Takla v Nasr

District Court of NSW|2011-08-09

The Matters for Decision 1This is a claim for damages alleging professional negligence against a solicitor. 2The questions to be decided are: (a)Whether the solicitor was negligent in 2005-6 when acting for the plaintiff, Ms Elizabeth Takla, on the purchase of a townhouse at Oatlands; (b)If so, whether the negligence led to any loss; (c)If so, what that loss was; (d)If the plaintiff suffered loss, whether she was guilty of any and if so what contributory negligence; (e)If the plaintiff suffered loss, whether any and if so which part of her loss was brought about by her failure to mitigate her loss; (f)If the plaintiff suffered loss, whether I should hold the vendor of the townhouse responsible for any and if so what proportion of that loss.

Background 3Ms Takla is aged 45 and has a young son from a former marriage. She was born in Australia of Lebanese heritage. She left school in year 11. She studied accounting full-time for a year. She then became involved in the fashion industry, in which she has worked ever since. She was, when married to her former husband, a director of a company which ran a self managed superannuation fund. Between them, they bought and sold several properties, although he had more involvement with those transactions than she did. She has had no other business experience. 4After her marriage was dissolved and property matters settled, Ms Takla was left with a sum of just over $450,000. She was keen to find somewhere to live in the Oatlands or Carlingford areas. Her son's school was in Oatlands. She wanted to ensure he would not have to change schools. She began searching on the Internet for properties to rent in that area. Her longer term aim was to buy a property. She saw an advertisement for town houses to rent in Oatlands. She went and inspected a townhouse there: number 5/210, Pennant Hills Road, Oatlands (eventually with the title reference SP 5/ 76147) (the townhouse). Having done that, she agreed to lease the townhouse for $400 per week. The building was still under construction when she moved in. A week or two after she moved in a director of the developer company, MTK Corporation Pty Ltd, (MTK) knocked on her door. His name was Mr Louis Rizk. (He is a brother in law to another of MTK's directors, Mr Ed Younis, of whom more will be said later.) Mr Rizk asked whether she was interested in buying the townhouse for $500,000 on certain terms. As it happens, she was interested. But (as later appears) the terms proposed were quite unusual. She was required to pay eighty per cent of the purchase price as the deposit, and permit MTK to have access to it on exchange. She was to have a rent free period for a year, and have returned to her her bond money and all rent she had paid. He also offered to give her some guarantees, although the evidence suggests the guarantors had no assets. 5The defendant had acted for the plaintiff's husband in the divorce. He held moneys in his trust account for each of them. As he held moneys for her she decided to retain the defendant as her solicitor on the purchase. Contracts were exchanged. The contract contained a form of guarantee by MTK's directors. MTK was in financial difficulties at the time. It eventually went into receivership and the plaintiff lost all her money when the receiver refused to settle, and a mortgagee sold to someone else under a power of sale. She says she was not properly advised by the defendant, and that caused her loss. A significant issue arose before me about the extent of the plaintiff's knowledge of MTK's financial problems at the time she agreed to buy the townhouse and whether the defendant could have done more, such as by giving her strong warnings, to protect her. The fundamental issue concerning causation, was whether the plaintiff would have bought the townhouse anyway, regardless of what advice the defendant gave her.

The case opened by counsel 6When he opened the case for the plaintiff, Mr T Morahan of counsel put the plaintiff's case in this way: "Mrs Takla wouldn't have entered into the contract in the first place if the risks had been pointed out to her about the contract's personal guarantees not being worth anything or the risk of them not being worth anything. ... [H]ad she been properly protected as she was told she would be and had she been properly advised of the risk, she would not have entered into it." 7Mr Morahan said the plaintiff's case was that had she understood the risk she might lose her money, she would not have entered the contract, and that the defendant had led the plaintiff to believe that her interests would be adequately protected by him. 8In his opening for the defendant, Mr G Sirtes SC put to me, inter alia, that I would not be persuaded on the balance of probabilities the plaintiff would have decided against buying the townhouse if given the advice she said she did not receive but should have. Insofar as she thought guarantees would be given, he submitted she could not prove that even if given, they would have had any value or have made any difference to the outcome.

