Murray v Morel & Co Ltd CA86/04 [2005] NZCA 432; [2006] 2 NZLR 366; (2006) 9 NZCLC 264,008; (2005) 2 NZCCLR 1020 (22 December 2005)

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IN THE COURT OF APPEAL OF NEW ZEALAND

_CA86/04

BETWEEN PETER JAMES MURRAY First Appellant

AND PETER JOHN LORIMER Second Appellant

AND DALE WILLIAMS RILEY Third Appellant

AND LEADMAN INVESTMENTS LIMITED Fourth Appellant

AND MOUNT AUCKLAND FOREST 1

LIMITED

Fifth Appellant

AND JAMES ALEXANDER DOUGLAS Sixth Appellant

AND AVALON MANAGEMENT LIMITED Seventh Appellant

AND ALAN REVELL AND MARGARET REVELL

Eighth Appellants

AND MOREL AND CO LIMITED First Respondent

AND JENNIFER ANN MOREL Second Respondent

AND TRUSTEES EXECUTORS LIMITED Third Respondent

Hearing: 9 and 10 May 2005

_{Court: Anderson P, Hammond and Chambers JJ}

MURRAY AND ORS V MOREL AND CO LTD AND ORS CA CA86/04 22 December 2005

Counsel: B O'Callahan and A E FitzHerbert for Appellants

P R Jagose and P R McRae for First and Second Respondents

L J Taylor and H S Fitzsimmons for Third Respondent

Judgment: 22 December 2005

_{JUDGMENT OF THE COURT}

A The appeal is allowed in part.

B The statement of claim is reinstated, save for the first and tenth causes of action, which remain struck out.

C The costs order made in the High Court is quashed. That court must reassess High Court costs in light of this judgment and the reasons therefor.

D The appellants are entitled to costs in this court in the sum of $10,000, plus usual disbursements. The liability to pay costs falls on the respondents jointly and severally. In the absence of agreement to the contrary, the first and second respondents must pay 50% and the third

_{respondent 50%. We certify for second counsel.}

REASONS

_{(Given by Chambers J)}

Table of Contents

_{Para No}

Public investment in forestry partnership near Warkworth [1] Causes of action [8] Issues on the appeal [20] Section 37 of the Securities Act [26] Reasonable discoverability – is it now the general limitation test? [43] Section 28 of the Limitation Act [54] Causation [73] Clause 13.14 of the deed of participation [78]

Result [83]

Tailpiece [87]

Public investment in forestry partnership near Warkworth

[1] In 1994, Cameron Hadlow and Yvonne Zuill, who owned a 138 hectare forest near Warkworth, approached Morel & Co Limited, the first respondent, with a view to raising money. A scheme was developed under which the right to harvest the trees would be sold to members of the public, who would buy shares in a forestry partnership. It would be Morels’ task to prepare and register a prospectus and to manage a public float, inviting subscriptions in the partnership. The partnership would take a lease from Mr Hadlow and Ms Zuill, entitling the partners to harvest the trees between 2001 and 2006. The cost of the lease was to be $2.4 million.

$1.3 million was to come from investors; the balance (including all preliminary expenses and commissions payable) would be funded by a bank loan.

[2] Because units in the partnership were to be participatory securities in terms of the Securities Act 1978, that Act’s provisions had to be complied with. A registered prospectus was one of the requirements. The prospectus was registered and issued on 18 August 1994. It provided for a subscription of 25 units, the cost of each unit being $52,000. The offer was to close no later than 31 October 1994. The statutory supervisor nominated in the prospectus was Trustees Executors Limited, the third respondent.

[3] By 31 October 1994 there had not been the minimum subscription required to establish the partnership. Pursuant to a power contained in the prospectus, Morels extended the closing date until 30 November 1994.

[4] By that date, seven applications for one unit each had been received by the promoters. Eighteen units still remained. On that date, Mr Hadlow and Ms Zuill decided that they would take up the remaining units in the partnership and sent in the appropriate application forms and a cheque for $936,000 (18 x $52,000). Mr Hadlow, in an accompanying letter to Trustees Executors, asked that the cheque be held and “offset...against the amount payable to us on settlement of the purchase

of the forest”. He asked that, once settlement had taken place, the cheque be destroyed. Trustees Executors accepted the applications and the cheque on that basis.

[5] There was then a delay of almost three weeks. At this stage, we do not know the reason for the delay: it may have had something to do with the fact that Mr Hadlow and Ms Zuill were busy on-selling some of the units they had offered to buy. In any event, the next step on the promoters’ side appears to have occurred on

19 December, when Trustees Executors declared itself satisfied that it held “application forms from investors representing the minimum subscription”. Settlement between the partnership and Mr Hadlow and Ms Zuill then took place on

21 December. On that date Mr Hadlow and Ms Zuill were paid the purchase price of the forest, less their extant contribution, which was set off. On that same date, Trustees Executors returned the Hadlow cheque to the solicitors for Mr Hadlow and Ms Zuill.

[6] Unfortunately the partnership was not a financial success. In December 2001, the other investors in the partnership discovered what had happened with respect to the Hadlow cheque. The disclosure is said to have been made at that time by Trustees Executors to Peter Murray, the first appellant. The other investors claim that the way in which Morels and Trustees Executors dealt with Mr Hadlow’s and Ms Zuill’s contribution was unlawful. They now seek to get back the money they subscribed, plus interest. There are three defendants to the litigation in the High Court: Morels, its managing director, Jennifer Morel, and Trustees Executors. There are no fewer than ten causes of action.

[7] The defendants applied to strike out the claim. Master Lang heard the application. He delivered a reserved judgment on 8 April last year: Murray v Morel

& Co Limited HC AK CIV2003-404-4897. He struck out all the causes of action. The investors (as we shall refer to the plaintiffs in the High Court) have appealed against that decision.

