Terracedale Developments Limited v Cavell Leitch Pringle & Boyle
[2016] NZHC 605
•7 April 2016
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2013-409-1611 [2016] NZHC 605
BETWEEN TERRACEDALE DEVELOPMENTS
LIMITED Plaintiff
AND
CAVELL LEITCH PRINGLE & BOYLE Defendant
Hearing: 14-17 September 2015 and
19-20 November 2015
Counsel:
E Walton and J Pow (and later J W A Johnson) G Gallaway and E Whiteside for Defendant
Judgment:
7 April 2016
JUDGMENT OF SIMON FRANCE J
TERRACEDALE DEVELOPMENTS LTD v CAVELL LEITCH PRINGLE & BOYLE [2016] NZHC 605 [7 April 2016]
Table of contents
Paragraph No.
Introduction [1] The basic facts [3] Disputed facts [16]
General credibility assessment [17] The content of the phone calls [26] Was farming an afterthought? [29] Mr Small’s knowledge of water consents [33]
Nature and scope of the retainer [36] Applicable law [37] This case [40] Was the retainer breached? [46]
Loss [53] (a) Money expended in trying to recover the water rights [55] (b) Income lost through reduced farming capacity [56] (c) The lost water rights [60]
Contribution [84] Mitigation [89] Outcome [93] Orders [96]
Introduction
[1] The defendant legal firm acted for the plaintiff on its purchase of rural land intended for subdivision. The vendor of the land owned water consents that authorised the taking of water from two irrigation wells on the property. If the subdivision was carried out, the consents would not be needed for the property.
[2] Consents such as these are issued to a person and do not automatically transfer with the land. In the present case no arrangement was made to transfer the consents to the plaintiff even though the vendor was willing to do so at no extra cost. The consents were surrendered by the vendor, and the plaintiff was unable to have them reinstated. The issues on the case are whether the defendant was negligent in allowing this to happen, and, if so, whether such negligence was causative of loss.
The basic facts
[3] Terracedale Developments Limited (Terracedale) is a rural property development enterprise established in 2006 by Mr and Mrs Small. The Smalls are Ashburton farmers. Mr Jim Keegan of the defendant firm (Cavell Leitch) has acted for the Smalls since 1989. He is a trustee of the trust that owns Terracedale. Mr Keegan believed that he and his firm acted for the Smalls only in relation to property transactions, and that the Smalls otherwise took advice from other solicitors in relation to farming matters and the like. Mr Small says that Cavell Leitch is their only legal adviser, and there is no evidence to the contrary.
[4] In late 2007 Mr Small became interested in a block of land advertised for sale. It was located in Swannanoa, northwest of Christchurch. The land would be bought for subdivision purposes, with the plan being either 4 ha lots (as of right) or
1 ha lots (needing a consent process). If purchased it would be the third subdivision enterprise carried out by Terracedale over a two year period. Cavell Leitch had acted on the other subdivisions.
[5] Mr Small contacted the agent and matters went from there. The agent sent Mr Small the various documentation that was available – an advertising flyer (which referred to the irrigation wells), the tender agreement and a LIM. At some point it was agreed the agent would also send the material to Mr Keegan, an event which happened on 30 October. What Mr Keegan received is a disputed fact to which I will return.
[6] On 7 November Mr Small spoke with Mr Keegan. The contents of this conversation are disputed. There is also a dispute as to how many phone calls there were. Mr Keegan says only two; Mr Small says more but accepted in cross-examination he was not sure.
[7] Returning to the 7 November conversation, it seems common ground that its genesis was that Mr Small was moving ahead with the purchase, and wanted advice on the tender documentation. There were two specific matters he wanted included by way of special conditions, and later that day Mr Keegan emailed him two clauses for inclusion. That seems to have been the extent of Mr Keegan’s involvement at that point. Mr Small submitted the tender, negotiated regarding price, and concluded the deal (obviously on behalf of Terracedale).
[8] Eventually a contract was agreed and the agent sent the concluded agreement to Mr Keegan on 20 November 2007. Much of the work then needed for settlement was done by an experienced legal executive who worked with Mr Keegan. She had particular expertise in subdivisions and had done the work on Terracedale’s previous subdivisions. It was she who:
(a) signed the acknowledgement of the agreement (on
22 November 2007);
(b) received the GST invoice and settlement statement from the vendor’s
solicitor (on 22 January 2008);
(c) prepared the notices required for the Council (23 January 2008);
(d) received the bank documentation (11 February 2008); and
(e) arranged for the various signatures to be provided, and settled the deal
(14 February 2008).
[9] Notable by its absence from this narrative is any discussion of water rights. An important basic point is that the water rights would not be needed for the subdivision. The subdivision once done would connect to an existing supply scheme, so the relevance of the water rights is only to the property as rural farm land, either for livestock or cropping. The basic conflict between the parties is this:
(a) Mr Small says that one of his options with the land was to farm it pending the carrying out of the subdivision. The farming options would be greater if the land were irrigated. He says that he mentioned at least the farming option to Mr Keegan, if not water rights expressly. Mr Small says he never did anything about the water rights because he believed they automatically transferred with the land.
