Authors
Timothy Price – Director
Dougal Langusch – Director
On 30 September 2024, the NSW Court of Appeal delivered its judgment in Gerrard Toltz Pty Ltd v City Garden Australia Pty Ltd (in liq) (No 2)[1] concerning the importance of a solicitor’s retainer to defining the scope of any associated fiduciary duty and whether a claim asserting breach of such duty, based on a failure to take reasonable care, is an apportionable claim.
The judgment provides helpful guidance to all professionals (particularly solicitors) who may owe fiduciary obligations in parallel with tortious or contractual duties.
This decision raises significant doubt about the correctness of relatively recent appellate authority in NSW to the effect that claims based on breach of fiduciary obligations are not apportionable claims where a defendant solicitor’s liability can be reduced against the conduct of other concurrent wrongdoers.
While not overturning that previous authority, because it was ultimately unnecessary to do so in this appeal, the judgment provides a strong and persuasive indication that the Court may do so when next required to deal with the issue. That indication significantly assists defendant solicitors (and their insurers) in an area where there has been divergent authority and justifies the maintenance of proportionate liability defences in response to professional liability claims. It will not be welcomed by plaintiffs seeking to avoid legislative proportionate liability regimes by advancing claims based on equitable rather than tortious or contractual duties.
Background
The claimant, City Garden, was a developer undertaking a property development at North Rocks, NSW. Through the actions of one of its two directors at the time, it entered into a series of three loan transactions. These were challenged in the primary proceedings on the basis that the other director, by now in control of the company, had no knowledge of the loans and did not authorise the company to enter into them.
It was alleged that the defendant solicitor, an incorporated legal practice which acted for certain of the lenders over the years and had also acted for City Garden on the acquisition of the development site, had an ongoing retainer and acted for City Garden on the first loan.
The solicitor submitted that although it had acted for City Garden in other capacities and issued a general costs disclosure and costs agreement in anticipation of being instructed to undertake other future work, it was not retained to act for City Garden on the first loan and there was therefore no breach of fiduciary obligation.
In the first instance judgment,[2] the primary judge held that the conduct of the director who caused City Garden to enter into the loans, without the knowledge or authority of the other director, was dishonest.
The primary judge found the defendant solicitor was retained in relation to the first loan and breached its fiduciary duty to City Garden, by reason of acting in a position of conflict and failing to ensure that it was the company, rather than its director, which wished to enter into the loan. While the pleaded case against the solicitor was based only on breach of fiduciary duty, with no parallel case based on tortious or contractual duties, the outcome rested on factual findings which essentially amounted to failing to take reasonable care.
The primary judge held, following the NSW Court of Appeal’s 2019 decision in Rahme v Benjamin & Khoury Pty Ltd,[3] that the claim was not apportionable because, notwithstanding factual findings of carelessness, a failure to exercise reasonable care was not an element of the cause of action pleaded against the solicitor. Accordingly, the proportionate liability regime in sections 34 and 35 of Part 4 of the Civil Liability Act 2002 (NSW) was held not to apply and the solicitor’s liability was not reduced by reason of the conduct of other concurrent wrongdoers, including the director whose conduct was held to be dishonest.
Notably, it is well established that where a claim is apportionable under the NSW regime and there is conduct which might constitute negligence by one wrongdoer, compared with more serious, deliberate or dishonest conduct by another wrongdoer, then the liability will be apportioned predominantly towards the latter: Hunt v Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd.[4] While the apportionment exercise is a matter of discretion and subject to the facts, cases of that nature have resulted in the negligent wrongdoer’s liability being reduced to proportions as low as 10% to 20%. It is to be recalled that Part 4 of the Civil Liability Act was a product of the NSW tort reforms commencing in 2002, driven by concerns about the doctrine of joint and several liability affecting litigation decisions and exacerbating the cost of obtaining liability insurance. The regime places the onus on the plaintiff to pursue all wrongdoers and avoid a multiplicity of cross claims.
Appeal
The solicitor appealed from the decision of the primary judge.
While there were numerous grounds of appeal, the principal and most important grounds were that the primary judge erred in finding that the solicitor’s retainer extended to acting for City Garden on the first loan and thus that the solicitor was in a position of conflicting fiduciary duties, in respect of which it failed to obtain informed consent.
The Court of Appeal allowed the appeal, holding that the solicitor was not retained by City Garden on the loan and owed no relevant obligation to it. Stern JA, with whom Kirk JA and Basten AJA agreed, observed at [37] that:
‘The ambit of a solicitor’s retainer is of overarching significance to any claim that the solicitor has acted in breach of fiduciary duty by reason of a conflict between their duty to their client and either their interest or their duty to another client (…)’
Stern JA went on to observe at [40] that:
‘The scope of the retainer will be material to whether a conflict of duty and duty arises relevant to an impeached transaction (…)’
The Court recognised that in so holding, that was dispositive of the appeal in favour of the solicitor.
