to supervise the carrying out of the trust, can he breach the confidentiality of the information he has received from his trustee/client and tell the beneficiary what the trustee proposes to do? As it seems to me, even if, as is arguable, he is not able to breach confidentiality by telling the beneficiary/client what the trustee has communicated to him, he should at least advise the beneficiary to seek independent advice in relation to the trust and the actions of the trustee before the prejudicial actions are carried out. 136 Indeed, the able submissions of Mr Darke SC [T905-910] recognised as much: There can be cases where the retainer requires the solicitor to advise on a particular matter, and if the solicitor has information which he is required to give in order to give that advice, the mere fact that that information is confidential doesn't mean that the solicitor in effect can give a lower standard of care. That is, if the information is required to be given in order to discharge the duty of care either the solicitor makes available the information or he doesn't, and in that postulated situation if the solicitor didn't make available that information the duty of care would be breached. It comes down to an analysis of what are the tasks required of the solicitor in carrying out the retainer and then an assessment needs to be made as to whether the carrying out of those tasks requires the providing of the information.

[102]

DARKE: Exactly. … 137 Accordingly, DDS's obligations to serve Mr Suleman's interests did not excuse it from warning other clients against entering into transactions if to their knowledge, howsoever derived, the proposed transactions appeared improvident. Because, as I have endeavoured to explain, it is my view that a solicitor's duty can extend beyond the bounds of the retainer, and in the context of a borrowing transaction the solicitor is necessarily required (consistent with Khoshaba) to give consideration to the purpose of the loan and the providence of the transaction - it was necessary for Ms Jajoo to give some consideration to the purpose and proposed application of the loan. But as soon as that is recognised, the conflict - which Patten AJ accepted would arise if DDS acted on any transaction involving Mr Suleman - could not be avoided. 138 Mr Leggat SC did not rely only on negligence, but also submitted that by reason of DDS's professional and personal and financial relationship with Mr Suleman, and their knowledge (through at least Ms Suzy David) that there were issues as to the legality of this investment scheme and that he had been advised not to take any more investments until they were resolved, DDS could not consistent with its fiduciary obligations to Mr and Mrs Riz continue to act for them and ought to have refused to do so, because they had information which they were bound to put at the disposal of Mr and Mrs Riz but were prevented by their obligations of confidence to Mr Suleman from doing so. As I have concluded that Mr and Mrs Riz are entitled to succeed and negligence, it is unnecessary to explore this question. Nor is it necessary to my decision on negligence that there was any conflict of interest (of DDS) and duty (to Mr and Mrs Riz), or duty (to Mr Suleman) and duty (to Mr and Mrs Riz) - although once it is accepted, as I do, that the duty of DDS extended to require them to consider the purpose for which their client was borrowing, it is difficult to escape the conclusion that a conflict of duty and duty was then inevitable. And although my conclusion that a warning bringing home the prima facie unreality of Mr and Mrs Riz's expectation as to the anticipated return on their proposed investment does not depend on the possession by Ms Jajoo, or DDS, of any special knowledge concerning Mr Suleman, one cannot but wonder whether solicitors independent of Mr Suleman might not have been more inclined to give the appropriate advice.

[104]

140 The total amount of the loan was $275,000, as at 15 October 2001. Of the proceeds of the loan, $111,335.91 was paid to Citibank to refinance the existing home loan; in that respect Mr and Mrs Riz suffered no loss. Mr Riz received a further $3,353.68 from the proceeds of the loan. A further $5,000 from the proceeds was paid to Zia George as a brokerage fee, the liability to pay which was incurred upon approval by Perpetual of the loan, before any involvement on the part of DDS, and which would not have been averted had proper advice been given by DDS. That leaves $155,310.41 from the principal of the Perpetual loan which Mr and Mrs Riz incurred as a liability which, properly advised, they would not have incurred. That represents 56.5% of the total loan of $275,000. 141 Since then, the loan balance has been increased by interest and the costs of default, including presumably interest at the "higher rate" applicable on default. As quantification of the amount outstanding was deferred until judgment, similarly quantification of these matters was necessarily deferred. Mr and Mrs Riz would have had to pay interest on the Citibank loan in any event, and only 56.5% of the total interest charges at the lower rate should be included in their damages, against which must be set off the sum of $9,555 paid to Mohammed Riz on behalf of KSE on 31 October 2001, pursuant to the KSE investment. However, that the Riz went into default was a foreseeable result of the failure to give appropriate advice in respect of the proposed KSE investment, and to the extent that their debt has been increased by interest at the "higher rate", the whole of such additional interest and costs of default should be included in their damages. 142 Mohammed's claim has been admitted in the liquidation of KSE for $140,445. The evidence suggests that there is likely to be a dividend of between 15-19 cents in the dollar, once all recovery actions are completed; this equates to $21,066 to $26,684. Obviously there is risk that the recovery might be less and a chance that it might be more, but the best that can be done is to conclude that there will probably be a recovery of 17 cents in the dollar in three years time. $23,875.65 discounted at 3% deferred for three years (0.915) is $21,846.22, for which credit should be given. 143 Accordingly, the damages to which Mr and Mrs Riz are entitled against DDS are $155,310.41; plus 56.5% of all interest charges on the Perpetual loan other than any additional "higher rate" interest, less $9,555; plus 100% of the additional "higher rate" interest and other costs of default; less $21,846.22 (being the value of the anticipated dividend in the liquidation).