Davys Burton v Thom [2007] NZCA 215; [2008] 1 NZLR 193; [2007] NZFLR 953; (2007) 18 PRNZ 653 (30 May 2007)

Last Updated: 2 February 2018

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IN THE COURT OF APPEAL OF NEW ZEALAND

CA3/06
[2007] NZCA 215

BETWEEN DAVYS BURTON
Appellant

AND CAMPBELL ROBERT THOM
Respondent

Hearing: 19 September 2006

Court: William Young P, O'Regan and Arnold JJ

Counsel: C T Walker and P A Paterson for Appellant
D J G Cox for Respondent

Judgment: 30 May 2007 at 3 pm

JUDGMENT OF THE COURT

1. The appeal is allowed.
2. The appellant will have costs in this Court of $4,000, plus usual disbursements.

REASONS OF THE COURT

(Given by Arnold J)

Introduction

[1] This case raises a short but troublesome point concerning the commencement of the limitation period in respect of a negligence action against a firm of solicitors. Under s 4(1) of the Limitation Act 1950 any such claim must be brought within six years of the date on which the cause of action accrued. A cause of action in tort does not accrue until loss or damage is suffered. The question in this case is when loss or damage was suffered.

Background

[2] At issue is an invalidly executed prenuptial agreement. Before we outline the factual background, we set out the relevant statutory provisions.

Statutory context

[3] The principal provision for the purposes of this case is s 21 of the Matrimonial Property Act 1976 (now the Property (Relationships) Act 1976), in the form that it was before the passage of the Property (Relationships) Amendment Act 2001. Under s 21(1) parties who were proposing to marry could contract out of the Act’s provisions by making an agreement in respect of the “status, ownership, and division of their property ...”. Section 21(4) required that such an agreement be in writing and be signed by both parties. Under s 21(5) each party was required to have independent legal advice before the signing of the agreement.
[4] Section 21(6) provided:

The signature of each party to an agreement under this section shall –

(a) If signed in New Zealand, be witnessed by a solicitor of the High Court of New Zealand; or

...

(c) If signed in a country that is not a Commonwealth country, be witnessed by a notary public, -

and, in every case, the witness shall certify that before the party whose signature he has witnessed signed the agreement he has explained to that party the effect and implications of the agreement.

[5] The section then dealt with non-compliance and unenforceability. It provided:

• (8) An agreement under this section shall be void in any case where–

(a) Subsections (4) to (6) of this section have not been complied with; or

(b) The Court is satisfied that it would be unjust to give effect to the agreement.

(9) Notwithstanding subsection (8)(a) of this section, where subsections (4) to (6) of this section have not been complied with in respect of an agreement under this section, the Court may in the course of any proceedings under this Act, or on application made for the purpose, declare that an agreement under this section shall have effect in whole or in part or for any particular purpose if it is satisfied that the non-compliance has not materially prejudiced the interests of any party to the agreement.
(10) In deciding whether it would be unjust to give effect to an agreement under this section the Court shall have regard to:

(a) The provisions of the agreement:

(b) The time that has elapsed since the agreement was entered into:
(c) Whether the agreement was unfair or unreasonable in the light of all the circumstances at the time it was entered into:
(d) Whether the agreement has become unfair or unreasonable in the light of any changes in circumstances since it was entered into (whether or not those changes were foreseen by the parties):
(e) Any other matters that the Court considers relevant.

....

(12) Where any agreement purporting to be made pursuant to this section is void or is avoided or is unforceable, the provisions of this Act (other than this section) shall have effect as if the agreement had never been made.

....

(15) Any matrimonial property to which an agreement under this section does not apply shall be subject to the provisions of this Act.

....

Facts

[6] In March 1990 the respondent was due to marry his fiancée in the United States, where they intended to reside, initially at least. A few days before leaving New Zealand for the wedding, the respondent instructed a solicitor from the appellant firm to draft a prenuptial agreement. The primary purpose of the agreement from the respondent’s perspective was to protect a residential property which he owned in Rotorua by treating it as separate property.
[7] The solicitor prepared a prenuptial agreement. Although it dealt specifically with the respondent’s Rotorua property, the agreement also treated property owned by his fiancée at the time of their marriage as her separate property. She owned a residential section and a motor vehicle, and had savings in the bank. In addition, the agreement provided that if the couple purchased property during their marriage, that property would be owned by them as separate property, in the proportions of their respective contributions to the purchase from their separate funds.
[8] The respondent executed the agreement. The solicitor witnessed his signature and certified that he had explained the effect and implications of the agreement to the respondent, as required by s 21(6)(a). The solicitor then gave the respondent oral instructions as to the way in which his fiancée should execute the agreement in the United States.
[9] The respondent travelled to the United States. He and his fiancée went to see a notary public. The fiancée signed the agreement and her signature was witnessed by the notary. However, the notary did not explain the effect and implications of the agreement to her, on the basis that she had no expertise in New Zealand law. Accordingly, the notary did not provide the required certification. As a consequence, the execution of the agreement was flawed. The wedding ceremony followed soon after.
[10] In February 1993 the respondent and his wife returned to live in New Zealand. In October 1993 they moved into the respondent’s Rotorua property. In April 1998 the couple separated. Matrimonial property proceedings followed. By a decision dated 30 December 1999 the Family Court declined to validate the prenuptial agreement: Thom v Thom (1999) 19 FRNZ 29.
[11] There was an appeal to the High Court but the Family Court’s decision was upheld: HC ROT AP5/00 31 August 2000. The effect was that the Rotorua house was not protected as being the respondent’s separate property but was treated as matrimonial property. The respondent’s wife was awarded a share in the house.
[12] On 26 July 2002 the respondent issued proceedings against the appellant firm, alleging negligence and breach of fiduciary duty. He sought damages in the amount of the value of his wife’s share in the Rotorua house and further amounts for legal costs incurred.

