IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV [2015] NZHC DENISE MICHELLE ROOSE First Plaintiff

Transcription

1 IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV [2015] NZHC 2035 BETWEEN AND AND AND AND DENISE MICHELLE ROOSE First Plaintiff DENISE DEVELOPMENTS LIMITED Second Plaintiff DMR DEVELOPMENTS LIMITED Third Plaintiff CRAIG DUTHIE AND KIRSTEN TAYLOR-RUITERMAN First Defendants DRK CHARTERED ACCOUNTANTS LIMITED Second Defendant Hearing: 11 March 2015 Appearances: K Crossland and S Langston for Plaintiffs G Pearson and L Pelly for Defendants Judgment: 27 August 2015 JUDGMENT OF TOOGOOD J This judgment was delivered by me on 27 August 2015 at 3:00 pm Pursuant to Rule 11.5 High Court Rules Registrar/Deputy Registrar ROOSE v DUTHIE [2015] NZHC 2035 [27 August 2015]

2 Table of Contents Paragraph Number Introduction [1] The pleaded claims [5] The limitation and pleading issues [7] The factual background alleged by the plaintiffs [11] The preliminary questions for determination [29] Commencement of the limitation periods in contract and tort Do the plaintiffs have an arguable claim that the defendants breached a duty of care under the contract of retainer in connection with advice given regarding the purchase of the property by DMR? The plaintiffs allegation of a continuing duty to correct the erroneous tax advice [30] [33] [36] The defendants arguments [37] Could Mr Duthie have owed Ms Roose a continuing duty in contract, to correct his mistake, that was breached on 2 May 2008? [39] Midland Bank Trust Co Ltd [40] Bell v Peter Browne Co [46] James v McMahon [51] Conclusions on claim in contract based on negligent advice Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care in tort in connection with advice regarding the purchase of the property by DMR? [55] [63] Submissions for the defendants [64] Submissions for the plaintiffs [69] Thom v Davys Burton [79] Discussion and conclusion on tort claims [83] Does s 28 of the Limitation Act 1950 allow an extension of the time for bringing the plaintiffs claims in contract and tort as a consequence of fraud in connection with advice given regarding the purchase of the property by DMR? [87]

3 Table of Contents Alternative argument against claim in equity for breach of fiduciary duty Do the plaintiffs have a claim for relief against the defendants under the Contractual Mistakes Act 1977 which is saved by s 28 of the Limitation Act? Paragraph Number [93] [98] Relevant provisions [101] The plaintiffs argument [106] The defendants response [108] Discussion and conclusion on Contractual Mistakes argument [112] Summary of findings [119] Order granting leave to amend pleadings [120] Costs [121]

4 Introduction [1] Ms Roose, the first plaintiff, is a real estate agent and a director and shareholder of the second plaintiff, Denise Developments Ltd ( DDL ), and the third plaintiff, DMR Developments Ltd ( DMR ). [2] The first defendants, Mr Duthie and Ms Taylor-Ruiterman, carried out business as chartered accountants in partnership as Duthie Taylor Ruiterman ( DTR ) until around March The second defendant, DRK Chartered Accountants Ltd ( DRK ) is another chartered accountancy business of which Mr Duthie is a director and shareholder. [3] Mr Duthie was a trustee of the Denise Roose Family Trust. From 1994, Mr Duthie was Ms Roose s accountant whom she engaged through DTR and then, from 2009, through DRK. Ms Roose also engaged Mr Duthie in his capacity as an exclusive adviser for a broad range of business, trust, financial planning, accountancy and taxation matters as required from time to time. [4] In essence, it is alleged in the proceeding that DDL entered into an agreement for the transfer of land to DMR in reliance on the incorrect advice of Mr Duthie that the sale would not attract tax. The Inland Revenue Department required DDL to pay tax of $339, It is said that Mr Duthie was under an obligation to correct the position, before the transfer of the property on 2 May 2008, once he learned that he had erred, and that Mr Duthie breached duties owed to the plaintiffs in connection with the preparation of financial statements and tax returns, and in his dealings with a tax review and audit by the IRD. The pleaded claims [5] Ms Roose, DDL and DMR have collectively brought claims in contract, tort and equity against the defendants. The claims are:

5 (a) Claims alleging breaches of a duty of care under the contract of retainer, in tort, and in equity, asserting negligence in connection with advice given regarding the purchase of the property by DMR. (b) Claims alleging breaches of a duty of care under the contract of retainer, in tort, and in equity, asserting negligence in connection with the compilation and filing of the plaintiffs 2009 financial statements and 2009 tax return. (c) Claims alleging breaches of a duty of care under the contract of retainer, in tort, and in equity, asserting negligence in connection with the Inland Revenue Department s tax review and subsequent audit. (d) A claim under the Contractual Mistakes Act 1977 asserting that the sale and purchase agreement was entered into by a common mistake. [6] The alleged losses for which damages are claimed comprise: (a) The total adverse fiscal outcome of the incidence of tax $413, (b) Losses on the capital increase in the value of properties sold to meet the tax liability and the cost of dealing with the IRD audit $796, (c) Other fees related to the audit $39, The limitation and pleading issues [7] The proceeding was filed on 1 May 2014, one day less than six years after settlement of the transfer of the property giving rise to the tax liability. The plaintiffs assert that the proceeding has been brought in time because Mr Duthie was in breach of contractual duties at the time of the settlement of the transaction on 2 May 2008, and that the loss arising from the imposition of tax occurred after settlement so that the cause of action in tort did not accrue until then. The plaintiffs also plead

