Roose v Duthie

[2015] NZHC 2035

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-1025 [2015] NZHC 2035

BETWEEN

DENISE MICHELLE ROOSE

First Plaintiff

AND

DENISE DEVELOPMENTS LIMITED Second Plaintiff

AND

DMR DEVELOPMENTS LIMITED Third Plaintiff

AND

CRAIG DUTHIE AND KIRSTEN TAYLOR-RUITERMAN

First Defendants

AND

DRK CHARTERED ACCOUNTANTS LIMITED

Second Defendant

Hearing:	11 March 2015
Appearances:	K Crossland and S Langston for Plaintiffs G Pearson and L Pelly for Defendants
Judgment:	27 August 2015

JUDGMENT OF TOOGOOD J

This judgment was delivered by me on 27 August 2015 at 3:00 pm

Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar

ROOSE v DUTHIE [2015] NZHC 2035 [27 August 2015]

Introduction  [1] The pleaded claims  [5] The limitation and pleading issues  [7] The factual background alleged by the plaintiffs  [11]

The preliminary questions for determination  [29]

Commencement of the limitation periods in contract and tort

Do the plaintiffs have an arguable claim that the defendants breached a duty of care under the contract of retainer in connection with advice given regarding the purchase of the property by DMR?

The plaintiffs’ allegation of a continuing duty to correct the erroneous tax advice

[30] [33]

[36]

The defendants’ arguments  [37]

Could Mr Duthie have owed Ms Roose a continuing duty in contract, to correct his mistake, that was breached on 2 May 2008?

[39]

Midland Bank Trust Co Ltd  [40]

Bell v Peter Browne Co  [46]

James v McMahon  [51]

Conclusions on claim in contract based on negligent advice

Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care in tort in connection with advice regarding the purchase of the property by DMR?

[55] [63]

Submissions for the defendants  [64] Submissions for the plaintiffs  [69] Thom v Davys Burton  [79]

Discussion and conclusion on tort claims  [83]

Does s 28 of the Limitation Act 1950 allow an extension of the time for bringing the plaintiffs’ claims in contract and tort as a consequence of fraud in connection with advice given regarding the purchase of the property by DMR?

[87]

Alternative argument against claim in equity for breach of fiduciary duty

Do the plaintiffs have a claim for relief against the defendants under the Contractual Mistakes Act 1977 which is saved by s 28 of the Limitation Act?

[93] [98]

Relevant provisions  [101]

The plaintiffs’ argument  [106]

The defendants’ response  [108]

Discussion  and  conclusion  on  Contractual  Mistakes argument

[112]

Summary of findings  [119] Order granting leave to amend pleadings  [120] Costs  [121]

Introduction

[1]      Ms  Roose,  the  first  plaintiff,  is  a  real  estate  agent  and  a  director  and shareholder of the second plaintiff, Denise Developments Ltd (“DDL”), and the third plaintiff, DMR Developments Ltd (“DMR”).

[2]      The  first  defendants,  Mr  Duthie  and  Ms  Taylor-Ruiterman,  carried  out business  as  chartered  accountants  in  partnership  as  Duthie  Taylor  Ruiterman (“DTR”) until around March 2009.   The second defendant, DRK Chartered Accountants  Ltd  (“DRK”)  is  another  chartered  accountancy  business  of  which Mr Duthie is a director and shareholder.

[3]      Mr Duthie was a trustee of the Denise Roose Family Trust.   From 1994, Mr Duthie was Ms Roose’s accountant whom she engaged through DTR and then, from 2009, through DRK.  Ms Roose also engaged Mr Duthie in his capacity as an exclusive   adviser   for   a   broad   range   of   business,   trust,   financial   planning, accountancy and taxation matters as required from time to time.

[4]      In essence, it is alleged in the proceeding that DDL entered into an agreement for the transfer of land to DMR in reliance on the incorrect advice of Mr Duthie that the sale would not attract tax.  The Inland Revenue Department required DDL to pay tax of $339,165.55.  It is said that Mr Duthie was under an obligation to correct the position, before the transfer of the property on 2 May 2008, once he learned that he had erred, and that Mr Duthie breached duties owed to the plaintiffs in connection with the preparation of financial statements and tax returns, and in his dealings with a tax review and audit by the IRD.

The pleaded claims

[5]      Ms Roose, DDL and DMR have collectively brought claims in contract, tort and equity against the defendants. The claims are:

(a)      Claims  alleging  breaches  of  a  duty of  care  under  the  contract  of retainer, in tort, and in equity, asserting negligence in connection with advice given regarding the purchase of the property by DMR.

(b)Claims  alleging  breaches  of  a  duty of  care  under  the  contract  of retainer, in tort, and in equity, asserting negligence in connection with the compilation and filing of the plaintiffs’ 2009 financial statements and 2009 tax return.

(c)      Claims  alleging  breaches  of  a  duty of  care  under  the  contract  of retainer, in tort, and in equity, asserting negligence in connection with the Inland Revenue Department’s tax review and subsequent audit.

(d)A claim under the Contractual Mistakes Act 1977 asserting that the sale and purchase agreement was entered into by a common mistake.

[6]      The alleged losses for which damages are claimed comprise:

(a)       The  “total  adverse  fiscal  outcome”  of  the  incidence  of  tax  –

$413,506.55.

(b)Losses on the capital increase in the value of properties sold to meet the  tax  liability  and  the  cost  of  dealing  with  the  IRD  audit  –

$796,222.00.

(c)       Other fees related to the audit – $39,588.00.

The limitation and pleading issues

[7]      The proceeding was filed on 1 May 2014, one day less than six years after settlement of the transfer of the property giving rise to the tax liability.  The plaintiffs assert that the proceeding has been brought in time because Mr Duthie was in breach of contractual duties at the time of the settlement of the transaction on 2 May 2008, and that the loss arising from the imposition of tax occurred after settlement so that the cause of action in  tort did not accrue until then.   The plaintiffs also plead

equitable fraud and mistake and seek to rely on s 28(c) of the Limitation Act 1950 under which the period of limitation did not begin to run until the plaintiff has discovered the fraud or mistake, or could with reasonable diligence have discovered it.

[8]      The defendants argue that, whatever the merits, the claims in contract and tort regarding erroneous advice are out of time in that the claims have been brought more than six years after the causes of action accrued.1  Further, the defendants argue that a cause of action in mistake under the Contractual Mistakes Act 1977 is not available at law and that the plaintiffs should not be permitted to plead claims in equity so as to circumvent the Limitation Act.

[9]      By agreement with the defendants, the plaintiffs have applied to the Court to answer preliminary questions of law relating to limitation periods prior to trial on the basis that the answers may substantially dispose of what would otherwise be a seven- day trial.

[10]     It is not suggested in this case that the claims based on alleged breaches after

1 May 2008, in connection with the preparation of the financial statements and tax return, and the IRD audit, are time-barred; the preliminary issues concern only the claims based on the advice given in early 2008 and not corrected by Mr Duthie prior to the transfer of the property.

The factual background alleged by the plaintiffs

[11]     Although this is not a strike-out application, I have approached the questions on  the  basis  that  the  Court  should  assume  (although  not  uncritically)  that  the plaintiffs will be able to prove the facts asserted in the statement of claim.   To explain the limitation issues, it is necessary to set out the history of the dealings between the plaintiffs and the defendants over the transfer of land which has given

rise to the claims.

1      Limitation Act 1950, s 4(1)(a) which, although now repealed and replaced by the Limitation Act

2010, was in force at all material times.

[12]     Some time toward the end of 2005, Ms Roose telephoned Mr Duthie to advise her on the most suitable ownership structure for a 1.9560 hectare property located at 6 Grace James Road, Pukekohe (“the property”) that she was considering purchasing.   In particular, Ms Roose wanted to know if using a company or other entity to purchase the property would minimise her tax liability.

[13]     The parties disagree about the reason that Ms Roose gave to Mr Duthie for purchasing the property.  Ms Roose claims that she told Mr Duthie that she intended to purchase the property to:

(a)      reclaim a part of the land that had been previously farmed by her forebears;

(b)landscape a portion of the property to create a walkway and park-like grounds with a commemorative plaque remembering and celebrating the Roose forebears who had farmed the property;

(c)      adjust the boundary between the property and the adjoining property at 4 Grace James Road owned by the Trustees of the Denise Roose Family Trust;

(d)      graze livestock in the interim; and

(e)       build a new home for her own use.

[14]     Mr Duthie says that Ms Roose told him that she intended to subdivide the property and sell the lots for a profit.

