Boyded Industries Pty Ltd v Bluth & Ors

In the matter of Boyded Industries Pty Ltd v Bluth & Ors¹, the New South Wales Supreme Court has recently provided a useful reminder of the approach courts will take when considering a case involving a lost chose in action caused by a solicitor’s negligent conduct.

Background

The plaintiff operated a car dealership in Paramatta on land it owned at 57, 63 and 83 Church Street. Those locations were known as the South Land, Central Land and North Land respectively.  In 2015 and 2016 the plaintiff entered into contracts to sell that land to various related entities, known as the Gateway entities, who intended to develop the land.

A dispute arose in connection with the purchase of the North Land and the South Land. Proceedings were commenced in the Supreme Court, essentially concerning whether notices to complete issued by the plaintiff were effective. The defendant firm acted for the plaintiff in those proceedings, which were settled in February 2017 on the basis that:

1. The contracts in connection with the North and South Land were to be completed by 15 May 2017;
2. The plaintiff and the Gateway entities would enter into a call option deed in relation to the sale of what came to be described as the ‘car showroom’ (a lot in the Central Land) from the Gateway entities back to the plaintiff (the option deed).  The option deed was to include a term precluding the lodgement of a caveat on the Central Land by the plaintiff, which was to be an essential term of the option deed and contract for sale.

The defendant firm represented the plaintiff in the negotiations concerning the option deed, which was executed by the parties on 15 May 2017. The option deed included as clause 8 a term providing that if a caveat was lodged, the option deed could be immediately terminated by the Gateway entities.

Relevantly, the option deed also provided that:

1. The plaintiff was granted a call option to purchase the car showroom from the Gateway entities, which was to be exercised prior to the expiration of the call option period, being 15 May 2020 (although the time for exercising the call option could be extended by agreement);
2. The exercise of the call option was conditional on various development approvals and strata documents being lodged by the Gateway entities in relation to the car showroom by 15 May 2020;
3. If the option deed was rescinded by either party (which they had the right to do in certain prescribed circumstances) the Gateway entities were to pay the plaintiff the sum of $5 million. Relevantly, in the absence of the above documents in relation to the car showroom being lodged by 15 May 2020, the option deed could be rescinded by the plaintiff.

It was common ground that the relevant documents were not lodged by 15 May 2020.

The caveat

On 24 July 2018, contrary to clause 8 of the deed, the plaintiff instructed the defendant firm to lodge a caveat over the Central Land and on 8 August 2019, the existence of the caveat came to the attention of the Gateway entities.

On 16 August 2019, the Gateway entities terminated the option deed on the basis that the plaintiff had breached clause 8. On 29 August 2019, the defendant firm withdrew the caveat and asserted on behalf of the plaintiff that the purported termination of the option deed was invalid and of no effect.

The termination proceedings

On 6 March 2020, the plaintiff, still represented by the defendant firm, commenced proceedings in the Supreme Court of New South Wales contesting the Gateway entities’ termination of the option deed.  In those proceedings, it was accepted by the plaintiff that by causing the caveat to be registered, it had breached clause 8 of the option deed. However, it argued the Gateway entities had, by their conduct waived any right to rely upon a breach of that clause or had otherwise elected to affirm the deed.

On 8 October 2020, the proceedings were dismissed and the termination stood.

The claim against the defendant firm

The plaintiff subsequently commenced proceedings against the defendant firm, alleging it negligently failed to advise the plaintiff that lodging a caveat would entitle the Gateway entities to terminate the option deed.

The plaintiff alleged that:

1. Given the documents relevant to the car showroom had not been lodged by the call option expiry date, being 15 May 2020, if the option deed remained on foot, it would have served a notice on the Gateway entities rescinding the option deed and requiring the payment of $3.5 million at around that time;
2. The defendant firm’s breach of duty therefore caused it to lose the opportunity to be paid $3.5 million upon recission of the option deed.

The defendant firm admitted it had breached its duty of care by failing to advise the plaintiff that lodging a caveat would entitle the Gateway entities to terminate the deed. It also conceded that if advised of the effect of clause 8, the plaintiff would have instructed it not to lodge the caveat and in those circumstances the option deed would not have been terminated.

