Duty of Care
50There is no doubt and indeed no dispute that on the findings made by the primary Judge, the appellants owed the respondents a duty of care when advising them to invest in the Fund. In Mutual Life & Citizens' Assurance Co Ltd v Evatt [1968] HCA 74; 122 CLR 556, Barwick CJ stated the principle as follows (at 572-573):
Whenever a person gives information or advice to another, whether that information is actively sought or merely accepted by that other upon a serious matter, and particularly a matter of business, and the relationship of the parties arising out of the circumstances is such that on the one hand the speaker realizes or ought to realize that he is being trusted, particularly if he is thought by the other to have, or to have particular access to, information or to have a capacity or opportunity to exercise judgment or both as to the matter in hand, to give the best of his information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for the other party to seek or accept and in either case to act upon that information and advice the speaker, choosing to give the information or advice in such circumstances, comes under a duty of care both to utilize with reasonable care the information and sources of information at his disposal and to employ with reasonable care what capacity he has for judgment in relation to the matter and to exercise reasonable care in the expression of what he is prepared to convey by way of information or advice. ... But, it should be emphasized, the obligation of the speaker is no more than to use reasonable care in the circumstances. He is not in breach merely because his communicated information is incorrect or his proffered advice erroneous. ... He is merely required to exercise reasonable care in preparing himself to speak in conveying information, in exercise of his judgment and in expressing the information or advice which he chooses to convey.
51As was pointed out by the plurality in San Sebastian Pty Ltd v Minister for Administering the Environmental Planning and Assessment Act 1979 [1986] HCA 68; 162 CLR 340, at 356, the majority in the Privy Council on appeal in MLC v Evatt placed liability on a narrower basis, confining it to those carrying on a profession, business or occupation involving the possession of skill and competence, or claiming to possess such skill and competence, in the subject matter of the advice. Nothing turns on that distinction in the present case as Mr Legat was the respondents' accountant and held himself out as competent to give them investment advice.
52The duty owed by the appellants to the respondents required them to take reasonable care that the advice given was accurate and that it did not expose the respondents to an avoidable risk of financial loss. The appellants would have breached that duty of care if, for example, Mr Legat had advised the respondents to invest in the Fund without undertaking obvious inquiries that would have revealed that the Fund was in a precarious financial position or that the respondents were unlikely to be able to redeem their investment at the expiration of the 90 day term.
53The respondents did not contend in this Court that Mr Legat's advice to invest in the Fund, when given, involved a breach of his duty to take reasonable care. In any event, on his Honour's findings, no inquiries that Mr Legat could reasonably have been expected to make prior to advising the respondents to invest in the Fund would have revealed that the Fund was otherwise than in a healthy financial position. On his Honour's findings, it was not until the events of very early March 2008 that Mr Legat became aware, or could have become aware, of circumstances indicating that it was unlikely that the respondents would be able to redeem their investment at the expiration of the 90 day period, or that the Fund was likely to encounter financial difficulties.
54The contention accepted by the primary Judge (at [85]) was that Mr Legat owed a duty of care to the respondents to take positive steps to warn and advise them during the cooling off period of their entitlement under the PDS to withdraw their money from the Fund. This was said to be an aspect of Mr Legat's duty to take reasonable care to advise the respondents in respect of their investment in the Fund so as to "avoid a real and foreseeable risk of economic loss" (at [86]). The primary Judge found (at [96]) that Mr Legat (and Swan & Baker) breached the duty by failing to take positive steps to inform the respondents, prior to 18 March 2008, of their entitlement to withdraw their investment under the cooling off provisions stated in the PDS.
55As Mr Gray accepted, there are circumstances in which a professional person or adviser may come under a duty to take affirmative action to alert the client, or a third party to whom the duty is owed, to circumstances that might cause the client or third party economic loss if further steps are not taken. Hawkins v Clayton [1988] HCA 15; 164 CLR 539 is an example, although each member of the majority gave different reasons for concluding that the duty was owed in the circumstances of that case.
56In Hawkins v Clayton, a solicitor drafted a will for a client of the solicitor's firm. The will was retained by the firm for safe keeping. When the testatrix died, the firm took a number of steps in relation to her estate but made no attempt to locate the executor named in the will (who was also the residuary beneficiary). Ultimately, the executor obtained a grant of probate, but in the meantime the estate sustained losses because the principal asset, a house, fell into disrepair. The High Court held, by majority (Brennan, Deane and Gaudron JJ; Mason CJ and Wilson J dissenting), that the solicitors had breached a duty owed to the executor of the estate and were liable in damages for the losses occasioned to the estate.
