TA v CIB Limited [2019] NZLCRO 38 (28 March 2019)

Last Updated: 3 May 2019

	LCRO 183/2016
CONCERNING	an application for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006
AND
CONCERNING	a determination of the [Area] Standards Committee [X]
BETWEEN	TA Applicant
AND	CIB LIMITED Respondent

DECISION

The names and identifying details of the parties in this decision have been changed

Introduction

[1] Mr TA has applied for a review of a decision by the [Area] Standards Committee [X] (the Committee) which had, following completion of its inquiry into a complaint made by Mr and Mrs CI, entered a finding of unsatisfactory conduct against Mr TA.

Background

[2] Mr and Mrs CI operated a building company. The company had traded since 2009 under the name of [CIB] Ltd.

[3] Mr TA had been the lawyer for the company since its incorporation.

[4] In February 2014, the company purchased a section. Its intention was to build a residential home on the section which would then be on sold.

[5] The company dealt directly with the vendor in negotiating the sale of the section. A purchase price of $385,000 inclusive of GST was agreed.

[6] Mr TA was instructed to prepare a sale and purchase agreement.

[7] That agreement was prepared by Mr TA, on what is conventionally known as the Auckland District Law Society agreement for sale and purchase (ADLS).

[8] That agreement provides opportunity for the parties to clarify:

1. if the vendor is registered for GST in respect of the transaction;
   
2. for the purchase price to be recorded as either “plus GST if any or inclusive of GST if any”; and
   

100. for the GST status of the parties to be recorded in a specific schedule.
     

[9] Mr and Mrs CI say that it was their understanding that in advancing an offer to purchase at a GST inclusive price, the company would be able to claim back the GST component of the purchase price, following settlement. They say that they had advised Mr TA of their intention to claim back the GST paid.

[10] The transaction settled in August 2014.

[11] Following settlement, the company sought to recover the GST payment. It was advised that it was unable to do so as the compulsory zero rating provisions of the Goods and Services Tax Act 1985 required that the transaction between the GST registered entities remain GST neutral.

[12] The company endeavoured to recover the GST paid from the vendor but were unable to do so.

The complaint and the Standards Committee decision

[13] Mr and Mrs CI lodged a complaint with the New Zealand Law Society Complaints Service (NZLS) on 3 November 2015. The substance of their complaint was that:

1. Mr TA had an intimate understanding of the nature of their business and was aware of the company’s GST status;

2. Mr TA was advised to prepare the agreement on the basis of clear indication that they understood that they would be able to reclaim the GST component on the transaction;
   

100. Mr TA had failed to adequately advise them on the GST consequences of the transaction;
     

4. Mr TA failed to make adequate inquiry as to the vendor’s GST status prior to the agreement being finalised; and
   
5. they had suffered significant financial loss as a consequence of Mr TA’s failure to adequately advise them on GST matters.
   

[14] In providing response to the company’s complaint, Mr TA submitted that:

1. the company had negotiated the purchase directly with the vendor;
   
   2. his letter of engagement had identified that there was possibility of the transaction raising some tax issues;
      
   100. his clients had not raised GST issues with him;
        
   4. if they had done so, he would have advised them to consult their accountant; and
      
   5. his clients were experienced business people, familiar with buying and selling of property.
      

[15] The Committee identified the issue for the focus of its inquiry as being whether or not the alleged failure on the part of Mr TA to advise as to, and ensure the correct treatment of, GST in the transaction, constituted unsatisfactory conduct, and if, as sought by the complainant, compensation should be considered and awarded under s 156(1)(b) of the Lawyers and Conveyancers Act 2006 (the Act).

[16] Following issuing a notice of hearing on 11 February 2016 which identified the issues that the Committee was intending to address, Mr TA, through his counsel, filed further submissions. To the extent that those submissions traversed new matters, it was submitted for Mr TA that:

1. Mr TA had specific instructions to prepare the agreement on a GST inclusive basis; and

2. a failure to complete the GST schedule in the contract was a “red herring”, considering that Mr TA was asked to prepare the agreement on a GST inclusive basis.
   

[17] The Committee delivered its decision on 5 July 2016 and determined, pursuant to s 152(2)(b) of the Act that there had been unsatisfactory conduct on the part of Mr TA. Consequential on that finding, an order to pay costs and a fine were imposed.

