Frank Ivan Yukich & v Peter Malcolm MacKenzie

IN THE COURT OF APPEAL OF NEW ZEALAND

CA100/99

BETWEEN	FRANK IVAN YUKICH AND KAY DIANE YUKICH
First Appellants

AND	PETER MALCOLM MACKENZIE AND OTHERS
First Respondents

CA203/99

AND	PETER MALCOLM MACKENZIE AND OTHERS
First Appellants

AND	FRANK IVAN YUKICH AND KAY DIANE YUKICH
First Respondents

Hearing:	8 and 9 May 2000
Coram:	Richardson P Gault J Tipping J
Appearances:	G J Judd QC and M J McCartney for Appellants R Harrison QC and R G Simpson for Respondents
Judgment:	20 June 2000

JUDGMENT OF THE COURT DELIVERED BY GAULT J

Mr and Mrs Yukich appeal against the judgment of the High Court delivered on 31 March 1999 in which their claim in negligence against the respondent solicitors was dismissed. A cross appeal was not pursued and is formally dismissed.
The appellants claimed for losses they alleged they suffered as a result of signing a personal guarantee of indebtedness incurred by the property development company Commercial Electronics Ltd (CEL) to three companies in the Westpac Banking Group (together Westpac) which they would not have signed but for the negligence of their solicitor Mr MacKenzie. Giles J found that Mr MacKenzie did not advise Mr and Mrs Yukich as they alleged and was under no duty in terms of his retainer to so advise. The Judge went on to express the view that in any event Mr and Mrs Yukich had not established that the alleged negligence was causative of their losses. In the course of the judgment the Judge made strong credibility findings adverse to Mr and Mrs Yukich to the effect that their claim was fraudulent. That led him to depart from factual findings made in an earlier case which the parties had agreed bound them.
The appellants contend that the Judge was wrong to deny them the benefit of those findings which were agreed constituted an issue estoppel; that there was a duty of care that was breached, and that they are entitled to recover losses claimed of $873,452.20 plus general damages.

The Material Facts

Mr Yukich had a successful business background in the wine industry. Since leaving that he had engaged in some property development activities. He was the managing director of the company Castel Corporation Ltd (Castel), the shares in which were owned by Yukich family trusts. He arranged in April 1987 for Castel to purchase a property at Rothwell Avenue, Albany with the intention that it would be developed and sold. In due course title was taken in the name of CEL of which Mr Yukich was also managing director. It was a wholly owned subsidiary of Castel. The purchase price of $700,000 plus GST was financed by a loan from the Bank of New Zealand (BNZ) secured by a first mortgage over the Yukich house property at Beach Road, Campbells Bay.
Mr Yukich negotiated an agreement with Imagineering Micro Distributors Ltd (Imagineering) to take a lease of the property after construction of three commercial units. The lease was to be for a period of 12 years with an option to purchase. The agreement was prepared by Mr MacKenzie. It included a clause 4.03 which imposed the obligation on the intended lessee Imagineering to “cause Studio Australia Pty Ltd to guarantee the performance of the lessee of its covenants under the lease and to execute the lease”. Studio owned 89% of the shares in Imagineering and was itself a subsidiary of a public company in Australia. The agreement had as an attachment the form of lease agreed to be entered into which provided for execution by CEL, Imagineering and Studio.
Mr MacKenzie arranged for execution of the agreement. It happened that CEL and Imagineering executed under seal not only the agreement but also (unnecessarily) the attached form of lease. The latter provided for execution by Studio but there was no execution by that company. It is common ground that the agreement was signed on 6 October 1987 though it bears the date 25 September.
By that time Mr Yukich had negotiated a joint venture arrangement with Mr and Mrs Davis whose company Monarch Construction Ltd (Monarch) contracted to build the units on the Albany property. Monarch also acquired from Castel half of the shares in CEL though the purchase price was not paid and the debt was secured by a mortgage over the shares in favour of Castel. The joint venture extended to the development of other properties at Howick and Mt Albert which had been acquired in the name of the company Ashling Achievements Ltd (Ashling) which was owned equally by Monarch and Castel.
Finance for the project was to be provided by Sunrise Finance Ltd and work commenced on the Albany development before the end of 1987. However, Sunrise Finance Ltd defaulted, presumably in light of the effects of the share market crash shortly before. Mr Yukich sought finance from Westpac for the Albany development. A loan offer originally made on 24 December 1987 was accepted on varied terms on 22 January 1988.
This provided for a loan to CEL of $4 million to be advanced against valuation certificates as the Albany development progressed. Guarantees were required from Mr and Mrs Yukich and Mr and Mrs Davis. Security required was a first mortgage over the Albany property and a second mortgage over the Yukich home at Campbells Bay with the first mortgage to be restricted to $1 million.
It was a “special condition” of the loan agreement requiring “Confirmation that Studio Australia Pty Ltd has guaranteed lease”.
The development proceeded with the buildings being configured to some extent to Imagineering’s requirements. The full amount of the Westpac loan was drawn down and in May 1988 Unit 1 was completed. Imagineering took possession. Units 2 and 3 were completed in June but were not occupied though rent was paid for a period. But in September 1988 it emerged that Imagineering did not wish to purchase the property and wanted to be released from the obligation to pay rent for Units 2 and 3. The Australian parent, Studio, determined not to give the guarantee, maintaining it was under no obligation to do so.
Because of a negative cash flow, CEL fell behind in the payment of interest to Westpac and, in October 1988, obtained Westpac’s agreement to capitalise arrears so that the amount of the loan was increased to $4.9 million.
The loan from BNZ was repaid by refinancing with FAI/Metlife which became the first mortgagee over the Yukich house property at Campbells Bay securing the principal sum of $700,000.
Eventually CEL settled with Imagineering on terms that included a guaranteed lease of Unit 1 but release of obligations in respect of the other two units.
In the meantime Mr and Mrs Yukich had also given guarantees to the institutions that had provided finance to enable Ashling to purchase the Howick and Mt Albert properties. In total these borrowings amounted to $3 million. Apart from one of the Mt Albert properties from which there was temporary rental income, these properties were not generating income. At that time finance costs were high. It seems that the only development immediately contemplated was renovation of the existing building on one of the Mt Albert properties.
Monarch failed. Castel as mortgagee re-acquired the shares Monarch held in CEL. Mr Yukich took steps to deal with the Ashling obligations. Over time the properties were disposed of and settlements were reached with the financiers. One consequence was the execution of a third mortgage over the Campbells Bay home securing $60,000 owed to National Australia Bank. At least one of the transactions (in 1993) involved use of funds which became available as a result of a proceeding taken by CEL against the solicitors. It is to that proceeding that it is necessary to turn next.

