Metro Waterloo Pty Ltd v HWL Ebsworth Lawyers

The appellant engaged the respondent as its solicitors to prepare contractual documents for a high-rise residential development. The appellant instructed the respondent to include a clause in the contract about the appointment of a particular letting agent. That clause was not included in the final contract due to the respondent’s negligence. Knowing that the contract did not contain such a clause, the appellant executed the contract. The Court of Appeal (Morrison and Mullins JJA and Mellifont J) upheld the primary judge’s decision that such an act broke the chain of causation. An informed and freely made decision not to terminate the risk meant that the appellant was the author of his own misfortune. Other grounds of appeal were raised which are not the subject of this note.

Morrison and Mullins JJA and Mellifont J

7 October 2022

Background

Metro Property Development Pty Ltd (“MPD”) incorporated a special purpose company, Metro (“the appellant”) for the purpose of carrying out a high-rise residential development called “Capri”. [1].

The appellant engaged the respondent, HWL Ebsworth Lawyers (“HWLE”) to act for it in respect of the Capri project and appointed Mr Warat as its attorney to sign sale contracts on its behalf. [2]. MPD also engaged a managing and letting company called Tessa. [4].

After the development was completed, the appellant wished to sell a block of the units to Forum Australia Residential Partnership Pty Ltd (“Forum”). [5]. Mr Hartman, a director of the appellant was responsible for negotiating the sale. [6]. Mr Hartman was a “very experienced developer with considerable experience in expressions of interest and contracts for the sale of real estate.” [97].

The appellant negotiated the inclusion of a clause which appointed Tessa as managing and letting agent. This was known as a “Tessa provision”. [6]. The appellant had used Tessa provisions in its contracts since 2014. [83].

Four expressions of interests were exchanged between Forum and the appellant. All the expressions of interest included a Tessa provision except for the second version of the expression of interest. [7].

The appellant instructed HWLE to prepare a contract reflecting the terms of the final expression of interest which contained a Tessa provision. [7].

Mr Warat drafted the contract of sale between the appellant and Forum. It did not contain the Tessa provision. [8].

Prior to the execution of the contract, Mr Hartman travelled to the USA. [21]. Mr Warat emailed the draft documents to Mr Hartman while he was overseas. Mr Hartman did not read them but asked “can you confirm clause for management rights/can we put Tessa or equivalent manager.” [83]. Mr Warat incorrectly told Mr Hartman that there was no Tessa provision because the final expression of interest gave Forum full discretion to appoint a managing agent. [8], [83].

Knowing that it did not contain a Tessa provision, Mr Hartman instructed Mr Warat to sign the contract. [8].

The appellant sued HWLE for damages in negligence and breach of contract. The learned trial judge dismissed the claim on the basis that causation had not been proved. [10].

Grounds of appeal

A number of grounds of appeal were raised. This note deals only with ‘Ground 3’ which concerned whether the appellant’s decision to proceed broke the chain of causation.

Ground 3 – Break in the chain of causation

In support of their submission that the decision to proceed with the contract did not break the chain of causation, the appellant relied on Medlin v State Government Insurance Commission (1995) 182 CLR 1 (“Medlin”). [105].

In Medlin, the High Court of Australia held that causation is a question of fact to be resolved on the balance of probabilities; even where the issue was complicated by the intervention of the plaintiff. [106]. Quoting the High Court in Medlin at pp 6–7, the Court of Appeal observed that:

“The ultimate question must, however, always be whether, notwithstanding the intervention of the subsequent decision, the defendant’s wrongful act or omission is, as between the plaintiff and the defendant and as a matter of common sense and experience, properly to be seen as having caused the relevant loss or damage”. [106].

Here, the intervening act was Mr Hartman’s decision to proceed with the contract knowing that it did not contain a Tessa provision. [110]. It was recognised by the learned trial judge, and the Court of Appeal, that the decision to proceed was ultimately a commercial one, including to avoid a risk that property prices might fall. [100]–[103], [111].

HWLE relied on Chand v Commonwealth Bank of Australia [2014] NSWSC 708. In that case, the Court at first instance explained that where the plaintiff is made aware of the defendant’s breach but makes a “deliberate decision not to terminate the risk”, the plaintiff’s decision breaks the chain of causation. [115]–[116]. That decision was upheld on appeal: Chand v Commonwealth Bank of Australia [2015] NSWCA 181. [117].

The Court of Appeal (Morrison JA with whom Mullins JA and Mellifont J agreed) recognised, by reference to Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224, that a free deliberate and informed act of a human being usually breaks a chain of causation. [112].

The Court found that given Mr Hartman’s experience in real estate development and the nature of the Tessa provision, “Mr Hartman’s decision to proceed without attempting to have the clause inserted in the contract prevented its omission from being seen, as a matter of common sense and experience, as having caused the loss.” [111].

Further, HWLE did not owe the appellant a contractual duty to protect Mr Hartman from proceeding without a Tessa provision. [113].

The Court observed that:

(1) Mr Hartman knew, prior to executing the contract, that it did not contain a Tessa provision;

(2) Mr Hartman did not take steps to put a Tessa provision into the contract;

(3) while Mr Warat erroneously advised Mr Hartman about the contents of the final expression of interest, Mr Hartman was at all times aware that he could insist on the insertion of a Tessa provision; and

(4) the learned trial judge found that had he insisted upon it, Forum would have inserted a Tessa provision into the contract. [118].

Therefore, Mr Hartman’s decision “was the sole effective cause of any loss”. [118]. This ground of appeal was rejected. [119].

A Hughes of Counsel