(b) Cavell Leitch says there was no mention of farming or water rights.
Water rights had not been an issue in previous subdivisions and were not on this. They were an irrelevancy and have only been raised by Mr Small after the sale when there were delays in the subdivision process.
[10] In relation to this conflict three matters require mentioning. First, the vendor was happy to transfer the water consents. The property was advertised as having two irrigation wells. Although the contract did not call for transfer of the water consents, the vendor was nevertheless willing to do so at no extra cost. Indeed, even after settlement he rang the Smalls to inquire if they were wanted. There is some confusion as to who took the call (it was not Mr Small) or if it was just a recorded message, but the situation was left that Mr Small should call the vendor back. That did not happen so the vendor filed surrender forms with the Council.
[11] Second, in perhaps unanticipated evidence, the legal executive who assisted Mr Keegan said she did think about the water rights issue during the settlement process. However, consistent with the position detailed above, she considered they were irrelevant to a subdivision and it was not necessary to ask Mr Small about them.
[12] Third, when Mr Small learned that he did not have the water rights, he immediately took steps to reverse the situation. Prior to that, being shortly after settlement when he believed he had obtained the water rights by acquiring the land, Mr Small had been considering whether to relocate an existing irrigator from his farm, and had asked for quotes for a replacement irrigator. In the interim he grazed livestock on the property.
[13] Mr Small testified that a few months after settlement, there was a change in the market and rural land became more valuable in its own right, so he considered whether he could just on-sell the land at a profit. He also knew by then that the more desirable 1 ha subdivision option would be problematic and would take time. At that point he rang Environment Canterbury because he was unsure whether the property had two or three wells, only to learn of the surrender of the water rights.
[14] Mr Small immediately contacted Mr Keegan who contacted the vendor’s solicitor. The original approach to the matter was either to consider it the vendor’s fault, or to persuade Environment Canterbury to reinstate the consents. Environment Canterbury’s position was that reinstatement was only possible if the consents had been part of the sale transaction and cancelled in error, which they were not.
[15] The detail of what followed is not particularly relevant. Various efforts were made to no avail. Eventually it was agreed the Smalls should obtain advice from another firm and in the end these proceedings were filed.
Disputed facts
[16] There are a number of facts and issues that are in dispute. Resolution of most of them is not pivotal to my view of Cavell Leitch’s obligations, but it is preferable that I draw conclusions in relation to them.
General credibility assessment
[17] Mr Keegan was a truthful witness but his evidence is not particularly reliable. He did not keep file notes, and his recall of events was largely based on his reconstructed file.1 However, it emerged at trial that the file was incomplete and out of order. The dispute as to what information Mr Keegan initially received from the agent was very much a consequence of this incomplete file.
[18] The original pack the land agent gave Mr Small consisted of a two page advertising flyer, a tender document and a LIM. These same documents were on the defendant’s file, a fact suggestive of the agent sending the same material to the lawyer. But Mr Keegan said he was sure that initially he only received three pages of the tender document and that the rest of the documents arrived later. He based this on their chronological placement within the file; they were in separate places and the bulk of the material other than the three pages came later.
[19] The issue of what documents arrived when first sent was seen to be important for two reasons. First, the advertising flyer had reference to there being two irrigation wells, something which arguably could have put a conveyancer on notice to inquire into the issue. Second, the defendant advances the proposition that there were two retainers – a very limited one at the time Mr Small was seeking to buy the property, and then a normal one concerning settlement, albeit one that still did not involve any obligations to ask the client about things such as water rights. The defence drew support for an initial retainer limited to assistance with the tender document from the fact that Mr Keegan was only initially sent three pages of the tender document, and nothing else. As noted, this evidence was based on Mr Keegan reviewing a copy of the file his firm had retained when sending the original file to the Smalls’ new solicitors. It became clear at trial that his firm had not kept a complete copy of the file, or if it had, it was not in order. I am satisfied that in fact Mr Keegan received the whole package from the outset. In this regard no good reason has ever been identified why the agent would only send three pages. The
agent said he had instructed his office to send through the material, and it is not
1 Having sent the original file to Terracedale’s new solicitors.
likely that an administrator unconnected with the transaction decided for reasons unknown to abridge what was sent.
[20] Two things need noting about Mr Keegan’s error in recollection. First, until shown to be in error, he described himself as sure about the point. Second, and flowing from that, it is clear he has no independent memory of these events. Mr Keegan is a busy conveyancer who will have done countless transactions between November 2007 and when he testified in November 2015. There is no reason why, without a reliable aide memoire, he would recall the details of this call accurately. But Mr Keegan did not make file notes. All this leads me to conclude Mr Keegan’s evidence about the events around the time of the initial engagement with Mr Small cannot be relied upon.
