Two recent cases from New Zealand's senior appellate courts have confirmed and restated the test for liability of lawyers who negligently advise on property transactions. The cases focus on causation of the loss in circumstances where negligence (ie, bad advice or failure to advise) has been admitted or proven.
Together they set the tone for lower courts to follow at first-instance hearings – that is, that there must be clear proof that the loss would not have been incurred if the lawyer had given proper or competent advice. Clients that are determined to proceed with speculative transactions or would have taken no notice of good advice or cautions (even if proffered) will struggle to show that the lawyer has caused their loss.
The Supreme Court recently ruled in Tauranga Law v Appleton that despite breaching its duties to the client in an apartment investment transaction (in the Blue Chip group), a firm of solicitors advising him were not liable for the client's lost deposit, as the client would have gone ahead anyway.(1) This decision overturned the Court of Appeal's earlier findings on causation. The case has already been followed in Blackwell v Chick where the Court of Appeal explored the principles of causation in more detail.(2)
Mr Appleton entered into an agreement to purchase an apartment in Auckland from a company called Rockfort Limited. Rockfort was a simple company with no assets, and was part of the now-notorious Blue Chip investment group that collapsed during the global financial crisis. This transaction was arranged through a Blue Chip broker, who conducted negotiations on a standard form conveyancing agreement in common usage. Appleton had previously invested in another Blue Chip product and had been satisfied with the outcome. He signed the sale and purchase agreement on April 23 2004 without taking legal advice.
The agreement related to an apartment in a property complex yet to be built. It did not include plans or specifications. The price was NZ$356,896 with a deposit of NZ$101,910 payable upon signing of the contract. Under a special clause in the agreement, the deposit was to be immediately released to the vendor and not held in an agent or stakeholder's trust account, a departure from usual practice in the standard form contract. The vendor would instead then pay interest on the amount of the deposit up to the settlement date when the balance was due to be paid by Appleton.
The Blue Chip broker recommended a firm of solicitors, Tauranga Law, to act for Appleton as they were already familiar with Blue Chip property products. He agreed, and transaction documents were sent to the law firm on April 29 2004. The significance of this date is that, at that time, Appleton still had one week remaining of a statutory 14-day cooling-off period, which allowed him a right to cancel before May 7 2004. However, Tauranga Law did not contact Appleton until May 24 2004 after receiving the loan documentation for the purchase.
Appleton confirmed his instructions and Tauranga Law then sent a letter of advice, in relatively standard language. It described the transaction, noted that the deposit was above the usual 10% and highlighted the major risk of the transaction prior to settlement (ie, Rockfort might go into liquidation or the developer might not complete the building and his deposit would be lost).
Appleton's evidence was that he did not take much notice of the letter. He signed the bank loan documents and the deposit was then paid (an amount slightly over $90,000, reduced from the sum agreed under the contract). As per the special condition, his deposit was not held on trust as in a usual property purchase and was in fact not paid to the vendor, Rockfort, but to another Blue Chip entity.
The apartment was never built. Interest was paid for a while, but eventually the Blue Chip group collapsed, Rockfort was liquidated and Appleton lost his deposit. He sued the law firm for breach of duty of care to provide competent legal advice on the risks of the transaction.
Appleton's position at trial had been that if he had appreciated that his deposit was not secure in a trust account, he would have done everything he could to extricate himself from the transaction. The High Court found that Tauranga Law had breached its duty of care in two respects:
- It had failed to contact Appleton and advise him prior to the statutory cancellation period ending; and
- It had failed to provide Appleton with proper advice, as the letter insufficiently warned and detailed the deposit insecurity risks.
However, the High Court found that Appleton had clearly made his mind up to proceed with this transaction and was unlikely to be put off by anything the lawyer wrote, such that the claim could not succeed. Appleton could not show that he would have acted differently on competent advice if he had received it, so the negligence did not cause the loss.
The Court of Appeal disagreed on causation, considering that the deficiencies in the advice letter were more serious, and merely highlighting the risk of loss in bold type did not demonstrate and explain to Appleton the magnitude of the risk. The letter's serious shortcomings led the Court of Appeal to revisit conclusions on causation. Even if Appleton was determined to enter into a normal property purchase transaction, that did not mean he was dead set on entering an unusual unsecured deposit arrangement. It concluded that had he been fully informed by the law firm of the unusual nature of the transaction and his exposed position, Appleton would have withdrawn and not paid the deposit. Therefore, the failure of advice caused his loss.
