Solicitor’s retainer extended to include advising on past transactions

04 July 2012 Topics: Insurance

The Queensland Court of Appeal has upheld a decision finding a solicitor liable for failing to advise on the risks of a transaction that took place prior to his engagement.

In the case Robert Bax & Associates v Cavenham Pty Ltd [2012] QCA 177, the plaintiff was a trustee of a family trust who made various loans to three borrowers for the purchase of properties.

The plaintiff made the first loan on the understanding that the borrower would arrange a first registered mortgage over the property that was being purchased, but this did not occur. National Australia Bank obtained a first registered mortgage over the property. The plaintiff held no security for the loan.

The plaintiff’s bank manager arranged for a solicitor to act for the plaintiff after the first loan transaction was complete. The bank made two further loans to the plaintiff on the condition that the plaintiff would take first registered mortgages over the properties in relation to all three loans. The solicitor prepared the loan agreements and registered mortgages in relation to the second and third loans.

The solicitor also prepared a mortgage in relation to the first loan, but there was some difficulty registering that mortgage. The plaintiff said not to worry about it, under the mistaken belief that the mortgages in relation to the second and third loans would provide sufficient security.

When the first loan period expired, the plaintiff had received no repayments of the principal loan amount from the borrower; only interest payments had been made. At the plaintiff’s request the solicitor prepared an agreement providing a three year extension for repayment of the principal.

The plaintiff later sued the solicitor for his losses when the borrowers defaulted on the loans.

The plaintiff alleged that the retainer obliged the solicitor to protect the plaintiff’s commercial interests as a money lender. The solicitor argued that his retainer was limited to preparing loan agreements and arranging first registered mortgages for loans two and three, and arranging a second registered mortgage for loan one.

The trial judge found that the retainer extended to a duty to act generally in the plaintiff’s interests, and awarded the plaintiff almost $1.5 million plus costs.

This decision has recently been upheld on appeal. Justice Muir concluded that the solicitor’s duty could not be exercised without ‘ascertaining the extent of the risk his client wished to assume in the transactions, evaluating the extent of the risks involved in the transactions and advising in that regard’.

The proper discharge of the defendant’s retainer did not depend on the plaintiff actively seeking advice. Of significance was the plaintiff’s lack of experience in these sorts of transactions, giving rise to the need for proactive explanations by the solicitor.

Justice Muir ultimately found the solicitor in breach of the retainer through his failure to question why the first loan had not been secured by a first mortgage and his failure to recommend securing each loan by mortgage.

This case demonstrates the extent to which solicitors might be held liable for failing to advise clients on matters that may appear to fall outside the scope of a specific engagement.

If you have any queries or you would like to discuss any matters relating to professional negligence, please contact Quentin Owen or Kevin Bartlett on +61 7 3231 2444.

The authors thank Alice Teague for her research.

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