Causes of action

[8] Before setting out the issues on this appeal, we set out the ten causes of action which the investors wish to advance.

[9] The investors’ first cause of action is against Morels and Ms Morel. The investors allege that the allotment of participatory securities in the partnership was invalid, being both a breach of an express provision in the prospectus and also in breach of s 37(2) of the Securities Act. That subsection at the relevant time read as follows:

No allotment shall be made of an equity security or a participatory security offered to the public for subscription if the allotment is the first allotment of such security to the public unless the amount stated in the registered prospectus relating thereto is the minimum amount which, in the opinion of the directors of the issuer, must be raised by the issue of the securities in order to provide for the matters specified in regulations made under this Act, is subscribed, and that amount is paid to, and received by, the issuer within

4 months after the date of the registered prospectus; and, for the purposes of this subsection –

(a) A sum shall be deemed to have been paid to, and received by, the issuer if a cheque for that sum is received in good faith by the issuer and the directors of the issuer have no reason to suspect that the cheque will not be paid:

(b) The amount so stated in the registered prospectus shall be reckoned exclusively of any amount payable otherwise than in cash.

[10] The date of the registered prospectus was 18 August 1994. The investors say that that meant that the minimum amount had to be paid within four months after

18 August 1994. They allege that the amount payable by Mr Hadlow and Ms Zuill for their 18 units was not “paid” by that date. Accordingly, the argument is that the allotment could not lawfully be made, was invalid and was of no effect in terms of s 37(4) of the Securities Act. On that basis, the investors seek the return of their subscriptions and later cash calls, together with interest from the date of subscription.

[11] The second cause of action is dependent on the allotment being void in terms of s 37. In that event, the investors allege that Morels held their subscriptions as constructive or resulting trustee for them. The investors assert that Morels is now obliged to account to them for their subscriptions.

[12] The third cause of action is based on an assertion that Morels is liable as a knowing receiver. The investors allege that Morels received the subscriptions with the knowledge that the minimum subscription requirement had not been met in cash. Accordingly, it is said, Morels, upon receipt of the investors’ subscriptions, became a constructive trustee of those subscriptions for the investors.

[13] The fourth cause of action is against Ms Morel. The investors allege that Ms Morel knowingly assisted a breach of trust by Morels, of which she was a director.

[14] The fifth cause of action is again based on breach of trust, but a different breach. The investors allege that Morels received the subscriptions as agent for or on behalf of Mr Hadlow and Ms Zuill. Because it is said the allotment was void, Mr Hadlow and Ms Zuill were constructive or resulting trustees for the investors. Morels, it is said, knew that the minimum subscription requirement had not been met in cash or in accordance with the terms of the offer. By paying the investors’ subscriptions to persons other than the investors themselves, Morels, it is said, assisted a breach of trust by Mr Hadlow and Ms Zuill. That assistance is said to have been dishonest and renders Morels liable to account to the investors for their subscriptions.

[15] The sixth cause of action is a claim against Morels and Ms Morel as promoters and/or issuers. The investors allege that Morels and Ms Morel had a fiduciary duty to make full disclosure to them, which was breached by their non-disclosure of various aspects of the transaction. They say that Morels and Ms Morel failed to disclose that Mr Hadlow and Ms Zuill were “their real clients”, failed to disclose that Chandler Fraser Keating, who had valued the investment for the purposes of the prospectus, were not independent, and failed to disclose that the applications by Mr Hadlow and Ms Zuill were sent to an address other than that specified in the prospectus and were not accompanied by any payment. The investors allege that, if proper disclosure had been made, they would not have subscribed for the participatory securities.

[16] The seventh, eighth, and ninth causes of action are against Trustees Executors. The seventh cause of action is a claim that Trustees Executors breached a term in the deed of participation. A draft of this deed formed part of the prospectus. Each investor on his or her application form certified that he or she had read the deed and agreed to be bound by its terms and conditions. The deed was in fact signed on

21 December 1994. Trustees Executors executed the deed on its own behalf and on behalf of all the investors, in the latter case pursuant to powers of attorney conferred in favour of Trustees Executors by each investor when submitting his or her application form. Under the deed of participation, Trustees Executors agreed to exercise reasonable diligence to ascertain whether or not any breach of the terms of the deed or of the offer of the units has occurred. Except where Trustees Executors were satisfied that the breach would not materially prejudice the interests of the partners, Trustees Executors was bound to do everything it could to cause any breach of those terms to be remedied. The investors allege that Trustees Executors breached that obligation by negligently failing to insist on the Hadlow cheque being banked to the trust account when the cheque was received or prior to allotment and in failing to advise the investors of the breaches of s 37. The investors seek recovery of their subscriptions and the later calls.

[17] The eighth cause of action is in negligence. The investors allege Trustees Executors, as the statutory supervisor, owed the appellants a duty to take reasonable care of the trust funds. That duty, it is said, was breached, the particulars of breach being the same as for the cause of action in contract.

[18] The ninth cause of action alleges that Trustees Executors paid the investors subscriptions and cash calls to persons other than the investors themselves, in breach of trust.

[19] The final cause of action is against Morels and Ms Morel. The investors allege that Morels and Ms Morel issued a prospectus which contained untrue statements, contrary to s 56 of the Securities Act. The investors allege that they have suffered loss as a result.

Issues on the appeal

[20] The primary issue before Master Lang and before us was whether the allotment was in breach of s 37(2). The judge found that what Morels and Trustees and Executors did with the Hadlow cheque was acceptable and that there had been no breach of s 37(2). This conclusion was sufficient to strike out the eight causes of action which were dependent on a finding that s 37 had been breached. Only two of the causes of action (the sixth and the tenth) are not dependent on a finding that s 37 was breached. Mr O’Callahan, for the investors, submitted that Master Lang had been wrong in his finding that s 37 was not breached.

