Johnston v Price WaterHouse HC Wellington CP No 348/93

[2001] NZHC 269

IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY CP NO 348/93

BETWEEN B G JOHNSTON and ANOR
Plaintiffs

AND The partnership of PRICE WATERHOUSE
Defendant

B N VICKERMAN and ANOR
Third Parties

AND WELLINGTON DISTRICT LAW SOCIETY
Second Third Party

AND NEW ZEALAND LAW SOCIETY
Third Third Party

CP NO 342/94

AND D C COOPER and ANOR
Plaintiffs

AND The Partnership of PRICE WATERHOUSE
Defendant

AND B N VICKERMAN and ANOR
Third Parties

AND WELLINGTON DISTRICT LAW SOCIETY
Second Third Party

AND NEW ZEALAND LAW SOCIETY
Third Third Party

Date of Hearing: 6 November 2000

Counsel: P.D. Green for Plaintiffs
M.R. Camp QC with B.A. Gibson for Defendant
V.H. Ullrich QC for Third Parties
P.J. Andrews with D.J. Friar for Second Third Party
P.N. Collins for Third Third Party

Judgment Date: 9 April 2001

JUDGMENT OF MASTER J C THOMSON

[1] The Wellington District Law Society (WDLS), the second third party in these proceedings, applies for an order striking out the defendant’s (Price Waterhouse) claim against it. It also applies to strike out the Statement of Claim brought by the first third party (Vickerman Campbell) against it. The WDLS ground to strike out Price Waterhouse’s claim and the Vickerman Campbell claim is that they disclose no reasonable causes of action. Rule 186 is relied on in each case. The plaintiffs, although making no submissions, have filed a Notice in Opposition in which they give notice that they will file a notice to join WDLS as a defendant in the proceedings.

[2] The third third party, the New Zealand Law Society (NZLS), also applies to strike out the Statement of Claim by Price Waterhouse against it. It does so on the Grounds that:

“1. The New Zealand Law Society had no role with respect to the matters alleged against it in the proceedings as explained by the particulars supplied.

2. It owed no duty of care to the partnership.

3. Rule 186 is relied on.”

[3] NZLS also applies for an order for determination of a separate question before trial pursuant to R418.

[4] All three strike out applications are opposed.

[5] The applications for strike out are to be considered against the background that since the Johnston proceedings were issued in 1993, and the Cooper proceedings in 1994, there have been multifarious interlocutory applications. The claims arise as the result of defalcations from a solicitors’ nominee company, John F Cuttance, Solicitors, Nominee Company (the Nominee Company). The Nominee Company was operated by the firm of Salek Turner Cuttance & Partners, of which Vickerman/Campbell were then partners of Cuttance, he being responsible for the defalcations.

WDLS Strike Out Applications

[6] I deal first with the applications by WDLS to strike out the Statements of Claim brought by Price Waterhouse and Vickerman Campbell against it.

[7] The essence of WDLS’s argument against Price Waterhouse is:

(a) There is no indemnity because there is no legal basis for indemnity.

(b) No contribution because there is no common duty to Johnston and Cooper (the clients of the solicitor’s firm).

(c) No other basis to join WDLS is alleged or could be alleged.

[8] The essence of the WDLS’s argument against Vickerman Campbell is:

(a) No indemnity because there is no legal basis for indemnity.

(b) No contribution because there is no common duty to Price Waterhouse.

(c) The amended Statement of Claim to join WDLS on the basis of ‘common relief’ relies on an independent cause of action which is statute barred.

[9] The strike out applications are made despite the Court of Appeal judgment in Price Waterhouse v Kwan (2000) 3NZLR 39 which also concerns a claim arising from defalcations by Cuttance from the Nominee Company. In that proceeding the Master refused the strike out application of Price Waterhouse brought on the basis that no duty of care was owed to the clients of the solicitors firm. The Court of Appeal in upholding the Master’s judgment refusing strike out held, as taken from the headnote:

“Held: 1 There was sufficient proximity between the auditor and the clients to justify the imposition of a duty of care in tort, subject to such policy considerations as might suggest otherwise. The regulatory regime, under which audits of solicitors’ trust accounts were conducted, confirmed that the purpose of an audit, at least in significant part, was to protect solicitors’ clients from loss as a result of improper conduct in relation to solicitors’ trust accounts. An auditor or a solicitor’s trust account owed to current clients of the solicitor a duty to conduct the audit with reasonable skill and care. The auditor was liable to such clients for any loss caused or contributed to by the auditor’s failure to exercise such reasonable skill and care (see paras [16], [25]). Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA) considered.”