The CEL Proceeding Against the Solicitors

CEL sued the solicitors alleging that Mr MacKenzie gave to Mr Yukich assurances first on 12 October 1987 and secondly about the time Imagineering was given possession of Unit 1 at Albany, that CEL had the protection of the guarantee from Studio. In a judgment delivered on 15 March 1991 Ellis J held that such an assurance was given on 12 October 1987 but he was not satisfied it was repeated in May 1998. He accepted that had CEL realised it could not insist on the guarantee it would not have proceeded with the development. He further held that if Mr Yukich had insisted on obtaining the guarantee at that time it probably would have been given. He held the solicitors to have been negligent and assessed CEL’s damages as the difference in market value between the developed property with the guarantee in place and its value without the guarantee. Eventually, shortly before a hearing of the solicitors’ appeal to the Privy Council (November 1993) settlement was reached under which CEL received in total the sum of $1.8 million.

The Present Proceeding

Because CEL could not meet the interest accruing under the loans, Mr and Mrs Yukich came under pressure first from FAI/Metlife and then from Westpac. They sold their home at Campbells Bay. The sale price was $2 million (accepted as full market value) and settlement was effected on 11 October 1990 when the three mortgages were discharged. They continued to be liable to Westpac on their personal guarantee for so much of the indebtedness as was not satisfied out of the proceeds of sale of the house, but they were not called on to make any further payments. The amount recovered by Westpac from the proceeds of sale of the house was comparatively small. But that, together with what was recovered on exercise of the power of sale of the Albany property ($3.6 million), was deemed sufficient. The balance was waived by Westpac.
Mr and Mrs Yukich then brought the present proceeding against the solicitors. We have not been informed how the claim was originally formulated but it has undergone significant changes. The sixth amended statement of claim was filed (with leave) at the end of the trial. It is the claim there formulated that must have our consideration. Even in that document earlier focus on the loss of the home has not been entirely relinquished and has led to some confusion in analysis of the alleged loss.
However, stated in simplified form, the claim was that Mr MacKenzie and his firm, who had acted in the past for Mr and Mrs Yukich in their personal affairs, acted for them in connection with the documentation of the Westpac borrowing; that there were breaches of the duty to exercise due professional care, skill and diligence by the solicitors in that (as alleged in para 58 of the sixth amended statement of claim) they:
(a)When asked by Mr Yukich about execution by Studio of the agreement before he went ahead with the development, reassured him that it was safe to do so.
(b)Did not inform the plaintiffs that it was unsafe to proceed, before allowing them to give their personal guarantee and to mortgage their home;
(c)Failed to advise the plaintiffs of the possible dangers of committing themselves personally by giving personal guarantees and mortgaging their home, in circumstances where Studio had not executed the agreement to lease;
(d)In circumstances where they had previously given the reassurance referred to in subparagraph (a) above, failed when acting in connection with the giving of the personal guarantee and mortgage to advise the plaintiffs of the possible dangers of committing themselves personally by giving personal guarantees and mortgaging their home.
The primary loss claimed was of the proceeds of the sale of the home and chattels. Additional losses were said to be loss of the benefits and enjoyment of the home and chattels and other losses in the nature of general damages. The value of the home and chattels was put at $2.485 million from which there was acknowledged there should be deducted the value of benefits received by Mr and Mrs Yukich through the recovery by CEL from the solicitors in the earlier proceeding. Interest and costs also were claimed.
A reference in the claim to the difference between market value (for which it was sold) and replacement value of a grand piano is not easily related to the claim and did not feature in argument in this Court.
Claims were made both in contract and tort though no distinction was drawn between them.
The defences were by way of denial of any material duty and breach. It was also said that if there was any breach of duty to the plaintiffs it was not causative of any loss for which they had not already been compensated as a result of the settlement of the earlier proceeding or which would not have been suffered in any event. There was a plea of contributory negligence but we heard nothing of that.