Evidence about the retainer 9I shall deal first with the evidence which led to the plaintiff's retaining the defendant, and then what occurred when she did retain him. The oral evidence on these matters came from the plaintiff and Ms Johnston, the defendant's employed conveyancer. 10Over the years the plaintiff has given several versions of how and when she retained the defendant. I shall deal with them in the order in which they were created. 11I have observed that after MTK was placed in the hands of a receiver, the receiver refused to settle with her, and she lost her $400,000 deposit. After the receiver was appointed, the plaintiff became very concerned about her position, and she sought advice from another firm. According to a letter of instructions (Exhibit D2) she sent in 2006 to that solicitor, this is what occurred at the time Mr Rizk first spoke to her about her buying the townhouse: " I moved in 12 July, 2005. There was still work being done in most of the townhouses, mine included. A week or two after I had moved in Louis Rizk (Ed Younis's brother in law) ask me if I was interested in buying the townhouse for $500,000. Several people had bought off the plan but the building construction had taken longer tha[n] planned, the #9 purchaser wanted to bail out and was threatening Ed's life if he didn't get his money back. I was suspicious but Ed and Louis explained that there was not enough cash flow to pay this person back because their money was tied up with several buildings that were being constructed; namely Terrigal, Salamander Bay and Cronulla. I [k]new some of the men that work with Ed as acquaintances, either from school, church or the Lebanese community. Ed had also contracted another guy to do repairs on the properties and he confirmed that Ed did have a number of buildings. This guy was working on Cronulla, Terrigal and Oatlands repairs". (Although this letter said she moved in on 12 July , contemporaneous documents suggest it was more likely that she moved in a week before that date. See for example an email she sent to the managing agent of 20 March 2007 and the licence agreement she signed on exchange of contracts. (Pp132-134 Exhibit D1). In her affidavit sworn for these proceedings she said the date was 5 July 2005.) 12Describing how she gave instructions to the defendant to act for her on the conveyance, her letter continued: "I contacted CPC lawyers [the defendant] and asked Joe Nasr if it was not a conflict of interest if he was to handle the purchase for me; Jo represented my ex in the divorce. He was my brother's best friend at school and did not realise in the early stage in my ex was married to. Sue Johnson, from CPC was appointed to handle my purchase. I explained that I was offered $500,000 to purchase #5 on the basis that I gave $400,000 upfront and a delayed settlement of 12 months. Sue expressed her concern however since I said that I knew some of the guys that were working with Ed and seemed genuine and because he wrote a letter of guarantee in his name and his father-in-law's name on an MTK letterhead, she thought that it seemed okay! Ed had personally spoken to me, he swore on the lives of his children and wife to ensure me that my money and my house were secure, and that he would not let Antony or I endure any more hardship than what we had been through in the marriage." (My emphases: as later appears, that letter of guarantee never came to light in the course of the trial). 13In her affidavit sworn on 21 September 2010, four years after she had sent Exhibit D2, the plaintiff said inter alia: "5. A few months after I moved in I was contacted by Louis Rizk who was working for the owner/developer. Mr Rizk said to me "Would you be interested in buying this townhouse for $500,000?" A short time later Mr Risk introduced me to Ed Younis whom he described as the developer/owner. Both Mr Rizk and Mr Younis explained to me that the building work was taking longer than expected and that this caused cash flow problems which made it difficult to meet obligations. 6. I was interested in buying the townhouse as the price was affordable to me and the location suited my then needs as it was close to my son's school which meant that he would not have to change schools at that time. I intended to keep the townhouse for about three years until my son was to enter Year 5 or Year 6 at which time I intended to move to the inner western suburbs as I was interested in sending my son to a school in that area. I was counting on the value of the townhouse increasing significantly as I believed I was paying below market value. 7. I contacted CPC lawyers and spoke to the defendant, Joe Nasr. I said to Mr Nasr, "You probably don't remember me. I went to your office to sign some papers regarding my divorce. You were acting for my former husband. You went to school with my older brother. If there is not a conflict of interest can you act for me on the purchase of a townhouse?" Mr Nasr said "No that is not a problem, Sue Johnson looks after the conveyancing. She will look after you." 8. I met Sue Johnson. I said to her "I am currently renting this place and it has been offered to me to buy". I was given a contract by Ed Younis and I handed it to Sue Johnson. 9. Sue Johnson appeared to read the contract. She said "You normally don't have to pay $400,000 up front. It is normally 10%." I said "It is a special price with a 12 month settlement. I spoke with some of the guys who work with Ed Younis and they say he is genuine and will guarantee the contract." Sue Johnson said "The deposit cheque is to be paid to the developer, normally it is held in trust." I said to Sue Johnson "Should I do this? Is there any risk that I will lose my $400,000?" Sue Johnson said "There is a risk but you seem to know them, you're getting a really good deal, you're getting their personal guarantees. It should be ok and you get to live there rent free for 12 months." I said to Sue Johnson "But should I go ahead?" Sue Johnson replied "I can't make that decision for you." 10. I signed the contract and returned later with a cheque for the deposit and handed it to Sue Johnson. I didn't hear anything from Sue Johnson and telephoned her some weeks later. She told me that contracts had been exchanged. 11. Prior to this transaction I had purchased three properties with my former husband. I had very little involvement in those purchases as my husband negotiated the purchases and dealt with the solicitors and banks." 14In cross-examination the plaintiff told me that she regarded the $500,000 as a special price: she had spoken to two owners in the complex with similar units to hers and one had paid $580,000, another $625,000. It was part of the arrangement with the vendor that she be permitted to live rent-free and licence free in the unit, until settlement. At that stage settlement was up to 12 months away. So the arrangement saved her $1600 per month. 15Although the plaintiff swore in [5] of her affidavit her visit from Mr Rizk was "a few months" after she moved in, that appears erroneous. I infer it occurred on or shortly before 18 July 2005. That is because on 18 July 2005 Mr Younis sent a fax to MTK's solicitors. The heading said "Sales Advice for Unit 5/210 Pennant Hills Road Oatlands". In the body of the fax he said this: "Please find attached sales advice for unit 5/210 Pennant Hills Road Oatlands. Purchaser to release $400,000 on exchange and 12 month delay settlement on the remainder $100,000. In relation to Cavana P/L as per your fax today, could we make an appointment to finalise the deed of guarantee as it is possible, not taking into account the release of the above-mentioned deposit for the sale of unit 5". 16With that fax was a document called a sales advice, dated 18 July 2005, referring to unit five, a purchase price of $500,000, the purchaser's name being that of the plaintiff, her solicitor being the defendant, the vendor being MTK and Mr Younis being the contact. Next to the heading "special conditions" were written the words "$400,000 deposit 12 month delayed settlement". 17The plaintiff did not necessarily see those documents, but on 22 July 2005 MTK's solicitors sent a draft contract of sale to the defendant on the plaintiff's behalf. Although there is some doubt in the mind of the plaintiff as to when she first had a conference with anyone in the defendant's office, I am satisfied from the fact that the date 22 July 2005 appears in the costs agreement she signed (pages 5 to 10 of Exhibit D1) that her first conference occurred on that day. 18Ms Johnson is not a solicitor. She had previously worked for several years as a conveyancing clerk and had then undertaken a course leading to her obtaining the relevant qualification under the Conveyancers Licensing Act 1995 (NSW) as a licensed conveyancer. I took her to say she saw herself as required to perform the mechanical conveyancing matters, leaving the giving of any legal advice to the defendant, under whose supervision she worked. The extent of his supervision, she told me, depended on a matter's complexity. 19The defendant's file was in evidence. Ms Johnson told me it was incomplete. However, in the end, if that were so, I did not understand either counsel to submit any omitted parts were material to any issue before me.

