Walters t/a Walters Law v Hyde HC Auckland Civ-2011-404-3521

[2011] NZHC 1495

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-003521

BETWEEN  JOHN MURU WALTERS TRADING AS WALTERS LAW

Appellant

ANDKEVIN JAMES HYDE AND LYNNE COLEEN HYDE

First Respondents

ANDKEVYNNE INVESTMENTS LIMITED Second Respondents

Hearing:         6 October 2011

Appearances: I M Hutcheson for Appellant

B M Easton for Respondents

Judgment:      10 October 2011 at 12:00 PM

JUDGMENT OF VENNING J

This judgment was delivered by me on 10 October 2011 at 12.00 noon, pursuant to Rule 11.5 of the

High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:           Walters Law, Auckland

Grimshaw & Co, Tauranga

Copy to:            I M Hutcheson, Auckland

WALTERS TRADING AS WALTERS LAW V HYDE  HC AK CIV-2011-404-003521 10 October 2011

[1]      This is an appeal from a decision of Judge Sharp in the District Court at Auckland, entering judgment for the liability for the respondents against the appellant’s law firm.

[2]      In  July  2003  the  respondents  agreed  to  purchase  a  unit  in  a  terraced development  from  Blue  Sky Holdings  Limited,  (Blue Sky),  a  Blue  Chip  group company.     The  appellant  acted  for  both  vendor  and  the  respondents  on  the transaction.

[3]      The development and the unit purchased by the respondents had a number of defects.  It did not have a code compliance certificate.  The cost of remedying the defects to the respondents’ unit is expected to be in excess of $150,000.

[4]      Despite the lack of a code compliance certificate, the respondents settled the purchase in May 2004.  When they learnt of the extent of the problems with the unit, they sued the appellant.

The District Court judgment

[5]      In the course of her reserved judgment,  Judge Sharp made a number of factual findings which the appellant does not challenge.  The Judge found that the respondents engaged the appellant’s firm after they had entered the agreement for sale and purchase (which was unconditional).   Next, the Judge found that the respondents were not informed of the ramifications of the appellant acting on both sides of the transaction so that the respondents did not give their fully informed consent to the appellant acting for both parties.

[6]      Judge Sharp then found that, while the appellant did advise there was no code compliance certificate, the appellant had failed to advise the respondents of the risks of settling without a code compliance certificate or that they may have had other options.

[7]      The Judge considered that the appellant preferred the interests of his major client Blue Sky, to the interests of the respondents.

[8]      Judge Sharp then found that, as a matter of law, the vendor was in breach of cl 7.1(6) of the standard agreement for sale and purchase and that the breach was such that the respondents would have been entitled to cancel the agreement for sale and purchase.   The Judge held the appellant breached his fiduciary duty to the respondents by failing to advise them of their options before settling the transaction and particularly, that they could have cancelled the agreement under the relevant provisions of the Contractual Remedies Act 1979 for breach of cl 7.1(6).

[9]      In  the  alternative  the  Judge  held  that,  even  if  the  respondents  were contractually bound to settle, they had a number of options which they could have exercised and that they had lost the opportunity to do so through the appellant’s breach of the fiduciary duty he owed them and his failure to properly advise them.

[10]    The Judge was satisfied that the respondents had suffered loss although quantification of that loss was left for a subsequent hearing.   She found for the respondents on the issue of liability.

The issue for the appeal

[11]     Counsel agree the issue on this appeal is whether the Judge was right to hold that the respondents were entitled to cancel the agreement for sale and purchase at the time they were called upon to settle.   The issue turns on the interpretation of cl 7.1(6) and whether the warranty under it applies at the date the agreement is made or, as the Judge found, it is a continuing obligation up to settlement.

[12]     Determination of that issue will be important for the quantum hearing which is to follow in the District Court.  If the respondents were not entitled to cancel, as the Judge found they were, that will have a fundamental effect on the proper assessment of the damages arising from the breach of the duty the appellant owed the respondents.

[13]     Resolution of the issue whether the respondents were entitled to cancel the agreement depends on the correct interpretation of cl 7 of the standard REINZ ADLS (7th ed) agreement for sale and purchase.  The relevant portion of the clause reads as follows:

7.0      Unit title and cross lease provisions

Unit Titles

7.1      If the property is a unit title the vendor warrants as follows:

(1)       As   at   the   date   of   this   agreement,   regular   periodic contributions payable to the body corporate have been paid

in full.