6 equitable fraud and mistake and seek to rely on s 28(c) of the Limitation Act 1950 under which the period of limitation did not begin to run until the plaintiff has discovered the fraud or mistake, or could with reasonable diligence have discovered it. [8] The defendants argue that, whatever the merits, the claims in contract and tort regarding erroneous advice are out of time in that the claims have been brought more than six years after the causes of action accrued. 1 Further, the defendants argue that a cause of action in mistake under the Contractual Mistakes Act 1977 is not available at law and that the plaintiffs should not be permitted to plead claims in equity so as to circumvent the Limitation Act. [9] By agreement with the defendants, the plaintiffs have applied to the Court to answer preliminary questions of law relating to limitation periods prior to trial on the basis that the answers may substantially dispose of what would otherwise be a sevenday trial. [10] It is not suggested in this case that the claims based on alleged breaches after 1 May 2008, in connection with the preparation of the financial statements and tax return, and the IRD audit, are time-barred; the preliminary issues concern only the claims based on the advice given in early 2008 and not corrected by Mr Duthie prior to the transfer of the property. The factual background alleged by the plaintiffs [11] Although this is not a strike-out application, I have approached the questions on the basis that the Court should assume (although not uncritically) that the plaintiffs will be able to prove the facts asserted in the statement of claim. To explain the limitation issues, it is necessary to set out the history of the dealings between the plaintiffs and the defendants over the transfer of land which has given rise to the claims. 1 Limitation Act 1950, s 4(1)(a) which, although now repealed and replaced by the Limitation Act 2010, was in force at all material times.

7 [12] Some time toward the end of 2005, Ms Roose telephoned Mr Duthie to advise her on the most suitable ownership structure for a hectare property located at 6 Grace James Road, Pukekohe ( the property ) that she was considering purchasing. In particular, Ms Roose wanted to know if using a company or other entity to purchase the property would minimise her tax liability. [13] The parties disagree about the reason that Ms Roose gave to Mr Duthie for purchasing the property. Ms Roose claims that she told Mr Duthie that she intended to purchase the property to: (a) reclaim a part of the land that had been previously farmed by her forebears; (b) landscape a portion of the property to create a walkway and park-like grounds with a commemorative plaque remembering and celebrating the Roose forebears who had farmed the property; (c) adjust the boundary between the property and the adjoining property at 4 Grace James Road owned by the Trustees of the Denise Roose Family Trust; (d) graze livestock in the interim; and (e) build a new home for her own use. [14] Mr Duthie says that Ms Roose told him that she intended to subdivide the property and sell the lots for a profit. [15] Mr Duthie, who is not an expert in tax, took advice from an accounting firm with tax expertise. That firm advised him that the Inland Revenue Department would tax any sale of the land if Ms Roose were to develop it. Accordingly, they advised Mr Duthie that Ms Roose should purchase the property through a company to minimise the tax liability she would incur.

8 [16] Ms Roose claims that on 28 October 2005 Mr Duthie told her that a company would be the best entity to purchase the property. On 21 December 2005, DDL was incorporated for that purpose; Mr Duthie registered the company for GST and specified in the GST registration application for that the company was in the business of property development. The purchase was settled on 27 January [17] In March 2006, Ms Roose met with Birch Surveyors Ltd to consider creating a public reserve on part of the property and to adjust the boundary between the property and the adjoining property. [18] In April 2006, DTR prepared a draft annual financial statement and tax return for the preceding tax year. The draft annual financial statements specified that DDL s business was property development. Ms Roose pleads that, during her review of the 2006 financial accounts in May 2006, she told Mr Duthie that neither she nor DDL were property developers. Mr Duthie disputes this. He says that Ms Roose told him that she was now thinking of subdividing the property again and asked about income tax, GST and gift duty implications. Mr Duthie went back to the accounting firm for tax advice. He then advised Ms Roose that if the company subdivided the property it must pay tax on any subsequent sale. [19] On 31 May 2006, Mr Duthie recorded in the 2006 annual financial statements submitted to the Companies Office and the IRD that DDL was a property developer. [20] On 11 December 2006, Birch Surveyors applied to the Franklin District Council on behalf of DDL with proposals to create a public reserve, to adjust the boundary between the property and the adjoining property and to subdivide the property into 11 sections. Following a query from the Council over the application, Ms Roose sought Mr Duthie s advice on whether gifting or selling part of the property to the Council would have any tax consequence and, if so, how to minimise it. Mr Duthie says that Ms Roose had asked him to advise her on undertaking a 20- section subdivision. [21] In June 2007, Mr Duthie sought assistance in obtaining this information for Ms Roose by ing the tax experts yet again. In seeking the advice, Mr Duthie