The conference of 22 July 2005 20There was little controversy at trial about what advice Ms Johnson gave the plaintiff at the first conference. I am satisfied however that the plaintiff's version in her affidavit is to a degree a reconstruction rather than a recollection of what exactly occurred. I make that observation, because the plaintiff took no notes of the conference, and her affidavit was prepared some five years after relevant events had occurred. Whereas Ms Johnson did take some notes; her notes were in evidence, and it was not suggested by Mr Morahan that the notes had been fabricated or had not been made at the time of the conference or immediately after. 21In her affidavit Ms Johnson said it was extremely unusual in her experience for a contract of sale to require payment of a deposit of more than ten per cent and for it to be released to the vendor, and that she had discussed this issue in some detail with the plaintiff. According to her, the following conversation occurred in the course of the conference: The plaintiff: "Ed has agreed that I can live in the property rent free until the purchase is completed and that the bond and two weeks rent which I have paid will be reimbursed to me..." Ms Johnson: "It is unusual to pay a deposit of more than 10% of the purchase price and to release the deposit to the vendor. Normally the deposit is held on trust until completion of the purchase. It is not in your best interests to agree to release a deposit of 80% of the purchase price as this would, in effect, be an interest-free loan to the vendor and if something goes wrong with the sale and you are entitled to recover the deposit, it may be difficult for you to get it back, particularly if the vendor has spent it or becomes insolvent." The plaintiff: "That was what I agreed with Ed and that is why the property is so cheap. I trust him and he has offered to personally guarantee the sale". 22Ms Johnson said that despite her advice that special condition 30 (setting out the unusual terms) should be deleted from the contract, the plaintiff was quite insistent on proceeding. She said she recalled in the course of dealing with the matter that the plaintiff told her on a number of occasions she had had direct discussions with Mr Younis concerning it, and she had the impression the plaintiff knew Mr Younis. But she did not know the nature of the relationship. 23Ms Johnson said when cross examined it had been her usual practice at the time, to spend in excess of an hour with a new client, taking him or her through the contractual terms. 24There was no evidence that following the conference on 22 July 2005 Ms Johnson ever sent a letter to the plaintiff confirming the contents of her advice. I took Ms Johnson to say that although it was her practice to send such a letter, she could find no copy of it on the file and could not conclude that one had in fact been sent. I am not satisfied any such letter was sent after the conference. Not only did Ms Johnson not assert positively she had sent one, the plaintiff did not say she had received such a letter. 25As appears below where I consider the credit of the above two witnesses, I have concluded that I prefer and accept the evidence of Ms Johnson where it conflicts with that of the plaintiff. 26There was one significant matter in Ms Johnson's affidavit concerning the warning she says she gave the plaintiff, which was not in her notes. It concerned the possible insolvency of MTK, as a reason why the plaintiff might not get her deposit back. As appears above, she swore in these proceedings that when warning the plaintiff she might not get her deposit back because the vendor might have spent it, she explained it might also be because MTK "becomes insolvent". I accept she mentioned insolvency in that context. It is consistent with the instructions the plaintiff gave the defendant as to what she knew of the vendor's financial problems at the time, as well as the tenor of the advice the note shows she was given, and with a letter the defendant wrote to the vendor's solicitors before exchange (see below) concerning the giving of guarantees, and in which the possibility "the vendor should become insolvent", was referred to. There are only minor differences in the versions of the plaintiff and Ms Johnson about this conversation but insofar as there were any differences I prefer and accept Ms Johnson's version. I find Ms Johnson and the plaintiff had the conversation in [21] above, and that the plaintiff retained the defendant's firm to act for her by performing the conveyancing on the purchase of the townhouse.

Events after the conference of 22 July 2005 27After the 22 July 2005 conference there was correspondence between the two firms about special conditions. The defendant's file has a note for 15 August 2005 saying the plaintiff had telephoned Ms Johnson that day concerning a deed of guarantee. On 16 August 2005 the defendant wrote to the vendor's solicitors inter alia: "We note it is our understanding that the parties are considering a delayed settlement in this matter of up to 12 months with a $400,000 deposit being paid on exchange and the balance of $100,000 on settlement. We note that our client would be agreeable to such a position on the following terms:

That the directors of the vendor provide personal guarantees to our client in relation to the monies paid.
Once the property has been registered our client is to be allowed to lodge a caveat over the property to protect their interests.
That the parties enter into a license agreement which confirms that our client is not required to pay any rental from date of exchange. We note it is in our client's interests to seek in particular the directors guarantee as in the event that the vendor should become insolvent than any potential liquidator may consider payments made by our client as a preferential payment. We note that our client needs some protection in the event that this may occur in the future. Subject to the above we note that our client would be in a position to exchange" 28According to Ms Johnson, that letter was drafted by Mr Nasr. By facsimile of 18 August 2005 the vendor's solicitors replied that they were instructed to agree to those three special conditions. They sent a draft of the conditions. The conditions were as follows: "30. The purchaser confirms their agreement to release the deposit to the vendor on exchange of contracts herein and acknowledges that the definition of "deposit holder" stated on page 3 of the pre-printed form of contract is hereby amended to read "the vendor or" in lieu of the words "vendor's agent (or if no vendor's agent is named in this contract, the vendor's solicitor)".
The vendor consents to the purchaser lodging a caveat over the subject lot following registration of the proposed strata plan of subdivision.
Edmond Charles Younis, Anthony Khalil and Bassam Wehbe, being the directors of the vendor company personally guarantee the performance of the vendor under this contract". 29According to Ms Johnson, when she received that facsimile, the three special conditions were placed in the contract. At the time the special conditions were sent, the vendor's solicitors also sent a license agreement. In the operative part the licensor (MTK) granted a licence of the premises free of charge subject to settlement occurring by an agreed delayed settlement date. The agreed delayed settlement date was the later of registration of the strata plan, and one year after exchange (clause 10, Additional Provisions). 30Contracts were exchanged on 4 October 2005. The contract was executed only by MTK, Mr Younis executing only in his capacity as director. None of those agreed to be guarantors executed in his own right. There was no execution clause in the contract for any guarantor to sign. Licence agreements were exchanged the same day. 31On 16 November 2005 MTK's solicitors advised the defendant that the strata plan had been lodged that day. On 1 December 2005 they served notice of registration of the plan and noted (incorrectly) settlement was to occur on or by 22 December. On 5 December they served a notice under section 109 Strata Schemes Management Act 1996. On 7 December they served a Final Occupation Certificate. Settlement did not occur. Indeed there was no evidence to the effect that MTK was ever, at any material time, ready willing and able to settle. On 3 March 2006 receivers and managers were appointed to MTK. The plaintiff, apparently unaware this was about to occur, arranged finance for the balance of the purchase money. Her application was approved on 29 March 2006. 32Early in April 2006 the plaintiff discovered a receiver had been appointed to MTK. On 4 April 2006 she telephoned Ms Johnson and said: "Our worst fears have happened. Ed is in financial difficulties". 33On 6 April 2006 MTK's solicitors gave notice to the defendant that a receiver had been appointed to it. As appears below [37], a few days later, Mr Younis told the plaintiff no caveat had been lodged on her behalf. She contacted Ms Johnson and pointed this out, and one was then lodged for her on 24 April 2006, claiming an interest as purchaser. On 20 March 2007 the plaintiff applied for and received a refund of the bond and rent paid before exchange of contracts. 34In the months following the appointment of the receiver to MTK, Ms Johnson tried unsuccessfully to arrange settlement with him. Settlement never occurred. On 24 December 2007 one of the mortgagees served a lapsing notice in respect of the caveat. The caveat lapsed when the plaintiff took no action to extend its effect. The property was transferred by the mortgagee's exercising its power of sale, on 29 January 2008, for $530,000. The plaintiff remained a tenant there, but paying rent to the new owner, until she vacated on 31 October 2008. 35The plaintiff thus lost her $400,000. In these proceedings she claims it from the defendant, together with interest. No claim was ever made by her against the three men named in the contract as guarantors.