[15]     Mr Duthie, who is not an expert in tax, took advice from an accounting firm with tax expertise.   That firm advised him that the Inland Revenue Department would tax any sale of the land if Ms Roose were to develop it.  Accordingly, they advised Mr Duthie that Ms Roose should purchase the property through a company to minimise the tax liability she would incur.

[16]     Ms Roose claims that on 28 October 2005 Mr Duthie told her that a company would be the best entity to purchase the property.  On 21 December 2005, DDL was incorporated for that purpose; Mr Duthie registered the company for GST and specified  in  the  GST  registration  application  for  that  the  company  was  in  the business of property development. The purchase was settled on 27 January 2006.

[17]     In March 2006, Ms Roose met with Birch Surveyors Ltd to consider creating a public reserve on part of the property and to adjust the boundary between the property and the adjoining property.

[18]     In April 2006, DTR prepared a draft annual financial statement and tax return for the preceding tax  year.   The draft annual financial statements specified that DDL’s business was property development. Ms Roose pleads that, during her review of the 2006 financial accounts in May 2006, she told Mr Duthie that neither she nor DDL were property developers. Mr Duthie disputes this.  He says that Ms Roose told him that she was now thinking of subdividing the property again and asked about income tax, GST and gift duty implications. Mr Duthie went back to the accounting firm for tax advice. He then advised Ms Roose that if the company subdivided the property it must pay tax on any subsequent sale.

[19]     On 31 May 2006, Mr Duthie recorded in the 2006 annual financial statements submitted to the Companies Office and the IRD that DDL was a property developer.

[20]     On 11  December  2006,  Birch  Surveyors  applied  to  the  Franklin  District Council on behalf of DDL with proposals to create a public reserve, to adjust the boundary between the property and the adjoining property and to subdivide the property into 11 sections.  Following a query from the Council over the application, Ms  Roose sought  Mr  Duthie’s  advice on  whether gifting or selling part  of the property to the Council would have any tax consequence and, if so, how to minimise it.  Mr Duthie says that Ms Roose had asked him to advise her on undertaking a 20- section subdivision.

[21]     In June 2007, Mr Duthie sought assistance in obtaining this information for

Ms Roose by emailing the tax experts yet again.  In seeking the advice, Mr Duthie

told the tax experts that Ms Roose was completing a 20-section sub-development of the property through a trading trust and that the purpose of creating a reserve was to obtain the Council’s consent to the proposed subdivision.

[22]     In July 2007, after obtaining further advice from the tax experts, Mr Duthie advised Ms Roose, that:

(a)       A sale or gifting of land to the Council would result in an obligation to pay either gift duty or GST and income tax.

(b)To avoid that occurring, the property development could be conducted through a trading trust with the Council being one of the beneficiaries.

(c)       Ms Roose would have to pay GST and income tax on any sale of the sections of the proposed subdivision.

[23]     In  November  2007,  the  Council  granted  resource  consent  in  part.    This permitted Ms Roose to subdivide the property into seven sections.   The Council declined Ms Roose’s proposal to create a public reserve.

[24]     In early 2008, Ms Roose asked Mr Duthie to advise her on protecting the property from any relationship property claims.  Mr Duthie orally advised Ms Roose:

(a)       to transfer the property from DDL to a trust;

(b)      that the transfer from DDL to the trust would not attract income tax;

and

(c)       that  the  sale  between  DDL  and  the  trust  would  be  as  a  “going concern” for GST purposes.

[25]     In  reliance  on  Mr  Duthie’s  advice,  Ms  Roose  incorporated  DMR  on

12 February 2008.   The DMR Development Trust was settled under deed dated

14 April 2008.  On the same day, on behalf of DDL and DMR, Ms Roose executed a sale  and  purchase  agreement  by  which  DDL  sold  the  property  to  DMR  for

$1,950,000. The agreement initially recorded that the settlement date was 21 April

2008, but settlement was varied to occur on 2 May 2008.   On behalf of DMR, Ms Roose signed an acknowledgment of debt in favour of DDL for $1,950,000.

[26]     The transfer of the property from DDL to DMR was settled on 2 May 2008.

[27]     On 14 June 2009, Mr Duthie completed DDL’s 2009 financial statements and a 2009 tax return and submitted them respectively to the Companies Registrar and to the Inland Revenue Department.   The IRD reviewed DDL and DMR during that period and found that DDL owed tax on the sale of the property in the amount of

$385,415.40, as well as a shortfall penalty.  A settlement was later made with the

IRD under which DDL paid $339,165.55 in tax.

[28]     Ms Roose claims that DDL sold the land relying on the alleged advice that a sale without tax was possible.

The preliminary questions for determination

[29]     The preliminary questions the Court is required to decide on this application are:

(a)      Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care under the contract of retainer in connection with advice given regarding the purchase of the property by DMR?  In that regard, did Mr Duthie owe Ms Roose a continuing duty in contract to correct his mistake, which was breached on 2 May

2008?

(b)Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care in tort in connection with advice regarding the purchase of the property by DMR?  In that regard, did DMR’s loss arise when the transfer settled on 2 May 2008 and the vendor became liable to pay tax on the proceeds of sale, or as soon as

the vendor and the purchaser entered into binding legal obligations with one another on 14 April 2008?

(c)      Does s 28 of the Limitation Act 1950 allow an extension of the time for  bringing  the  plaintiffs’ claims,  either  in  contract  or  tort,  as  a consequence of fraud in connection with advice given regarding the purchase of the property by DMR?2

(d)If the pleaded claims in contract and tort for negligent misstatement are time-barred, is the plaintiffs’ claim for breach of fiduciary duty barred under the Limitation Act 1950 by analogy because the plaintiff is endeavouring to put the same essential allegations on two different bases, one at law asserting negligence and the other in equity asserting breaches of fiduciary duty?

(e)      Do the plaintiffs have a claim for relief against the defendants under the Contractual Mistakes Act 1977 which is within time by virtue of s

28 of the Limitation Act?

Commencement of the limitation periods in contract and tort

[30]     Before turning to consider the preliminary questions, I set out the general rules relating to the commencement of limitation periods in contract and tort.

[31]     Section 4(1)(a) of the Limitation Act 1950 provided that actions founded on simple contract or on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued.  It is common ground that causes of action in contract accrue when the breach of contract occurs, without the need for

actual loss or damage.3    It is also not disputed that a cause of action in negligence

arises when the plaintiff first sustains a loss attributable to a breach of a duty to the

2     Section 28(c) of the Limitation Act 1950 provides that where, in the case of any action for which a period of limitation is prescribed by the Act, the action is for relief from the consequences of fraud  or  a  mistake,  the  period  of  limitation shall  not  begin  to  run  until  the  plaintiff has discovered the fraud or mistake, or could with reasonable diligence have discovered it.

3      Gedye v South [2010] 3 NZLR 271 (CA and SC).

plaintiff.   This is so even if quantification was, at the point in time, difficult or dependent on further contingencies.4

[32]     To pursue any claim alleging a breach of contractual duty, the plaintiffs must establish that the breach occurred on or after 1 May 2008 and, in order for any negligence claim to be in time, the plaintiffs must show that they first sustained a loss attributable to the defendants’ breach of duty on or after that date.

Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care under the contract of retainer in connection with advice given regarding the purchase of the property by DMR?

[33]     The plaintiffs submit that under his contract with Ms Roose, Mr Duthie was under an implied obligation to act as a reasonable and transparent adviser.   The amended statement of claim alleges that breaches of this duty occurred before settlement of the sale and purchase on 2 May 2008 in that the defendants:

(a)       failed to ascertain or clarify DDL’s primary purpose in purchasing the

property in 2005;

(b)failed  to  properly  consider  the  risk  of  how  DDL’s  purpose  in purchasing the property in 2005 would affect DDL’s future taxation treatment in transferring the property;

(c)      failed  to  properly  consider  the  risk  of  how  DDL’s  purpose  in purchasing the property in 2005 would be interpreted in the light of DDL’s  2006–7  financial  statements,  DDL’s  2006  GST registration form  and  its  subsequent  conduct  in  applying  to  subdivide  the property;

(d)failed  to  explain  and  advise  Ms Roose,  DDL  and  DMR  that  the transfer  of  the  property  would  or  may  give  rise  to  income  tax

obligations;

4      Thom v Davys Burton [2008] NZSC 65, [2009] 1 NZLR 437.

(e)      incorrectly  informed  Ms  Roose  and  DDL that  the  transfer  of  the property  from  DDL to  DMR  would  be  tax  free  from  an  income perspective;

(f)      failed to correct or modify the advice that the transfer would be tax free; and

(g)failed to provide an alternative re-structure that would avoid negative tax consequences.