[10] The question now is whether the claims against the WDLS and NZLS should also go to trial for similar reasons. The basis to strike out hardly needs repetition but I set out the principles as taken from Attorney-General v Prince & Gardner:

“Striking out

A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true. That is so even although they are not or may not be admitted. It is well settled that before the Court may strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed (R Lucas & Son (Nelson Mail) Ltd v O’Brien [1978] 2 NZLR 289 at pp 294 - 295; Takaro Properties Ltd (in receivership) v Rowling [1978] 2 NZLR 314 at pp 316 - 317); the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it has the requisite material (Gartside v Sheffield, Young & Ellis [1983] NZLR 37 at p45; Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2 NZLR 641); but the fact that applications to strike out raise difficult questions of law, and require extensive argument does not exclude jurisdiction (Gartside v Sheffield, Young & Ellis).”

[11] The extensive arguments submitted to me for and against the applications is probably reason enough to direct that the plaintiffs’ claims should proceed with all of the present parties being before the Court. I say that because it seems to me, depending on the facts found at trial, there could well be further litigation involving the WDLS and/or the NZLS if they are not kept in the proceedings as presently constituted. Be that as it may, I deal with the applications on their merits.

WDLS’s application to strike out Price Waterhouse’s claim

No common law duty of care to the auditors Price Waterhouse

[12] WDLS submits that in determining the issue of a novel duty of care, consideration is required of proximity and policy issues. It is submitted on the basis of these considerations that no duty of care arises. One starts from the position that there is no duty of care to the clients of the solicitor’s firm. WDLS submits that the present case falls within the category of persons defined in Fleming v Securities Commission (1995) 2NZLR 514 to whom no duty of care is owed because no forseeability can be demonstrated. WDLS further submits even if it were forseeable that a failure by the Council of WDLS to intervene may create a risk of loss to individual clients who invest with a solicitor, that forseeability is insufficient to establish the necessary proximate relationship, and the Law Practitioner’s Act (the Act) does not create such a relationship between WDLS and clients.

[13] Accordingly WDLS argues:

(a) That if no duty of care is owed to the clients, then a fortiori no duty of care is owed to the auditors. The primary purpose of the Act is the protection of clients who invest money with solicitors; it is not for the protection of auditors. If the WDLS does not owe a duty to the clients, then it cannot owe a duty to the auditors.

(b) While Price Waterhouse owes a duty of care to WDLS, there is no authority for a reverse duty of care.

(c) Price Waterhouse had rights of access to every facet to the trust account necessary for the proper conduct of the audit. Further, the auditor must make at least 3 examinations per year. By way of contrast, WDLS only had access to Price Waterhouse’s report on an annual basis.

(d) WDLS and its Council have a wide range of functions and a limited size. The Council has a discretion to act rather than a duty, and to impose a duty would cut across this discretion.

(e) Primary liability is placed on the solicitors and auditors by the Act and the Solicitors Audit Regulations (1987) (the Regulations). This can be seen from the offences section of the Regulations and in particular Regulation 71 which provides an offence for breaches of the Regulations by either solicitors or auditors and from the requirement that auditors carry professional indemnity insurance.

[14] For these reasons, it is submitted that it would be inappropriate to impose a novel duty of care on WDLS. Accordingly, even if Price Waterhouse were to amend its pleadings and claim a broader basis on which to join WDLS as a third party, Price Waterhouse would not succeed in showing that a duty at common law- was owed.

No duty of care to Vickerman Campbell

[I5] As in the case of a duty to the solicitor’s clients, and a duty to Price Waterhouse, the determination of a novel duty of care requires consideration of proximity and policy issues.

[16] WDLS submits:

(a) That if no duty of care is owed to the clients, then a fortiori no duty of care is owed to the solicitors. The primary purpose of the Act is the protection of clients who invest money with solicitors; it is not for the protection of the partners of a solicitor who misappropriates money. If WDLS does not owe a duty to the clients, then it cannot owe a duty to the solicitors.

(b) This point, Counsel for WDLS says, was made by Chisholm J in Stringer v Peat Marwick Mitchell & Co (2000) 1 NZLR 450, where he was considering whether an auditor owed a duty of care to practitioners and said at p458:

“For practitioners to contend that they rely on auditors to find fault is implicitly contending that they can discharge their duty to comply with regulations by leaving it to the auditors to find fault and, via the law society, impose discipline on them. That is “nonsense”. Any common law duty of care would be athwart the statutory duties imposed by the Act and regulations. It would be completely contrary to policy for solicitors to be able to abrogate their responsibilities or to obtain indemnity or contribution from third parties.”

