Smith v Singleton
[2014] NZHC 2672
•3 November 2014
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2014-441-032 [2014] NZHC 2672
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: 11 July 2014 Counsel:
J D Cairney for Plaintiffs
M Wenley for First Defendant
M Leggat for Second DefendantJudgment:
3 November 2014
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The defendants apply to strike out the plaintiffs’ claims against them. In the alternative, they seek summary judgment on those claims.
Background
[2] The defendants are investment advisors. 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.
HEATHER SMITH and ANDREW MARTIN v KEA FOODS LIMITED [2014] NZHC 2672 [3 November 2014]
[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 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.
Legal principles for striking out and for defendants’ summary judgment
Strike-out applications
[17] The following principles applicable to strike-out applications are taken from the decision of the Court of Appeal in Attorney-General v Prince and Gardner,1 and were endorsed by the Supreme Court in Couch v Attorney-General:2
(1) Pleaded facts, whether or not admitted, are assumed to be true.
(2)The cause of action must be clearly untenable: the Court must be certain that it cannot succeed.
(3) The jurisdiction is to be exercised sparingly, and only in clear cases.
(4)The jurisdiction is not excluded by the need to decide difficult questions of law, requiring extensive argument.
(5)The Court should be particularly slow to strike out a claim in a developing area of the law.
[18] In an appropriate case, the Court may receive affidavit evidence on a strike- out application, but it will not attempt to resolve genuinely disputed issues of fact. Generally, affidavit evidence admitted on a strike-out application will be limited to matter which is undisputed.3
[19] Each cause of action is to be considered separately, and if the Court concludes that it clearly cannot succeed, it may be struck out.
Summary judgment applications
[20] Under r 12.2(2) of the High Court Rules, the Court may give judgment against a plaintiff if the defendant satisfies the Court that none of the causes of action
in the plaintiff’s statement of claim can succeed.
1 Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA).
2 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725.
3 Attorney-General v McVeagh [1995] 1 NZLR 558 (CA) at 566.
[21] The decision of the Court of Appeal in Westpac Banking Corporation v M M Kembla New Zealand Ltd 4 is authority for the following propositions:
(1)A defendant applying for summary judgment has the onus of proving the plaintiff cannot succeed. Usually, summary judgment for a defendant will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim.
(2)The Court must be satisfied that none of the claims can succeed: it is not enough that they are shown to have weaknesses.
(3)Summary judgment will only be suitable where all the material facts are not in dispute and can be put before the Court efficiently in affidavit form.
(4)The procedure may be inappropriate if the case is likely to turn on a judgment which can only be reached properly after hearing all the evidence at trial.
(5)Developing points of law may require the added context and perspective provided by a full trial.
The issues in this case
(1)Are the plaintiffs’ negligence and negligent mis-statements claims clearly time-barred under the Limitation Act 1950?
(2)Is the plaintiffs’ claim for breach of fiduciary duty clearly time-barred in equity?
(3) Is the defendants’ evidence as to reinvestment in
Dominion Finance Group a complete answer to the sixth and seventh causes of action?
4 Westpac Banking Corporation v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).
Issue 1 – Are the plaintiffs’ negligence and negligent mis-statement claims clearly time-barred under the Limitation Act 1950?
The Parties’ positions
[22] The defendants say that, if the plaintiffs suffered any loss as a result of negligence or negligent mis-statement on their part, the loss happened on the respective dates on which the plaintiffs made the investments. In the case of the Dominon investment, that was 18 April 2005. The Irongate investment was made on
28 December 2005, and the NZ Finance investment was made on 15 October 2006. As noted above, the Dominion investment was initially for a two year term only – the plaintiffs re-subscribed for a further two year term on 18 April 2007.
[23] As the plaintiffs did not issue this proceeding until 14 March 2014, all of those dates fall outside the period of six years within which the plaintiffs would have been entitled to commence a court proceeding under s 4 of the Limitation Act 1950.5
[24] A cause of action in negligence arises only when loss or detriment is suffered by a plaintiff by reason of breach of the duty of care owed by the defendant.6 The critical question, then, is whether the plaintiffs can be said to have suffered relevant loss on the dates they made the investments, as the defendants contend, or whether they suffered loss when the three companies in which they invested either went into receivership or the plaintiffs were notified that the company would not be in a
position to repay their investment – the plaintiffs’ position.
