More on the solicitor’s ‘penumbral’ duty of care (or lack of it)

Ever since Heydon v NRMA Ltd [2000] NSWCA 374; (2000) 51 NSWLR 1, the solicitor’s penumbral duty of care, orthodoxy since Hawkins v Clayton (1988) 164 CLR 539, has been looking shaky. The reference to the penumbral duty of care is a reference to the proposition that lawyers may owe duties in tort to take care to avoid foreseeable loss accruing to their clients, even if their retainer (i.e. their contractual obligations to the client) does not require them to do so. The classic example is the solicitor retained to document a transaction which to the solicitor seems improvident.  Can the solicitor document the transaction and stay mum about his concerns?  More to the point, can the stupid solicitor who does not notice what a competent solicitor would notice — that the transaction is manifestly improvident, get away with it by saying ‘Not my problem. Go sue someone you asked to advise on whether you struck a good deal or not.’? The whole question got a thorough going over in Kowalczuk v Accom Finance [2008] NSWCA 343. The decision of Justice of Appeal Campbell, with which Justices of Appeal Hodgson and McColl agreed, said:

‘A Solicitor’s Penumbral Duty of Care?

267 Mr Conti submitted that there was a duty of care on Dalla in the present case that went beyond his contractual obligation to exercise the care and skill of a reasonably competent solicitor to explain the documents. He urged the court to follow the decision of Brereton J in Riz, and in particular an aspect of the decision where Brereton J held that the solicitor involved in that case should have given advice about the improvidence of the transaction the client was proposing to enter into. That submission requires me to examine the present state of authority about whether a solicitor can owe to a client what has been called a “penumbral” duty, that is a duty of care that extends beyond the scope of the solicitor’s contractual obligations to the client.

268 In Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398 Sheller JA (with whom Meagher JA and Abadee AJA agreed) considered a situation where a husband and wife had purchased a home financed by a mortgage repayable by monthly instalments, the amount of which increased at the end of each of the first three years, but thereafter remained constant. Some elementary financial planning would have shown that, even assuming the couple remained in the type of employment that they had, it was unlikely that their income would increase during the first four years of the mortgage, at a rate sufficient to enable them to pay the mortgage instalments and have enough money left to live on. Mr Eliades was a solicitor they engaged to act on the contract for sale and on the mortgage of the property. Sheller JA said, at 413:

“As a matter of contract, such a retainer would not, by inference or implication, extend to require him to provide financial advice to the O’Briens.”

269 The trial judge had held Mr Eliades liable in negligence. The trial judge had said, as recorded by Sheller JA at 407:

“There was a need for Mr Eliades to consider the O’Briens’ financial position, to protect their position and to advise them in relation to it having regard to these contract terms, and this made the terms on which they could obtain finance, the carriage of an application for finance and the feasibility of any proposal for finance matters within his retainer for which Mr Eliades incurred professional responsibility to the O’Briens. It could not be a reasonable view of his professional duty that he should only see that they got finance on some basis which enabled them to complete their purchase; the terms on which they obtained finance had to be related to the overall objective of owning and keeping the house, or the retainer would be futile.”

270 Another finding that the trial judge made in O’Brien, recorded by Sheller JA at 408, was:

“As counsel said, no further duty beyond the precise retainer arises. Yet the retainer must be carried out to a reasonable standard of professional care, skill and responsibility. In the O’Briens’ circumstances it ought to have been very obvious to a reasonable solicitor acting for them that, putting together the facts of their income, prospects and the amounts of the obligations incurred, that the chances of their carrying their projects through to a successful outcome in which they owned the house and paid off their debts were very small. The difficulties which the O’Briens faced were so great, and to professional persons, so obvious that a solicitor could not reasonably leave them unstated.

In my finding the terms of the documents were not adequately explained, in that this effect of the workings of the documents was not brought home to the O’Briens. The deficiency in explanation was not a deficiency in explaining the detail in what the documents said, or in explaining the broad nature of the documents. The deficiency was in explaining how the obligations undertaken would operate in the O’Briens’ circumstances. It is not a matter of explaining anything obscure or subtle, requiring a deep knowledge of their affairs to understand. A superficial knowledge of their affairs was quite enough to show that there was a need to spell out where they would stand as they attempted to pay the instalments and meet the interest obligations.”