9 told the tax experts that Ms Roose was completing a 20-section sub-development of the property through a trading trust and that the purpose of creating a reserve was to obtain the Council s consent to the proposed subdivision. [22] In July 2007, after obtaining further advice from the tax experts, Mr Duthie advised Ms Roose, that: (a) A sale or gifting of land to the Council would result in an obligation to pay either gift duty or GST and income tax. (b) To avoid that occurring, the property development could be conducted through a trading trust with the Council being one of the beneficiaries. (c) Ms Roose would have to pay GST and income tax on any sale of the sections of the proposed subdivision. [23] In November 2007, the Council granted resource consent in part. This permitted Ms Roose to subdivide the property into seven sections. The Council declined Ms Roose s proposal to create a public reserve. [24] In early 2008, Ms Roose asked Mr Duthie to advise her on protecting the property from any relationship property claims. Mr Duthie orally advised Ms Roose: (a) to transfer the property from DDL to a trust; (b) that the transfer from DDL to the trust would not attract income tax; and (c) that the sale between DDL and the trust would be as a going concern for GST purposes. [25] In reliance on Mr Duthie s advice, Ms Roose incorporated DMR on 12 February The DMR Development Trust was settled under deed dated 14 April On the same day, on behalf of DDL and DMR, Ms Roose executed a sale and purchase agreement by which DDL sold the property to DMR for

10 $1,950,000. The agreement initially recorded that the settlement date was 21 April 2008, but settlement was varied to occur on 2 May On behalf of DMR, Ms Roose signed an acknowledgment of debt in favour of DDL for $1,950,000. [26] The transfer of the property from DDL to DMR was settled on 2 May [27] On 14 June 2009, Mr Duthie completed DDL s 2009 financial statements and a 2009 tax return and submitted them respectively to the Companies Registrar and to the Inland Revenue Department. The IRD reviewed DDL and DMR during that period and found that DDL owed tax on the sale of the property in the amount of $385,415.40, as well as a shortfall penalty. A settlement was later made with the IRD under which DDL paid $339, in tax. [28] Ms Roose claims that DDL sold the land relying on the alleged advice that a sale without tax was possible. The preliminary questions for determination [29] The preliminary questions the Court is required to decide on this application are: (a) Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care under the contract of retainer in connection with advice given regarding the purchase of the property by DMR? In that regard, did Mr Duthie owe Ms Roose a continuing duty in contract to correct his mistake, which was breached on 2 May 2008? (b) Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care in tort in connection with advice regarding the purchase of the property by DMR? In that regard, did DMR s loss arise when the transfer settled on 2 May 2008 and the vendor became liable to pay tax on the proceeds of sale, or as soon as

11 the vendor and the purchaser entered into binding legal obligations with one another on 14 April 2008? (c) Does s 28 of the Limitation Act 1950 allow an extension of the time for bringing the plaintiffs claims, either in contract or tort, as a consequence of fraud in connection with advice given regarding the purchase of the property by DMR? 2 (d) If the pleaded claims in contract and tort for negligent misstatement are time-barred, is the plaintiffs claim for breach of fiduciary duty barred under the Limitation Act 1950 by analogy because the plaintiff is endeavouring to put the same essential allegations on two different bases, one at law asserting negligence and the other in equity asserting breaches of fiduciary duty? (e) Do the plaintiffs have a claim for relief against the defendants under the Contractual Mistakes Act 1977 which is within time by virtue of s 28 of the Limitation Act? Commencement of the limitation periods in contract and tort [30] Before turning to consider the preliminary questions, I set out the general rules relating to the commencement of limitation periods in contract and tort. [31] Section 4(1)(a) of the Limitation Act 1950 provided that actions founded on simple contract or on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued. It is common ground that causes of action in contract accrue when the breach of contract occurs, without the need for actual loss or damage. 3 It is also not disputed that a cause of action in negligence arises when the plaintiff first sustains a loss attributable to a breach of a duty to the 2 3 Section 28(c) of the Limitation Act 1950 provides that where, in the case of any action for which a period of limitation is prescribed by the Act, the action is for relief from the consequences of fraud or a mistake, the period of limitation shall not begin to run until the plaintiff has discovered the fraud or mistake, or could with reasonable diligence have discovered it. Gedye v South [2010] 3 NZLR 271 (CA and SC).

12 plaintiff. This is so even if quantification was, at the point in time, difficult or dependent on further contingencies. 4 [32] To pursue any claim alleging a breach of contractual duty, the plaintiffs must establish that the breach occurred on or after 1 May 2008 and, in order for any negligence claim to be in time, the plaintiffs must show that they first sustained a loss attributable to the defendants breach of duty on or after that date. Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care under the contract of retainer in connection with advice given regarding the purchase of the property by DMR? [33] The plaintiffs submit that under his contract with Ms Roose, Mr Duthie was under an implied obligation to act as a reasonable and transparent adviser. The amended statement of claim alleges that breaches of this duty occurred before settlement of the sale and purchase on 2 May 2008 in that the defendants: (a) failed to ascertain or clarify DDL s primary purpose in purchasing the property in 2005; (b) failed to properly consider the risk of how DDL s purpose in purchasing the property in 2005 would affect DDL s future taxation treatment in transferring the property; (c) failed to properly consider the risk of how DDL s purpose in purchasing the property in 2005 would be interpreted in the light of DDL s financial statements, DDL s 2006 GST registration form and its subsequent conduct in applying to subdivide the property; (d) failed to explain and advise Ms Roose, DDL and DMR that the transfer of the property would or may give rise to income tax obligations; 4 Thom v Davys Burton [2008] NZSC 65, [2009] 1 NZLR 437.

