Smith v Singleton
[2015] NZHC 1643
•14 July 2015
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2014-441-32 [2015] NZHC 1643
BETWEEN HEATHER SMITH AND ANDREW
MARTIN
First PlaintiffsAND
KEA FOODS LIMITED Second Plaintiff
AND
LLOYD SINGLETON First Defendant
AND
MCDOUALL STUART SECURITIES LIMITED
Second Defendant
Hearing: 31 March 2015 Appearances:
JD Cairney for Plaintiffs
MJ Wenley and Mr Ward for First Defendant
M Leggat for Second DefendantJudgment:
14 July 2015
JUDGMENT OF TOOGOOD J
[Review of Associate Judge's decision on strike-out application]
This judgment was delivered by me on 14 July 2015 at 4:15 pm
Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
SMITH v SINGLETON[2015] NZHC 1643 [14 July 2015]
Table of Contents Paragraph
Number
Introduction [1] Facts [4] Issues [5] A The transfer application [6]
Are the circumstances “exceptional” such that the application for review should be transferred to the Court of Appeal under s 64 of the Judicature Act 1908?
[6]
Legal principles [6]
Analysis [8]
Is the strike-out application exceptional under s 64(2)? [11]
Decision on first criterion for transfer [19]
Does the proceeding raise one or more issues of considerable public importance that need to be determined urgently?
The third criterion: conflicting decisions of the High
Court
[20]
[23]
Section 64(3) [24]
B The review application [31]
Legal principles – strike-out [32]
Are the plaintiffs’ negligence and negligent misstatement
claims time-barred by the Limitation Act 1950?
[33]
Associate Judge Smith’s decision [33]
The defendants’ grounds of challenge [37]
Discussion [40]
Can the draft amended statement of claim support the proceeding?
[49]
Discussion of the draft amended pleading [54]
Can the amended pleading overcome the time bar? [55]
The proposed amended pleading requires fuller consideration by the parties
[57]
Table of Contents Paragraph
Number
Is the plaintiffs’ claim in equity time-barred? [60] Discussion of first cause of action in equity [66] Decision [68]
Formal order [69]
Costs [70]
Introduction
[1] The defendants are investment advisors. From at least 1999 to 2012 the plaintiffs relied on the defendants for financial advice. In 2013 they sought advice elsewhere. They filed a claim in March 2014 alleging negligence, negligent misstatement and breach of fiduciary duty on the part of the defendants, on the basis that the defendants had sold them investments that were significantly more risky than the plaintiffs had asked for.
[2] The defendants applied for orders striking out the causes of action and, alternatively, for summary judgment dismissing the claims. On 3 November 2014, Associate Judge Smith refused the defendants’ applications.1
[3] The defendants now apply for review of the strike-out aspect of the judgment and to have that application transferred to the Court of Appeal.
Facts
[4] Associate Judge Smith helpfully set out the background of the dispute:
[2] The defendants are investment advisers. From 1999 until 2004 the first defendant, Mr Singleton, provided investment advice to the plaintiffs through a company in which he was a director and shareholder, namely L R Singleton & Co. Ltd. The business of L R Singleton & Co. Ltd was acquired by the second defendant (McDouall Stuart) in about 2004. Thereafter, Mr Singleton was employed by McDouall Stuart as an investment advisor.
[3] The plaintiffs were among Mr Singleton's clients, both when he was operating L R Singleton & Co Ltd and later when he was employed by McDouall Stuart. From about 2004 until at least 2011, Mr Singleton managed McDouall Stuart's Hastings office.
[4] Until February 2006, the investments were made by the first plaintiffs in their capacity as trustees of the Heather Trust. From then until 9
December 2009, the first plaintiffs made and held their investments through the second plaintiff, Kea Foods Ltd (Kea). The first plaintiffs owned 78 per
cent of the shareholding in Kea.
[5] In their claim, the plaintiffs say that they were unsophisticated investors, and relied on Mr Singleton to recommend low risk investments that met their investment criteria. They allege that Mr Singleton and McDouall Stuart acted negligently in advising them to invest in finance
1 Smith & Martin v Singleton [2014] NZHC 2672.
companies, including in Dominion Finance Group Ltd debentures (the Dominion investment), Irongate Property Ltd bonds (the Irongate investment), and New Zealand Finance Holdings Ltd Capital Notes (the NZ Finance investment). These companies were all finance companies primarily lending to the property sector.
[6] The plaintiffs allege various failings in the advice given to them by Mr Singleton, and also failings in the processes followed by the defendants in giving advice to the plaintiffs (e.g. failing to enquire about the plaintiffs' liquidity needs, their investment timeframe, and their investment aims). The defendants are also said to have failed to ensure the plaintiffs' investment portfolio was adequately diversified. The plaintiffs allege that, as a result of the defendants' process and advice failings, they made investments that were substantially more risky than they believed they were making, and suffered loss as a result.
[7] The plaintiffs' negligence allegations are pleaded in a total of six separate causes of action: negligence and negligent misstatement are pleaded separately in respect of each of the Dominion investment, the Irongate investment, and the NZ Finance investment.
[8] The plaintiffs also plead a third cause of action relating to the NZ Finance investment. They say that McDouall Stuart was the organising participant and lead manager for the NZ Finance investment offer, and that it would receive remuneration from the issuer for those services. They allege that, in breach of alleged fiduciary duties owed by the defendants to the plaintiffs, the defendants failed to bring to their attention McDouall Stuart's role in the offer of the NZ Finance investment or its relationship with New Zealand Finance Holdings Ltd. The plaintiffs say that the defendants were in a conflict situation acting for the plaintiffs in the October 2006 NZ Finance investment, and that they failed to obtain the informed consent of the plaintiffs before continuing to act for them in the NZ Finance investment. They also say that the defendants received an undisclosed benefit (a profit and/or the avoidance of a detriment) when the plaintiffs made the NZ Finance investment.