It is submitted that on the same basis, it would be even more contrary to policy for practitioners to be able to abrogate their responsibility by allowing them to discharge their duty by relying on the Law Society to impose discipline.

(c) The partners have access to every part of the trust account, more so than the auditors and the WDLS. The WDLS has only access to Price Waterhouse’s report on an annual basis.

(d) WDLS and its Council have a wide range of functions and a limited size. The Council has a discretion to act rather than a duty, and to impose a duty would cut across this discretion.

(e) Primary liability is placed on the solicitors. This can be seen from the offences section of the Regulations (Regulation 71, which provides an offence for breaches of the Regulations by solicitors), and the basic principle of partnership that one is responsible for one’s partners actions.

[17] For these reasons, it is submitted that it would be inappropriate to impose a novel duty of care on WDLS and accordingly even if Vickerman Campbell further amended their pleadings, they could not succeed in showing that a duty at common law was owed.

[18] There is no allegation in the draft second amended statement of claim sufficient to establish that the alleged breaches were a material and substantial cause of the loss that Vickerman Campbell may suffer. At most, a “but for” link is alleged. It is submitted that Vickerman Campbell’s claim should be struck out.

Discussion re Price Waterhouse and Vickerman Campbell claims as to duty of care against WDLS

[19] WDLS’ primary argument is that it has no duty of care to clients of a solicitors’ firm. If it has no such duty, a fortiori, it can have no duty, to auditors or solicitors. As to the proposition that law societies have no duty to clients of a solicitors’ firm, there is little authority. Our Court of Appeal have left that question open for future decision.

[20] See Price Waterhouse v Kwan (2000) 3NZLR 45 where Tipping J said at p45:

“Mr Camp also suggested that the district law society would not be liable if it negligently failed to act on an auditor’s report, and thus caused loss to a client. The corollary, Mr Camp suggested, was that an auditor should not be liable to the client either. We do not necessarily accept Mr Camp’s premise, but as the issue of the district law society’s potential liability in such circumstances is not before us we prefer to say no more about it.”

[21] Support for the view that a Law Society in the administration of the Act and the Regulations has no duty of care to the solicitor’s clients can be found in the judgment of Sir Richard Scott VC at first instance in Law Society v KPMC (2000) lAll ER 515 at p522 where he said:

“Mr Pollock’s main objections to the duty of care were based upon the statutory framework under which accountants’ reports are made. This, he pointed out, is an area of public law. The Law Society performs a public duty in regulating the solicitors’ profession. The obligation on solicitors to submit accountant’s reports annually is an obligation under public law imposed on them in the interests of the public. He submitted that the Law Society did not owe any duty of care to solicitors’ clients as to the manner in which it carried on its regulatory function. I agree with him on this point.”

[22] This view was endorsed by Lord Woolf C.J. in the Court of Appeal. Law Society v KPMG Peat Marwick & Ors (2000) 2 All SR540 at p545 where he said:

“16. As to the defendants’ objection to there being a duty of care because of the statutory framework under which the reports are made, Sir Richard Scott V C accepted that the Law Society was performing a public duty in regulating the solicitors’ profession. He also accepted that the Law Society did not owe any duty of care to the clients of solicitors as to the manner in which it carried out its regulatory functions. However, he regarded it as clear that the statutory framework incorporates private law remedies as part of its structure. In particular, the client would have a private law remedy against the solicitor for recovery of the misappropriated funds and the Law Society, if it made a grant, would be subrogated to the client’s private law remedies against the solicitor.”

[23] However, contrary to WDLS’s submission that if there is no duty owed by a Law Society to clients of solicitors, there can be no duty owed to auditors or solicitors. Lord Woolf C.J. in concluding that auditors owe a duty of care to Law Societies when auditing solicitors’ trust accounts, touched upon the issue of whether there could be a reciprocal duty of care on the Law Society to the Auditor where he said at p549:

“Mr Pollock also relied on the inability of the auditors to rely on contributory negligence as against the Law Society whereas they would be in a position to allege contributory negligence in an action brought against them by the innocent partners. It has to be accepted that there could be situations where this is the case. However, if the Law Society itself was at fault in not taking action which could have helped to protect the fund, the auditors would be entitled to rely on this fault in reduction of their liability.”

[24] The failure of the Law Societies (both WDLS and NZLS) to act on the audit reports of Price Waterhouse is of course the very claim made against them here. As things stand at present then, the Courts have held:

(a) Auditors can have a duty of care to a solicitors’ clients. Price Waterhouse v Kuan.

