Background

The owner of a large development site in the Western suburbs of Sydney (the Owner) entered into negotiations to set up a joint venture to develop the land.  From his point of view, it was essential that a $20m loan and mortgage on the land be transferred to the new joint venture, because he did not have any other way to repay the loan.

It turned out that the joint venture agreement signed after extensive negotiations didn’t transfer the debt as he wanted – in fact, it included a clause which, critically, required him to pay out the loan and arrange clear title once planning approval was obtained.

In due course planning approval was obtained.  The Owner was unable to pay out the loan and clear the mortgage – just as he had anticipated.  The JV partner relied upon that non-compliance with the JV agreement to call a default, and force the early sale of the undeveloped property.

In Lindsay-Owen v HWL Ebsworth Lawyers [2023] NSWSC 68 the Owner took legal action claiming damages from the legal firm that assisted with the JV negotiations and the drafting of the JV agreement (the Lawyer).  He said that if he had understood that the JV agreement did not include the debt transfer, he would have negotiated to have it added, and if that was not possible, that he would have arranged for the bank loan to be extended so that he could negotiate a similar arrangement with other interested parties.

His bank had earlier issued a default notice of its own, and so the likely response of the bank to a hypothetical extension request was a key, contested, question before the Court.

The Banking Expert Witness

The Owner arranged a report from a Banking Expert Witness to provide an opinion about how the bank would have responded if it had been asked for an extension.

The Lawyer objected to the banking expert’s report.  It said that a prediction about a response to a hypothetical question was outside the scope of matters that an expert was able to express an opinion upon.

The Court agreed.  It said that the evidence of the banking expert witness was:

…inadmissible on the question of what [the Bank] would have done in 2010. His report does not satisfy the requirements of s 79 of the Evidence Act 1995. [The Expert] purports to express opinions about what [the Bank] might have done, about what [the Bank’s] state of mind was, and even about what an alternative joint venture partner might have done. These opinions are not evidence of banking practice or any other fields of expertise based on specialised knowledge.

Outcome

The rejection of the banking expert’s report wasn’t fatal to the Owner’s case.  Having determined that the question of the bank’s response was a question for the Court, not an expert, the Court concluded that the bank would have granted an extension if it had been asked i.e., in fact agreeing with the inadmissible view of the banking expert.

The Court held that the Owner was entitled to damages, to be assessed separately.

Comment – In my experience it would be more usual to be asked about the response of a “reasonable lender” in the circumstances, rather than to be asked to predict what a nominated party might do – but depending on the circumstances and the question, even a question framed that way might be regarded as too speculative. 

The opinion of a banking expert might still assist the parties, however, without speculating.  A banking expert could be asked to identify the matters that reasonable lenders take into account when making such discretionary decisions, and to identify whether or not those matters were in evidence in the particular case – while still leaving the ultimate question to the Court.