The legal proceedings

[13] The respondent’s claim was heard in the District Court: DC ROT CIV2003063-83 10 December 2004. Judge McGuire found that the solicitor was negligent in failing to provide the respondent with written instructions that could be provided to either the fiancée or the notary public. The Judge then found that the respondent was contributorially negligent, to the extent of 50 per cent.
[14] However, the Judge went on to hold that the action was statute barred as the limitation period had expired. The Judge held that the cause of action accrued on 29 March 1990, the time of the incorrect execution of the agreement, or, in the alternative, in October 1993 when the couple moved into the respondent’s Rotorua house.
[15] Judge McGuire also held that the doctrine of reasonable discoverability did not assist the respondent because he could have discovered the essential ingredients of the cause of action from the date of flawed execution in March 1990.
[16] The respondent appealed to the High Court against the Judge’s findings as to limitation and contributory negligence. Simon France J allowed the appeal on the limitation point: [2006] NZFLR 116.
[17] The Judge said that the resolution of the case turned on the nature of an agreement under s 21 and the effect of non-compliance with the procedural requirements imposed by the section: at [18]. He went on to say:

[32] Section 21 agreements are a creature of statute that are contingent on Court decisions both in relation to the enforceability of the agreement, and the overall disposition of property. Until these decisions are taken, it is incorrect to say loss has accrued. Fisher on Matrimonial and Relationship Property (LexisNexis) describes a non-complying agreement as “prima facie void” and a complying agreement as “prima facie valid”. These terms reflect, I consider, the reality of the statutory context.

[33] The present agreement, if validly executed, would not have changed the conventional proprietary interests of the parties. The agreement provided that property owned by each remained owned by each, and that property bought by both of them was to remain the property of both of them in proportions reflecting their monetary contribution. Its immediate effect was nil. Like the Act itself, it would have had effect only when a Court was asked to make a matrimonial property order at some point in the future.

[18] The Judge then discussed the decisions of this Court in Connell v Odlum [1993] 2 NZLR 257 and of the High Court in Russell v Preston [2002] NZFLR 941, to which we return below, and concluded:

[41] Within the scheme of the Matrimonial Property Act 1976, I am satisfied that s 21 agreements generally have a degree of contingency, and that, in particular, non-compliance with the execution requirements does not thereby make an agreement ineffective. Ineffectiveness occurs only when a Court determines that errors have led to material prejudice.

[19] Accordingly, the Judge held that the respondent suffered loss only when the Family Court refused to give effect to the agreement, so that the action was not time-barred.
[20] The appellant then applied for leave to appeal against Simon France J’s decision on the limitation point. Simon France J granted leave: HC ROT CIV 2005-463-69 29 November 2005. In doing so the Judge said (at [13]):

No formulation of a question seems required. However, I confirm that the matter on which leave is given can be worded along these lines:

Where a prenuptial agreement is incorrectly executed by reason of negligence on the part of the legal adviser, does time run for the purposes of the Limitation Act 1950 at the time of flawed execution, or at the time when the Family Court declines to enforce the agreement. Alternatively, does time run from the occurrence of a specific factual event – in this case the couple making the intended separate property their matrimonial home.

Basis of appeal

[21] Mr Walker for the appellant argued that the respondent’s cause of action accrued “when he suffered actual, relevant damage”. He said that the respondent suffered immediate loss upon the invalid execution of the prenuptial agreement because he should have obtained an enforceable agreement but instead obtained a void or voidable agreement. He argued that the cases on contingent liabilities were not relevant as the respondent did not incur a contingent liability. Rather, he did not obtain a benefit that he expected to receive. To the extent that there were contingencies in the present case they were contingencies going to the quantification rather than the occurrence of loss.

Discussion

[22] We begin with the authorities. There are many, and we do not propose to discuss all of them. Rather we focus on those which expose the relevant lines of analysis. Unfortunately, extensive citation from some will be required.

The authorities

[23] We begin with a decision of the English Court of Appeal, Forster v Outred & Co [1982] 1 WLR 86. In the presence of her solicitor the plaintiff had executed a mortgage over her freehold home as security for a loan by a company to her son. The son subsequently went bankrupt and the company made demand under the mortgage. The plaintiff repaid the loan and sued her solicitors, claiming damages in negligence and/or breach of contract for failing to advise her adequately when she entered into the mortgage.
[24] There was an issue as to the time at which the limitation period began to run. The Court held that it ran from the date of execution of the mortgage rather than from the date on which the company made demand under it, emphasising that the mortgage was an encumbrance on the property and reduced the value of the plaintiff’s equity of redemption. The quantum of the loss might vary depending upon when the action was brought, but loss had been suffered at the time the plaintiff granted the mortgage: per Stephenson LJ at 98 and Dunn LJ at 100.
[25] Next is a further decision of the English Court of Appeal, DW Moore & Co Ltd v Ferrier [1988] 1 WLR 267. That case concerned a negligently drafted restraint of trade clause in two agreements between the two major shareholders of DW Moore & Co (an insurance brokerage) and a person who was at once a shareholder, a director and an employee of the company. The latter resigned as an employee and a director and set up a competing brokerage. However, because he retained his shareholding in the company the restraint of trade clause did not operate. The company and the two major shareholders sued their solicitor alleging negligence. The question was whether the limitation period operated from the dates that the agreements were entered into or from the time that the employee either left the company’s employ or did something that the clause should have prohibited. The answer depended on when loss or damage first occurred.
[26] The Court held that loss or damage occurred when the plaintiffs entered into the two agreements. Neill LJ considered that the case was governed by the reasoning in Forster v Outred & Co and a further decision of the Court of Appeal to like effect, Baker v Ollard & Bentley (1982) 126 SJ 593. He noted that a restrictive covenant can generally be assigned to the purchaser of the goodwill of the relevant business, so that the covenant had some value. He said that this was particularly so in the context of a broking business where personal contacts were likely to be important (at 277).
[27] Neill LJ then said (at 278):

In the present case the judge rightly rejected the notion that where a solicitor gives negligent advice, damage is presumed to occur at the time when the advice is acted upon. I am satisfied that there is no such presumption. It is a question of fact in each case whether actual damage has been established. In the present case, to use the language of Templeman LJ in Baker v Ollard & Bentley... the plaintiffs suffered damage “because [they] did not get what [they] should have got.” The plaintiffs’ rights under the two agreements were demonstrably less valuable than they would have been had adequate restrictive covenants been included.