Estoppel

A consent memorandum signed by counsel for the parties on 6 November 1996 was in the following terms:

MEMORANDUM OF CONSENT BY COUNSEL
FOR THE PLAINTIFFS AND THE DEFENDANTS
IN RESPONSE TO APPLICATIONS FOR DIRECTIONS
PURSUANT TO RULES 418 AND 437 OF THE HIGH COURT RULES

The plaintiffs and the defendants to this proceeding admit that it would be an abuse of process for them to relitigate the following findings made by Justice Ellis in his judgment dated 16 October 1990 in CP2759/89 in the Auckland Registry of the High Court of New Zealand and/or that they are estopped from relitigating those findings:
1.On or about 12 October 1987 the first named plaintiff, Mr F I Yukich, asked the first named defendant, Mr P A MacKenzie, about execution by Studio Australia Pty Limited (“Studio”) of the agreement to lease between Commercial Electronics Limited and Imagineering Micro Distributors Limited (“Imagineering”) before Commercial Electronics Limited went ahead with the development of the land at Lot 11 North Harbour Industrial Park, Albany, Auckland (“the property”) and was reassured by Mr MacKenzie that it was safe to do so.
2.Mr Yukich did not request any reassurance from Mr MacKenzie about the execution by Studio of the agreement to lease before letting Imagineering into possession of the premises in May 1988. Mr MacKenzie was not consulted by Mr Yukich prior to Commercial Electronics Limited granting possession of the premises to Imagineering and Mr MacKenzie did not repeat the assurance already given on or about 12 October 1987.
3.At all material times both Mr Yukich and Mr MacKenzie knew that Studio had not signed the agreement to lease and Mr Yukich knew every detail of that transaction.
4.If Mr MacKenzie had insisted that Studio execute the agreement to lease in 1987, then Studio would have signed that agreement.
5.McElroy Milne breached its contractual duty of care to Commercial Electronics Limited by:
(a)failing to have Studio execute the agreement to lease;
(b)failing to warn Commercial Electronics Limited of the possible dangers of proceeding without Studio executing the agreement to lease.

6.Studio did not, and by mid 1988 would not, execute a guarantee of the lease.
7.Any litigation undertaken by Commercial Limited to obtain Studio’s guarantee would have been costly, protracted and uncertain. Commercial Electronics Limited acted reasonably and prudently in negotiating a settlement and did all that was required of it to avoid its losses as best it could
8.At all material times Commercial Electronics Limited wished to complete the development, tenant it and sell it.
9.The property complete and fully let in accordance with the agreement to lease would have been sold (that is with conveyance and settlement) by January 1989 for $5.250 million. At the date of trial, the value of the property complete with Unit 1 let to Imagineering was $4 million. It follows that Commercial Electronics Limited’s claim against McElroy Milne on these findings was for the difference in the value, namely $1.25M. This sum must be discounted by 25% for all contingencies relating to the value of Studio’s guarantee.
10.Any damages payable by McElroy Milne to Commercial Electronics Limited must be discounted by 25% for all contingencies relating to the value of Studio’s guarantee.

In the third (and last) amended statement of defence, dated 2 October 1998, it was admitted that the parties had by memorandum agreed they were bound by, and estopped from re-litigating, the findings of Ellis J. In particular para 37 of that statement of defence reads:
They admit the plaintiffs and the defendants are bound by a finding made by Justice Ellis in his judgment dated 16 August 1990 in CP2759/89 that on or about 12 October 1987, the first named plaintiff, Frank Yukich, asked the first named defendant, P A MacKenzie about execution by Studio of the agreement to lease between CEL and Imagineering before CEL went ahead with the development of the Albany property and was assured that it was safe to do so. Except as admitted they deny paragraph 37 of the claim.

The fifth and/or alternative defence pleaded relied on other findings of Ellis J and asserted the plaintiffs were estopped from denying them.

In accordance with what now is common practice, briefs of evidence were exchanged before trial. In his brief, read as his evidence-in-chief, Mr Yukich described the discussion he said he had with Mr MacKenzie on 12 October 1987 and referred to his diary entry for that day (which he produced). He said the discussion took place then because Mr MacKenzie had been unavailable earlier. He said also that he raised the matter out of concern that Studio had not executed the form of lease attached to the agreement. He went on to describe further discussions he said he had with Mr MacKenzie in November and December 1987 when further assurances were given. He again referred to diary entries to fix the dates. He went further still and described his wife’s concern at having to mortgage the home and referred to a memorandum he claims to have written to convey Mr MacKenzie’s assurances to her. He produced the memorandum dated 21 December 1987.
Mr Yukich went on to describe a meeting with Mr MacKenzie on 22 January 1988. His evidence was that they met at Mr MacKenzie’s office to go over details of the Westpac loan proposals and the securities required. They then went together to the bank to discuss the matter with the manager, Mr Weatherburn. He claimed that in both discussions Mr MacKenzie advised to the effect that the Studio guarantee was assured. That was the day the Westpac offer was accepted.
Mr Yukich said that without the assurances from Mr MacKenzie relating to the Studio guarantee the development project would not have proceeded and he and his wife would not have signed the personal guarantees nor mortgaged their home in favour of Westpac.
Mr Yukich was cross-examined at length. He was broadly challenged on his credit. In particular the authenticity of his diary entries was questioned and it was put to him that the memorandum written for his wife and dated 21 December 1987 was in fact written much later drawing on a set of minutes in virtually identical terms and was thus a fabrication.
Mrs Yukich gave evidence supporting aspects of her husband’s evidence. She too was challenged on credit and on the authenticity of the 21 December memorandum.
Mr MacKenzie gave evidence. In his brief of evidence, exchanged before trial, he said with reference to the discussion said by Mr Yukich to have taken place on 12 October 1987, that he did not recall the conversation and had no file note of it but “Nevertheless I am bound by the findings made by Justice Ellis in earlier proceedings …”. He said he had no conversation on 21 December 1987 as claimed by Mr Yukich. He said he did not discuss the Studio guarantee at the meetings on 22 January 1988.
In the course of his oral evidence Mr MacKenzie confirmed that, at the material time, he believed Studio was bound to guarantee the lease and if he had been asked he would have so advised. In cross-examination he reiterated that he could not recall the conversation with Mr Yukich on 12 October. When asked about the discussions on 22 January he accepted the meetings took place but did not have a distinct recollection of them. He said he could only surmise that the discussions were to do with the loan offer and any legal issues that might have arisen from it. He accepted that the Westpac special condition requiring confirmation of the Studio guarantee must have been satisfied but he could not say how or by whom.