[9] The plaintiffs say that they invested $240,000 in the NZ Finance investment, in October 2006. The Capital Notes had a maturity date of 15
March 2011, with interest at 9.75 per cent per annum to be paid quarterly.
[10] The plaintiffs were notified on 31 January 2011 that NZ Finance Holdings Ltd was not in a position to repay the investment on maturity. The plaintiffs lost their investment. They claim equitable damages of $240,000 from the defendants for that loss, together with interest and costs.
[11] The Irongate investment was made on 28 December 2005. The first plaintiffs invested $1 million in the Irongate investment. Irongate was placed in receivership on 4 May 2011, and, as at 14 November 2013, the plaintiffs had been unable to recover $277,702 out of the original $1 million investment. They claim damages of $277,702 from the defendants together with interest and costs.
[12] The plaintiffs say that in or about April 2005 the defendants advised them to make the Dominion investment. The first plaintiffs say that on 18
April 2005 they invested $100,000 in the Dominion investment in reliance
on that advice. The Dominion investment was transferred to Kea on 14
February 2006; the plaintiffs say that they continued to rely on the defendants at that time.
[13] Dominion Finance Group Ltd was placed in receivership on 9
September 2008, and the plaintiffs have been unable to recover $87,485.65 out of the Dominion investment. They claim damages for that sum, together with interest and costs.
[14] The defendants deny that they acted negligently or in breach of any fiduciary obligation owed to the plaintiffs. But those are not matters to be decided on these applications. The principal bases for the strike-out and summary judgment applications are that all of the plaintiffs' claims are out of time. Specifically, the defendants say that in each case the plaintiffs' causes of action arose upon the making of the relevant investments, all of which were made more than six years before the plaintiffs filed this proceeding. They say that the plaintiffs' negligence claims are therefore statute-barred under the Limitation Act 1950, and that the breach of fiduciary obligations claim is time-barred on the principle that the statutory limitation under the Limitation Act 1950 operates by analogy to the plaintiffs' claims in equity. Alternatively, they say that the breach of fiduciary obligations claim is barred under the doctrine of laches.
[15] In addition to the limitation grounds mentioned above, McDouall Stuart says that its role in the NZ Finance investment issue was disclosed to the plaintiffs. However, Ms Smith has given evidence stating that she was not given a copy of the prospectus for the NZ Finance investment issue, and in those circumstances McDouall Stuart accepts that the question of whether or not it adequately disclosed its role in the issue is not appropriate for determination on a summary judgment application.
[16] McDouall Stuart also says in relation to the plaintiffs' claims resulting from the Dominion investment, that the losses were not caused by any (pleaded) advice given by them. They say that the original investment was for a period of two years only, and that if loss was caused it was caused by the plaintiffs' decision to renew the Dominion investment for a further two years in April 2007. They say that the plaintiffs' statement of claim does not allege that the plaintiffs relied on any advice from the defendants when they elected to renew the Dominion investment.
Issues
[5] In this judgment I am required to decide:
(a) Are the circumstances “exceptional” such that the application for review should be transferred to the Court of Appeal under s 64 of the Judicature Act 1908?
(b)If not, was the Associate Judge right to dismiss the strike-out application? In particular:
(i) Are the plaintiffs’ negligence and negligent misstatement
claims time-barred by the Limitation Act 1950? (ii) Is the plaintiffs’ claim in equity time-barred?
(iii)Is the defendants’ evidence as to reinvestment in Dominion Finance Group a complete answer to the sixth and seventh causes of action?
A The transfer application
Are the circumstances “exceptional” such that the application for review should
be transferred to the Court of Appeal under s 64 of the Judicature Act 1908?
Legal principles
[6] Section 26P(2) of the Judicature Act applies:
Review of, or appeals against, decisions of Associate Judges
(1) Any party to any proceedings who is affected by any order or decision made by an Associate Judge in chambers may apply to the court to review that order or decision and, where a party so applies in accordance with the High Court Rules, the court—
(a) must review the order or decision in accordance with the
High Court Rules; and
(b) may make such order as may be just.
(1AA) The determination of the High Court on a review under subsection (1) is final, unless the High Court gives leave (or the High Court refuses leave, but the Court of Appeal gives special leave) to appeal from it to the Court of Appeal.
...
(2) Any party to any proceedings may appeal to the Court of Appeal against any order or decision of an Associate Judge in those proceedings (other than an order or decision made in chambers). ...
(emphasis added)
[7] Since the judgment refusing to strike out the pleadings was a decision in chambers, Parliament’s express intention is that the High Court is the proper forum in which to review it. The decision of an Associate Judge on a strike-out application is not appealable to the Court of Appeal, but must be dealt with by review of the High Court.2 Any further appeal to the Court of Appeal would require leave pursuant to s 26P(1AA) of the Judicature Act. However, the Judicature Act makes provision for civil proceedings to be transferred from the High Court to the Court of Appeal:
64 Transfer of civil proceedings from High Court to Court of
Appeal
(1) If the circumstances of a civil proceeding pending before the High Court are exceptional, the High Court may order that the proceeding be transferred to the Court of Appeal.
(2) Without limiting the generality of subsection (1), the circumstances of a proceeding may be exceptional if—
(a) a party to the proceeding intends to submit that a relevant decision of the Court of Appeal should be overruled by the Court of Appeal:
(b) the proceeding raises 1 or more issues of considerable public importance that need to be determined urgently, and those issues are unlikely to be determined urgently if the proceeding is heard and determined by both the High Court and the Court of Appeal:
(c) the proceeding does not raise any question of fact or any significant question of fact, but does raise 1 or more questions of law that are the subject of conflicting decisions of the High Court.