[28] Bingham LJ propounded what was referred to in later cases as the “Bingham test” (at 280):

The matter may be tested. It is common ground, on the assumption that the plaintiffs’ pleaded case is correct, that the defendants were in breach of contract when they negligently advised and settled documents in 1971 and 1975. A cause of action then arose. Suppose, per impossible, that the plaintiffs had sued at once and before the later difficulties with [the employee] arose. They would have been bound to succeed. If of opinion that the plaintiffs had suffered no damage, the judge would have awarded them nominal damages. But it seems to me plain that the judge would not have done that on these facts. He would have assessed as best he could on the available evidence the loss fairly and reasonably flowing in the usual course of things from the defendants’ breach of contract, reaching a figure that might have been large or small but would not have been nominal. I think that the plaintiffs were in argument inclined to accept that. If, in a contractual claim for negligence, the court would have awarded other than nominal damages, I do not see how it can be said that an action in tort based on the same negligence would have been bound to fail for want of any damage as an essential ingredient of the cause of action.

[29] The next case is again a decision of the English Court of Appeal, Bell v Peter Browne & Co [1990] 2 QB 495. Following the breakdown of his marriage the plaintiff consulted the defendant firm of solicitors. It was agreed that the parties’ matrimonial home, which was registered in their joint names, would be transferred to the wife, on the basis that if she should sell it, the plaintiff would receive one sixth of the sale price. The plaintiff’s interest in the house was to have been protected by way of a trust or mortgage, and by the placing of a “caution” on the Land Register. The plaintiff’s solicitors negligently failed to ensure that these steps were taken.
[30] Nine years later the wife sold the house and spent the proceeds without accounting to the plaintiff for one sixth of the sale price. As a result, he did not receive his entitlement. He sued his solicitors for breach of contract and in negligence. The solicitors raised a limitation defence.
[31] As to the tort claim, the plaintiff argued that he suffered no loss until his wife failed to do what she had undertaken to do, that is pay him one sixth of the proceeds of the house sale. The Court of Appeal rejected that submission. Applying Forster v Outred & Co and DW Moore & Co Ltd v Ferrier, the Court held that the cause of action accrued when the solicitors failed to protect the plaintiff’s interests at the outset. As a consequence the plaintiff’s claim was statute barred. See Nicholls LJ at 502-4, Beldam LJ at 509-10 and Mustill LJ at 513.
[32] The plaintiff had attempted to draw a distinction between the two acts of negligence alleged – the failure to establish a trust or require a mortgage and the failure to register the caution. Even if, in relation to the former, loss or damage occurred when steps were not taken at the outset, in relation to the latter, loss or damage could not have occurred until the time of sale. This was because a caution could have been registered at any time up to the time the house was sold, without any involvement from his wife or his solicitors.
[33] The Court did not accept this distinction. The possibility that the failure could be remedied did not mean that this failure should be treated differently from the other. It was a matter of theoretical interest rather than practical importance: see Nicholls LJ at 503.
[34] In Knapp v Ecclesiastical Insurance Group plc [1997] EWCA Civ 2616; [1998] PNLR 172, yet another decision of the Court of Appeal, an insurance broker had arranged fire cover for the plaintiffs. Subsequently they lost property in a fire. The insurance company avoided the policy for non-disclosure. The plaintiffs sued their broker. It was accepted for the purpose of argument that he had been negligent in not advising the plaintiffs adequately when arranging the cover.
[35] The Court held that the plaintiffs suffered actionable loss at the time they entered into the voidable contract rather than at the time the insurer chose to avoid it or when the fire occurred. Hobhouse LJ discussed authorities such as Forster v Outred, DW Moore v Ferrier and Bell v Peter Browne and said (at 184):

From these authorities it can be seen that the cause of action can accrue and the plaintiff have suffered damage once he has acted upon the relevant advice “to his detriment” and failed to get that to which he was entitled. He is less well off than he would have been if the defendant had not been negligent. Applying this to the present case, the plaintiffs paid their renewal premium without getting in return a binding contract of indemnity from the insurance company. They had acted to their detriment: they did not get that to which they were entitled. The fact that how serious the consequences of the negligence would be depended upon subsequent events and contingencies does not alter this; such considerations go to the quantification of the plaintiffs’ loss not to whether or not they have suffered loss. The risk of loss existed from the outset and in the absence of better evidence would have to be evaluated and assessed as a risk and damages awarded accordingly.

[36] We now turn to a decision of the High Court of Australia, Wardley Australia Ltd v State of Western Australia [1992] HCA 55; (1992) 175 CLR 514. That case concerned a statutory cause of action under the Trade Practices Act 1974 based on misleading or deceptive conduct. The State of Western Australia had given an indemnity to a bank in relation to a bill facility which the bank had granted to a company, Rothwells Limited. Rothwells defaulted and the State was called upon to answer the indemnity. The State issued proceedings against Wardley, alleging that it had given the indemnity on the basis of misrepresentations by Wardley as to the financial soundness of Rothwells.
[37] The question in the case concerned the time at which loss or damage was suffered where a party entered into an indemnity as a result of misleading or deceptive conduct and was subsequently called upon to answer the indemnity.
[38] The principal judgment is that of Mason CJ, Dawson, Gaudron and McHugh JJ. Their Honours noted the nature of the indemnity at issue as follows (at 524-525):

The indemnity was not one of a kind which generates an immediate noncontingent liability to pay upon execution of the instrument. It was neither a promise to meet a liability of the promisee to make a payment nor a promise to pay a debt owing by a third party to the promisee. In our view, the indemnity, on its true construction, was one which created a liability on the part of the respondent to the Bank to make payment if and when the Bank’s relevant “net loss” was ascertained and quantified, subject to the making of a demand for payment by the Bank. The liability was, therefore ... contingent and executory. The likelihood, perhaps the virtual certainty, that there would be a loss, in the light of Rothwell’s actual financial position as it stood when the indemnity was executed, did not transform the liability into an actual or present liability at that time. (Footnotes omitted)

The appellant argued that, even so, loss accrued when the indemnity was given because the respondent’s liability under it was greater than it would have been had the representations been correct.