[25] The plaintiffs say that they did not suffer loss on the Dominion investment until that company was placed in receivership on 9 September 2008. They say that their loss on the NZ Finance investment did not arise until they were advised by that company on 31 January 2011 that it would not be in a position to repay their investment, and that they suffered loss on the Irongate investment on 4 May 2011,
when Irongate Property Ltd was placed in receivership.
5 Limitation Act 2010, s 59. The Limitation Act 1950 is the relevant limitation statute, as the acts or omissions in question occurred prior to the commencement of the Limitation Act 2010 on 1
January 2011.
6 Thom v Davys Burton [2008] NZSC 65, [2009] 1 NZLR 437 at [2].
[26] If the plaintiffs are correct on the question of when the alleged loss was suffered, their claim has been brought in time.
Does the statement of claim allege breaches during the six-year limitation period?
[27] The plaintiffs also argue that even if the defendants are correct on the question of when the loss was suffered their claim is in time. That is said to be because the claim includes allegations of systemic and ongoing failures over the entire course of the advisor/client relationship which existed between them and the first defendant. That relationship continued until 2012, and the plaintiffs say that, right through until 2012 the defendants were still advising them on what to do with their finances and investments, including those which were then losing money for the plaintiffs. In their written submissions, the plaintiffs say that the defendants owed them a duty of care not only in advising them to enter investments but also in respect of exiting from investments, and “generally in relation to their financial affairs up to the end of the investor/client relationship.”
[28] The defendants say that that is not how the plaintiffs’ claim has been pleaded. I agree. The claim as presently pleaded alleges failures in both the defendants’ process for giving advice, and in the advice allegedly given itself. The statement of claim goes on to plead that “as a result of the defendants’ process and advice failings, the plaintiffs made investments that were substantially more risky than what they believed they were making”.7 The negligence and negligent mis-statement causes of action relating to the NZ Finance investment plead that the defendants breached their duties of care in advising the plaintiffs to make the NZ Finance investment8, and “in
making the NZ Finance suitability representation”.9 Similarly, in the causes of
action relating to the Irongate investment, the plaintiffs allege breach by the
defendants “in advising the first plaintiffs to invest in Irongate bonds”10, and “in
making the Irongate suitability representation”.11 The pleading in respect of the
7 Statement of Claim, 14 March 2014, at [52].
8 At [80].
9 At [92].
10 At [103].
11 At [116].
Dominion investment is similar – the only allegations of breach are directed to the period before the plaintiffs made their investment.12
Possible amendments to the statement of claim
[29] At the hearing, and in their written submissions, the plaintiffs signalled that they may amend their statement of claim to specifically allege ongoing breaches by the defendant, including in respect of the period after 14 March 2008. However, I was not provided with any draft statement of claim showing the detail of any proposed amendments. At the hearing, I asked counsel to consider whether the matter might best be addressed by adjourning the hearing to allow the plaintiffs time to file a draft amended statement of claim, incorporating any proposed amendments. Counsel declined that invitation, and asked me to proceed on the basis of the statement of claim as it stands. I will proceed accordingly.
When loss accrues – the legal position
[30] In Thom v Davys Burton the Supreme Court dealt with a case of negligence by solicitors advising a client who was about to enter into a pre-nuptial agreement. Through the negligence of the solicitors, the agreement was not properly witnessed by their client’s future wife, and was of no legal effect (the notary in the United States who witnessed Mr Thom’s future wife’s signature on the agreement refused to sign the certificate required under s 21(5) and (4) of the
Property (Relationships) Act 1976. 13 Eight years later the parties separated, and the
Family Court subsequently decline to uphold the agreement. Mr Thom sued his solicitors, who applied to have the claim struck out on the grounds that it was time- barred. They contended that a cause of action arose when the agreement was improperly executed, and not when (a) the marriage subsequently failed or (b) the Family Court declined to validate the agreement. The Supreme Court upheld that contention holding that Mr Thom suffered “actual and quantifiable loss” when he obtained a damaged asset, namely an agreement which was not legally enforceable. That was the case even though the extent of the resultant damage would not become
clear until later. The contingencies relating to the failure of marriage and the Family
12 Statement of Claim, 14 March 2014 at [128] and [143].
13 Now s 21(F)(3) and (5) of the Property (Relationships) Act 1976.
Court declining to validate the agreement went only to the valuation of the loss, and not to the question of whether a loss was suffered when the agreement was signed.
