Walters t/a Walters Law v Hyde
[2013] NZHC 2596
•7 October 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2013-404-000404 [2013] NZHC 2596
BETWEEN JOHN MURU WALTERS TRADING AS WALTERS LAW
Appellant
AND
KEVIN JAMES HYDE AND LYNNE COLLEEN HYDE First Respondents
AND
KEVYNNE INVESTMENTS LIMITED Second Respondents
Hearing: 23 July 2013 Appearances:
K F Quinn for the Appellant
B M Easton for the RespondentsJudgment:
7 October 2013
JUDGMENT OF GILBERT J
This judgment was delivered by me on 7 October2013 at 9.30 am pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:
JOHN MURU WALTERS TRADING AS WALTERS LAW v KEVIN JAMES HYDE AND LYNNE COLLEEN HYDE [2013] NZHC 2596 [7 October 2013]
Introduction
[1] This appeal concerns the quantum of damages payable by a solicitor to his former clients for breach of fiduciary duty and negligence when acting for them on their purchase of an investment property. Following a hearing in the District Court at Auckland, Judge D J Harvey found that the respondent clients were entitled to damages amounting to $8,549.20 and he ordered the appellant, their former solicitor, to pay their costs on a solicitor/client basis. The appellant appeals against the costs order. The respondents cross-appeal against the quantum of damages they were awarded.
Background
[2] In July 2003, the first respondents, Mr and Mrs Hyde, agreed to purchase from Blue Sky Holdings Limited, a Blue Chip company, a unit in a multi-unit residential complex to be constructed in Albany. The purchase price was $285,000 to be paid by way of a deposit of $72,566 on signing the agreement and the balance on settlement which was to occur five working days after title for the unit issued. Mr and Mrs Hyde instructed Mr Walters to act for them as their solicitor on the purchase. Mr Walters, who became a director of Blue Chip New Zealand Limited on
30 April 2004, also acted for Blue Sky on the sale.
[3] As was common with Blue Chip investments, Mr and Mrs Hyde formed a Loss Attributing Qualifying Company to complete the purchase. They accordingly incorporated the second respondent, Kevynne Investments Limited, and nominated it to take title to the unit. Settlement was completed in May 2004.
[4] Mr and Mrs Hyde were unaware at the time of settlement that the entire development suffered from significant building defects or that a notice to rectify had been issued by the North Shore City Council in October 2003 but not complied with. On the day of settlement, Mr Walters signed, as Blue Sky’s attorney, an unconditional undertaking to Kevynne Investments to obtain a code compliance certificate within four months of the settlement date. However, he did not draw this undertaking to Mr and Mrs Hyde’s attention or discuss it with them.
[5] Blue Sky did not comply with this undertaking. Substantial remedial works to the entire development, costing in excess of $5 million, had to be undertaken before the Council was prepared to issue a code compliance certificate. The certificate did not issue until October 2012, long after Blue Sky was placed in liquidation.
[6] Kevynne Investments had to pay for its share of the remedial costs which amounted to $129,514.69. It also lost rental income of $7,800 while the works were carried out on its unit between November 2010 and April 2011. Taking into account loan establishment fees and legal fees, Kevynne Investments’ total losses as a result of the defects amounted to $139,339.69.
[7] In July 2009, prior to the works being carried out, Mr and Mrs Hyde and Kevynne Investments sued Mr Walters for the estimated repair costs and lost rental. They claimed that they instructed Mr Walters before they entered into the agreement for sale and purchase. They advanced claims for breach of fiduciary duty, breach of contract and negligence. In respect of each cause of action, the plaintiffs pleaded that:
If Walters Law had fulfilled their duties and properly advised the Hydes, they would have:
(a) obtained independent legal advice on their purchase; (b) not entered the agreement; or
(c) cancelled the agreement; or
(d) negotiated a reduction in the price to reflect the need for repairs to the property.
[8] Because the losses had not been quantified at that stage, the issues of liability and quantum were split. Following a hearing in the District Court at Auckland in May 2011, Judge M-E Sharp determined the issue of liability based on the plaintiffs’ original statement of claim.