271 This Court upheld an appeal by Mr Eliades, Sheller JA saying, at 418:

“In my opinion the difficulties faced by the O’Briens which his Honour considered were so great and, to professional persons, so obvious that a solicitor could not reasonably leave them unstated, did not impose the duty his Honour held Mr Eliades to be under. Stated bluntly, such a duty would require solicitors, retained to act on a purchase or mortgage for their skill in the law, to inform every client for whom they so acted of their views about the financial prospects of the purchase or mortgage where they felt or ought reasonably to have felt that there was risk of loss. One consequence of this would be to require solicitors to give opinions, which they were not qualified to give, with the obvious consequence that if they were wrong and the client had acted on the basis of those views, they would be liable in negligence. For good reason such a proposition is contrary to authority. The solicitor’s duty is found in the terms of the retainer and the ambit of any additional assumed responsibility relied upon.

Moreover, in order to make such a case in negligence, the O’Briens were bound to prove that, if Mr Eliades had advised them for the reasons suggested not to go on with the contract for purchase or finance, they would have acted on that advice. They gave no such evidence and in my opinion it was not open to his Honour to infer in the absence of any such evidence that the O’Briens would have taken some course other than the course they did in fact take.”

272 In Heydon v NRMA Ltd [2000] NSWCA 374; (2000) 51 NSWLR 1 this court accepted that the duty of care of the solicitors involved in that case was coextensive with the solicitors’ contractual liability, and there was no “penumbral” duty. The course of authority was summarised by MacPherson AJA at [364]:

“At one time a solicitor’s duty was considered to be limited by the terms of the retainer from the client, there being no affirmative legal obligation to give advice going “beyond the specifically agreed task or function”. Then, in Hawkins v Clayton [1988] HCA 15; (1988) 164 CLR 539 at 585, it was held that there was no justification for imposing a contractual duty of care that was co-extensive with the parallel duty independently imposed in the law of negligence. It followed that an obligation might arise requiring a solicitor to take positive steps, beyond the specifically agreed professional task or function, to avoid a real and foreseeable risk of economic loss being sustained by the client, or even by others who were not the clients who had retained the solicitor. The result was that in Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 at 652, a majority of this Court held that an affirmative duty to advise might exist in relation to matters that were not directly within the ambit of the retainer from the client. The decision on this point in Waimond Pty Ltd v Byrne has since been followed on several occasions. More recently, however, in Henderson v Merrett Syndicates Ltd [1994] UKHL 5; [1995] 2 AC 145 at 193–194, the House of Lords rejected the reasoning of Deane J in Hawkins v Clayton, holding instead that there was “no sound basis for a rule which automatically restricts the claimant to either a tortious or a contractual remedy”, and that it was the contract that defines the relationship of the parties, so that ordinarily “the parties must be taken to have agreed that the tortious remedy is to be limited or excluded”. In Astley v Austrust Ltd [1999] HCA 6; (1999) 197 CLR 1, the High Court decided to follow the reasoning in Henderson v Merrett Syndicates Ltd, in preference to that of Deane J in Hawkins v Clayton. The result, in my respectful opinion, is that what was said by Deane J in Hawkins v Clayton has ceased to be good law in Australia. Because it formed the or a pivotal point in the reasoning in Waimond Pty Ltd v Byrne, it is no longer possible to say that there is a “penumbral” duty in tort requiring a solicitor to advise on matters going beyond the limits of his or her retainer. On that aspect, the decision in Waimond Pty Ltd v Byrne is inconsistent with the reasoning in Astley v Austrust Ltd, and should, in my opinion, no longer be followed. It had the effect of enlarging or extending the range of matters on which a solicitor, and possibly also a barrister, might be required by the law of tort to advise a client or other persons.”

273 Malcolm AJA and McPherson AJA also referred to Astley as providing a reason why the Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 principle did not apply to advice given by barristers, at [309], [365] and [417].

274 Similarly, concerning the scope of a solicitor’s duty of care Malcolm AJA said, at [147]:

“In this context the content of the duty of care and the liability is the same whether it is founded on contract in the case of a solicitor, or whether it is founded on a duty of care in tort in the case of a barrister. In each case the duty is to apply the relevant degree of skill and exercise reasonable care to carrying out the task. There is no implied undertaking that the advice is correct, but only that the requisite degree of professional skill and care has been exercised in the giving of the advice. Of course, where there is reason for doubt or there are risks which a person possessing the relevant degree of skill and competence should perceive, it follows from the above that there may be a duty to warn of the kind recognised by their Honours in Rogers v Whitaker. Thus, in Hawkins v Clayton (at 583–585), it was held by Deane J that, in the case of a solicitor, the circumstances may give rise to a duty to do more than simply perform the task defined by his instructions, if circumstances arose giving rise to a real and foreseeable risk of economic loss by the client, or, in particular circumstances, even a person who was not a client but who may be adversely effected. See also Waimond Pty Ltd v Byrne in which the judgment of Deane J was followed. In Henderson v Merrett Syndicates Ltd [1994] UKHL 5; [1995] 2 AC 145, the House of Lords declined to follow Hawkins v Clayton insofar as it suggested that in the case of a solicitor liability lay only in contract rather than concurrently in contract and tort. In Astley v Austrust Ltd, the High Court decided to follow the decision in Henderson v Merrett Syndicates Ltd in preference to the judgment of Deane J so that in the case of solicitors, the liability remains a concurrent liability in contract and in tort.”