[39] In relation to the concept of loss or damage in the context of misrepresentations, their Honours said (at 527):

When a plaintiff is induced by a misrepresentation to enter into an agreement which is, or proves to be, to his or her disadvantage, the plaintiff sustains a detriment in a general sense on entry into the agreement. That is because the agreement subjects the plaintiff to obligations and liabilities which exceed the value or worth of the rights and benefits which it confers upon the plaintiff. But, as will appear shortly, detriment in this general sense has not universally been equated with the legal concept of “loss or damage”. And that is just as well. In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact upon events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired. To compel a plaintiff to institute proceedings before the existence of his or her loss is ascertained or ascertainable would be unjust. Moreover, it would increase the possibility that the courts would be forced to estimate damages on the basis of likelihood or probability instead of assessing damages by reference to established events. In such a situation, there would be an ever-present risk of undercompensation or overcompensation, the risk of the former being the greater.

[40] Their Honours said that the decision in Forster v Outred & Co was explicable by reference to the immediate effect of the execution of the mortgage on the value of the plaintiff’s equity of redemption (at 529). They went on to say (at 530-531):

[T]he English decisions have proceeded according to the view that, where the plaintiff is induced by a negligent misrepresentation to enter into a contract and the contract, as a result of the negligence, yields property or contractual rights of lesser value, the plaintiff first suffers financial loss on entry into the contract, notwithstanding that the full extent of the plaintiff’s financial loss may be incapable of ascertainment until some later date. In part, the English approach appears to have been influenced by the general principle stated in Darley Main Colliery Co v Mitchell [(1886) 11 App Cas 127] that damages in respect of a cause of action are awarded on a once and for all basis. But that principle tells us very little, if anything, about the time when the plaintiff first suffers loss or damage in the circumstances of a particular case, except that, properly understood, Darley Main Colliery emphasises the need for actual, as distinct from prospective, damage before prospective damages can be included in the award.

Another element in some of the English decisions ... is the conclusion that, because the subject matter of the agreement lacked the qualities which it had been represented as having, that subject matter was therefore less valuable than it would have been if the representations had been true. That conclusion is acceptable in cases in which the contract measure of damages is appropriate but it is not acceptable here where the contract measure of damages does not apply. The application of that measure of damages may, in some situations, enable a court to conclude more readily that the plaintiff first suffers loss or damage on entry into an agreement.

It has been contended that the principle underlying the English decisions extends to the point that a plaintiff sustains loss on entry into an agreement notwithstanding that the loss to which the plaintiff is subjected by the agreement is loss upon a contingency. For our part, we doubt that the decisions travel so far. Rather, it seems to us, the decisions in cases which involve contingent loss were decisions which turned on the plaintiff sustaining measurable loss at an earlier time, quite apart from the contingent loss which threatened at a later date. (Footnotes omitted)

[41] Forster v Outred & Co and DW Moore & Co v Ferrier were given as illustrations of the point made in the last paragraph of this extract. Their Honours then said (at 532):

If, contrary to the view which we have just expressed, the English decisions properly understood support the proposition that where, as a result of the defendant’s negligent misrepresentation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred. A deferred liability may stand in a different position but there is no occasion here to discuss that matter.

[42] They concluded (at 533):

The conclusion we have reached is reinforced by the general considerations to which we referred earlier. It is unjust and unreasonable to expect the plaintiff to commence proceedings before the contingency is fulfilled. If an action is commenced before that date, it will fail if the events so transpire that it becomes clear that no loss is, or will be, incurred. Moreover, the plaintiff will run the risk that damages will be estimated on a contingency basis, in which event the compensation awarded may not fully compensate the plaintiff for the loss ultimately suffered. These practical consequences which would follow from an adoption of the view for which the appellants contend outweigh the strength of the argument that the principle applicable to the cases in which the plaintiff acquires property (or a chose in action) should be extended to cases where an agreement subjects the plaintiff to a contingent loss. In such cases, it is fair and sensible to say that the plaintiff does not incur loss until the contingency is fulfilled.

[43] Brennan, Deane and Toohey JJ delivered separate decisions in which they reached the same result.
[44] Next came the decision of the House of Lords in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] UKHL 53; [1997] 1 WLR 1627. It is unnecessary for present purposes to detail the factual background, other than to say that the case involved a claim in negligence by a bank against valuers, the bank having made loans against the security of properties on the basis of negligent over-valuations. An issue arose as to the time at which the cause of action arose – was it immediately the loans were made or at the time when the amount the bank was owed exceeded the value of the borrowers’ covenants and securities?
[45] Their Lordships held that the cause of action arose on the date on which the lender suffered loss attributable to the valuer’s breach of duty, and that would depend on the facts of the particular case. As Lord Hoffmann put it (at 1639):

[L]oss will be suffered when the lender can show that he is worse off than he would have been if the security had been worth the sum advised by the valuer. The comparison is between the lender’s actual position and what it would have been if the valuation had been correct.

In the particular case, this meant that loss or damage was not suffered until the later of the two points in time identified at [44] above.

[46] In relation to Wardley, Lord Nicholls of Birkenhead said (at 1632-1633):

It should be acknowledged at once that, to a greater or lesser extent, quantification of the lender’s loss is bound to be less certain, and therefore less satisfactory, if the quanitification exercise is carried out before, rather than after, the security is ultimately sold. This consideration weighed heavily with the High Court of Australia in Wardley Australia Ltd v State of Western Australia [1992] HCA 55; (1992) 175 CLR 514. But the difficulties of assessment at the earlier stage do not seem to me to lead to the conclusion that at the earlier stage the lender has suffered no measurable loss and has no cause of action, and that it is only when the assessment becomes more straightforward or final that loss first arises and with it the cause of action.