(3) In deciding whether to transfer a proceeding under subsection (1), a
Judge must have regard to the following matters:
(a) the primary purpose of the Court of Appeal as an appellate court:
(b) the desirability of obtaining a determination at first instance and a review of that determination on appeal:
(c) whether a full court of the High Court could effectively determine the question in issue:
(d) whether the proceeding raises any question of fact or any significant question of fact:
2 Siemer v Heron [2013] NZCA 599 at [10]-[15].
(e) whether the parties have agreed to the transfer of the proceeding to the Court of Appeal:
(f) any other matter that the Judge considers that he or she should have regard to in the public interest.
(4) The fact that the parties to a proceeding agree to the transfer of the proceeding to the Court of Appeal is not in itself a sufficient ground for an order transferring the proceeding.
(5) If the High Court transfers a proceeding under subsection (1), the Court of Appeal has the jurisdiction of the High Court to hear and determine the proceeding.
Analysis
[8] Section 64(1) of the Act requires this Court to be satisfied that the circumstances of a civil proceeding pending before the High Court are “exceptional” before it can exercise its discretion to transfer the proceeding to the Court of Appeal. This was plainly intended to be a high threshold to overcome.3
[9] There is no doubt that interlocutory applications to the High Court can be moved directly to the Court of Appeal.4 There is a greater openness to transfer part only of a proceeding, and particularly strike-out applications, because of their potential to determine claims.5
[10] I turn now to consider:
(a) whether the proceeding is exceptional under s 64(2); and
(b) the mandatory considerations for transfer under s 64(3).
3 See Lai v Chamberlains (2002) 16 PRNZ 628 (HC) at 633.
4 See, for example, Vector Ltd v Transpower NZ Ltd (2000) 14 PRNZ 240 (HC); Lai v
Chamberlains, above n 3.
5 Vector Ltd v Transpower NZ Ltd, above, n 4.
Is the strike-out application exceptional under s 64(2)?
[11] The first criterion under s 64(2) of the Act which may make a proceeding exceptional is whether a party intends to submit that a relevant decision of the Court of Appeal should be overruled by the Court of Appeal.6
[12] The main issue in this proceeding is the determination of the date upon which the loss arises when a plaintiff enters into a disadvantageous transaction in reliance on allegedly negligent advice. In New Zealand there is a dearth of case law on limitation as it relates to the giving of financial advice.
[13] The defendants submit that the New Zealand case most applicable to the plaintiff’s claims is the Court of Appeal’s decision in Westland District Council v York.7 In that case the plaintiffs settled the purchase of a motel at Franz Josef in September 2005, having first obtained from the Westland District Council a Land Information Memorandum (“LIM”). The LIM omitted information known to the Council about the location of the Alpine Fault, the damage that the town might suffer from a large earthquake, and a Government suggestion that local authorities should create fault avoidance zones along fault lines. The plaintiffs alleged that it was not
until November 2010, when the Council first mooted such a zone, that they discovered these omissions. The plaintiffs sued the Council in tort, relying on a local authority’s duty of care when completing a LIM. The cause of action was in negligent misstatement and the plaintiffs claimed to have suffered economic loss through the diminution in the motel’s market value. The Council’s application to strike out the claim on limitation grounds was dismissed by the High Court and the Council appealed.
[14] The Council said, accepting the pleaded facts for the purposes of the strike- out application, that the plaintiffs suffered economic loss on 30 September 2005 when they paid more for the motel than it was worth; accordingly, their claim was barred by the Limitation Act. The plaintiffs argued that they suffered no loss until
the property market responded to the information omitted from the LIM and that this
6 Judicature Act 1908, s 64(2)(a).
7 Westland District Council v York [2014] NZCA 59.
did not happen until November 2010 when the information was first made public, which meant that their claim was filed in time.
[15] At issue was whether the decision of the Supreme Court in Marlborough District Council v Altimarloch Joint Venture was distinguishable from the plaintiff’s claim.8 In Altimarloch, the Supreme Court held that “the purchasers suffered loss and their cause of action accrued when they committed in ignorance to pay more than the property’s actual worth”.9 The Court in Westland District Council rejected the plaintiff’s argument that, unlike Altimarloch, the case was a contingent liability case:10
[The present case] is what the authorities class as a transaction case, meaning that through some wrong the plaintiff suffered diminution in the value of an existing asset – such as a home, a business arrangement, or a claim for damages – or disappointment in the value of an asset acquired.11 The plaintiff’s damage happens with the transaction, although the loss may not be quantifiable at once.
[16] The Court noted also that in “a transaction case contingency about loss does not ordinarily prevent time running”.12 It quoted the speech of Lord Nicholls in Nykredit Bank v Edward Erdman Group (No 2) in which his Lordship stated that “damage” in economic loss claims includes contingent damage:13
[actual damage] … is any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases.
8 Marlborough District Council v Altimarloch Joint Venture [2012] NZSC 11, [2012] 2 NZLR
726.
9 Above n 7 at [17], distilling the principle in Marlborough District Council v Altimarloch Joint Venture, above, n 8 at [9], [48] and [49] per Elias CJ, [69]-[71] per Blanchard J, [122] per Tipping J and [200] per McGrath J.
10 Westland District Council v York, above n 7, at [29], [37].
11 Law Society v Septhon & 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; Davys Burton v Thom [2008] NZSC 65, [2009] 1 NZLR 427 at [46].
12 Westland District Council v York, above n 7, at [31].
13 Nykredit Bank v Edward Erdman Group (No 2)[1997] 1 WLR 1627 (HL) at 1630, cited in
Westland District Council v York, above n 7, at [32].
[17] The Court allowed the appeal, holding that:14
if the Council’s omission caused the respondents any loss of market value, it must have done so with the transaction under which they paid more for the property than it was actually worth…
Altimarloch is not relevantly distinguishable. This is a transaction case, and on the pleaded facts the respondents must have suffered material loss when they bought the motel at a price which exceeded its worth. That loss was suffered, at the latest, on 30 September 2005. It follows that the claim is out of time.
