McKay Hill & Co v Hendrik Jacobus Eksteen and
[2000] NZCA 68
•30 May 2000
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA 161/99 |
| BETWEEN | McKAY HILL & CO |
| Appellant |
| AND | HENDRIK JACOBUS EKSTEEN and ANNETTE EKSTEEN |
| Respondents |
| Hearing: | 22 May 2000 |
| Coram: | Richardson P Gault J Tipping J |
| Appearances: | C M Meechan for Appellant D A T Hollings for Respondents |
| Judgment: | 30 May 2000 |
| JUDGMENT OF THE COURT DELIVERED BY RICHARDSON P |
The issue in this appeal is whether McKay Hill & Co, a firm of solicitors, was properly held liable in negligence to the respondents, Mr and Mrs Eksteen, for a lost investment. The Eksteens were not clients of the firm. The crucial questions argued on the appeal were whether McKay Hill owed the Eksteens a duty of care in tort which was breached, and in particular whether the firm assumed a responsibility in that regard to the Eksteens; and whether, if so, the breach was causative of the loss which they sustained.
Background
The Eksteens migrated to New Zealand from South Africa. Mr I L White, their immigration adviser, recommended they enter into a commercial venture with Rubicon Timber Ltd for a new company to be formed, Rubicon Timber Trading Ltd, whose business would be drying for profit on immediate resale native timbers purchased primarily from Rubicon Timber Ltd. The latter company would own 60% of the 100 $1 shares and the Eksteens 40%. The Eksteens were to provide some $104,000 to the company secured by debenture.
The Eksteens agreed. Mr White arranged for Mr K C Foote, a financial consultant, to give instructions to McKay Hill for the formation of the new company and for the debenture. The claim to a duty of care on the part of the firm to the Eksteens turns essentially on a letter of 24 June 1994 which McKay Hill wrote to Dr Eksteen as follows:
re: Rubicon Timber Trading Limited
From instructions from Keith Foote we have prepared the documents for incorporation of this company and enclose the same for your signature.
Would you and Mrs Eksteen please have your signatures witnessed in the manner by way of example on a copy of one of the documents. The witness should add occupation and address after signature.
Basically a[n] ordinary private company is being formed with a nominal capital of $100.00 divided on an agreed 60‑40 basis. The company will also complete on registration and issue a Debenture in your favour for an advance of $104,000.00 to the company upon the terms and conditions set out in a copy of the proposed Debenture attached.
Once you have signed these documents would you be kind enough to forward them all on in the enclosed envelope and covering letter to Mr Ian White in order that he can have his part of the documentation signed and in due course sent down here for registration. We would like to have these back as soon as possible and leave it to you if there is any enquiry you wish to make to either telephone me or Mr Foote for any further assistance.
Mr Foote advised Mr McKay orally that McKay Hill were not acting for the Eksteens, who were handling things for themselves. A short time later Dr Eksteen advised a staff solicitor of McKay Hill to the same effect. Mr McKay never spoke with Dr Eksteen. The Eksteens never sought advice from McKay Hill.
Later, other documents, including a supply contract between the two companies, were also prepared, circulated and signed. Because of a number of problems Rubicon Timber Trading Ltd was not incorporated until 17 October 1994.
The debenture in favour of the Eksteens was purportedly executed by the company on 12 July - purportedly because it was before the company's incorporation and so was not valid. McKay Hill did not seek to register the debenture following execution because on 18 July 1994, and again on 25 October 1994, Mr Foote expressly instructed them not to do so, stating that the parties to the debenture were still in negotiation as to its terms. The debenture was registered in August 1995 following a High Court order extending the time for registration.
Before then, in fact between 19 August 1994 and 29 November 1994, the Eksteens had advanced the investment funds. Rubicon Timber Trading Ltd was wound up for unpaid taxes on 2 November 1995. It was found to have no assets and in particular no timber over which the debenture, even if valid, would have provided the Eksteens with security.
The proceedings and the judgment
The Eksteens sued Mr White and McKay Hill. Mr White is impecunious and did not defend the proceeding. Judgment was entered against him.
Hammond J rejected the plaintiff's argument that there was a contract of retainer giving rise to a solicitor/client relationship between the Eksteens and McKay Hill. He dismissed claims founded on contract or breach of fiduciary duty. He had also earlier noted that there had been no attempt to plead promissory estoppel; trust; third party fiduciary of any contract of retainer; or breach of the Fair Trading Act 1986. That then left the claim in tort.