[21] The second issue is whether all the causes of action are time-barred and should be struck out on that basis. The judge, notwithstanding his finding on the s 37 point, went on to consider the limitation argument. He concluded that all claims bar the seventh cause of action were time-barred. The seventh cause of action was in a different category because it was based on an alleged breach of the deed of participation. He noted that actions upon a deed are specifically dealt with by s 4(3) of the Limitation Act 1950. This provides that an action upon a deed shall not be brought after the expiration of 12 years from the date on which the cause of action accrued. Master Lang said that he would not have been prepared to strike out the seventh cause of action on the basis of the limitation argument: at [85]. By error, when he was preparing the summary of his orders, he said that the seventh cause of action was struck out “on the basis that the alleged breach of s 37 of the Securities Act 1978 cannot succeed, and the claim is in any event barred by the Limitation Act

1950”: at [104]. Clearly the judge did not mean that, in view of his earlier findings. It is clear that he intended to strike out the seventh cause of action solely on the basis that, in his view, there had been no breach of s 37.

[22] Mr O’Callahan attacked the judge’s limitation findings on several grounds. Mr O’Callahan’s primary submission was that, no matter what the cause of action, time does not start running until the plaintiffs had knowledge of the essential facts relevant to their claim or could reasonably have been expected to discover them. The test has frequently been referred to as the “reasonable discoverability” test. Mr O’Callahan submitted that it was not until 2001 that the investors became aware

of what had happened to the Hadlow cheque. With respect to the eight causes of action dependent upon s 37, time accordingly did not start running until December

2001 (the date of the disclosure to Mr Murray). With respect to the sixth cause of action, it is not clear when the investors found out the matters referred to in [15] above. With respect to the tenth cause of action, Mr O’Callahan said the untruthfulness of certain statements contained in the prospectus was discovered “some time in 1999”.

[23] Mr O’Callahan, if he failed on his “reasonable discoverability” argument, accepted that the first and tenth causes of action would have to remain struck out, but he submitted that all of the others should be reinstated. In the case of the seventh cause of action, that was because it was an action upon a deed, with a 12 year limitation period. With respect to the others, it was because they were all actions based upon the (equitable) fraud of the defendants and accordingly, in terms of s 28 of the Limitation Act, the period of limitation did not begin to run until the investors had “discovered the fraud or mistake...or could with reasonable diligence have discovered it”.

[24] The third issue concerns causation. Mr Taylor, for Trustees Executors, argued that, even if a breach of s 37 of the Securities Act was arguable, Trustees Executors’ failings in that regard could not have been causative of the loss allegedly suffered by the investors. On this issue, Master Lang had found the statement of claim deficient, but repairable. He would have declined to strike out on this ground.

[25] The final issue was also raised by Mr Taylor. He submitted that clause 13.14 of the deed of participation prevented Trustees Executors being liable other than under the deed. On this basis, he argued, the causes of action in negligence and for breach of trust should be struck out.

Section 37 of the Securities Act

[26] The essential facts as to what happened in 1994 are all known and are not the subject of controversy. They are contained in an affidavit sworn by

Zsuzsanna Bognar, who in 1994 was the Wellington manager of a division of

Trustees Executors.

[27] In light of the material contained in the affidavit, Mr O’Callahan in the High Court raised a number of arguments as to why what happened breached s 37(2). But before us he took only two points:

(a) The Hadlow cheque did not come within para (a) because the issuer (Morels) “could not have held the view in good faith that the cheque would be paid, because it was agreed that it would not be paid”.

(b) The payment by Mr Hadlow and Ms Zuill was not “in cash”, with the consequence that it was to be excluded from the minimum subscription amount stated in the prospectus ($1.3 million). Accordingly, the minimum amount had not been subscribed, rendering the allotment invalid.

[28] Master Lang did not accept Mr O’Callahan’s argument on these points. He thought that there was no breach of s 37(2). He considered that the Hadlow cheque came within para (a) because the issuer’s directors had no reason to believe that the value of the cheque would not be provided: at [50]. He continued:

[52] In one sense the arrangement provided the issuer with greater certainty than an ordinary or bank cheque. Both forms of cheque are always received subject to the risk that the cheque will be stopped or dishonoured. In this case that risk is eliminated. The partnership was able to acquire the assets by tendering payment for the agreed purchase price less the value of the cheque. There can be no basis in the circumstances of the present case for an allegation that the directors ought to have suspected that the partnership would not receive the full value of the cheque.

[53] I have therefore reached the conclusion that the Hadlows’ cheque also constituted valid payment in terms of s 37(2)(a).

[29] On Mr O’Callahan’s second point, Master Lang found that the Hadlow cheque did amount to a payment “in cash”. The judge held that “in cash” in s 37(2)(b) must be taken as a reference to legal tender: at [56]. But he added, “I accept also that a personal cheque will not constitute legal tender unless the form of

tender is accepted. In the present case, however, the Hadlows’ cheque was accepted by the issuer, and on that basis I consider that it did constitute legal tender.”

[30] Master Lang’s conclusion, therefore, was:

[57] For the reasons set out above I have reached the conclusion that the validity of the allotment of units in the partnership could not be affected by the arrangement relating to the Hadlows’ cheque. The allotment was therefore not void by virtue of s 37(4) of the Act.

[31] We do not, with respect, accept the judge’s conclusion or reasoning on this point. In our view, what happened here was in breach of s 37(2). Our reasoning is not, however, the reasoning which Mr O’Callahan urged on us.

[32] In our view, the emphasis on the Hadlow cheque, both in the High Court judgment and in the argument before us, was misplaced. The Hadlow cheque was and is a red herring, as it in itself never amounted to a payment or even a promise to pay. It is clear from the documentation annexed to Ms Bognar’s affidavit that the cheque was provided on a condition that it never be presented. There is no way in which the cheque could constitute a payment, because, as Mr O’Callahan submitted, “it was agreed that it would not be paid”.