[31] In Davys Burton, Wilson J referred to the House of Lords decision of Law Society v Sephton & Co14 a case in which the Law Society sought to recover payments it had made to clients of a dishonest solicitor from accountants who had negligently certified that the solicitor had complied with the relevant accounting rules. In Sephton Lord Hoffmann reviewed a number of cases where various kinds of damage had been established, placing some in the “benefits and burdens”
category, in which a transaction had benefits as well as burdens. In those cases, loss was said to be suffered only when it was possible to say that, on balance, the claimant was worse off.15 In his judgment in Davys Burton, Wilson J said of Lord Hoffmann’s judgment in Sephton:16
Lord Hoffmann also analysed cases where the liability is for the difference between what plaintiffs got and what they would have got if the defendants had done what they were supposed to have done, as well as cases where the damage is the difference between the position of claimants after entering into the transaction and what it would have been if they had not done so. In cases of that kind the failure to get what the claimants should have got was “quantifiable damage even though further damage which might result from the flaw in the transaction was still contingent”. Lord Hoffmann distinguished such cases from those in which a purely contingent obligation has been incurred. He thus drew a distinction between two factual situations; those where the loss or liability is entirely contingent, and those where there is immediate, quantifiable loss or damage either because the claimants did not get what they should have got, or they got, on balance, something worse.
(Footnotes omitted)
[32] The Supreme Court in Davys Burton emphasised that difficulties in quantification of a plaintiff’s loss do not mean that there is no measurable loss and that no cause of action arises. As the Chief Justice put it in Davys Burton: 17
The cause of action arises as soon as the plaintiff who relied on the advice is “financially worse off”, even if quantification is difficult and its measure in a particular case may ultimately depend on further contingencies.
(Footnotes omitted)
14 Law Society v Sephton & Co [2006] 2 AC 543.
15 At [20].
16 Thom v Davys Burton, above n 6, at [42].
17 At [16].
[33] Wilson J noted in his judgment in Davys Burton the valuation of loss exercise would not have been easy, but was conceptually possible. It would have involved an assessment of the likelihood of the marriage failing and the likelihood in that event of the court validating the defective agreement. The Judge then noted: 18
But that type of contingency is not of the same kind as a contingency which results in the plaintiff not suffering any loss at all until the contingency is fulfilled. There is a material difference between contingencies relevant to existence of damage and contingencies relevant to valuation of damage.
[34] Wilson J noted that damage would be contingent, and therefore not actual for limitation purposes, if the plaintiff would suffer no damage at all unless and until a contingency was fulfilled. (His Honour took as an example the situation where a plaintiff is exposed to a liability which is contingent on the occurrence of a future uncertain event, such as the liability of a guarantor which is contingent on default by the principle debtor). If there is an immediate reduction in the value of an asset, however, whether tangible or intangible, there will be actual damage as soon as the
asset becomes less valuable.19
[35] Wilson J concluded that the case was a “damaged asset” case, not one of exposure to contingent liability. That was because the product which Mr Thom had instructed his solicitors to procure for him was created with an inherent flaw, which represented actual damage or harm suffered by Mr Thom from the moment the defective prenuptial agreement came into existence. The damage was quantifiable at that stage, either on the straightforward basis of what it would have cost Mr Thom to obtain or attempt to obtain a valid agreement, or on the more difficult basis of the difference in value between a defective agreement and one which was not
defective.20
[36] In Westland District Council v York, the claimants purchased a motel in September 2005, having obtained from the District Council a LIM report which the claimants alleged had been prepared negligently. The respondents sued the Council in July 2012, alleging that they had suffered economic loss through diminution in the
motel’s market value. The Council applied to strike the claim out on the grounds
18 Thom v Davys Burton, above n 6, at [50].
19 At [46].
20 At [49].
that it was out of time. The claimants contended that the loss did not occur until
2010, when a change of zoning was first mooted by the Council. They argued that until then, the Council’s liability was only contingent.
[37] The Court of Appeal rejected those arguments. Delivering the judgment of the Court, Miller J said: 21
This is not a contingent liability case. It 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, 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 …
(Footnotes omitted)
[38] The Court of Appeal concluded on the pleaded facts that the claimants must have suffered material loss when they bought the motel at a price which exceeded its worth. That loss was suffered, at the latest, in September 2005. It followed that the claim was out of time.22
[39] In Sephton, Hoffmann LJ referred with approval to the decision of the High Court of Australia in Wardley Australia Ltd v State of Western Australia.23 On the question of whether loss is suffered immediately where a plaintiff on entry into a contract is exposed to the risk of future contingent loss, the High Court of Australia said: 24
It has been contended that the principle underlying the English decisions extends to the point that a plaintiff sustains loss on entry into an agreement notwithstanding that the loss to which the plaintiff is subjected by the agreement is a loss upon a contingency. For our part, we doubt that the decisions travel so far. Rather, it seems to us, the decisions in cases which involve contingent loss were decisions which turned on the plaintiff sustaining measurable loss at an earlier time, quite apart from the contingent loss which threatened at a later date.