However, the defendant firm defended the proceedings on the basis that in the absence of the admitted breach of duty:

1. The plaintiff would not have rescinded the option deed in May 2020;
2. Instead, the plaintiff whose relevant agent (Mr Turner) was keen to acquire the car showroom, would have secured a three year extension of time for the exercise of the option to May 2023;
3. In May 2023, the Gateway entities would not have complied with the relevant terms of the option deed, which would have triggered an entitlement at that time for the plaintiff to rescind the extended call option deed;
4. By May 2023, the Gateway entities’ financial position was “terminal” and they would have been unable to make the $3.5 million payment under the option deed to the plaintiff.

The defendant firm therefore submitted that the lost opportunity, namely the opportunity to be paid an amount following the rescission of the option deed, was of a negligible value, such that no loss was caused by the alleged breach of duty. It was also alleged the plaintiff had been contributorily negligent, on the basis that it failed to recall the option deed prohibited the lodgement of a caveat.

The decision

Rescission or extension?

The court found the contemporaneous documentary evidence supported the plaintiff’s counterfactual analysis, and that the plaintiff (by Mr Turner), would have taken steps to rescind the deed by reason of the Gateway entities’ failure to achieve the relevant contractual milestones in May 2020. 

Although the court agreed with the defendant firm’s position that the plaintiff initially preferred the acquisition of the car showroom to the payment of the $3.5 million, it found that preference was not immutable.  The court found the plaintiff would ultimately have been driven by Mr Turner’s assessment of what he considered to be the most financially advantageous position for the plaintiff.  By May 2020, given Mr Turner had some uncertainty surrounding the Gateway entities’ financial position, the court found he would, on the balance of probabilities, have favoured rescinding the option deed.

Lost commercial opportunity

The plaintiff’s case was that it lost the opportunity to be paid $3.5 million on exercising its rescission rights under the option deed.  In order for the plaintiff to succeed in that case, it was necessary for the plaintiff to demonstrate, on the balance of probabilities, that it had lost an opportunity of some value, which was not negligible.²

The court agreed with the defendant firm’s submission that the amount payable following rescission was an unsecured chose in action, which required an assessment of whether that chose in action had a value.  The court assessed whether the opportunity had any value by considering the willingness of the Gateway entities to pay $3.5 million upon demand in May 2020 as well as their ability to do so at the relevant time.

Willingness to pay

In terms of willingness to pay, the defendant firm emphasised that the $3.5 million was an unsecured promise to pay money that had no value unless it could be enforced and satisfied.  The plaintiff submitted the court should infer a willingness to pay not merely because there was the legal obligation to pay it, but because of the unambiguous strength of the cause of action against the Gateway entities. The defendant firm did not argue to the contrary and it did not advance a submission that the Gateway entities had any defence to the claim for payment of the $3.5 million.

The court found the fact the Gateway entities had no apparent defence was a “significant objective fact supportive of an inference being drawn that there would have been a willingness to meet the demand by the Gateway entities”.  The court also found that the Gateway entities’ willingness to pay was also informed by the consequences of their failure to do so: liquidation for the entities or bankruptcy for their director (Mr Fayad).  Given Mr Fayad had been resisting bankruptcy proceedings against him, the court inferred he would have been concerned about the threat of bankruptcy and taken steps to avoid it by meeting a hypothetical demand by the plaintiff.

Ability to pay

The plaintiff argued a number of matters supported a finding that the Gateway entities and/or Mr Fayad had the ability to pay $3.5 million at the relevant time. As regards the Gateway entities, the plaintiff argued the court could infer their ability to pay from the value of their property holdings and a consideration of their asset position, which demonstrated an ability to fund their obligations. 

As regards Mr Fayad, the plaintiff argued his ability to pay could be inferred from his significant personal land holdings and the fact that he had loaned a significant sum to the Gateway entities previously, indicating that he was an individual of some means.

The defendants sought to impugn the Gateway entities’ and Mr Fayad’s ability to pay by highlighting that little development had been undertaken on the three lots, that the lots were triple mortgaged, that there was limited equity available in the Gateway entities and that Mr Fayad was the subject of ongoing bankruptcy proceedings.