[33] So the cheque must be put to one side. It is clear, however, that when

Mr Hadlow and Ms Zuill applied for the 18 units, they promised to pay for them

$936,000, and they further agreed that that debt could be set off against the debt which the partnership would owe them on or following allotment. This court recently held in Trans Otway Limited v Shephard [2005] NZCA 145; [2005] 3 NZLR 678 that a set-off could constitute a “payment of money” for the purposes of s 292(1)(e) of the Companies Act 1993. (This decision has been upheld on appeal: [2005] NZSC 76. There was no challenge in the Supreme Court to this court’s view of the meaning of “payment of money”: at [8].) This court’s reasoning in Trans Otway applies to the present case. What the parties agreed was that Mr Hadlow’s and Ms Zuill’s debt to the prospective partnership would be set off against the partnership’s debt to them. Each side would thereby “pay” the other at the time of set-off.

[34] But when did the set-off (and hence the mutual “payments”) occur? Clearly the set-off did not occur on 30 November. That is because at that stage the proposed partnership had not come into existence and accordingly had not incurred its debt to Mr Hadlow and Ms Zuill. By 30 November, applications for the 25 units had been received by the promoters. These applications were merely offers. Morels expressly reserved the right to “refuse any application received” i.e. to reject any offer. Trustees Executors then had to satisfy itself that it held “application forms from investors representing the minimum subscription”. It was then required to confirm that fact in writing to Grant Thornton International, a firm of chartered accountants. Grant Thornton was “the Administrator” of the scheme. One of its responsibilities was to act as “the registrar of the Partnership units”. It was Grant Thornton’s job to allot the partnership units. Grant Thornton, with the assistance of its solicitors, Buddle Findlay, also had the job of settling the purchase of the lease with Mr Hadlow and Ms Zuill.

[35] The insuperable problem the respondents face, however, is that allotment did not take place early enough for the set-off arrangement to work. It is essential under s 37(2) that the minimum amount (here, $1.3 million) must be “paid to, and received by, the issuer within 4 months after the date of the registered prospectus.” That meant in this case that the $1.3 million had to be paid on or before 18 December

1994. Mr Hadlow’s and Ms Zuill’s contribution of $936,000 had not been paid by that date because allotment did not take place until after 18 December. It is not clear on the information before us exactly when allotment (acceptance of the offers) took place, but we do know that it could not have been before 19 December. That was the date upon which Trustees Executors advised Buddle Findlay that the requisite number of units had been subscribed for. We do not know when Buddle Findlay or their client, Grant Thornton, advised the offerers of the acceptance of their offers, but it cannot have been prior to the receipt of Trustees Executors’ 19 December letter. We also have not seen the terms of the agreement to lease between Mr Hadlow and Ms Zuill and Morels “on behalf of the Partnership” dated 12 August 1994, but one can safely draw an inference that the obligation to enter into the lease and to pay Mr Hadlow and Ms Zuill $2.4 million did not arise unless and until the partnership was formed. The partnership could not be created until allotment.

[36] Accordingly, even if we make every assumption in the respondents’ favour, we end up with the position that the partnership’s debt to Mr Hadlow and Ms Zuill could not have arisen prior to 19 December 1994, a day out of time. As at

18 December, therefore, Mr Hadlow and Ms Zuill had not paid their contribution; they had merely promised to pay. Payment by set-off did not occur within the stipulated period.

[37] Paragraph (a) of s 37(2) does not assist the respondents, as, for the reasons already given, “the directors of the issuer” had very good reason to suspect that the Hadlow cheque would not be paid; indeed, they knew it would not be paid, because that was the condition upon which the cheque was tendered.

[38] Paragraph (b) is irrelevant. In this case there is no dispute about what the minimum amount was: it was $1.3 million. Mr Hadlow and Ms Zuill always intended to contribute in cash. Had the set-off arrangement taken place in a timely fashion, their payment would have been in cash: the $936,000 they owed would have been set off against the partnership’s debt to them of $2.4 million.

[39] Mr Jagose, for Morels and Ms Morel, and Mr Taylor both argued for a “purposive” reading of s 37(2). They submitted that “the payment method adopted amounted to payment in cash (prior to allotment) in that it provided the required immediate value or money’s worth, as opposed to credit”. But that is simply not correct. The cheque was valueless: it could not be presented. Indeed, no doubt the reason why Mr Hadlow and Ms Zuill adopted the stratagem they did was that they did not have the ability to pay prior to settlement or did not want to try to arrange a short-term facility with their bank. Certainly they promised to pay on settlement by way of set-off, but a promise to pay is not payment.

[40] The respondents’ fallback argument was that, in terms of s 37(2)(a), “the payment method adopted meant that the issuer could be certain that the cheque would be paid – that is “honoured” or “satisfied””. Again, on the contrary, the only thing the issuer knew with respect to that cheque was that it would not be paid, would not be honoured or satisfied.

[41] Messrs Jagose and Taylor also referred to the underlying policy of s 37, which, they said, was to ensure that intending investors were protected against an investment scheme which was undercapitalised. We agree that that is a major purpose of s 37(2). Further, we are prepared to accept that the proposal for Mr Hadlow and Ms Zuill to pay by way of set-off, such payment being simultaneous with allotment, could have been successful, but only if done within the four month period. The respondents’ submissions do not deal with another purpose of s 37(2), which is to provide investors with an assurance that there is a statutory cut-off date by which the venture must be either fully subscribed or called off. Allotments should not be made “pursuant to an out-of-date prospectus”: Christchurch Pavilion Partnership No 1 v Deloitte & Touche Tohmatsu Trustee Co Ltd [2002] 3 NZLR 289 at [21] (PC). Unfortunately in the present case Morels and the others involved with this float overlooked the imperative of compliance by 18 December.

