Stratford v Phillips Shayle-George & Co

IN THE COURT OF APPEAL OF NEW ZEALAND

CA199/00

BETWEEN	JENNIFER ANN STRATFORD
Appellant

AND	PHILLIPS SHAYLE-GEORGE
Respondent

Hearing:	9 August 2001
Coram:	Elias CJ Gault J Keith J Tipping J McGrath J
Appearances:	S J Brown for Appellant P Courtney and A Challis for Respondent
Judgment:	21 August 2001

JUDGMENT OF THE COURT DELIVERED BY TIPPING J

Introduction

The appellant, Mrs Stratford, established in the High Court that the respondent solicitors, Phillips Shayle-George (the solicitors) had been negligent when advising her in relation to a transaction into which she entered with her husband during 1987. But her claim for damages against the solicitors failed because Ellis J held it was statute-barred.
Mrs Stratford’s proceeding was commenced in January 1996. She therefore had to establish that her cause of action arose no earlier than January 1990. The issue on this appeal is whether the Judge was right in finding in favour of the solicitors on the limitation point. They do not challenge the finding of negligence against them. The background circumstances are of some intricacy. We will describe them only to the extent necessary to consider the limitation issue.

Background circumstances

By 1985 Mr and Mrs Stratford had accumulated substantial assets. Mr Stratford was a property developer and, because of the nature of his work and an earlier forced sale of their then family home, he and his wife decided to take steps to protect the current family home in Hinau Street, Lower Hutt. To that end Mr Stratford consulted Mr Thom of the respondent firm about putting the property as far as possible into Mrs Stratford’s name. It appears from the evidence that in December 1985 the proposal was to enter into a transaction making the parties owners in shares; those shares being 75% to Mrs Stratford and 25% to Mr Stratford. Mrs Stratford agreed with that proposal. The home was at the time settled on both of them as joint tenants under the Joint Family Home Act 1964. For reasons that were not identified no steps were taken to change that joint tenancy into a 75:25 arrangement.
The following year, acting on Mr Stratford’s instructions, Mr Thom prepared an agreement which was signed. It is dated 16 April 1986. Its effect was to transfer Hinau Street to Mrs Stratford at an agreed value of $350,000. Mr Stratford was to discharge the indebtedness on Hinau Street. Mrs Stratford received shares and other assets bringing the total she acquired under this agreement to $1,416,500. Mr Stratford retained shares and options valued at $2,360,000 and assumed debts of $590,000, making a net figure in his favour of $1,736,000. The agreement contained a clause which made all future property acquired by Mr Stratford in his name, his separate property, and similarly all future property acquired by Mrs Stratford in her name, her separate property. The agreement was expressed to be in full settlement of all matrimonial property issues both ways and was signed and certified as required by the Matrimonial Property Act 1976. Mr Thom advised Mrs Stratford, and Mr Stratford was independently advised. The indebtedness secured on the Hinau Street property was repaid but the title was not transferred into Mrs Stratford’s name. The Judge stated that no satisfactory reasons for that omission had been identified. The omission did not matter as Hinau Street was sold soon after.
On 19 August 1986 Mr Stratford signed an agreement to purchase 117 Woburn Road for $1m. Title was taken by agreement in his name on the understanding that he would transfer it into his wife’s name when he had paid off the mortgage which was required to secure the monies he had borrowed from Barclays to fund the purchase. Mrs Stratford had agreed to make available to Mr Stratford her various shares and options to assist in the acquisition of 117 Woburn Road. She also agreed to sell Hinau Street for $329,000 and to put the proceeds towards 117 Woburn Road. A further $400,000 was raised and spent on upgrading the property. It is unnecessary to describe the intricacies of the financing of this expenditure.
Two adjoining properties in Woburn Road, Nos 125 and 127, were acquired in Mr Stratford’s name in December 1986. Again the financing of these acquisitions does not require discussion. It is sufficient to say that Barclays, which was also involved in financing the adjoining acquisitions, maintained its security over No. 117 pending an anticipated general re-arrangement of securities. The position now was that, as title to 117 Woburn Road and indeed the other Woburn Road properties had been taken in Mr Stratford’s name, they were his separate property in terms of the April 1986 agreement but Mrs Stratford had contributed her separate property, namely the proceeds of the sale of Hinau Street and her options and shares, towards the acquisition of No. 117.
In June 1987 Mr and Mrs Stratford signed an application to register No. 117 as a joint family home. They did so on a Phillips Shayle-George form. Their signatures were witnessed by a Lower Hutt solicitor whose identity was not established. The application was not registered and that circumstance was not explained either. In the application the property was described as being subject to the caveat which Barclays had registered to protect its unregistered mortgage over No. 117. In September 1987, in circumstances which are not material, Barclays released No. 117 from its mortgage. The property then became unencumbered in Mr Stratford’s name. He wrote to the solicitors in October requesting them “to transfer the title deed of the property [No. 117] to Jennifer Ann Stratford”. He also said that the transfer was not to prejudice a matrimonial property agreement which he said was dated 22 September 1987. There was no such agreement and the Judge said that the reference to such an agreement was not explained. He also said that the provenance of the letter was suspicious as it was dated 15 October 1987 but was not received by the solicitors until 1pm on 19 October 1987, the date of the share market crash. But, as the Judge said, he had no need to resolve “any implications this may have”.