(b) Auditors can have a duty of care to innocent partners of solicitors firms. Stringer v Peat Marwick & Co (2000) 1NZLR 450 where Chisholm J at p461 said:

“There does not appear to be any reason why a duty in favour of the solicitor could undermine or weaken any duty in favour of the Law Society and/or client.”

He went on to hold (p464):

“My analysis has led me to conclude that any policy factors which may weigh against the recognition of a duty are not sufficiently compelling to entitle the Court to refuse recognition of a duty of care at the interlocutory stage.”

I should say here that the passage cited from the judgment of Chisholm J in Stringer v Peat Marwick Mitchell & Co by counsel in her submissions for WDLS supra where the Judge appears to express a contrary view results from a misreading of his judgment. The extract is cited out of context. It commences with the words:

“The defendant’s position can also be summarised. . .”

The Judge, in summarising the defendant’s argument certainly did not endorse it. In the end he concluded that whether or not a duty of care existed should be allowed to go to trial. At the end of his judgment at p463 he said:

“For reasons expressed under the previous two headings, I doubt that these provide strong reasons to deny a duty. The statutory regime, including criminal and disciplinary sanctions, plus the possibility of civil action against the solicitor, provide strong incentives for solicitors to properly administer their own trust accounts and nominee companies. Even if a duty of care is recognised, the solicitor would be well aware that any claim against auditors which attempted to pass the solicitor’s responsibilities to the auditors would not prosper. This also underlines the importance of allowing claims to be determined on their merits rather than cutting off a claim at the strike out stage on the basis that there is no duty of care.”

(c) Auditors can have a duty of care to Law Societies and Law Societies can be liable for contributory negligence to auditors if they fail to act on their reports: Law Society v Peat Marwick &: Ors.

[25] Given (a), (b) and (c) above, I do not think it would be a big step for a New Zealand Court to hold that Law Societies in the administration of the Act and Regulations could have duties of care to auditors and to innocent partners of the solicitor’s firm, and possibly, even clients of the firm.

Any duties would be owed by Councils of Law Societies and not by the Societies themselves

[26] WDLS advances a specific argument based on the Act and Regulations that the Statement of Claim of Price Waterhouse against WDLS alleges in paragraphs 9, 10, 12 and 13 that WDLS had duties as therein set out. WDLS says the allegations in paragraph 9 reflect the wording of s 81 of the Act. Those in paragraph 10 reflect the wording of s 85 of the Act and those in paragraph 13 reflect the wording of Regulation 64 of the Regulations. WDLS argues that the Act spells out a deliberate distinction in functions between the Council of the District Law Society and the Society itself. It says the duties claimed are duties imposed on Councils, not Societies. It is submitted that where the Council of the NZLS and/or the Council of a District Law Society act in respect of sections 81 to 85 and Regulation 64, they are acting independently of their Societies, and that is why indemnity in respect of actions taken under the Act, and given by s 189, is given specifically to Councils and not to their Societies.

[27] While that argument may have some validity in respect of the duties claimed in paragraphs 9, 10 and 13 of the Price Waterhouse Statement of Claim, it does not in my view assist in respect of the duties claimed against WDLS in paragraph 12 of the Statement of Claim. That, as I have said, is the claimed duty which is at the heart of the complaint by the auditors, ie failure to act on its reports. That claimed duty is not identified by WDLS as being based on any section of the Act, or of the Regulations. Similarly paragraph 11 of the Draft Second Amended Statement of Claim of Vickerman Campbell alleges that WDLS failed to intervene in the solicitor’s practice and/or initiate an investigation of the solicitors’ affairs and in particular the activities of Cuttance, notwithstanding advice from the defendants of deficiencies in the solicitors’ practice. As to that contention, in Law Society v KPMG Peat Marwick Lord Woolf CJ pointed out that while Sir Richard Scott VC in the lower Court accepted that the Law Society was performing a public duty in regulating the solicitors’ profession, it was clear that the statutory framework incorporated private law remedies as part of its structure. In particular the client would have a private law remedy against the solicitor for recovery of misappropriated funds, and the Law Society, if it made a grant would be subrogated to the clients’ private law remedies against the solicitor. Lord Woolf CJ also pointed out that Sir Richard Scott VC was totally unimpressed by arguments based on drawing a distinction between the functions of the Council and the Law Society.

[28] I conclude the structure of the Act and the Regulations does not militate against the common law duties of care contended for by Price Waterhouse and Vickerman Campbell against WDLS.

Indemnity and Contribution

[29] WDLS further argues neither Price Waterhouse nor Vickerman Campbell can claim indemnity. Counsel for those parties accept that is correct. WDLS also says that neither can claim contribution. Prive Waterhouse and Vickerman Campbell certainly do not accept that they have no right of contribution.