[9] The Judge rejected Mr and Mrs Hyde’s claim that they would not have entered into the agreement had they received independent legal advice. Her Honour found that they signed the agreement before Mr Walters was instructed.
[10] The Judge found that Mr Walters did not disclose to Mr and Mrs Hyde that the Council was refusing to issue a code compliance certificate and that there were issues with the cladding, despite being aware of this:1
The defendant knew that the Council was refusing to issue a code compliance certificate; knew that there was an issue with the cladding; knew that remedial works were being carried out on the development and believed that the Council required a cavity system, yet they disclosed none of this information to Mr Hyde.
[11] The Judge accepted Mr Hyde’s evidence that if he had been advised of the significance of the code compliance certificate and the reasons for the Council’s refusal to issue it, he would not have settled the purchase, even if this had meant forfeiting the deposit:2
I accept Mr Hyde’s evidence that if he had been advised of the significance of the code compliance certificate and the reasons for the Council’s refusal to issue it, he would not have settled. He said the plaintiffs would even have been prepared to even forfeit their deposit.
[12] The Judge also found that the plaintiffs would have been entitled to cancel the agreement because of a breach of cl 7.1(6)(b) of the agreement. This clause in the standard form agreement provides:
7.1 If the property is a unit title the vendor warrants as follows:
…
(6) The vendor has no knowledge or notice of any fact which might give rise to or indicate the possibility of:
…
(b) any proceedings being instituted by or against the body corporate.
[13] The Judge considered that this warranty applied because, although the agreement was entered into on 18 July 2003 prior to the Council issuing the notice to rectify on 3 October 2003, the warranty was a continuing warranty up to the date of
settlement.3
1 Hyde v Walters DC Auckland CIV-2009-004-1746, 27 May 2011at [37].
2 At [29].
3 At [39].
[14] Alternatively, her Honour found that even if she was wrong about there being a right to cancel, the lack of competent independent advice deprived the plaintiffs of the chance to avoid the costs of the remedial works by negotiating with Blue Sky to defer settlement or pay the balance of the purchase price into a solicitor’s trust account pending the issue of a code compliance certificate.4 This finding went beyond the plaintiffs’ pleaded claim as quoted in [7] above. However, no issue was taken with this.
[15] Mr Walters appealed against this judgment on the basis that the Judge was wrong to find that the plaintiffs had a right to cancel the agreement. Venning J allowed this appeal in October 2011 finding that cl 7.1(6) applied only at the date of execution of the agreement and was not a continuing warranty.5 However, Venning J agreed with the Judge’s alternative factual finding that the plaintiffs may nevertheless have suffered a loss as a consequence of Mr Walters’ breaches of duty because:6
… if the respondents had been fully appraised of the information which the appellant had, they may have been able to negotiate and defer settlement or perhaps pay the purchase monies into a solicitor’s trust account until the code compliance certificate issue was resolved.
[16] Venning J noted that the value of the plaintiffs’ lost chance to preserve their position on settlement would need to be determined at the quantum hearing in the District Court:7
The respondents have, to that extent, lost an opportunity they may have had to negotiate a better position if the appellant had fulfilled his obligations to them. The value of that loss must be for the quantum hearing in the District Court.
Did the Judge assess the loss correctly?
[17] Consistent with Judge Sharp’s finding at the liability hearing quoted in [11]
above, Mr Hyde’s evidence at the quantum hearing was as follows:
4 At [44] and [45].
5 Walters t/a Walters Law v Hyde (2011) 12 NZCPR 940.
6 At [32].7 At [33].
If we knew prior to settlement of our purchase of the Unit about the building defects with the complex including the Unit that we were purchasing, and that our Unit would have to be completely re-clad we would not have proceeded with the purchase of it.
My wife and I would have instructed Walters Law or any other solicitor acting for us not to settle the purchase of the Unit until the Unit had been repaired to the Council’s satisfaction and a code compliance certificate issued. If the vendor was not prepared to delay the settlement until the unit had been repaired then we would have walked away from the purchase altogether and purchased another investment property.