[18] The present plaintiffs deny that the review of Associate Judge Smith’s decision will require a review of the Court of Appeal’s decision in Westland District Council. They say that all that is required by the review application is a finding on whether or not the Court of Appeal’s decision applies to the facts of this case.
Decision on first criterion for transfer
[19] I agree that the first criterion for transfer is not made out in this case. The test for an exceptional case is whether it is being argued that an appellate decision should be “overruled”.15 The question in the present case is not whether Westland District Council was wrongly decided but whether it applies to the present factual situation. This case does not meet the criterion for transfer in s 64(2)(a).
Does the proceeding raise one or more issues of considerable public importance that need to be determined urgently?
[20] The second criterion is whether the proceeding raises one or more issues of considerable public importance that need to be determined urgently in circumstances where those issues are unlikely to be determined urgently if the proceeding is heard
and determined by both the High Court and the Court of Appeal.16
14 Above n 7, at [36]-[37].
15 See Lai v Chamberlains (2002) 16 PRNZ 628 (HC) at 633, in which Heath J held that s 64(2)(a)
was satisfied, although ultimately he denied the application for transfer. The plaintiffs in Lai, seeking to strike out the plea of barristerial immunity contained in the defendants’ statements of defence, intended to submit to the Court of Appeal that the decision in Rees v Sinclair [1974] 1
NZLR 180 (CA), which held the doctrine of barristerial immunity formed part of the law of New
Zealand, should be overruled.
16 Judicature Act 1908, s 64(2)(b).
[21] The defendants submit that this is an appropriate case for transfer because it raises an issue of public importance. In response to the plaintiffs’ assertion that this involves an academic argument of a point of law that will shortly be irrelevant because of the Limitation Act 2010, they argue that there will be several more years where claims are decided under the 1950 Act. The defendants emphasise that whether the proceeding should be struck out requires a consideration of whether the decision of the Court of Appeal for England and Wales in Shore v Sedgwick
Financial Services Ltd17 should be applied as good law in New Zealand and that the
Court’s decision on that point will have far reaching effects. In particular, it will
affect the obligations of financial advisers to keep records.
[22] I accept that this is a matter of public importance, but justification for transfer on this ground requires also that the matter is one that needs to be resolved urgently by the Court of Appeal. There is no evidence that that is the case here. The second criterion in s 64(2) does not apply.
The third criterion: conflicting decisions of the High Court
[23] This is not a situation that is covered by the third criterion; that is, where the proceeding raises one or more questions of law that are the subject of conflicting decisions of the High Court.18
Section 64(3)
[24] Whether or not any of the criteria in s 64(2) are present, s 64(3) of the Act requires the Court to have regard to six factors when deciding whether to transfer proceedings.
[25] It is not suggested here that a full court of the High Court could effectively determine the strike-out application19 and the application does not raise a question of
fact.20 The parties have not agreed to transfer the proceeding to the Court of
17 Shore v Sedgwick Financial Services Ltd, above n 11.
18 Judicature Act 1908, s 64(2)(c).
19 Section 64(3)(c).
20 Section 64(3)(d).
Appeal.21 Accordingly, I consider the remaining mandatory factors of the primary purpose of the Court of Appeal as an appellate court,22 and the desirability of obtaining a determination at first instance and a review of that determination on appeal.23
[26] The defendants submit that there is already a reasoned decision at first instance, which they challenge, and that the Court of Appeal would very much be sitting as an appellate Court, albeit that the appeal is termed a “review”. They say that these are good reasons to support a transfer to the appellate court.
[27] Moreover, they argue that the limitation point is more likely than not to go before the Court of Appeal anyway, either through an application for leave pursuant to s 26P(1AA) or after a trial. The defendants say that it is a better use of court time and resources to finally determine the point now. They rely on the following passage in Grey District Council v Blain, in which Fogarty J, “with some diffidence”, allowed an application for an interlocutory proceeding to be transferred to the Court
of Appeal, saying:24
[21] I have not lost sight of subsections (1) and (3) of s 64. I think these circumstances are exceptional. In a situation where an interlocutory proceeding is inevitably heading to the appellate Courts, it is desirable that it be heard in the first instance by a High Court Judge rather than an Associate Judge. Otherwise, s 64 has to be used for a purpose that it is not obviously intended for. Parliament expects it to be used rarely. But this issue, having been examined by an Associate Judge, it would in this particular case place an onerous and unjustified burden on counsel for it to be re-argued in the High Court.
[28] The plaintiffs argue that there is nothing to indicate that appeal to the Court of Appeal is inevitable. They add also that Grey District Council v Blain can be distinguished as it did in fact raise an issue of considerable public importance and needed to be determined expeditiously.
[29] I accept the plaintiffs’ argument on this point. For reasons of expediency, because the parties were in a position to provide full argument on the merits of the
21 Section 64(3)(e).
22 Section 64(3)(a).
23 Section 64(3)(b).
24 Grey District Council v Blain [2013] NZHC 976.
challenge to the Associate Judge’s decision, I heard the transfer application and the review arguments together. It was appropriate to do so in any event in order to understand whether the defendants were right that the strike-out application is exceptional. In these circumstances, the primary purpose of the Court of Appeal as an appellate court and the desirability of obtaining a determination at first instance and a review of that determination on appeal weigh in favour of retaining the review application in this Court.
[30] Removal of the review of Associate Judge Smith’s decision to the Court of
Appeal is not justified. Accordingly, I address the review on the merits.