[34]     Accepting that a cause of action in contract accrues when the breach of contract occurs, a breach in the form of incorrect advice would have occurred when the advice was given or, at the latest, when the sale and purchase agreement was executed on 14 April 2008 in reliance upon it.  The plaintiffs do not now argue that they can rely on any breach of contract by the giving of negligent advice in early

2008, but they submit that there is an alternative ground on which the contract claim based on the advice can be found to be in time.   That is, that if Mr Duthie had knowledge of his mistake before settlement occurred on 2 May 2008, he was under a continuing obligation under his retainer to correct his mistake right up until the settlement date.

[35]     I am required to consider whether this argument is available to the plaintiffs on the pleadings as a matter of law.  If so, whether either ground is actually made out will be a matter for the trial judge to determine.

The plaintiffs’ allegation of a continuing duty to correct the erroneous tax advice

[36]     The plaintiffs submit that the unique circumstances of the transaction would have enabled Ms Roose to unwind it if Mr Duthie had informed her of his error before the settlement on 2 May 2008.  Although not disputing that a breach of the duty to give correct advice occurred when the advice was given, or when the sale and purchase agreement was executed,  Mr Crossland argues that, if the Court accepts at trial that Mr Duthie knew or ought to have known before settlement that the sale was taxable, and that he failed to correct his error by advising Ms Roose of the position, a

further breach of contractual duty occurred on 2 May 2008 when Mr Duthie failed to correct his advice before settlement of the transaction.  Consequently, the filing of the proceeding on 1 May 2014 was within the limitation period by one day.

The defendants’ arguments

[37]     The defendants argue that the breach of contract occurred  in early 2008 when, as pleaded by the plaintiffs, Mr Duthie gave the negligent advice.  Since the damage resulting from the breach occurred when the sale and purchase agreement was entered into on 14 April 2008, a failure to provide preventative advice after that date cannot be causative of the plaintiffs’ loss.  The defendants emphasise that the

Supreme Court in Murray v Morel & Co Ltd5 rejected the proposition that the time a

cause of action accrues can be extended, through the principle of “reasonable discoverability”, to a time when a plaintiff has knowledge that he or she suffered a loss.   Tipping J  (who  delivered  the  principal  judgment  for the majority on  the limitation issue) said:6

In my view the numerous references in the Limitation Act to accrual of a cause of action can only be construed as references to the point of time at which everything has happened entitling the plaintiff to the judgment of the court on the cause of action asserted.  Save when the Limitation Act itself makes knowledge or reasonable discoverability relevant, the plaintiff's state of knowledge has no bearing on limitation issues.  Accrual is an occurrence- based, not a knowledge-based, concept.  The Limitation Act as a whole is structured  around  that  fundamental  starting  point.  The  periods  of  time selected for various purposes must have been chosen on that understanding. The circumstances of postponement and extension have themselves been similarly framed.

[Emphasis added]

[38]     I agree that, while that case did not involve an action in contract or tort, Tipping J was speaking generally and the principle applies here.   The defendants accordingly submit that the cause of action in contract began to run in early 2008 when the contractual obligation concerning tax advice was first breached and the

claim based on the incorrect advice is time-barred.

5      Trustees Executors Ltd v Murray [2007] NZSC 27, reported as Murray v Morel & Co Ltd [2007]

3 NZLR 721.

6 At [69].

Could Mr Duthie have owed Ms Roose a continuing duty in contract, to correct his mistake, that was breached on 2 May 2008?

[39]     I have considered the cases relied upon by Mr Crossland for the plaintiffs to support his contention that Mr Duthie owed Ms Roose a continuing duty in contract to correct his erroneous  advice up  to the point  at which the sale and  purchase agreement was settled on 2 May 2008, and that it was breached when the transaction settled without Mr Duthie having corrected his advice.

Midland Bank Trust Co Ltd

[40]     In Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp,7 Walter Green agreed to grant his son Geoffrey Green an option to purchase from him a farm in 1961. Their solicitor, Mr Stubbs, had negligently failed to register an option to purchase the land.  Sometime later, in 1967, Walter Green discovered that the option had never been registered and defeated it by selling the land to his wife.  Between the failure to register the option and the sale of the land, the solicitor had been asked at various times by Geoffrey Green to consider whether or not the option ought to be exercised. The solicitor had given advice on those occasions without considering whether or not the option had in fact been registered.   Geoffrey Green’s estate made a claim against the solicitor for breach of contract in 1972.  The defendant sought to rely on the United Kingdom Limitation Act 1939 and submitted that the plaintiff’s action had already become time-barred before the date of the sale and conveyance of the farm to Walter Green’s wife.   The plaintiff argued that the solicitor was under a “continuing duty” to ensure that the option had been duly registered which arose from time to time whenever any advice was sought in relation to the option.

[41]     It was held that the duty is directly related to the confines of the retainer and that  it  is  not  seriously arguable  that  a  solicitor  who,  or  whose  firm,  has  acted negligently comes under a continuing duty to take care to remind himself of the negligence of which, ex hypothesi, he is unaware.8    In response to the submission that, because the exercise of the option was crucial to the scheme which Geoffrey

Green was proposing in June 1967, it then became Mr Stubbs's duty to consider and

7      Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384.

8      At 403.

check on the registration of the option, the Judge held that that was not what the solicitor was asked to do. The instructions were given in the context of an agreement between father and son who were on friendly terms and against the background that Mr Stubbs's firm had, for years, acted as solicitors for both parties and would expect to know if Walter was contemplating any sale of his property.9

[42]     The Court said there was no reason why the possibility of Walter Green's disposing of the land in defiance of the option should then have been present in the solicitors mind nor why the instructions to advise as to the tax and death duty consequences should have suggested to him that he ought to check whether the option had been registered.   It followed that, if there was no continuing duty to register up to that point, there was nothing in the instructions given in June 1967 which would have revived it or created some fresh duty in Mr Stubbs to consider

whether or not the option had been registered.10

[43]     Mr  Crossland  argued,  however,  that  Oliver  J  accepted  an  alternative proposition, that the solicitor had a continuing duty under his retainer to effect a valid registration of the option.  The Judge distinguished this from a duty to correct erroneous advice.   He found that the duty to effect a valid registration was breached

when registration became impossible on the sale of the land to a third party.11    On

that basis, the limitation defence failed.

[44]     As I understand it, the proposition advanced by Mr Crossland on behalf of the  plaintiffs  is  that,  because  the  property  transfer  was  between  closely-related parties, it could have been unwound at any time up to settlement and that Mr Duthie continued to be involved in the matter.

[45]     I am not persuaded that what is argued for the plaintiffs in reliance on this case is any different from an assertion that Mr Duthie had a continuing duty to correct the erroneous advice already given, a proposition rejected by Oliver J.  There

was no continuing duty in this case for Mr Duthie, an accountant, to do anything in

9      Above.

10     Above.

11     At 435-439.

relation to the property settlement which could be said to be similar to a duty to register an option.

Bell v Peter Browne Co

[46]     The decision in Midland Bank Trust Co Ltd provides an example of the principle that whether a claim in contract is brought within the limitation period turns upon the identification of the nature of the contractual duty and the timing of the alleged breach.  That principle was in play in Bell v Peter Browne Co (a firm),12 also referred to me by Mr Crossland.  In that case, the plaintiff, Mr Bell, consulted the defendant firm regarding the breakdown of his marriage in October 1977.  One of the points he discussed with his solicitors concerned what was to happen to the matrimonial home which was registered in the joint names of his wife and himself. It was worth about £12,000 and subject to a mortgage for about £8,000.  If the house

had then been sold, Mr Bell would have received about £2,000.  Mr Bell and his wife agreed that the house would not be sold for the time being, but that Mr Bell he was to receive one-sixth of whatever might be the gross proceeds when a sale did take place.  Meanwhile, the house would be transferred into the sole name of the wife and Mr Bell’s continuing interest in value of the matrimonial home would be protected by a trust deed or a mortgage.

