SLIDE 2 270 DECEMBER 2011 AUSTRALIA AND NEW ZEALAND PROPERTY JOURNAL AUSTRALIA AND NEW ZEALAND PROPERTY JOURNAL DECEMBER 2011 271
Legal Notebook
capital outlay and the fact that he had now suffered a capital loss demonstrated that the advice given by the bank (recommending that the claimant enter into the investment) was negligent. Following a detailed review of the factual circumstances giving rise to this case, the Court concluded that the advice given to the claimant by the bank was 'negligent'. However, the Court also found that the bank was not liable to the claimant (in terms of substantial damages) given that the 'negligent' advice did not cause the loss suffered by the Claimant. This was because, in order to demonstrate an entitlement to damages as a result of the provision of 'negligent' advice, the claimant was required to prove that:
- 1. The bank owed the claimant a duty of
care.
- 2. The bank breached the duty of care
that it owed to the claimant.
- 3. That breach of duty of care by the
bank caused the claimant to suffer loss and/or damage of a kind reasonably foreseeable (and therefore not too remote) at the time of the breach. Whilst the claimant established the fjrst two 'elements' above, the claimant was unable to establish the third element. The Court found that the events of September 2008 and following (now known as the Global Financial Crisis) were not reasonably foreseeable by the bank, or any prudent fjnancial advisor, at the time when the investment was recommended and/or made in or prior to September 2005. As stated by The Honourable Mr Justice Jonathan Parker:
... the test of what was reasonably foreseeable must be applied as at September 2005: and not at any time thereafter. Since the [Northern Hemisphere] autumn of 2008, we have become accustomed to economic bombshells of a kind not seen since the Great Depression. We are now reconciled
- course. It will be interesting to see what
impact this case will have, especially in the arena of valuer's liability. This case also provides guidance as to how the decision of Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 might be interpreted on different facts. Kenny & Good concerned a valuation
- f a residential property for mortgage
purposes which stated that the property was 'suitable security for investment of trust funds to the extent of 65% of our valuation for a term of 3-5 years'. The lender suffered loss and/or damage when the borrower defaulted and the lender was unable to recoup the loan funds via sale of the property due to a fall in the market. The valuer argued that the loss was caused, at least partially, by a fall in the value of the property caused by market fmuctuations. The Court found that the fall in the market was not too remote and, accordingly, the entirety of the lender's loss was caused by the valuer's
- negligence. The valuer was therefore
found liable for the entirety of the loss. Whilst we consider that the factual circumstances of Kenny & Good made it a problematic case to run in the fjrst place (from the valuer's perspective), the judgment of Rubenstein will hopefully clarify the position that a valuer's duty to exercise reasonable care does not, in our respectful view, extend to an
- bligation upon the valuer to take into
account (or be responsible for loss arising from) unpredictable, far-fetched, fanciful and unforeseeable events such as a catastrophic decline in the property market (or portions of the market) as we have now witnessed due to the Global Financial Crisis. Whilst the fatal twist for the valuer in Kenny & Good was largely due to the representation that the property was 'suitable security ... for a term of 3-5 years', we understand that such representations are now far less common
to the fact that a sovereign state within the eurozone has defaulted. We have now witnessed the downgrading of the AAA credit rating of the United States. The suggestion that either of these events was going to occur would have been regarded as fanciful in September 2005. ... I fjnd that the loss was not caused by any negligence on the part of [the bank] in making the recommendation [to invest in the EVRF]. I also fjnd that the loss was not reasonably foreseeable by [the bank] and is too remote in law to be recoverable as damages for breach of contract or in tort.
The claimant was therefore only awarded nominal damages.
IMPACT
This case clearly articulates that, in certain circumstances, a professional (such as a valuer) may not be found liable for 'negligent' advice if the actual cause of any loss and/or damage suffered by a claimant is due to the Global Financial Crisis (or some such other unforseen event), which was not reasonably foreseeable at the time that the 'negligent' advice was provided. This potential defence could therefore be raised in claims against valuers by lenders who have suffered losses as a result of loans entered into prior to the Global Financial Crisis (allegedly in reliance upon a 'negligent' valuation) where the cause
- f the loss is the signifjcant reduction in
the market value of the security property for that loan due to the effects of the Global Financial Crisis. Although each case will 'rise and fall'
- n its own facts, including whether the
impact of the Global Financial Crisis was reasonably foreseeable at the relevant time (it would seem that such foreseeability would probably increase the closer the relevant acts/omissions were to September 2008), this case represents persuasive international judicial commentary that will no doubt be considered by Australian Courts in due in the valuation industry and should not be made by valuers.
