Zakka v Elias [2013] NSWCA 119

A solicitor (with a restricted practising certificate and therefore only entitled to practise as an employed solicitor) acted for a lender in relation to a number of loans secured over the lender’s home. The lender was her relative and the solicitor took steps to ensure that her employer did not know of the matters, which she did as a favour to the lender. The first loan proceeds were on-lent to the solicitor’s brother, by way of a loan that was undocumented and unsecured. The second loan proceeds were on-lent to someone, the solicitor advised was a ‘con’, and while this loan was documented, inadequate security was taken by way of an unregistered second mortgage. The solicitor had advised the lender of the risks of the second loan, namely that the lender might lose his home. The lender successfully sued the solicitor for negligence on the first on-loan by reason of the potential conflict and the solicitor was ordered to repay the first loan plus interest. The lender appealed on the basis that the solicitor should have been found negligent on the second on-loan as well by virtue of the inadequate security and further that her boss was vicarious liable for her negligence. The solicitor had advised the lender of the risks of the second loan, namely that the lender might lose his home and that the borrower on the on-loan was a con man.

The Court of Appeal found the solicitor breached her duty on the second on-loan despite there being no retainer in relation to that loan, in failing to advise the lender that he should consider or seek further advice as to whether the security for the on-loan was adequate and at the very least, should lodge a caveat to protect his interest, since the solicitor was on notice of facts that raised these risks. However the court did not go so far as to require the solicitor to then advise on those matters in the absence of a retainer.

The Court of Appeal found a penumbral duty arose to provide advice beyond the scope of the retainer once the solicitor became aware, in reviewing briefly the on-loan, of matters that a reasonably competent conveyancing practitioner would have seen as risks to her client, namely that the on-loan was secured only by an unregistered second mortgage and to advise the lender that he should consider, and perhaps obtain further advice as to whether, the security for that loan was adequate. This she did not do.

However the Court of Appeal found that this breach did not cause the lender’s loss because the lender would have proceeded anyway, even if given such advice.

The court found the real cause of loss was the lender’s decision to place trust in the con man and to invest in his business.

The Court of Appeal also found that the boss was not vicariously liable for the solicitor’s acts because her acts were not in the course of her employment or in pursuit of her employer’s interests or the intended performance of her contract, nor in ostensible pursuit of her employer’s business or with apparent authority which the employer held her out as having. The court found that the solicitor had engaged in a frolic of her own. The court also found that while some of the tasks were of a nature that she might perform during her employment on client files, this was not sufficient to bring what she did within the scope of her employment. The solicitor was only employed to assist her boss on matters for his clients.

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