[18] In reaching its decision the Committee concluded that:

1. Mr TA’s letter of engagement held out his firm as being able to provide general tax advice for its clients;
   
2. suggestion by Mr TA that he had never in the course of his practice provided advice on GST or other tax matters, was inconsistent with his firm’s letter of engagement;
   

100. if Mr TA specifically refrained from providing advice on GST or tax matters and did not consider that he was required to do so in respect to the specific transaction, that should have been disclosed to his clients;
     

4. Mr TA could have been expected to have been aware of the company’s GST status;
   
5. Mr TA had a duty to ensure that the GST status of the transaction was understood by his clients;
   
6. it would be expected of Mr TA, that he would have been thoroughly familiar with the provisions of the ADLS agreement; and
   
7. Mr TA had failed in a primary obligation to his clients, in that a competent and diligent lawyer experienced in residential and commercial property transactions, would be expected to know and be able to advise on, the provisions of the standard form of agreement for sale and purchase of real estate.
   

Application for review

[19] Mr TA filed an application for review on 12 August 2016.

[20] He submits that:

1. the Committee erred in failing to take into account that the company’s accountant had discussed tax issues with the vendor’s solicitors prior to settlement;
   
2. the company accountant had received a copy of a tax invoice in respect of the transaction:
   

100. the company did not seek advice from Mr TA as to the GST status of the transaction;
     

4. the company had previous experience with zero rated GST transactions;
   
5. the company had negotiated and agreed the terms of the agreement for sale and purchase with the vendors prior to Mr TA being instructed;
   
6. the company had instructed Mr TA to prepare the agreement for sale and purchase on a GST inclusive basis;
   
7. the Committee was wrong to conclude that it was unnecessary to determine whether the company communicated its intention to Mr TA to claim back GST;
   
8. the Committee was wrong to conclude that advice on the GST implications of the transaction fell within the scope of Mr TA’s retainer; and
   
9. the Committee was wrong to conclude that the obligation to address the application of the terms of the agreement to the GST status of the company was paramount.
   

Review on the papers

[21] The parties have agreed to the review being dealt with on the papers. This review has been undertaken on the papers pursuant to s 206(2) of the Act, which allows a Legal Complaints Review Officer (LCRO) to conduct the review on the basis of all information available if the LCRO considers that the review can be adequately determined in the absence of the parties.

[22] I record that having carefully read the complaint, the response to the complaint, the Committee’s decision and the submissions filed in support of and in opposition to the application for review, there are no additional issues or questions in my mind that necessitate any further submission from either party. On the basis of the

information available I have concluded that the review can be adequately determined in the absence of the parties.

Nature and scope of review

[23] The nature and scope of a review have been discussed by the High Court, which said of the process of review under the Act:1

... the power of review conferred upon Review Officers is not appropriately equated with a general appeal. The obligations and powers of the Review Officer as described in the Act create a very particular statutory process.

The Review Officer has broad powers to conduct his or her own investigations including the power to exercise for that purpose all the powers of a Standards Committee or an investigator and seek and receive evidence. These powers extend to “any review” ...

... the power of review is much broader than an appeal. It gives the Review Officer discretion as to the approach to be taken on any particular review as to the extent of the investigations necessary to conduct that review, and therefore clearly contemplates the Review Officer reaching his or her own view on the evidence before her. Nevertheless, as the Guidelines properly recognise, where the review is of the exercise of a discretion, it is appropriate for the Review Officer to exercise some particular caution before substituting his or her own judgment without good reason.

[24] More recently, the High Court has described a review by this Office in the following way:2

A review by the LCRO is neither a judicial review nor an appeal. Those seeking a review of a Committee determination are entitled to a review based on the LCRO’s own opinion rather than on deference to the view of the Committee. A review by the LCRO is informal, inquisitorial and robust. It involves the LCRO coming to his or her own view of the fairness of the substance and process of a Committee’s determination.

[25] Given those directions, the approach on this review, based on my own view of the fairness of the substance and process of the Committee’s determination, has been to:

1. consider all of the available material afresh, including the Committee’s decision; and
   
2. provide an independent opinion based on those materials.
   

Analysis

1 Deliu v Hong [2012] NZHC 158, [2012] NZAR 209 at [39]–[41].

2 Deliu v Connell [2016] NZHC 361, [2016] NZAR 475 at [2].

[26] Mr TA has filed comprehensive submissions, both in response to the complaint, and in support of his application to review the Committee decision.

[27] I intend no disrespect to those submissions when I conclude that the arguments he raises can, on review, be reduced to a consideration of two issues:

1. Did he have an obligation to advise the company of the GST implications of the agreement?
   
2. If he did have such obligation, was that obligation diminished or extinguished because of:
   
   • (i) the nature of the retainer;
     
   • (ii) instructions received by his clients;
     
   • (iii) the commercial acumen of his client; and
     
   • (iv) advice provided to his clients on the transaction by other parties.
     