B The review application
[31] Associate Judge Smith gave his decision on the strike-out application following a defended hearing and supported his decision with documented reasons. Accordingly, r 2.3(4) of the High Court Rules requires this review to proceed as a rehearing. As on any general appeal, Mr Singleton and McDouall Stuart Securities Limited must establish that the Associate Judge’s view was materially wrong in that it rested on unsupportable findings of fact and/or applied wrong principles of law.25
Equally, I must make my own assessment as to whether the original decision is
wrong.26
Legal principles – strike-out
[32] The Associate Judge correctly framed the legal principles relating to strike- out. A court may strike out all or part of a claim if it discloses no reasonably arguable cause of action.27 The approach to be taken by a court under this ground is
well established. It can be summarised as follows:28
25 Midland Metals Overseas Pte Ltd v Christchurch Press Co Ltd (2002) 16 PRNZ 107 (HC) at
[13].
26 Austin Nicholls & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141;
Burmeister v O’Brien [2008] 3 NZLR 842, (2009) 9 NZBLC 102,415 (HC) at [29].
27 High Court Rules, r 15.1(1)(a).
28 Attorney-General v Prince and Gardiner [1998] 1 NZLR 262 (CA) at 267, endorsed by the
Supreme Court in Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
(a) The facts pleaded in the statement of claim are assumed to be true, but the court is not required to accept entirely speculative facts.
(b)The causes of action must be so clearly untenable that they cannot possibly succeed.
(c) The jurisdiction is to be exercised sparingly and only in a clear case where the court is satisfied that it has the requisite material.
(d)Jurisdiction to strike out is not excluded by the need to decide difficult questions of law that require extensive argument.
(e) The court should be particularly slow to strike out a claim in any developing area of the law.
Are the plaintiffs’ negligence and negligent misstatement claims time-barred by the Limitation Act 1950?
Associate Judge Smith’s decision
[33] The Associate Judge began his analysis with a reference to the Supreme Court’s decision in Davys Burton v Thom.29 He identified the principle in that case that a person suffers a loss in tort when he or she suffers an “actual and quantifiable loss”, even if quantification is difficult and its measure may depend on further contingencies.
[34] The Judge then considered when limitation periods begin to run in “transaction cases” and in “benefit and burden” cases, where plaintiffs enter into transactions which involve both benefits and disadvantages. Relying on Westland District Council v York,30 the Judge identified that “transaction cases” are cases where the plaintiff, through some wrong, suffers diminution in the value of an existing asset, such as a home. The damage occurs when the plaintiff enters into the
transaction, although the loss may not be quantifiable at that point in time.
29 Davys Burton v Thom [2008] NZSC 65, [2009] 1 NZLR 437 at [16].
30 Above n 7.
[35] As to “benefit and burden cases”, the Judge considered the decisions in Wardley Australia Ltd v State of Western Australia,31 Forster v Outred & Co,32 Law Society v Sephton & Co33 and First National Commercial Bank plc v Humberts.34
He identified that where the plaintiff enters into a transaction where there are both “benefits and burdens” it is more difficult to assess when the plaintiff suffers loss. The Judge said that if the claimant did not get what he or she should have got on entering the transaction, then the answer is simple: the claimant suffered loss immediately. But where, despite the breach of the duty, the transaction was originally, on balance, advantageous to the claimant, then the loss does not arise until the point in time claimant is, on balance, worse off. The Judge held that the critical question is, therefore: when is it possible to say that the claimant is, on balance, worse off?
[36] The Judge then applied these legal principles to the case at hand. He held that that this was a “benefits and burdens” type case, not a “transaction case”. As such, the ultimate question was whether the plaintiffs got less than they paid for when they made the investments. He found that it was not possible, at least on the evidence which had been produced, to look at the investments and conclude that the plaintiffs’ net worth has been reduced in some way upon making the investments. He noted that the defendants provided him with no evidence that the plaintiffs were financially worse off immediately after they made the investments; nor was there any evidence that the values of the investments did not increase between the dates on which they were made and the dates of the receivership. The Judge concluded that there was a reasonably arguable case that the plaintiffs did not suffer actual loss, and therefore the causes of action did not accrue, until the investment companies went into receivership. Further, he found that the decision in Westland District Council does not establish a definitive rule that the law treats a claimant’s damage as always having been suffered on the date when he or she enters into the relevant transaction.
Accordingly, the negligence claims were not limitation barred.
31 Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514.
32 Forster v Outred & Co (1982) 1 WLR 86.
33 Law Society v Sephton & Co, above n 11.
34 First National Commercial Bank plc v Humberts [1995] 2 All ER 673 at 679.
The defendants’ grounds of challenge
[37] The basis of the plaintiffs’ negligence and negligent misstatement causes of action is that, due to certain process failings and advice failings, the defendants failed to exercise the standard of care and skill to be expected of a reasonably competent and professional adviser. This, the plaintiffs say, caused them to make investments that were substantially more risky than what they believed they were making.
[38] The defendants submit that the plaintiffs suffered actual loss immediately upon making their investments, because they received something more risky than they wanted to receive. The breach could have been remedied immediately by liquidating the investments and purchasing substitute investments that actually met the risk specification. The defendants argue that the Associate Judge erred in his treatment of the decisions in Westland District Council and Shore. The defendants say that he should have found that these decisions applied directly to the present proceedings and barred the plaintiffs’ claims.
[39] The impugned paragraphs of the Judge’s decision are:35
[72] Shore v Sedgwick Financial Services Ltd does not assist the defendants. In delivering the judgment of the Court of Appeal in Shore, Dyson LJ noted that the bundle of rights which Mr Shore would obtain under the new scheme was, from the outset, less advantageous to him than the benefits that he had enjoyed under the existing scheme. On the particular facts of the case, it was not necessary to wait to see what happened to determine whether Mr Shore would be financially worse off in the new scheme than he would have been in his existing scheme. The case seems to be no more than an orthodox example of the essential principle to which I have referred. The approach in Shore as to when loss occurred was followed by the Court of Appeal in Williams v Lishman, Sybill, Campbell & Price Ltd.
