Detailed causation analysis in solicitor’s negligence case

Walton v Efato Pty Ltd [2008] NSWCA 86 was the subject of this sister post in relation to advocates’ immunity. But the case is also interesting for the detailed analysis given in relation to causation, which is the subject of this post. The Court found that the solicitor’s failure to lodge within time an application to set aside a creditors statutory demand was the cause not only of the failure of that application but also of the costs incurred in the ensuing successful defence of an application to wind up the client company, an atypical costs order at the end of that application by which the client company was ordered to pay the costs of the creditor who had applied unsuccessfully (i.e. so that the rule that costs follow the event was turned on its head) and the costs of the liquidation which was occasioned by the client company’s inability to meet the costs order. The decision will have legal liability insurers squirming and a High Court appeal must be a possibility.

The facts in a bit more detail were as follows. A creditor served a statutory demand on a company. The company’s solicitor failed to get an application to set aside a creditors statutory demand in on time. He filed it late, and the application failed at the outset. The result was that for the purposes of an application to wind up the company, the failure to comply with or set aside the demand was an insolvency event with the result that the client was deemed to be insolvent.

Only with the leave of the court could the company raise a matter which could have been raised in response to the statutory demand. [If you are unfamiliar with the law relating to creditors statutory demands, refer to the judgment where it is all spelt out.] Leave to do so was sought. The company said it did not owe the money to the creditor. The demand was for $11,000. The company’s director said she had been in a de facto relationship with the creditor, and that $9,000 of the money was a gift. There was evidence of a similar kind in relation to the remaining $2,000, but it seems not to have been admitted at the trial.

The company ultimately succeeded in avoiding being wound up. It did not succeed on the basis that there was a genuine dispute as to the whole of the indebtedness of $11,000 alleged by the creditor. Rather, it succeeded because, a day before the trial, a white knight offered the company $50,000, putting beyond doubt that the company was solvent. The client company’s director had actually asked the solicitor ‘Is there anything I can do or provide for the hearing? Do I need to get any letters or references from family or friends that they would be prepared to offer financial help for my Company?’ and the solicitor had said no. The company sacked the solicitor after a while, and the new solicitors had the good sense to have the client scour the world for a white knight. That adventure succeeded in the knick of time. The Master who heard the trial ordered the company to pay the creditor’s costs notwithstanding that the company had ultimately prevailed. It had failed to file and serve the critical white knight evidence in advance of the trial by the deadline fixed by directions.

The company claimed from the solicitor the costs payable to the creditor in the unsuccessful out of time application to set aside the statutory demand, the costs payable to the other side at the trial, the costs of the new solicitors retained shortly before the trial, and the costs of the liquidation which ensued when the company was unable to pay the costs orders to the other side.

The client company said that all of its losses flowed from the original failure, which the solicitor admitted was negligent, to lodge the application to set aside the creditors statutory demand within time. The solicitor said they didn’t. The client company won this battle. In short, the Court said that the failure to get the application to set aside the statutory demand in on time caused the company’s liquidation even though the liquidation might also be said to have been caused by an inability to satisfy adverse costs orders which were sustained notwithstanding that the client company prevailed in the winding up application, and that those costs orders were caused not so much by the original negligence as by subsequent negligence in failing to get the crucial evidence in a timely fashion. So even if the failure to get the evidence of the white knight together in a timely fashion could be said to be a cause of the losses which were the result of the liquidation, and even if that negligence were immune from suit, it did not matter, because all of the loss could be attached to the original non-immune act of negligence. This is an expansive view, and it will be interesting to see whether the decision is appealed, and if so what the High Court says about it.

Tobias JA, speaking for the Court of Appeal, analysed causation like this:

’91 The [client company’s] primary submission on appeal before this Court, as it was before the primary judge, was that neither [costs under the adverse costs order in the winding up application], the [costs of the new solicitors] nor the liquidator’s fees, would have been incurred had the appellant filed [an application to set aside the statutory demand] within time. Had such an application been filed within time and the Demand set aside, no presumption of insolvency would have arisen and on any winding up application the onus would have lain upon [the creditor] to establish that the [client company] was insolvent, rather than the [client company] being required to establish that it was actually solvent. The onus of proof would have been reversed. In these circumstances at the time of the [solicitor’s] breach of his duty of care or of the implied term of his retainer to exercise such care, it was reasonably foreseeable (in the case of negligence) and in the usual course of things (in the case of breach of retainer) that the damages claimed by the respondent would have been sustained.

92 These submissions engage, in the case of breach of retainer, the first limb of the rule in Hadley v Baxendale (1854) 9 Ex 341 at 354; [1854] EWHC J70 (Exch); 156 ER 145 at 151 per Alderson B. His Lordship’s statement of that rule was that the damages claimed must flow “according to the usual course of the things” from the defendant’s breach. The preponderance of Australian authority has, however, preferred Lord Reid’s approach in Koufos v C Czarnikow Ltd [1967] UKHL 4; [1969] 1 AC 350 at 388: that the loss or damage must be “not unlikely” to result from the breach: see generally Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454 at 471-2; Burns v M.A.N. Automative (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653 at 657; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at 99; Kenny & Good v MGICA [1999] HCA 25; (1999) 199 CLR 413 at 435 [46]. In each of those cases the following elaboration by Lord Reid in Koufos at 385 of the relevant principle was referred to with approval:

“The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.”

