JC Cooper Trust v Peach Cornwall and Partners HC Wanganui CIV-2009-483-325

[2011] NZHC 1549

IN THE HIGH COURT OF NEW ZEALAND WANGANUI REGISTRY

CIV-2009-483-325

BETWEEN  JC COOPER TRUST Plaintiff

ANDPEACH CORNWALL AND PARTNERS Defendant

ANDACE INSURANCE LIMITED Third Party

Hearing:          11 May 2011

(Heard at Wanganui)

Counsel:          C. Light - Counsel for Plaintiff

T.J. Castle - Counsel for Kevin Bruce Stephenson (Retired Partner of the Defendant)

V.M. Heward - Counsel for the Third Party

Judgment:      24 May 2011 at 2:30 PM

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This Judgment was delivered by Associate Judge Gendall on 24 May 2011 at 2.30 pm under r 11.5 of the High Court Rules.

Solicitors:          Stace Hammond, Solicitors, PO Box 19-101, Hamilton Treadwell Gordon, Solicitors, PO Box 4084, Wanganui Anderson Lloyd, Lawyers, Private Bag 1959, Dunedin

JC COOPER TRUST V PEACH CORNWALL AND PARTNERS HC WANG CIV-2009-483-325 24 May 2011

Introduction

[1]       These proceedings relate to an action brought by the plaintiff trust (the John Coutts Cooper Trust) against the defendant accountancy partnership (Peach Cornwall and Partners) for professional negligence on the part of the defendant.

[2]       In 1998 the partnership of Peach Cornwall and Partners which had practised and traded for some time ceased to exist.   In 1999 Peach Cornwall Limited (PCL) was incorporated and began trading.  In 2005 PCL merged with Ballance Chartered Accountants Limited (BCL).  ACE Insurance Limited (ACE) insured BCA for professional negligence amongst other things under the Icon Chartered Accountants’ Professional Indemnity Insurance Policy (the Policy) between 1 September 2008 and 1 September 2009.   After the present proceeding was brought by the plaintiff against the defendants, partners of the defendant subsequently filed statements of claim against ACE claiming performance of the insurance indemnity contract.

[3]       Now, ACE Insurance Limited (ACE) applies, as third party to these proceedings, to strike out the plaintiff trust’s pleading against the defendant.   The stated grounds for that application are that the plaintiff’s pleading is so clearly statute barred that its claim can properly be regarded as frivolous, vexatious or an abuse of process of this Court.

Background

[4]       The breach alleged by the plaintiff trust arises out of professional advice given by the defendant in advising the plaintiff on a forestry right investment with Farmers Mutual Investment Services Limited (FMI).

[5]       The plaintiff trust, settled in 2003, now holds a block of farm land at Ongarue near Taumarunui.  Previously that block was owned by Mr John Cooper along with three others (the past proprietors).  In late 1995 Mr John Cooper retained the defendant as accountants to represent him and his then, co-proprietors.  In 1996 the past proprietors of the farm, on the advice and assistance of the defendant, entered into the forestry right investment.   That investment provided for a grant to FMI of a forestry right for a  term of 35 years from 1

April 1996 or following harvesting and replanting of one forestry rotation, whichever was the sooner.  Clause 5.1.2 of the Agreement outlining the forestry right (“the Agreement”) provided for regular review of the calculation of rental payable to the plaintiff from 1 April

2007. The calculation was to be based on the Grazing Farmland Price Index (the Index).

[6]       In 2005 the past proprietors transferred the block of land, and the associated forestry rights, to the plaintiff trust.

[7]       The  initial  rental  for  the  forestry  right  fixed  for  the  first  11  years  under  the Agreement was determined by reference to a valuation of the woodlot being 7% of its unimproved value.  This was fixed at $26,271.00 plus GST per annum.  After the first 11 years on 1 April 2007 the rental was to be determined by the formula in clause 5.1.2 of the Agreement by reference to the Index as noted in [5] above.  The Index is compiled using the sale prices of grazing farmland generally over periods of six months, ending on 30 June and

31 December in each year.  The Index values accordingly rise and fall with reference to the sale prices of grazing farmland during each six-month period.

[8]       Issue has since arisen with the calculation of the rent on review in April 2007.