Price Waterhouse right to contribution

[30] WDLS argue that Price Waterhouse must show that both WDLS and it have a common liability to Johnston and Cooper in order to make a successful claim against WDLS for contribution. Given that Johnston and Cooper claim that Price Waterhouse is liable to them in tort, Price Waterhouse must establish that WDLS is also liable in tort to Johnston and Cooper.

[31] WDLS says the only duty that Price Waterhouse claims was owed by WDLS to Johnston and Cooper is at paragraph 9 of the statement of claim. The remaining allegations as to duty are particularised as being owed to Price Waterhouse.

[32] Paragraph 9 alleges that WDLS owed a duty to the clients of the firm to intervene in the firm. The source of the duty is not stated, but as the words mirror section 81 of the Act, the duty appears to derive from that section. If WDLS did owe such a duty, it concedes a common law claim for damages might be made under the tort of breach of statutory duty, or under a general duty of care.

WDLS submits that it owes neither duty to Johnston and Cooper because:

(a) First it is the WDLS’s Council rather than WDLS that is authorised to act under s 81. It is Council which has a statutory immunity under s 189. As no authority is given to WDLS a duty in tort cannot attach to it.

(b) Secondly, even if WDLS is authorised to act under section 81 (which is denied) there is a power rather than a duty to act under the section. Accordingly, no breach of statutory duty claim arises.

(c) Thirdly, even if WDLS is authorised to act under section 81 (which is denied), there is no duty of care that arises from the power to act under section 81.

Vickerman Campbell

[33] WDLS argues that to claim a contribution, Vickerman and Campbell must show that WDLS owed a common law duty to Price Waterhouse. However, no such duty is alleged by Vickerman and Campbell.

[34] Even if Vickerman and Campbell were to again amend their statement of claim to make such an allegation, it is argued on the basis of the submissions made in respect of Price Waterhouse’s claim there could be no right to contribution.

Master’s conclusion as to right to contribution

[35] As I understand it, WDLS insist that to claim contribution:

(a) Price Waterhouse must show that both WDLS and Price Waterhouse had a common duty of care to the solicitors’ clients, and

(b) Vickerman Campbell must show WDLS and Vickerman Campbell had a common duty of care to the defendants.

[36] WDLS’s contention is based on a passage from McGechan, cited by counsel for WDLS which says:

“Common liability to the plaintiff (or the defendant and third party) can give rise to a right of contribution at common law or in equity”. (HR 75.05)

[37] That citation follows a passage cited from Halsbury which says:

“The essence of the right to contribution lies in the liability to a common demand: 9(I) Halsbury’s Law of England (4th Ed) para 654.” (Para 1116?)

[38] It is apparent to me that Counsel in citing that extract from McGechan has failed to appreciate that in that part of the commentary, McGechan is dealing with the situation of co-obligors such as contractors, trustees, directors etc, but not tortfeasors. Tortfeasors are dealt with later in the commentary. The liability of co-obliors and tortfeasors as to contribution is set out in Goff and Jones, the Laws of Restitution, 5th Edition, p394 where the authors say:

“It has long been held that at law and in equity, sureties, joint-contractors, trustees, directors, partners, insurers, mortgagors and co-owners can generally claim contribution from their co-obligors if they satisfy more than their proper share of the common debt. But contribution claims were and are not limited to these familiar situations. Any obligor who owes with another a duty to a third party and is liable with that other to a common demand should be able to claim contribution. So a plaintiff who is jointly responsible with the defendant for maintaining a party wall can obtain contribution if he has to bear the expense of pulling down the wall which has been condemned as a dangerous structure. As Eyre C.B. once said: “If a view is taken of the cases, it will appear the bottom of contribution is a fixed principle of justice, and is not founded in contract. . .” There could be no contribution if there was no liability to a common demand. The ground of the restitutionary claim is, therefore, compulsion of law. Consequently, there was no contribution if tortfeasors independently caused damage to a third party, or if the liability of contractors to a third person arose from separate and independent contracts. The Law Reform (Married Women and Tortfeasors) Act 1935, s 6, however, gave tortfeasors a limited right to contribution. The Civil Liability (Contribution) Act 1978 has now repealed that section, but has extended the statutory right of contribution, enacting that “any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or not).”

[39] Thus it is clear a claim for contribution by a tortfeasor arises from statute. The New Zealand statute, and section, as to tortfeasors is s 171(c) of the Law Reform Act 1936 which says:

“171(c) Where damage is suffered by any person as a result of a tort (whether a crime or not) -

Any tortfeasor liable in respect of that damage may recover contribution from any other tortfeasor who is, or would if sued in time have been liable in respect of the same damage, whether as a joint tortfeasor or otherwise. . .”