[47]     On 1 September 1978, Mr Bell executed a transfer of the house into his wife's sole name but no steps were taken by his solicitors to protect his one-sixth share in the proceeds of sale.  No declaration of trust or mortgage was prepared or executed; no caution was registered at the Land Registry.   The parties were divorced in the following year.  In December 1986, Mr Bell learned from his former wife that she had sold the property for £33,000 in July 1986, almost eight years after the property had been transferred into her sole name.  She had spent all the proceeds and Mr Bell was thus deprived of his one-sixth share.   Mr Bell brought an action against his former solicitors for damages for professional negligence.  The writ was issued on

20 August 1987. The issue was whether the action was statute-barred.

12     Bell v Peter Browne Co (a firm) [1990] 2 QB 495 (EWCA).

[48]     The English Court of Appeal found that the continuing failure to correct the solicitor’s omission did not constitute a new breach of duty.  Lord Justice Nicholls accepted that the solicitor's breach of contract in 1978 did not discharge his obligations.13     But although the plaintiff would have been entitled to go back to his former solicitor and require him to carry out his contractual obligations belatedly, so far as they could still be performed, the breach had occurred and failure thereafter to

make good the omission did not constitute a further breach.  It was simply the case that the breach in 1978 remained unremedied.14    The Court held, significantly, that the position would not have been different if in, say 1980, the plaintiff's solicitor had been asked to remedy his breach of contract and he had failed to do so.  His failure to make good his existing breach of contract on request would not have constituted a further breach of contract so as to set a new six-year limitation period running. The

position would have been simply that the solicitor remained in breach.   And the position was not any different because the breach remained remediable until 1986 when the house was sold:  a remediable breach is just as much a breach of contract when it occurs as an irremediable breach, although the practical consequences are likely to be less serious if the breach comes to light in time to take remedial action.

The Court said:15

Were the law otherwise, in any of these instances, the effect would be to frustrate the purpose of the statutes of limitation, for it would mean that breaches of contract would never become statute-barred unless the innocent party chose to accept the defaulting party's conduct as a repudiation or, perhaps, performance ceased to be possible.

[49]     The Court added that those observations were directed at the normal case where a contract provides for something to be done, and the defaulting party fails to fulfil his contractual obligation in that regard at the time when performance is due under the contract. In such a case there is a single breach of contract.  The Court contrasted, however, the exceptional cases where, on the true construction of the contract, the defaulting party's obligation is a continuing contractual obligation.  In such cases the obligation is not breached once and for all, but it is a contractual

obligation  which  arises  anew  for  performance  day  after  day,  so  that  on  each

13     At 500.

14     At 501.

15     Above.

successive day there is a fresh breach.16   So, Lord Justice Nicholls distinguished the decision of Oliver J in Midland Bank Trust Co. Ltd on its facts as one such case.  He explained that the defendant firm of solicitors in that case never treated themselves as functi officio in relation to the option; that they continued to have dealings with their client in respect of the unregistered option; and that the obligation to register the option continued until it was no longer possible to do so.  That position was to be contrasted with Mr Bell’s case.  There was no suggestion that the defendants had any further contact with Mr Bell or his affairs after the conclusion of the divorce proceedings.  That was more than six years before the writ was issued. The amended statement of claim alleged that the solicitors owed a "continuing duty" to protect Mr Bell's one-sixth beneficial interest until that duty could no longer be fulfilled or the plaintiff accepted the solicitors' breach as repudiation, but the alleged continuing duty was not founded on any facts other than the initial retainer and it did not take

the plaintiff's case any further.17

[50]     I do not detect anything in Bell which assists the plaintiffs.  On the essential facts of the two cases, the reasoning of the English Court of Appeal applies here.

James v McMahon

[51]     The decisions in Midland Bank Trust Co. Ltd and Bell v Peter Browne Co were considered by the New Zealand High Court in James (as trustees of the James Family Trust v McMahon,18 a case in which the plaintiffs raised arguments similar to those advanced in this case.  The plaintiffs owned commercial premises, the ground floor of which they leased to Alexandra Park Functions Limited (“Alexandra Park”) in 2005, through two lease agreements. The leases were guaranteed by Auckland

Trotting Club Incorporated (“Auckland Trotting”), a subsidiary of Alexandra Park. Alexandra Park wanted to reorganise the leases.   It arranged to surrender the old leases on the basis that new renewable leases for three terms of three years would be executed with Alexandra Park as tenant and Auckland Trotting as guarantor.  It was

agreed that Auckland Trotting would guarantee the leases until the final expiry date

16     Above.

17     Above.

18     James (as trustee of the James Family Trust) v McMahon [2013] NZHC 3018.

in 2015, assuming that the renewals were exercised. But the plaintiff ’s solicitors

failed to ensure that the lease obligations were guaranteed beyond September 2006.

[52]     The  defendant  solicitors  had  further  dealings  with  the  plaintiffs  and  the tenants, which occurred in situations where the tenants were in default of paying rent.  The defendants were retained to develop strategies to deal with the defaults. The plaintiffs submitted that on each of these occasions they expressly or impliedly raised with the defendants the plaintiffs’ on-going entitlement to rely on Auckland Trotting’s guarantee, and that there accordingly arose a fresh obligation on each occasion for the defendants to check the documents in order to ensure that there was indeed an enforceable guarantee for the whole of the lease period.

[53]     Justice Allan  considered  the  decisions  in  Midland  Bank  Trust  and  Bell. Consistently with the view of the Court of Appeal in Chief Executive Land Information New Zealand v Te Whanau O Rangiwhakaahu Hapu Charitable Trust,19 he held that those authorities demonstrated that the defendants, having negligently drafted or approved the Auckland Trotting guarantee, were not under some sort of general continuing duty to rectify the error.   Neither did it matter that Mr James subsequently asked the defendants  to confirm that he remained entitled to hold Auckland Trotting liable on its guarantee on more than one occasion.   The Judge

agreed with Oliver J in Midland Bank Trust that it is not seriously arguable that a solicitor who has acted negligently comes under a continuing duty to take care to remind himself of the negligence of which he is unaware.20

[54]     Justice Allan accepted that the position might well have been different had Mr James given the defendants explicit instructions which of necessity required them to reconsider the express terms of the Auckland Trotting guarantee, but held that that had not occurred.  The plaintiffs’ evidence was to the effect that Mr James consulted the defendant from time to time in the context of on-going difficulties with the lessees, for the purpose of getting advice about an appropriate strategy.   A claim against Auckland Trotting was no doubt one of the options available to the plaintiffs,

but given that there had never been any doubt as to the efficacy of the Auckland

19     Chief  Executive  Land  Information  New  Zealand  v  Te  Whanau  O  Rangiwhakaahu  Hapu

Charitable Trust [2013] NZCA 33, [2013] NZAR 539.

20     James (as trustee of the James Family Trust) v McMahon, above n 18, at [43].

Trotting guarantee, the instructions would not have extended to a requirement that the defendants conduct a review of the guarantee in order to ensure that it accurately reflected the instructions given by the plaintiffs in 2005.21   The plaintiffs’ subsequent dealings with the defendants in respect of various assignments and lessee defaults did not in the circumstances give rise to a fresh cause of action based upon an allegation that the defendants had failed at some later point in time to check the validity of the Auckland Trotting guarantee.22

Conclusions on claim in contract based on negligent advice

[55]   The conclusion to be drawn from Te Whanau O Rangiwhakaahu Hapu Charitable Trust, James v McMahon and the English cases is that, in the absence of Mr Duthie becoming aware prior to the transfer of the property that he had given erroneous tax advice, he was not under a continuing duty in contract to rectify the breach  founded  on  his  advice.    Although  the  plaintiffs  allege  that  Mr  Duthie continued to be engaged by them over the relevant period, he was not in the same position as the solicitors in Midland Bank Trust who remained under a continuing duty to register the option up to the time at which that was no longer possible.

[56]     The decisions provide examples of the principle that whether a claim in contract is brought within the limitation period turns upon the identification of the nature of the contractual duty and the timing of the alleged breach.  It is convenient to adopt the point made by the Court of Appeal in Te Whanau O Rangiwhakaahu Hapu Charitable Trust that there is a difference between a continuous breach and the

failure to rectify a breach that has already occurred.23   When a defendant has omitted

to do something that they have contracted to do, the breach (in their failure to act) is continuous, and the duty may be complied with, up to the point when performance is no longer possible.  This may be compared with situations, as existed here, where a defendant who is under a duty (in this case, to give competent advice) has acted in a

manner that breaches that obligation.  In such a case the breach of contract occurred

21 At [44].

22 At [45].

23     Chief  Executive  Land  Information  New  Zealand  v  Te  Whanau  O  Rangiwhakaahu  Hapu

Charitable Trust, above n 19, at [141].

when the defendant acted in a manner contrary to the duty, although the breach may have been capable of remediation before loss or damage was suffered.