[42] For these reasons, we find in favour of the appellants on the first issue. The allotment was made in contravention of s 37(2) because the $1.3 million had not been paid to the issuer by 18 December 2004. The full amount was not finally paid until, at the earliest, allotment; only then did Mr Hadlow and Ms Zuill pay their

$936,000 (by way of set-off).

Reasonable discoverability – is it now the general limitation test?

[43] We now come to the second issue on this appeal. The respondents assert that, even if there was a breach of s 37(2), it is now too late for the investors to complain. They claim that all the causes of action (except the seventh) should be struck out on the basis that they amount to an abuse of process, being time-barred. Mr O’Callahan disagrees. He submits that, notwithstanding the events complained of all happened in 1994, time did not start running against the investors until 1999, in some cases, and 2001, in others. The delay in time starting to run arises, Mr O’Callahan submits, because of the “reasonable discoverability” doctrine, which he submits now “ought to be applied generally”. Under this doctrine, it is said, a cause of action does not accrue until the plaintiff knows or ought to know of the facts necessary to establish his or her cause of action.

[44] Mr O’Callahan ran a similar argument in the High Court. Master Lang did not accept the submission. On the contrary, he held that the normal rule is that a cause of action accrues when all the facts giving rise to the cause of action are in existence, regardless of whether they are then known to the plaintiff. He accepted that exceptions had been recognised in tort claims involving latent defects in buildings (Invercargill City Council v Hamlin [1996] 1 NZLR 513 (PC)), in personal injury cases (G D Searle and Co v Gunn [1996] 2 NZLR 129 (CA), and in sexual abuse cases (S v G [1995] 3 NZLR 681 (CA)), but these remained, he thought, exceptions to the normal rule: at [93]-[99]. The judge considered that if the law in this area were to be further extended, such “must come either from legislative change or from an authoritative decision of the Court of Appeal”: at [100].

[45] We have no hesitation in rejecting Mr O’Callahan’s broad proposition that “reasonable discoverability” now applies to all causes of action. Such a broad proposition is contrary to numerous decisions of this court. If that gloss is to be placed generally by judicial fiat on the Limitation Act, it will have to be the Supreme Court which does it.

[46] Mr O’Callahan accepted that there was no Court of Appeal decision supporting his general proposition. He relied, however, on the reasoning in a number of High Court and Court of Appeal decisions, which, he said, amounted to “a compelling indication that as a matter of principle the doctrine ought to be of general application”. He also referred to two decisions of the Supreme Court of Canada. Of the cases cited by Mr O’Callahan, we intend to discuss only Hamlin and this court’s decisions. The Canadian cases do not require discussion as they have already been taken into account by this court in its jurisprudence in this area.

[47] First, Hamlin. Mr O’Callahan submitted that, while their Lordships in that case “confined their advice to the particular context of latent defects in buildings”, they nonetheless advanced “no reason why the doctrine ought not to apply generally”. With respect, Mr O’Callahan’s argument shows a misunderstanding of Hamlin. What the Privy Council stressed in that case is that the owner of a house which is found to contain defects sues not for physical damage to the house or foundations but for loss to his or her pocket. The plaintiff’s loss occurs when the

market value of the house is depreciated by reason of the defective foundations. If he or she resells the house at full value before the defect is discovered, he or she has suffered no loss. Thus, as the authors of Todd (ed) The Law of Torts in New Zealand (4ed 2005) say at [27.5](3)(a), “in the common case the occurrence of the loss and the discovery of the loss will coincide”. They say: “Once this point is appreciated the difficulties surrounding the limitation question fall away.” Hamlin, therefore, far from being authority for a general proposition that “reasonable discoverability” is or ought to be the norm, in fact is authority for the contrary (traditional) view. Indeed, their Lordships specifically reinforced that (at 526):

The approach [we have adopted] is consistent with the underlying principle that a cause of action accrues when, but not before, all the elements necessary to support the plaintiff’s claim are in existence. For in the case of a latent defect in a building the element of loss or damage which is necessary to support a claim for economic loss in tort does not exist so long as the market value of the house is unaffected.

[48] Searle has clearly established that, where a plaintiff has sustained a latent injury or latent disease as a consequence of another’s act or omission, the plaintiff’s cause of action in negligence does not accrue until the plaintiff has discovered the link between the injury and the act or omission, or such link was reasonably discoverable: [1996] 2 NZLR 129 at 132-133. The decision is no wider than that, however. There is nothing in the decision to suggest that the principles enunciated have any application in cases of contract, trust, or fiduciary duty.

[49] Stratford v Phillips Shayle-George [2001] NZCA 299; (2001) 15 PRNZ 573, though relied on by Mr O’Callahan, does not support his thesis. On the contrary, this court supported the traditional view:

[17] A cause of action accrues for limitation purposes when all the facts necessary to establish the claim are in existence. The relevant facts for the tort of negligence are those necessary to establish duty, breach, and consequent loss. If the tortfeasor is a fiduciary the position is the same unless there is also a breach of fiduciary duty (i.e. a breach of a duty of fidelity or loyalty). Thus, if the breach established against a fiduciary is simply a breach of a duty of care by a person who happens to stand in a fiduciary relationship with the plaintiff, the claim is in reality tortious and limitation issues are dealt with on that basis rather than in equity.

[50] No question of discoverability arose in Stratford. The loss or damage was suffered “no later than 23 August 1989” (at [22]), outside the limitation period.

Mrs Stratford was aware of all the facts necessary to establish the cause of action at that date; it was irrelevant that she may not then have been aware of the legal consequences of those facts: at [25].