13 (e) incorrectly informed Ms Roose and DDL that the transfer of the property from DDL to DMR would be tax free from an income perspective; (f) failed to correct or modify the advice that the transfer would be tax free; and (g) failed to provide an alternative re-structure that would avoid negative tax consequences. [34] Accepting that a cause of action in contract accrues when the breach of contract occurs, a breach in the form of incorrect advice would have occurred when the advice was given or, at the latest, when the sale and purchase agreement was executed on 14 April 2008 in reliance upon it. The plaintiffs do not now argue that they can rely on any breach of contract by the giving of negligent advice in early 2008, but they submit that there is an alternative ground on which the contract claim based on the advice can be found to be in time. That is, that if Mr Duthie had knowledge of his mistake before settlement occurred on 2 May 2008, he was under a continuing obligation under his retainer to correct his mistake right up until the settlement date. [35] I am required to consider whether this argument is available to the plaintiffs on the pleadings as a matter of law. If so, whether either ground is actually made out will be a matter for the trial judge to determine. The plaintiffs allegation of a continuing duty to correct the erroneous tax advice [36] The plaintiffs submit that the unique circumstances of the transaction would have enabled Ms Roose to unwind it if Mr Duthie had informed her of his error before the settlement on 2 May Although not disputing that a breach of the duty to give correct advice occurred when the advice was given, or when the sale and purchase agreement was executed, Mr Crossland argues that, if the Court accepts at trial that Mr Duthie knew or ought to have known before settlement that the sale was taxable, and that he failed to correct his error by advising Ms Roose of the position, a

14 further breach of contractual duty occurred on 2 May 2008 when Mr Duthie failed to correct his advice before settlement of the transaction. Consequently, the filing of the proceeding on 1 May 2014 was within the limitation period by one day. The defendants arguments [37] The defendants argue that the breach of contract occurred in early 2008 when, as pleaded by the plaintiffs, Mr Duthie gave the negligent advice. Since the damage resulting from the breach occurred when the sale and purchase agreement was entered into on 14 April 2008, a failure to provide preventative advice after that date cannot be causative of the plaintiffs loss. The defendants emphasise that the Supreme Court in Murray v Morel & Co Ltd 5 rejected the proposition that the time a cause of action accrues can be extended, through the principle of reasonable discoverability, to a time when a plaintiff has knowledge that he or she suffered a loss. Tipping J (who delivered the principal judgment for the majority on the limitation issue) said: 6 In my view the numerous references in the Limitation Act to accrual of a cause of action can only be construed as references to the point of time at which everything has happened entitling the plaintiff to the judgment of the court on the cause of action asserted. Save when the Limitation Act itself makes knowledge or reasonable discoverability relevant, the plaintiff's state of knowledge has no bearing on limitation issues. Accrual is an occurrencebased, not a knowledge-based, concept. The Limitation Act as a whole is structured around that fundamental starting point. The periods of time selected for various purposes must have been chosen on that understanding. The circumstances of postponement and extension have themselves been similarly framed. [Emphasis added] [38] I agree that, while that case did not involve an action in contract or tort, Tipping J was speaking generally and the principle applies here. The defendants accordingly submit that the cause of action in contract began to run in early 2008 when the contractual obligation concerning tax advice was first breached and the claim based on the incorrect advice is time-barred. 5 6 Trustees Executors Ltd v Murray [2007] NZSC 27, reported as Murray v Morel & Co Ltd [2007] 3 NZLR 721. At [69].

15 Could Mr Duthie have owed Ms Roose a continuing duty in contract, to correct his mistake, that was breached on 2 May 2008? [39] I have considered the cases relied upon by Mr Crossland for the plaintiffs to support his contention that Mr Duthie owed Ms Roose a continuing duty in contract to correct his erroneous advice up to the point at which the sale and purchase agreement was settled on 2 May 2008, and that it was breached when the transaction settled without Mr Duthie having corrected his advice. Midland Bank Trust Co Ltd [40] In Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp, 7 Walter Green agreed to grant his son Geoffrey Green an option to purchase from him a farm in Their solicitor, Mr Stubbs, had negligently failed to register an option to purchase the land. Sometime later, in 1967, Walter Green discovered that the option had never been registered and defeated it by selling the land to his wife. Between the failure to register the option and the sale of the land, the solicitor had been asked at various times by Geoffrey Green to consider whether or not the option ought to be exercised. The solicitor had given advice on those occasions without considering whether or not the option had in fact been registered. Geoffrey Green s estate made a claim against the solicitor for breach of contract in The defendant sought to rely on the United Kingdom Limitation Act 1939 and submitted that the plaintiff s action had already become time-barred before the date of the sale and conveyance of the farm to Walter Green s wife. The plaintiff argued that the solicitor was under a continuing duty to ensure that the option had been duly registered which arose from time to time whenever any advice was sought in relation to the option. [41] It was held that the duty is directly related to the confines of the retainer and that it is not seriously arguable that a solicitor who, or whose firm, has acted negligently comes under a continuing duty to take care to remind himself of the negligence of which, ex hypothesi, he is unaware. 8 In response to the submission that, because the exercise of the option was crucial to the scheme which Geoffrey Green was proposing in June 1967, it then became Mr Stubbs's duty to consider and 7 8 Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384. At 403.