[73] The final case to which I will refer is the recent New Zealand Court of Appeal decision in Westland District Council v York. Mr Wenley and Mr Leggat both relied on it in support of a submission that there exists a category of cases known as “transaction cases” in which the law treats a claimant's damage as always having been suffered when he or she enters into the relevant “transaction”. They submit that this is one of those cases.
[74] I do not understand the Court of Appeal in Westland District Council to have purported to lay down any such rule. The question must always be whether, on entry into the relevant transaction, the claimant can be said to
35 Westland District Council v York, above n 7, at [72]-[74].
have suffered at least some “quantifiable damage” (or become “financially worse off”). While the Court of Appeal did refer to a line of “transaction cases”, it seems to me that that expression is no more than a description of cases in which the courts have found, on the facts of the particular case, that quantifiable loss was suffered immediately when the claimant entered into the transaction.
(footnotes omitted)
Discussion
[40] In Shore v Sedgwick Financial Services,36 the plaintiff began proceedings in
2005 alleging negligence on the part of the defendant (“SFS”). Mr Shore claimed that SFS breached its duty of care in relation to advice it gave to him which led to his transferring the benefits from his existing pension scheme to a less advantageous scheme, causing him loss as a result. SFS argued that Mr Shore first suffered loss in
1997 when he changed pension schemes, so the claim was limitation barred. Mr Shore argued that his claim was brought within time because he suffered the loss either in 2005 when he first suffered a cumulative loss of income, or in 2000 when he became aware of the fact that the pension scheme he had transferred into would be less advantageous than his original scheme.
[41] Associate Judge Smith appeared to distinguish the facts of Shore from the present proceedings on the basis that the bundle of rights which Mr Shore obtained under the new scheme was, from the outset, less advantageous to him than the benefits that he had enjoyed under the existing scheme. In other words, Mr Shore suffered immediate financial loss upon transferring schemes. In my respectful view, however, the Associate Judge overlooked the fact that this was not the only ground upon which the Court of Appeal found in favour of SFS. For the Court, Dyson LJ
said:37
[37] … It is Mr Shore's case (assumed for present purposes to be established) that the PFW scheme was inferior to the Avesta scheme because it was riskier. It was inferior because Mr Shore wanted a secure scheme: he did not want to take risks. In other words, from Mr Shore's point of view, it was less advantageous and caused him detriment. If he had wanted a more insecure income than that provided by the Avesta scheme, then he would have got what he wanted and would have suffered no detriment. In the event, however, he made a risky investment with an uncertain income stream
36 Shore v Sedgwick Financial Services Ltd, above n 11.
37 At [37]-[38].
instead of a safe investment with a fixed and certain income stream which is what he wanted.
[39] The analogy with the investor who is negligently advised to buy shares rather than Government bonds does not assist [counsel for Mr Shore]. In my judgment, an investor who wishes to place £100 in a secure risk-free investment and, in reliance on negligent advice, purchases shares does suffer financial detriment on the acquisition of the shares despite the fact that he pays the market price for the shares. It is no answer to this investor's complaint that he has been induced to buy a risky investment when he wanted a safe one to say that the risky investment was worth what he paid for it in the market. His complaint is that he did not want a risky investment. A claim for damages immediately upon the acquisition of the shares would succeed. The investor would at least be entitled to the difference between the cost of buying the Government bonds and the cost of buying and selling the shares.
(emphasis added).
[42] Applying Dyson LJ’s reasoning to the present case, the plaintiffs suffered a loss when they first invested in the various finance companies on the advice of the first and second defendants because they received an investment that was riskier than they wanted. They could have claimed for damages immediately upon making the investments, and they would at least be entitled to the difference between the cost of investing in the less risky finance company and the cost of calling in the more risky investments.
[43] I am satisfied that this aspect of the decision in Shore is good law in New Zealand. The Court of Appeal in Westland District Council cited the case with approval and, relying also on Sephton and Davys Burton, said that a transaction case occurs when: 38
… through some wrong the plaintiff suffered diminution in the value of an existing asset – such as a home, a business arrangement, or a claim for damages – or disappointment in the value of an asset acquired. The plaintiff’s damage happens with the transaction, although the loss may not be quantifiable at once.
(emphasis added)
38 Westland District Council v York, above n 7, at [29].
[44] Based on the statement of claim, the present case is one of the plaintiffs being disappointed in the value of the asset acquired in that they wanted to invest in a less risky finance company.
[45] Mr Cairney attempted to distinguish the present case from Westland District Council on the basis that the plaintiffs did not suffer actual loss upon the transaction, but were merely exposed to an actual loss. I cannot accept that submission. The Court of Appeal in Westland expressly rejected the proposition that time does not run where economic loss is possible but not certain.39
[46] I summarise briefly the relevant causes of action as presently pleaded by the plaintiffs:
(a) The second cause of action alleges that due to process failings, advice failings and a failure to disclose their relationship with NZ Finance, the first and second defendants gave negligent advice to the plaintiffs when advising them to invest in NZ Finance capital notes.
(b)The third cause of action alleges that, upon advising the plaintiffs to invest in NZ Finance capital notes, the first and second defendants negligently represented to the plaintiffs that NZ Finance capital notes were a suitable investment for them given their Stated Investment Risk Profile and Investment Objectives.
(c) The fourth cause of action alleges that due to process failings and advice failings, the first and second defendants gave negligent advice to the plaintiffs when advising them to invest in Irongate Investment bonds.
(d)The fifth cause of action alleges that, upon advising the plaintiffs to invest in Irongate Investment bonds, the first and second defendants
negligently represented to the plaintiffs that Irongate Investment
39 At [27]-[28].
bonds were a suitable investment for them given their Stated
Investment Risk Profile and Investment Objectives.
(e) The sixth cause of action alleges that due to process failings and advice failings, the first and second defendants gave negligent advice to the plaintiffs when advising them to invest in Dominion Finance debentures.