The plaintiff's further and continuing dealings with MTK 36The defendant contended that the plaintiff had a special relationship with Mr Younis, which explained why she trusted him, and took the risk she might lose her deposit, having had a very good understanding of how great the risk was. 37According to the plaintiff, following exchange, she continued to keep in touch with Mr Younis. In her affidavit (paragraph 12) she said that a few days before Easter 2006 he telephoned her and said he had been with his solicitor who had told him that no caveat had been lodged on her behalf. He asked her what her solicitor was doing. He told her his solicitor said it was not his responsibility but she should have one in case something went wrong. She telephoned Ms Johnson and said "there is no caveat on my money. Is that right?" Ms Johnson said: "I'll speak to Joe." Ms Johnson telephoned her a short time later and said: "we will put a caveat on immediately. It is put on the property not on your money". A few days later Ms Johnson telephoned her and said the caveat had been lodged. After that incident Ms Johnson contacted her and said something was not right and they should push for completion. She (Ms Johnson) said however she could not get any information out of MTK's solicitor. The plaintiff then became concerned and telephoned Mr Younis to ask if there was a problem. He told her he would make sure it was "okay". She says she then telephoned Ms Johnson frequently for advice on completing the purchase. Eventually, when she was not able to get any information, she changed to a different solicitor.

Some additional material concerning the plaintiff's knowledge of MTK's financial position before exchange 38At about the time she learned from Mr Younis no caveat had been lodged for her, the plaintiff was offered another deal by Mr Younis. Although she was not certain about the number, I find that on three occasions he suggested she move into another property, on which he would pay the rent. But she declined his offer. She agreed when cross examined on the issue that he had made the offer because he had originally told her nothing would go wrong and that he would guarantee it. I took her answer to mean that that had been her understanding as to why the offer had been made. On another occasion at about that time, also before the receivership, he had discussed with her, she said, the possibility of reducing the purchase price by $100,000 to compensate her for various problems she had experienced in the building, such as having a poor or non existent garbage service. 39The contents of Exhibit D2 suggest strongly to me that the plaintiff was aware before exchange how bad MTK's financial position was. For example, she said she had been suspicious. She told me that in saying she had been suspicious concerning the deal, she had meant she had been suspicious concerning the cash flow problem and the circumstances in which a purchaser had been wanting to "bail out". She said her suspicions had caused her to question Mr Rizk and Mr Younis concerning the purchase of unit nine. But she considered, having discussed matters with them, that they were being frank with her. She agreed that some of her suspicions had been allayed by the time she had gone to see Ms Johnson. She agreed she had also spoken to three people who had worked for MTK. She said her purpose in speaking with them had been to be reassured MTK was genuine, and that the other developments were in fact proceeding.

Was there another guarantee? 40In the course of her cross examination a curious issue arose concerning a written guarantee. In Exhibit D2 she had referred to a letter of guarantee in the name of Mr Younis and his father in law on an MTK letterhead and said that she had shown it to Ms Johnson, who said it seemed "okay". The plaintiff appeared to have little recollection concerning the circumstances in which she had received it. She said she had seen it on Ms Johnson's file, and Ms Johnson had told her she had such a letter; she said she assumed that had come to Ms Johnson from MTK's solicitors. No such document was produced in the course of the trial. Mr Sirtes put to the plaintiff (but she denied) that the document had been given to her but not passed on to Ms Johnson. Ms Johnson was not asked about this letter. There is no reference to the letter in the correspondence between solicitors. The plaintiff's description of the letter in Exhibit D2 seems quite specific, such as by referring to the MTK letterhead. But her memory at trial for events in 2005 to 2006 was in conflict with some contemporaneous documents. I conclude she is mistaken in saying she ever saw such a letter.