If…the English decisions properly understood support the proposition that where, as a result of the defendant’s negligent representation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract,
21 Westland District Council v York [2014] NZCA 59 at [29].
22 At [37].
23 Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514.
24 At 529, 531 - 532.
we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred.
[40] In his judgment in Sephton, Hoffmann LJ also considered transactions in which there are both “benefits and burdens”. His Lordship referred in that context to the judgment of Brennan J in Wardley, again with apparent approval. Brennan J said: 25
If the plaintiff acquires no benefit, the loss or damage is suffered when the event occurs. At that time, the plaintiff’s net worth is reduced. And that is so even if the quantification of loss or damage is not then ascertainable. But if a benefit is acquired by the plaintiff, it may not be possible to ascertain whether loss or damage has been suffered at the time when the burden is born – that is, at the time of the payment, the transfer, the diminution in value of the asset or the incurring of the liability. A transaction in which there are benefits and burdens results in loss or damage only if an adverse balance is struck.
[41] The question in a “benefits and burdens” case, then, is: when is it possible to say that the claimant is, on balance, worse off?
[42] A critical question in deciding when the loss has occurred might be whether or not the claimant got what he or she should have got on entering into the relevant transaction. If that were the only question to be asked, it would often be a relatively simple matter to say that the loss had been suffered immediately – the fact that a claim has been made at all will normally imply that the claimant considers that he or she did not get what he or she should have got.
[43] However if the correct measure of loss is the difference between the claimant’s position after entering into the transaction and what it would have been if the claimant had not entered into the transaction, the answer may be more difficult. Despite the breach of duty, the transaction may on balance have originally been advantageous to the claimant, and some evidence may be necessary to show when
the claimant was actually in a worse position.26 In Sephton, Hoffmann LJ noted that
25 Wardley Australia Ltd v State of Western Australia, above n 23, at 536.
26 Law Society v Sephton & Co, above n 14, at 552 per Hoffman LJ.
this distinction was adverted to by the High Court of Australia in Wardley in the following terms: 27
Another element in some of the English decisions…is the conclusion that, because the subject-matter of the agreement lacked the qualities which it had been represented as having, that subject-matter was therefore less valuable than it would have been if the representations had been true. That conclusion is acceptable in cases in which the contract measure of damages is appropriate but it is not acceptable here where the contract measure of damages does not apply. The application of that measure of damages [i.e. the difference between the value of what the plaintiff got and what he would have got if the defendant had performed his duty] may, in some situations, enable a court to conclude more readily that the plaintiff first suffers loss or damage on entry into an agreement.
[44] Hoffman LJ concluded that a contingent liability is not, as such, damage until the contingency occurs. However the existence of a contingent liability may depress the value of other property, as in Forster v Outred & Co, or it may mean that a party to a bilateral transaction has received less than he or she should have done, or is worse off than if he or she had not entered into the transaction (according to which is the appropriate measure of damages in the circumstances).28 But standing alone,
without those additional factors, a contingency does not constitute damage.29
[45] In his judgment in Sephton, Walker LJ also expressed his agreement with the High Court of Australia in Wardley, that the English cases which have involved contingent loss being recoverable were actually decisions which turned on the plaintiff having sustained measurable loss at an earlier time, quite apart from the contingent loss which threatened at a later date. The claimant will have suffered a diminution (sometimes immediately quantifiable, often not yet quantifiable) in the value of an existing asset, or been disappointed (as against what he or she was entitled to expect) in an asset which he or she acquired. Walker LJ referred to the Court of Appeal decision in First National Commercial Bank plc v Humberts, in
which Saville LJ observed:30
At the hearing and in the judgment much reliance was placed on the cases where the claimant entered into a transaction which through a breach of duty owed to the claimant provided the claimant with less rights than should have
27 Wardley Australia Ltd v State of Western Australia, above n 23, at 530 – 531.
28 Forster v Outred & Co (1982) 1 WLR 86.
29 Law Society v Sephton & Co, above n 14, at [49].
30 First National Commercial Bank plc v Humberts [1995] 2 All ER 673 at 679.
been secured, or imposed liabilities or obligations on the claimant which would not have been imposed…In all those cases, however, the court was able to conclude that the transaction then and there caused the claimant loss on the basis that if the injured party had been put in the position he would have occupied but for the breach of duty, the transaction in question would have provided greater rights, or imposed lesser liabilities or obligations than was the case; and that the difference between these two states of affairs could be quantified in money terms at the date of the transaction.