Mr Park was the solicitor who was engaged in implementing Mr Stratford’s instructions. In an undated diary note he recorded that a matrimonial property agreement was required for this one asset – meaning 117 Woburn Road. He noted that it had not “been around” when the earlier agreement was signed and was a “windfall”, so Mr Stratford was giving Mrs Stratford a half share. He then noted the proposed mechanics and it is these that gave rise to the later problems. The idea was to transfer a half share in No. 117 to Mrs Stratford in consideration of her matrimonial property rights and the other half by way of sale and purchase at a price of $500,000 which would be satisfied by Mrs Stratford giving Mr Stratford a registered mortgage for that whole sum payable in 40 years time and free of interest.
Mr Park prepared a further matrimonial property agreement along these lines, together with a memorandum of transfer and a mortgage to implement the necessary conveyancing steps. Mr Park appears to have thought there was no element of gift involved and the mortgage debt would be forgiven by Mr Stratford by annual instalments of $25,000. On that basis it would take 20 years to discharge and Mr Stratford would not have to pay any interest in the interim. Having prepared the documents, Mr Park wrote to Mrs Stratford saying that she was required to have independent advice prior to signing them and:
“we would be grateful if you could do this and arrange for … execution [of the agreement] and execution of the Mortgage as soon as possible and return these to us so that the Transfer of the property into your name and the Mortgage can be registered. If you have any enquiries regarding the above matters please contact the writer.”
Mr and Mrs Stratford attended upon the Lower Hutt office of Phillips Shayle-George, presumably not understanding that this hardly constituted independent advice. They were attended by a staff solicitor, a Mr O’Sullivan, who appears simply to have witnessed Mrs Stratford’s signature. She said he did not explain the documents and their general significance to her. There was no contrary evidence. The Judge observed “it seems that he could not possibly have done so”. That no doubt was a reflection on the obvious difficulties in what was proposed from Mrs Stratford’s point of view. Mr O’Sullivan nevertheless signed a conventional matrimonial property certificate to the effect that he had explained to Mrs Stratford the effects and implications of the agreement before she signed it. The agreement was signed in November 1987 and the transfer and mortgage were registered on 28 January 1988. Mrs Stratford thereby became the sole registered proprietor of 117 Woburn Road but subject to the mortgage to her husband for $500,000 on the terms earlier stated. Mr Stratford was adjudicated bankrupt on 23 August 1989. On 6 September 1989 the Official Assignee registered a caveat against the title to No. 117. The caveat was not produced as the Registry copy could not be found and no other copy was available. The terms of the caveat were therefore not in evidence but, as will emerge, that is ultimately of no moment.
On 14 September 1990, and we are now within the limitation period, the Official Assignee claimed that the transfer to Mrs Stratford, and necessarily with it the mortgage, were void or voidable against him. Eventually, through other solicitors, Mrs Stratford negotiated a settlement with the Official Assignee whereby he withdrew his claim to avoid the transaction and released the mortgage in return for the sum of $500,000 which Mrs Stratford paid him.
The Judge held that a reasonably competent solicitor should have known that the terms of the mortgage back to Mr Stratford would attract gift duty “on nearly all of the $500,000”. But as things turned out, no doubt because of the settlement with the Official Assignee whereby Mrs Stratford paid cash for that half of the house, the Inland Revenue Department did not pursue claims which they had earlier made for gift duty. That aspect therefore requires no further examination.
The critical present issue is the way in which Mrs Stratford paid for the half share in the house to which she was not entitled under the Matrimonial Property Act. It was accepted by all concerned that the transfer to her of the other half was a legitimate transaction under the Matrimonial Property Act. The problem with the mortgage back was that it was not, in the light of its terms, adequate consideration for the $500,000 price Mrs Stratford was supposed to be paying. A reasonably competent solicitor should have been aware of that and, what is more, as the Judge found:
In order to transfer the other half to Mrs Stratford, the consideration that would have appealed to a solicitor seized of the available facts would have been by way of forgiveness of part of the debt owed to Mrs Stratford by her husband. The alternative of a mortgage back would have no appeal, let alone one attracting gift duty. It seems to me there would have been no better solution than the debt forgiveness available and that it would have been obvious.
The solicitors’ relevant negligence thus lay in not identifying that the consideration purportedly provided by the mortgage back was at best dubious and further fixed her with a significant debt obligation. The appropriate form of consideration from Mrs Stratford’s point of view would have been for her to forgive $500,000 of the amount which Mr Stratford owed her at this time. The source of this indebtedness is of no present relevance. If she had adopted this alternative form of consideration for the relevant half of the house, Mrs Stratford would thereby have been able to acquire the house outright without any encumbrances. She would also have acquired the corresponding advantage not only of having given fully adequate consideration but also of not being dependent on her husband’s future financial viability to get full value out of his indebtedness to her. Indeed the whole point of the exercise was to protect Mrs Stratford to best advantage from the financial vagaries of her husband’s business activities. Furthermore, the share market crash had just occurred. The evidence indicates that if the alternative form of consideration had been suggested, it would have been acceptable to Mr Stratford.