16 check on the registration of the option, the Judge held that that was not what the solicitor was asked to do. The instructions were given in the context of an agreement between father and son who were on friendly terms and against the background that Mr Stubbs's firm had, for years, acted as solicitors for both parties and would expect to know if Walter was contemplating any sale of his property. 9 [42] The Court said there was no reason why the possibility of Walter Green's disposing of the land in defiance of the option should then have been present in the solicitors mind nor why the instructions to advise as to the tax and death duty consequences should have suggested to him that he ought to check whether the option had been registered. It followed that, if there was no continuing duty to register up to that point, there was nothing in the instructions given in June 1967 which would have revived it or created some fresh duty in Mr Stubbs to consider whether or not the option had been registered. 10 [43] Mr Crossland argued, however, that Oliver J accepted an alternative proposition, that the solicitor had a continuing duty under his retainer to effect a valid registration of the option. The Judge distinguished this from a duty to correct erroneous advice. He found that the duty to effect a valid registration was breached when registration became impossible on the sale of the land to a third party. 11 On that basis, the limitation defence failed. [44] As I understand it, the proposition advanced by Mr Crossland on behalf of the plaintiffs is that, because the property transfer was between closely-related parties, it could have been unwound at any time up to settlement and that Mr Duthie continued to be involved in the matter. [45] I am not persuaded that what is argued for the plaintiffs in reliance on this case is any different from an assertion that Mr Duthie had a continuing duty to correct the erroneous advice already given, a proposition rejected by Oliver J. There was no continuing duty in this case for Mr Duthie, an accountant, to do anything in Above. Above. At

17 relation to the property settlement which could be said to be similar to a duty to register an option. Bell v Peter Browne Co [46] The decision in Midland Bank Trust Co Ltd provides an example of the principle that whether a claim in contract is brought within the limitation period turns upon the identification of the nature of the contractual duty and the timing of the alleged breach. That principle was in play in Bell v Peter Browne Co (a firm), 12 also referred to me by Mr Crossland. In that case, the plaintiff, Mr Bell, consulted the defendant firm regarding the breakdown of his marriage in October One of the points he discussed with his solicitors concerned what was to happen to the matrimonial home which was registered in the joint names of his wife and himself. It was worth about 12,000 and subject to a mortgage for about 8,000. If the house had then been sold, Mr Bell would have received about 2,000. Mr Bell and his wife agreed that the house would not be sold for the time being, but that Mr Bell he was to receive one-sixth of whatever might be the gross proceeds when a sale did take place. Meanwhile, the house would be transferred into the sole name of the wife and Mr Bell s continuing interest in value of the matrimonial home would be protected by a trust deed or a mortgage. [47] On 1 September 1978, Mr Bell executed a transfer of the house into his wife's sole name but no steps were taken by his solicitors to protect his one-sixth share in the proceeds of sale. No declaration of trust or mortgage was prepared or executed; no caution was registered at the Land Registry. The parties were divorced in the following year. In December 1986, Mr Bell learned from his former wife that she had sold the property for 33,000 in July 1986, almost eight years after the property had been transferred into her sole name. She had spent all the proceeds and Mr Bell was thus deprived of his one-sixth share. Mr Bell brought an action against his former solicitors for damages for professional negligence. The writ was issued on 20 August The issue was whether the action was statute-barred. 12 Bell v Peter Browne Co (a firm) [1990] 2 QB 495 (EWCA).

18 [48] The English Court of Appeal found that the continuing failure to correct the solicitor s omission did not constitute a new breach of duty. Lord Justice Nicholls accepted that the solicitor's breach of contract in 1978 did not discharge his obligations. 13 But although the plaintiff would have been entitled to go back to his former solicitor and require him to carry out his contractual obligations belatedly, so far as they could still be performed, the breach had occurred and failure thereafter to make good the omission did not constitute a further breach. It was simply the case that the breach in 1978 remained unremedied. 14 The Court held, significantly, that the position would not have been different if in, say 1980, the plaintiff's solicitor had been asked to remedy his breach of contract and he had failed to do so. His failure to make good his existing breach of contract on request would not have constituted a further breach of contract so as to set a new six-year limitation period running. The position would have been simply that the solicitor remained in breach. And the position was not any different because the breach remained remediable until 1986 when the house was sold: a remediable breach is just as much a breach of contract when it occurs as an irremediable breach, although the practical consequences are likely to be less serious if the breach comes to light in time to take remedial action. The Court said: 15 Were the law otherwise, in any of these instances, the effect would be to frustrate the purpose of the statutes of limitation, for it would mean that breaches of contract would never become statute-barred unless the innocent party chose to accept the defaulting party's conduct as a repudiation or, perhaps, performance ceased to be possible. [49] The Court added that those observations were directed at the normal case where a contract provides for something to be done, and the defaulting party fails to fulfil his contractual obligation in that regard at the time when performance is due under the contract. In such a case there is a single breach of contract. The Court contrasted, however, the exceptional cases where, on the true construction of the contract, the defaulting party's obligation is a continuing contractual obligation. In such cases the obligation is not breached once and for all, but it is a contractual obligation which arises anew for performance day after day, so that on each At 500. At 501. Above.