(2)       Not less than five working days before the settlement date the vendor will provide:

(a)       a  copy  of  all  insurance  policies  or  certificates

effected by the body corporate under the provisions of section 15 of the Unit Titles Act 1972 (“the Act”); and

(b)      a certificate from the body corporate under section

36 of the Act. Any periodic outgoings shown in that certificate (not being amounts referred in paragraph

(d) of section 36) shall be apportioned.

(3)      There are no amounts owing by the vendor under sections

14, 33 or 34 of the Act.

(4)       There   are   no   unsatisfied   judgments   against   the   body corporate and no proceedings have been instituted against or

by the body corporate.

(5)       No order or declaration has been made by any Court under sections 28, 37, 40, 42, 43, 46 or 51 of the Act.

(6)      The vendor has no knowledge or notice of any fact which

might give rise to or indicate the possibility of:

(a)       the vendor or the purchaser incurring any liability under sections 14, 33 or 34 of the Act;  or

(b)      any proceedings being instituted by or against the

body corporate;  or

(c)       any order or declaration being sought under sections

28, 37, 40, 42, 43, 46 or 51 of the Act.

(7)       The  vendor  is  not  aware  of  proposals  to  pass  any  body corporate resolution relating to its rules nor are there any unregistered changes to the body corporate rules which have not been disclosed to the purchaser.

(8)       No lease, licence, easement or special privilege has been granted by the body corporate in respect of any part of the

common property.

[14]     Judge Sharp found that the vendors were in breach of cl 7.1(6) as at the date of settlement.  She considered that the lack of code compliance certificate and the

problems which prompted the Council’s refusal to issue one were facts which “might give rise to or indicate the possibility of proceedings being instituted by the body corporate”.  Importantly, as noted, the Judge considered that the warranty in cl 7.1(6) applied  up  to  the date  of settlement  rather than  at  the date the agreement  was concluded as argued for by the appellant.

[15]     On 3 October 2003 (some months after the agreement was entered, but before settlement) the North Shore City Council issued a notice to rectify building work relating to the units within the development.   The Judge found the appellant was aware of the full details of the defects but did not fully inform the respondents.

[16]     The Judge rejected the submission the clause should be read down so that unless there was evidence of actual proceedings being instituted by or against the body corporate there was no breach.  In rejecting that submission the Judge referred to and relied on the following passage from Moxon v SK Cassidy & MGI Wilson

Trustees Ltd:[1]

... Clause 7 in effect places a very heavy onus of disclosure upon the vendor. If the information might only indicate the possibility of proceedings being issued, she was obliged to disclose the material.  She could not substitute her own judgment for that of the purchaser as to the significance of all of the information, and decide to keep the relevant information from Mrs Cassidy and the trustees.

[1] Moxon v SK Cassidy & MGI Wilson Trustees Ltd Auckland HC CIV-2006-404-5380, 27 August

2007 at [46].

[17]     No issue is taken with that aspect of the Judge’s finding.  In the Moxon case the particular issue as to the date at which the warranty applied was not in issue. The focus of that case was on disclosure at the time the agreement was made.

[18]     In finding that the obligation to disclose under cl 7.1(6) extended up to the date of settlement Judge Sharp noted that cl 7.1(1) expressly referred to:  “as at the date of this agreement, ...” whereas cl 7.1(6) was not so qualified.  She considered that to be a meaningful omission.

[19]     However, there are a number of factors that support the interpretation argued for by the appellant.   The plain wording of cl 7.1(6) that “The vendor has no

knowledge  or  notice”  would  ordinarily  be  read  as  referring  to  the  vendor’s knowledge or notice as at the date the vendor completed the agreement.  The plain wording does not speak of or refer to future knowledge or notice.   The relevant definition of “has” in the Oxford English Dictionary is “To hold in hand, in keeping, in possession”, which suggests possession at the relevant time which in this case is the execution of the agreement.  The respondents’ argument and the Judge’s finding requires the words “That at settlement” to be implied so the clause reads “That at settlement the vendor has no knowledge or notice of any fact which might give rise to ....”.

[20]     Next, cl 7.1(6)(b) must be construed in its particular context.  It is directed at informing the purchaser about potential liabilities the purchaser could be required to assume arising out of the nature of unit titles and body corporate structures.

[21]     It is significant that cl 7.1(6)(a) and cl 7.1(3) both address liability under ss 14, 33 or 34 of the Unit Titles Act 1972.  Clause 7.1(3) provides a warranty in relation to liability under those sections for amounts then owing, which must be as at the date of the agreement.  Clause 7.1(6)(a) also speaks as at the date of agreement but looks to knowledge of facts which might affect liability in the future.