275 This paragraph followed reasoning leading to the conclusion that lawyers who were the leaders of their profession in particular areas of the law were to be judged by the standard of an ordinary skilled person exercising and professing to have that special skill, not by some higher standard. It seems to me that what Malcolm AJA was intending by opening the paragraph I have quoted with the words “In this context” was to indicate that the paragraph was dealing with what is the content of the standard of an ordinary skilled person exercising and professing that special skill.

276 Ormiston AJA referred briefly, at [678] to “ … the “Waimond” principle described and correctly criticised in the judgment of McPherson A-JA” and also said, at footnote 478 to para [667]:

“Insofar as I have failed to deal with certain of the matters raised in argument, I would adopt the reasoning of the other members of the Court, to the extent that is not inconsistent with this judgment.”

277 Heydon was not a case where it was necessary to consider whether, in a situation where a solicitor gives advice, conveys information or expresses an opinion on a topic outside that for which the solicitor has been retained, the solicitor comes under any, and if so what, duty of care. Thus, the remarks of the judges in Heydon concerning the absence of a penumbral duty of care should not, in my view, be treated as applying to that situation. Nor is the present case one where it is necessary to consider whether there is a duty of care if a solicitor embarks upon acting outside the scope of his or her retainer. There is no complaint in the present case that Dalla went outside the scope of the task he was retained to perform and erred in so doing. Rather, the complaint is that the task for which he was retained was inadequately carried out, and that as well he failed to take positive action to protect Kowalczuk and Mars from the financial danger for which they would be heading if they borrowed the money and granted the mortgages.

278 The question of whether a solicitor owes to a client duties beyond the contractual duties was further considered in Curnuck v Nitschke [2001] NSWCA 176. There, solicitors were retained to advise, institute and maintain proceedings against the vendor of a defective truck. The client was slow in providing particulars both of the defects and of the damages, but by a date approximately three years after the date of purchase of the truck some further instructions on those topics had been obtained, counsel who had already drafted a statement of claim returned his brief with a draft of some further particulars, and said that the statement of claim and further particulars would enable the solicitors to commence the proceedings. However the following month the client entered into a Deed of Arrangement under Part X of the Bankruptcy Act 1966 (Cth). Counsel advised the trustee of the Deed that the client had reasonable prospects of succeeding, but that the particulars of loss were yet to be completed. Even so, the trustee was not willing to fund the action. On a date less than four years after the purchase of the truck, the trustee assigned the benefit of the cause of action against the vendor of the truck back to the client. The solicitors took no further action concerning the matter before the limitation period expired.

279 Fitzgerald AJA held that the solicitors were in breach of both their contractual and tortious duty by failing to notify the clients of their decision not to act in relation to the cause of action after it was reassigned, or to warn clients of the limitation period (at [59]). He took the view that, even though entering the Deed of Arrangement terminated the solicitors’ instructions to commence proceedings, it did not terminate the entire relationship of solicitor and client or bring the entire contract to an end, and after the reassignment the solicitors were in breach of their ongoing contractual duty to (at least) provide “information and advice which was appropriate for a prudent finalisation of their relationship if that was to occur.” (at [63])

280 Davies AJA at [2]-[5] noted the course of authority that had led McPherson AJA in Heydon to conclude that the decision in Waimond was no longer good law. He continued, at [6]-[9]:

“However, I do not read the decisions in Henderson v Merrett Syndicates Ltd and Astley v Austrust Ltd as leading to that conclusion. The fact that the causes of action in tort and contract may be concurrent does not mean that their incidents are necessarily the same. Under contract law, duty turns upon the terms, scope and context of the contract. Under torts law, issues of proximity and foreseeability are crucial to liability. Public policy may play a part. And there are many other differences. The respective laws on damages are different. The principles of contributory negligence and contribution differ as between the causes of action. The limitation periods may be different. A plaintiff is entitled to sue in both contract and in tort or in either, and may choose the best result.