[18] Despite Judge Sharp’s finding that the plaintiffs would not have settled had they known about the problems regarding the code compliance certificate, and despite the fact that Mr Hyde’s evidence quoted in the previous paragraph was not challenged in cross-examination, Judge Harvey found that the plaintiffs would not have walked away from the agreement:
[42] That being the case, it seems that it is unnecessary to embark upon a “what if” examination of the “walking away from the agreement” scenario that has been proposed, because in my view that would have been an inextremist outcome. Mr Hyde would have been well aware of the difficulties that he could encounter in terms of forfeiture (of all or part of the deposit) and it would be far more likely, I think, for him to try and resolve matters through his connections with Blue Sky than simply to take what must be considered to be the extreme and high risk course of action of walking away from the agreement.
[19] Judge Harvey then assessed the damages as being $8,549.20 for the reasons he set out in the next two paragraphs of his judgment:
[43] So the loss that is derived from the purchase – and I am satisfied with the figures that have been given by Mr Henderson in that regard – must be looked at in light of the loss that is following from the lost chance. It seems to me that the loss following from the lost chance could be either a resolution of difficulties surrounding the particular property, which Mr Hyde could then still be owning, or alternatively the inability to go out and buy another rental property that would provide him with some income.
[44] Regrettably, I do not have any figures that lead me to be able to assess the measure of damages in the latter scenario. But I certainly do have figures for the former scenario, and it is that there has been a loss of
$8549.20 when one takes into account the balancing of benefits and disadvantages that were carried out by Mr Henderson.
[20] In finding that the plaintiffs’ losses amounted to $8,549.20, Judge Harvey accepted the evidence of Martyn Henderson, a chartered accountant called by
Mr Walters. However, this figure was not calculated by Mr Henderson on the basis of the Judge’s scenario, namely “a resolution of difficulties surrounding the particular property, which Mr Hyde could then still be owning” but rather on the basis that Mr and Mrs Hyde had never entered into the agreement in the first place. Mr Henderson stated:
My calculations show that as a result of having purchased and owned this property, the plaintiffs are … $8,549.20 worse off than they would have been if they had never been involved in the transaction at all.
[21] There is therefore an inconsistency between the Judge’s assessment of what would have occurred and his calculation of the loss in that circumstance. Mr Walters was not instructed until after the agreement was signed. He was therefore not liable for the plaintiffs’ losses as a result of entering into the agreement. Mr Henderson’s calculation that the plaintiffs were worse off by $8,549.20 as a result of entering into the agreement is therefore not relevant. Because this is the calculation underpinning the judgment, it cannot stand and must be set aside.
[22] Understandably, the parties do not want me to refer the case back to the District Court for a second time. They have asked me to assess the damages based on the available evidence.
[23] Following Judge Sharp’s determination, confirmed on appeal, that the plaintiffs may have lost the chance to avoid the losses associated with the remedial works by negotiating with Blue Sky to defer settlement until the code compliance certificate issued, Judge Harvey should have determined the value of that lost chance but did not do so. I now consider whether there was any value in that lost chance.
[24] In my view, there was a reasonable prospect that Blue Sky would have agreed to defer settlement pending issue of the code compliance certificate had this been proposed at the time. In reaching this conclusion, I take account of the following evidence. First, at the time of settlement, Blue Sky gave a written undertaking that a code compliance certificate would issue within four months. This indicates that Blue Sky was confident at that time that any deferral of settlement was likely to be for only a short period. Second, Mr Hyde was then employed by Ingot Development Limited, another company in the Blue Chip group. Blue Sky may therefore have
wished to accommodate him. Third, another purchaser successfully negotiated a re-sale of his two units in the same development to another Blue Chip company for significantly more than he had paid after he discovered, following settlement of the purchase of his units in July 2004, that the Council had issued an unremedied notice to rectify.
[25] However, even if Blue Sky had agreed to defer settlement until after the code compliance certificate issued, the result would have been that the plaintiffs would not have settled. Blue Sky went into liquidation long before the remedial works were carried out and the certificate issued. There was therefore no prospect of Blue Sky meeting the plaintiffs’ costs associated with the remedial works. It follows that the losses suffered by the plaintiffs under this scenario must be assessed by considering the position they would have been in had they entered into the agreement but not settled it.