57Brennan J held (at 549) that after the death of the testatrix, the solicitors came under a duty to the executor to disclose promptly the existence of the will of which they retained custody. His Honour did not regard this as a duty to take reasonable care to avoid causing the executor or the estate foreseeable loss. Rather, the solicitors were subject to a positive duty of disclosure which arose from the particular circumstances of the case. The circumstances included the solicitors' retention of the will after the testatrix's death, the nature of the will and its contents and the foreseeable consequences of a failure promptly to disclose to the executor the existence of the will.
58Gaudron J took a different approach. Her Honour identified (at 597) "reasonable expectation" as a suitable criterion of "proximity", which at that time was a key concept in determining whether a defendant owed a duty of care to a plaintiff. Her Honour considered the criterion to be appropriate:
where the information [known to the solicitors] is necessary for the exercise or enjoyment of a legal right and the person against whom the duty is asserted knows or ought to know of that right and the necessity for the information before the right can be exercised or enjoyed.
Gaudron J regarded it as a matter of great significance in determining whether a person was under a duty to volunteer information that the person was exclusively in possession of the relevant information (at 597, citing L Shaddock & Associates Pty Ltd v Parramatta City Council [No.1] [1981] HCA 59; 150 CLR 225, at 243, per Stephen J).
59Deane J, in accordance with the principles prevailing at the time, also analysed (at 578) the case in terms of the proximity of the relationship between the testatrix and the solicitors. In his view, the critical elements in the case were (at 578) the
assumption of responsibility and of reliance combine[d] with that of the foreseeability of a real risk of economic loss.
The risk that the estate and the executor (in effect, the sole beneficiary under the will) would sustain economic loss was "real and foreseeable" (at 579).
60Deane J expressed the view that the content of the duty of care in some special categories of case may
extend to require the taking of positive steps to avoid physical damage or economic loss being sustained by the person or persons to whom the duty is owed. ...[T]he categories of case in which a relationship of proximity gives rise to a duty of care which may, according to circumstances, so extend are, like those in which there is a duty of care to avoid pure economic loss, commonly those involving the related elements of an assumption of responsibility and reliance.
His Honour observed that the relationship of a solicitor and client may well give rise to a duty of care which requires the solicitor to take positive steps, beyond the specifically agreed professional task or function, to avoid a real and foreseeable risk of economic loss being sustained by the client. In a passage to which reference has already been made, his Honour said that whether such a duty arises depends (at 579) "upon the nature of the particular professional task or function ... and the circumstances of the case".
61Although it is not entirely clear, it appears that in their dissenting judgment (at 543) Mason CJ and Wilson J agreed with Deane J on this point: see Craig v Troy (1997) 16 WAR 96, at 144, per Malcolm CJ, with whom Franklyn and Wallwork JJ agreed. Mason CJ and Wilson J contemplated (at 545) that there can be circumstances that so strengthen a professional relationship as to import a common law duty of care to take positive steps to inform an executor of the existence and contents of a will: see Craig v Troy, at 140.
62As I have noted, Mr Gray did not dispute that the judgment of Deane J in Hawkins v Clayton, shorn of its references to proximity, correctly states the principles that determine whether the appellants' duty of care to the respondents could include a duty to take positive steps to alert them, after the Fund imposed a delay on redemptions, to their entitlement to take advantage of the cooling off period to withdraw their investment. Mr Gray may have taken that view because Deane J's judgment has been referred to with apparent approval in several cases which have considered the contentious issue of whether the duty of care owed by a professional person to his or her client may be broader than the scope of the retainer by which that person was engaged (see, for example, Waimond Pty Ltd v Byrne, at 652, 654, per Kirby P; Curnuck v Nitschke, at [9]-[10], per Davies AJA (with whom Meagher JA agreed); AJH Lawyers Pty Ltd v Basim Hamo [2010] VSCA 222; 29 VR 384, at [23], per Nettle JA (with whom Maxwell P agreed); cf Heydon v NRMA Ltd [2000] NSWCA 374; 51 NSWLR 1, at [364], per McPherson AJA). As I have explained, neither party has relied in this case upon the terms of any retainer or contractual arrangement that may (or may not) have been entered into between the respondents and the appellants.
63The appellants clearly owed a duty to the respondents to take reasonable care to ensure that Mr Legat's advice that they should invest in the Fund was based on accurate information and that the investment would not expose the respondents to a significant and avoidable risk of financial loss. The duty of care found by the primary Judge went further in two respects. First, the duty required the appellants to exercise reasonable care to avoid exposing or continuing the exposure of the respondents to a risk of financial loss even after the respondents had invested in the Fund. Secondly, it required the appellants, in order to avoid breaching their duty of care, to take affirmative action to bring the cooling off period to the attention of the respondents.