[46] On the facts in Sephton, the House of Lords held that, until a claim was actually made on the Law Society’s fund, no loss or damage was sustained by the fund.
Application of legal principles in this case
[47] The defendants say that this case is properly classified as a “transaction case”, of the kind discussed by Miller J in Westland District Council v York. They submit that the loss occurred when the plaintiffs made investments that were substantially more risky than what they believed they were making. They say that is the essence of the plaintiffs’ claim, and that the plaintiffs suffered disappointment in the value and quality of each of the relevant investments as and when that investment was acquired. They submit that, in a “transaction case”, the loss necessarily occurs when the claimant enters into the relevant contract.
[48] In addition to Westland District Council v York, McDouall Stuart refers to decisions of the Court of Appeal in the United Kingdom, including Shore v Sedgwick Financial Services Ltd that was a case in which the claimant alleged negligent advice resulting in him switching from his existing pension scheme to a less advantageous scheme. 31 There were some similarities with this case, in that the claimant said that he wanted a secure scheme and did not want a risky investment. He argued that time did not run until the pension into which he switched suffered losses or it became clear that he would be worse off than if he had stayed in the original scheme.
[49] The Court of Appeal noted that the pension scheme to which Mr Shore transferred provided him with a bundle of rights which, from the outset, were less
advantageous to him than the benefits that he enjoyed under the existing (Avesta)
31 Shore v Sedgwick Financial Services Ltd [2008] EWCA Civ 863, [2008] PNLR 37.
scheme. The Court noted that, “on the facts of this case, it was not necessary to wait to see what happened to determine whether Mr Shore was financially worse off in [the new] scheme than he would have been in the Avesta scheme”. On the facts, the Court held that Mr Shore first suffered loss on the date of payment of the benefits of the first scheme into the second scheme.
[50] McDouall Stuart submits that, if as the plaintiffs allege they were given bad advice leading them to make riskier investments, their cause of action arose when they entered into the investment transactions. Applying Davys Burton, when they made the relevant investments they did not get what they should have got: their loss happened at that point.
[51] In essence, the defendants submit that there is a particular category of case, referred to by Miller J in Davys Burton, as a “transaction case”, where the law regards a claimant’s loss as always (and necessarily) suffered when the claimant enters into the relevant transaction. They submit that this is such a case, and that the plaintiffs’ negligence and negligent mis-statement claims are therefore statute-barred.
[52] McDouall Stuart also refers to Williams v Lishman, Sidwell, Campbell & Price Ltd,32 Axa Insurance Ltd v Akther & Darby Solicitors,33 and Pegasus Management Holdings SCA & Anor v Ernst & Young (A firm) & Anor,34 all being decisions of the United Kingdom Court of Appeal in which the loss was held to have been suffered when the claimants entered into the relevant transactions. Applying
the authorities to this case, McDouall Stuart says that the plaintiffs received something of less value than they would have received but for the negligence of the defendants. When the plaintiffs acted on the defendants’ advice, they acted to their detriment and failed to get that to which they were entitled.
[53] I am not persuaded that the evidence on these applications justifies striking out the negligence and negligent mis-statement causes of action on limitation
grounds.
32 Williams v Lishman, Sidwell, Campbell & Price Ltd [2010] EWCA Civ 418, [2010] PNLR 25.
33 Axa Insurance Ltd v Akther & Darby Solicitors [2010] 1 WLR 1662.
34 Pegasus Management Holdings SCA & Anor v Ernst & Young (A firm) & Anor [2010] EWCA Civ 181, [2010] 3 All ER 297.
[54] In Davys Burton the Chief Justice considered that the cause of action arises as soon as the plaintiff who relied on the advice is “financially worse off”, even if quantification is difficult, and measure in a particular case may ultimately depend on further contingencies. Is it possible to say that the plaintiffs in this case were “financially worse off” as soon as they made the investments? There is nothing in the evidence which would support such a finding. It appears that there were no defaults in making payments of interest on any of the investments before
14 March 2008, and there is no expert evidence which might have justified a finding that the investments, when they were made, were worth less than their face value on account of their “risky” nature.