The appeal to the Supreme Court was limited to the issue of causation and (unusually) the judges on appeal took a heavily factual approach. Disagreeing with the Court of Appeal's analysis of the evidence, they instead decided that in light of the agreement and history of dealings between Appleton and the Blue Chip broker, the legal advice that Appleton had received was immaterial to him because of the confidence that he had in the investment property group.
It also found that it was not reasonable for Appleton to maintain his mistaken belief that the deposit was to be held in a trust account. The lawyer's letter and the agreement made it very clear that the deposit would be immediately released and that the vendor was to pay interest in return. It was also apparent from the agreement that the deposit was to be held by someone other than a stakeholder. Although deficient, the advice that Appleton had received did convey that the deposit was being advanced for the use of the vendor and that in the event of liquidation it could be lost.
The Court of Appeal has recently relied on the Supreme Court's Appleton decision to buttress a firmer finding on the causation test. In Blackwell v Chick, Mr Blackwell had agreed to lease his farm to his close friends and neighbours the Chicks at below-market rent and with an option to purchase. The same law firm, Edmund Judd, acted for both parties to the transaction and again on later variations and renewal of the agreement.
Blackwell had been seriously unwell with a brain tumour, but during the relevant times between 2004 to 2007, his health had improved significantly with therapy. When he took a further turn downhill, his sons intervened using their power of attorney and were managing the farm by 2010 when the Chicks decided that their option to purchase would be eventually exercised. By that time the price previously agreed was less than half of the current market value. Blackwell's sons claimed an indemnity from the law firm, if compelled to sell the farm at a shortfall to market value.
The High Court found that the lawyers had failed in their duties to Blackwell. Edmonds Judd had not obtained informed consent to act for both parties and had not explored adequately with Blackwell the highly disadvantageous nature of the transaction that he was embarking upon. The High Court ordered the law firm to pay the deficit between the 2010 market value of the farm and the purchase price.
Again, on appeal, the case was limited to the issue of causation. The Blackwell brothers argued that their father did not appreciate that the property value would increase over time and that the option could be used to get the farm for far less than market value. He should have been advised to obtain a current market valuation at the 2004 and 2007 variations and renewals.
The Court of Appeal agreed with the approach in Appleton and said it had not been shown that the negligence was a material and substantial cause of the loss. The key principles of causation were as follows:
- The breach of duty must have had a real influence on the resulting loss; it is not enough that it simply provided an opportunity for loss.
- Where the solicitor's negligence was by omission, it had to be established that Blackwell would have acted otherwise and accepted competent legal advice or warnings, so that the transaction would not proceed.(3)
- Sufficient evidential foundation must be shown to support an inference that must be drawn about what Blackwell would have hypothetically done in that alternative scenario.
There was no evidence that Blackwell would have included a clause to vary the price. It seemed that personal relationships and not market value were the motivating factor for him. He had consistently sought to provide the Chicks the farm at a price that they could afford. From time to time the Chicks would make improvements to the farm and had agreed not to purchase until after Blackwell's death. Overall, this was not a commercial deal.
New Zealand courts have affirmed that a high threshold should be maintained in professional negligence claims by clients – there must be a material connection between the lawyer's breach of duty and the loss incurred. Disgruntled clients will have to show that, had they been properly advised, they would have changed their course of action. As Appleton shows, this requires more than the client's own evidence after the event speculating upon what they would have done. The court will look at the circumstances surrounding the transaction, the steps the client took and the intended consequences of the transaction. As the Court of Appeal in Blackwell concluded:
"The understandable judicial reluctance to absolve a negligent lawyer from liability is always subject to the overriding principle… that liability cannot be imposed for a loss which would have been incurred even if the lawyer had given competent advice. The Supreme Court has recently reaffirmed this principle in the same context of a claim for damages against an admittedly negligent solicitor. A failure to exercise a duty cannot sound in damages where one is not causative of the other."
For further information on this topic please contact Gary Hughes or Gracey Campbell at Wilson Harle by telephone (+64 9 915 5700) or email (firstname.lastname@example.org or email@example.com).The Wilson Harle website can be accessed at www.wilsonharle.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.