[21] Turning to Mr Small, he was the subject of a sustained challenge to his reliability. The defence focused on changes in his evidence and his conduct in relation to disclosure. Concerning the latter it emerged for the first time at trial that Mr Small had a diary note of the 7 November conversation. Indeed he had looked at the note over the weekend prior to the trial starting, but at no time disclosed its existence to his counsel.
[22] As regards changes in his evidence, like Mr Keegan, Mr Small wavered on the number of calls prior to November 7. Mr Keegan had initially said one, but he accepted there were two. Mr Small thought there were several but accepted he was not sure, and conceded there could have been only two but he thought more. Further, in oral evidence he spoke for the first time of plans and options for the property that he had not previously mentioned. Under cross-examination he was generally less sure about what he said to Mr Keegan. The defendant submits Mr Small deliberately downplayed his business experience, and generally was a witness that could not be relied upon.
[23] There is some validity to these points but they are over-stated. Under the pressure of cross-examination witnesses often become less sure; depending on your viewpoint it can be trumpeted as a sign of honesty and a willingness to accept error, or as here a sign of unreliability in the original evidence. I see it as going to
reliability but not honesty. Likewise the non-disclosure was poor but not a sign of dishonesty. It was after all Mr Small who disclosed its existence at all. The non-disclosure is, however, a sign of him not appreciating responsibilities to the litigation, despite them no doubt being made clear to Mr Small.
[24] In the end, to the extent the proposition is that Mr Small was not an honest witness I do not accept the proposition. To the extent that the proposition is that his evidence is not wholly reliable, I agree. There were inconsistencies, and at times a sense of having convinced himself of the correctness of his position, rather than really recalling the events.
[25] I turn now to specific issues.
The content of the phone calls
[26] This is a difficult issue. I have already explained why I do not consider I can rely on Mr Keegan’s recollection. On the other hand, Mr Small is also just working off memory, and he cannot be sure about it either. The phone call was seven years ago and uncertainty is not surprising.
[27] I do consider that if water rights or access had been expressly mentioned Mr Keegan would have followed up on it with Mr Small. It follows that I am not satisfied the existence of water consents and the proposition that their existence was a “bonus” was said by Mr Small. On the other hand, I do not discount that farming could have been mentioned. Mr Keegan in his evidence seemed to regard the possibility of farming the property in the interim as Mr Small’s business and not something particularly of interest to him. It seems, with respect, that he and the legal executive were so focused on the ultimate subdivision plan that other issues and possibilities were not thought about. It follows in my view that had Mr Small mentioned he might farm the property for a while, I consider it would not have registered particularly at the time with Mr Keegan. Accordingly, Mr Keegan’s lack of recall of farming being mentioned does not mean it was not mentioned.
[28] This was a long-standing business relationship, and it is plain the two men respected each other and talked reasonably often. Mr Small says, and I accept, that
they would at times discuss personal matters such as families. I do not take that to mean in any depth, but more by way of general chat. The length and frequency of the relationship causes me to doubt that the conversation would have been as sparse as Mr Keegan recalls, and so I see a passing reference to farming as something that possibly was said.
Was farming an afterthought?
[29] Related to the preceding issue is the defendant’s proposition that Mr Small only thought about farming long after settlement, once there were delays in the subdivision and the market had shifted. Obviously if that is correct, Mr Small would not have mentioned farming to Mr Keegan at the time of the phone call. It is for that reason the two issues are connected.
[30] I accept that Mr Small had it in mind he might farm the property in the interim before a subdivision got underway. That is not to say it would be a full scale farming operation, but I see no reason to doubt that Mr Small thought he would use the land as best he could for as long as he could. Indeed, unbeknown to Mr Keegan, he had in fact done the same on one of the earlier subdivisions.
[31] In his evidence Mr Small stressed that his business model was always to have three options in relation to a transaction such as this. I accept, as a basic philosophy, it is a practice he would follow. Farming the property and keeping it as a farm was one of them. He is a farmer and well aware of the opportunities land provides, even on a short-term basis. I accordingly accept his evidence that he had it in mind to use the property pending the subdivision.
[32] It follows that I accept on balance he would have mentioned farming at the time of these calls. I do not suggest it was necessarily much more than a comment in passing, and I doubt it went into any detail as to what that might entail. But I reject the proposition that using the land was only a post-settlement afterthought.
Mr Small’s knowledge of water consents
[33] There was some focus on Mr Small’s business savvy and his history of farming and land deals. The focus was to test his previous dealings with water consents. I presume the proposition was that Mr Small knew that water rights had to be separately transferred, decided he did not want to bother and then changed his mind later.
[34] I reject this proposition without hesitation. I am well satisfied that Mr Small thought the water consents would transfer without him needing to do anything. It is not an unrealistic belief. I will address later evidence that they are a standalone tradable commodity, but on the face of it one might well think they went with the land. For example, the consent is limited to taking water from identified wells on the subject property. This connection between the consent and the land makes it understandable why someone might think they would transfer at the same time.