Importantly, in rejecting the claim in contract and as a lead in to considering any claim in tort, the Judge found that Dr Eksteen and his wife's reliance on Mr McKay (though undoubted) was of a limited character. It was that Mr McKay would do what he had stated in his letter of 24 June 1994, namely form and register the company and "issue a [valid] debenture ... in favour [of the Eksteens] for an advance of $104,000 to the company upon the terms and conditions set out ... [in the draft debenture sent to Dr Eksteen]", but no more.
As finally pleaded in the course of the trial, the duty contended for by the plaintiffs was that:
35.Acting in their capacity as solicitors of Keith Charles Foote, and/or Rubicon Timber Limited, the second defendant represented to the plaintiffs
(a) That on incorporation of Rubicon Timber Trading Limited the debenture in favour of the plaintiffs for the plaintiffs investment would be issued and completed.
(b) That on incorporation of Rubicon Timber Trading Limited the said debenture would be registered in the Companies Office.
(c) The said debenture would be a valid security.
Particulars:
The said representations were in writing. They were contained in or are to be inferred from a letter from the second defendant to the first named plaintiff, Hendrik Jacob Eksteen dated 24 June 1994.
36.At the time of making the said representations, the second defendant intended and it well knew or ought to have known that the plaintiffs would rely thereon and would be induced thereby to invest the said sum of $104,000 in the said company upon the terms aforesaid.
37.In the premises, the second defendants were under a duty to take care (i) in the making of the said representations to the plaintiffs; (ii) to exercise due professional care, skill and diligence; (iii) to avoid acts or omissions which they could reasonably foresee would be likely to injure the plaintiffs.
38.Acting on faith of the said representations and induced thereby, the plaintiffs invested a sum of $100,000 in Rubicon Timber Trading Limited ...
Hammond J's reasons for finding a duty of care are set out in paras [119] and [122] of his judgment:
[119] In this case, in my view there was a duty of care - albeit of a restricted character - owed by McKay Hill to the Eksteens. Mr McKay undertook to Messrs White & Foote and Dr Eksteen to form the company, and register a valid debenture. He knew perfectly well that the venture between his clients and the Eksteens would not proceed at all, unless this was done. He represented to the Eksteens that he would take those steps. He knew the Eksteens were relying on those representations, and they did. And Mr McKay voluntarily assumed the responsibility, to the Eksteens, of undertaking those tasks. They could not undertake them - in this case only Mr McKay could. The transaction is a bounded one. Indiscriminate liability is not raised. There are no public policy reasons why there should not be a duty such as this in this case.
[122] The duty of care, in this case was, in content, to do those things Mr McKay assumed responsibility for - but no more. He had a duty to the Eksteens to register the company, and a valid debenture in the form he had presented to them. Those duties were owed directly to the Eksteens. Mr McKay had no duty, at least in tort, to advise on the merits of the loan, or to have it looked into further, or even to advise them not to advance their money until the (valid) debenture was registered. He was not the Eksteens' solicitor.
That duty was breached because the debenture was not registered and could not be validly registered because it was executed before the company came into existence.
The Judge went on to hold that it was a necessary incident of the duty of care which McKay Hill had assumed that Mr McKay could not defer completion by registration without notice to the Eksteens:
In my view, notwithstanding that Dr Eksteen was not his client, but given the obligation he had assumed to "issue a debenture" in the Eksteen's favour, Mr McKay did have an obligation to contact Dr Eksteen, and to tell him he was under instructions not to register a debenture.
And he added that the evidence of Mr Darlow, an experienced commercial law practitioner, was that he would have felt constrained to tell his client that he must speak to Dr Eksteen about that instruction.
On his assessment of the facts, the Judge considered that Mr McKay was entitled to wait a few days to see if the difficulties he had been told existed resolved themselves. But he should have contacted both his own clients and Dr Eksteen before the expiry date for registration and that contact would have been prior to the date of the second advance of 23 September 1994.
As to causation, Hammond J went on to hold that the delayed (and invalid) registration of the debenture was not causative of the loss of the second and subsequent advances totalling $80,875. It was a poor investment and any loss on account of that breach of care would have come about regardless of the state of the debenture. However, had the Eksteens been told in September 1994 that the debenture was still not registered and that McKay Hill had instructions not to register it, the Eksteens would clearly not have made any further advances. On that basis the breach of duty to speak, as opposed to the failure to register a valid debenture, caused a loss of $80,875.