19 successive day there is a fresh breach. 16 So, Lord Justice Nicholls distinguished the decision of Oliver J in Midland Bank Trust Co. Ltd on its facts as one such case. He explained that the defendant firm of solicitors in that case never treated themselves as functi officio in relation to the option; that they continued to have dealings with their client in respect of the unregistered option; and that the obligation to register the option continued until it was no longer possible to do so. That position was to be contrasted with Mr Bell s case. There was no suggestion that the defendants had any further contact with Mr Bell or his affairs after the conclusion of the divorce proceedings. That was more than six years before the writ was issued. The amended statement of claim alleged that the solicitors owed a "continuing duty" to protect Mr Bell's one-sixth beneficial interest until that duty could no longer be fulfilled or the plaintiff accepted the solicitors' breach as repudiation, but the alleged continuing duty was not founded on any facts other than the initial retainer and it did not take the plaintiff's case any further. 17 [50] I do not detect anything in Bell which assists the plaintiffs. On the essential facts of the two cases, the reasoning of the English Court of Appeal applies here. James v McMahon [51] The decisions in Midland Bank Trust Co. Ltd and Bell v Peter Browne Co were considered by the New Zealand High Court in James (as trustees of the James Family Trust v McMahon, 18 a case in which the plaintiffs raised arguments similar to those advanced in this case. The plaintiffs owned commercial premises, the ground floor of which they leased to Alexandra Park Functions Limited ( Alexandra Park ) in 2005, through two lease agreements. The leases were guaranteed by Auckland Trotting Club Incorporated ( Auckland Trotting ), a subsidiary of Alexandra Park. Alexandra Park wanted to reorganise the leases. It arranged to surrender the old leases on the basis that new renewable leases for three terms of three years would be executed with Alexandra Park as tenant and Auckland Trotting as guarantor. It was agreed that Auckland Trotting would guarantee the leases until the final expiry date Above. Above. James (as trustee of the James Family Trust) v McMahon [2013] NZHC 3018.

20 in 2015, assuming that the renewals were exercised. But the plaintiff s solicitors failed to ensure that the lease obligations were guaranteed beyond September [52] The defendant solicitors had further dealings with the plaintiffs and the tenants, which occurred in situations where the tenants were in default of paying rent. The defendants were retained to develop strategies to deal with the defaults. The plaintiffs submitted that on each of these occasions they expressly or impliedly raised with the defendants the plaintiffs on-going entitlement to rely on Auckland Trotting s guarantee, and that there accordingly arose a fresh obligation on each occasion for the defendants to check the documents in order to ensure that there was indeed an enforceable guarantee for the whole of the lease period. [53] Justice Allan considered the decisions in Midland Bank Trust and Bell. Consistently with the view of the Court of Appeal in Chief Executive Land Information New Zealand v Te Whanau O Rangiwhakaahu Hapu Charitable Trust, 19 he held that those authorities demonstrated that the defendants, having negligently drafted or approved the Auckland Trotting guarantee, were not under some sort of general continuing duty to rectify the error. Neither did it matter that Mr James subsequently asked the defendants to confirm that he remained entitled to hold Auckland Trotting liable on its guarantee on more than one occasion. The Judge agreed with Oliver J in Midland Bank Trust that it is not seriously arguable that a solicitor who has acted negligently comes under a continuing duty to take care to remind himself of the negligence of which he is unaware. 20 [54] Justice Allan accepted that the position might well have been different had Mr James given the defendants explicit instructions which of necessity required them to reconsider the express terms of the Auckland Trotting guarantee, but held that that had not occurred. The plaintiffs evidence was to the effect that Mr James consulted the defendant from time to time in the context of on-going difficulties with the lessees, for the purpose of getting advice about an appropriate strategy. A claim against Auckland Trotting was no doubt one of the options available to the plaintiffs, but given that there had never been any doubt as to the efficacy of the Auckland Chief Executive Land Information New Zealand v Te Whanau O Rangiwhakaahu Hapu Charitable Trust [2013] NZCA 33, [2013] NZAR 539. James (as trustee of the James Family Trust) v McMahon, above n 18, at [43].