64The reasoning in Hawkins v Clayton supports the proposition that the duty owed by the appellants to the respondents could be as extensive as the primary Judge found. Deane J considered it significant that the relationship between the solicitor and the testatrix involved an assumption of responsibility by the former and reliance by the latter. In these circumstances, the foreseeable risk of economic loss to the client's estate if the executor remained unaware of the existence of the will justified the imposition of a duty of care on the solicitors to avoid the risk of loss to the estate materialising. Deane J concluded that the particular circumstances in Hawkins v Clayton warranted imposing a duty on the solicitors which required them, after the testatrix's death, to take affirmative steps to bring the will to the executor's attention.
65In the present case the primary Judge rejected Mr Legat's denial that he had accepted responsibility for providing advice to the respondents concerning the proposed investment in the Fund. His Honour found that:
- the respondents sought advice from Mr Legat as to where they should place the moneys they had available for investment;
- the respondents specifically informed Mr Legat that the moneys were to be invested for a term of 90 days because they wished to utilise the moneys to purchase an investment property;
- Mr Legat understood from his conversations with Mr Marando that the respondents wanted to redeem their investment at the expiration of 90 days because they wanted to do something else with their money;
- Mr Legat knew that the respondents were relying on his advice that the Fund was a suitable investment to meet their requirements; and
- Mr Legat facilitated the respondents' investment in the Fund for the fixed term of 90 days by filling out the application form for them to sign and forwarding it to the Fund.
66On the basis of these findings, it is clear that Mr Legat assumed responsibility for advising the respondents and that they relied on his advice. Of course, this does not necessarily mean that Mr Legat accepted responsibility for advising the respondents of developments post-dating their investment that created a risk of their incurring a loss by reason of the investment. However, the primary Judge made other findings that bear on the question:
- Mr Legat was familiar with the PDS and should have known of the cooling off period available to investors in the Fund;
- Mr Legat did not inform the respondents of the cooling off period at their meetings (Mr Legat accepted this in his cross-examination);
- Mr Legat knew from his conversations with the respondents in February 2008 that they were going away on holidays within a very short time;
- Mr Legat had the respondents' mobile telephone number;
- Mr Legat knew within a very short time after 3 March 2008 that there had been a run of redemptions on the Fund and he was mindful at the time of the respondents' recent investment in the Fund;
- Mr Legat learned at the same time that the Fund had extended the period for redemptions to 180 days;
- given the run of redemptions there was a real and foreseeable risk of economic loss being sustained by the respondents, both in terms of the Fund delaying redemptions indefinitely or becoming frozen;
- although Mr Legat claimed not to recall having seen the letter to investors of 3 March 2008, he knew about the letter and must have been aware of its contents;
- upon learning of the run on the Fund, Mr Legat sought advice from Mr Swan and received his assurance that "they expected that in the normal course of the cash flows expected of the [F]und, the [F]und would restore itself";
- Mr Legat made no further inquiries about the position of the Fund; and
- Mr Legat gave no thought to contacting the respondents to advise them to take advantage of the cooling off period.
67It will be seen that the primary Judge proceeded on the basis that Mr Legat should have known about the cooling off period, and made no explicit finding that he did know of the respondents' entitlement to withdraw their investment during that period. It would seem that a finding of actual knowledge was not made because it was not squarely put to Mr Legat that he did know of the respondents' entitlement despite there being indications in the evidence that he had read the PDS. For example, Mr Legat said in his affidavit that he handed to Mr Marando a copy of the PDS "copies of which were publically [sic] available and with which I was familiar". Elsewhere in his affidavit Mr Legat said that he had gained certain information concerning the Fund from "what [he] had read in the [PDS]". Moreover, the primary Judge found that Mr Legat knew of the letter of 3 March 2008, which referred to the cooling off period. Nonetheless I am content to proceed on the same basis as the primary Judge.
68Mr Gray challenged the finding that Mr Legat knew of the letter of 3 March 2008. The challenge seemed to be on the basis that Mr Legat said in his evidence that he did not recall seeing the letter at the time. However, he did say that he knew at the time that a letter had been sent to investors "post the freeze". Moreover, the primary Judge did not accept Mr Legat's evidence on some matters and identified other considerations (such as the fact that Mr Legat's parents were investors) that made it likely that he had seen the letter. There is no reason to interfere with his Honour's factual finding.