The case pleaded 41The case was pleaded only in negligence. The statement of claim, after noting that the defendant had acted for the plaintiff on the purchase, a receiver had been appointed to MTK, and completion had never occurred, alleged as follows: "10 The defendant failed to act carefully and competently and in accordance with the standard of skill and competency that might reasonably be expected of a qualified solicitor. Particulars The defendant: (a) Failed to warn or advise the plaintiff of the risk in paying in a real estate transaction a deposit of 80% of the purchase price. (b) Failed to warn or advise the plaintiff of the risk in agreeing to the deposit of 80% of the purchase price being paid to the vendor of the property on exchange of contracts. (c) Failed to warn or advise the plaintiff of the risk in agreeing not to lodge a caveat on the title to the property after contracts were exchanged. (d) Failed to take any action or to warn or advise the plaintiff of the effect of being served with a notice to caveator of proposed lapsing of caveat. (e) Failed generally to protect and safeguard the plaintiff's interest in respect of the purchase." 42In the course of submissions, it became apparent that under particular (e), the plaintiff, as part of the failure to "protect and safeguard the plaintiff's interest", included a failure to have guarantees executed by the directors of MTK. 43It was the defendant's case that there had been no negligence, and that nothing done or said by the defendant or Ms Johnson had had any relevant causative effect on the plaintiff's decision to exchange contracts on the terms offered by MTK. Further, she had failed to mitigate her losses by pursuing MTK's directors. Finally, Mr Sirtes submitted that by the time she had gone to her first conference with Ms Johnson, the plaintiff had already made up her mind to buy the property, and that regardless of what advice was or was not given, nothing done or left undone by the defendant had made any difference to that decision.

The Expert Evidence 44Mr Dennis Bluth is a highly experienced conveyancing solicitor. His expertise was not challenged. He was provided with a number of documents, including a draft of what I took to be the plaintiff's affidavit of 21 September 2010 in its final form. In a written report he said that despite the oral advice given by Ms Johnson about the dangers of letting MTK have the deposit, there were ways the plaintiff's interests could have been better protected. For example the consent of the mortgagees could have been obtained; (though he conceded it would be rare for this to happen after the deposit had been paid directly to the vendor), and collateral security could have been obtained from the directors. 45Mr Bluth said it is common practice for solicitors advising a purchaser in the plaintiff's position who faces a significant commercial risk of losing such a significant sum, for the advice to be confirmed in writing. He also said it is common to have the client acknowledge in writing that notwithstanding that advice and the risk, the client is proceeding, with full knowledge of the risks. In his view it is not sufficient that such advice be given orally in a conference and a mere note made on a file of the conference. 46He said the written advice should canvas matters such as the unusual arrangement for the deposit to exceed ten per cent, and for it to be paid straight to the vendor, that a caveat would not provide protection in the event of default under the existing securities where the secured creditor took possession, and that directors' guarantees would not hold weight unless the directors were of substance and could put up security. 47He said it is common practice for directors to provide a list of assets and liabilities and to grant a mortgage over land to secure such a prepayment; due enquiry could have been made of the indebtedness of MTK and an effort made to have the mortgagees' consent to release of the $400,000. But he conceded commercial reality was that even if one mortgagee had agreed, another would not. He said even if no written advice is given, it is common practice for a solicitor to at least canvas those issues in conference. 48A somewhat unusual opinion put forward by Mr Bluth was that if a client refuses to accept a solicitor's advice not to enter a transaction as risky as this one, he/she should cease to act for the client. 49Mr Bluth said it is common practice to advise a client strongly not to enter into such a transaction unless the purchaser is fully conversant with the risks, and able to suffer the loss of his or her money. 50He noted from the correspondence that the defendant had contemplated the vendor might become insolvent, but said the special conditions had provided completely insufficient protection. 51He concluded that the retainer had been to act on the investment which involved a prepayment of eighty per cent of the purchase price: it had been the duty of a solicitor in those circumstances to protect the client as best as possible, and to provide comprehensive advice about the significant risks of the transaction. 52Mr Bluth agreed in cross examination that there had been but one risk in this transaction, that the plaintiff would not get back her deposit.

Credit 53The plaintiff and Mr Bluth were the only witnesses in the plaintiff's case. The only witness called in the defendant's case was Ms Johnson. Neither counsel made any submissions to me about the credit of Mr Bluth. I accept him as a witness of truth. 54Both counsel addressed me on the credit of the plaintiff and Ms Johnson. I treat the plaintiff's evidence with some reserve: (a)I take into account that she had had a very unhappy experience with the defendant and lost $400,000 and in these proceedings blames the defendant for what happened to her; (b)In cross examination she seemed at times to effect the manner of an innocent or naive person when it came to business matters, leaving everything in the hands of the defendant. That attitude was somewhat at odds with my own assessment of her, which was that she is an intelligent, shrewd, and worldly wise woman, who, of course, engaged in wide ranging investigations about MTK, and conducted the initial negotiations to buy the town house from MTK; (c)There was what I regard as an inconsistency in her answers when she seemed to see an earlier answer might be damaging. For example at T37.20 (D1) she said she did not deny having been warned that if something went wrong and she had an entitlement to get her deposit back that might be difficult if the vendor had spent it or was insolvent. But at T39.33 to 39 (D1) she at first denied that had been said to her and then said: "I don't know. How can I say yes to that when it's not even clear?" At T40 (D1) she denied having any understanding there was a risk she might not get her money back if she paid it to MTK. At T49.29 (D1) she denied having been told of a risk she might not get back her money if the sale did not go through; (d)I thought her memory was problematic. For example when it was put to her she had told Ms Johnson a receiver had been appointed to MTK she responded "No, how would I know?" Yet in Exhibit D2 she had written that it was she who had told Ms Johnson of this, having heard it elsewhere. She swore in her affidavit of 21 September 2010 Mr Rizk had approached her about buying the unit "a few months" after she moved in. Yet the sales report was dated 18 July 2015, just a week or so after the licence agreement shows she moved in. These factual matters where she obviously erred are not highly significant, but they are additional material which cause me to exercise caution when accepting her evidence on issues of real importance. 55I consider Ms Johnson was honest, and reasonably accurate. Ms Johnson's knowledge of the law of conveyancing when tested appeared shallow. But in the end, despite a vigorous and lengthy cross examination of her by Mr Morahan, I did not think she was shaken on her essential evidence that what she had asserted having told the plaintiff about the risks of the transaction in that first conference was as set out in her affidavit. I take into account that Ms Johnson did say to me that she did not know if she had told the plaintiff she should not enter the contract. But I have no doubt she told her it was not in her best interests to do so. I find the plaintiff understood full well by, at the latest, the time she left the defendant's office on 22 July 2005, that by entering the contract she was at risk of losing her deposit if MTK became insolvent. I find further that she also knew at that time that MTK was in significant financial difficulties.