The defence also called an expert document examiner who had been briefed prior to trial but whose brief was not made available to the plaintiff until after Mr Yukich had been cross-examined. The evidence was directed to supporting the contentions that the memorandum of 21 December was not written on that date and that notes said by Mr Yukich to record a quite different assurance given by the bank manager, Mr Weatherburn, relating to the financial viability of Monarch also was fabricated.
It was in final submissions to the trial Judge that counsel for the defendants first overtly sought to challenge the estoppel and resile from the consent memorandum that had been filed. At the same time it was submitted that the plaintiffs continued to be bound by Ellis J’s judgment. This was said to be justified because fresh evidence (the 21 December memorandum) had become available indicating the earlier decision was incorrect and because the earlier judgment had been obtained by fraud. It was also submitted that Ellis J’s finding on Mr MacKenzie’s assurance on 12 October was collateral to his decision.
The submissions in response for the plaintiffs were clear and direct. Para 92 of the written submissions reads:
The parties agreed that they are issue estopped by the findings [of Ellis J] above. That agreement was made on 6.11.96, as recorded in a memorandum of that date (on the Court file, but copy tendered). Admissions are recorded in the statement of defence filed by the defendants. See statement of defence §§37, 38, 39, 40. Up until the delivery of the closing submissions on Wednesday, the fact that the defendants are bound by the findings had not been challenged, including by Mr MacKenzie in evidence-in-chief (where again he said he had no recollection of the conversation of 12 October 1987 but did not challenge it) by evidence led in the hearing and by cross-examination.
Giles J accepted the submissions for the respondents. He found on the evidence he heard that the memorandum dated 21 December 1987 was written by Mr Yukich much later and by reference to a set of minutes of a meeting held in September 1988 and, so far as it purported to pass on to his wife assurances said to have been received from Mr MacKenzie, was fabricated. He found that the diary entries relied on by Mr Yukich in his evidence could not be accepted as authentic in terms of their chronology. His conclusion was:
For those reasons I am unable to accept the authenticity in terms of their chronology of the diary entries or Exhibit 2. Without them it is simply a question of Mr Yukich’s word against Messrs MacKenzie and Weatherburn. I prefer the latter two witnesses. If follows that I do not accept the claim made by Mr Yukich that a positive assurance of the kind contended for in paragraph 58(a) of the sixth amended statement of claim was ever made by Mr MacKenzie.
I appreciate that, in so finding, there is an inconsistency of factual finding as between myself and Ellis J. That is unfortunate, but cannot be avoided. I am in little doubt that if the memorandum and diary entries had been made available to counsel in the earlier case, and had been examined in the way they have been examined before me, the possibility of a different conclusion cannot be discounted. However, the fact of the difference does not in any way impinge upon the integrity of the decision made in the earlier case because vis-à-vis CEL. Ellis J was satisfied that McElroy Milne had failed in their duty to advise correctly in relation to Studio’s obligation on the guarantee and, in that regard, his Honour was plainly right and McElroy Milne have accepted that and settled that judgment.
Earlier the Judge had cited Meates v Taylor [1992] 2 NZLR 36 and Arnold v National Westminster Bank Plc [1991] 2 AC 93 and said:
I detect a willingness in these decisions of high authority to acknowledge the need for a degree of flexibility where the interests of justice so require. In this case, some years after a trial much closer in time to the events in issue, a very crucial document surfaces for the first time. It is offered as corroborative evidence of the plaintiffs’ contention that a positive assurance was given to them – that positive assurance being very important to their prospects of success. Furthermore, it is now said that notwithstanding that no mention was made of any occasion other than 12 October 1987 before Ellis J, there were in fact other times at which assurances were given. Diary entries are said to corroborate those occasions which were not mentioned at the earlier hearing. The defendants say those are false documents. If that is so then there are real credibility issues arising, the determination of which might very well impact on the earlier finding.
Fraud is something which cuts to the heart of justice. A finding procured on a fraud should not become sacrosanct through the doctrine of issue of estoppel. To allow that to occur would be to foster injustice. I conclude that there is sufficient basis for concern here to allow, indeed require, this matter to be reconsidered on the basis of fresh evidence not reasonably procurable at the earlier hearing; that the finding was collateral and, in any event fraud may well exist.
The Judge did not expressly accept that the finding of Ellis J on the positive assurance was collateral because that Judge found other independent negligence. That is understandable because it was as much a plank in his determination as was his finding of negligence by failure to secure the Studio guarantee.
Giles J relied on a statement made by counsel that the crucial document dated 21 December 1987 had not been discovered in the proceeding when the consent memorandum was signed. That was unfortunate. Mr Judd produced a letter with which the document was sent to the defendants’ solicitors in March 1995.
The Judge also relied on what he construed as a reservation in the statement of defence of a right to challenge the issue estoppel principle on the basis of “special circumstances”. But that was in a general plea made separately from the specific, unqualified admission, in para 37 of the same document, of the estoppel and the agreement on its application to the assurance given by Mr MacKenzie to Mr Yukich on 12 October 1987.
In this Court it was said that the respondents’ advisers did not obtain the minutes of 13 September 1988, which appeared to be the source of the memorandum dated 21 December 1987, until after the consent memorandum was signed (“just prior to Christmas 1998”). But the challenge to the authenticity of the diary entries plainly was already contemplated as the instructions to the document examiner were received on 9 September 1998.
Though the memorandum dated 21 December 1987 and the impugned diary entry other than that for 12 October 1987 were not before Ellis J, it was said his finding was obtained by fraud and that had he heard all the evidence placed before Giles J he would not have accepted Mr Yukich’s evidence of the assurance by Mr MacKenzie on 12 October.
Giles J did not expressly find fraud, though that is the tenor of his judgment read as a whole. Nor did he find any more than that the possibility that a different conclusion by Ellis J could not be discounted. Nevertheless Mr Harrison submitted that “Fraud is all pervasive or infectious” and that any finding based on fraudulent evidence should be vitiated: Jonesco v Beard [1930] AC 298, 301. That may be so when fraud is properly pleaded and proved.
In this case the first suggestion of impugning the estoppel and resiling from the consent memorandum emerged in final submissions. In spite of ample time and opportunity to amend the pleadings expressly to plead that the estoppel and agreement should not be applied, no step was taken and no notice was given. An attempt was made to rely on a qualification endorsed on the agreed bundle of documents for trial that the authenticity of the diary entries and the 21 December memorandum was not accepted. But that must be rejected as insignificant in the face of the express admissions and the consent memorandum.
It was submitted that counsel for the plaintiffs at the trial opened and led evidence particularly of the alleged assurance given on 12 October 1987 in a manner indicating that the estoppel was not regarded as binding and that, looked at overall, it should now be said that failure to give notice and properly plead the challenge to the estoppel would have made no difference. We do not accept that. We are unable to speculate how the trial might have been conducted in the event that the pleadings had been quite different from those upon which it was based.
In the circumstances we are satisfied it was not open to the Judge to embark upon any enquiry into the correctness of the proposition that on 12 October Mr MacKenzie gave to Mr Yukich an assurance that it was safe to proceed with the Albany development without concern for the non-execution by Studio of a guarantee of the proposed lease to Imagineering.
To allow a party to conduct a trial on the basis of an accepted estoppel with cross-examination going generally to credit and then to rely on answers obtained to question the estoppel without prior notice would be to negate the very purpose of the principle of issue estoppel – to prevent re-litigation between the parties or their privies.