EDDIE MICHAEL AWAD & ANOR V TWIN CREEK PROPERTIES PTY LTD [2011] NSWSC 923 FACTS
The plaintiffs purchased land from the defendant vendor, as part of a larger development known as Twin Creeks, allegedly in reliance upon various representations made by and/
- r contained in promotional material
provided to them by the vendor's real estate agent. Essentially, these representations fell into four main categories, one of which was that the purchasers had expected that a resort hotel would open at Twin Creeks and that the managers of that hotel would manage the various recreation and restaurant facilities at Twin
- Creeks. However, even at the time of the
proceedings, there was no such resort hotel and the recreation and restaurant facilities were managed by a third party. Following a detailed analysis of the evidence, the Court found that the representation outlined above was misleading and deceptive and therefore in contravention of section 52 of the Trade Practices Act 1974 (Cth) as the vendor could not establish reasonable grounds for making it. Although an alternative claim was made pursuant to section 53A of the Trade Practices Act 1974 (Cth), which was concerned with representations pertaining to the sale or grant of interests in land, the Court found that this additional claim added nothing to the case under section 52. It was not even suggested by Counsel for the purchasers that it added anything. The Court was also required to consider the impact of proportionate liability pursuant to the Civil Liability Act 2002 (NSW), given the vendor's allegations that the solicitor who acted for the purchasers on the sale transaction was a concurrent wrongdoer. These allegations were based on the solicitor's failure to advise the purchasers that the representations and promotional material (which included various disclaimers) was/were not contractual in nature. In addition, the solicitor failed to advise the purchasers that the special conditions
- f the contract made it clear that there
was no contractual obligation on the vendor to implement the development in accordance with the representations. The Court found that a solicitor using due competence and prudence ought to have advised the purchasers that there was no legal obligation on the vendor to implement the development in accordance with the representations and that their legal rights were those contained in the contract and no more. Based upon the evidence before it, the Court accepted that the conduct of the solicitor in question had fallen short of the standard expected of a solicitor acting for and advising a purchaser in these circumstances. Accordingly, the solicitor was found to be a concurrent wrongdoer for the purposes
- f the proportionate liability provisions.
Turning then to the question of how to apportion liability between the solicitor and the vendor, the Court noted that, in most of the cases where a solicitor's proportionate liability has tended to be around 10%, the other wrongdoer has been guilty of fraudulent
- misrepresentation. In this case there
was no such allegation, let alone fjnding, against the vendor. Based upon the relevant legal principles
- utlined in Kayteal Pty Ltd v John Joseph
Dignan & Ors [2011] NSWSC 197 (reported at pages 187 and 188 of the September 2011 edition of this journal), the Court accepted that, in cases such as this where a misrepresentor is not guilty
- f fraud, their share of the responsibility
should be less and the negligent solicitor's share should be greater. Accordingly, based upon the facts of this case and noting that 'the apportionment
- f responsibility in this type of situation is
necessarily a broad-brush one', the Court apportioned liability two-thirds to the vendor and one-third to the solicitor.
IMPACT
Following on from Kayteal, this case provides further guidance as to how responsibility will be apportioned between two or more wrongdoers in a property transaction, especially in circumstances where fraud is not alleged, or found. Obviously, the facts of individual cases will/may lead to different percentages of responsibility/wrongdoing. As readers of this journal may recall, in Kayteal, the solicitor's share of responsibility was found to be 12.5%, while the valuer (who was grossly negligent) was found to be 40% responsible and the borrower (who engaged in fraudulent/intentional misrepresentations) was found to be 47.5% responsible. However, assuming that the valuer was not 'grossly' negligent and the borrower had only made 'innocent' misrepresentations, following the rationale in Awad, one would expect the shares of responsibility apportioned to the valuer and the borrower under proportionate liability law to be reduced, with the solicitor's share of responsibility increased. This case is therefore particularly relevant to the potential liability of solicitors involved in lending transactions where a valuer is also sued. Likewise, it is a stark reminder to plaintiffs/claimants that, in order to
- btain a judgment against concurrent