[55] Indeed, there is nothing in the evidence to say that the values of the investments might not have increased in the periods between the dates on which they were made and the dates of receivership (or notice to the plaintiffs that their investment could not be repaid). I think there is force in the plaintiffs’ submission that if they had issued a proceeding in, say, 2007, they would almost certainly have been met with a defence that they had suffered no loss. Applying the test adopted by the Chief Justice in Davys Burton, then, I am not satisfied that the plaintiffs were financially worse off as soon as they made the investments.
[56] The judgment of Wilson J in Davys Burton does not suggest any different conclusion. The judge referred to the judgment of Hoffmann LJ in Sephton, and in particular his Lordship’s reference to the “benefits and burdens” category of case, in which a particular transaction had benefits as well as burdens. In such cases, loss is suffered only when it is possible to say, on balance, that the claimant is worse off.
[57] It seems to me that this is a “benefits and burdens” type of case: the plaintiffs paid the money which they invested, but they got something in return (the debentures, bonds, and capital notes), and the question is whether, on balance, they got less than they paid for. As Brennan J said in Wardley, it may not be possible in such cases to ascertain whether loss or damage has been suffered at the time when
the burden is borne – that is, at the time of the payment.35
35 Wardley Australia Ltd v State of Western Australia, above n 23, at 529, 531 – 532.
[58] That is the situation here: at the time the plaintiffs made their investments, it was not possible, at least on the evidence which has been produced on these applications, to look at the investments and conclude that the plaintiffs’ net worth had been reduced in some way. That seems to me to be the critical test, applied in all of the leading cases.
[59] Wilson J noted in Davys Burton that there is a material difference between contingencies relevant to existence of damage and contingencies relevant to valuation of damage.36 The contingencies in this case were that the plaintiffs’ investments might be lost or might decline in value. That kind of contingency seems to me to be a contingency going to the existence of damage (or not), rather than to the valuation of any immediate and recognisable damage. It is in essence a situation where the claimant will suffer no damage at all unless and until the contingency is
fulfilled (the investment is lost or loses value).
[60] The defendants seek to classify this case as a “damaged asset” case, of the kind with which the court was concerned in Davys Burton, on the basis that the plaintiffs got something less than they bargained for – they wanted “secure” investments, and they got “risky” investments. But that submission seems to me to conflate the alleged breach of duty with the claimed damage. And “risky” in the context really means no more than subject to the contingency that loss in the form of a lost or depreciated investment might be suffered some time in the future. I think the essential question must remain whether it could have been said on looking at the plaintiffs’ investments when they were made, that they were financially worse off in some way immediately afterwards. The situation is really no different from that described by the High Court of Australia in Wardley, where, as a result of the defendants’ negligent representation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, and the plaintiff sustains no actual
damage until the contingency is fulfilled and the loss becomes actual.37
36 Thom v Davys Burton, above n 6, at [50].
37 Wardley Australia Ltd v State of Western Australia, above n 23, at 529, 531-532.
[61] As Hoffmann LJ noted in Sephton, the transactions may on balance have originally been advantageous to the plaintiffs, and in those circumstances some evidence is necessary to show when they were actually in a worse position.38
[62] The defendants, in essence, rely on the beguilingly simple proposition that, because the subject matter of the investments lacked the qualities which they had been represented as having, that subject matter was therefore less valuable than if the representations had been true. That proposition was considered by the High Court of Australia in Wardley and referred to by Hoffmann LJ in Sephton. The High Court of Australia considered the conclusion to be acceptable in cases in which the contract measure of damages was appropriate, but not acceptable where the contract measure of damages did not apply.
[63] In Sephton, Hoffmann LJ appears to have taken a similar view, noting that if the correct measure of loss is the difference between the claimant’s position after entering into the transaction and what it would have been if the claimant had not entered into the transaction (i.e. the classical tort measure of loss) the answer may be more difficult. Despite the breach of duty, the transaction may on balance have originally been advantageous to the claimant, and evidence may be necessary to show when the claimant was actually in a worse position.
[64] The plaintiffs have not made any claim in this case for breach of contract. They could never have done that, because the limitation period for breach of contract claims runs from the date of the breach, not from the date of the subsequent damage. Any contract claim would clearly have been out of time. The fact that these are negligence/negligent mis-statement claims, and not claims for breach of contract, makes it inappropriate to adopt the simple approach that, because the plaintiffs did not get what they expected to get (non-risky investments), what they did get was necessarily less valuable than what they would have got apart from the defendants’ alleged breaches of duty.