Consideration of Other Findings

It is necessary, therefore, to proceed with further consideration of the case on the basis that there was an assurance given on 12 October 1987. That, of course, does not in itself undermine the other findings made by the Judge. But they too were challenged on appeal and require consideration.
Mr Judd was not able to advance any convincing grounds for interfering with the Judge’s findings rejecting the claims by Mr Yukich of assurances on other occasions between October 1987 and 22 January 1988. He did submit that it was equally tenable that the 21 December memorandum was the original document and the source of the information in the minutes of 13 September 1988. But he was confronted with the difficulty that Mr Yukich was adamant neither was produced by reference to the other – the unlikelihood of which the Judge was entitled to weigh.
Mr Judd also submitted that with proper notice the authenticity of the diary entries could have been further investigated. He sought leave to introduce on appeal evidence tending to show lack of opportunity to falsify the diary entries. But for the one entry for 12 October 1987 the diaries were clearly always going to be open to challenge given the reliance on them in Mr Yukich’s evidence in chief. We, therefore, decline to consider the further evidence and place little weight on the lack of notice of challenge in respect of the other diary entries.
There was also complaint that the Judge admitted evidence from Mr Weatherburn on a collateral issue to undermine the credibility of Mr Yukich when objection to its admissibility was taken. We accept there is strength in this point, but we are not persuaded that it bore directly on material findings or would have made any significant difference to the Judge’s assessment overall of Mr Yukich’s credibility.
Mr Judd was on somewhat stronger ground in his criticism of the Judge’s treatment of the evidence relating to the meetings on 22 January 1988. Because he had formed an unfavourable view of Mr Yukich he expressed his preference for the evidence of Mr MacKenzie where that conflicted with that of Mr Yukich. But Mr MacKenzie was unable to recall the detail of the discussions of 22 January so that there was no conflict with the evidence of what Mr Yukich said took place. Mr Weatherburn was equally unable to assist on this aspect. The Judge made no finding on whether the assurances said to have been given by Mr MacKenzie at each of the meetings on that day were in fact given. Nor did he make any finding on whether Mr MacKenzie was instrumental in Westpac’s special condition being satisfied – as it must have been.
It was said that for Mr Yukich to contend for assurances at meetings on 22 January was inconsistent with para 2 of the consent memorandum. That “Mr Yukich did not request any re-assurance from Mr MacKenzie about execution by Studio of the agreement to lease before letting Imagineering into possession of the premises in May 1988”. In context that clearly intended to reflect the finding of Ellis J which was directed to an allegation of a re-assurance by Mr MacKenzie on the particular occasion in May 1988 when possession of the premises was given to Imagineering. It does not raise an estoppel preventing evidence of such a re-assurance on a different (earlier) occasion such as in discussions relating to the Westpac loan offer on 22 January 1988.
Nevertheless, against the credibility findings made by Giles J, and in the absence of any finding by him, we are reluctant to find affirmatively that Mr MacKenzie gave further re-assurance of the Studio guarantee on 22 January 1988. No affirmative assurances given on 22 January were relied upon in the proceeding before Ellis J. That the case before him involved the company rather than Mr and Mrs Yukich is unlikely to have been a reason for ignoring it. Further, it is unnecessary to attempt any finding of positive assurance by or on behalf of the respondents in satisfaction of Westpac’s “special condition” because the case does not seem to have been mounted on negligence in that respect. But with reference to the allegation in para 58(d) of the sixth amended statement of claim on which Giles J did not, and had no need to, make a finding in light of his rejection of the estoppel, we consider a finding must now be made. If there was a duty to do so, Mr MacKenzie, when advising Mr Yukich on 22 January 1988 on any legal issues in respect of the Westpac loan offer (which included the special conditions), as he accepted was the purpose of the meeting that day, knowing he had earlier (in October) advised Mr Yukich (albeit as managing director of CEL) that it was safe to proceed with the development because the Studio guarantee was assured, failed to correct the understanding on the basis of which his clients were committing themselves to the personal guarantee and mortgage.