Did Mr TA have an obligation to advise the company of the GST implications of the agreement?

[28] Mr TA was providing regulated services to the company.

[29] He had acted for the company for a number of years. The company was in the business of purchasing land, building homes, and selling.

[30] Having acted for the company on what Mr CI has described as numerous transactions, it could be reasonably expected that Mr TA would have developed a sound understanding of the company’s business. It could also be assumed that Mr TA was an experienced conveyancing practitioner.

[31] In providing regulated services to a client, a lawyer must always act competently and in a timely manner consistent with the terms of the retainer and the duty to take reasonable care.3

[32] It has been noted, that competence does not necessarily require an exhaustive knowledge of the law or procedure in any particular area. It entails an

3 Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008, r 3.

ability to complete the work required by finding the relevant law and applying the relevant skills.4

[33] The standard of competence is an objective one.

[34] The question is whether the lawyer applied the necessary degree of care and skill that any reasonable lawyer in the same position would have done.

[35] The requirement for lawyers to ensure that the services they provide meet a necessary level competency, is reinforced by s 12(a) of the Act which, in defining conduct which falls into the category of unsatisfactory, notes that a lawyers conduct will be considered unsatisfactory, if it falls short of the standard of competence and diligence that a member of the public is entitled to expect of a reasonably competent lawyer.

[36] While there is an existing professional duty of competence in New Zealand, albeit one which is particularly narrow, there is no duty to provide a high level of service to clients. The duty of competence is, in reality, a duty not to be incompetent and is aimed at ensuring minimum standards of service.5

[37] It is argued for Mr TA that he had no obligation to advise the company on GST matters. In part, he argues that there were specific reasons as to why any obligation he may have had to provide such advice was negated (and I will return to those shortly) but the foundation on which he builds his argument, is the contention that he was not purporting to provide tax advice and therefore could not be criticised for not having done so. He was, he says, attending to a basic conveyancing transaction. He did not, in the general course of managing his conveyancing practice, ever provide advice to his clients on GST issues.

[38] Critical to Mr TA’s argument, is an acceptance of the proposition that the nature of the conveyancing transaction was such, that it could not reasonably have been expected of him that he would be required to provide advice on tax matters.

[39] In my view, Mr TA adopts an unduly restrictive view of the extent of his obligations.

[40] Any practitioner practising in the conveyancing arena, would be expected to have a basic working understanding and appreciation of how the GST regime applies on the sale and purchase of property and an awareness that in the course of providing

4 Duncan Webb, Kathryn Dalziel and Kerry Cook Ethics, Professional Responsibility and the Lawyer (3rd ed, LexisNexis, Wellington, 2016) at [11.3].

5 At [11.3].

advice in respect to a sale and purchase agreement, that a component of that advice may require them to alert their client to possibility of the agreement having tax implications for their client.

[41] I do not put this at the level of the practitioner being expected to provide detailed and specialist advice on tax matters, but at minimum it could be expected that a competent and diligent conveyancing practitioner would be equipped to advise a client as to whether they were entitled to claim a GST refund on a straightforward purchase. If there were factors that made a determination of that issue problematical (and these matters, depending on circumstances can assume a degree of complexity) then it would be beholden on the practitioner to advise his clients to seek further advice. But at first step, it is the lawyer’s responsibility to ensure that tax implications are properly addressed.

[42] The critical issue to identify at commencement was the GST status of the parties, and whether the transaction as a consequence, was zero rated for GST purposes.

[43] The nature of the advice required to be provided did not, on the facts of this particular case, present as particularly complex or requiring of a high degree of specialist expertise.

[44] As noted above, whether a lawyer, in his or her chosen area of practice has demonstrated that he or she is able to complete the work by applying the applicable law and skills required must be considered objectively. That will largely be measured against acknowledged professional practice at the relevant time.

[45] Whilst Mr TA distances himself from any obligation to provide advice on tax issues, he cannot responsibly maintain that degree of distance when considering his responsibility to provide competent advice in respect of the agreement that he was instructed to draft.

[46] It would be expected that Mr TA would be thoroughly conversant with the ADLS agreement and aware of the need to ensure that his clients understood the contract document that was to bind them. The agreement is comprehensive.

[47] I agree with the Committee that in order to properly and adequately represent clients entering into contracts adopting the standard form agreement, lawyers must be thoroughly familiar with all of the provisions of the agreement and able to advise their clients accordingly.