[35] The most the defendant’s evidence does is establish that there was an opportunity for Mr Small to know otherwise, but I am satisfied he did not. There is no reason to consider Mr Small would not bother to have the vendor transfer them to him, just in case. It may be that consequently there would be some effort involved in then surrendering them, but not too much effort given the ease with which the present vendor did so.
Nature and scope of the retainer
[36] The case is pleaded in both contract and tort but for liability purposes little turns on the distinction between them.
Applicable law
[37] In Gilbert v Shanahan it was observed:2
Solicitors’ duties are governed by the scope of their retainer, but it would be unreasonable and artificial to define that scope by reference only to the client’s express instructions. Matters which fairly and reasonably arise in the
2 Gilbert v Shanahan [1998] 3 NZLR 528, at 537.
course of carrying out those instructions must be regarded as coming within the scope of the retainer.
[38] Also helpful are the following passages cited in Camdoola Investments Ltd v
Cavell Leitch Pringle and Boyle.3 First:4
The scope of a lawyer’s advisory role in relation to commercial and conveyancing transactions in today’s society cannot be stated with any precision. Solicitors have, and are regarded as having a wide expertise, drawing on their knowledge of commercial and financial matters as men of affairs, just as much as on their knowledge of the particular branch of the law. What advice will be expected by the client and given by the solicitor will depend on all the circumstances, including the nature and money value of the transaction and its legal and commercial ramifications and the relationship between the particular client and his lawyer.
And second:5
Now no doubt the duties owed by a solicitor to his client are high, in the sense that he holds himself out as practising a highly skilled and exacting profession, but I think that the court must beware of imposing upon solicitors
– or upon professional men in other spheres – duties which go beyond the scope of what they are requested and undertake to do. It may be that a
particularly meticulous and conscientious practitioner would, in his client’s
general interests, take it upon himself to pursue a line of inquiry beyond the strict limits comprehended by his instructions. But that is not the test. The
test is what the reasonably competent practitioner would do having regard to
the standards normally adopted in his profession, and cases such as Duchess of Argyll v Beuselinck; Griffiths v Evans and Hall v Meyrick demonstrate that the duty is directly related to the confines of the retainer.
[39] Here the proposition advanced by the defendant is that this was not a situation of a general retainer to carry out a conveyance. Rather there was a limited retainer concerning the pre-contract stage which consisted only of providing advice on the tender document. Later there was a general retainer to carry out settlement of the purchase. Mr Galloway refers to a recent decision of Heath J where his Honour
observed:6
[54] The first question is whether the instructions given to Preston Russell constituted a general or specific retainer. In the absence of some clear indication to the contrary, it is usually presumed that parties engaging lawyers expect to be advised on all aspects of their affairs with which the lawyers are dealing. That is the nature of a general retainer. Both
3 Camdoola Investments Ltd v Cavell Leitch Pringle and Boyle CA 43/93, 28 October 1994.
4 Provost Developments Ltd v Collingwood Towers [1980] 2 NZLR 205 at 213.
5 Midland Bank Trust Co Ltd v Hett, Stubbs and Kemp [1979] 1 Ch 384 at 402, citations omitted.
6 Peters v Peters [2013] NZHC 1061, footnotes omitted.
counsel accept that the appropriate approach to identifying the scope of a solicitor’s duty to a client is set out in the Court of Appeal’s judgment in Gilbert v Shanahan.
This case
[40] A case-specific analysis of the terms of engagement is required, but in my view the general context cannot be ignored. The defendant was the Smalls’ legal adviser, and had been for a number of years – indeed almost 20 years at the time of this transaction. The firm had acted for Mr Small on numerous property transactions, including two recent subdivisions. It is unconvincing to contend that the retainer in this case was defined by the specific request made by Mr Small, and that Cavell Leitch had not undertaken the more general conveyancing retainer one would associate with the situation.
[41] I also consider it artificial to divide up a standard conveyance in the way Cavell Leitch does. Again, a longstanding client makes contact to say he is looking at purchasing another block of rural land for subdivision. The firm has acted in recent times on two similar projects. The client notes on this occasion it is a tender process which he has not encountered before and seeks general advice about tenders as well as assistance with two clauses. Prior to that the client has caused the land agent to forward all the available documentation, including the advertising flyer and the LIM. In my view this conduct by Mr Small, against the general background of the longstanding lawyer-client relationship, and Mr Keegan’s role as trustee of the
trust that owns the shares in Terracedale,7 points towards a general conveyancing
retainer. Little points the other way other than the solicitor’s somewhat narrow
perception of his role on this occasion.
[42] The artificiality of the two retainers concept is illustrated by the timeline:
30 October – agent sends documents;
7 November – client consults about tender documents;
19 November – firm receives from agent advice of confirmed contract and signs solicitor notification letter;
7 Mr Keegan’s trustee role was not the subject of submission, and I do not place particular weight on it. But it is in my view a relevant contextual fact.