The Solicitor’s Duty

It is necessary then to turn to the question whether Mr MacKenzie had a duty to warn Mr Yukich that his belief on which he was proceeding, that the Studio guarantee was assured, was not correct. Giles J found that the solicitor/client relationship between Mr MacKenzie’s firm and Mr and Mrs Yukich did not begin until 22 January. Before that the firm’s client was CEL. Mr Yukich had negotiated the Westpac loan offer without legal assistance and Mr and Mrs Yukich well knew the effects and consequences of personal guarantees. In the circumstances he held that the firm’s obligation to them was confined to the nature and effect of the security documents to be executed in the bank’s favour and did not extend to “ … broad-ranging advice about the existing CEL/Imagineering contract and any risks in that transaction”.
We were invited to consider the history of the relationship between Mr and Mrs Yukich and the solicitors. They had acted in the past in personal matters. But in view of the clear solicitor/client relationship by 22 January 1988 that does not seem material.
The Judge had found against the assertion of the assurance given to Mr Yukich on 12 October 1987. On that finding the authorities on which he relied provide support for a limited scope of the retainer. But those same authorities emphasise that the scope of a solicitor’s retainer depend on the circumstances: Provost Developments Ltd v Collingwood Towers [1980] 2 NZLR 205, 213, Caradine Properties Ltd v D J Freeman & CO (a firm) (1982) 126 S J 157, Clark Boyce v Mouat [1993] 3 NZLR 641, 648, Gilbert v Shanahan [1998] 3 NZLR 528, 537.
In this case Mr and Mrs Yukich did not merely attend to sign security documents at their solicitors’ office. Mr Yukich consulted Mr MacKenzie about the Westpac loan offer before it was accepted. They discussed it against the background of the express request and reassurance on 12 October with reference to the very development for which the loan moneys were required. While in general clients seeking simply to complete loan documentation are not entitled to expect advice as to the wisdom of underlying business transactions, that cannot apply in absolute terms when, because of prior advice by the solicitor to those persons who are now clients, those clients are labouring under a serious misunderstanding as to the risks involved. In that situation a solicitor, exercising reasonable skill and care, will ensure the prior erroneous advice is corrected.
In the circumstances of this case, we consider there was a duty of care which was breached in the manner alleged in para 58(d) of the statement of claim.