[9]       The past proprietors maintain they were advised at the outset by the defendant that the  rent  was  the  product of  dividing the  Index  as  at  the  quarter  ending 31  December immediately preceding the adjustment date  by the Index as at the quarter immediately preceding the 1996 commencement date of the Agreement.   However, as determined at arbitration in 2007, the contract constituting the Agreement as drawn actually provided for review for the 2007 payment onwards based only on the previous year’s Index (ie the product of dividing the Index as at the quarter ending 31 December immediately preceding the adjustment date (1829) by the Index as at the quarter immediately preceding 1 April

2007) (1829) and multiplying this against the previous rental $26,271.00) which left the same figure of $26,271.00.    Therefore, the starting point was the Index in 2006 not, as hoped by the plaintiffs, the Index in 1996 which, as it turns out, would have provided them with significantly increased rent, rather than no change to the previous rental which as I have noted actually prevailed.

[10]      Under s 4 of the Limitation Act 1950 an action founded on tort shall not be brought after  the  expiration  of  six  years  from the  date  on  which  the  cause  of  action  accrued. Therefore, if the cause of action here accrued at the date on which the plaintiff trust received advice from the defendant, the action is time barred.  The plaintiff argues, however, that no loss was suffered before 1 January 2007 (i.e. the date on which the 2006 Index value was available).   That is because any loss before 1 January 2007 was wholly contingent on an index value at the end of a period being higher than the index value at the commencement of that period and thus the plaintiff would suffer a loss by way of a reduced rental for the next (and subsequent) periods under the Agreement.

Counsels’ Submissions and My Decision

Jurisdiction

[11]     It was undisputed between the parties that a third party may bring an application to strike out a plaintiff’s claim against a defendant.1    However, the plaintiff trust says that a third party will succeed only in rare cases.   That is particularly so in a case such as this where the limitation period under s 4 of the Limitation Act 1950 does not apply to the defendant’s claim as against the third party ACE.  Nevertheless, counsel for the defendant has filed a memorandum in support of ACE’s application and counsel for one of the former partners of the defendant Mr Kevin Bruce Stephenson (Mr Stephenson) has also provided submissions in support.   In those circumstances, I am satisfied that I have jurisdiction to strike out the plaintiff trust’s claim if I am satisfied that the criteria under r 15.1 are met.

Principles on Strike Out

[12]     In order to succeed in striking out a cause of action as statute-barred, the defendant must satisfy the Court that the plaintiff’s cause of action is so clearly statute-barred that the plaintiff’s claim can properly be regarded as frivolous, vexatious or an abuse of process.2

Tipping J went on to say in Murray v Morel & Co Ltd:3

In  the  end  the  judge  must  assess  whether, in  such  a  case,  the  plaintiff has presented enough by  way  of  pleadings and  particulars  (and  evidence, if  the plaintiff elects to produce evidence), to persuade the court that what might have looked like a claim which was clearly subject to a statute bar is not, after all, to be viewed in that way, because of a fairly arguable claim for extension or postponement. If the plaintiff demonstrates that to be so, the court cannot say that the plaintiff’s claim is frivolous, vexatious or an abuse of process. The plaintiff must, however, produce something by way of pleadings, particulars and, if so advised, evidence, in order to give an air of reality to the contention that the plaintiff is entitled to an extension or postponement which will bring the claim back within time.

ACE’s Submissions

[13]      ACE argues that loss was suffered by the plaintiff trust between 20 May 1996 and

June/July 1996 when the past proprietors entered into the Agreement.  The past proprietors

1 Hermawan v City Construction Ltd (1999) 13 PRNZ 27.

2 Murray v Morel & Co Ltd [2007] NZSC 27, [2007] 3 NZLR 721 at [33].

were bound by that Agreement upon entering into it, therefore, it was certain that as at the adjustment date (1 April 2007) the annual rental would be calculated pursuant to clause

5.1.2.   As such, the Agreement was significantly less valuable to the past proprietors immediately upon their entering into it.

[14]      ACE further argues that the value of the Index as at 1 January 2007 is only relevant to the calculation of the plaintiff trust’s actual loss, and not to the existence of any loss. ACE relies on the Supreme Court decision in Thom v Davys Burton as authority for that proposition.4   There the Supreme Court noted:5

There is a material difference between contingencies relevant to existence of damage and contingencies relevant to valuation of damage. In short, if the defendant’s negligence damages an asset of the plaintiff, that damage is immediate and actual. If the negligence exposes the plaintiff to a contingent liability, there is no actual damage until the contingency is fulfilled.

[15]      ACE proposes the following to test that concept:

This position can be tested by considering that:

i.the  past  proprietors  could  have  sought  to  rectify  the  Forestry  Right Agreement before 1 January 2007 (thereby incurring the cost of “putting it right”);

…

ii.         if the past proprietors had sought to sell the Farm at any time before 1

January 2007 it would have been necessary for a purchaser to value the Forestry Right Agreement (again, this could have been in the same way that the [plaintiff trust] now calculate[s] the damages claimed).