[57]     Here, the breach occurred well before the settlement of the property transfer – on the giving of the negligent advice or on 14 April 2008 at the latest, when the sale and purchase agreement was entered into – and the cause of action in contract accrued at the time that the breach occurred.   There was no additional continuous contractual obligation to rectify that breach,  which, if  not fulfilled, would  have constituted a further breach when rectification became impossible.  As the Court of Appeal identified, if the plaintiffs’ argument were to be accepted, it would apply to every contractual dispute in which a defendant has failed to rectify a breach (almost every contract claim) and would render s 4 of the Limitation Act almost entirely

redundant in contract cases.24

[58]     To found an arguable claim based on the allegations concerning incorrect tax advice by Mr Duthie and his failure to rectify it prior to the transfer of the property, the plaintiffs must establish that a fresh duty arose – one that was in continuing effect on 2 May 2008 – and that it was breached at the time of the transfer on that date. That is not the case here.  The allegations of breach set out at [76] of the amended

statement of claim25 are either based on alleged failures prior to or at the time of the

giving of the advice in early 2008,26  or failures to remedy27  which, without more, I

have held do not amount to actionable breaches.

[59]     I have not overlooked that the plaintiffs allege that Mr Duthie was under a duty, on learning of any error in the provision of past services and/or advice to promptly notify Ms Roose of such an error28  and to correct or modify the advice or provide an alternative re-structure that would avoid negative tax consequences.  This argument  is  advanced  on  the  basis  that  Mr  Duthie  was  under  a  professional obligation to draw his negligence to the attention of his client once he became aware

of it.29   In that event, because of the nature of the relationship between the transferor

24     Above.

25 Set out in this judgment at [33].

26     At [76.1] to [76.5] of the amended statement of claim.

27     At [76.6] and [76.7] of the amended statement of claim.

28     At [9.1(m)] of the amended statement of claim.

29     Relying on Gold v Mincoff [2001] Lloyd’s Law Reports 423, a case involving a solicitor but

and transferee of the property, the agreement for sale and purchase could have been set aside and an alternative means of achieving Ms Roose’s objectives might have been adopted.

[60]     The plaintiffs do not allege in the amended statement of claim, however, that Mr Duthie actually knew prior to May 2008 that he had made a mistake, nor that something had occurred from which he ought to have known of his error.  Neither do the plaintiffs allege in the present case that, immediately prior to the settlement of the transfer, Mr Duthie had been given a fresh instruction to view and confirm his earlier advice.

[61]     As presently pleaded, therefore, the claim in contract based on the negligent misstatement as to the tax effect of the transaction was brought outside the limitation period and cannot proceed.

[62]     I  deal  later  with  Mr  Crossland’s  alternative  argument  that  s  28  of  the Limitation Act 1950 allows an extension of the time for bringing the plaintiffs’ claim in contract for negligent advice and turn next to the claim in tort alleging negligent advice.

Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care in tort in connection with advice regarding the purchase of the property by DMR?

[63]     It is not disputed that Mr Duthie owed a duty of care in tort to exercise reasonable care and skill in his dealings with the plaintiffs.  Although the defendants deny the other particulars of alleged breaches in tort, it may be assumed for present purposes that the provision of incorrect tax advice in early 2008 about the taxability of the property transfer was a breach of the duty to exercise reasonable care and skill.

Submissions for the defendants

[64]     The defendants say, however, that the cause of action in tort, so far as it rests on the provision of incorrect tax advice, accrued when the plaintiffs first sustained a

applicable, in the plaintiffs’ submission, to an accountant by analogy.

loss attributable to the defendants’ breach of duty.30    They argue that the cause of action accrued on 14 April 2008 when the transferor and transferee entered into the unconditional sale and purchase agreement, and DMR gave an unconditional acknowledgment of the debt for the purchase price.

[65]     Mr Pearson submits for the defendants that the decision of the Supreme Court in Thom v Davys Burton31  determines when the plaintiffs suffered the loss through the negligent advice.  The facts of Davys Burton, which are explained in more detail at [79]-[80], involved a claim by Mr Thom against his solicitors for negligent advice about entering into an agreement under the Matrimonial Property Act 1976. The solicitors’ advice resulted in the agreement being unenforceable. The Court held that

a person suffers loss in tort at the point in time when, through the negligence of the defendant,  he  did  not  obtain  the  rights  he  should  have  obtained  and  could immediately recover the cost of putting it right, even though that cost may not be immediately ascertainable.  Applying that principle, the Supreme Court concluded that Mr Thom suffered a loss when the parties executed the matrimonial property agreement, when the marriage failed.

[66]     Mr Pearson submits, therefore, that it was on 14 April 2008, when DDL and DMR entered into a binding agreement, that the sale of the land was unconditional and DMR was legally obliged to complete the purchase of the property, triggering the liability to pay tax under CB14(1) of the Income Tax Act 2007.   When the income is derived is not relevant, in counsel’s submission; the liability arises upon the disposal of the land.

[67]     In Mills v Commissioner of Inland Revenue,32  Hardie Boys J held disposal occurs when a sale and purchase agreement becomes unconditional because the purchaser obtains  an  equitable interest  in  the property and  can  sue  for  specific performance accordingly.  So, the defendants say, applying Mills and Davys Burton

to this case, the plaintiffs’ loss accrued when they had a binding agreement, even

30     Thom v Davys Burton, above n 4.

31     At [24]-[27] (per Elias CJ), at [28] (per Blanchard J) and at [46]-[51] (per Wilson, Tipping and

McGrath JJ).

32     Mills v Commissioner of Inland Revenue (1985) 7 NZTC 5,025 (HC).

though quantification of the full extent of their loss might be contingent on the occurrence of further events.

[68]     In addition, the defendants submit that it is settled law that liability for tax is not contingent on an assessment of that liability.  Rather, it is an absolute liability imposed by statute which, although it may not be ascertained as to amount until assessed, is not subject to any contingency.33

Submissions for the plaintiffs

[69]     The plaintiffs argue that they first sustained a loss attributable to a breach of duty on 2 May 2008 when, on settlement of the transfer, a legal debt arose and a tax liability was created. Their reasons may be summarised briefly.

[70]     The plaintiffs say the  loss  here  is  the liability to  pay income tax.   The Commissioner  of  Inland  Revenue  considered  that  the  sale  of  the  property  was taxable under either s CB6 or s CB14 of the Income Tax Act.   The sections both describe income as “…an amount that a person derives from disposing of land….” Derivation here means when a debt is due from the purchaser and can be recovered accordingly.  Pursuant to these sections, the tax liability is triggered only when the person accrues or derives an amount of money for the sale of the land.   So, if a taxpayer is yet to have incurred the income but is merely expecting it, he is not, at that point in time, liable for income tax and has suffered no loss.

[71]     The plaintiffs say it does not matter that equitable title may have passed to the purchaser on 14 April 2008 because the vendor could not then sue for the purchase price.  The vendor’s loss occurred when the income was derived and the sum was less than anticipated because of the tax liability, not when the land was disposed of. In that event, the Court should not consider itself bound by the view of Hardie Boys J in Mills v Commissioner of Inland Revenue.34   Mr Crossland argues that the court in Mills did not consider whether the income was actually derived at the time

the sale and purchase agreement went unconditional.

33     BNZ Finance Ltd v Holland (1997) 18 NZTC 13,156 (CA) at 13,168 (per McKay J).

34     Mills v Commissioner of Inland Revenue, above n 32.

[72]     The plaintiffs seek to rely, instead, on the decision of the Australian Federal Court in Gasparin v FCT35  in which a developer entered into several land sale and purchase agreements.   The agreements became unconditional before, but did not settle until after, the end of the financial year.  The Court determined that income is derived when a legal debt arises in respect of the property disposed of:36

… the joint venturers derived income from the sale of the allotments of land which comprised their trading stock not when the contracts became unconditional,  but  at  settlement  when  a  debt  accrued  due  from  each purchaser to the joint venturers.  The critical consideration is the time when the debt arose.  It should also be held that each allotment remained trading stock on hand until settlement, that being the point of time in a transaction for the sale of land under a contract of sale in terms of those before the Court when the vendor finally loses all dispositive power, and the contingency that the sale will not proceed to completion disappears.

[73]     The plaintiffs say it follows from this view that a legal debt generally arises at the time of settlement.  Before that date, the vendor has an equitable interest in the property and may demand specific performance or damages, but he or she is not entitled to sue for the purchase price as an unpaid debt.  The purchase price is the income and it is only when the income is derived that the tax liability is imposed.