Causation and Quantum

Giles J accepted, and the trial had proceeded on the basis of, the distinction between a claim based on negligent advice and a claim based on negligent failure to give proper advice. That is the distinction explained by Millett LJ in Bristol & West Building Society v Mothew [1998] Ch 1, 11; [1996] 4 All ER 698, 705.
Where a client sues his solicitor for having negligently failed to give him proper advice, he must show what advice should have been given and (on a balance of probabilities) that if such advice had been given he would not have entered into the relevant transaction or would not have entered into it on the terms he did. The same applies where the client’s complaint is that the solicitor failed in his duty to give him material information. In Sykes v Midland Bank Executor and Trustee Co Ltd [1970] 2 All ER 471, [1971] 1 QB 113, which was concerned with a failure to give proper advice, the plaintiff was unable to establish this and his claim to damages for negligence failed. In Mortgage Express Ltd v Bowerman & Partners (a firm) [1996] 2 All ER 836, which was concerned with a failure to convey information, the plaintiff was able to establish that if it had been given the information it would have withdrawn from the transaction and its claim succeeded.
Where, however, a client sues his solicitor for having negligently given him incorrect advice or for having negligently given him incorrect information, the position appears to be different. In such a case it is sufficient for the plaintiff to prove that he relied on the advice or information, that is to say that he would not have acted as he did if he had not been given such advice or information. It is not necessary for him to prove that he would not have acted as he did if he had been given the proper advice or the correct information.
For the plaintiffs it was accepted that if they succeeded in establishing only the omission to properly advise, they would need to prove on the balance of probabilities that if they had been informed of the risk they would not have proceeded with the personal guarantee and mortgage.
It was substantially common ground that if they had been told the Studio guarantee was not assured Mr and Mrs Yukich would not have given their guarantee and mortgage. The dispute was really whether, had the position been recognised in January or February 1988, the Studio guarantee would then have been obtained. The Judge made no finding on that. Ellis J had found that it would probably have been obtained “in 1987” by which we understand he meant at the time of Mr MacKenzie’s erroneous assurance to CEL. But it does not follow that it still would have been given in early 1988 bearing in mind the uncertainties of the time. We heard argument as to the onus of proof. Giles J held it remained throughout on the plaintiff. It was submitted that because the damages in the CEL claim were assessed on the basis that the guarantee would have been obtained, a different approach in this case would be inappropriate. We do not see that it matters in this case.