Indeed, for the cause of action to arise only when the lender realises his security would be a highly unattractive proposition. It would mean that, however obvious it may be that the lender will not recover his money, he cannot start proceedings. He must wait until he manages to sell the property, a process which may be protracted. This would be a surprising stance for the law to take. It would be all the more surprising when one has in mind that a lender’s cause of action against his negligent valuer for breach of contract, as distinct from a claim in tort, arises when the negligent valuation is given. If disaster were evident and the lender were to sue his valuer for breach of contract without waiting until he had realised his security, it is inconceivable that the court would award only nominal damages. The court would do its best to assess the loss. This prompted the trenchant observation of Bingham LJ in D W Moore & Co Ltd v Ferrier [1988] 1 WLR 267, 280:

“If, in a contractual claim for negligence, the court would have awarded other than nominal damages, I do not see how it can be said that an action in tort based on the same negligence would have been bound to fail for want of any damage as an essential ingredient of the cause of action.”

As Mr Briggs submitted, no accountant or prospective buyer, viewing the loan book of a commercial lender, would say that the shortfall in security against outstanding loans to defaulting borrowers did not represent a loss to the lender merely because the securities had yet to be sold. Realisation of the security does not create the lender’s loss, nor does it convert a potential loss into an actual loss. Rather, it crystallises the amount of a present loss, which hitherto had been open to be aggravated or diminished by movements in the property market.

[47] This Court discussed the cases of Forster, Wardley and Nykredit in Gilbert v Shanahan [1998] 3 NZLR 528. In that case, the plaintiff had guaranteed the obligations of a company under a lease. The effect of the guarantee was that the plaintiff became a principal debtor/covenantor to the lessor. The plaintiff was not under any legal obligation to give the guarantee, but this was not drawn to his attention by his solicitors. The company became insolvent and the plaintiff was called upon to answer the guarantee. The plaintiff sued his solicitors for breach of fiduciary duty and in negligence. The question of limitation arose.
[48] Tipping J delivered the judgment of the Court. He identified the question for decision as being when the plaintiff first suffered loss or damage from having entered into the guarantee: at 538. His Honour drew a distinction between a present liability which falls due in the future and a contingent liability, that is, a liability which may or may not occur in the future: at 539. In a case involving the assumption of a liability, the measure of the plaintiff’s loss was the difference between the position that he would have been in had the liability not been assumed, and his position as a result of assuming that liability. He said (at 540):

The contrast for present purposes is between [the plaintiff’s] position with or without the liability which he assumed under the guarantee. But if the liability is contingent, no sensible contrast can be made unless and until the contingency is fulfilled. The only other way to deal with the matter is to value the contingency and compensate accordingly. This would involve a major risk of either undercompensating or overcompensating the plaintiff: ...

[49] The Judge then discussed the three authorities referred to at [45] and said (at 542-543):

Having considered the views expressed in Nykredit and Wardley, we are of the provisional view that the Australian approach is in general terms preferable to the English. For the purposes of deciding the present case it is unnecessary finally to determine the point. The crucial issue is whether a person who incurs a contingent liability thereupon immediately suffers loss or damage for limitation purposes. If a liability is subject to a condition or contingency which may or may not be fulfilled, it appears more satisfactory for limitation purposes to say that the debtor has suffered no loss or damage, unless and until an event occurs which converts the liability from a potential to an actual liability. Until then, all one can say is that the person subject to the liability may, with a greater or lesser degree of probability, suffer loss or damage.

When a liability is said to be the loss or damage which the plaintiff has suffered, it is necessary on this approach to determine whether that liability is present or contingent. If it is a present liability, there will be loss or damage when it is incurred, notwithstanding it may not be dischargeable in whole or in part until a future date. If the liability is contingent, it will not amount to loss or damage unless and until the contingency is fulfilled.

[50] The Court ultimately held that, because the plaintiff became a principal debtor/covenantor under the guarantee, his liability was a present one, albeit dischargeable in the future. Accordingly he suffered loss or damage at the time that he entered into the guarantee and his claim was statute-barred (at 544-545).
[51] The issue arose again in Stratford v Phillips Shayle-George [2001] NZCA 299; (2001) 15 PRNZ 573 (CA). The case involved a rather complex factual situation which it is unnecessary to detail, but which resulted in the plaintiff suing her solicitors in negligence and for breach of fiduciary duty. The Court had to consider when a cause of action in negligence accrued where, on legal advice, the plaintiff had given a mortgage over her interest in the family home as part of a series of financial arrangements with her husband. Unfortunately it was not necessary that the plaintiff give the mortgage and by doing so, she incurred a debt which previously did not exist.
[52] Tipping J, delivering the judgment of the Full Court, said that the liability was a present one, albeit one that fell due in the future. Prima facie, then, the plaintiff suffered loss immediately upon her entry into the mortgage (at [18]). The Judge then addressed an argument that the plaintiff had, from a balance sheet perspective, suffered no loss or damage at that time as her husband was indebted to her in exactly the same amount as was secured by the mortgage.
[53] As to that, Tipping J said:

[20] There are ... problems with such an analysis for limitation purposes. The harm suffered by [the plaintiff] was a debt certain, secured over real estate that would otherwise have been unencumbered. Although the debt was payable a long time in the future, [the plaintiff] could not deal with her house as freely as would have been the case had there been no mortgage on it. She could not sell the house without arranging to discharge the mortgage, and she could not raise money on it as freely as would otherwise have been the case. While difficult to quantify, those aspects represent a species of loss or damage for limitation purposes. For example, further borrowing on second mortgage would be likely to be at a higher rate of interest and any necessary steps to discharge the mortgage would have cost money. Loss or damage does not have to be quantified at the point of accrual of a cause of action. It might be said that loss or damage of this nature was contingent upon [the plaintiff] wishing to take some step that was impeded or made more expensive by the existence of the mortgage. But such a proposition could fairly be countered by saying that, as a result of the solicitors’ negligence, [the plaintiff] now had a property which was less valuable to her by an amount greater than simply the face or present value of the mortgage.

