In a dispute between a law firm and its former client, the New South Wales Court of Appeal considered whether the evidence adduced in the proceedings allowed for an inference to be drawn proving a fact in issue on the balance of probabilities, as opposed to mere speculation.
In issue
- Whether a law firm, in breaching its duty of care owed to a former client, caused its former client to sustain losses as a result of its inability to exercise a right to recission under a call option deed entered into for sale of land.
- Whether the evidence adduced in the proceedings sufficiently served to establish, on the balance of probabilities, a fact in issue.
The background
Boyded Industries Pty Ltd (Boyded) is the owner of several car dealerships in NSW. Between 2015-2016, Boyded entered into contracts for sale of land to several entities known as Gateway Group (Gateway). Following a dispute between Boyded and Gateway regarding the sale of the land, an agreement was reached between the parties extending the time for Gateway to complete the purchase of the land, as well granting Boyded a call option in respect of a proposed lot to be created on the land as part of a development (Deed of Call Option).
Relevantly, the Deed of Call Option included a clause:
- whereby if the site was not ready for development by 15 May 2020, Boyded was able to rescind the Deed of Call Option and would receive $3.5 million; and
- prohibiting Boyded from lodging a caveat over the land, whereby if a caveat was lodged, Gateway had the right to terminate the Deed of Call Option.
Boyded subsequently instructed its solicitors, HWL Ebsworth Lawyers (HWL), to lodge a caveat over the land which in turn, caused Gateway to terminate the Deed of Call Option.
Although HWL acted on the instructions of its client to lodge a caveat over the land, it conceded that by failing to advise its client about the prohibition in the Deed of Call Option from lodging a caveat, this amounted to a breach of the duty of care owed to the client.
The question however was whether this was causative of any loss sustained by Boyded.
First Instance
At first instance, to answer the question of whether HWL caused loss sustained by Boyded, the court was tasked with determining what would have happened had the Deed of Call Option not been terminated by Gateway. In this regard, the primary judge had to consider the following two questions:
- firstly, had the Deed of Call Option not been terminated, would Boyded have sought to rescind the Deed of Call Option or would it have sought to negotiate an extension of the sunset date for the call option; and
- secondly, had the Deed of Call Option not been terminated, what would the owner of the land have done if Boyded exercised its right of recission.
After considering the evidence, the primary judge made a finding that, but for HWL's breach of duty, Boyded would have rescinded the Deed of Call Option and been entitled to $3.5 million. Furthermore, had the Deed of Call Option been rescinded, Gateway was both willing and able to pay the amount owed to Boyded.
The Appeal
While HWL sought to rely on 6 grounds for the Appeal, ultimately the Appeal was allowed based on a finding that the primary judge had erred in concluding that there was evidence rising higher than speculation that Gateway was, although willing, able to pay the $3.5 million to Boyded in the event the Deed of Call Option was rescinded.
In finding that Gateway was able to pay in May / June 2020, the primary judge relied on evidence:
- that Gateway was the owner of the land valued at $159 million; and
- a summary of a balance sheet.
Despite the above however, Justice Harrison JA (with Bell CJ and Gleeson JA agreeing) found that, based on the material provided to the Court of Appeal, it was not reasonable to infer that Gateway had an ability to pay $3.5 million dollars. In reaching this conclusion, the Court of Appeal noted several gaps in the evidence adduced by Boyded meant that assertions regarding Gateway’s ability to pay were merely conjecture.
In particular, the Court of Appeal noted that Boyded should have led sufficient evidence from which Gateway’s ability to pay could be inferred. All three properties owned by Gateway were encumbered with mortgages, yet none of the mortgages or their terms were in evidence. The Gateway balance sheet only described the financial positions of two of the three relevant Gateway entities and did not include the most valuable entity. There was no evidence about the income of the companies. Consequently, the companies’ ability to pay $3.5 million was always dependent upon their capacity to refinance.
The Court of Appeal rejected the argument that the fact that Gateway had previously refinanced meant that it could do so again for a relatively small sum such as the one required in this instance. The Court of Appeal observed that the balance sheet tendered showed a deteriorating net equity position and suggested a diminishing capacity to refinance on the security of two of the properties.
After a review of other evidence on Gateway’s ownership of land, the Court of Appeal concluded that the mere ownership of valuable but mortgaged land does not reliably inform the availability of that inference.
The Court of Appeal therefore determined that the evidence did not support a finding on the balance of probabilities that Gateway or Mr Fayad had the ability to pay $3.5 million on May or June 2020. The Appeal was allowed and Boyded was ordered to pay HWL’s costs.
Implications for you
This matter demonstrates the importance in negligence cases of moving beyond breach of duty and assessing with care issues referrable to causation and the evidential burden faced by a plaintiff. That is particularly so in respect of the inferences which a court may make based on the objective evidence before the court to establish a counterfactual on the balance of probabilities, which must extend beyond mere speculation.
Bluth v Boyded Industries Pty Ltd [2024] NSWCA 67