Particulars of negligence pleaded 56I shall deal now with the individual allegations of negligence pleaded. (a) Failing to warn or advise the plaintiff of the risk in paying in a real estate transaction a deposit of 80% of the purchase price. 57At common law a solicitor does not owe a client a duty to warn about whether or not a transaction is prudent: Polkinghorne v Holland (1934) 51 CLR 143 at 167; Clark Boyce v Mouat [1994] 1 AC 428 at 437. Hogan v Howard Finance Ltd (1987) ASC 55-594 at 57, 535; (Hogan admits of some circumstances where investment advice may come from the retainer: such as in the case of a client of limited means, education and understanding; but this plaintiff, though of apparently limited means, is far from lacking in education and understanding); Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 418; Orszulak v Hoy (1989) Aust Torts Reports 80-293 at 69, 184; Krambousanos v Jedda Investments Pty Ltd [1996] FCA 144; (1996) 64 FCR 348 at [90]; Solicitors' Liability Committee v Gray & Winter (1997) 77 FCR 1 at 13-14. In Citicorp at 418, Sheller JA said: "The solicitor's duty is found in the terms of the retainer and the ambit of any additional assumed responsibility relied upon." I do not consider, on the facts as I have found them to be, that the defendant's retainer extended to giving business advice, or of advising on the business sense of buying the townhouse on the terms the plaintiff herself had negotiated with MTK. Further, a defendant owes no duty to warn of obvious risks in a transaction: s 5H(1) Civil Liability Act, 2002 (NSW) (CLA). The very thing which occurred, namely MTK's insolvency, preventing her from getting her money back was a risk of which I am satisfied she was warned, by Ms Johnson. 58Before me the plaintiff accepted the transaction had contained a risk. It was put to her the risk had been acceptable to her because of the benefits the contract brought her: free rent for a year, return of her bond and past rent paid. She said: "I don't know if they outweighed the risk of losing $400,000." Mr Sirtes submitted that the risk from releasing an eighty per cent deposit was or ought to have been obvious to her. I consider the risk was obvious to her. 59In the end, I did not take Mr Morahan to suggest the plaintiff had not been warned she might lose her money. As I understood the case he put finally, particularly based on the evidence of Mr Bluth, it was that the defendant should have confirmed the advice about that risk in writing, and then have declined to act for her if she insisted on proceeding. 60I do not regard failing to confirm in writing advice given orally in conference necessarily indicates a breach of a solicitor's duty to take reasonable care, though receipt of such a letter could be a sobering experience for some. In any situation the particular circumstances of the transaction, particularly the personality of the client, are matters to be taken into account. For example in Fortune v Bevan [2000] QSC 460 the Supreme Court of Queensland found a failure to confirm in writing advice given orally, was not, on the proven facts there, a breach of duty. As I have observed, the plaintiff is an intelligent and shrewd woman, of worldly wisdom. I am satisfied she thought this a very good deal at the time, and receiving a written advice warning she might lose her money on MTK's insolvency would not, I find, have changed her mind. I am not satisfied this particular of negligence is made out. 61Although Mr Bluth's evidence was not contradicted, I do not accept his evidence that a solicitor should refuse to act for a client who declines to take advice. It sometimes happens in a criminal matter that a solicitor must decline to act for a client who insists on a particular line of defence which would amount to an impropriety. In civil matters there is less scope for such an obligation to arise. But unless to continue to act in a conveyancing matter such as this one, would place the solicitor in conflict with his or her professional obligations of honesty and good ethics, I do not consider there is any obligation to decline to act. I acknowledge my view was not supported by expert evidence, but I consider this is a point of law concerning legal practice where a court is sufficiently equipped to form an opinion unaided by or different from expert opinion: Lucantonio v Kleinert [2009] NSWSC 853 at [8], (6) (per Brereton J). (b) Failed to warn or advise the plaintiff of the risk in agreeing to the deposit of 80% of the purchase price being paid to the vendor or the property on exchange of contracts. 62I do not consider this adds anything to the plaintiff's allegations and it is sufficient to refer to my reasons under (a) above. (c) Failed to warn or advise the plaintiff of the risk in agreeing not to lodge a caveat on the title to the property after contracts were exchanged. 63In the end I did not understand Mr Morahan to rely on this allegation. It is hard to see what difference the failure to advise made. Mr Bluth said that lodging a caveat before the strata plan was registered would not have afforded any greater protection than she had: it could have been removed at any time by application by one or other of the registered mortgagees. A caveat was lodged after the strata plan was registered but that gave no protection from the registered mortgages, and nor could it have. The mortgagees who were registered before the strata plan was registered ultimately sold under their power of sale and the evidence establishes they did not receive from the sales the whole of the sum secured under the mortgages: there was still a deficiency. Further, a transfer from a mortgagee exercising a power of sale is registered regardless of the presence of a caveat: section 74H(5)(g) Real Property Act 1900 (NSW). (d) Failed to take any action or to warn or advise the plaintiff of the effect of being served with a notice to caveator of proposed lapsing of caveat. 64Mr Morahan did not strongly press this particular. It is hard to see what the defendant could have done when served with the lapsing notice. No loss could possibly have followed from the defendant's doing and advising nothing when the notice was received. In fact the plaintiff would have risked receiving an order for costs against her had she tried to extend the caveat. (e) Failed generally to protect and safeguard the plaintiff's interests in respect of the purchase. 65Included under this heading I took Mr Morahan to include the allegation that the defendant had taken no proper steps to ensure there were guarantees in place, or to enquire into the financial situation of those who offered guarantees. As I have observed, Mr Bluth gave substantial evidence about steps which could have been taken to investigate the amounts owing on mortgages, and the financial situation of the directors. I have no doubt Ms Johnson took no action to investigate the financial situation of the directors, or advise specifically that that would be a good thing to do. Nor did she investigate the mortgages which existed at the time of exchange, to see what amounts were owing. Nor did she on exchange obtain signatures of the guarantors on the guarantee attached to the contract. 66Having in mind the appointment of a receiver to MTK some months after exchange and the problems MTK was to the plaintiff's knowledge having with cash flow at the time of exchange, I am not persuaded that conducting investigations of the type Mr Bluth said should have been done, or having the guarantors sign the contract, would have affected the outcome. It is clear that MTK was in severe financial difficulties at the time of exchange. It is clear the position of the directors was also parlous. I conclude the latter from MTK's insolvency, the fact that one of them is now bankrupt, and the threats to Mr Younis when MTK was apparently unable to repay a deposit. In the absence of any evidence on this issue I infer the mortgagees would not if asked have permitted registration of a partial discharge of mortgage. It is possible that ensuring MTK's directors executed the guarantee of MTK's performance at the time of exchange might have assisted the plaintiff. Given the directors agreed to the unusual form of guarantee being in the agreement, I infer they would if asked have executed it in their personal capacities. But Mr Morahan did not in the end submit that the plaintiff had lost anything as a result of the failure to have the guarantee signed. There was no evidence the directors ever had the ability to honour the guarantee, and that, I conclude, was the reason for Mr Morahan's position on that issue. Mr Morahan submitted the defendant should have warned the plaintiff that Mr Younis' swearing on the lives of his wife and children was worthless. However, even if that were so, I am not persuaded saying that to her, either orally or in writing, would have dissuaded her from proceeding. 67In my view there was no breach of duty, but even if there was, it had no impact on the outcome for the plaintiff.