22 January – settlement statement received;
11 February – bank documents received;
14 February – transaction settled.
This sequence is somewhat unremarkable and is a general portrait of a conveyance being carried out for an established client. I do not accept it is to be parcelled up into separate retainers. In my view it was a standard general conveyancing retainer.
[43] For completeness I note the absence of any communication by the law firm setting out a limited role. Again this is not determinative but is indicative of the absence of anything unusual or limited.
[44] A final point to note in this regard is that the firm’s bill for the work done for Mr Small includes within the attendances “searching and approving the title”, “perusing and approving the LIM” and “confirming special conditions of the agreement”. These are of course the normal incidents of a conveyance and part of what would be expected in a general retainer of the type I am describing. The invoice was the responsibility of the legal executive who says these entries are an error, and these things were not done prior to the contract being formed. It is explained that a default notation was not amended to suit the case as it should have been. I accept this evidence but again consider it is indicative of the proposition that the idea of a limited pre-contract retainer is an after the fact analysis rather than the reality.
[45] It follows from my conclusion on the retainer issue that Cavell Leitch’s
submission that the claim in contract is statute-barred must fail.
Was the retainer breached?
[46] The plaintiff called expert evidence from Mr Lindsay Lloyd, an experienced conveyancer. His evidence was largely unchallenged because the defendant considered that it referred to the purchase of rural land for rural land purposes, and did not address the obligations on a conveyancer where the land is bought for subdivision.
[47] This raises the key question in this case: did the client’s intention to subdivide the property, an activity to which water consents would be irrelevant, change the solicitor’s obligations such that the normal expectations attaching to the purchase of rural land did not apply?
[48] I do not consider that it did. I am influenced by the emphasis that Mr Lloyd placed on the importance of securing a scarce resource. There can be no guarantee the land would not be needed as rural land – whether because the subdivision could not proceed or the market changed. There may be a number of reasons. I consider a conveyancer acting for the purchaser should advise on what is needed to maintain the value of the land as rural land. Here that would only involve raising with the client the question of water rights. It is then over to the client to decide whether to pursue them.
[49] Mr Keegan took a limited view of his initial role, and Cavell Leitch’s case is premised on the water rights issue being too late once the contract was unconditional. That is not so generally since a client may nevertheless wish to pursue the water rights even though they are not presently part of the unconditional contract and even though there might be a cost; and not so at all in the particular case as the vendor was happy to transfer them at no cost even though there was no obligation under the contract to do so. The obligation to raise water rights with the client purchaser would still exist at the time of settlement, even if the lawyer had had no opportunity to do so prior to the contract becoming unconditional. Whether it would have been possible for the client at that stage to do anything about it will be relevant to whether loss has been caused, but I am satisfied the duty would still exist.
[50] Against the background of those observations, I note Mr Lloyd’s evidence:
2In my view, when acting for a purchaser who is acquiring a rural property in Canterbury, a discussion on the availability of the water and how it is to be legally secured would be intrinsic to the transaction.
3 The property being purchased was a rural property of 52.5 hectares.
Availability of water would be vital to the economic viability of the farming operation and should be at the forefront of the mind of the solicitor advising the purchaser. This has particularly been the case for all of this century, and in my view, even prior to the year 2000.
And later:
7In the normal course of events when purchasing a rural property an application to the Canterbury Regional Council for a Land Information Report should have been recommended. In Canterbury, like many rural areas of New Zealand, a Regional Council is responsible for, inter alia, allocation of water consents. A LIM report from the local authority (which has been supplied by the vendor’s agent) in itself is not sufficient. Mr Small in his evidence says that he was shown a copy of the water permit by the vendor’s agent but this was after settlement. The Land Information Report would, or should have revealed the situation relating to the water consents. It does not appear the obtaining of this report was recommended. I recognise in practical terms the time frames for obtaining the same would be short. Alternatively a telephone call to the Regional Council or a consent search on the Regional Council website could have been made.
[51] As noted, the only counter to this evidence is the proposition that because the land was bought for subdivision purposes, these steps were not needed. For the reasons given I do not agree. Since access to water is an important component to the utility and value of the land, the matter should at least have been raised with the client.
[52] I therefore consider that Terracedale has established a breach both in contract and tort. There was a breach of the implied term to use reasonable skill and care in carrying out the retainer. Likewise Terracedale has established negligence.
Loss
[53] Three heads of loss are claimed:
(a) money expended in trying to recover the surrendered water rights;
(b)the income lost, prior to subdivision, through having to farm an unirrigated property;
(c) the loss caused by not having the water rights. Terracedale contends the water rights have a stand-alone commodity value, and seek that figure. Alternatively, Terracedale claims the difference in the value of the land with versus without irrigation.
[54] Each claim is addressed in turn, followed by consideration of Cavell Leitch’s claim for contribution, and also an allegation that Terracedale failed to mitigate its loss.
(a) Money expended in trying to recover the water rights
[55] There is no real contest as regards this head of loss. The figure claimed is
$26,296.58 (GST inclusive).