The Plaintiff Trust’s Opposing Arguments

[16]      In response, the plaintiff trust submits that the loss was contingent on the 2006 Index value being higher than the 1995 Index value.   As such, the plaintiff trust’s loss was not “actual and quantifiable” and it maintains it did not suffer any loss until, at the earliest, 1

January 2007.

[17]      The plaintiff trust sought to distinguish the decision in Thom from the present case. Thom concerned a matrimonial property agreement, an agreement purporting to contract out of the Matrimonial Property Act 1976.  That agreement was found to be void by the Family

Court due to non-compliance with the statutory formalities.  Mr Thom sought to claim in negligence against his solicitors for their advice.  Two grounds were advanced in the present case on which the plaintiff trust sought to distinguish Thom.

[18]      First,  it  was  submitted  that  in  Thom  the  agreement  was  legally  unenforceable, whereas here, the Agreement is legally valid.  Secondly, in Thom the Supreme Court held that Mr Thom suffered actual loss upon entering into the matrimonial property agreement. That was because the damage was quantifiable at that stage due to the cost to obtain a valid agreement or on the basis of the difference in value of property obtained by Mr Thom.  Here, there was no “ratchet clause” in the Agreement and also the Index could fluctuate up or down.  Accordingly, the rent received by the plaintiff trust could increase or decrease.  Loss could, therefore, not be quantified until 1 January 2007.

[19]      On all of this, before me, the plaintiff trust posed the following counter factual:

If instead the initial period during which there was to be no rental review was only two years, then the answer as to when the loss would be suffered would have to be the same, ie the length of the non-rental review period makes no difference.  It would similarly be impossible to tell whether the Index value would be higher or lower at the end of the two year period and a plaintiff would not have to file a proceeding until after that Index value was known, because he/she may not suffer any loss at all.

My Decision

[20]      The nub of the issue in the present case is, therefore, whether the plaintiff’s loss was so clearly actual and quantifiable prior to 2007 that its claim is outside the limitation period and can properly be regarded as frivolous, vexatious or an abuse of process.

[21]      A cause of action in negligence does not exist until there is an act or omission of the defendant which breaches a duty of care owed by the defendant to the plaintiff and, more importantly for the present case, loss or injury is caused by that act or omission.   “The existence of loss or injury is an element without which the cause of action does not exist and accordingly until it occurs time does not run against the plaintiff for limitation purposes”.6

As  loss  is  required  it  is  unjust  and  unreasonable  to  expect  a  plaintiff  to  commence

proceedings before the loss is quantified.7

[22]     In New Zealand, the test to determine at what time damage will be actual and quantifiable has been expressed thus:8

Damage will be  contingent, and  hence  not  actual  for  limitation purposes, if the plaintiff will suffer no damage at all unless and until a contingency is fulfilled.  That will be so if the damage results from the plaintiff being exposed to a liability which is contingent on the occurrence of a future uncertain event … A reduction in the value of an asset, whether tangible or intangible, constitutes actual damage and exists as soon as the asset becomes less valuable.

[23]      Therefore, it appears that it matters not whether the actual pleaded damage had come into existence.  Rather:9

…if it can be shown that a claimant is worse off in terms that can be measured financially at the date of receipt of the advice or the negligent failure, the cause of action will accrue on that date, even though accurate measurement of damage would be difficult and some of the damage may still be contingent.

[24]     Indeed, it seems the general approach of the courts in the United Kingdom and Australia is that if some measurable loss can be proven at an earlier point in time, quite apart from the contingent loss, the cause of action will accrue at that earlier time, notwithstanding that the full extent of the plaintiff’s financial loss may be incapable of ascertainment until some later date.10     From the test expressed above at [22], I consider that New Zealand authority is generally in line with the United Kingdom in that respect.

[25]      In Bell v Peter Browne & Co [1990] 2 QB 495 (CA) at 503 (generally adopted by the Supreme Court in Thom at [26] and [47]) Nicholls LJ expressed what may be seen as an extreme test to assist in determining whether some loss was actual and quantifiable at an earlier time:

In considering whether damage was suffered in 1978 one can test the matter by considering what would have happened if in, say, 1980 the plaintiff had learned of his solicitors' default and brought an action for damages. Of course, he would have taken steps to remedy the default. But he would have been entitled at least to recover from the defendants the cost incurred in going to other solicitors for advice on what should be done and for their assistance in lodging the appropriate caution. The cost would have been modest, but not negligible.