The solicitor did not directly challenge the authority of Rahme on the question of apportionable claims, the appeal focusing instead on distinguishing Rahme from the facts of this case. In any event, the Court recognised that it was not necessary to determine this issue or the correctness of Rahme, because the solicitor had succeeded entirely on the principal issues of retainer and duty. Nevertheless, all three judges commented on the issue.
Kirk JA recognised at [2] that the construction of sections 34 and 35 of the Civil Liability Act raises issues which are complex and important.
Stern JA expressed some doubt as to the correctness of Rahme in a case like this one, where the alleged breach of fiduciary duty involved an element of failure to take reasonable care, and noted at [171]-[183] the various divergent authority, including Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2)[5] and Reinhold v NSW Lotteries Corporation (No 2)[6] in NSW, Godfrey Spowers (Victoria) Pty Ltd v Lincoln Scott Australia Pty Ltd[7] and Tanah Merah Vic Pty Ltd v Owners Corp No 1 of PS613436[8] in Victoria and Herridge Parties v Electricity Networks Corp t/as Western Power[9] in WA. In effect, her Honour recognised that the approach by the Victorian Court of Appeal on this issue, in the context of a very similar statutory scheme, is not consistent with the narrow approach adopted in Rahme to the question of what constitutes an apportionable claim.
Basten AJA at [186]-[243] provided, respectfully, a detailed and helpful analysis of the divergent views on this topic expressed in the authorities, concluding as follows:
‘[240] For these reasons, this Court should follow the analysis of s 34(1) adopted by Barrett J in Reinhold, approved by the Victorian Court of Appeal in Godfrey Spowers, and explained in CTC Group, not being inconsistent with Herridge Parties. The Court should not have adopted a different view in Rahme unless comfortably satisfied that the reasoning in Godfrey Spowers either did not apply or was erroneous: it did neither. Furthermore, the reasoning relied upon in Rahme was almost entirely dependent on acceptance of Macfarlan JA’s minority view in CTC Group, which, for the reasons set out above, is not persuasive.
[241] Section 34(1)(a) should not be construed as extending to a claim found to have arisen absent any failure to take reasonable care. On the other hand, a claim, whatever the pleaded cause of action, which has been upheld on the basis that there was a failure to take reasonable care will constitute an apportionable claim under s 34(1)(a) (…)
[242] To the extent that s 35(2) presents a dilemma, the resolution is to be found by the application of s 34(1A), where, even if a number of causes of action have been pleaded, there will only be a single apportionable claim in respect of proceedings for the same loss or damage. That resolution of the dilemma is available so long as the definition of apportionable claim turns upon factual findings made in the course of the trial, rather than merely upon the pleading of an individual cause of action.
[243] There is a suggestion, implicit in CTC Group, that a plaintiff can, after pleading different causes of action, one of which involves a failure to take reasonable care and another of which involves fault-free liability, after obtaining a favourable judgment on both, withdraw the former claim so as to avoid a finding of an apportionable claim. That position is not tenable; it finds no basis in the statute and is a false solution to the s 35(2) dilemma.’
Take-aways
Often, equitable obligations owed by professionals produce surprising outcomes and an expansion of professional exposure.
This appeal decision, consistently with authority, reminds us that the central integer informing any obligations owed by a professional such as a solicitor in this context is the retainer. This echoes similar statements in other recent significant cases of this type: see, for example, Australian Executor Trustees (SA) Ltd v Kerr.[10]
The paramountcy of the retainer should be the primary focus both for those bringing claims based on a professional’s equitable obligations and for those defending such claims. In this case, albeit on appeal, the solicitor’s reliance on the retainer was powerfully vindicated.
While the question of whether a claim for breach of fiduciary duties will constitute an apportionable claim remains subject to a definitive intermediate appellate determination in NSW, this judgment casts persuasive doubt over the correctness of the narrow approach in Rahme and supports the broader approach (that in many instances such claims are apportionable) in other NSW authority and in Victoria and WA.
Had the solicitor in this case not succeeded on the retainer and duty grounds, its proportionate liability defence would likely have reduced its exposure to any loss significantly, particularly having regard to the dishonest conduct (unchallenged on appeal) of one of City Garden’s directors.
The judgment and the reasoning contained in it mean that solicitors and other defendants accused of breaching fiduciary duties by failing to take reasonable care (whether or not pleaded in that way) are justified in advancing and maintaining a defence that such claims are apportionable.
[1][2024] NSWCA 232
[2] City Garden Australia Pty Ltd (in administration) as trustee for the Ming Tian City Garden Unit Trust v Meng Dai [2023] NSWSC 1498
[3] (2019) 100 NSWLR 550; [2019] NSWCA 211
[4] (2013) 247 CLR 613; [2013] HCA 10
[5][2013] NSWCA 58
[6] (2008) 82 NSWLR 762; [2008] NSWSC 187
[7] (2008) 21 VR 84; [2008] VSCA 208
[8] [2021] VSCA 72
[9] (2021) 59 WAR 69; [2021] WASCA 111
[10] [2021] NSWCA 5; discussed by YPOL and Lawcover in this article: Link to article
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