Waimond Pty Ltd v Byrne seems to me to be well based upon the principle enunciated in Henderson v Merrett Syndicates Ltd and Astley v Austrust Ltd. In that case, the duty of a solicitor to speak with his client with respect to a certain transaction did not arise from his contractual retainer. It arose out of the relationship of proximity which existed between the solicitor and his client. The solicitor knew that a transaction, which he had been instructed to carry out for another client, affected the interests of his client. The majority of the Court considered that the circumstances were such that the solicitor had a duty to check with his client or to advise him to seek independent advice.

It is one thing to say, where a solicitor has a contractual relationship with a client and where the matter in issue arises within the scope of the retainer, that there will be no difference between the duty of care imposed by the contract and that imposed by the law of negligence. It is another thing to say that, in respect of a matter which is beyond the scope of the contract, a tortious duty of care may not arise from the relationship between the parties.

In Australia, there have been several cases where a duty of care has been imposed upon solicitors notwithstanding that the solicitor’s retainer did not impose that duty. (See Hawkins v Clayton; Hill v Van Erp [1997] HCA 9; (1997) 188 CLR 159; and Waimond Pty Ltd v Byrne.)”

281 Unlike Fitzgerald JA, Davies AJA decided the case on the basis of assuming that there was no ongoing contractual obligation. He noted, at [10]:

“The solicitors were aware that the cause of action had been reassigned to the appellants. They were the bailees of the appellants’ cause of action, insofar as that cause of action consisted of legal papers. They were aware that the documents remained with them because they were the solicitors who had handled the matter. They were aware, moreover, that the cause of action which their file represented would become valueless with the passing of the six year limitation period.”

282 Those circumstances, together with the vulnerability of the client arising from the limitation period not being a matter of general knowledge but of legal knowledge, were in his view sufficient to give rise to a tortious duty of care. (How that vulnerability comes into play, in light of the trial judge’s finding, recorded by Fitzgerald JA at [50], that the client knew that there was a limitation period, is not altogether clear.)

283 Meagher JA agreed with both Fitzgerald AJA and Davies AJA.

284 Other cases in this court have also accepted that a solicitor can in some circumstances owe a duty of care to a client in circumstances where no contractual duty is owed: Walmsley v Cosentino [2001] NSWCA 403 at [55] per Powell JA (with whom Priestley and Beazley JJA agreed); Miller v Cooney [2004] NSWCA 380 at [30] per Sheller JA (with whom Hodgson and Santow JJA agreed).

285 In Watkins v De Varda [2003] NSWCA 242 at [145] Ipp JA (with whom Sheller JA and Foster AJA agreed) referred to Heydon at pages 103 and 118 (which is where para [309] occurs) without any express disagreement. However too much should not be read into that. Ipp JA at [146] also referred to [364], 118 of Heydon, where McPherson AJA said the reason why contractual and tortious duties were co-extensive was that:

“… it was the contract that defines the relationship of the parties, so that ordinarily “the parties must be taken to have agreed that the tortious remedy is to be limited or excluded.””

286 Watkins was a case where there was no contract of retainer at all, so it was not possible for a contract to limit or exclude the tortious remedy. As I understand it, the purpose of Ipp JA referring to these passages in Heydon was to distinguish them, and thus he had no occasion to consider their correctness or completeness.

287 Similarly, Buss JA (with whom Wheeler and McLure JJA agreed) in Townsend v Roussety & Co (WA) Pty Ltd [2007] WASCA 40; (2007) 33 WAR 321 at [116], referred to Heydon at [364] and [309] without any express disagreement, but again was a case where there was no contract of retainer, so there was no occasion for His Honour to consider the correctness or completeness of those remarks.

288 In Riz Brereton J considered a claim for negligence, brought by a couple who had borrowed money on mortgage to invest in the ill-fated scheme operated by Karl Suleman Enterprizes, against the solicitors who had acted for them on the mortgage. The breach alleged (para [91]) was of failing to cease to act for the plaintiffs unless and until they had obtained financial advice, or failing to warn the plaintiffs that their proposed investment was imprudent. The plaintiffs in Riz told their solicitor of the returns that they expected to get from it, namely $12,000 per fortnight on an investment of $150,000, which amounts to a return of in excess of 200%. Brereton J held, at [129] that it should have been plain to the solicitor that the plaintiffs “were putting their home at risk for the purpose of raising funds for an investment in respect of which they had expectations that objectively were absurd.” Brereton J said, at [109]:

“I accept that the scope of a retainer is of considerable significance in identifying the extent of a solicitor’s duty of care. However, the scope of a solicitor’s duty of care to a client is not confined to the contract of retainer but may extend in the circumstances of a particular case to require the taking of positive steps, beyond the specifically agreed task or function, where such steps are necessary to avoid a real and foreseeable risk of economic loss being sustained by the client [Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642].