(b) Income lost through reduced farming capacity
[56] I have already concluded that Mr Small mentioned farming in passing during the initial calls, and that it was an option he always contemplated.
[57] Cavell Leitch submits that this loss was not reasonably foreseeable but I do not accept that is so. There are several reasons:
(a) the plaintiff mentioned the possibility of farming; (b) the land is rural farmland;
(c) the Smalls are farmers;
(d) subdivisions take time, and the land would otherwise be unproductive; (e) Cavell Leitch knew the purchase was being funded by borrowing
which would need servicing;
(f) Cavell Leitch knew Terracedale was considering seeking approval for
1 ha lots, a process which would defer the commencement of the subdivision.
[58] The claim is for four years at the uncontested per annum loss of $34,350, plus GST. Four years is the period from date of purchase to 14 August 2012 when subdivision was complete. The timeline disclosed in Terracedale’s evidence is:
(a) May 2008 – obtains 4 ha subdivision consent;
(b) June 2010 – Mr Small realises that the chances of consent to the 1 ha
proposal are “very slim”;
(c) August 2010 – the 4 ha consent is renewed by the Council;
(d) July 2011 – Mr Small realises chances of the 1 ha option are now
“virtually nil”.
[59] I do not consider it was reasonably foreseeable that the subdivision would be delayed beyond the time when the 1 ha option became unrealistic. I take that to have occurred in June 2010. Nor does the evidence satisfy me farming was realistic beyond commencement of the subdivision work. Allowing some time after June 2010 to commence the subdivision work, I allow two years six months from settlement as the period over which the diminished farming opportunities were experienced. This equates to $85,875, plus GST.
(c) The lost water rights
[60] I address first the issue of whether the plaintiff has established a standalone commodity value for the water rights.
[61] The initial focus was on the reduced value of the land without the capacity to irrigate. Somewhat late in the piece, due to a change in evidence by the plaintiff’s expert, the proposition emerged that the water rights had an independent value as a tradable commodity, and that this independent value should be taken as the measure of loss. The proposition of a standalone value is relevant in two ways:
(a) If accepted, the proposed standalone value of the water rights is greater than their value to this land. Terracedale accordingly sought this higher independent value.
(b)The failure to obtain the water rights due to Cavell Leitch’s breach would be a loss that is not affected by the subdivision plan. The water consent would be a standalone asset the plaintiff could have sold in addition to subdividing.
[62] Terracedale’s reliance on an independent market for the water rights came about in an unusual way. Both parties briefed experts to assess the value of the land with and without water. This was a considerable divergence. Terracedale’s expert (Mr Crighton) said the difference was $285,000, plus GST. The defendant’s expert said $10,000 plus GST.
[63] In his report Mr Crighton identified four possible methods of assessing the value of the water consents:
(a) the value of the land with and without irrigation;
(b) water trading benchmarks (ie the commodity price); (c) capitalised land value rental difference;
(d) capitalised EBIT difference.
Mr Crighton agreed with Cavell Leitch’s expert that the first method (land with and without water) was the preferred approach amongst valuers, and the usual methodology adopted. He was content to use it here. The defence expert testified it was his “strong” opinion that it was the appropriate methodology.
[64] After their initial reports were presented, the experts conferred and reached an agreed figure, using the with and without water methodology, of $182,640, plus GST. At trial, however, Mr Crighton – while not resiling from that figure – altered his opinion as to it being the appropriate valuation methodology. He did not consider the revised result of $182,640 represented a correct value, and so turned to the other methodologies he had identified in his original brief.
[65] I understand the reasoning behind Mr Crighton’s change. He accepts that the methodology used by the defendant and initially by him is the usual one, and the most favoured one. Originally on his analysis it produced a figure broadly in line with the other possible methodologies, and accordingly a figure he was comfortable with. When after consultation that figure changed, he concluded the methodology was producing an incorrect figure out of line with other methodologies, and out of line with his instinctual assessment based on his experience. This qualification was foreshadowed in the original brief:
The favoured approach to determine water permit value, assuming sufficient transaction evidence is available, is the use of comparable sales “with” and “without” irrigation. This assumed the added value of water represents the value of the water permit, as long as that value is generally supported by other approaches. (emphasis added)
[66] The defendant’s expert had originally suggested a with/without difference of only $10,000 but this was revised up after the meeting. The reason, though, why he originally valued the difference as so small is the same reason why Mr Crighton does not accept the revised agreed figure is a correct value. The reason is that the value of the land “without water” option is greatly inflated in the present circumstance by the demand in the area for rural lifestyle blocks. The water consents are irrelevant to a subdivision exercise so this inflated value of the land due to subdivision potential effectively sets the market value of the dry land option. The significance of water to the land is thereby devalued. If the market was only for the land as a farm, the difference would be much more. Mr Crighton believes there is a legitimate other methodology – namely valuing the water consents. His assessment under this approach was a figure of $300,000 if traded at the time on the market.