[51] With respect to this court’s decisions, Mr O’Callahan referred finally to Gilbert v Shanahan [1998] 3 NZLR 528, a decision which he conceded did not support his broad proposition. Obviously it does not. In that case, this court reaffirmed the traditional view as to when a cause of action accrues. This court acknowledged that the outcome in that case “might be thought a hard case for Mr Gilbert”: at 544. This court referred to the Law Commission’s work in this area, and in particular that body’s recommendation that “subject to an ultimate longstop period of 15 years, time should not run against a plaintiff in the absence of knowledge of essential facts relevant to the claim”. This court added (at 545):

From Mr Gilbert’s point of view, it is unfortunate that the reform recommended by the Law Commission has not yet been implemented. From a wider perspective, this subject deserves early legislative attention.

[52] We are still waiting for that legislative attention.

[53] The decisions of this court are consistent and do not establish the broad proposition for which Mr O’Callahan contends. As this court has said on several occasions, if the law is to adopt “reasonable discoverability” as the norm, that will require legislative change. Almost certainly it will also require a longstop provision such as recommended by the Law Commission. An example of such a longstop provision can now be found in s 393 of the Building Act 2004, which provides that in no circumstances can civil proceedings relating to building work be brought “after

10 years or more from the date of the act or omission on which the proceedings are based”. It would be folly for the courts to create by judicial gloss a “reasonable discoverability” requirement before a cause of action can be said to accrue when the courts have no power to couple such a gloss with any sort of longstop provision.

Section 28 of the Limitation Act

[54] Mr O’Callahan accepted that, if we rejected his primary submission that “reasonable discoverability” is now the general test, the first and tenth causes of action must remain struck out. He submitted that all the remaining causes of action (except the seventh cause of action) were prima facie time-barred. But, he said, the investors were saved through a postponement of the start of the limitation period by virtue of s 28 of the Limitation Act. Because of Mr O’Callahan’s concession that the other causes of action are prima facie time-barred, we have not turned our minds to when we think time would have started to run on each of them, absent s 28. For present purposes, we have assumed the concession was appropriate and we have focused solely on how s 28 is to be approached at the strike-out stage.

[55] The relevant part of s 28 reads as follows:

Where, in the case of any action for which a period of limitation is prescribed by this Act, ...

(a) The action is based upon the fraud of the defendant or his agent or of any person through whom he claims or his agent; or

(b) The right of action is concealed by the fraud of any such person as aforesaid;

the period of limitation shall not begin to run until the plaintiff has discovered the fraud...or could with reasonable diligence have discovered it.

[56] Mr O’Callahan noted that Master Lang had accepted that for the purposes of s 28 the term “fraud” embraces equitable fraud: Official Assignee of Collier v Creighton [1993] 2 NZLR 534 at 538 (CA), affirmed on appeal [1996] UKPC 7; [1996] 2 NZLR 257 (PC). The judge considered that the second to sixth and the eighth and ninth causes of action involved allegations of equitable fraud on the respondents’ part: see Master Lang’s judgment at [88]. The respondents did not challenge this conclusion: their complaint was focused on whether there was any evidence to support the allegations.

[57] Mr O’Callahan accepted that it is well established, as Master Lang said, that

“a defendant may apply for an order striking out the plaintiff’s claim if that claim is

barred by virtue of the provisions of the Limitation Act 1950”: at [82]. The judge went on:

In such circumstances the claim will be struck out not on the basis that it discloses no tenable cause of action, but on the basis that the plaintiff’s claim is frivolous, vexatious and an abuse of the Court’s process. See eg Matai Industries Limited v Jensen [1988] NZHC 205; [1989] 1 NZLR 525 at 531 to 533.

[58] Mr O’Callahan accepted the correctness of that proposition. He also accepted that “evidence can be admitted on a strike-out application where, as in this case, the allegation is one of a frivolous or vexatious proceeding because of a limitation issue”. He added that “the question of evidence must be approached with care because, as the High Court said, it is not to result in a mini-trial”. There is no risk of such a mini-trial in the present case. The sole evidence was contained in Ms Bognar’s affidavit, and no challenge is made to any part of it. It contains nothing but incontrovertible fact, although clearly (as these reasons for judgment show) it is not necessarily complete.

[59] Mr O’Callahan in his oral submissions accepted that the correct approach in cases such as these was that adopted by the English Court of Appeal in Ronex Properties Ltd v John Laing Construction Limited [1982] 3 All ER 961. Ronex was followed by Tipping J in Matai Industries at 531-532. Those cases establish the appropriate procedure when a defendant considers that he or she has a good limitation defence and that the plaintiff’s reliance on s 28 as an answer is frivolous or vexatious. What the defendant should do in these circumstances is either “plead the defence and...seek trial of the defence as a preliminary issue or in a clear case...apply to strike out the plaintiff’s claim on the grounds that it is frivolous, vexatious and an abuse of process”: Matai at 531.

[60] The two cases also establish that “the onus is clearly on the defendants to show that the plaintiff’s claim, or at least some part of it, is statute-barred”: Matai at

532. Evidence can be tendered either way by affidavit.

[61] Mr O’Callahan’s point is that in the present case there is no evidence at all from Morels. Ms Bognar’s affidavit, tendered by Trustees Executors, is limited to

exhibiting “documents to support the chronology”. It does not, Mr O’Callahan says, provide any evidence about the subjective state of mind of any of the defendants.