[48] The agreement alerts parties to the need to be cognisant of possible GST implications. Clause 14.0 of the agreement (set out under the heading “zero – rating”) describes the GST implications when the agreement is negotiated between two GST registered parties. The section notes the particulars to be included in schedule two of the agreement.

[49] What these provisions indicate, is that a lawyer cannot, when providing advice on the standard form agreement, avoid the need to address with their client any potential GST implications.

[50] It would also be expected that Mr TA would be familiar with the Property Transactions and E-dealing Practice Guidelines (the Guidelines) promoted by the New Zealand Law Society.6

[51] Those Guidelines, whilst neither intended to provide an exhaustive checklist of a practitioner’s obligations nor intended to inhibit a lawyer from exercising professional judgement, are nevertheless designed with purpose to reflect recommended practice for property transactions and e- dealings.

[52] The Guidelines have been endorsed by the NZLS Board. The guidelines are a reflection of what experienced conveyancing practitioners consider to be “best practice” when managing property transactions.

[53] A number of the Guidelines are given contractual force in the ADLS agreement. Part 2 of the Guidelines are endorsed by the Registrar General of Land for recommendation to lawyers using Landonline.

[54] Significantly in terms of the issues engaged by this review, the Guidelines recommend that lawyers acting for either vendor or purchaser, ensure that they obtain information from their clients, concerning the client’s GST position.

[55] The information that it is recommended a lawyer obtain, is comprehensive.

[56] When advising a purchaser, it is recommended that a lawyer ascertain:7

1. Is the purchase price ‘plus GST’ or ‘GST inclusive’?
   
2. Is the purchaser registered for GST and on what basis?
   

100. Is the vendor registered for GST and on what basis?
     

6 New Zealand Law Society “Property Transactions and E-dealing Practice Guidelines” (April 2015) <www.lawsociety.org.nz>.

7 At [3.21]-[3.22].

4. If the purchaser is registered for GST and the vendor is registered for GST would the sale be subject to the compulsory zero-rating regime (CZR) which requires the vendors who are GST registered to charge GST at 0% on any supply to a registered person involving land, or in which land is a component, if at the time of settlement:

i the purchaser intends to use the goods for making taxable supplies; and

2. the supply is not a supply of land intended to be used as a principal place of residence of the purchaser or a relative.
   

5. If d. applies ensure the necessary information is included in Schedule 2 of the ADLS Agreement and advise the purchaser of the consequences of any changes to the purchaser’s intentions or use prior to the settlement date.
   
6. If d. does not apply can the sale be nevertheless zero-rated?
   
7. If the purchaser is required to pay GST:
   1. Can the purchaser claim back GST?
   2. When is the purchaser entitled to a tax invoice from the vendor?
   3. When is the purchaser obliged to pay GST?
   4. When is the time of supply?
   5. If there is a nomination, consider the GST implications.
      

Make sure that the agreement accurately reflects the purchaser’s requirements and that if applicable the necessary information has been provided in Schedule 2 of the ADLS agreement or, where it has not, that the purchaser understands the full implications of the GST clauses.

Are there any other tax issues for the purchaser? E.g. can borrowing be structured so that interest paid by the purchaser is tax deductible?

[57] It is abundantly clear then that a lawyer who is advising a client on a sale and purchase agreement, is required to turn their mind to a consideration of potential tax implications.

[58] I do not accept Mr TA’s position that he had no obligation to provide advice on GST matters. He was drafting the agreement. He had a responsibility to ensure that matters traversed by the agreement (including GST issues) were addressed with his clients. His responsibility to ensure that his clients were alerted to any potential GST implications, is abundantly reinforced by the practice guidelines.

If Mr TA had an obligation to provide advice on GST matters, was that obligation diminished or extinguished because of:

(i) The nature of the retainer.

(ii) Instructions received by his clients.

(iii) The commercial acumen of his client.

(iv) Advice provided to his clients on the transaction by other parties.

[59] Mr TA argues that his clients were commercially savvy, and very accustomed to managing the sale and purchase of property. It was their business. He says that his clients had previous experience with zero rated GST transactions.

[60] I take it that Mr TA is suggesting that the extent of his obligation to provide advice to his clients, must be measured by reference to the degree of business acumen possessed by his clients.

[61] This is to argue that the more knowledgeable the client, the less responsibility the lawyer carries for the advice provided.

[62] That may present as a more expansive exposition of Mr TA’s position than what he intended, but at the very least, he clearly is suggesting that the company was aware of GST issues, hence it is unreasonable to criticise him for failing to address them.