[74]     Further, the plaintiffs argue that the Court should apply this approach because it is thought to be correct according to a tax information bulletin issued by the Inland Revenue Department37 which cites both Gasparin and a 1924 New Zealand decision, Ruddenklau v Charlesworth.38

[75]     In Ruddenklau v Charlesworth it was held by Salmond J at first instance that, as a general rule, on the failure or refusal of a purchaser to complete an executory contract for the purchase of land the vendor is not entitled to sue for the purchase money as a debt.   He is entitled merely to sue for specific performance or for damages for the loss of his bargain.  It is only when the contract has been completed by the execution and acceptance of a conveyance that unpaid purchase money may

become a debt and can be recovered accordingly.39    Any exception to the rule, for

35     Gasparin v FCT [1994] FCA 1057.

36 At [21].

37     Inland Revenue Department Tax Information Bulletin Vol 16 No 5 (June 2004) at 34.

38     Ruddenklau v Charlesworth [1925] NZLR 161.

39     At 164. This point was not addressed in the subsequent appeal.

example in respect of a deposit payable before settlement, does not apply in this case.

[76]     Mr Crossland submitted also that in Hawkes Bay Power Distributions Ltd v Commissioner of Inland Revenue,40  the Court of Appeal appeared to agree with the approach of the Australian Federal Court in Gasparin.   That case concerned an electricity supplier which, under its contract with consumers, was entitled to read meters every few months but could issue estimated readings in the interim.  There was an issue about the time that the electricity supplier derived the income.   The

Court of Appeal held that the supplier derived the income on the date of supply. Mr Crossland  emphasises  that  the  Court  said  that  when  derivation  occurs  will depend on the particular facts and circumstances of a case, including the provisions of any contract involved.41

[77]     Relying on the Gasparin line of authority, Mr Crossland submitted that the liability to pay income tax does not arise until the debt is due; that is, at the time of settlement when the purchaser handed over title to the property in exchange for the transfer of the purchase price.  Thus, counsel says, the tax liability was created on

2 May 2008; the cause of action in negligence ran from that date; and the claim in tort based on the incorrect advice was brought within time.

[78]     Further, the plaintiffs submit that the findings of the members of the Supreme Court in Davys Burton are inconsistent on the point and should not be applied to the plaintiffs’ situation. This argument requires a more detailed discussion of the facts of that case and the reasoning of the judges.

Thom v Davys Burton

[79]     In March 1990, Mr Thom contracted a law firm, Davys Burton, to prepare a prenuptial agreement contracting out of the provisions of the Matrimonial Property Act 1976 (“the Act”).  Mr Thom wanted to ensure that the house he owned would

remain his separate property, even if used as the matrimonial home.  After Mr Thom

40     Hawkes Bay Power Distributions Ltd v Commissioner of Inland Revenue (1999) 19 NZTC

15,226 (CA).

41 At [20].

executed the agreement in New Zealand on 26 March 1990, he took it to the United

States for his future wife, Ms Lawrence, an American citizen, to sign.

[80]     The American notary public who witnessed Ms  Lawrence’s signature on

29 March  1990  felt  unable  to  fully  explain  the  “effect  and  implications  of  the agreement” due to unfamiliarity with New Zealand law, and did not give the certificate required by s 21(6) of the Act.  Accordingly, Ms Lawrence did not receive any independent legal advice before signing, and the agreement was void under s 21(8)(a) of the Act.  The marriage took place on 31 March 1990.  Eight years later, when  the  parties  separated,  the  Family  Court  held  the  matrimonial  property agreement to be ineffective. The alleged negligence was the failure by Davys Burton to advise Mr Thom how crucial it was for his wife-to-be to get independent advice and for the advising lawyer to certify accordingly.

[81]     Mr  Crossland  argues  for  the  plaintiffs  that  the  three  separate  judgments issued by the Supreme Court differ over the time that Mr Thom’s loss arose.   In particular, he submits, there is no analysis of whether the loss arose on the execution date of the agreement and or the day on which the marriage actually took place.  In the  view  of  Elias  CJ,  Mr  Thom  suffered  immediate  loss  on  his  marriage  (on

31 March 1990) without the protection of a valid contracting-out agreement because he “did not get what he should have got”.42    Justice Blanchard said that Mr Thom suffered actual loss or damage on 29 March 1990 when the agreement was entered into (by Ms Lawrence).43   Tipping, McGrath and Wilson JJ said Mr Thom relied on Davys Burton to obtain a legally enforceable prenuptial agreement which would ensure  that  Ms  Lawrence  had  no  claim  on  the  house  as  matrimonial  property. Instead, he got a less valuable asset, an agreement that was not legally enforceable. Mr Thom thereby suffered an immediate loss “upon the signing of the agreement”44 even though the loss may have been difficult to quantify at that time.45   Because of these apparently inconsistent views of the members Court, the plaintiffs submit that

Gasparin is a more relevant case for resolving the limitation issue in this case,

because it focuses on the particular nature of the contract.

42     Thom v Davys Burton, above n 4, at [25].

43 At [28].

44 At [47].

45     At [48]-[50].

[82]     In my assessment, however, there are no material differences in the views of the members of the Supreme Court in Davys Burton.  The Chief Justice may have been right to acknowledge, without saying so expressly, that it was on the occurrence of the marriage that Mr Thom suffered loss, rather than when the agreement was signed two days earlier:   the agreement was in contemplation of the marriage and contingent upon it, otherwise the legislative regime it addressed would not bite.  But the Court was unanimous in deciding that the loss occurred when the agreement became effective and that the time for the issuing of proceedings to recover the loss ran from then, not when the marriage failed years later.

Discussion and conclusion on tort claim based on incorrect advice

[83]     Negligent misstatement is not actionable per se; it requires the plaintiff to show that he or she has suffered some loss.  This means that the limitation period starts to run from the time when loss or damage which is more than minimal actually occurs.46

[84]     In my view, the principles in Davys Burton apply to the plaintiffs’ claims in negligent misstatement in the present case and it would be inconsistent with settled principles in tort law to count the limitation period as beginning to run when the income tax liability was imposed.  In this case, DDL entered into an unconditional sale with DRM on 14 April 2008 and in return received an acknowledgement of debt.   The limitation period in tort started to run when the vendor entered into a binding  agreement  with  a  view  to  receiving  net  sale  proceeds  which  were significantly less, on account of the tax liability, than what it had expected to receive. The plaintiff’s loss occurred with the transaction, although the loss may not have

been quantifiable at once.47

[85]     I  acknowledge  that,  if  the  problem  with  Mr  Duthie’s  advice  had  been

discovered  between 14 April 2008 and  2 May 2008, the deal might  have been unwound by the contracting parties.   But the plaintiffs would have incurred legal

46     Rothwell v Chemical & Insulating Co Ltd [2007] UKHL 39, [2008] 1 AC 281 at [65]; Matai

Industries Ltd v Jensen [1989] 1 NZLR 525 (HC).

47     Westland District Council v York [2014] NZCA 59 at [29], relying on Law Society v Sephton & Co [2006] UKHL 22, [2006] 2 AC 542 at [46] and [48]; Shore v Sedgwick Financial Services Ltd [2008] EWCA Civ 863, [2008] PNLR 37 at 882; and Thom v Davys Burton, above n 4.

costs in undoing the agreement so that there would have been actionable loss to that extent at least.

[86]     Applying Thom v Davys Burton, I find that DMR’s loss did not arise when the transfer settled on 2 May 2008 and the vendor became liable to pay tax on the proceeds of sale, but as soon as the vendor and the purchaser entered into binding legal  obligations  with  one  another.    That  was  on  14 April  2008,  meaning  the limitation period for the claim in tort expired on 14 April 2014.  The claim in tort based on incorrect tax advice regarding the transfer of the property is out of time and cannot be pursued on the current pleading.

Does s 28 of the Limitation Act 1950 allow an extension of the time for bringing the plaintiffs’ claims, either in contract and tort, as a consequence of fraud in connection with advice given regarding the purchase of the property by DMR?

[87]     Mr Crossland argues, alternatively, that s 28 of the Limitation Act 1950 allows an extension of the plaintiffs’ claims in contract and tort for negligent advice to bring them within time.  He submits that Mr Duthie must have realised that the sale was taxable sometime after 2 May 2008 when he was assisting the IRD with the investigation  of  Ms  Roose’s  affairs  and  that  he  acted  fraudulently in  failing  to disclose to Ms Roose that he had earlier made an error.   In such an event, the plaintiffs argue that s 28 of the Limitation Act 1950 allows the limitation period for the claims based on negligent advice to be extended.

[88]     Section 28 of the Limitation Act 1950 provides:

28       Postponement of limitation period in case of fraud or mistake

Where, in the case of any action for which a period of limitation is prescribed by this Act, either—

(a)      The action is based upon the fraud of the defendant or his agent or of any person through whom he claims or his agent; or

(b)      The right of action is concealed by the fraud of any such person as aforesaid; or

(c)       The action is for relief from the consequences of a mistake,— the period of limitation shall not begin to run until the plaintiff has discovered the fraud or the mistake, as the case may be, or could with

reasonable diligence have discovered it ….