[22]     Next, cl 7.1(2) requires the vendor to provide a certificate under s 36 of the Act prior to settlement.  The s 36 certificate addresses a number of issues, including: any amounts recoverable against the proprietor of the unit under s 14, and whether or not the proprietor has any potential liability for work carried out under ss 33 or 34 of the Act, the same matters provided for in cl 7.1(3).  There would seem to be little point in requiring the vendor to provide a certificate as to those matters before settlement if the warranty about the same matters as provided for in cl 7.1(3) was a continuing obligation through to settlement.

[23]     Clause 7.1(6) is in the same form as cl 7.1(3).  Both address the state of the vendor’s  knowledge as  at  the date of execution  of the contract.    Clause 7.1(3) confirms there is no extant claim and cl 7.1(6) confirms there is no knowledge or notice about such potential claims.  There is no reason to construe cl 7.1(6)(b) any differently to cl 7.1(3).

[24]     Further the clause must be construed in the context of the agreement for sale and purchase as a whole.  Clause 6 for instance provides for vendor’s warranties and undertakings.   While I accept Mr Easton’s point that the clause is not specifically addressed at unit titles, cl 6.3(2) does expressly provide for a warranty in relation to an obligation arising after the date of the agreement and prior to settlement by providing:

6.3      The vendor warrants and undertakes that at settlement:

...

(2)      Any notice or demand received by the vendor, which directly or indirectly affects the property, after the date of this agreement from:

(a)      any local or government authority;  or

(b)      any person under the Resource Management Act 1991; or

(c)      any tenant –

has been delivered forthwith by the vendor to either the purchaser or

the purchaser’s solicitor, ...

(Emphasis added).

[25]     If it was intended the obligation in cl 7.1(6) was to apply, not only as at the date of execution but also, through until settlement then similar wording could have been used in cl 7.1(6).  It was not.

[26]     I also agree with Mr Hutcheson’s submission that construing the clause in this way is consistent with the nature of the parties’ interest in real estate under an unconditional contract for sale and purchase.  From the time the equitable estate in the property passes to the purchaser (which it did in this unconditional contract on execution), the vendor retains the right to possession of the property until settlement but is treated in equity as trustee of the property for the purchaser.  As noted in D W

McMorland Sale of Land (2nd  ed) 2000 at 10.06 while the vendor retains certain

rights the vendor’s obligations in that context in relation to the property are limited.

[27]     For the above reasons I conclude that the obligation under cl 7.1(6) was a warranty speaking as at the date of the agreement and that it does not apply to notice of any fact which might have arisen after the date of the agreement.

[28]     In the present case the Judge held that the vendor and appellant knew that the reason the Council had failed to issue a code compliance certificate was that there was an issue with the cladding, that remedial works were being carried out, and that the Council required a cavity system to be incorporated.   As the vendor had not disclosed the above facts the Judge held the vendor was in breach of cl 7.1(6) which the appellant was aware of and should have advised the respondent about.

[29]     However, as those issues only came to the knowledge of the vendor after the date of execution of the agreement, there was no obligation under the contract to inform the respondents and no ability for the respondents to cancel the contract for breach of cl 7.1(6).

[30]     It follows that I conclude the Judge was wrong to hold that the respondents were entitled to cancel the agreement for sale and purchase for breach of warranty under cl 7.1(6).  The appellant cannot be liable for failing to advise them they could cancel in reliance on cl 7.1(6), as they were not entitled to do so.

[31]     To that extent the appeal must be allowed.

[32]     However, I agree with the Judge’s alternative factual finding that, even if the respondents  were  obliged  to  settle,  they  may  still  have  sustained  loss  as  a consequence of the appellant’s breach of duty to them.  As Mr Eade, the expert’s conveyancer said, 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 moneys into a solicitor’s trust account until the code compliance certificate issue was resolved.  In both situations they would have had a measure  of  protection  until  the  issue  of  the  code  compliance  certificate  was addressed.

[33]     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.

Result

[34]     The appeal is allowed in part. There will be declarations:

(a)      the respondents were not entitled to cancel the contract in reliance upon a breach of cl 7.1(6);

(b)confirming  that  the  appellant  was  in  breach  of  the  duty  to  the respondents by failing to advise them of the full reasons the code compliance certificate was not issued.

Costs

[35]     The appellant is entitled to costs which I fix on a 2B basis together with disbursements as fixed by the Registrar.

Venning J