(f) The seventh cause of action alleges that, upon advising the plaintiffs to invest in Dominion Finance debentures, the first and second defendants negligently represented to the plaintiffs that Dominion Finance debentures were a suitable investment for them given their Stated Investment Risk Profile and Investment Objectives.
[47] Contrary to the view of the Associate Judge, I find that the plaintiffs’ causes of action in negligence and negligent misstatement accrued on the following dates:
(a) For the second and third causes of action, 15 October 2006. This is the date on which the plaintiffs invested in New Zealand Finance capital notes.
(b)For the four and fifth causes of action, 28 December 2005. This is the date on which the plaintiffs invested in Irongate Property Limited bonds.
(c) For the sixth and seventh causes of action, 18 April 2005. This is the date on which the plaintiffs invested in Dominion Finance Group debentures.
[48] Section 4(1) of the Limitation Act 1950 provides that actions in tort shall not be brought after the expiration of six years from the date on which the cause of action accrued. Accordingly, I find that the second to seventh causes of action are
time-barred. The first cause of action, which is in equity rather than tort, is discussed below.40
Can the draft amended statement of claim support the proceeding?
[49] During the review hearing, Mr Cairney sought to avoid having the claims struck out by handing up an amended draft statement of claim, purporting to show that the plaintiffs’ actually accrued later. He submitted that the plaintiffs’ case as pleaded does not have to rely solely on the fact that they received investments that were riskier than they wanted them to be. He argued that the claim could be reformulated to allege that a duty of care arose from 1999 and continued until the relationship ended in 2012. The breaches of the duty the plaintiffs allege in the draft amended statement of claim relate to advice failures and process failures during the whole of that relationship, asserting lack of care in the ongoing management of the plaintiffs’ finances. The losses suffered by the plaintiffs were losses in capital and interest resulting from the receiverships or other failures of the companies to which they lent money. Those losses occurred, and accordingly time started running, on the following dates:
(a) 9 September 2008 when Dominion Finance Group Limited was placed in receivership.
(b)31 January 2011 when the respondents were notified that NZ Finance would not be in a position to repay the investment.
(c) 4 May 2011 when Irongate Property Ltd was placed in receivership.
[50] Mr Cairney made the same argument during the hearing of the strike-out application before Associate Judge Smith. The Judge did not accept that was how the plaintiffs’ claim was pleaded.41 The only allegations of breach were directed to the period before the plaintiffs made their investment. The Associate Judge declined to adjourn to allow the plaintiffs to amend their statement of claim to include
ongoing breaches and proceeded on the basis of the statement of claim as it stood.
40 At [60] – [68].
41 Smith & Martin v Singleton, above n 1, at [27].
[51] Mr Wenley for the first defendant submitted that the proposed amendment attempts to obscure the limitation point by adding what is in reality a fresh and separate cause of action, namely the duties owed subsequent to the purchase of the investments and the advice given in consequence. Mr Leggat for the second defendant agreed. He argued that the amendment would not be mere tinkering with the existing proceeding; it would be substituting for, or adding to, the existing causes of action a claim brought on an entirely different basis.
[52] Mr Cairney argued that he was not seeking to alter the duty that had been subjected to the Associate Judge’s decision and was not adding a fresh duty post- investment but amending an existing cause of action. He said that the amendment goes to the breach rather than the duty: there were multiple breaches of that duty within the period, and those breaches related not only to the actual investments but also to the monitoring of those investments and to the assessments of the risk profile that were not undertaken by the defendants. He emphasised that discovery had not yet taken place and that the plaintiffs had not yet received the benefit of initial disclosure and defence pleadings from the second defendant. He said submitted that the claim ought not to be struck out until discovery and pleading procedures are complete, as the plaintiffs claim will likely change following the receipt of discovery.
[53] Mr Cairney referred me to two decisions. First, he identified that in Marshall Futures v Marshall Tipping J indicated that in addressing a strike-out application a court may consider not only pleadings, but also affidavits filed in support of pleadings.42 Likewise, he argued that the Supreme Court in Couch v Attorney- General noted that the Court may also consider not only the basis upon which the claim is presently pleaded, but also any other basis upon which the claim might be pleaded. A draft amended statement of claim lodged for the purpose of indicating to the court how the claim could be pleaded can be used to defeat an application for
strike out.43
42 Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 (HC) at 323.
43 Couch v Attorney General, above n 28, at [123].
Discussion of the draft amended pleading
[54] The way in which the plaintiffs plead the claim in the draft amended
statement of claim is “essentially different” from the claim as originally pleaded.44
As Mr Leggat correctly pointed out, the suggested amendments allege a failure, after the investments were made, to review the investments from time to time and to advise the plaintiffs to change the investments which they had made. I consider this to be a substantively different pleading, asserting a different duty from the duty attached to the giving of the initial advice at the time the investments were purchased.
Can the amended pleading overcome the time bar?
[55] Further, I have some doubt about whether it is possible for the plaintiffs to overcome the time bar based on their draft amended statement of claim. It alleges that the defendants owed a continuing duty to the plaintiffs to review the investments and advise the plaintiffs as to how to minimise the risks associated with the investments following the initial breach of duty when the investments were made. It appears to me that such a duty does not arise in tort by virtue of the “neighbour principle”, but rather in contract. The duty depends entirely on the nature of the retainer between the parties. Even if the claim were re-pleaded in contract rather
than tort, the decisions in Midland Bank Trust Co v Hett, Stubbs & Kemp,45 Bell v
Peter Browne Co (a firm)46 and James (as trustees of the James Family Trust) v McMahon47 establish that there cannot be, in general, a continuing duty in contract to rectify a breach. These authorities allow the law to impose upon a defendant a continuing duty only in two specific situations:
(a) Where the advisor’s duty is to effect a transaction and realises, during the process of so effecting that transaction, that he has given incorrect advice. The duty extends until the date on which the transaction is
effected.