[26] Mr Hyde did not refer in his evidence to the possibility of Blue Sky agreeing to allow settlement to proceed with the plaintiffs paying the balance of the purchase price into a solicitor’s trust account pending issue of the code compliance certificate. For that reason, I do not need to consider this alternative prospect identified by Judge Sharp and confirmed by Venning J on appeal. As noted in [17] above, Mr Hyde referred only to the prospect of deferring settlement:
If the vendor was not prepared to delay the settlement until the unit had been repaired then we would have walked away from the purchase altogether and purchased another investment property.
[27] In the circumstances of this case, it makes no material difference whether Blue Sky would have agreed to defer settlement. If Blue Sky had agreed to defer settlement, the code compliance certificate would not have issued before it went into liquidation and the plaintiffs would not have settled. Equally, if Blue Sky had refused to defer settlement, the plaintiffs would not have settled. That was Mr Hyde’s unchallenged evidence and it was also Judge Sharp’s factual finding.
[28] It follows that the plaintiffs’ damages are to be assessed on the basis that, had they received competent independent legal advice, they would not have settled the purchase.
[29] Mr Henderson’s evidence was that the plaintiffs are actually better off than they would have been if they had refused to settle. However, I consider that Mr Henderson’s calculations are seriously flawed. Mr Henderson may have found it difficult to fulfil his obligation to assist the Court impartially because he was Mr Walters’ accountant and business advisor. Whatever the explanation, the errors are unfortunate because Judge Harvey relied on Mr Henderson’s evidence, as he was entitled to do.
[30] Mr Henderson calculated that the plaintiffs would have been worse off by more than $50,000 had they refused to settle and forfeited $28,500 being a
10 per cent deposit. Alternatively, he calculated that they would have been worse off by over $90,000 if they had refused to settle and forfeited the whole of the deposit they had paid of approximately $72,000. Mr Henderson reached these conclusions even allowing for the fact that the plaintiffs had to bear the losses associated with the remedial works of approximately $139,000. In other words, Mr Henderson calculates that the plaintiffs were better off paying remedial costs of $139,000 than walking away from a deposit of $28,500 or $72,000. I now briefly explain the methodology Mr Henderson employed to reach this surprising conclusion.
[31] Mr Henderson calculates the benefits achieved by settling the purchase and comparing these with the costs of doing so as disclosed in the profit and loss statements prepared for Kevynne Investments. He also takes into account present and future tax benefits accruing to Mr and Mrs Hyde. In summary, his calculation is as follows:
Benefits
Increase in property value assessed as at 30 January 2013 $145,000
Rental income for seven years to 31 March 2011 $121,776
Tax benefit for seven years to 31 March 2011 $ 24,181
Future tax benefits $ 17,417
Total benefits $308,374
Costs
Costs of owning property for seven years to 31 March 2011 $180,504
Remedial costs $136,419
Total costs $316,923
Difference between benefits and costs (loss) ($8,549)
[32] This is Mr Henderson’s calculation of the loss the plaintiffs suffered as a result of entering into the agreement and is the figure the Judge adopted as the loss the plaintiffs were entitled to recover from Mr Walters. Mr Henderson then calculated the additional loss the plaintiffs would have suffered had they not settled and forfeited $28,500, being 10 per cent of the purchase price, or the entire deposit paid. He inappropriately adds brokerage fees paid to Blue Chip of $7,125 and other costs of $350 and takes into account the interest costs that would have been incurred in funding the deposit, brokerage and other costs. He prepared alternative calculations of the interest costs depending on whether these costs were funded on an interest only basis or repaid over a 10 year period.
[33] The major flaw in Mr Henderson’s analysis is that it assumes that the plaintiffs would not have achieved any return over the same seven year period (or nine year period if you take into account the date the unrealised capital gain was calculated) on the monies they would have retained had they not settled in May 2004. This is completely unrealistic. Mr Henderson assumes that the plaintiffs would have done no better with this money than if they had hidden it under their mattress for the last seven to nine years. The evidence does not support this. On the contrary, Mr Hyde’s unchallenged evidence was that he would not have settled this purchase had he been competently advised by an independent solicitor and would have purchased another investment property. It is reasonable to assume that the plaintiffs would have received similar benefits from doing so as they received from the Albany unit.
