Executive Summary
The NSW Court of Appeal decision in Gerrard Toltz Pty Ltd v City Garden Australia Pty Ltd (in liq) (No 2) (the Case),1 may assist defendants to use the Civil Liability Act 2002 (NSW) (CLA) to reduce their liability to plaintiffs regardless of the type of case pleaded by the plaintiff. This contrasts with other case law that states that the plaintiff must have pleaded a case that is based on a failure to take reasonable care.
The result may be that it is easier for defendants (e.g. subcontractors and consultants) to limit their liability, and harder for plaintiffs (e.g. principals and developers) to hold any single defendant responsible for their loss and damage regardless of how they present their case.
Current authorities limit a defendant’s right to invoke the apportionment provisions of the CLA to where the plaintiff has elected to plead a cause of action based on a failure to take reasonable care. For example; negligence, breach of contractual duty of care and statutory claims for misleading or deceptive conduct. A common strategy has developed for plaintiffs to limit their pleadings to causes of action that are not based on a failure to take reasonable care (e.g. debts due) so that a defendant could not invoke the CLA to reduce their liability.
In the Case, the judges (albeit in obiter) indicated that it would not be limited to the pleaded cause of action, and instead could reduce a defendant’s liability if the underlying facts showed a failure to take reasonable care.
What Happened?
The Case concerns whether or not an alleged solicitor-client retainer existed between the now-deregistered law firm, Gerrard Toltz Pty Ltd (Toltz). The Court had to determine whether Toltz was the lender’s and borrower’s solicitor.
City Garden Australia Pty Ltd (City Garden) (as borrower) entered into three loans with Gemi Investments Pty Ltd (Gemi Investments) (as lender) worth a total of $21,870,688.55 (Loans) to fund a construction project at the North Rocks with building company Ming Tian Real Property Pty Ltd (the Builder).
Meng (Adam) Dai, a director of both City Garden and the Builder, and his wife, Ms Lin (Julianne) Zhu, both executed the Loans without the knowledge of the second director of City Garden, Jian Wei (Victor) Liang.
Adam and Julianne co-executed the Loans without valid authority from City Garden. Julianne also fraudulently represented herself as City Garden’s secretary.
Toltz challenged the allegation that it acted for City Garden and argued:
- it only acted for Gemi Investments in all of its lending, including the Loans to City Garden;
- if any damages were payable to City Garden, they would be apportionable under the CLA due to Adam and Julianne’s fraudulent conduct; and
- the declaration signed by Adam and Julianne represented to Toltz that City Garden had obtained independent legal advice for the Loans.
The Decision
In 2020, City Garden commenced Supreme Court proceedings alleging that City Garden had engaged Toltz to assist and advise on the original loan and that Toltz had breached its fiduciary duty in advising City Garden and Gemi.
Toltz sought to adopt a broader approach to apportionable claims and apportion its losses resulting from a breach of fiduciary duty arising out of the contract (i.e., a solicitor-client retainer), even though the plaintiff had not alleged Toltz’s negligence or a failure to take care.
The primary Judge rejected Toltz’s arguments as they failed to establish that City Garden’s claim was apportionable under the CLA. An apportionment defence was not available as City Garden did not include a failure to take reasonable care as an element of its cause of action against Toltz.
The primary Judge confirmed the narrow approach to apportionment as per the majority decision in Perpetual Trustee and the subsequent unanimous decision of the NSW Court of Appeal in Rahme v Benjamin & Khoury Pty Ltd (2019).2 The narrow approach has been favoured in Victoria as well.3
Rahme was another claim for breach of fiduciary duty, where the NSW Court of Appeal held that the defence of proportionate liability was not available.
The Supreme Court found City Garden had retained Toltz and was in breach of its fiduciary duty owed to City Garden as its solicitor. The Court also held that if Toltz had contacted Victor while obtaining fully informed consent or in discharging its obligation to act in City Garden’s best interests, then City Garden would not have proceeded with the original loan.
The Court held that the defence of proportionate liability under s 31(1)(a) of the CLA was not available to the defendant as the action before the Court involved a breach of fiduciary duty. Toltz was ordered to pay $16,403,016 to City Garden.
The Appeal
Toltz appealed the decision, arguing that they had only acted on behalf of Gemi Investments regarding the Loans by challenging the primary Judge’s findings regarding informed consent, causation, and loss. Appeal Ground 11 sought to apportion any damages payable by Toltz.
Kirk JA, Stern JA, and Basten AJA heard the appeal. After considering the parties’ post-contractual conduct, the Court held that Toltz did not enter into a retainer or contract with City Garden for the original loan. This led to reversing the primary Judge’s decision and dismissing the order for damages. As a result, Toltz was no longer required to pay damages to City Garden.
The Court of Appeal held that the question of apportionment was complex and did not need to be considered where the findings of breach of fiduciary duty were set aside. However, Basten AJA in obiter criticised the narrow approach adopted by the Victorian Court of Appeal.4 Stern JA also provided helpful comments in obiter that the primary judge’s approach to apportionment may have been in error.
Stern JA stated that Her Honour had “some doubt as to the correctness… that, to fall within the ambit of s 34(1)(a), a failure to take reasonable care must be an element of the cause of action upon which the plaintiff succeeds”.5 Her Honour further stated that there is room to doubt that the narrow approach … is required to be adopted and that the [broader] approach appears to more closely accord with the statutory language and purpose of the CLA.6
Key takeaways
The Case does not provide a decisive resolution of the broad and narrow interpretation of the apportionment regime but suggests there may be changes on the horizon.
If these changes come to pass, then it will be more difficult for plaintiffs to avoid the CLA or, put another way, easier for defendant to invoke and so reduce their liability.
How can HWLE help you?
HWL Ebsworth Lawyers has expertise in advising builders and owners of their rights and obligations in a building dispute. Please contact Leighton Moon of our Construction and Infrastructure team with any enquiries.
This article was written by Leighton Moon, Partner, Patricia Oman, Senior Associate, and Nick Jarrett, Solicitor.
1 [2024] NSWCA 232.
2 100 NSWLR 550; [2019] NSWCA 211.
3 Tanah Merah Vic Pty Ltd v Owners Corp No 1 of PS613436 [2021] VSCA 72 (Lacrosse).
4 At para 234, citing the decision in Tanah Merah Vic Pty Ltd v Owners’ Corporation No 1 of PS631436T [2021] VSCA 72(Beach and Osborn JJA, Stynes AJA).
5 At para 173.
6At para 182.