289 After a review of the authorities relating to the scope of a solicitor’s duty of care when advising on mortgage and loan documentation, he concluded, at [113]:

“… the prevailing position is that the scope of a solicitor’s duty of care is not limited to the terms of the retainer but, depending upon the circumstances of the particular case, may require the taking of positive steps beyond the specifically agreed professional task or function, where these are necessary to avoid a real and foreseeable risk of economic loss being sustained by the client.”

290 Brereton J came to a more specific conclusion about the state of the law at [128]:

“… although the duty normally owed by a solicitor to a client only extends to legal advice, it is often difficult in a given situation to disentangle legal and business or practical advice, and a solicitor who is carrying out a transaction for a client is not justified in expressing no opinion when it is plain that the client is rushing into an unwise, not to say disastrous, adventure. The cases that state that it is not the function of a lawyer to give financial advice mean that a lawyer is not expected to bring to his or her task the knowledge and expertise of a stockbroker, an accountant or a financial planner. But a lawyer giving independent advice is required to address the fairness or reasonableness of a proposed transaction, so that the client can appreciate its disadvantages; if this involves matters beyond the lawyer’s expertise, then the lawyer should seek specialist assistance. That is not to say that the solicitor is to be expected to give financial advice – of the type that a stockbroker might – about the proposed investment. But where it is evident that the borrower is relying on the investment to generate the income to service the loan which is secured over the family home, and where at first sight the expectation appears utterly unrealistic, a solicitor acting reasonably would … take steps for the protection of the client’s interest.”

291 The Appellants submitted that this Court should follow Brereton J’s decision in Riz, and use it as a basis for concluding that Dalla was in breach of his duty in failing to warn against the borrowing.

292 Riz was decided after the first instance decision in the present case. Mr Craddock SC, counsel for Dalla, submits that it is not open to the Appellants to put an argument based on Riz in this appeal, when there was no submission put below that there was any difference between the contractual retainer duty and the tort duty. While I accept that it was not put below that there was any difference between the contractual duty and the tortious duty, it was still put below that it was a breach of duty not to warn about the imprudence of the transaction. That is sufficient, in my view, to allow the argument based on Riz to be considered on the appeal.

293 How the argument based on Riz is considered in this judgment needs to be approached with some care. There was no application by any party to re-argue the correctness of any of the decisions of this Court concerning the duty of care of a solicitor advising on mortgage or loan documents. That in itself limits the options available in deciding this case. As well, the decision in Riz is itself the subject of an appeal that has not yet been argued. While this Court should consider the argument based on Riz, in this appeal, if possible that should be done in a way that does not foreclose the outcome of the appeal in Riz itself.

294 Assuming without deciding that the principles I have quoted from Riz are correct, the present case is distinguishable from Riz. In the argument of this case there was no attempt made to identify, in the way Davies AJA did in Curnuck, any specific features of the relationship between Dalla and Kowalczuk that might give rise to a tortious duty of care that went beyond the scope of the contractual duty. Dalla was aware that both the Berowra loan and the Haberfield loan were intended to be very short term loans, that were to be refinanced. He did not enter into the question of what Kowalczuk intended to do with the monies that were raised. He was uninformed about Kowalczuk’s income (apart from the statement in the documents that emanated from Accom that his income was $100,000), occupation (given that the trial judge rejected Kowalczuk’s evidence that the documentation concerning the Berowra loan transaction had been signed at his place of work), and asset and liability position. At the time he was advising concerning the Haberfield loan, he did not know that the Berowra loan had gone into default. The only relationship that existed between Dalla and Kowalczuk was that Dalla was engaged, on two separate occasions, for the isolated task of explaining the mortgage transaction documents. Thus, the factual situations that Brereton J saw as triggering a duty to give more than legal advice within the scope of the retainer, namely “it is plain that the client is rushing into an unwise, not to say disastrous, adventure”, and that the client has an “expectation [that] appears utterly unrealistic” (at [128]) are not present in the present case. Thus, even if the principles on which Brereton J proceeded in Riz are correct, there is no “penumbral” duty in the present case.’

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