High Court judgment

Ellis J held that Mrs Stratford’s cause of action in tort arose on Mr Stratford’s bankruptcy or, if not then, when the Official Assignee registered his caveat. The Judge further held that Mrs Stratford’s cause of action alleging breach of fiduciary duty arose at the same time. This was because the breach was really a tortious one. The Judge was also of the view that any fiduciary obligations were closely analogous to those in tort, ie. to take reasonable care. If they were to be classified as arising in equity rather than in tort, the six year limitation period should be applied by analogy. In this the Judge relied on s4(9) of the Limitation Act 1950, and Matai v Jensen [1989] 1 NZLR 523.
The solicitors’ breach of duty, however classified, occurred in November 1987 when Mrs Stratford entered into the mortgage. Her cause of action in tort did not arise until she suffered loss or damage. In the Judge’s view that loss or damage was contingent at least on Mr Stratford’s bankruptcy or alternatively on the making of a claim by the Official Assignee to avoid the transfer and mortgage, which the Judge saw as having occurred when the caveat was registered. It is unnecessary to go further into the Judge’s reasoning. While we agree with his conclusion that the claim was statute barred, we consider that result follows for rather different reasons.

Discussion

A cause of action accrues for limitation purposes when all the facts necessary to establish the claim are in existence. The relevant facts for the tort of negligence are those necessary to establish duty, breach and consequent loss. If the tortfeasor is a fiduciary the position is the same unless there is also a breach of fiduciary duty (ie. a breach of a duty of fidelity or loyalty). Thus, if the breach established against a fiduciary is simply a breach of a duty of care by a person who happens to stand in a fiduciary relationship with the plaintiff, the claim is in reality tortious and limitation issues are dealt with on that basis rather than in equity.
In the present case the crucial question is when Mrs Stratford suffered loss or damage as a consequence of having entered into the mortgage to her husband. She thereby incurred a debt which did not hitherto exist. That debt was a present debt, albeit one which fell due in the future. It was not a contingent debt. There was no contingency attached to the obligation to pay the monies secured by the mortgage: for the distinction between present and contingent debts, see Gilbert v Shanahan [1998] 3 NZLR 528, 538-544 (CA). Neither counsel challenged the correctness of the analysis made in that case; indeed Mr Brown accepted that, in terms of that analysis, Mrs Stratford’s obligation under the mortgage was a present one. Thus prima facie Mrs Stratford suffered loss or damage immediately upon her entry into the mortgage. Through the solicitors’ negligence she assumed a debt, secured against her house, which, had she been properly advised, could have been avoided by using as consideration the monies which her husband owed her.
Mrs Stratford’s only escape from this analysis is to mount an argument not directly advanced by Mr Brown. It derives from the essence of the solicitors’ negligence which was not to use the available alternative consideration. But by dint of not using her husband’s indebtedness to her, Mrs Stratford still had that asset. The proposition is that this asset in nominal terms exactly matched the debt which she needlessly incurred. Thus, from a balance sheet point of view, it might be said she suffered no immediate loss or damage.
There are, however, as Ms Courtney argued, problems with such an analysis for limitation purposes. The harm suffered by Mrs Stratford was a debt certain, secured over real estate that would otherwise have been unencumbered. Although the debt was payable a long time in the future, Mrs Stratford could not deal with her house as freely as would have been the case had there been no mortgage on it. She could not sell the house without arranging to discharge the mortgage, and she could not raise money on it as freely as would otherwise have been the case. While difficult to quantify, those aspects represent a species of loss or damage for limitation purposes. For example, further borrowing on second mortgage would be likely to be at a higher rate of interest and any necessary steps to discharge the mortgage would have cost money. Loss or damage does not have to be quantified at the point of accrual of a cause of action. It might be said that loss or damage of this nature was contingent upon Mrs Stratford wishing to take some step that was impeded or made more expensive by the existence of the mortgage. But such a proposition could fairly be countered by saying that, as a result of the solicitors’ negligence, Mrs Stratford now had a property which was less valuable to her by an amount greater than simply the face or present value of the mortgage.
These issues do not have to be finally determined because, in any event, when Mr Stratford was adjudicated bankrupt, Mrs Stratford undoubtedly suffered loss or harm from the existence of the mortgage. The value of her husband’s indebtedness to her was reduced either to nothing or to the point where unarguably it was less than her obligation to him under the mortgage. If, in view of the long date of the mortgage, her obligation to him were to be notionally reduced on a present value basis, the present value calculation would necessarily be influenced by the near certainty that the Official Assignee would challenge the transaction of which the mortgage was an integral part.
On any view of the matter it follows that when Mr Stratford went bankrupt, Mrs Stratford’s secured obligations under the mortgage exceeded his unsecured capacity to discharge his indebtedness to her. As a result of entering into the mortgage she therefore suffered loss or damage no later than 23 August 1989. This was more than six years before she commenced her proceedings in January 1996. Thus her cause of action in tort was statute barred. We will now turn to the fiduciary aspect and the question of discoverability raised by Mr Brown.