If Mr Yukich had been informed that Studio was not bound, he would (as he accepted) have required that its commitment be obtained. If it had been then obtained, and the guarantee given, the development would have proceeded and the property would have yielded on sale (as Ellis J found) $5.125 million. Subject to the argument that even then there might have been some shortfall in meeting all the indebtedness on the particular development, there would have been no call on the Yukich guarantee.
On the other hand, if the Studio guarantee had been sought and refused early in 1988, loan moneys would not have become available and, on the evidence, the development would have been stopped and the property sold. There is no reason to believe that would not have yielded close to enough to repay the BNZ mortgage so that no personal liability would have remained on Mr and Mrs Yukich.
It follows that the loss incurred through signing the personal guarantees and mortgage when they should have been warned of the unrecognised risk was the value of the Campbells Bay property - $2 million - less so much of the sale proceeds as was applied to discharge Yukich personal obligations.
There remain the two matters of strongest contention. They occupied a considerable part of the trial. The first is the argument that Mr and Mrs Yukich already have been compensated for all claimable loss through benefits flowing to them from the receipt by CEL of the money paid by the solicitors on the settlement of the earlier proceeding. The second is the argument that any recoverable loss would have been suffered in any event and should not be attributed to the solicitors’ negligence.
Although they called no evidence on these issues, counsel for the respondents extensively cross-examined on these matters by reference to documents obtained on discovery. By the end of the trial the appellants accepted that from the $1.8 million paid to CEL on settlement of the earlier proceeding they derived benefit to the value of $1,126,548 which must be credited against the $2 million loss leaving $873,452 uncompensated. The respondents maintain that the value of personal benefits from the settlement is higher than $1.1 million and point to various payments made by CEL which were deducted without justification from the $1.8 million recovered. In particular they refer to a sum of $290,000 paid by CEL to Castel as “management fees” for the services of Mr Yukich as managing director. The Judge did not need to make specific findings on quantum but he expressed “grave reservations” as to integrity of some of the payments.
In the absence of findings we are not in a position on appeal to determine either the amount of the house sale proceeds of $2 million which constituted loss to Mr and Mrs Yukich (e.g. plainly arrears of rates and insurance premiums were their responsibility), nor the legitimacy of payments made by CEL to Castel, purportedly under a debenture the validity of which is undetermined, and to others.
It does appear that the amount of the sale proceeds allocated to discharge the prior FAI/Metlife mortgage was a necessary expenditure to enable Westpac to access the sale proceeds. If the guarantee and mortgage to Westpac had not been given, the BNZ mortgage would have remained securing a personal obligation of Mr and Mrs Yukich – but, as explained, whether or not the Studio guarantee was obtained, there was sufficient security in the Albany property substantially to cover the relevant prior mortgage so that we do not see that the amount of such mortgage forms any significant part of the loss quantification.
To the extent that the loss had not been compensated from the $1.8 million settlement already paid by the solicitors to CEL, it is necessary to examine the claim that the loss was inevitable and would have been suffered irrespective of the negligence.
The argument rests on the advances said to have been made by CEL to Ashling out of borrowings guaranteed by Mr and Mrs Yukich. By reference to financial statements and accounting records, in cross-examination of Mr Yukich and an expert accountant called by counsel for the plaintiffs, defence counsel sought to establish that during 1988-89 CEL advanced substantial sums to Ashling. CEL’s balance sheet at 30 June 1988 showed Ashling as a debtor in the amount of $572,478.79. Ashling’s balance sheet at the same date recorded a liability of the same amount to CEL. Ashling's 1989 balance sheet shows that liability as $1,184,727. In the two years ended on those dates Ashling’s revenue statements showed losses of $355,750 and $533,544 respectively, made up predominantly of interest. CEL’s balance sheet at 30 June 1989 no longer showed advances to Ashling. This is explained (at least substantially) by a journal entry of that date writing off advances to Ashling of $1,014,313 as unrecoverable.
While Mr Yukich and the expert accountant accepted that the accounts showed these advances, they were troubled by them as they did not know where the money could have come from. The Judge found that the advances were made ($1.19 million by 30 November 1988) but he made no finding on the source of the moneys other than that they were “borrowed moneys”.
It was argued for the respondents that the sources of the funds for these advances were BNZ, Westpac and FAI/Metlife. It was said that the borrowings from these institutions were those guaranteed by Mr and Mrs Yukich, that they were employed to finance Ashling’s borrowings, also guaranteed by Mr and Mrs Yukich, so that if they had not been called on by Westpac and FAI/Metlife under their guarantees they would have been called on under the guarantees of Ashling’s borrowings under which they assumed liabilities totalling $3 million plus interest.
But if the sources of the advances from CEL to Ashling were borrowings which Mr and Mrs Yukich did not guarantee, it would not follow that Mr and Mrs Yukich personally would have lost in any event. The position seems to be that the original advance from BNZ, secured by mortgage over the Campbells Bay home was applied to the purchase of the Albany property. That was repaid from the proceeds of the later FAI/Metlife facility. The original Westpac loans of $4 million were drawn down against progress certificate on the Albany development. They amounted to the full contract sum of $3,220,801. The full loan was drawn down but it is not clear on what basis. The CEL accounts to 30 June 1998 record the full amount of the Westpac loan as drawn down but moneys owning to Monarch of $284,721 which sum exceeded the amount certified in the final certificate dated 24 June 1988. The Westpac loan was increased in September 1988 to $4.9 million although that appears to have reflected capitalisation of accrued interest and may not have generated available funds to any great extent. There is no indication of significant loans from other sources having been accessed by CEL although the June and November 1988 balance sheets record substantial bank overdraft liability, indebtedness to Monarch and advances from Castel and a partnership.
The conclusion therefore must be, as the Judge found, that part of the moneys from Westpac and FAI/Metlife were applied in meeting interest costs accruing against Ashling. That reduced the exposure of Mr and Mrs Yukich under their guarantees. Had that not occurred, since Ashling had no other source of funds, it is probable that Mr and Mrs Yukich would have been called upon as the only guarantors of substance. Yet there would not necessarily have been a corresponding reduction in the $2 million loss under the guarantee to Westpac; it would probably have meant only that the amount Westpac wrote off would have been less. We are quite unable to see in the circumstance under which repayment of the Ashling loans was ultimately settled any basis for inferring that Mr and Mrs Yukich could have avoided demands on their guarantees in 1988 and 1989 if the inter-company advances had not been made.
Without any close analysis of the figures, which would require further investigation, it certainly appears that the extent of the exposure to Ashling creditors avoided by the inter-company advances out of the proceeds of the Westpac and FAI/Metlife loans must have been more than the amount by which the $2 million lost on the sale of the home exceeded the value of benefits recovered out of the settlement between the solicitors and CEL even if that is taken at the full amount of the claim of $873,452. If that is correct there is now no loss recoverable from the solicitors flowing from the guarantees given to Westpac. That it is correct seems clear from the memorandum signed by Mr Yukich on 4 January 1989 headed “Charge to Ashling Achievements Ltd” and identifying costs to be charged to Ashling “re: Restructuring Finance by CEL, Westpac and Metlife to fund shortfall of $930,000 in Ashling Achievements Ltd”. It is also entirely consistent with the Judge’s findings, with the documents and with the evidence given in cross-examination by the expert accountant called by counsel for Mr and Mrs Yukich.
It is however also necessary to take into account the time sequence. The loss upon sale of the home was incurred in 1990. The benefits recovered following settlement of the CEL proceeding were not received until 1992 (as to part) and 1993. To the extent that loss incurred by Mr and Mrs Yukich under the Westpac guarantee through the negligence of the solicitors was reimbursed at later dates they would be entitled to interest to those dates.
It will require a full accounting to determine, even approximately, the amount (if any) the solicitors should pay for interest in the period until Mr and Mrs Yukich recovered the benefits of the CEL settlement.
For the reasons outlined we are unable to determine with any precision:
(a)The amount by which the sale proceeds of the Yukich home should be reduced in assessing their loss to allow for expenses for which they were personally responsible.
(b)The amount by which Mr and Mrs Yukich benefited from the proceeds of the CEL settlement in light of payments made by CEL in respect of which there is dispute.
(c)The amount by which their exposure under guarantees to Ashling creditors was reduced by the application of funds advanced from Westpac and FAI/Metlife guaranteed borrowings; the maximum would seem to be Ashling interest payments in the 1988-89 period with relevant penalties and fees and any amount by which application of those funds increased the market value of Ashling assets.
(d)The interest to be calculated on recoverable loss reimbursed through the CEL settlement for the period from the sale of the house until the benefits were received.
All of these matters should be capable of determination among the advisers to the parties. But if that proves impossible the case may need to be remitted to the High Court. The unavailability of the trial judge makes that an unattractive course. Therefore, the matter is adjourned with leave to apply to allow the parties to consider this judgment. We mention, in case it may be of assistance, that on our tentative consideration of the evidence, without the benefit of argument, it appears unlikely that a full accounting will yield any substantial sum for which the respondents still are liable. If the details including costs, cannot be resolved, the matter will need to

come back to this Court. Memoranda should be filed in the first instance.

Solicitors
Cockcroft d’Young Moorhouse, Auckland, for Appellants
Bell Gully Buddle Weir, Auckland, for Respondents

[2000] NZCA 91

20 June 2000