[65] The English Court of Appeal authorities cited by Mr Leggat39 do not in my
view materially advance the defendants’ arguments.
38 Law Society v Sephton & Co, above n 14, at [21].
[66] Axa Insurance Ltd v Akther & Darby Solicitors considered a claim by an insurer against a solicitor, based on negligent vetting of the prospects of success of personal injuries claims. The claimant insurer was the assignee of policies issued under a scheme operated by a claims management company.
[67] The claimant in Axa made significant losses from its involvement in the scheme, and claimed that the defendant had negligently assessed some claims, and continued to conduct the litigation of some claims without notifying the claimant when the claim’s prospects of success fell. The Court considered Sephton and characterised the case before it as a flawed bilateral transaction rather than a merely contingent liability. The Court found that the insurer suffered measurable loss when the ATE policies were entered into, as this was the time at which the insurer valued the policies erroneously in reliance on the defendant’s negligent vetting.
[68] On the facts, the Court found that although the insurer’s liability on the policies was contingent upon a subsequent claim, there was also measurable loss at the inception of the policies in that they were worth less than they would have been had there been proper vetting. From the inception of the policies, there was a greater risk of a claim than there should have been and the premiums were correspondingly less than they would have been.
[69] Pegasus Management Holdings SCA & Anor v Ernst & Young (a firm) & Anor concerned a claim against accountants based on alleged failure to properly advise their client on certain tax planning issues. The claimed consequence of the advice (“the adverse consequence”) was that it resulted in Pegasus incurring a liability for corporation tax calculated by reference to a capital gain, when the relevant disposal in fact resulted in a loss.
[70] The essence of the claimant’s limitation argument was that, as a matter of fact, the adverse consequence did not occur until after 10 November 1999 (six years before the claim), and the limitation period for their negligence claim did not start to
run until the adverse consequence was actually suffered. The English Court of
39 Axa Insurance Ltd v Akther & Darby Solicitors, above n 33; Pegasus Management Holdings SCA & Anor v Ernst & Young (A firm) & Anor, above n 34; Shore v Sedgwick Financial Services Ltd, above n 31; and Williams v Lishman, Sidwell, Campbell & Price Ltd, above n 32.
Appeal rejected this argument. The damage was suffered because the alleged flaw in Ernst & Young’s advice immediately reduced the claimant’s flexibility. The claimant was disadvantaged not because his shares in Pegasus were then worth less than he paid for them, but because those shares did not give him the control of a company with characteristics that would be proof against the adverse consequence. The claimant was therefore in a materially worse commercial position as a result of the advice.
[71] However the Court acknowledged that it is always a question of fact whether a particular piece of negligence has caused actual loss. There is no presumption that the non-delivery by the defendant of what the claimant ought to have received means that relevant damage has been suffered.40 The Court upheld the Judge’s conclusion that there was sufficient detriment to amount to actual loss and set time running for limitation purposes.
[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.
40 Pegasus, at [83].
[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 have suffered at least some “quantifiable damage” (or become “financially worse off”).41 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.
[75] There is no evidence in the present case to show that when the investments were made, they were worth less than their face value. There is nothing to show that the plaintiffs were financially worse off, that their net worth was reduced in some way as soon as they made the investments, or that any more risk was assumed as a result of entering the investments than otherwise would have been assumed if entering any other investment.
[76] For the foregoing reasons, I decline to strike out the plaintiffs’ second to seventh causes of action, being the causes of action based in either negligence or negligent mis-statement, on the basis that they are out of time under the Limitation Act 1950.
[77] That finding means that the defendants’ summary judgment applications must fail in their entirety. That is because the defendants had to satisfy the Court that none of the plaintiffs’ causes of action could succeed, and in this case there are some causes of action (e.g. those relating to the Irongate investment) where the only alleged basis for the entry of summary judgment was that the causes of action were out of time under the Limitation Act 1950.
Issue 2 – is the plaintiffs claim for breach of fiduciary duty clearly time-barred in equity?
[78] It is only necessary to consider the defendants’ application to strike out this
cause of action.