8 Thom v Davys Burton [2009] NZSC 65 at [46].

9  Spencer v Secretary of State for Work and Pensions and Moore v Secretary of State for Transport and Motor Insurers’ Bureau [2008] EWCA Civ 750 at [24].

10 Wardley Australia Ltd v Western Australia [1992] HCA 55, (1992) 175 CLR 514 at 530-531.

[26]     Further, the following summary of English authorities compiled by Elias CJ in Thom

is instructive:11

The  present  case  is  therefore  comparable  to  cases  such  as  Iron  Trade  Mutual Insurance Co Ltd v JK Buckenham Ltd,12 Bell v Peter Browne & Co,13 D W Moore, and Knapp v Ecclesiastical Insurance Group plc.14 They are cases where the plaintiff, through the negligence of the defendant, did not obtain the rights he should have obtained or had imposed on him liabilities or obligations that should not ha ve been imposed.

In Bell, the negligence of solicitors in not securing the position of the plaintiff on transfer of property to the sole ownership of the wife was held to make the plaintiff “actually, and not just potentially, worse off than if the solicitors had performed their task competently”,15  even though at the time the  wife’s wrongful dealing in the property so as to defeat his unsecured interest (which made the breach irremediable) lay in the future. The negligence of the solicitors in D W Moore, in failing to provide an effective restrictive covenant, meant that the business which should have been protected by a valid restrictive covenant suffered immediate financial detriment, even though it was wholly uncertain at the time whether there would ever be occasion to invoke the covenant.16  In Knapp and in Iron Trade Mutual Insurance, where the negligence of the plaintiffs’ insurance brokers led to policies being voidable, the plaintiffs were held to have suffered immediate damage on entering into the policies because they  did  not  get  the  protection they should  have  had,  even  though the eventual uninsured losses and the avoidance of the policies were wholly contingent at the time the insurance agreements were made and might never have eventuated.17 In all these cases, immediate quantifiable damage arose even though further damage arising from the flawed transactions remained contingent. Such further contingencies “only go to quantum … and [do] not affect the fact that the damages were suffered on [the date of the breach of duty] …because [the plaintiff] did not get what she should have got”.18 In Sephton, Lord Walker described cases such as these (in terms earlier used by Saville LJ in First National Commercial Bank plc v Humberts)19 as transactions where the plaintiff suffered quantifiable loss “then and there” because he

11 At [20]-[21].

12 [1990] 1 All ER 808 (QB).

13 [1990] 2 QB 495 (CA).

14 [1998] PNLR 172 (CA)

15 At 513 per Mustill LJ, agreeing with Nicholls LJ.

16 At 278 per Neill LJ and at p 279 per Bingham LJ.

17 See Hobhouse J in Knapp and Rokison QC (sitting as Deputy Judge of the High Court) in Iron

Trade Mutual Insurance at 820 – 821.

18 Baker v Ollard & Bentley (Court of Appeal (Civil Division), 12 May 1982, Transcript No. 155 of

1982, Lawton, Templeman and Fox LJJ) per Templeman J (cited by Buxton LJ in Knapp).

19 [1995] 2 All ER 673 at 679 (CA).

should have had greater rights or lesser obligations and instead ended up “with a package of rights less valuable than he was entitled to expect”.20

[27]      In the present case, I accept that there was no way of knowing the actual extent  of the loss that the plaintiff trust could have suffered prior to 1 January 2007.   The issue, however, from the overview of the authorities I have noted above, is whether some quantifiable loss was suffered by the plaintiff trust upon entering into the Agreement.   As in Thom, could the present case be described as a “damaged asset case, not one of exposure to a contingent liability”.  I acknowledge at the outset that there are dissimilarities between this case and that in Thom in that in Thom, Mr Thom’s liability depended on the statutory overlay of the Matrimonial Property Act.  That determination required, in essence, a finding as to the status of a contracting out agreement in lieu of a determination of a court to its effect.  Nevertheless, in the present case, in my view,  damage is quantifiable.  Certainly, the contingent liability could, potentially, increase the damage suffered by the plaintiff trust. But, upon entering into the Agreement, the entitlements conferred by the Agreement (the asset) were less than what the past proprietors expected.