21 Trotting guarantee, the instructions would not have extended to a requirement that the defendants conduct a review of the guarantee in order to ensure that it accurately reflected the instructions given by the plaintiffs in The plaintiffs subsequent dealings with the defendants in respect of various assignments and lessee defaults did not in the circumstances give rise to a fresh cause of action based upon an allegation that the defendants had failed at some later point in time to check the validity of the Auckland Trotting guarantee. 22 Conclusions on claim in contract based on negligent advice [55] The conclusion to be drawn from Te Whanau O Rangiwhakaahu Hapu Charitable Trust, James v McMahon and the English cases is that, in the absence of Mr Duthie becoming aware prior to the transfer of the property that he had given erroneous tax advice, he was not under a continuing duty in contract to rectify the breach founded on his advice. Although the plaintiffs allege that Mr Duthie continued to be engaged by them over the relevant period, he was not in the same position as the solicitors in Midland Bank Trust who remained under a continuing duty to register the option up to the time at which that was no longer possible. [56] The decisions provide examples of the principle that whether a claim in contract is brought within the limitation period turns upon the identification of the nature of the contractual duty and the timing of the alleged breach. It is convenient to adopt the point made by the Court of Appeal in Te Whanau O Rangiwhakaahu Hapu Charitable Trust that there is a difference between a continuous breach and the failure to rectify a breach that has already occurred. 23 When a defendant has omitted to do something that they have contracted to do, the breach (in their failure to act) is continuous, and the duty may be complied with, up to the point when performance is no longer possible. This may be compared with situations, as existed here, where a defendant who is under a duty (in this case, to give competent advice) has acted in a manner that breaches that obligation. In such a case the breach of contract occurred At [44]. At [45]. Chief Executive Land Information New Zealand v Te Whanau O Rangiwhakaahu Hapu Charitable Trust, above n 19, at [141].

22 when the defendant acted in a manner contrary to the duty, although the breach may have been capable of remediation before loss or damage was suffered. [57] Here, the breach occurred well before the settlement of the property transfer on the giving of the negligent advice or on 14 April 2008 at the latest, when the sale and purchase agreement was entered into and the cause of action in contract accrued at the time that the breach occurred. There was no additional continuous contractual obligation to rectify that breach, which, if not fulfilled, would have constituted a further breach when rectification became impossible. As the Court of Appeal identified, if the plaintiffs argument were to be accepted, it would apply to every contractual dispute in which a defendant has failed to rectify a breach (almost every contract claim) and would render s 4 of the Limitation Act almost entirely redundant in contract cases. 24 [58] To found an arguable claim based on the allegations concerning incorrect tax advice by Mr Duthie and his failure to rectify it prior to the transfer of the property, the plaintiffs must establish that a fresh duty arose one that was in continuing effect on 2 May 2008 and that it was breached at the time of the transfer on that date. That is not the case here. The allegations of breach set out at [76] of the amended statement of claim 25 are either based on alleged failures prior to or at the time of the giving of the advice in early 2008, 26 or failures to remedy 27 which, without more, I have held do not amount to actionable breaches. [59] I have not overlooked that the plaintiffs allege that Mr Duthie was under a duty, on learning of any error in the provision of past services and/or advice to promptly notify Ms Roose of such an error 28 and to correct or modify the advice or provide an alternative re-structure that would avoid negative tax consequences. This argument is advanced on the basis that Mr Duthie was under a professional obligation to draw his negligence to the attention of his client once he became aware of it. 29 In that event, because of the nature of the relationship between the transferor Above. Set out in this judgment at [33]. At [76.1] to [76.5] of the amended statement of claim. At [76.6] and [76.7] of the amended statement of claim. At [9.1(m)] of the amended statement of claim. Relying on Gold v Mincoff [2001] Lloyd s Law Reports 423, a case involving a solicitor but

23 and transferee of the property, the agreement for sale and purchase could have been set aside and an alternative means of achieving Ms Roose s objectives might have been adopted. [60] The plaintiffs do not allege in the amended statement of claim, however, that Mr Duthie actually knew prior to May 2008 that he had made a mistake, nor that something had occurred from which he ought to have known of his error. Neither do the plaintiffs allege in the present case that, immediately prior to the settlement of the transfer, Mr Duthie had been given a fresh instruction to view and confirm his earlier advice. [61] As presently pleaded, therefore, the claim in contract based on the negligent misstatement as to the tax effect of the transaction was brought outside the limitation period and cannot proceed. [62] I deal later with Mr Crossland s alternative argument that s 28 of the Limitation Act 1950 allows an extension of the time for bringing the plaintiffs claim in contract for negligent advice and turn next to the claim in tort alleging negligent advice. Do the plaintiffs have an arguable claim, brought within time, that the defendants breached a duty of care in tort in connection with advice regarding the purchase of the property by DMR? [63] It is not disputed that Mr Duthie owed a duty of care in tort to exercise reasonable care and skill in his dealings with the plaintiffs. Although the defendants deny the other particulars of alleged breaches in tort, it may be assumed for present purposes that the provision of incorrect tax advice in early 2008 about the taxability of the property transfer was a breach of the duty to exercise reasonable care and skill. Submissions for the defendants [64] The defendants say, however, that the cause of action in tort, so far as it rests on the provision of incorrect tax advice, accrued when the plaintiffs first sustained a applicable, in the plaintiffs submission, to an accountant by analogy.