[40] In England their equivalent Act was replaced by the Civil Liability (Contribution Act) 1978. Despite recommendations made for us to adopt a similar Act, such pleas have fallen on deaf ears.

[41] The effect of our Law Reform Act 1936 is that if D1 and D2 are concurrent tortfeasors, D1 (who is liable to P) may bring an action against D2 for contribution. If D2 is, or would, if sued in time by P have been, liable to P for the same damage, D1 may recover from D2 the contribution which the Court finds to be “just and equitable”. So contribution in unequal shares is clearly contemplated.

[42] I think Mrs Ullrich is correct when she argues:

“There are two ways in which Vickerman Campbell can claim contribution:

(i) First, on the basis that a duty of care is owed by Vickerman Campbell and by WDLS to the plaintiffs, and therefore they are joint tortfeasors vis-a-vis the plaintiffs;

(ii) Secondly, Vickerman Campbell is entitled to claim that a duty of care is owed by WDLS to them in respect of the same damage that is claimed by the defendant against Vickerman Campbell, albeit in respect of a different duty of care. Both Vickerman Campbell and WDLS are tortfeasors vis-a-vis the defendant, but not joint tortfeasors.”

[13] Thus even if WDLS is correct that WDLS has no duty of care to the plaintiffs so (i) above does not apply, in my view Vickerman Campbell can claim contribution under (ii) above. Similarly Price Waterhouse is entitled to claim contribution on the basis that a duty of care is owed by WDLS to it in respect of the same damage that is claimed by Vickerman Campbell against Price Waterhouse, albeit in respect of a different duty of care. Both Price Waterhouse and WDLS are tortfeasors vis-a-vis Vickerman Campbell, but not joint tortfeasors.

Claim by defendant Price Waterhouse against NZLS

[44] The allegations made by the defendant against NZLS are set out in the defendant’s statement of claim. The key allegations are contained in paragraphs 8 - 14 of the statement of claim. In particular it is asserted that NZLS owed certain duties to the clients of the law firm or to unspecified persons in the following terms:

“9. The third third party, had a duty to the clients of the partnership and to the defendant to intervene in the practice of solicitors where it has reasonable cause to believe that, in the course of his practice as a solicitor, a solicitor has been guilty of theft or of any improper conduct in relation to the money or other property of any other person.

Further the third third party had a duty to instigate an investigation of a solicitor’s affairs where it has reasonable cause to believe that money entrusted to a solicitor has been stolen or that any trust account of a solicitor or firm of solicitors has not been kept or operated in accordance with any rules or regulations made under the Law Practitioners Act 1982 or relating to trust accounts and the audit of such accounts.”

[45] NZLS submits that on any analysis both of the facts before the Court in this application and of the regulations which governed solicitors’ audits at the relevant time:

(a) the NZLS had no role in respect of the matters alleged in the statement of claim; and

(b) it owed no duty either to the defendant or to clients of the solicitors’ firm.

[46] NZLS further submits it is relevant to note that the defendant has made the same allegations against NZLS as against WDLS without differentiating between their respective roles, when their regulatory functions are quite separate.

[47] On the basis of the affidavits filed, NZLS says there is no evidence to support the allegations that NZLS had reasonable cause to believe that:

(a) (in terms of paragraph 9 in the statement of claim) in the course of his practice as a solicitor, Mr Cuttance had been guilty of theft or of any improper conduct in relation to the money or other property of any other person; or

(b) (in terms of paragraph 10 in the statement of claim) money entrusted to Mr Cuttance had been stolen or that any trust account of Mr Cuttance, or the solicitors, had not been kept or operated in accordance with any Rules or Regulations made under the Law Practitioners Act 1982 or relating to trust accounts and the audit of such accounts.

[48] In paragraph 11 of its statement of claim against NZLS, the defendant alleges that on two separate occasions it advised NZLS (as distinct from WDLS) which advice is said to have given rise to the duties pleaded in paragraphs 9 and 10 of the statement of claim, namely:

(a) in an audit report dated 14 November 1989 (paragraph 11.4 statement of claim); and

(b) in an audit report on or about 5 July 1988 (paragraph 11.5).