[28]     In analysing the plaintiff trust’s proposed counter factual, (ie consider if the rent review was two years out rather than 11), in my view there is a possible argument here that some loss would have occurred at the outset.  First, as suggested by Nicholls LJ in Bell if the plaintiff trust (or at that stage the past proprietors) had sought to remedy the situation, some expense would need to have been undertaken in engaging solicitors or initiating proceedings. Secondly, loss also might be evident by the fact that adjudication was required to determine the proper interpretation of the Agreement.  Due to that ambiguity, the Agreement arguably would have been, if an attempt was made to have it quantified at an earlier date, worth less. Thirdly, the Agreement itself arguably would have been worth less as a result of the 1996

Index not being the anchor.  While quantification of the full extent of the loss would not have been achievable at that point, there is a possible argument that any valuation of the Agreement (and consequently the farm) would need to have taken into account the fact that the rent review in 2007 would not be based on the 1996 Index figure.  As the Index is based on the sales prices of grazing land, a valuer could estimate the value of the Index along with a projected value in 2006.  As such, the plaintiff trust’s “package of rights” arguably became less valuable than it expected.

[29]     None of those losses is easily quantifiable, but the point argued for ACE is that quantification is conceptually possible.21     That quantification would have required an assessment of the likelihood of the Index increasing over time.   But, as in  Thom, it is possibly arguable that this contingency is not of the same kind as a contingency which results in the plaintiff trust not suffering any loss at all until the contingency is fulfilled.

[30]     The thrust of the arguments I have noted above would tend to lead to a possible conclusion here that the plaintiff’s asset being the Agreement was the subject of actual damage at the time it was entered into in 1996 and thus it follows the present claim should be struck out on limitation grounds.  I remind myself, however, that the application before me is one for strike out which is a jurisdiction to be exercised sparingly and only in a clear case where the Court is satisfied that it has all the requisite material – Attorney General v Prince and Gardner [1981] 1 NZLR 262 (CA). Also the plaintiff’s cause of action must be shown to be clearly untenable on limitation grounds so that it could not possibly succeed.

[31]      It is clear to me in the present case that, the question of when any loss was suffered by the plaintiff here and whether it was inevitable that the trustees would suffer a loss, is by its very nature a hypothetical question.  There is a reasonable argument, in my view, that in answering this question it is wrong to use perfect hindsight vision by looking at the actual Index values that are known in 2011 (or were known in 2007) and then to reason that Index values would inevitably have gone up during the eleven year period from 1996.   Those Index values relate to farm grazing land prices.  The enormous increase in world dairy prices in recent years and the recent upsurge in meat and wool prices which are no doubt part of a huge global commodity price increase, has no doubt been responsible for a bubble occurring in dairying and dry-stock farm land values and accordingly general grazing land prices.  It was not, however, in my view utterly inevitable that this would occur.   It is possible for example that if some major farming crisis had occurred in New Zealand over the period in question, for example, dare I say it, by way of a major foot and mouth or other universal disease outbreak, a widespread drought throughout the country or some other major climate event or the like, the grazing land price index could conceivably have plummeted.  In this event, it is possible that the 2007 Index would be at or even lower than the 1996 index.

[32]      For these reasons, there is a possible argument open here that whether or not the

plaintiff would suffer a loss as a result of the defendant’s alleged negligence was contingent

upon the occurrence of an unknown future event (being the calculation of the 2007 index)

and therefore no actual loss happened until that contingency occurred.

[33]      The  following  passages  in  the  judgment  of  Mason  CJ,  Dawson,  Guadron  and

McHugh JJ in Wardley Australia Ltd v Western Australia22 are apposite here:

When a plaintiff is induced by a misrepresentation to enter into an agreement which is, or proves to be, to his or her disadvantage, the plaintiff sustains a detriment in a general sense on entry into the agreement.  That is because the agreement subjects the plaintiff to obligations and liabilities which exceed the value or worth of the rights and benefits which it confers upon the plaintiff.  But, as will appear shortly, detriment in this general sense has not universally been equated with the legal concept of “loss or damage”.   And that is just as well.   In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact upon events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired. To compel a plaintiff to institute proceedings before the existence of his or her loss is ascertained or ascertainable would be unjust.  Moreover, it would increase the possibility that the  Courts would be  forced to estimate damages on the basis of likelihood or probability instead of assessing damages by reference to established events.  In such a situation, there would be an ever-present risk of undercompensation or overcompensation, the risk of the former being the greater.

[34]     In conclusion, I find that the limitation arguments in this proceeding are finely balanced.  Whilst, in my view, there is some substance in the arguments I have noted above raised on behalf of ACE and the defendants again I remind myself of the nature of the application before me and accordingly, I find ACE has not done sufficient here to satisfy the high test on a strike out to show that the plaintiff’s claim is clearly subject to the statutory limitation bar.

[35]      For these reasons the strike out application before me must fail.

[36]      As to the issue of costs, I see no reason why they should not follow the event in the usual way.   Costs are therefore awarded to the plaintiff on this application on a 2B basis together with disbursements as fixed by the Registrar.

‘Associate Judge D.I. Gendall’