44 See Transpower New Zealand Ltd v Todd Energy Ltd [2007] NZCA 302 at [61].
45 Midland Bank Trust Co v Hett, Stubbs & Kemp [1979] Ch 384.
46 Bell v Peter Browne Co (a firm) [1990] 2 QB 495.
47 James (as trustee of the James Family Trust v McMahon [2013] NZHC 3018.
(b)Where there is a fresh instruction given to the defendant to review the advice.
[56] The first exception is irrelevant on the facts as presently pleaded. Accordingly, I would expect the plaintiffs draft amended statement of claim to be capable of avoiding strike-out only if the plaintiffs are able to produce some evidential foundation to demonstrate that they gave fresh instructions to the defendants to review the advice they gave to the plaintiffs.
The proposed amended pleading requires fuller consideration by the parties
[57] For these reasons, I consider the plaintiffs will need to address more fully the nature of the proposal to amend. Further, the defendants’ first opportunity to read the draft amended statement of claim was on the day of the review hearing. Because the allegations are fundamentally different, the defendants should be afforded an opportunity to consider their position before responding. The proposed amended claim may well give rise to new limitation issues and require an investigation into the scope of the defendants’ retainer with the plaintiffs.
[58] Accordingly, if the plaintiffs wish to amend their statement of claim to include the new cause of action, they need to do so pursuant to r 7.77 of the High Court Rules and to have the proposed amendment fully scrutinised in that context. I am not persuaded that I should refuse to strike out the current negligence and negligent misstatement causes of action based on the draft amended statement of claim.
[59] The second to seventh causes of action in the statement of claim must be struck out. That being so, it is unnecessary for me to consider whether the defendants’ evidence as to reinvestment in Dominion Finance Group is a complete answer to the sixth and seventh causes of action.
Is the plaintiffs’ claim in equity time-barred?
[60] Mr Wenley submitted for the first defendants that the plaintiffs’ claim in
equity against the defendants for breach of fiduciary duty based on the role of the
second defendant as organising participant and leading manager of the NZ Finance
Capital Note issue should also be struck out on the basis it is time barred.
[61] The first cause of action pleads, in summary, that a fiduciary relationship existed between the plaintiffs and defendants and that both defendants stood to benefit from a successful NZ Finance capital note issue. Against that background the defendants approached the plaintiffs and recommended they invest maturing SKY TV corporate bond funds in NZ Finance capital notes and by doing so, placed themselves in a position where their own interests conflicted with those of the plaintiff.
[62] Associate Judge Smith did not find it necessary to reach a conclusion on this issue because he found that causes of action two through seven were not time barred.48
[63] Mr Wenley relies on the decision in Matai Industries v Jensen,49 affirmed by the Court of Appeal in Johns v Johns50 in which Tipping J held that a claim in equity will be barred by analogy where it parallels a statute-barred claim so closely that it would be inequitable to allow the statutory bar to be outflanked by the fiduciary
claim. In determining how close the parallel is, the Court must look at both the underlying facts and the nature of the relationship between the parties, and the purpose and policy of the different causes of action. Mr Wenley identifies that the plaintiffs claim equitable damages of $240,000 for breach of fiduciary duty in respect of NZ Finance and that, under the second cause of action, they sought an award of damages of $240,000 for alleged negligent financial advice. Mr Wenley argues that this demonstrates that the loss claimed for breach of fiduciary duty is the same loss as that claimed under negligent misstatement. Accordingly, the equitable claim should also be limitation barred.
[64] In reply, Mr Cairney submits that the claim based on an alleged conflict of interest is fundamentally different to the negligent misstatement claim against the
defendants. The rationale for a claim in negligence is the “neighbour principle”; that
48 Smith & Martin v Singleton, above n 1, at [80].
49 Matai Industries v Jensen [1989] 1 NZLR 525 (HC).
50 Johns v Johns CA108/03, 31 March 2004 at [80].
is, that one must take reasonable care to avoid acts or omissions that could reasonably be foreseen as likely to injure one's neighbour. The rationale for a conflict of interest claim is that the fiduciary, by virtue of his or her role, has a strict duty not to profit at the expense of the beneficiary.
[65] In any event, Mr Cairney argues, a detailed factual inquiry is required to determine any applicability of equitable limitation by common law analogy and this is not appropriate at the strike-out stage.
Discussion of first cause of action in equity
[66] I accept Mr Cairney’s submissions on this point. I acknowledge that, as currently pleaded, the claims appear to be similar in terms of the outcome sought, but I must also focus on the nature of the relationship between the parties and the policy behind the respective causes of action. The gravamen of the claim in equity is that the defendants improperly took advantage of the trust and confidence that the plaintiffs placed in them to make a profit. This is different from the essence of the negligence claim which is that the defendants failed to take certain steps that a reasonable professional would have taken in the circumstances to prevent foreseeable harm to the plaintiffs. The claims assert different mischief.
[67] Although the loss or damage pleaded is the same in relation to each cause of action, a plaintiff is entitled to claim compensatory damages in respect of both causes of action. It is irrelevant to this issue that the loss allegedly caused by the claimed breaches of each of the different duties is the same.
Decision
[68] I am not persuaded it would be unfair or unreasonable to allow the claim in equity to proceed. The first defendant’s application to strike out the claim for breach of fiduciary duties is dismissed.
Formal order
[69] I order that the second to seventh causes of action in the plaintiff’s statement
of claim be struck out.
Costs
[70] The defendants have been mostly successful in their application to review the Associate Judge’s decision. They are entitled to costs on the review and on the hearing before Associate Judge Smith.
[71] The costs are to be fixed on a category 2B basis, with disbursements as fixed by the Registrar. If the parties cannot agree, the defendants shall have until
7 August 2015 to file and serve a costs memorandum; the plaintiffs shall have until
28 August 2015 to file and serve a memorandum in reply. Costs shall then be determined on the papers unless the Court directs otherwise.
……………………………………
Toogood J
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