[49] There is no evidence counsel for NZLS says to show that audit reports of 14 November 1989 or (about) 5 July 1988 were provided to or received by NZLS and Mr Ritchie’s evidence that no such reports were received is uncontroverted. The only relevant reference counsel says in the evidence is in exhibit “H” to Mr Croft’s affidavit which refers to a “management letter of 5 July 1988 to Salek Turner Cuttance & Partners”. Mr Ritchie acknowledges in paragraph 3 of his affidavit that “the records show that a management report to the solicitors dated 5th July 1998 was copied to Mr R J Burns, one of the New Zealand Law Society’s audit inspectors”. This presumably, he says, relates to the “management letter” and is something quite different from an audit report as asserted in paragraph 11.5 in the statement of claim.

[50] Contrary to the allegations in paragraphs 11.4 and 11.5 in the statement of claim there is no evidence to show that any audit reports were given to NZLS so as to impose a duty (if there was a duty at all, which is denied) “to intervene in the solicitors’ practice and/or initiate an investigation of the solicitors’ affairs” in terms of paragraph 11 of the statement of claim.

[51] The defendant does not allege or give evidence that it provided any other advice or information to NZLS to provide the basis for any duty which might be said to arise.

[52] It is submitted that the Court may regard as undisputed the evidence that NZLS received neither of the two reports which form the basis for the defendant’s entire claim against NZLS, and that this is a situation where the central factual allegation in the pleading is so contrary to indisputable fact that the matter ought not to be allowed to proceed further, in terms of the principle in CED Distributors (1988) Ltd v Computer Logic (in Receivership) (1991) 4 PRNZ 35 CA where that Court said:

“The court is entitled to receive affidavit evidence on a striking-out application, and will do so in a proper case. It will not attempt to resolve genuinely disputed issues of fact and therefore will generally limit evidence to that which is undisputed. Normally it will not consider evidence inconsistent with the pleading, for a striking-out application is dealt with on the footing that the pleaded facts can be proved . . .but there may be case where an essential factual allegation is so contrary to indisputable fact that the matter ought not to be allowed to proceed further.”

[53] In summary NZLS says the duties asserted by the defendant in paragraphs 9 and 10 of the statement of claim are said in paragraph 11 to have been breached because of a failure to intervene in the solicitors’ practice and/or initiate an investigation notwithstanding certain advice from the defendant. The statement of claim then provides six separate particulars of the advice which was said to have been given, in paragraphs 11.1-11.6. Of those particulars, all but two do not concern NZLS at all. The evidence before the Court that NZLS did not receive the two audit reports upon which the defendant’s entire allegation of breach of duty is based, is not disputed by the defendant.

The Statutory Regime

[54] NZLS submits the regime governing audits, reporting, investigation and possibly intervention in the practice of a solicitor may be summarised as follows:

(a) The District Law Society conducts regular auditing through an audit inspector appointed by the District Society as agent for NZLS.

(b) The audit inspector reports to the District Society in the event of any adverse finding and is required to provide an annual report in any event.

(c) Any adverse report is required to be communicated by the secretary of the District Law Society to the Council of the District Law Society which may investigate and take any action available to it (in practice this would mean either instigating a s.85 investigation or taking control of the trust account under s.82 of the Law Practitioners Act).

(d) Only once the District Society has considered an adverse report is it required to forward a report to the NZLS.

(e) The NZLS may then take action itself under .83 or s.85 of the Act (although in practice this would most likely be done by the District Law Society in conjunction with any action being undertaken under s.82).

[55] That is the legislative regime under which the audits were conducted in this case. NZLS says that:

“(a) It is not asserted in the pleadings (nor is there any evidence before the Court) that the Council of the District Law Society forwarded a report to NZLS under Regulation 64;

(b) NZLS is not entitled to receive nor it is obliged to act on any audit report coming directly from the auditor and the only reporting to NZLS is carried out by the District under Regulation 64;

(c) Apart from instances where it receives Regulation 64 report from the District, the NZLS plays no role in the regime of audit reporting and investigations.”

[56] Since NZLS had no role or function in the regulatory auditing or investigation process outside of a Regulation 64 report, and given that there was no such report in this case, then it is submitted that the defendant’s claim is untenable and cannot succeed and should be struck out; NZLS simply had no function in the matters in respect of which the defendant has proceeded against it.

Price Waterhouse’s argument

[57] The defendant in response to NZLS submissions says:

“It is clear from the exhibits to the Croft affidavit that as early as December 1987 NZLS per Mr Burns received the audit report directly from the auditors. It is clear from exhibit “1” that the same happened in 1990. It is not factually open to NZLS to say that no such reports were received.

Price Waterhouse was the auditor of the law firm. Mr Burns was the audit inspector of NZLS. The two were entirely distinct but Mr Burns worked for NZLS and his knowledge was that of NZLS.

It is factually not the case that NZLS’ only function is under Regulation 64. As exhibit “G” shows, Mr Burns, on behalf of NZLS, had an active role which can found a duty of care.”