Causation 68Although I have found there was no breach of duty. I shall express my views on the causation issue. The plaintiff did not give evidence in chief that if properly warned of the risk she might lose her deposit, she would not have entered the agreement to buy the townhouse. Such evidence of course would have been inadmissible: Civil Liability Act 2002, s 5D(3)(b). She did say in cross examination, however, that her mind had not been one hundred per cent made up before she retained the defendant. I treat that evidence with caution, given its hindsight nature. It has been said in a medical negligence context that a plaintiff's assertion as to what he or she would have done in hypothetical circumstances may of itself carry little weight: Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434 at [15]- [17] (Gleeson CJ); [44]-[45] (McHugh J); [86]-[87] (Gummow J); [157]-[158] (Kirby J) and [221] (per Callinan J). 69In Elbourne v Gibbs [2006] NSWCA 127 at [67], another medical negligence case, Basten JA described evidence of what a patient would have done if warned of a medical risk as "indisputably relevant". But as his Honour observed in Chamberlain v Ormsby t/as Ormsby Flower [2005] NSWCA 454 at [137]: "[T]he test of causation is ultimately one to be determined on all the relevant material and not merely upon the assertion of the plaintiff as to what he or she would have done in hypothetical circumstances." See also Hancock v Arnold; Dodd v Arnold [2008] NSWCA 254 at [67] (per Basten JA). 70Chamberlain was a claim against a firm of solicitors for the loss of an opportunity said to have been suffered by an injured worker who received workers compensation but said he would have wanted, if told he could have done so, to claim damages at common law. It was his assertion that he would have sued if properly advised, that was the subject of Basten JA's observation. 71For the following reasons, on all of the relevant material before me, I consider that the plaintiff would have entered the contract even if the defendants had given her a written confirmation of Ms Johnson's oral warning of the danger she might lose her deposit and the fact the directors might have no assets to back up the guarantee. (a)As the sales report shows, she had reached agreement on all significant matters before seeing the defendant; the only additional provision of significance added later, and with the defendant's intervention, was the unsigned guarantee by the three directors. (b)She had been living in the townhouse for a week or two before she was approached: so she knew the townhouse and the building and its location, and the townhouse was the type of place she wanted to live in. (c)The townhouse was close to her son's school, and she had no wish to have him change schools. (d)She was to have the bond returned and the rent she had paid before exchange: she had been paying $400 per week rent; she was to be permitted to live in the unit rent free for at least a year before being required to complete. (e)She spoke to the owner of another unit in the complex and he said he had paid $580,000. To her knowledge, another owner had paid $625,000. By reason of that knowledge, she considered $500,000 was a special price; both those units had the same configuration as hers. (f)She hoped to make a capital gain on the property and believed she was paying below market value. (g)She was, as I have found, a shrewd and intelligent person. (h)She knew there was a risk she would lose her deposit if MTK became insolvent but took the risk; she made a number of enquiries on her own behalf. She was impressed with the vendor's employees whom she came across on site and she knew some of them anyway from school, church and the Lebanese community. (i)She was aware the vendor had had cash flow problems due to the construction's taking longer than expected. Further, she knew they were so bad, that when a purchaser had asked for his deposit back it had trouble paying him, and that a threat had accordingly been made against Mr Younis. (j)She knew Mr Younis had a number of developments on foot soaking up cash. (k)She thought Mr Younis was a genuine man, and he had offered personally to guarantee the contract. (l)She had spoken with others about Mr Younis and been told he was genuine. (m)She accepted in cross-examination that she understood expressly or impliedly that the deal which required her to pay $400,000 on exchange was the price she had to pay for getting the special price of $500,000 and the rent-free period. (n)From when she first agreed on the deal with MTK, a period of about three months went by before exchange: she had that time to reflect on the advice she had been given by Ms Johnson and whether or not to accept it. (o)She knew it was unusual to pay a deposit of more than ten per cent and to release the deposit to the vendor. (p)She made no mention in Exhibit D2 of not having been warned that she might lose her money in the event of insolvency of the vendor prior to completion. As I have found, she knew full well that this was a possibility, because she had been warned by Ms Johnson, and had a deal of information suggesting MTK was in some financial difficulties. 72Mr Morahan observed that the sum of $400,000 was, as he put to me, all the money she owned. Mr Sirtes conceded (and I agree) that this was a powerful fact. I have not overlooked Mr Morahan's submission. I have taken it into account. 73Mr Morahan submitted that the plaintiff had not been involved in many conveyances and had had little experience of business: her career had been in the creative, not commercial, aspects of fashion. I accept she had limited business experience, and that most of her career has been in the fashion industry. But that does not alter the fact that she regarded the deal as a very good one, and knowingly took the risk of losing her deposit. 74Mr Morahan put to me that assuming it was correct that she bought the property at $100,000 below market value, and received a year's free rent, it is unlikely she would have risked losing $400,000 to save $117,500, being the combined total of the saving on purchase price and the saving on rent. However from my assessment of the plaintiff, that is exactly what she did do. 75Mr Morahan submitted I should accent Mr Bluth's advice in its entirety, since there was no contrary evidence. I agree there was no contrary evidence. But that is not the end of the matter. It is a matter for me to decide, based on the evidence, assisted by his expert evidence, as to what, on the probabilities, would have occurred had the defendant exercised its obligations properly as the plaintiff's solicitor. Mr Bluth's evidence is significant on the content of the duty of care owed to her by the defendant, and, to some extent on the causation issue. But it is not decisive on any issue. 76Mr Morahan reminded me of Mr Bluth's evidence that the defendant should have said, after enquiries, "we're sorry but this guarantee really will not protect you very much at all, do you want to go ahead?" He submitted he should have put that in writing to her. He pointed out that Ms Johnson had never said the verbal promise was worthless. He submitted that had a written advice been given saying "don't do this", she would have taken the advice and not have proceeded. However I do not accept that submission. I am quite satisfied that no failure on the part of the defendant to give her advice of that nature or any other nature concerning guarantees made any difference or would have made any difference to her decision. 77Mr Morahan invited me to draw a Jones v Dunkel (1959) 101 CLR 298 inference against the defendant for not giving evidence to say there had been a system of safeguards in place: to ensure adequate supervision of Ms Johnson to give her adequate support in dealing with tricky legal questions. In particular, he put to me she knew there had been discussion of a guarantee, yet she, and thereafter the defendant, left the clause concerning a guarantee to be drafted by the vendor's solicitors: Ms Johnson had done nothing about obtaining a different and more effective form of guarantee. However I do not see how calling the defendant would have made any difference or what he could have added. As I have found, I do not consider the form in which the guarantee ultimately took had any influence on the outcome. 78Further, at T258 (D2) I put to Mr Morahan: "Well do you say that the defendant was negligent then not to have obtained a properly executed guarantee?" And he said: "Well it probably doesn't go that far because in the event a properly executed guarantee may not have helped either." 79Mr Morahan's response is, I consider, consistent with the evidence which shows strongly that MTK and its directors were in grave financial trouble at the time of exchange.