[54] The Court did not finally determine the point because it was able to determine the case on an alternative basis (see [21]).
[55] The next case in the sequence is McCarroll v Statham Gill Davies (a firm) [2003] EWCA Civ 425. The plaintiff was a former drummer in the band, Oasis. A solicitor acted for the group in the negotiation of a recording contract with Sony. The effect of two clauses in the contract, coupled with the absence of a partnership agreement, was that two members of the band (other than the plaintiff) owned the name “Oasis” and had the ability to dismiss the plaintiff and others from the band instantly and without compensation. The plaintiff, together with the other members of the band, signed the agreement.
[56] Following that the group made a very successful album. Sony called for a second album, but before recording began, the plaintiff was summarily dismissed from the group. He brought an action against the other four members, who contended that the group constituted a partnership at will. That action settled before trial. The plaintiff then brought an action against the solicitor who acted on the negotiation, alleging various acts of negligence. This action was brought within six years of his expulsion from the group but well after six years from the date of execution of the Sony agreement. A limitation defence was raised.
[57] Pill LJ delivered a judgment concurred in by the other members of the Court of Appeal. The plaintiff relied upon the Wardley case and Gilbert v Shanahan to argue that he did not suffer loss until he was expelled from the group. In rejecting this argument Pill LJ discussed Knapp v Ecclesiastical Insurance Group Plc and D W Moore & Co Ltd v Ferrier and concluded:

[21] In my judgment, that principle applies in the present case. Given the assumed breach of duty, the appellant suffered damage from the moment the Sony Agreement was made. He was party to an agreement which he claims was, by reason of the negligence of the respondents, less favourable to him than it should have been. A monetary value could have been put upon the loss at that time though the extent of the loss would have depended on subsequent events and an accurate quantification of loss would have been likely to become clearer with the passage of time. The contract into which he entered was of less commercial value than it would otherwise have been, the risk of instant expulsion constituting actual loss.

[22] While the amount of loss may be contingent upon future events, there was an actual loss when the agreement was made. The appellant was only a partner-at-will and one who lost the right to the group’s name if he was expelled from the group. ...

[58] Finally we come to the decision of the House of Lords in Law Society v Sephton & Co [2006] UKHL 22; [2006] 2 AC 543. Lords Hoffmann, Walker of Gestingthorpe and Mance delivered speeches in which the other members of the House concurred.
[59] A solicitor misappropriated client funds over a period of years up until March 1996. In each of the years 1988 to 1995 the solicitor presented to the Law Society a report from the respondent accounting firm, in which a member of the firm certified that he had examined the solicitor’s accounts and was satisfied that the solicitor had complied with the relevant accounting rules. The certifying accountant was negligent in making the reports, as if he had examined the accounts properly the misappropriations would have been discovered.
[60] The clients whose money was misappropriated claimed against a compensation fund administered by the Society. The Society paid the claims and sought to recover the amounts paid from the accounting firm. The question before their Lordships was whether the cause of action accrued before 16 May 1996, because if it did, the Society’s claim was statute-barred.
[61] Lord Hoffmann discussed Forster v Outred & Co and then set out some of the discussion of that and other English cases from the principal judgment in the Wardley case (see [40] – [41] above). His Lordship then said:

[18] I say at once that I am in complete agreement with this analysis, which provides the answer to this appeal. By virtue of the terms of the Solicitors’ Compensation Fund Rules 1995, [the solicitor’s] misappropriations gave rise to the possibility of a liability to pay a grant out of the fund, contingent upon the misappropriation not being otherwise made good and a claim in proper form being made. Such a liability would be enforceable only in public law, by judicial review, but would still in my opinion count as damage. But until a claim was actually made, no loss or damage was sustained by the fund. I must however consider certain other authorities and contrary arguments.

[62] In his further discussion of the English authorities, Lord Hoffmann said:

[20] The Nykredit (No 2) case ... therefore decides that in a transaction in which there are benefits (covenant for repayment and security) as well as burdens (payment of the loan) and the measure of the damages is the extent to which the lender is worse off than he would have been if he had not entered into the transaction, the lender suffers loss and damage only when it is possible to say that he is on balance worse off. It does not discuss the question of a purely contingent liability.

[21] Next, there are a number of cases in the Court of Appeal which involve transactions, with both benefits and burdens, into which the plaintiff entered as a result of the negligence or breach of contract of the defendant. None of these cases concerned purely contingent obligations. It is only necessary to observe that in such bilateral transactions the answer to the question of whether damage has been suffered may be different according to whether the liability is for the consequences of the defendant not performing his duty or (as is usual in claims for misrepresentation) the consequences, or some of the consequences, of the plaintiff entering into the transaction. If the liability is for the difference between what the plaintiff got and what he would have got if the defendant had done what he was supposed to have done, it may be relatively easy, as Bingham LJ pointed out in D W Moore & Co Ltd v Ferrier..., to infer that the plaintiff has suffered some immediate damage, simply because he did not get what he should have got. Thus in Knapp v Ecclesiastical Insurance Group plc..., where the plaintiff paid a premium for a voidable fire insurance policy because his insurance broker had failed to disclose material facts, the Court of Appeal held that he had suffered immediate damage because he “did not get what he should have got”, namely a policy binding on the insurers. On the other hand, if the damage is (as it was in the Nykredit (No 2) case ... and First National Commercial Bank plc v Humberts [1995] 2 All ER 673) the difference between the defendant’s position after entering into the transaction and what it would have been if he had not entered into the transaction, the answer may be more difficult. Despite the breach of duty, the transaction may on balance have originally been advantageous to the plaintiff and some evidence may be necessary to show when he was actually in a worse position. The judgment of Mason CJ and his colleagues in the Wardley case drew attention to this distinction [1992] HCA 55; 175 CLR 514, 530-531:

“Another element in some of the English decisions ... is the conclusion that, because the subject matter of the agreement lacked the qualities which it had been represented as having that subject matter was therefore less valuable than it would have been if the representations had been true. That conclusion is acceptable in cases in which the contract measures of damages is appropriate but it is not acceptable here where the contract measure of damage does not apply. The application of that measure of damages [sc the difference between the value of what the plaintiff got and what he would have got if the defendant had performed his duty] may, in some situations, enable a court to conclude more readily that the plaintiff first suffers loss or damage on entry into an agreement.”