[67] The key issue, however, is whether the evidence before me established that the water rights could have been sold independent of the land. I do not consider it did. The deficiencies I see in the evidence are possibly due to the late emergence of this tradable commodity proposition, but I must deal with evidence as it is, and be satisfied it was a realistic option. Mr Crighton says there was a market, and I respect that view, but the evidence in support was lacking.
[68] Mr Crighton had written to a company called Hydrotrader which was the auction house for water trading rights. No-one from that firm was called to give evidence. The auction house provided detail of nine water rights sales over two years. Of these only two possibly related to the same water trading area as the present case, so the sample is low. Other than price there was no further detail as to the circumstances of the two sales. I do not see two unparticularised sales over two years as a reliable indicator of demand.
[69] Next, one has to factor in the reality that if there was a market there seems to have been very limited knowledge of it. The separate sale of water consents had not arisen in any of the many other subdivisions Mr Keegan had acted on. And further, in this case the vendors simply surrendered the water consents, and seemingly did so on Council forms available for that very purpose.
[70] Third, there was no supporting evidence of the reality of the option to sell the water rights. There was no evidence from the Council as to what its attitude would have been, nor from Hydrotrader as to how it might work. The consents in this case were clearly linked to taking water from the particular wells on the farm. Presumably one would apply to transfer the entitlement to another well within the same water area but there was no evidence on this. Mr Crighton accepted he had not inquired within the Council into what issues might arise on such an application or how likely it was that consent would be given. Nor had he factored this contingency into his valuation.
[71] Finally, there remains the point that the preferred methodology amongst valuers is the irrigated/not irrigated analysis. If factors such as subdivision potential inflate the value of the not irrigated option, that does not seem in itself a reason to reject the outcome as invalid. It just means there is not much difference in value. Accordingly I reject this as a means of assessing loss.
[72] Turning then to the other option of the diminution of the value of the land, if this measure of loss is recoverable the figure is not in dispute – $182,640 plus GST. There can be no doubt that Terracedale has suffered this loss at the date of settlement as a result of the defendant’s breach. It was not a contingent future loss –
Terracedale should have on settlement obtained land with a value $182,640 higher than it did acquire. The usual measure of damage is to place the losing party in the position in which they would have been had the contract been performed as it should have been.
[73] This is subject, however, to the principle that a plaintiff must take all reasonable steps to mitigate and:8
… when, in the course of his business, he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss which he has suffered may be taken into account, even though there was no duty on him to act.
[74] In the present case Terracedale ultimately subdivided the land at a considerable profit. Subdivision had always been one of the options in mind when it purchased the land, and indeed was the primary purpose behind the purchase. The other options such as farming or on-sale were very much safeguard options. A further unusual feature of the case is that this primary option, namely subdivision, once done, completely overwhelmed the significance of the breach. At that point, the land lost its character as rural farmland, and the water rights became irrelevant. They were not necessary to, nor able to be used for, the subdivision.
[75] The ability of Terracedale nevertheless to claim this loss turns on whether the decision to subdivide was an act of reasonable mitigation (in which case the subdivision profits are taken into account) or is an unrelated decision made by the plaintiff in relation to its land (in which case the profit does not diminish the loss).
[76] Two cases illustrate the opposite sides of this divide. In British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd, British Westinghouse supplies eight steam engines.9 The engines did not meet the contract’s specifications with the result that Underground Electric was forced to use more coal to achieve its aims. Eventually a new product by a different company became available and Underground Electric replaced the deficient machines. The
new engines had a greater capacity than the original ones would have had even if
8 British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1911–1913] All ER 63 at 69.
9 British Westinghouse above n 8.
properly functioning. It was found as a matter of fact that it would have made economic sense to obtain the new machines regardless of the efficiency of the existing British Westinghouse engines.
[77] The House of Lords accepted the contention of British Westinghouse that the increased profit achieved by the new machines ought to be taken into account when assessing loss. This was because the purchase of the machines was an action which:10
… a reasonable and prudent person might in the ordinary conduct of business properly have taken, and in fact did take whether bound to or not, [and accordingly] a jury or an arbitrator may properly look at the whole of the facts and ascertain the result in estimating the quantum of damage.
[78] By contrast, Hussey v Eels is an example of insufficient nexus between the act producing the subsequent profit, and the original breach.11 There the purchasers of a property had been incorrectly assured that there was no subsidence under the bungalow. Once the subsidence damage was discovered, the purchasers were unable to afford repair so explored other options with the property. Eventually, some
30 months later, they obtained consent to locate two dwellings on a different part of the property. The property was then sold as a development opportunity at a price substantially greater than the original purchase price.
[79] Lord Mustill observed:12
To my mind the reality of the situation is that the plaintiffs bought the house to live in, and did live in it for a substantial period. It was only after two years that the possibility of selling the land and moving elsewhere was explored, and six months later still that this possibility came to fruition. It seems to me that when the plaintiffs unlocked the development value of their land they did so for their own benefit, and not as part of a continuous transaction of which the purchase of land and bungalow was the inception.