Failure to mitigate 80Insofar as the defendant maintained the plaintiff had failed to mitigate her losses by suing the directors (and this was, if at all, only faintly raised by Mr Sirtes in final address) I am not persuaded the plaintiff ought to have sued the directors. Her counsel's concession that that may not have assisted her, at the very least, shows there would have been no point; thus she had no obligation to pursue them.

Conclusion 81I am not persuaded that the defendant was in breach of his duty of care in any of the ways particularised. I am not persuaded on the balance of probabilities that the failure on the part of the defendant to take any of the steps the plaintiff says should have been taken, would have made any difference to the plaintiff's decision to proceed with the transaction. It follows that no questions of contributory or proportional liability arise. There should accordingly be a judgement for the defendant.

Damages 82In case it is found I am in error on liability, I shall assess the damages I would have awarded had the claim succeeded. When I reserved judgment I gave the parties liberty to serve written submissions if they could not agree on damages. I was later informed they could not agree. I received written submissions from counsel for each party. 83An award must, as nearly as money can, put a plaintiff in the same position as if an alleged tort had not been committed: Johnson v Perez (1988) 166 CLR 351 at 355, 367. Generally, damages in a tort case are to be assessed as at the date the cause of action arises. At the latest, this would have been the date contracts were exchanged, 4 October 2005. I infer that had she not bought the townhouse, the plaintiff would have invested the $400,000 and then bought another, similarly priced property, about a year later, in the same neighbourhood. She told me her plan at the time she moved into the townhouse had been to rent for a while, assess the market, then buy. Had she bought another property, I infer, there would have been some non taxable capital gain from 2006 to the present. For about a year before buying the alternative property, she would, I find, have kept the $400,000 in an interest bearing deposit with a bank, and paid income tax on the interest. But she would have paid rent for that year of, I conclude, $400 per week. Taking a broad brush approach, the rent and net income would, I find, have been roughly equal. So there would have been no loss for that year. From October 2006 to the present, a period of about five years, she would have owned a property and it would, I find, have increased in value. The extent of the increase would not have been taxable. There was no evidence as to the rate of capital growth in Sydney suburban townhouses. I infer it would have been roughly equal to the interest the sum of $400,000 would have earned in accordance with the alternative calculation in paragraph 5 of Mr Morahan's written submission of 6 October 2011 and a document called "F4 Rental Deposit and Investment Rates", attached to his written submission (I mark a copy of the submission and annexure, Exhibit C). Mr Morahan has calculated the interest from 4 October 2005 as $143,089.96 to 9 August 2011. But he allowed for a deduction of $150 per week for the period 4 October 2005 to 3 October 2006, using the occupation fee as a yardstick. I have found she would have suffered no loss for the first year. So I would adopt his calculation but deduct a further $250 per week for the year 2005-6, and extend the period in his table to 3 November 2011. That would add $7307. Thus this would be the calculation: Total in alternative 2 $143,089.96 Add +$7,307.00 (For 10 August 2011 to 7 November 2011) $150,396.96 Deduct (52 x 250) -$13,000.00 TOTAL $137,396.96

84I would round that off to $140,000. Thus total damages I would have awarded would have been $540,000. Tax would not be payable on the $140,000, as it merely represents a loss of a capital, non taxable, gain. Interest rates were used to calculate the loss, but only as a yardstick, in the absence of evidence from a valuer. 85Orders: (1)Judgment for the defendant. (2)Plaintiff to pay the defendant's costs. (3)Exhibits to be returned.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 November 2011

Conveyancers Licensing Act 1995(NSW)

At a glance

Court

Decision date

Source

Judgment (19 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (14)

Cited By (1)