[63] This approach is reinforced by argument that it was his clients who had negotiated the purchase, this to minimise his responsibility for what his clients clearly perceived to be was an adverse outcome for them.

[64] In my view, irrespective of the extent of commercial experience possessed by his clients, Mr TA had a responsibility to ensure that he was satisfied that his clients understood the agreement that he had drafted.

[65] He could not proceed on the basis of assumption that his clients understood the GST issues that he had a responsibility to address with them.

[66] It could also be reasonably argued, that Mr TA’s depth of understanding of his client’s business interests, should have made him more conscious of the need to consider tax implications.

[67] The professional standard to be met was not that of “a counsel of perfection” but of a reasonably competent lawyer who was mindful of their responsibility to alert their client to potential GST issues, when advising on a sale and purchase agreement.

[68] Mr TA suggests that his client had discussed tax issues with their accountant. I am uncertain on the evidence before me to what he is specifically referring. But irrespective of what discussions Mr and Mrs CI may have or not have had with other professionals, this did not absolve Mr TA of his obligation to provide competent advice to his clients. If it was the case that Mr TA considered the extent of his responsibilities to have been reduced, at minimum it could be expected that he would have recorded in

a file note that his clients had confirmed they were receiving specialist advice elsewhere.

[69] The Committee considered, and I agree with it, that if Mr TA was maintaining the stance that he did not provide advice on GST or other tax matters, and he did not consider that he was either invited nor obliged to offer advice in connection with the GST status of the transaction, that should have been a matter disclosed to Mr and Mrs CI as a restriction of the terms of his retainer before they entered into the agreement, and again at later stages before they confirmed the conditions or completed settlement.

[70] I am also in agreement with the Committee that Mr TA’s suggestion that he never provided advice on GST or tax matters was inconsistent with the terms of his engagement letter which specifically recorded (under the heading “Tax Issues”), the following:

Please contact us to discuss both your intentions for the property and which entity (i.e. self, company, trust et cetera) will complete the purchase, as this may have a bearing on your tax position. Even though there is no capital gains tax or stamp duty payable, there are situations where GST is payable on where profit from land transactions are subject to income tax.

[71] The singular feature of this clause, is that it directly references the type of advice that Mr TA says he never provides.

[72] The clause is appropriately cautionary, in that it alerts Mr TA’s clients that their property transaction may have tax consequences. He does not recommend that his clients take advice elsewhere. He advises them to contact him to discuss both their “intention” in respect to the property, and to clarify the entity which will be completing the purchase.

[73] Mr TA is signalling the possibility of GST consequences, but not from the position of isolating himself from obligation to provide that advice. To the contrary, he is clearly indicating that the tax issues need to be addressed.

[74] Finally, Mr TA argues that the Committee was wrong to conclude that it was unnecessary to determine whether the company had communicated its intention to Mr TA to claim back GST.

[75] Mr CI says he made it clear to Mr TA that it was the company’s intention to claim the GST component after the purchase had settled. Mr TA rejects suggestion that he discussed the GST issue with Mr CI.

[76] That conflict of recollections cannot be resolved here.

[77] But I agree with the Committee, that the issue is not material to the determination of the conduct issues.

[78] I see no grounds which could persuade me to depart from the Committee’s decision.

Costs

[79] Where a finding of unsatisfactory conduct is made or upheld against a practitioner on review it is usual that a costs order will be imposed. I see no reason to depart from that principle in this case.

[80] Taking into account the Costs Guidelines of this Office, Mr TA is ordered to contribute the sum of $900.00 to the costs of the review, that sum to be paid to the New Zealand Law Society within 30 days of the date of this decision.

[81] The order for costs is made pursuant to s 210(1) of the Lawyers and Conveyancers Act 2006.

Publication

[82] Pursuant to s 206(4) of the Act I direct that this decision be published so as to be accessible to the wider profession in a form anonymising the parties and bereft of anything as might lead to their identification.

Decision

Pursuant to s 211(1)(a) of the Lawyers and Conveyancers Act 2006 the decision of the Standards Committee is confirmed.

DATED this 28th day of March 2019

R Maidment

Legal Complaints Review Officer

In accordance with s 213 of the Lawyers and Conveyancers Act 2006 copies of this decision are to be provided to:

Mr TA as the Applicant

[CIB] Limited Attention: CI as the Respondent Ms EB as the Representative for the Applicant Mr GN as a Related Person

[Area] Standards Committee [X] New Zealand Law Society