[89]     The plaintiffs argue, first, that Mr Duthie’s failure to disclose the information that he had erred in his advice about the taxability of the transaction amounted to equitable fraud. They say:

(a)      In Gold v Mincoff Science & Gold48  it was held that a statute-barred claim could be resurrected by a fresh cause of action for loss of the right to sue “on the basis that, at a time within the limitation period and less than six years before the issue of the proceeding, the solicitor failed to advise that he had been negligent”.  A solicitor is duty bound to inform his or her client of his or her negligence, which can arise as a result of the solicitors’ professional obligations.

(b)Mr  Duthie  is  an  accountant  and  business  adviser.    Such  persons generally owe fiduciary duties to clients for complete and full disclosure of all facts properly coming within the ambit of inquiry. The accountants’ ethical code requires impartiality and avoidance of conflicts of interest.   Such duties are consistent with a duty to self- report incidents of negligence to the client once that is realised by the practitioner.   Breach of fiduciary obligation constitutes a species of

equitable fraud.49

[90]     It is alleged in the amended statement of claim that Mr Duthie agreed, as part of the supplementary DRK retainer, that he would provide Ms Roose, DDL and DMR advice and assistance in relation to IRD’s review and subsequent audit.50   The argument is that the IRD review and subsequent audit must have made Mr Duthie realise he had made a mistake in his advice on the tax position.   He was under a fiduciary obligation to disclose this information to Ms Duthie, the disclosure of which would have allowed her to seek legal advice earlier and bring a claim against him earlier.

[91]     I  accept  that  these  propositions  are  distinctly  arguable  but,  if  they  are established on the evidence at trial, they go only to providing a new cause of action

48     Gold v Mincoff Science & Gold, above n 29, at [98].

49     Collier v Creighton [1993] 2 NZLR 534 (CA); Matai Industries v Jensen [1989] 1 NZLR 525.

50 Amended Statement of Claim at [99].

based on equitable fraud occurring at the time Mr Duthie was made aware of his error and decided to withhold it from Ms Roose.  On Mr Crossland’s scenario, that would have been after settlement of the transfer when Mr Duthie was involved in discussions with the IRD about the tax implications of the completed transaction.

[92]     Gold v Mincoff Science & Gold is not authority for the proposition that a cause of action which is out of time can be  resurrected; it is authority for the establishment of a fresh cause of action based on a subsequent  breach of duty. Section 28 of the Limitation Act serves to delay the commencement of the limitation period to the time of the discovery of the fraud or its reasonable apprehension, but there is nothing in the application of s 28 in this case which operates to defer the dates on which the limitation period commenced for other causes of action in tort or contract which accrued on or before 14 April 2008.

Alternative argument against claim in equity for breach of fiduciary duty – limitation by analogy

[93]     Although there is no statutory time bar for claims of breach of fiduciary duty, it was held by Tipping J in Matai Industries Ltd v Jensen51 that a claim for breach of fiduciary duty was barred under the Limitation Act 1950 by analogy because the plaintiff was endeavouring to put the same essential allegations on two different bases, one at law in negligence and the other in equity by asserting breaches of fiduciary duty. Tipping J said:52

He who seeks equity must do equity and it would seem to me to be highly inequitable that with this degree of correspondence a plaintiff in equity could circumvent the barring of his cause of action at law.

[94]     The defendants attack the plaintiffs’ claim based on the alleged breach of

fiduciary duty, as currently pleaded, on the same basis.

[95]     The plaintiffs acknowledge that the claim in equity is not well drafted.  They request leave to file an amended statement of claim which separates the breach of

fiduciary obligations identified in [9.1] of the amended statement of claim into a

51     Maitai Industries v Jensen, above n 46.

52     At 544.

discrete cause of action, acknowledging that the duties currently pleaded at [9.1(g), (k), (l) and (m)] do not arise in tort.  For the defendants, Mr Pearson properly accepts that the amended statement of claim could be re-pleaded to include a separate cause of action in equity, provided that it relates to the way in which Mr Duthie acted after

1 May 2008 and does not attempt to re-plead matters that are limitation barred.

[96]     The plaintiffs shall have leave pursuant to rr 7.7 and 7.77 of the High Court Rules to recast their claim in equity, alleging that Mr Duthie breached his fiduciary obligations  by failing  to  inform  Ms  Roose  of  his  earlier  error when  it  became apparent to him during the IRD audit of the plaintiffs’ accounts.

[97]     The plaintiffs will be required to plead the essential facts upon which any alleged breach of fiduciary duty is founded.  The grant of leave does not indicate that the Court holds any view on the merits of any such allegations.  Furthermore, it is not appropriate at this point for the Court to speculate whether, if the plaintiffs suffered losses as a consequence of the alleged breaches of contractual or tortious duties concerning the giving of advice prior to 1 May 2008, one or more of the plaintiffs suffered any recoverable loss attributable to any breach of fiduciary duty after that date.

Do  the  plaintiffs  have  a  claim  for  relief  against  the  defendants  under  the

Contractual Mistakes Act 1977 which is saved by s 28 of the Limitation Act?

[98]     The eighth cause of action alleges that DDL and DMR, by common mistake, entered  into  the  sale  and  purchase  agreement  for  the  property  believing  the transaction would be non-taxable.  The plaintiffs assert that Mr Duthie caused the mistake.  Accordingly, relief by way of compensation is sought against Mr Duthie under the Contractual Mistakes Act 1977 (“CMA”).

[99]     Where an action is for relief from the consequences of a mistake, s 28(c) of the Limitation Act postpones the period of time that a limitation period begins to run until the plaintiff discovers the mistake.  The plaintiffs invoke s 28(c) on the basis that the claims asserting that Mr Duthie gave incorrect tax advice are actions “for relief from the consequences of a mistake”.

[100]   One difficulty that confronts the plaintiffs is that Mr Duthie is not a party to the contract between DDL and DMR.   Accordingly, the plaintiffs, in addition to showing that the requirements of the CMA are made out, must also show that the CMA can apply to situations where the mistake arises from a breach of duty by a third party.

Relevant provisions

[101]   Before considering the arguments of the parties, it is helpful to set out the relevant provisions of the CMA.

[102]   Section 6 of the CMA materially provides that a court may in the course of any proceedings or on application made for the purpose grant relief under s 7 to any party to a contract if:

(a)       in entering into that contract:

(i)that  party was  influenced  in  his  decision  to  enter  into  the contract by a mistake that was material to him;53 or

(ii)all  the  parties  to  the  contract  were  influenced  in  their respective decisions  to enter into  the contract  by the same mistake;54 and

(b)the mistake resulted  at  the time of the contract  in  a substantially unequal exchange of values;55 or in the conferment of a benefit, or in the imposition or inclusion of an obligation, which was, in all the circumstances, a benefit or obligation substantially disproportionate to the consideration therefore.56

[103]   Section 7 of the CMA says that where, by virtue of the provisions of s 6, the court has power to grant relief to a party to a contract, it may grant relief not only to

53     Contractual Mistakes Act 1977, s 6(1)(a)(i).

54     Section 6(1)(a)(ii).

55     Section 6(1)(b)(i).

56     Section 6(1)(b)(ii).

that party but  also to  any person claiming through or under that party.57     It is noteworthy in the present context that the court has a wide discretion to make such order as it thinks just.  The express examples in s 7(3) of the orders which may be made are:

(a)       declaring the contract to be valid and subsisting in whole or in part or for any particular purpose;58

(b)      cancelling the contract;59

(c)       granting relief by way of variation of the contract;60 and

(d)      granting relief by way of restitution or compensation.61

[104]   Section 7(4) provides that an application for relief under the section may be made by any person to whom the court may grant that relief, or any other person where it is material for that person to know whether relief under this section will be granted.

[105]   Finally, s 8 of the CMA provides that the Act does not invalidate the rights of a third party who is a bona fide purchaser for value of property, or who otherwise receives, in good faith, property which is the subject matter of the mistaken contract, where he or she does not have notice of the mistake.

The plaintiffs’ argument

[106]   The plaintiffs argue that, based on Mr Duthie’s negligent advice, DDL sold the property mistakenly believing that it would receive $1.95 million net; in fact, it received that sum subject to an income tax liability of around $340,000, or around

$1.61 million net.  Accordingly, they say that DDL suffered the imposition of “an

obligation substantially disproportionate for the consideration therefore” in terms of

57     Section 7(1).

58     Section 7(3)(a).

59     Section 7(3)(b)

60     Section 7(3)(c).

61     Section 7(3)(d).

s 6(1)(b)(ii) of the Act, and relief by way of restitution or compensation is available against Mr Duthie under s 7(3)(d) of the Act.  The plaintiffs say nothing in the CMA requires that the defendant must be a contractual party in order for a plaintiff to qualify for relief.  The plaintiffs submit that the inclusion of s 8 signals expressly an intention that relief can be granted under the CMA that affects third parties.

