Permanent Custodians v Geagea [2014] NSWSC 562

A solicitor acted on the understanding that he represented two brothers on a loan, secured over a property registered in their names and that of a third brother, in their capacity as trustee for their parents. One brother was a fraudster. The other brother or someone purporting to be him authorised the solicitor to act for him. The solicitor did not act for the third brother, who was in a prison in Lebanon. The loan went into default and the lender sued the borrowers for the mortgage debt as well as the solicitor for breach of warranty of authority, misleading and deceptive conduct and negligence on the basis that the solicitor represented that he acted for all three brothers. The proceedings against the brothers settled so this case concerns only the claim against the solicitor.

The court found that the solicitor’s letter and its header, enclosing the loan documents on behalf of each of the three borrowers was not itself a representation that he was acting for each of them but the authority to direct disbursement was a representation either expressly or impliedly that each of the three brothers had authorised the disbursement. The court found this representation misleading and a breach of the solicitor’s warranty of authority. The fact that the solicitor was found to have sent the disbursements letter to the lender in good faith on the basis that his two clients had authorised it and on the basis that they had represented that the third brother had also authorised the disbursements was not enough to relieve him from liability.

The court found that the lender relied upon the representation that the solicitor was acting for the brother in prison and was authorised to direct the disbursements. The court found it irrelevant that damage would have occurred if the disbursements letter had not been sent by the solicitor on the basis that the fraudulent brother would have forged the signatures required in any event.

The court noted that proportionate liability arose under the claim for misleading conduct but not for breach of warranty of authority. The court found the originator responsible for 33 1/3% of the lender’s loss because it failed to identify each borrower and represented to the lender that the solicitor acted for each of them. The court noted that the originator was not the agent of the lender but failed to take a number of essential steps to protect the lender.

The court gave leave to the solicitor to address the impact on damages of the following matters:

1. the originator’s wrongdoing;

2. the fraudster’s wrongdoing; and

3. the settlement reached with the brothers.

The court found it unnecessary to determine the claim for negligence because the solicitor was liable for breach of warranty of authority and misleading and deceptive conduct. That meant that the issue of whether a duty of care owed by a solicitor for a party to a transaction is owed to the other party to the transaction was left unanswered.

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