In Provident Capital Ltd v Papa  NSWCA 36, the New South Wales Supreme Court of Appeal considered the nature of legal advice given to a borrower who was required to obtain independent legal advice as a pre-condition to obtaining financial accommodation.
Provident Capital Limited (Provident) provided financial accommodation via a “low doc” lending arrangement to Mrs Papa.
Mrs Papa was a mature lady who owned a property in Leichhardt where she resided on her own and from which she conducted a small business. Mrs Papa’s only other asset was a car. Provident was prepared to lend $700,000 to Mrs Papa to assist her son with a gymnasium business and to repay an earlier debt. The loan was to be used in part to buy “some flashy new equipment from the States”.
Mrs Papa did not have any involvement in the gymnasium business and her son was solely responsible for the repayments of the loan. This was not a relevant factor to Provident as it was not concerned with Mrs Papa’s ability to service the loan as it only required her assurance (by signed Declaration) that she could do so, and satisfactory credit checks. Provident also required that Mrs Papa obtain independent legal advice and confirm that she had done so.
Mrs Papa obtained independent legal advice from Mr Caramanlis and confirmed to Provident that she had done so. The advice that Mr Caramanlis provided to Mrs Papa was to explain to Mrs Papa the legal effect of the documents she was to sign, namely, that Provident could sell her property if interest was not paid, or the loan was not repaid according to its terms.
Mr Caramanlis did not give Mrs Papa any further advice, for example, that she should obtain independent financial advice due to the obvious dependency of her ability to meet her commitments to Provident on the success of the gymnasium business.
Mrs Papa’s son had told her that the gymnasium business was very profitable and that it would be able to make the interest payments to Provident. Accordingly, Mrs Papa completed the loan documentation and received funds from Provident.
It turned out that the gymnasium business was far from profitable and was actually in external administration before Mrs Papa entered into the loan agreements with Provident. As the gymnasium business was unable to meet the interest payments to Provident, Mrs Papa defaulted under the loan arrangements with Provident and Provident commenced proceedings to obtain possession of Mrs Papa’s home.
At first instance the New South Wales Supreme Court found (amongst other things) that:
the loan agreements with Provident were unjust; and
Mr Caramanlis did not breach his duty by providing advice to Mrs Papa.
Outcome of appeal
The Court of Appeal disagreed. Macfarlan JA stated at :
A reasonable solicitor in the position of Mr Caramanlis would have formed the view that Mrs Papa’s home, and the business which constituted her livelihood that she conducted from it, would be significantly endangered by her entry into the transactions with Provident.
A reasonable solicitor giving her independent legal advice in relation to the transactions would not in my view have failed to draw to Mrs Papa’s attention, in strong terms, that her home and livelihood was dependent upon the viability and prospects of the gymnasium, specifically on the ability and willingness of her son to make the loan repayments out of the income from the business, and to recommend, again in strong terms, that she obtain financial advice, independent of her son, concerning the capacity of the business to service the loan.
A solicitor’s obligation is not simply to explain the legal effect of documents but to advise his or her client of the obvious practical implications of the client’s entry into a transaction the subject of advice. The prospect of the subject transaction wreaking havoc on Mrs Papa’s life was glaring, given the by no means remote prospect that the business would be unable to support the loan repayments.
The Court of Appeal found:
That the legal advice was inadequate was not Provident’s fault. It was the fault of Mr Caramanlis who bore legal responsibility for the consequences of his breach of duty.
Provident was entitled to assume, and proceed on the basis, that Mrs Papa had obtained advice of the type that a reasonably prudent solicitor would have given (detailed in the quote above).
That advice would have ensured that she was well aware that her retention of her home and workplace was dependent on the viability and prospects of the gymnasium business, and would have led to her receiving advice from a financial advisor that the business could not fairly be described, as it was by Mrs Papa’s son to Mrs Papa, as “going well” and that its prospects were at best uncertain.
As Provident was not aware of any disability under which Mrs Papa laboured (and there was in fact none), Provident could not reasonably have been expected to do more. Its conduct was not therefore such as to make the loan contracts unjust.
Lavan Legal comment
This case is important to lenders that require borrowers to obtain independent legal advice as a pre-condition to obtaining finance approval. That is because those lenders will be entitled to assume that the legal advisor had provided reasonable advice (and to rely on that advice), even in circumstances where a borrower had no obvious financial benefit in entering into the financial arrangements.