[107]   Mr Crossland draws upon the commentary in The Law of Contract in New Zealand where the authors comment, in relation to s 7 of the CMA, that relief may be granted not only to or against parties to the contract but also to or against parties to the proceedings.62

The defendants’ response

[108]   The defendants’ response is that relief under the CMA against a non-party is not available to be used as a statutory cause of action in negligence.  The defendants submit  that  the  conventional  view  of  the  CMA  is  that  it  allows  validation, rectification  and  remediation  of  various  kinds  when  mistakes  affect  contracts. Section 6(1)(a)(ii) applies when any party to a contract seeks relief because the parties to the contract were influenced by the same mistake.  It gives no suggestion of a statutory cause of action in negligence against a non-party.  Section 7 prescribes the nature of the relief and s 8 provides that rights of third persons are not affected. The terms of those sections are to that effect and they do not establish a new cause of action.

[109]   The defendants rely on two High Court decisions in which the Court rejected the applicability of the CMA to third parties.  The first is the decision in McKinlay Hendry Ltd v Tonkin & Taylor and Long International Ltd63  in which the plaintiffs sought relief under the CMA claiming they were induced into entering a construction contract with the second defendant under the influence of a common mistake.  The first plaintiff said it entered into the contract as agent of the second plaintiff for the

benefit of the second plaintiff.  The Court held, however, that the first plaintiff was

62     John Burrows, Jeremy Finn & Stephen Todd The Law of Contract in New Zealand (4th  ed, LexisNexis, Wellington, 2012) at [10.5.1].

63     McKinlay Hendry Ltd v Tonkin & Taylor and Long International Ltd HC Wellington CIV-1999-

485-78, 22 March 2004.

not entitled to seek relief under the Act because it was not an actual party to the construction contract.  It found that the case was not one in which in which it could be said that the first plaintiff entered into a contract for the benefit of the second plaintiff; on the contrary, the second plaintiff was the party contract under which relief was claimed.  So, the Court in McKinlay Hendry confirmed that compensation is recoverable under the Contractual Mistakes Act only by a party to the contract

because of an actionable mistake made or adopted by that party.64

[110]   That proposition does not assist the defendants here, however, because the plaintiffs are seeking to rely on a mistake they made regarding a contract into which the plaintiffs entered.  The defendants’ argument is based on the proposition that the defendants were not parties to the contract, which is an altogether different point not addressed in McKinlay Hendry.

[111]   The second decision referred to by Mr Pearson for the defendants is Mitchell v Causer,65  in which the intended plaintiffs were refused relief under the CMA, is similarly unhelpful.  As in McKinlay Hendry, the decision was concerned with the ability of a non-contracting plaintiff to sue on the basis of a mistake by another person.  In that case also, the Court did not address the question of whether a non- party defendant may be sued under the CMA by a contracting plaintiff. Accordingly,

this decision does not assist the defendants either.

Discussion and conclusion on Contractual Mistakes argument

[112]   I am not persuaded that the comment made by the authors of the Law of Contract in New Zealand, that relief may be granted not only to or against parties to the contract, but to or against parties to the  proceedings,66  may be regarded as authority for the proposition that the plaintiffs are entitled to relief under the CMA against the defendants in this case.

[113]   It is plain from the scheme of the statutory provision that the CMA can be invoked only where the unwanted consequence relied upon by the plaintiff is one

64 At [117].

65     Mitchell v Causer HC Whangarei CIV-2007-488-596, 15 April 2008

66 Referred to above at [108].

which arises from the contract and which either results in an unequal exchange of values between the parties to the contract, or in a disproportionate benefit or obligation, under the contract, arising by reference to the consideration for  that benefit provided by the party seeking relief.   That view is reinforced by the requirement that the consequence must be one resulting “at the time of the contract”.

[114]   Neither condition is met in the present case.   As between the contracting parties in the present case there was no substantially unequal exchange of values: the transferor, DDL, received from the transferee, DMR, (at least nominally) the sum of

$1.95 million which, it is not disputed, was the value of the property at the time of the   contract.      Correspondingly,   DMR   paid   what   the   property   was   worth. Furthermore, the consideration provided by the parties was  proportionate to the respective benefits and obligations provided for in the contract. The obligation about which  DDL complains,  namely  its  obligation  to  pay  tax  on  the  proceeds,  was extraneous to the contract which, in itself, did not result in a bargain in which the transferor received anything less by way of consideration for the property than the property was worth.

[115]   In essence, the plaintiffs are asking the Court to hold that relief is available under the CMA against a defendant which was not a party to the contract, on the basis that negligent advice led to the parties to the contract being mistaken as to fact or law concerning the downstream consequences of the contract.  To so hold would be to permit claims based on alleged breaches of duties of care to be made under the Act without any need for consideration of the body of law addressing limitation and the accrual of causes of action in contract and tort.

[116]   As Mr Pearson submitted, such a view would render the Supreme Court’s decision in Thom v Davys Burton relevant only to its own facts rather than a decision settling an issue of general importance.  It would also result in the acceptance of a statutory cause of action more or less co-extensive with the tort of negligent misstatement which has hitherto been undiscovered for nearly four decades.

[117]   The statement from the Law of Contract in New Zealand relied upon by

Mr Crossland  is  refined  by,  and  should  be  read  in  the  light  of,  the  discussion

appearing at [10.5.3] of the text.67     That makes it clear that s 8 was intended by Parliament to address issues concerning the common law distinction between contracts which were void for mistake and contracts which were merely voidable because of misrepresentation, and the effect on the passing of title.

[118]   It  follows  that  the  first  plaintiff’s  cause  of  action  seeking  relief  under

s 7(3)(d) of the Contractual Mistakes Act is misconceived and not arguable.

Summary of findings

[119]   In summary, I have held as follows:

(a)      In the absence of Mr Duthie becoming aware prior to the transfer of the property that he had given erroneous tax advice, he was not under a continuing duty in contract to rectify the breach founded on his advice.     To  found  an  arguable  claim  in  contract  based  on  the allegations  concerning incorrect  tax  advice by Mr Duthie  and  his failure to rectify it prior to the transfer of the property, the plaintiffs must establish that a fresh duty arose – one that was in continuing effect on 2 May 2008 – and that it was breached at the time of the transfer on that date.   As presently pleaded, therefore, the claim in contract based on the erroneous advice as to the tax effect of the transaction was brought outside the limitation period and cannot proceed:  above at [55]–[61].

(b)Applying Thom v Davys Burton, I find that DMR’s loss did not arise when the transfer settled on 2 May 2008 and the vendor became liable to pay tax on the proceeds of sale, but as soon as the vendor and the purchaser entered  into  binding legal  obligations  with  one another. That was on 14 April 2008, meaning the limitation period for the claim in tort expired on 14 April 2014.  The claim in tort based on

incorrect tax advice regarding the transfer of the property is out of

67     Burrows, Finn and Todd The Law of Contract in New Zealand, above n 62.

time and cannot be pursued on the current pleading: above at [83] –

[86].

(c)      Section 28 of the Limitation Act serves to delay the commencement of the  limitation  period  to  the  time  of  the  discovery of  fraud  or  its reasonable apprehension, but there is nothing in the application of s 28  in  this  case  which  operates  to  defer  the  dates  on  which  the limitation period commenced for other causes of action in  tort or contract which accrued on or before 14 April 2008:  above at [91] – [92].

(d)The first plaintiff ’s cause of action seeking relief under s 7(3)(d) of the  Contractual  Mistakes  Act  is  misconceived  and  not  arguable: above at [112] – [118].

Order granting leave to amend pleadings

[120]   The plaintiffs have leave pursuant to rr 7.7 and 7.77 of the High Court Rules to  recast  their  claim  in  equity,  alleging  that  Mr Duthie  breached  his  fiduciary obligations  by failing  to  inform  Ms  Roose  of  his  earlier  error when  it  became apparent to him during the IRD audit of the plaintiffs’ accounts.

Costs

[121]   Costs are reserved. Any party seeking an order for costs shall file and serve a costs memorandum on or before 18 September 2015.  Any memorandum in reply shall  be  filed  and  served  on  or  before  9  October  2015.    Costs  shall  then  be determined on the papers unless the Court directs otherwise.

…………………………

Toogood J