[22] Thus cases like Bell v Peter Brown & Co ... and Knapp v Ecclesiastical Insurance Group plc ... are readily explicable as cases in which the damage was the difference between the plaintiff’s position as it was and as it would have been if the defendant had performed his duty and in which it was possible to infer that the plaintiff’s failure to get what he should have got from a bilateral transaction was quantifiable damage, even though further damage might result from the flaw in the transaction was still contingent. The plaintiff had paid money, transferred property, incurred liabilities or suffered diminution in the value of an asset and in return obtained less than he should have got. But these authorities have no relevance to a case in which a purely contingent obligation has been incurred.

[63] His Lordship concluded:

[30] In my opinion, therefore, the question must be decided on principle. A contingent liability is not as such damage until the contingency occurs. The existence of a contingent liability may depress the value of other property, as in Forster v Outred & Co ..., or it may mean that a party to a bilateral transaction has received less than he should have done, or is worse off than if he had not entered into the transaction (according to which is the appropriate measure of damages in the circumstances). But, standing alone as in this case, the contingency is not damage.

[64] As is clear from these cases, in this as in other areas of law, context is everything. The authorities establish that where a plaintiff alleges that he or she has executed a document in accordance with a solicitor’s negligent advice, and has suffered loss as a result, the cause of action will generally accrue when the advice is acted upon. This will be so even though the full dimensions of the loss may not become apparent until some time later. As McGee Limitation Periods (5th ed 2006) says at [5.030]:

[I]n the overwhelming majority of cases the cause of action will accrue when the negligent advice is acted upon and ... this will usually be when the plaintiff executes a document.

[65] Broadly, the rationale for this is that when the document is executed the plaintiff will have a package of rights that is less than that which he sought and should have received. As Lord Walker put it in Law Society v Sephton:

[48] In all these cases the claimant has as a result of professional negligence suffered a diminution (sometimes immediately quantifiable, often not yet quantifiable) in the value of an existing asset of his, or has been disappointed (as against what he was entitled to expect) in an asset which he acquires, whether it is a house, a business arrangement, an insurance policy, or a claim for damages.

[66] However, this outcome is not automatic. As Neill LJ emphasised in DW Moore & Co Ltd v Ferrier (see [28] above), there is no presumption that loss arises at the time that the negligent advice from the solicitor is acted upon – it depends on when in the circumstances of the case actual damage occurs. It appears from their Lordships’ discussion in Law Society v Sephton that the critical issue in such a case is whether the plaintiff’s legal position has, through the solicitor’s negligence, been altered to his immediate, financial disadvantage (see Lord Walker at [43] and Lord Mance at [67]). If so, loss or damage accrues immediately even if the full measure of that loss may not become clear until a later point in time.

This case

[67] As we have said, in the usual run of cases, where a person enters into an agreement on the advice of his or her solicitor and, as a result of the solicitor’s negligence, the agreement does not achieve what it is supposed to achieve, that person will suffer an immediate loss.
[68] The present case is an unusual one, however. Here the agreement, even if validly made, would not necessarily have been enforceable, given the court’s discretion under s 21(8)(b). Equally, although the agreement was invalidly made it was not necessarily unenforceable, given the court’s discretion under s 21(8)(a). So a s 21 agreement, whether validly or invalidly executed, is, to some extent at least, a backdrop for the exercise of a statutory discretion by the court. And the court will only be called upon to exercise its discretion if the parties’ marriage breaks down. The question is whether these factors mean that the respondent did not suffer an actual loss at the time he acted on his solicitor’s negligent advice, but suffered it only at some later point.
[69] As we see it, besides the time at which the respondent acted on the negligent advice (March 1990), there are three other points at which it might be argued that loss or damage accrued, so as to trigger the commencement of the limitation period. They are the date on which the couple moved into the respondent’s Rotorua property (October 1993), the date on which they separated (April 1998) and the date on which the Family Court refused to validate the agreement (December 1999). The present proceedings were issued in July 2002, so that if either of the first two dates applies, the proceedings will be time-barred.
[70] There is a substantial argument that the respondent suffered actionable loss or damage at the time that he acted on his solicitor’s advice. While the invalid execution of the agreement became problematic only on the occurrence of certain future events (the parties adopting the Rotorua house as their matrimonial home and their marriage failing), at the time of its execution the respondent did not obtain what he sought and was entitled to, namely a validly executed prenuptial agreement. While such an agreement did not guarantee that he would be able to protect the Rotorua house as his separate property given the criteria set out in s 21(10), it did give him the best opportunity to do so. A validly executed prenuptial agreement between two parties, each of whom owned significant assets prior to marriage, which was intended to preserve their separate property would not readily be set aside on the ground that it was unjust: see the helpful discussion in Wood v Wood [1998] 3 NZLR 234 at 240-244 (HC). But because the agreement was invalidly executed, the respondent faced a more difficult task in persuading a court to give effect to it. He had to establish that the failure to follow the prescribed process did not materially prejudice his wife before there could be any issue as to the overall justice of the agreement. On the authorities, the prospects of persuading a court that a party who was inadequately advised was not materially prejudiced by that lack of advice were weak. In short, then, at the time of execution the respondent had, as a result of his solicitor’s negligence, a further hurdle to overcome to maintain the agreement, should that become necessary.
[71] Equally, however, there are strong arguments against that date. If the respondent’s position at that time is analysed on a “benefits and burdens” basis, it is difficult to conclude that burdens outweighed benefits, or, putting it another way, that it could be shown that the respondent’s legal position had changed to his financial detriment. There were too many uncertainties as to how matters would develop in the future to make that assessment. Had the respondent sued his solicitor for breach of a contractual duty to use reasonable care and skill in 1990, it would have been difficult for the court to calculate damages on other than a nominal basis. This case is not like the invalid restraint of trade covenant in DW Moore & Co Ltd v Ferrier, for example. There it could be said that the negligence caused immediate financial loss because a valid restraint of trade clause would have been reflected in the value of the goodwill of the business, and that would have been a valuable asset on a sale of the business. As is clear from the Nykredit case, a bank granting a loan secured against property that has been negligently overvalued may suffer immediate loss. This will be reflected in the value of the bank’s loan book, which is, of course, saleable. In the present case, however, it is difficult to see any immediate financial impact even though there was a general detriment in the sense that the respondent did not get what he wanted.
[72] It is unnecessary that we reach a final view on this point, however, as we think it clear that the respondent suffered actual loss or damage in October 1993 when the couple moved into the respondent’s house in Rotorua. Accordingly, we consider that the limitation period ran from that date at the latest. The present proceedings were issued more than six years after and so are time-barred.
[73] Many of uncertainties that existed in March 1990 when the agreement was executed were removed when the respondent and his wife moved into his Rotorua house in 1993. They had come to New Zealand to live in February 1993 and moved into the house in October of that year. It was to be their principal family residence. In the absence of a validly executed prenuptial agreement preserving the house as the respondent’s separate property, it became matrimonial (now relationship) property, and the respondent’s wife became entitled to a share in it. Presumably when the couple moved into the house, the respondent did so on the basis that the agreement preserved it as his separate property. At this point, even though it was possible, if unlikely, that a court would later validate the agreement, it can fairly be said that the respondent was financially worse off as a result of his solicitor’s negligence, or that from his perspective “burdens outweighed benefits”.
[74] As to policy considerations, we agree with Judge McGuire that there is a powerful policy argument against the treating the respondent’s loss as accruing on the date of the Family Court’s refusal to validate the agreement. As the Judge pointed out, if loss did not accrue until a court declined to validate an invalidly executed agreement there could be a lengthy period between the allegedly negligent conduct and the proceedings based on it. A marriage breakdown may occur many years after marriage. Even though the invalidity was obvious on the face of the document or was reasonably discoverable, the institution of proceedings could be delayed until a court had determined the question of enforceability. In this context, we note the observation of Lord Nicholls in the Nykredit case at 1633:

Further, within the bounds of sense and reasonableness the policy of the law should be to advance, rather than retard, the accrual of a cause of action. This is especially so if the law provides parallel causes of action in contract and in tort in respect of the same conduct. The disparity between the time when these parallel causes of action arise should be smaller, rather than greater.

[75] We acknowledge that this approach may in some cases cause hardship to people in the respondent’s position. But that is in the nature of limitation periods. As the Supreme Court has emphasised in its recent decision concerning reasonable discoverability, Trustees Executors Limited v Murray [2007] NZSC 27, the Limitation Act reflects a balance struck by Parliament between the interests of plaintiffs and defendants, and must be respected as such: see especially Tipping J at [74]-[76]. As McGrath J said at [101]:

[I]t must be borne in mind that the unfairness to plaintiffs, if damage is treated as arising before they knew or ought to have known of it, in some situations will be matched and outweighed [by unfairness to defendants] if allegations of wrongful conduct can be raised many years after what is complained of happened.

[76] We turn now to the two authorities upon which Simon France J relied, Connell v Odlum and Russell v Preston. In both cases s 21 agreements had been declared void on the basis that the wives involved had not received adequate explanation from their solicitors as to the effect of the agreements. In each case the husband brought a claim in negligence against the wife’s solicitor. The claims were both brought on the basis that the solicitor, in advising the wife under s 21, owed a duty of care to the husband.
[77] In Connell v Odlum the solicitor applied to have the claim struck out on the basis that he owed no duty of care to the husband in advising the wife. He did not succeed before the High Court and appealed. This Court held that the husband had an arguable claim against the solicitor, so that the application to strike out was properly declined. In Russell v Preston such a claim went to trial. The High Court held that the solicitor owed the husband a duty of care and had breached that duty. The Court refused to award the husband all of the losses which he claimed, however, on the basis that the agreement, quite apart from being invalidly executed, was substantively unjust. As a consequence, the solicitor’s negligence was not causative of all of the loss suffered from its non-enforcement.
[78] For present purposes an interesting aspect of both cases is that the agreements were made more than six years before the actions were instituted, but within six years of their being declared void. Yet, as Simon France J said at [39], there was no suggestion in either case that there might be a limitation problem. Further, the Judge said that Russell v Preston demonstrated that any loss in this type of case was truly contingent and could not be determined until the Family Court had resolved the question of the status of the agreement (at [40]).
[79] As to the point that the question of limitation was not dealt with, it must be remembered that the expiry of the limitation period does not extinguish the cause of action in this class of case - it merely means that no remedy is available. The expiry of the limitation period is an affirmative “defence” and must be pleaded specifically by the person wishing to take advantage of it. A court will not take the time point if it is not raised.
[80] Against this background it is not surprising that this Court did not mention the question of limitation in Connell v Odlum. That case involved an appeal from a refusal to strike out on the basis that no duty of care was owed. This Court said that it was arguable that a duty of care existed in the circumstances of the case. Nothing can properly be drawn from the decision in relation to limitation.
[81] In Russell v Preston the action went to trial. For whatever reason the defendant did not raise a limitation defence. The Court was not therefore called upon to deal with it. It is correct, as Simon France J said, that the case illustrates that the precise extent of a plaintiff’s loss may not be known until events have taken their course. But, as emerges from the cases discussed above, that is often the position, and does not mean that actual loss is not suffered at some earlier point.
[82] For our part, then, we do not see these two decisions as providing any assistance.
[83] We make one final observation. This may be thought to be a harsh result for someone in the respondent’s position, who may well have no reason to think that a prenuptial agreement has been invalidly executed. In Gilbert v Shanahan Tipping J said (at 544-545):

This might be thought a hard case for [the plaintiff]. The result derives from the way the Limitation Act 1950 applies to the present circumstances. In its report no 6 entitled “Limitation Defences in Civil Proceedings” presented to the Minister of Justice in October 1988 (NZLC R6), the Law Commission recommended substantial changes to this area of the law. One of its central recommendations was 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. From [the plaintiff’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.

[84] This remains the position. We reiterate the view that early legislative consideration is desirable.

Decision

[85] We allow the appeal. The appellant will have costs of $4,000 in this Court, plus usual disbursements.

Solicitors:
Gilbert Walker, Auckland for Appellant
Rennie Cox, Auckland, for Respondent