[58] Without accepting it as necessary for NZLS to owe a duty of care to clients of law firms, it can still separately owe a duty to the auditors just as the auditors can owe a duty to it.

[59] It is unclear whether NZLS accepts that the defendant had a duty to the District Law Society when it says: “The defendant had an obligation to exercise reasonable skill and care in auditing the solicitors’ trust account and to report to the District law Society”. It is also unclear whether NZLS contends that the auditor owes a duty of care to NZLS.

[60] As to the issue of vulnerability, the auditor is entirely vulnerable to inaction by WDLS or NZLS causing, contributing or increasing the potential liability of the auditor to investing clients when inaction has increased the loss.

Conclusion

[61] I think Mr Camp is correct when he argues that there are clearly disputed issues of fact to be resolved as to whether NZLS:

(a) Did or did not receive audit reports and in particular the two in dispute.

(b) The extent to which it did or did not act on audit reports.

(c) The extent to which it was, or was not, required to act on any audit reports it received.

[62] Given that I have found that a duty of care should not be ruled out against the WDLS at an interlocutory stage, the same reasoning applies in respect of NZLS, particularly in the light of the comments I have cited from the judgment of Lord Woolf CJ in Law Society v KPMG Peat Marwick & Others.

[63] All in all I am satisfied that in order to resolve this long running litigation it is important to have all parties who might be liable to contribute to the plaintiffs’ losses, in the event that they are successful, before the Court. The situation here has similarities to ANZ Banking Group (New Zealand) Limited v Marac Financial Services Ltd unreported CA 156/92 judgment 17/12/92 where the Court of Appeal allowed joinder of a number of third parties which the High Court had refused. Cooke P in his judgment at p 10 said:

“It is not to be overlooked that in a memorandum counsel for the plaintiff has advanced argument against the new ground taken by the Auditor-General and has indicated that he would like to be heard further orally. But the latter course is inappropriate at this interlocutory stage, when (let it be repeated) no final determination of the existence of any duty is being made and what is important is to ensure at the trial adequate examination of the true issues arising in this pattern of relationships.”

And at pages 10 and 11 he said:

“I agree that the joinder would escalate the parameters of the case (assuming that a parameter can be escalated) but am respectfully unable to agree that it would do so unreasonably. Smellie J describes what happened as massive defalcations cunningly perpetrated and masked’. The Auditor-General alleges that Johnson and Williams were conspirators privy to the fraud in relation to about two thirds of the losses to DCL. If the Auditor-General is found to have been negligent, it may well be that he will be entitled to very significant contribution from Johnson and Williams. How far he would be able to enforce that right is problematical but cannot be decisive at the leave stage.”

Finally he said at p 11:

“Before leaving the case I would repeat that I have been much influenced by Smellie J’s assessment that the litigation is likely to turn on issues of contributory negligence and apportionment, and also by the consideration that a comprehensive judgment will be desirable. This Court has had experience of the unsatisfactory results of piecemeal dealing with complicated commercial cases.”

NZLS’s R418 application

[64] For the reason that I consider it important that all those potentially liable should be before the Court at one trial, I see no merit in the NZLS’s application for certain questions to be tried separately and before trial of the main proceeding pursuant to R418, particularly as there are clearly disputed questions of fact to be resolved between NZLS and Price Waterhouse. That application is refused.

Limitation issues

[65] WDLS submits that R187 provides that a party may before trial file an amended Statement of Claim that introduces a fresh cause of action which is not statute barred. In the original Statement of Claim, Vickerman Campbell only claimed indemnity from WDLS. It is submitted by WDLS that the new allegations for relief in the draft second Amended Statement of Claim mirrors the claim for relief which Price Waterhouse has brought against Vickerman Campbell. WDLS submits it is now statute barred by virtue of s 4 of the Limitation Act 1950. It is also submitted that any amendment of Price Waterhouse’s Statement of Claim to plead a broader basis on which to claim against WDLS would also be statute barred. In my view, for the same reasons as I refused the R418 application by NZLS, and because the Court of Appeal has decreed that limitation defences should normally be dealt with at trial, and not in the context of a strike out application, strike out relying on limitation grounds is refused. Depending on the final state of the pleading by Price Waterhouse and Vickerman Campbell, WDLS will of course be able to plead affirmative limitation defences if it so chooses and have them tested at trial.

[66] The result is all three strike out applications are refused, as is the Rule 418 application. Costs to Price Waterhouse and Vickerman Campbell on a Category 2 basis against the applicants, and disbursements, as fixed by the Registrar.