24 loss attributable to the defendants breach of duty. 30 They argue that the cause of action accrued on 14 April 2008 when the transferor and transferee entered into the unconditional sale and purchase agreement, and DMR gave an unconditional acknowledgment of the debt for the purchase price. [65] Mr Pearson submits for the defendants that the decision of the Supreme Court in Thom v Davys Burton 31 determines when the plaintiffs suffered the loss through the negligent advice. The facts of Davys Burton, which are explained in more detail at [79]-[80], involved a claim by Mr Thom against his solicitors for negligent advice about entering into an agreement under the Matrimonial Property Act The solicitors advice resulted in the agreement being unenforceable. The Court held that a person suffers loss in tort at the point in time when, through the negligence of the defendant, he did not obtain the rights he should have obtained and could immediately recover the cost of putting it right, even though that cost may not be immediately ascertainable. Applying that principle, the Supreme Court concluded that Mr Thom suffered a loss when the parties executed the matrimonial property agreement, when the marriage failed. [66] Mr Pearson submits, therefore, that it was on 14 April 2008, when DDL and DMR entered into a binding agreement, that the sale of the land was unconditional and DMR was legally obliged to complete the purchase of the property, triggering the liability to pay tax under CB14(1) of the Income Tax Act When the income is derived is not relevant, in counsel s submission; the liability arises upon the disposal of the land. [67] In Mills v Commissioner of Inland Revenue, 32 Hardie Boys J held disposal occurs when a sale and purchase agreement becomes unconditional because the purchaser obtains an equitable interest in the property and can sue for specific performance accordingly. So, the defendants say, applying Mills and Davys Burton to this case, the plaintiffs loss accrued when they had a binding agreement, even Thom v Davys Burton, above n 4. At [24]-[27] (per Elias CJ), at [28] (per Blanchard J) and at [46]-[51] (per Wilson, Tipping and McGrath JJ). Mills v Commissioner of Inland Revenue (1985) 7 NZTC 5,025 (HC).

25 though quantification of the full extent of their loss might be contingent on the occurrence of further events. [68] In addition, the defendants submit that it is settled law that liability for tax is not contingent on an assessment of that liability. Rather, it is an absolute liability imposed by statute which, although it may not be ascertained as to amount until assessed, is not subject to any contingency. 33 Submissions for the plaintiffs [69] The plaintiffs argue that they first sustained a loss attributable to a breach of duty on 2 May 2008 when, on settlement of the transfer, a legal debt arose and a tax liability was created. Their reasons may be summarised briefly. [70] The plaintiffs say the loss here is the liability to pay income tax. The Commissioner of Inland Revenue considered that the sale of the property was taxable under either s CB6 or s CB14 of the Income Tax Act. The sections both describe income as an amount that a person derives from disposing of land. Derivation here means when a debt is due from the purchaser and can be recovered accordingly. Pursuant to these sections, the tax liability is triggered only when the person accrues or derives an amount of money for the sale of the land. So, if a taxpayer is yet to have incurred the income but is merely expecting it, he is not, at that point in time, liable for income tax and has suffered no loss. [71] The plaintiffs say it does not matter that equitable title may have passed to the purchaser on 14 April 2008 because the vendor could not then sue for the purchase price. The vendor s loss occurred when the income was derived and the sum was less than anticipated because of the tax liability, not when the land was disposed of. In that event, the Court should not consider itself bound by the view of Hardie Boys J in Mills v Commissioner of Inland Revenue. 34 Mr Crossland argues that the court in Mills did not consider whether the income was actually derived at the time the sale and purchase agreement went unconditional BNZ Finance Ltd v Holland (1997) 18 NZTC 13,156 (CA) at 13,168 (per McKay J). Mills v Commissioner of Inland Revenue, above n 32.

26 [72] The plaintiffs seek to rely, instead, on the decision of the Australian Federal Court in Gasparin v FCT 35 in which a developer entered into several land sale and purchase agreements. The agreements became unconditional before, but did not settle until after, the end of the financial year. The Court determined that income is derived when a legal debt arises in respect of the property disposed of: 36 the joint venturers derived income from the sale of the allotments of land which comprised their trading stock not when the contracts became unconditional, but at settlement when a debt accrued due from each purchaser to the joint venturers. The critical consideration is the time when the debt arose. It should also be held that each allotment remained trading stock on hand until settlement, that being the point of time in a transaction for the sale of land under a contract of sale in terms of those before the Court when the vendor finally loses all dispositive power, and the contingency that the sale will not proceed to completion disappears. [73] The plaintiffs say it follows from this view that a legal debt generally arises at the time of settlement. Before that date, the vendor has an equitable interest in the property and may demand specific performance or damages, but he or she is not entitled to sue for the purchase price as an unpaid debt. The purchase price is the income and it is only when the income is derived that the tax liability is imposed. [74] Further, the plaintiffs argue that the Court should apply this approach because it is thought to be correct according to a tax information bulletin issued by the Inland Revenue Department 37 which cites both Gasparin and a 1924 New Zealand decision, Ruddenklau v Charlesworth. 38 [75] In Ruddenklau v Charlesworth it was held by Salmond J at first instance that, as a general rule, on the failure or refusal of a purchaser to complete an executory contract for the purchase of land the vendor is not entitled to sue for the purchase money as a debt. He is entitled merely to sue for specific performance or for damages for the loss of his bargain. It is only when the contract has been completed by the execution and acceptance of a conveyance that unpaid purchase money may become a debt and can be recovered accordingly. 39 Any exception to the rule, for Gasparin v FCT [1994] FCA At [21]. Inland Revenue Department Tax Information Bulletin Vol 16 No 5 (June 2004) at 34. Ruddenklau v Charlesworth [1925] NZLR 161. At 164. This point was not addressed in the subsequent appeal.