[62] In our view, Mr O’Callahan’s point is a good one. There is no evidence from Ms Morel as to whether or not she realised there was a problem once, no doubt by error, the 18 December deadline was allowed to pass. There is also no evidence from Trustees Executors as to who was making the relevant decisions within that organisation and as to their state of knowledge of the significance of the

18 December cut-off date. This case differs significantly from Matai in that respect; in Matai both sides tendered evidence by way of affidavit (at 532) with the consequence that Tipping J was able to form a view on it. The lack of evidence in this case may reflect the fact that normal strike-out applications (based on the ground that the statement of claim discloses no reasonable cause of action) proceed without evidence and on an assumption that all allegations of fact contained in the statement of claim are true. The procedure is different in these much rarer cases where the ground of challenge is that the claim is frivolous and vexatious. In these cases, evidence is permissible and indeed normally required, as shown by Ronex and Matai. It is noteworthy that, while the respondents’ notices of application to strike out contained reference to a number of authorities, Ronex and Matai were not among them. That may indicate that counsel were not aware until too late of the importance of evidence on strike-out applications of this sort. It may also indicate they misunderstood who bore the onus of proof.

[63] In the present case, Morels and Ms Morel have not demonstrated that they did not know they were bound not to make the allotment once 18 December had passed and that they were obliged to repay the subscriptions they had received. The four causes of action based on breach of trust must be allowed to continue. The fiduciary duty relied on is said to be a “duty to make full disclosure to the plaintiffs as subscribers of participatory securities”. If there was such a duty and if it was breached, that could amount to an action based upon equitable fraud. In the absence of affidavit evidence to the contrary, it must be assumed that the allegations of breach contained in the statement of claim are true. On this basis too, therefore, Morels and Ms Morel have failed to prove that the claim is frivolous or vexatious or an abuse of process.

[64] Mr Jagose submitted that “the uncontroverted evidence shows that none of the defendants was ever aware of the possibility of any breach of the Securities Act, or any consequent right of action on the part of the plaintiffs”. With respect, the “evidence” at this stage shows no such thing. There is no evidence from Ms Morel as to what she knew on this topic. Ms Bognar’s affidavit does not assist Ms Morel at all.

[65] Mr Jagose further submitted that this was a case “where the defendants could not disclose that which they did not know”. Again, how do we know that, in the absence of any evidence from Ms Morel as to what she did or did not know?

[66] Finally, Mr Jagose submitted, contrary to what we have said at [60] above, that “if the plaintiff seeks to rely on an exception to the primary limitation rule such as s 28, then the onus is on the plaintiff to bring sufficient evidence to establish the relevant exception”. Mr Jagose cited Humphrey v Fairweather [1993] 3 NZLR 91, like Matai, a decision of Tipping J. But Tipping J in Humphrey was talking about the onus at trial. That is completely different from the onus on a strike-out application.

[67] The case against Trustees Executors is slightly more problematic. The claim in negligence (the eighth cause of action) is simply the tortious equivalent of the cause of action in contract (the seventh cause of action). We have some doubt as to whether this cause of action can be said to be based upon Trustees Executors’ fraud. Further, the paragraph in the statement of claim alleging deliberate concealment of factual matters (paragraph 18(b)) is not specifically pleaded with respect to this cause of action. In the end, however, we have decided that the negligence cause of action should be allowed to run for two reasons. First, it adds nothing to the contract cause of action, which it is accepted is not statute-barred. The eighth cause of action will require no additional evidence at trial. Secondly, we are conscious that it may be arguable that Morels or Ms Morel was in some way implicated in the alleged breach of the duty of care and that Morels or Ms Morel may be, for some purposes, Trustees Executors’ agent or a person through whom it claims. If that were so and if Morels or Ms Morel had been “fraudulent” in the s 28 sense, then there may be some

argument that the investors can rely on s 28. None of that was explored before us. We prefer that this be fully explored by the trial judge.

[68] The remaining cause of action against Trustees Executors is based on breach of trust. For the same reasons that the trust claims against Morels and Ms Morel should be allowed to run, we think this cause of action should also run. We shall deal with the separate argument that clause 13.14 of the deed of participation provides protection to Trustees Executors in respect of the causes of action in negligence and for breach of trust later in these reasons for judgment.

[69] Master Lang considered that the question whether to strike out on limitation grounds was “finely balanced”: at [90]. In the end, he concluded that the investors should lose on this point because they had failed “to provide an evidential basis for the claims they [had] made”: at [91]. With respect, however, the investors were required to provide evidence only if the respondents did, and the respondents had failed to provide any evidence as to what they knew when they decided to proceed with allotment on or after 19 December 1994. It is undoubtedly the case that “the arrangement relating to the Hadlow’s cheque was documented at the time” – but all the documentation has established is that there was a breach of s 37(2) of the Securities Act. Master Lang said that the arrangement “was the subject of open correspondence between the defendants”. “Open” in what sense? There is no suggestion that any of the investors saw the correspondence at that time. Indeed, it seems incontrovertible that the investors did not know the special arrangement relating to Mr Hadlow’s and Ms Zuill’s contributions until many years later.

[70] It may well be, as the judge says, that “all of these matters tend to suggest that the plaintiffs will not be able to substantiate their allegations”: at [92]. But that is not the test on a strike-out application. On a strike-out application based on an assertion that a claim is frivolous or vexatious, we take the assertions in the plaintiff’s claim, together with any relevant evidence relating to s 28 matters. Here, there is no evidence as to what Ms Morel or the relevant officer or officers within Trustees Executors knew or did not know about the legality of the steps taken after

18 December 1994. It may well be that the steps were taken with a belief that they were lawful, but there is at this stage no evidence to substantiate that. This is not at

this stage one of those “clear cases” where the court can say that the investors’ claims are statute-barred. The respondents have failed to satisfy the onus clearly on them.

[71] Of course, at trial, the onus will be on the investors to establish that the circumstances bring the case within either s 28(a) or s 28(b). By that stage the investors will have the benefit not only of discovery but also of cross-examination of Ms Morel and relevant personnel from Trustees Executors.

[72] Lest there be any misunderstanding, we reiterate that we are not in any way finding that any of the respondents were fraudulent or concealed any right of action by fraud. All we are saying is that the respondents have not at this stage established that the assumed breaches of trust and fiduciary duty were not fraudulent. We also reiterate that s 28 uses the word “fraud” in a specialised sense; that sense is much broader than any popular understanding of the term.

