A solicitor encouraged two investors to go into the mortgage lending business. The solicitor promptly embezzled the principle funds on five fictitious loans and used money he embezzled from the firm’s trust account to pay the investor’s interest.
The investors sued the partnership and the question on the appeal in this case was whether the wrongful acts were committed in the ordinary course of business of the law firm or with its apparent authority under s.13(1) of the Partnership Act 1891 (Qld).
The lenders also alleged that the law firm had a duty to take reasonable care when performing work for a client to prevent the firm from acting in transactions “that were unauthorised by law or were sham transactions” and that it had breached that duty. The law firm denied it had a duty of care (or that it had breached it).
The judges concluded that the former partner was not acting in the ordinary course of the business of the firm when he engaged in the wrongful acts largely because introducing borrowers to lenders on mortgages was illegal unless mortgage fidelity insurance was obtained and none had been obtained. Such work was therefore not part of the law firm’s business.
However, the judges found that the former partner did act within apparent authority carrying on business of the kind carried on by the firm (as required by section 8(1) of the Partnership Act) because such acts being done by solicitors acting in commercial lending transactions, including those in which the solicitor introduced the borrower to a lender client, the firm earned fees from the work and there was nothing unusual which should have caused the lenders to question otherwise.
The court rejected the argument that “mortgage broking” was not part of the kind of work ordinarily done by solicitors in Queensland in 2006 and 2007 because the lenders were new to this form of business and the requirement is judged from the perspective of a reasonable lender. The Court held that the law firm was liable to make good the loss.
Although not relevant to the outcome because the law firm was found liable under the Partnership Act, the Court determined that the law firm did not owe the duty of care alleged by the lenders to take reasonable care to prevent the firm in acting in transactions that were unauthorised by law or “sham” transactions. The Court rejected such a novel duty saying:
The alleged duty is postulated for the very purpose of enlarging the liability of firms for the unauthorised acts of one partner beyond the liability which is imposed by the provisions of the Partnership Act which codified the common law upon that subject. The alleged duty would also cut across the relationship of trust and confidence which is the foundation of a partnership in so far as it would in every case require each partner who does work in connection with a file kept by a copartner to examine the file, not with the interests of the client solely in mind, but also with a view to looking over the shoulder of the copartner. I would add that, because the alleged duty would require all partners to perform this extra work in all cases with a view to avoiding liability beyond the scope of that imposed by the Partnership Act, it would presumably result in a general increase in firms’ operating costs.