The decision

In Kayteal Pty Ltd v Dignan1, the plaintiff (Kayteal) lent A$780,000 to Mr Bsat on the security of a mortgage over property owned by Mr Bsat, valued by Mr Dignan and his company (the valuers) at A$1.2 million. The property was worth only A$52,000. Mr Bsat did not repay any of the loan. Kayteal obtained judgment against Mr Bsat, however it remained unsatisfied and Mr Bsat was later made bankrupt. Kayteal sued the solicitors who acted for them on the mortgage alleging they were negligent.

Brereton J found that:

  • unless specifically instructed, the scope of a solicitor's duty of care to a lender includes the legal efficacy of the security, but not its value, nor the creditworthiness of the borrower
  • if in the course of investigating title and preparing for settlement, a solicitor discovers facts that might cause the lender to doubt the correctness of the valuation, or some other element of the lending decision, the solicitor is required to report the matters to the client.

His Honour found that the solicitor had discovered facts that might cause the lender to doubt the correctness of the valuation (namely that there were discrepancies between the valuation and a survey of Mr Bsat's property and the council zoning certificate). Brereton J found the solicitor had drawn certain discrepancies to the valuers' attention but should not have been satisfied with the valuers' responses. In addition, the solicitor had not drawn the valuers' attention to a "significant" matter, namely that, contrary to what was stated in the valuation, the property was subject to flooding.

Brereton J found that that the solicitors breached their duty of care by assuring Kayteal that the valuation was "okay" instead of advising Kayteal that the valuers had not sufficiently addressed their concerns. Also the valuers had assumed that the property was not subject to flooding when a council certificate showed otherwise.

Brereton J apportioned responsibility between the wrongdoers as follows:

  • Mr Bsat – 47.5% – "he must have known that the valuation (and thus his statement of assets and liabilities) was erroneous, as he had purchased the property only two months earlier for A$52,000. His misrepresentation must have been intentional, and was for his benefit"
  • the valuers – 40% – "while not intentional, their negligence was gross and their responsibility not much less than that of Mr Bsat"
  • the solicitors – 12.5% "their responsibility is relatively slight ...".

In determining the solicitors' responsibility, his Honour said that the cases of Ginelle Finance (90% fraudster, 10% solicitors), style="font-style: italic;">Chandra (90% fraudster, 10% solicitors) and Vella (72% fraudster, 15% a solicitor who falsely witnessed a signature and 12.5% negligent solicitors) provided "much needed guidance".

In addition, Brereton J's conclusions with respect to the wider aspects of the apportionment legislation include that a cross-claim is not maintainable against any person who is found to be a concurrent wrongdoer - except that a cross-claim is maintainable against any person who is an "excluded concurrent wrongdoer" – one who intentionally or fraudulently caused the loss: s34A of the Civil Liability Act 2002 (NSW).

His Honour dismissed the solicitors' cross-claim against the valuers (his Honour commented that the cross-claim did not assert intentional or fraudulent wrongdoing). The solicitors had not brought a cross-claim against Mr Bsat (whom Brereton J said would be an "excluded concurrent wrongdoer").

The Kayteal case leaves open the question of whether a concurrent wrongdoer is prevented or prohibited from obtaining contribution or indemnity from any other concurrent wrongdoer because no other concurrent wrongdoer has contributed to that person's particular (apportioned) loss – see the decision of McDougall J in Dymocks2.

Comment

The Kayteal case illustrates the scope of a solicitor's duty of care to a lender and the apportionment of responsibility between defendants where a fraudster is involved in the lender's loss.

The decision also indicates that a cross-claim can be brought against a fraudulent or intentional wrongdoer. However, the commercial prospects of the cross-claim would need to be considered as in many instances fraudulent and/or intentional wrongdoers are persons of straw.

[1] [2011] NSWSC 197.
[2] Dymocks Book Arcade Pty Ltd v Capral Limited [2010] NSWSC 195.

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