Should a law firm that allegedly failed to advise its client about the risks of providing vendorfinance secured only by way of second mortgage be held responsible for the security proving worthless in the event of the buyer’s default?
That question is before Queensland’s Supreme Court in relation to the $2 million sale of a Carbarlah (outside Toowoomba) development site to HCD Pty Ltd as long ago as 2006.
Seller Poltimix Pty Ltd alleges Toowoomba law firm Rees Law failed to warn of the financial risks associated with the provision of vendor finance of $975k and failed to recommend any investigations as to the asset backing of HCD’s directors to verify the worth of their personal guarantees.
Justice Jean Dalton last week ruled on the seller’s application to strike out limitation defences raised by the lawyers’ to its $815k negligence claim on grounds that they were “embarrassing”.
Poltimix Pty Ltd had novated the contract 12 months later with modified terms allowing the repayment of the vendor finance by instalments of $32.5k on the completion of the sale of each subdivided lot together with interest after 12 months.
Settlement occurred in February 2008 with the seller’s mortgage registered to follow that of Westpac.
With the intervention of the GFC, by the time Westpac inevitably came to exercise its mortgagee rights due to HCD’s default, Poltimix had received just $260k from the sales and the security value of the land had been exhausted.
Pursuit of the guarantors proved fruitless leaving the seller to turn its attention to the law firm.
But because “it is not entirely clear what cause of action is being relied upon,” Justice Dalton declined to strike out any part of the defence at an interlocutory stage.
In her view the seller’s statement of claim and claim were themselves “embarrassing”.
“That the plaintiff first pleaded its loss on an unsustainable basis and there is an ambiguity in the pleading as to whether the claim is in contract or negligence,” she ruled “does not inspire confidence that the limitation point should be determined in advance of trial”.