93 It was submitted in the present case that at the time the [solicitor] was retained on behalf of the [client company] to take steps to have the Demand set aside, a reasonable person in his position would have realised that his failure to make [an application to set aside the statutory demand] within time would result in a presumption of insolvency which, in any subsequently instituted winding up proceedings, would require his client to affirmatively establish that it was solvent. From that failure, the incurring of the [costs under the adverse costs order in the winding up application] and the [costs of the new solicitors] would be likely to result; and the incurring of liquidator’s fees would be likely to result from the respondent being wound up as a consequence of its inability to pay the [costs under the adverse costs order in the winding up application] which were the subject of court orders.

94 With respect to the [client company’s] claim in tort, the question of remoteness of damage is determined by the test of foreseeability of the type of harm in question. It is well established that the harm suffered or loss sustained must be of a kind, type or class foreseeable as a result of the defendant’s negligence. Furthermore, the cases establish that it is unnecessary for a plaintiff to prove the precise manner in which it sustained its loss. The test is whether, in the circumstances, the defendant could reasonably have foreseen in a general way the kind or type of loss that was likely to result from his negligent failure to exercise reasonable care and whether “some such sequence of events” as those that actually occurred was foreseeable: Castellan v Electric Power Transmission Pty Ltd (1967) 69 SR (NSW) 159 at 169; Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 365-366.

95 In my view it is sufficient to find, and I so find, that a reasonably competent solicitor in the position of the appellant would, in the circumstances, have foreseen that if [an application to set aside the statutory demand] was not filed in time, a presumption of insolvency would arise, the onus of rebutting which in any consequent winding up application would lie with his client which would involve the incurring of legal costs and expenses. If the [client company] was unable to rebut the presumption, such costs would extend to [the creditor’s ] costs of the winding up application on the basis of the rule that costs would follow the event. But even if it was rebutted so that the winding up application was dismissed, as in fact occurred, it was in my view still foreseeable that circumstances could occur which would result in an order that the [client company] pay the whole or part of [the creditor’s] costs of that application. A reasonably competent solicitor would foresee that circumstances might arise during the course of such litigation which could result in the making of special costs orders or the denial, in whole or in part, to a successful party of their costs of the proceedings.

96 Accordingly, in my view the making of the second costs order was reasonably foreseeable although the precise reason for or manner of its occurrence was not. In other words, the general sequence of events was foreseeable and this is sufficient. I would add that no remoteness issue was raised with respect to the [fees payable to the new solicitors], being those incurred by the [client company] in attempting, as it turned out successfully, to rebut a presumption which it should not have been required to rebut in the first place.

97 Accordingly, in my opinion the second costs order was not too remote in terms of the appellant’s breach of its duty of care to file [an application to set aside the statutory demand] within time.

98 Whether or not the incurring of the liquidator’s fees was also reasonably foreseeable at the time [the solicitor] failed to apply to have the Demand set aside is a somewhat more difficult question.

99 In the event, liquidator’s fees were incurred because the [client company] was wound up voluntarily due to its inability to pay the two costs orders. Arguably, the sequence of events that led to that result was reasonably foreseeable. Even if the [client company] was able to rebut the presumption of insolvency in the winding up application, which it did albeit with evidence adduced at the last minute, it was foreseeable at the time of the [solicitor’s] breach that it might incur the costs orders. It is but a short step from this to also hold that if the respondent was unable to meet those costs it was likely that it would be wound up either on the application of [the creditor] or voluntarily and that liquidator’s fees would thereby be incurred. It can be inferred that [the solicitor] knew that the [client company] was a small company and that its financial position was relatively tight, so that the incurring of the substantial costs in contesting a winding up application based on its presumed insolvency might force it into liquidation.

100 However, as I have indicated it is not necessary that the precise sequence of events as actually occurred be foreseen if the ultimate event, namely, the liquidation of the [client company], could have been foreseen albeit occurring by a somewhat different route. I have already held that it was a reasonably foreseeable consequence of the [solicitor’s] failure to apply to set aside the Demand that the presumption of insolvency would arise in winding up proceedings and that rebutting this presumption may be a difficult and potentially costly task. If the [client company] was unable to rebut that presumption in the winding up application it would be subject to an order to be wound up in insolvency and liquidator’s fees would thereby be incurred. The consequence of liquidation and the incurring of liquidator’s fees in these circumstances were reasonably foreseeable.

101 Accordingly, in my view not only were the two costs orders reasonably foreseeable but so also was the incurring of liquidator’s fees if the inability of the [client company] to pay those costs resulted in its winding up, as occurred. A reasonably competent solicitor in the position of the appellant at the time of the breach of his duty of care would in my opinion have reasonably foreseen “some such sequence of events” as those that actually occurred, namely, that the [client company] would be ultimately placed in liquidation and liquidator’s fees thereby incurred (paraphrasing Castellan at 169).

102 For the foregoing reasons I would therefore determine this appeal upon the basis contended for by the [client company], which does not depend upon a finding that the [solicitor] was also in breach of his duty of care by failing to obtain [the white knight’s] evidence in a timely manner. It is in these circumstances that it is unnecessary to express a concluded view upon the issues of reliance and immunity upon which the appellant relied.’

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