[80] The learned authors of MacGregor on Damages are critical of the decision in that it is contended the Court placed too much weight on a lack of continuity in dealing with the breach – something that was not part of the British Westinghouse
principle which focused more on whether the act was done in mitigation of the
10 At 70.
11 Hussey v Eels [1990] 2 QB 227 (EWCA).
12 At 241.
breach.13 This criticism, however, seems best viewed as a dispute about the correct interpretation of the particular facts.
[81] A case discussed in Hussey is also of some relevance. In Marder v Sautelle and Hicks negligent pre-inspection of what turned out to be a defective building led a buyer to pay too much for a property.14 The only apparent remedy was demolition of the defective building, so the trial Judge awarded the difference between the price paid on the one hand, and the lesser value of the land plus demolition costs on the other. However, subsequent to judgment the buyer was able to sell the property, as is, for substantially more than the original purchase price.15 The negligent inspectors appealed, seeking to have the profit included in the calculation but were unsuccessful.
[82] Analysed against these principles, I do not consider it can be said that Terracedale subdivided as an act of mitigation in response to the absence of water rights. It was always intended to subdivide if possible, and the fact that it was able to be successfully done is not a matter that diminishes the loss suffered by the plaintiff’s breach. Although the subdivision put an end to the continuing loss, this was a fortunate consequence rather than the purpose of the conduct; it was not done in response to the breach. Accordingly, in my view, there is an insufficient nexus.
[83] Accordingly, subject to issues of contribution, I consider Terracedale is entitled to the agreed figure required to provide it with the value of land it would have received but for Cavell Leitch’s default.
Contribution
[84] Cavell Leitch submits Terracedale contributed to its own loss by failing to make clear to the solicitor it intended to farm the land and that preserving it as rural land was one of Mr Small’s options. There is, in my view, more merit in the point
than Terracedale accepts.
13 Harvey MacGregor MacGregor on Damages (19th ed, Sweet and Maxwell, London, 2014) at
[9-137].
14 Marder v Sautelle and Hicks [1988] 2 EGLR 187.
15 It is unclear whether this was due to a market shift, or if the new purchasers had simply paid too much.
[85] It is clear that Mr Small did not appreciate the need to transfer water rights separately and there can have been no expectation on him to specifically refer to the matter. But his own evidence was that he does everything with options in mind, and that these options are there from the outset. In oral evidence he described his first two options on this occasion as farming and on-selling, yet neither of these was discussed with Cavell Leitch.
[86] Although I accept Mr Small probably mentioned farming, it was only in passing. There is no doubt that the focus conveyed to Mr Keegan was subdivision and that was consistent with the other two recent purchases by Terracedale. Had Mr Small explained that he had these options in mind from the outset, Mr Keegan would have been on much clearer notice. I am confident he would then have addressed water rights. Further, the legal executive would have acted differently when the issue came into her mind during the settlement. And as the evidence shows, the water rights were there to be had, and would have been secured.
[87] None of this is to absolve the conveyancers of their responsibility but I do consider it a significant contribution to what has gone wrong. The point that emerged strongly from Mr Small’s evidence was that these were options he always had in his mind. He explained how they were aware of the house on the property, and how the property was an attractive package in its own right. It is therefore surprising that none of this was conveyed to his solicitor with whom he had such a longstanding and good relationship. He certainly did not help his lawyer to help him.
[88] I consider a reduction of one half is appropriate. The responsibility for what happened is to be equally apportioned.
Mitigation
[89] The defendant submits that the plaintiff failed in three ways to mitigate its loss.
[90] The first alleged failure is in not ultimately applying for a new water consent. There is nothing in the evidence to satisfy me this was a realistic option, and the defendant’s own internal advice was that it would be unlikely to succeed.
[91] The second point is the proposition that Terracedale should have subdivided earlier. I have already factored this into the calculation of the period for which farming losses should be recoverable. Again, other than that, the evidence favours it being a reasonable period to assess options. Considerable endeavour and time, much of it through the offices of, and with the encouragement of the defendant was spent on trying to get back the surrendered consents.
[92] The third proposition is that the plaintiff should have instituted proceedings earlier. Given the nature of the loss I have identified, the length of time until filing proceedings does not affect the quantum. The only loss that grew with delay is the use of the land for farming, and that has already been addressed.
Outcome
[93] I find that the claims in tort and contract are made out.
[94] I accept the three heads of loss as claimed but with the adjustment indicated at [58].
[95] I consider the plaintiff has contributed by failing to advise the lawyer of options for the property other than subdivision. These options were in the plaintiff’s contemplation from the outset. There will be an adjustment of one half.
Orders
[96] The plaintiff is entitled to orders in the sum of:
(a) $42,937.50 (plus GST) for reduced farming income;
(b)$13,198.29 (GST inclusive) being reimbursement of expenses incurred in seeking to recover water rights;
(c) $91,320 (plus GST) for reduced value of land;
(d) interest from date of judgment.
Simon France J
0