[34] Mr Henderson’s calculations, based on the assumption that the plaintiffs would have forfeited the entire amount paid towards the purchase, are also unrealistic. The maximum amount Blue Sky were entitled to forfeit if the plaintiffs
had refused to settle was $28,500, being 10 per cent of the purchase price.8
8 Cl 9.4(b)(i) of the agreement.
[35] If the plaintiffs had been competently advised by an independent solicitor, they would not have settled the purchase. They would not have incurred the remedial costs of $139,000 but would have forfeited $28,500 of the deposit. However, because the deposit is a May 2004 figure and the remedial costs were mostly paid in August 2010, it would not be appropriate simply to offset one against the other. I consider that the most appropriate way of assessing the loss on the basis of the available evidence is as follows:
Losses associated with remedial works $139,340
Plus interest on this sum from 1 September 2010
at the rate prescribed in s 62B of the District Courts
Act 1947 to the date of judgment
Less deposit that would have been forfeited $ 28,500
Less interest on deposit at the prescribed rate from 1 June 2004 to the date of judgment
[36] The judgment in favour of the plaintiffs for $8,549.20 is set aside and replaced by judgment in favour of Kevynne Investments calculated in this manner. The judgment is in favour of Kevynne Investments because the evidence shows that it suffered the loss rather than Mr and Mrs Hyde. If there is any dispute as to the calculation of the judgment sum, this will be determined by memoranda to be filed in accordance with the timetable directions given at the conclusion of this judgment.
Costs appeal
[37] Judge Harvey ordered Mr Walters to pay costs calculated on a solicitor/client basis. In reaching this conclusion he took into account that the sum he awarded as damages was less than the costs to which the plaintiffs would be entitled if calculated in accordance with the scale:9
I am mindful that the sum of the damages would mean that a strict schedule-based approach would not in any way reflect the real outlays that have taken place in this case.
9 At [49].
[38] While I can sympathise with the Judge’s desire to produce a just result overall, I consider that it would be contrary to principle to award solicitor/client costs to the plaintiffs to compensate them for the fact that the damages they proved were only a small fraction of what they had claimed. On the contrary, such limited success could have justified a conclusion that Mr Walters was, in reality, the successful party. In any event, this consideration is no longer relevant because the plaintiffs have now succeeded for substantial damages.
[39] The Judge also took into account that Mr Walters had little answer to the plaintiffs’ claims that he was negligent and had acted in breach of fiduciary duty. The Judge considered that Mr Walters’ position on liability was “only slightly defensible, if at all”. I agree with this assessment. In my view, it was unarguable that Walters Law acted negligently and in breach of fiduciary duty.
[40] However, there was a legitimate contest as to the nature of the breach and the consequences of it. Mr Walters was found to be justified in contesting the allegation that his firm acted for Mr and Mrs Hyde before they entered into the agreement for sale and purchase. He was therefore not liable for all losses suffered as a result of the plaintiffs entering into the agreement, as had been claimed. Mr Walters was also found to be justified in contesting the allegation that he should have advised the plaintiffs that they were entitled to cancel the agreement. It could not fairly be said that Mr Walters acted vexatiously, frivolously or improperly in defending the claims made against him.
[41] In these circumstances, I do not consider that Mr Walters should have been ordered to pay the plaintiffs’ costs on a solicitor/client basis. In my view, the award cannot be justified and should be replaced with an order requiring Mr Walters to pay the plaintiffs’ costs according to scale. Again, if there is any dispute as to the quantification of these costs, it is to be dealt with by memoranda filed in accordance with the timetable set at the conclusion of this judgment.
Result
[42] The appeal against the costs award is allowed. The order requiring the appellant to pay the respondents’ costs on a solicitor/client basis is set aside and replaced with an order for costs according to scale.
[43] The cross-appeal against the damages award is also allowed. The judgment is set aside and replaced with judgment in favour of Kevynne Investments Limited calculated in accordance with [35] of this judgment.
[44] If there is any dispute as to the quantum of the judgment sum or the costs payable, memoranda should be filed and served within 21 days of the date of this judgment with any reply within 14 days thereafter.
[45] The appeal and the cross-appeal having both succeeded, costs for these appeals are to lie where they fall.
M A Gilbert J
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