Causation

[73] The next matter to be discussed is Mr Taylor’s submission that, even if the allotment was invalid under s 37(2), there was no sufficient causal connection between Trustees Executors’ alleged breach of duty and the investors’ alleged loss. Mr Taylor submitted that the investors’ pleading demonstrated a “but for” approach to causation, an approach which had been firmly rejected by the Privy Council in Christchurch Pavilion and in other cases, such as Bank of New Zealand v New Zealand Guardian Trust Company Limited [1999] 1 NZLR 664 at 681 (CA).

[74] Master Lang recognised that there were deficiencies in the statement of claim. He said, for instance, at [74]:

At present paragraph 43 of the statement of claim appears to rely solely upon the “but for” approach to causation that was firmly rejected in the cases to which I have referred. It does not allege that the venture has failed so that the plaintiffs’ units have become worthless. Neither does it specifically allege any causal nexus between the acts of the third defendant and the loss the plaintiffs have suffered. All of these matters would need to be attended to if the claim against the third defendant was to proceed to trial.

[75] The judge went on (at [77]):

If the allotment was held to be invalid liability could arguably attach to the third defendant on the basis that it had failed to exercise reasonable diligence to ascertain whether a breach of the offer of the units had occurred. Whether or not the plaintiffs could prove that the third defendant’s breach caused them loss would be a matter for trial. The pleadings would, however, need to be amended so as to plead the actual basis upon which the plaintiffs contend that the third defendant’s breach caused them to suffer loss.

[76] We agree with the judge that there are deficiencies in the statement of claim. Those deficiencies have not been corrected because, of course, the entire statement of claim was struck out on other grounds. Like the judge, we consider that the investors should be given the opportunity to fix up the pleading. It may well be that the investors’ current methodology for calculating damages is wrong, but that does not mean that it can be safely assumed that Trustees Executors’ role in the breach of s 37(2) was not causative of any loss.

[77] Like Master Lang, we do not consider that Trustees Executors has shown that the causes of action against it should be struck out at this stage on the grounds of lack of causation.

Clause 13.14 of the deed of participation

[78] The final issue is the effect of clause 13.14 of the deed of participation. That clause reads as follows:

Liability: The Statutory Supervisor shall be subject to no liability or obligation other than any liability or obligation that arises as a consequence of this deed and as Statutory Supervisor for the Partners. The Partnership shall not have any action or claim against the Statutory Supervisor for any damages, losses, expenses or orders unless the same arises directly from a breach by the Statutory Supervisor of any of the duties and obligations set out in this deed.

[79] Mr Taylor submitted that this clause means that Trustees Executors cannot be liable except pursuant to clause 13.1. Clause 13.14 would not protect Trustees Executors from liability under the contract cause of action, but it would operate to protect it from liability in negligence or for breach of trust. Mr Taylor submitted that there was “no ambiguity” in clause 13.14 and that there was “no basis for reading

down those provisions so as to expose the Statutory Supervisor to any wider liability”.

[80] It appears that this issue was raised in the High Court, although it is not mentioned in Master Lang’s reasons for judgment. As a consequence, it was not a matter dealt with by Mr O’Callahan in his written submissions. Effectively what Mr Taylor is seeking to do is support the decision appealed against on other grounds. Today that would have to be signalled in advance by a memorandum under r 33 of the Court of Appeal (Civil) Rules 2005. Those rules were not in force, however, at the time the parties filed their submissions; there was no equivalent rule under the Court of Appeal (Civil) Rules 1997. The reason for mentioning this is simply to make the point that this issue was not explored by the judge and has not been the subject of detailed submission by the investors. That naturally leads to some caution on our part in dealing with the issue.

[81] At this stage, we do not accept that clause 13.14 is a king hit for Trustees Executors. It is arguable that any liability Trustees Executors may face in negligence or for breach of trust is a liability arising “as Statutory Supervisor for the Partners”. It may also be arguable, as Mr O’Callahan orally submitted, that the clause bars only actions or claims by “the Partnership”; here, the investors are suing, not as “the Partnership” but rather as some of the investors in it.

[82] We do not know what the answer is to these competing contentions. What we do know is that the clause and its effects are not sufficiently clear at this stage to justify striking out the negligence and trust causes of action on the basis that they are frivolous or vexatious.

Result

[83] The first and tenth causes of action remain struck out. The second to ninth causes of action are reinstated.

[84] Presumably, the investors will now seek a case management conference in the High Court so that remaining interlocutory steps can be timetabled.

[85] The costs order in the High Court is quashed. That court must reassess costs in the High Court in light of this judgment.

[86] The investors, while they have not been totally successful in this court, have been substantially successful. They are entitled to costs from the respondents on a standard two day basis.

Tailpiece

[87] While the investors have been successful at this stage, the victory may turn out to be worth little. There must be a strong possibility that relief will be granted under the Illegal Contracts Act 1970: Re AIC Merchant Finance Limited [1990] 2

NZLR 385 (CA), and see generally Morison’s Company and Securities Law (looseleaf ed) at [12.13]. Further, there would seem to be significant causation issues. Thirdly, at trial, unlike now, the onus will be on the investors to establish s 28 fraud. The investors may ultimately be able to establish that, or it may turn out to be the case that, the 18 December cut-off date was simply overlooked.

[88] These comments are not in any way intended as a pre-judgment on the issues that will arise. Rather, they are intended to be of assistance to the parties. In particular, the investors will be entitled to a thorough reappraisal of their chances of ultimate success from their lawyers following discovery and inspection of documents.

Solicitors:

Carter & Partners, Auckland, for Appellant

Chapman Tripp, Wellington, for First and Second Respondents

Minter Ellison, Wellington, for Third Respondent