Ultimately, the court accepted the plaintiff’s position that both the Gateway entities and Mr Fayad had an ability to pay the plaintiff in May 2020.  It was therefore found that the alleged loss of opportunity had some value, not being a negligible value.

Assessing the value: quantum of loss

The court then assessed the value of the lost opportunity, which is “ascertained by reference to the degree of probabilities or possibilities”³ of the hoped for outcome being achieved.  In undertaking that assessment, the court acknowledged that the following principles relevantly applied:

1. Once it is established the lost opportunity has some value, it is not necessary to demonstrate that the likelihood of it being realised is greater than 50%;⁴
2. Although the task of assessing the value of the lost opportunity is a difficult one, that does not mean the plaintiff is limited to an award of nominal damages.  Rather, the court must do the best it can to assess the value of the lost opportunity;⁵
3. Proving a loss of a chance has some value and ascertaining the value of that lost chance usually involves a consideration of the same body of evidence;⁶
4. Loss of opportunity damages do not readily give rise to a precise calculation and it is not essential for the court to evaluate the opportunity lost by reducing the hoped for outcome by an overall percentage.  A global approach, not involving particular percentages or degrees of probability or possibility is acceptable⁷ and a process of estimation or a degree of guesswork may be involved.⁸

The defendant firm submitted the circumstances of the case required “a very substantial discount”, involving a reduction of around 90% of the amount claimed.  The plaintiff on the other hand submitted that a modest discount of around 10% to 20% should be applied to the full amount claimed.

In assessing the value, the court had regard to the matters outlined above in relation to the Gateway entities’ ability and willingness to pay the plaintiff.  It found the plaintiff’s entitlement to be paid $3.5 million was clear and there was a strong legal entitlement for it to be paid that amount. However, the court considered it was “at least possible” the Gateway entities and Mr Fayad would have disputed the claim, and had a basis to do so and it was therefore appropriate to take that into account when assessing damages.

The court also held it was also appropriate to adjust the plaintiff’s claim to account for the likelihood of the hypothetical claim resolving by way of compromise.  In that respect it was noted compromising disputes is reasonably commonplace and that the evidence indicated the plaintiff had concerns about the Gateway entities’ financial position and was aware there was a risk that it would not secure any benefit under the option deed.  The court also considered the Gateway entities would have been minded to compromise the claim in light of their financial position and the strength of the claim against them.  

In light of the various matters outlined above, the court found it was appropriate to reduce the plaintiff’s lost hypothetical $3.5 million claim against the Gateway entities to $2 million, being a reduction of $1.5 million on the full value of the claim.

Contributory negligence

Finally, the court rejected the defendant firm’s case that the plaintiff was contributorily negligent for failing to recall the option deed contained a prohibition on lodging a caveat.  The court held there was no basis for finding the plaintiff was negligent and that it was neither just nor equitable to apportion any liability to the plaintiff, given:

1. There was no evidence Mr Turner knew of the existence of clause 8 or that he understood the legal effect of the clause.  In that regard, the court noted there was no cross examination of Mr Turner to suggest he knew and understood those matters, nor was it apparent from the documentary evidence;
2. The context of Mr Turner instructing the defendant firm to lodge the caveat was also considered important.  Mr Turner provided the instructions to the defendant firm via a text message while he was on holidays.  The court was unpersuaded that he should have been aware at the time of sending the text message (more than one year after entering into the option deed) of the effect of clause 8.

Conclusion

The decision provides a useful reminder of the approach courts will take when considering a case involving a lost chose in action caused by the negligence of a solicitor.  It also provides a helpful example of the type of evidence that may be relied on to demonstrate a hypothetical defendant could and would have been able to meet a claim against them.     

The decision highlights the risks associated with both prosecuting and defending these types of claims, given the uncertainties that can be involved in determining causation and assessing loss.  In our view, it is particularly noteworthy that despite the court finding the Gateway entities would have been both willing and able to pay the plaintiff in May 2020 and that there was effectively no defence to the lost claim, it was appropriate to quantify the plaintiff’s damages at $2 million, being a reduction of over 40% from the $3.5 million claimed. 

The decision shows it is open for defendants in these types of matters to obtain significant reductions in damages awards against them by casting doubt over a plaintiff’s capacity to receive the commercial opportunity they allegedly lost.

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