41 Thom v Davys Burton, above n 6, at [46].
[79] The defendants rely primarily on the contention that the six-year limitation period prescribed by s 4 of the Limitation Act 1950 applies by analogy to a case in which the claim is made in equity rather than in contract or tort. They point to the fact that the plaintiffs seek “equitable damages of $240,000”, which is precisely the same relief (minus the word “equitable”) which they seek in their negligence and negligent mis-statement causes of action arising out of the NZ Finance investment. Mr Leggat referred to Knox v Gye in support of the proposition that, where a remedy in equity corresponds to the remedy at law, and the latter is subject to a limit in point in time by the statute of limitations, the Court of Equity acts by analogy to the statute
and imposes on the remedy the same limitations.42 He submits that no truly
equitable remedy is sought, and in the circumstances the same limitation period should, in accordance with the principle in Knox v Gye apply by analogy.
[80] It is not necessary to reach any conclusion on this issue, having regard to the conclusions I have reached on issue 1, in which I have found that the defendants have not clearly shown that the plaintiffs’ negligence and negligent mis-statement causes of action are out of time under s 4 of the Limitation Act 1950. If as the defendants submit, the limitation period prescribed under the 1950 Act applied by analogy to the plaintiffs’ first cause of action (i.e. the cause of action for breach of fiduciary obligations), the same result must follow. And if the time limit for bringing claims in negligence and negligent mis-statement has not been shown to have expired, the result must be the same if the same time limit is applied to the claim for damages in equity.
[81] The defendants have also referred to the doctrine of laches, but neither Mr Leggat nor Mr Wenley pressed this argument in submissions. As Tipping J noted in Matai Industries v Jensen, the essence of the defence of laches is that where a plaintiff has a right in equity, the defendant demonstrates that his plea of laches outweighs the plaintiff’s right. Questions of acquiescence, alteration of position,
capacity and the like all have to be weighed.43
42 Knox v Gye (1872) LR 5 HL 656 at 674.
43 Matai Industries Ltd v Jensen [1989] 1 NZLR 525 (HC) at 524 – 544.
[82] In this case, I do not consider that the defendants have provided any evidential basis for a defence of laches. They have not raised any issues of acquiescence, alteration of position, or any other matter going beyond the argument for analogy with the limitation period in the Limitation Act 1950, which raises some equity sufficient to outweigh the plaintiffs’ entitlement to have their case heard.
[83] I decline to strike out the plaintiff’s cause of action based on breach of fiduciary obligation, on the grounds of either a time-bar by analogy with the limitation period prescribed in the Limitation Act 1950 for claims in negligence, or under the doctrine of laches.
Issue 3 – is the defendants’ evidence as to reinvestment in Dominion Finance Group a complete answer to the sixth and seventh causes of action?
[84] The issue is whether the plaintiffs’ claim should be struck out on this ground. It cannot be a summary judgment matter, as the defendants’ summary judgment applications are refused on the basis that they have not shown they have a complete answer to all of the plaintiffs’ causes of action.
[85] The essential issue is one of causation. Have the defendants shown that the advice alleged to have been given by them in respect of the Dominion Investment could not have been causative of the plaintiffs’ loss? They submit that if the plaintiffs have suffered loss on the Dominion investment, the loss results from their decision to re-invest in 2007. The defendants say that this is one of the cases on a strike-out application where undisputed affidavit evidence which demonstrably supports a defendant’s case should be allowed
[86] In my view the fact that the Dominion investment was initially only for a period of two years, with the plaintiffs electing to re-invest at the end of that first term, does not provide a sufficient basis for striking out the plaintiffs’ two causes of action which relate to the Dominion investment. While Ms Smith does not dispute that the investment was originally for a period of two years, and that the plaintiffs elected to extend the investment in April 2007, she says that all investment decisions through the period would have been made on Mr Singleton’s advice. That
presumably includes the decision to re-invest in the Dominion investment. She also says in her affidavit that Mr Singleton did not advise the plaintiffs to exit the Dominion investment.
[87] On a strike-out application such as this, with very limited evidence, I do not think it is possible, or at least appropriate, for the Court to attempt to determine whether or not advice given by the defendants to the plaintiffs before the Dominion investment was originally made continued to play a role in the plaintiffs’ decision to renew that investment in 2007. Questions of causation are notoriously fact-specific, and it seems to me that this is a question best left for trial. I accordingly decline to strike out the plaintiffs’ causes of action (numbers six and seven) which relate to the Dominion investment.
Orders
(1)The defendants’ applications for summary judgment, and to strike out all causes of action in the plaintiffs statement of claim, are refused.
(2) The costs of the application are reserved.
Associate Judge Smith
Solicitors:
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