Fiduciary duty

The key point in this area of the case has already been foreshadowed. As determined in Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA), not all breaches of duty by fiduciaries are breaches of fiduciary duty. We agree with Ellis J that the essence of the solicitors’ breach lay in a failure to take reasonable care. Thus the breach was tortious rather than fiduciary and the limitation period was six years rather than the more open ended approach of equity. Furthermore, as Ellis J held following Matai v Jensen (supra), the result is the same on the basis that in cases such as the present equity follows the law and applies by analogy the limitation period applicable at law.

Discoverability

Mr Brown argued that Mrs Stratford did not know and could not reasonably have discovered she had a cause of action against the solicitors until she became aware that the Official Assignee was challenging the November 1987 transaction. She was unaware of the registration of the caveat and only became aware of the Official Assignee’s challenge within the six year period. There is a problem of principle with this argument.

No question of discoverability arises if the plaintiff is already aware of all the facts necessary to establish the cause of action. The plaintiff does not however have to be aware of the legal consequences of those facts. Mrs Stratford obviously knew of the facts which gave rise to the solicitors’ duty of care and its breach. She also knew she had signed the mortgage in November 1987 and that her husband went bankrupt in September 1989. She therefore knew the facts constituting the ingredients of the cause of action, namely duty, breach and loss. The same applies with the analogous equitable approach. The case is quite different from one in which the plaintiff is not aware of the facts demonstrating loss or damage, for example cracks in the foundation of a building caused by negligent construction. It is in this sort of situation that the concept of reasonable discoverability applies.

General

On the view we take of the matter, neither s47 of the Matrimonial Property Act 1976 nor the voidability sections of the Insolvency Act 1967 need be considered.
We mention, for completeness, a point with which Mr Brown commenced his oral submissions. Counsel raised the novel proposition that the transaction in question was not a “real” one. He characterised it as a sham. This contention had not been signalled in the appellant’s written material. What is more, if correct, it would have undermined the Judge’s finding that the solicitors’ negligence was causative of Mrs Stratford’s loss. This self defeating aspect did not appear to have been appreciated on Mrs Stratford’s side. The argument was not formally withdrawn but is, in any event, neither open nor tenable. It is precluded by Mrs Stratford’s settlement with the Official Assignee.

Formal orders

For the reasons given the appeal is dismissed. The appellant is to pay the respondent costs in the sum of $5000 plus disbursements including the reasonable travel and accommodation expenses of one counsel, to be fixed if necessary by the Registrar.
Solicitors
Stephen Brown, Wellington, for Appellant
McElroys, Auckland, for Respondent

[2001] NZCA 299

21 August 2001