Discussion and conclusions
For reasons which we can express quite shortly we are satisfied that Hammond J erred in concluding that there was a duty of care to the Eksteens to register the debenture and, further, that there was a second duty arising as an incident of the first duty to take reasonable care and warn the Eksteens that he (Mr McKay) had instructions not to register the debenture at that time.
It is sufficient for present purposes to begin (and end) by considering whether McKay Hill can be said to have assumed any responsibility to the Eksteens and, if so, what was the content of that responsibility. That inquiry involves examining the letter of 24 June in its factual background and in the light of the important finding of the Judge that the Eksteens' reliance on McKay Hill was limited to what he had said in that letter he would do. But the Judge seems to have interpreted the letter as containing an undertaking by McKay Hill to the Eksteens to form the company and register a valid debenture, and that McKay Hill voluntarily assumed the responsibility to the Eksteens of undertaking the necessary steps to secure that result.
With respect, that interpretation is inconsistent with the plain meaning and intent of the letter considered in the factual setting. It is a straightforward letter to a non‑client of the firm recording the instructions that had been received, requesting execution of documents, and outlining the client's intentions regarding the formation of the company and the issue of a debenture. The letter (see [para 3] above) begins, "From instructions from Keith Foote". Clearly it was written on behalf of that client. And at the outset Mr Foote told Mr McKay that he was not the Eksteens' solicitor. They were dealing with the matter themselves. There is nothing in the first paragraph of the letter or in succeeding paragraphs, or considering the letter as a whole, which expresses or reflects an undertaking or assumption of responsibility by the firm to the Eksteens.
What the letter said is that "the company will ... issue a debenture in your favour ... ". Not that "we will" register a debenture or that "McKay Hill will" do anything. McKay Hill did not express any personal responsibility. They were commenting on what they were doing for their client. The act of issuing a debenture was not something within the control of McKay Hill. It was wholly within the control of Mr Foote and of the company when formed. And in the ordinary course the instructions as initially given were always subject to modification by the client. The responsibility that McKay Hill assumed was to its client, Mr Foote, and to the company formed in accordance with Mr Foote's instructions.
The second and secondary duty is also unsustainable. Expressed as an incident or consequence of the first duty contended for, it fails on rejection of the first duty. Further, there is no representation in the letter of 24 June that McKay Hill would notify the Eksteens of any change of instructions from the firm's client, nor any express or implicit assumption of responsibility to do so. On the contrary, to assume such a responsibility would be inconsistent with the responsibility to their client reflected in the letter. The instructions to McKay Hill came through Mr Foote. Clearly they reflected preceding discussions for the promotion of the company and its financing with others, necessarily including Dr Eksteen. The only representation the letter conveys is that those concerned in the proposals were leaving the instruction of solicitors to Mr Foote.
When Mr Foote subsequently instructed McKay Hill not to register the debenture - and explained that some terms were under negotiation - McKay Hill must have been entitled to act accordingly without questioning that authority or taking any steps inconsistent with it. To go further, as Hammond J held, involves the proposition that McKay Hill could and should have questioned that authority by speaking to the Eksteens.
Thus, unlike the will cases, such as Gartside v Sheffield, Young & Ellis [1983] NZLR 37, and certificate cases, such as Allied Finance and Investments Ltd v Haddow & Co [1983] NZLR 22, the duty as contended for here cannot be said to be in furtherance of or as marching with the paramount duty which the solicitor owes to the client.
Concluding as we do that there is no basis in the evidence for the assumption of responsibilities giving rise to the duties of care to the plaintiffs as found by the Judge, it is unnecessary to consider other aspects relevant to the imposition of duties of care in new situations and in particular to review relevant policy considerations. But clearly it would be difficult in policy terms to reconcile that paramount duty the solicitor owed the client and the imposition of an obligation on a solicitor, who has told a non‑client what his client's instructions and intentions were, to notify the non client if the client changed the instructions.
As to causation, the inconsistency between the duties contended for is highlighted by the Judge's conclusion that breach of the first duty was not causative of the loss, but breach of the second, an incident of the first, led to a loss which they would have sustained even had a valid debenture been registered. In the result, however, it is unnecessary to explore the complexities of causation and remoteness.
Result
For these reasons the appeal is allowed, the orders made in the High Court against McKay Hill are quashed and judgment is entered in favour of McKay Hill.
McKay Hill are entitled to costs on the appeal which are fixed at $5,000 together with reasonable disbursements as fixed, if necessary, by the Registrar. Costs in the High Court are to be fixed in that court.
Solicitors
Bell Gully, Auckland, for appellant
Kendall Strong & Co, Auckland, for respondents
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