A solicitor was not liable in negligence or contract for not advising a client that its defences to various claims were hopeless and doomed to fail.
In issue
Whether failure to advise that proposed defences, an appeal of an unsuccessfully defended matter, and a related but separate claim for damages were hopeless and doomed to fail, amounted to negligence by the defendant’s solicitor.
The background
The defendant, Anthony Malouf t/as Malouf Solicitors, acted for the three plaintiffs (Victorian X-Ray Group (Dandenong) Pty Ltd (VXG Dandenong); Victorian X-Ray Group (Boronia) Pty Ltd (VXG Boronia); and Mr Bevyn Thomas White (White) in several sets of proceedings in the District Court of New South Wales (the underlying proceedings), brought by Philips Healthcare pursuant to Service Agreements with each company in relation to the maintenance of radiology equipment, which were guaranteed by Mr White.
The underlying proceedings also included a claim by Philips against Victorian X-Ray Group (Balwyn) Pty Ltd (VXG Balwyn), which was placed in liquidation before the commencement of the claim against Mr Malouf and the benefits of that chose in action assigned by the liquidator.
The VXG companies fell into arrears under the Service Agreements, and Philips terminated the Service Agreements and commenced the underlying proceedings to recover unpaid amounts.
The defendant was instructed on behalf of the VXG companies by Mr White as well as Mr Vandemeer, who reported to Mr White and was involved in the affairs of the companies. The defendant, on the instructions of the plaintiffs and VXG Balwyn, filed defences alleging oral agreements to vary the Service Agreements with VXG Balwyn and VXG Dandenong (such that they owed a lesser amount than that claimed by Philips) and that the amounts claimed from VXG Boronia were not payable due to Philips’ alleged non-provision of the services charged for.
In the case of VXG Dandenong, Philips had obtained default judgment prior to the filing of a defence, which was the subject of two applications for setting aside (with only the latter being successful). Philips ultimately obtained judgment against VXG Dandenong anyway.
On the instructions of VXG Boronia and Mr White, the defendant issued proceedings on behalf of VXG Boronia seeking damages for lost revenue and repair costs arising out of the breakdown of VXG Boronia’s CT machine, which Philips had allegedly failed to repair, in order to strengthen the defence in the underlying proceedings against VXG Boronia.
The underlying proceedings against VXG Balwyn, decided in Philips’ favour, were the subject of an appeal which was dismissed with indemnity costs.
In this case, the plaintiffs alleged that if the defendant had told them that the proposed defences in the underlying proceedings were hopeless and doomed to fail, they would not have attempted to defend the underlying proceedings and would have settled them on the best possible terms, even if that required them to pay the claims in full.
A key aspect of the claim against the defendant was his alleged failure to read the Service Agreements, which contained a clause that relevantly provided that they were not to be varied otherwise than in writing and executed by the parties; the plaintiffs contended that had the defendant read and been aware of that provision, he would have known and therefore been obliged to advise the plaintiffs that their defences of variation in the underlying proceedings were bound to fail.
The plaintiffs also alleged that at the time the defendant, on their instructions, filed a Notice of Intention to Appeal in relation to the VXG Balwyn proceedings, he ought to have known that the appeal was hopeless.
The decision at trial
Long-established principles underpinned the Court’s finding that a solicitor owes a duty of care to their client both in contract and tort, the nature and extent of which is impacted by the nature of the client’s instructions. In the litigation context, this may include not only an obligation to advise the client on their rights and obligations but also on the prospects of the client succeeding in the litigation and the risks associated with any particular course pursued by the client. The solicitor’s duty may be discharged by the exercise of reasonable care.
At the time the defendant certified the defences in the underlying proceedings, he was required only to have reasonably believed on the basis of provable facts and a reasonably arguable view of the law that the defences had reasonable prospects of success (pursuant to the Legal Profession Uniform Law Application Act 2014 (NSW) sch 2 cl 2). That involved making appropriate enquiries and properly assessing the legal position, but the discharge of his duty did not require the defendant to be aware of 'every case and every fine legal argument which might be raised'. Nor did it require the defendant to do otherwise than rely on his instructions, which were neither absurd nor illogical, and assume that in due course the evidence which became available to prove the matters alleged in the defences would be accepted.
Despite the fact that the ‘no variation’ clause had not formed part of the decisions in the underlying proceedings which led to judgment being entered against the plaintiffs, the Court in this case was required to consider whether or not the defendant had incorrectly advised the plaintiffs that they could argue that the Service Agreements had been varied by oral agreement.
The Court found that it would not have been incorrect for the defendant to have so advised, consistent with Australian authorities on the issue. The Court also noted that this was consistent with the findings of the judges that determined the VXG Balwyn and VXG Dandenong claims in the underlying proceedings; if they had thought otherwise, they would have dismissed those cases on the basis of the Service Agreement.
Though the Court did not find that the defendant himself had read the Service Agreements, it did not take issue with the evidence of his highly experienced employed solicitor, who was assisting the defendant in the day-to-day conduct of the file, that he did.
The Court paid close attention to the contemporaneous documentary evidence of the defendant’s advice to and taking of instructions from the plaintiffs, finding that the documents in evidence largely spoke for themselves. Mr White’s instructions and responses to the advice he was provided suggested he was of the belief that the behaviour of his lawyers, which he seemed to think needed 'toughening up', was the reason that Philips did not provide the plaintiffs with the outcome they desired.
The Court accepted that the defendant never provided optimistic advice in relation to the defences in the underlying proceedings, and that 'there was a consistent theme in the advice given to Mr White, being that the defences were risky and there were difficulties with the defences filed' including initially forming the view that no defence was available (which he reviewed on receipt of further materials and instructions). It did not find that the defendant, acting reasonably, ought to have concluded that the defences were hopeless.
On commencing the separate proceedings against Philips on behalf of VXG Boronia, the defendant had engaged counsel to advise and draft the pleading; the Court accepted that the defendant, though he remained responsible for the pleading and was required to certify it, was entitled to have regard to the advice of counsel along with his instructions.
The Court also did not accept that the plaintiffs had established that a solicitor exercising reasonable care ought to have known that the appeal proceedings were hopeless prior to filing the Notice of Intention to Appeal, which does not state any grounds of appeal and does not require certification, as it does not have the effect of commencing proceedings.
Implications for you
Contemporaneous materials, such as file notes of telephone calls and correspondence recording instructions and advice, were preferred in this case over the affidavits in evidence, which were largely reconstructions of events assisted by the documentary evidence. As such, this case highlights the importance of effective file management.
Though verification of defences and other pleadings is not always a requirement of the relevant procedural rules, obtaining written instructions confirming their contents and the advice received in relation to the proposed pleading is also an effective way of managing a client who wishes to commence or defend a risky case.
This case is also a helpful reminder that a solicitor's duty to their clients goes beyond merely executing their instructions. Legal practitioners ought to be mindful of their professional statutory obligations in relation to the commencement of proceedings and the filing of defences (and pleadings generally), as well as their ethical obligations and duty to the administration of justice.
Victorian X-Ray Group Pty Ltd v Malouf t/a Malouf Solicitors (No 3) [2024] NSWSC 888