69The primary Judge found that Mr Legat gave the respondents a copy of the PDS at the meeting of 18 February 2008. However, it was not suggested on the appeal that the respondents read the PDS nor that they appreciated that the PDS provided for a cooling off period. Nor was it suggested that Mr Legat had any reasonable basis for believing that the respondents knew of the cooling off period. Indeed on Mr Legat's own evidence, despite his familiarity with the PDS, he himself did not appreciate that the respondents could withdraw their investment during a cooling off period.
70The primary Judge correctly found that if Mr Legat had acted with reasonable care when advising the respondents to invest in the Fund, he would have become aware of the cooling off period for which the PDS provided. Had Mr Legat specifically directed the respondents' attention to their entitlement to withdraw their investment during the cooling off period, either at the meeting of 18 February 2008 or the meeting two days later, he may well have discharged his duty to take reasonable care to ensure that the respondents were not exposed to a risk of avoidable financial loss, even though he knew that the respondents were going away on holidays. But Mr Legat did not direct their attention to the cooling off period and, as I have observed, he had no reasonable basis for believing that they knew of their entitlement. And had Mr Legat discharged his duty of reasonable care he would have had the one piece of information that, if communicated in a timely fashion to the respondents, could have enabled them to avoid any financial loss by reason of their investment.
71At the meetings of 18 and 20 February 2008, Mr Legat assumed responsibility for advising the respondents to invest in the Fund in order to achieve the specific objective they had communicated to him - namely, to invest for a period of 90 days and then use the money to purchase a property. On the findings made by the primary Judge, Mr Legat learned within ten days that the Fund had delayed redemptions for up to 180 days. This decision removed the very foundation of the respondents' investment decision: the ability to redeem their investment at the expiration of the 90 days fixed term. Mr Legat clearly appreciated that this was so since (as he said in his evidence) when he learned of the freeze he had the respondents in mind. When asked why he had not notified the respondents of the delay in redemptions, Mr Legat gave more than one explanation, but he never suggested that it was because he had forgotten what the respondents had told him or because he did not realise that the respondents would be adversely affected by the delay in redemptions.
72The announcement of the delay created a significant risk of financial loss to the respondents unless they were able to withdraw their investment. As Mr Gray accepted in argument in this Court, the inability of the respondents to redeem their investment at the expiration of 90 days created a serious impediment to their stated intention of purchasing a property with the money. Thus, regardless of whether their capital was safe, the Fund's announcement exposed the respondents to a risk of financial loss.
73But the risk faced by the respondents had a further dimension. As the primary Judge found, the run on the Fund in early March 2008 created a real and foreseeable risk that the respondents would suffer losses because redemptions might be indefinitely delayed or their capital might be imperilled. There was no expert evidence to this effect, but it hardly required particular expertise for an accountant who had recommended the investment to realise that the enforced delay in redemptions created a risk that investors would suffer loss, regardless of what Mr Swan said. In any event, Mr Legat clearly appreciated the risk since he sought reassurance from Mr Swan as to the Fund's cash flow. Moreover, in cross-examination Mr Legat acknowledged the rather obvious proposition that it was possible that the run could have turned into a stampede.
74In these circumstances, it seems to me that the primary Judge was correct to conclude that the appellants' duty to the respondents did not end once they had made their investment in the Fund. They were still at risk of financial loss. As Mr Legat realised, the freeze on redemptions from the Fund materially increased the risk of financial loss to the respondents. Mr Legat should have known that the respondents were entitled to withdraw their investment during the cooling off period. Thus he should have known that the respondents could have eliminated the additional risk to which they were exposed by exercising their entitlement to withdraw their investment. In my opinion, the appellants continued after the freeze to owe the respondents a duty to take reasonable care not to expose (or to continue to expose) them to an avoidable risk of financial loss by reason of their investment in the Fund.
75I also think that the primary Judge was correct to conclude that the appellants' duty to exercise reasonable care to avoid the risk of financial loss to the respondents could extend to requiring the appellants to take affirmative action to eliminate the additional risk the respondents faced after the announcement of the freeze. Mr Legat had assumed responsibility for giving specific investment advice to the respondents. He knew that the respondents had relied on that advice, making this a case of particular reliance by an investor as distinct from "general reliance": Brodie v Singleton Shire Council [2001] HCA 29; 206 CLR 512, at [307], per Hayne J. And if he had acted with reasonable care, Mr Legat would have appreciated that he had the one piece of information that, if communicated to the respondents, would have enabled them to avoid the risk to which the freeze on redemptions exposed them.
76This conclusion does not necessarily mean that the appellants were in breach of their duty. That is a separate question, to which I now turn.