Background

Australian Executor Trustees (SA) Limited (AET) was the trustee for the interests of a group of investors, known as ‘Covenantholders’, in a number of forestry schemes.

The work of planting, tending, felling and selling the trees was conducted by two companies, known as the ‘Forest Company’ and the ‘Milling Company’. They each charged AET a commission for their services from the proceeds of sale before passing the balance on to AET.

The Forest Company and the Milling Company were wholly owned subsidiaries of Auspine, which, together with the Forest Company, owned other forestry schemes within the same area. Auspine was a wholly owned subsidiary of Gunn Limited (Gunns).

The Sale

In 2011, in the face of escalating financial problems, Gunns sought to sell its forestry business, including the AET schemes. Gunns advised AET that it could achieve a better sale price if the entire business was able to be sold unencumbered. That required AET’s consent, because AET held encumbrances over the scheme land which secured the Forest Company’s obligations to AET.

It was proposed that AET would withdraw the encumbrances on completion of the sale. The proceeds of sale to which the Covenantholders were entitled (save for $1.00, which was paid directly) would be paid to the Milling Company and funnelled to AET via the Forest Company, with each company deducting the commission to which it was normally entitled.

AET retained solicitors in December 2011 to provide advice on draft documents to facilitate the sale. AET sought advice on five specific matters, including whether the drafts were ‘in order’ for execution by AET. Relevantly, the solicitors were not asked to advise on whether AET should consent to the sale, nor were they instructed to assist in negotiations about the sale.

The solicitors provided advice to the effect that the documents were ‘in order’. AET agreed to the proposal and the sale completed in March 2012. However, after being paid to the Milling Company the proceeds of sale were instead deposited into an overdrawn loan account held by Gunns. Gunns entered administration shortly thereafter and the money was never paid to AET.

Proceedings were brought on behalf of the Covenantholders against AET and the solicitors who advised AET. The Covenantholders were successful as against AET.

The Advice

In response to AET’s instructions in December 2011, the solicitors advised on the five specific matters such that the documents were in order for execution by AET. However, the advice was subject to an extensive list of assumptions and qualifications. One of the assumptions was that the sale of the scheme trees and the land on which they were located would not “reduce any protections, rights or benefits afforded to any Covenantholders…”.

The Trial

The trial judge found that this assumption was known by the solicitors not to be true, because the solicitors knew that releasing the encumbrances as proposed would reduce the Covenantholders’ protections, by eliminating AET’s security in respect of the Forest Company’s obligations. A finding of negligence was made on this basis that the solicitors should have advised AET that the draft agreement would reduce the protections afforded to the Covenantholders due to the release of the encumbrances, without any funds being paid to the Covenantholders.

Although a finding was made that the solicitors had given negligent advice, the trial judge found that the solicitors’ negligence had not been established to have caused AET’s breach of trust. Accordingly, judgment was entered in favour of the plaintiff against AET only.

Judgment was entered against AET in favour of the Covenantholders in the sum of approximately $76 million dollars.

AET appealed.

The Appeal

AET accepted on appeal that the key decision maker at AET knew that the encumbrances would be released on completion. It asserted, however, that the decision maker did not appreciate that the encumbrances provided security for the Forest Company’s obligations, including, ultimately, to pay the proceeds of sale to AET. The trial judge described this as an ‘astonishing state of affairs’, given the decision maker’s senior position in a professional corporate trustee. That finding was not challenged.

AET’s appeal in respect of the solicitors was primarily directed towards the trial judge’s decision on causation. AET argued that if the solicitors had given proper advice, there is no reason to believe that the advice would not have been followed by AET.

One of the impediments to AET’s claim against the solicitors was the fact that it had asked for advice only on five specified matters in relation to the draft sale documents. The Court did not accept AET’s submission on appeal that the solicitors owed a ‘penumbral’ duty of care, that is, a duty to take actions beyond the ambit of their retainer. The solicitors were asked to advise on five matters and they did so. Although the advice that was given was negligent, the solicitors were not negligent for failing to recommend that AET negotiate a better deal, when they had not been asked to do so.

On appeal, the solicitors did not contest the primary judge’s finding that the advice they had given was negligent. Rather, they sought to uphold the finding that there was insufficient evidence to conclude that AET would have proceeded differently, regardless of the advice given.

The Court of Appeal upheld the trial judge’s decision. Crucial to its decision was the fact that, although the decision maker did not appreciate the importance of the encumbrances, there was no evidence that the decision maker’s supervisor was labouring under the same misapprehension.

The supervisor was not called to give evidence. However, there was documentary evidence that he was ‘closely involved’ with the details of the transaction. Gunns’ deteriorating financial position had placed AET in a difficult position, and the Court of Appeal accepted that the supervisor had considered the risks and benefits of entering into the transaction. In the absence of evidence that the supervisor suffered under the same misapprehension as the decision maker, there was no reason to conclude that AET’s breach of trust would have been avoided, if the solicitors had given appropriate advice about the importance of the encumbrances, because the advice that was required was something which the supervisor (and the decision maker) should already have known.

Conclusion / Implications

This case is a reminder that a finding of professional negligence, like all tort claims, requires separate consideration of whether the breach of duty caused the harm alleged. Establishing that a professional has breached their duty of care is not, on its own, a sufficient basis for a successful claim.

Even experienced professional consumers of legal services should ensure that they understand what they are asking their legal advisers to do and the advice they expect to receive.