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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
TAURANGA REGISTRY
CIV
2007-470-654
BETWEEN MCEWAN (2003) LIMITED
Plaintiff
AND SHARP TUDHOPE
Defendant
Hearing:
6, 7 and 8 April 2009
Counsel: J B Holmes for Plaintiff
F B Barton and A M Cunninghame for Defendant
Judgment:
15 June 2009
JUDGMENT OF HEATH J
This judgment was delivered by me on 15 June 2009 at 2.O0pm
pursuant to Rule 11.5 of the High
Court Rules
Registrar/Deputy
Registrar
Solicitors:
Sanderson Weir, PO Box 856, Shortland Street, Auckland
Anderson Lloyd, Private Bag 1959, Dunedin
Counsel:
J B Holmes, PO Box 13110, Tauranga
MCEWAN (2003) LIMITED V SHARP TUDHOPE HC TAU CIV 2007-470-654 15 June 2009
Contents
Introduction [1]
Background
[4]
The issues
[13]
McEwan's proceedings against the directors [20]
The claims against Sharp Tudhope
[32]
Actual authority: What happened at the mediation? [40]
Ostensible
authority
(a) Two issues [58]
(b) Mrs Campbell's authority
[59]
(c) Mr Crombie's agency [65]
Was Sharp
Tudhope negligent? [70]
Causation and quantum
[74]
Result [81]
Introduction
[1] McEwan
(2003) Ltd (McEwan) became involved in a dispute with Donnelly
Holdings Ltd (Donnelly) about alleged misrepresentations by Donnelly
as to the
viability of a motel business that McEwan was buying from it. The parties went to
mediation to resolve their differences.
Agreement was reached. Part of the
agreement involved Donnelly's directors guaranteeing the settlement. When
Donnelly did not perform its side of the bargain, the directors disputed that they had
any personal obligations to complete the settlement.
[2] McEwan brought proceedings against the directors. Eventually, those
proceedings were struck out because McEwan
did not comply with an order
requiring security for costs to be paid. Instead, McEwan elected to sue its former
solicitors, Sharp
Tudhope, for preparing the post mediation settlement agreement
negligently and for failing to protect its interests.
[3] The
central issue involves the enforceability of the guarantees that McEwan
thought it had procured from the four directors of Donnelly
at the mediation.
Background
[4] In January 2003, Mr and Mrs McEwan contracted with Donnelly to buy the
Donhur Motor Inn, in
Waihi Road, Tauranga. Subsequently, they nominated
McEwan as purchaser. In due course, the transaction settled and McEwan
entered
into possession of the motel business. Title to the freehold estate in the land
remained in the name of Donnelly; leaving
Donnelly as lessor and McEwan as lessee
of the land on which the motel stood.
[5] By March 2004, Mr McEwan had concerns about
whether all information
provided by Donnelly about the motel's business was accurate or complete. He had
placed reliance on that
information when making the decision to purchase the
business. The nature of McEwan's concerns were relayed to Donnelly.
The
simmering dispute was brought to a head when McEwan stopped paying rent to
Donnelly.
[6] After initial correspondence between solicitors, it was agreed
that the dispute
would be referred to mediation. A mediation conference was convened on 12
August 2004. At its commencement, the
mediator (Mr Sharp) provided to the parties
a "Mediation Agreement", including a confidentiality provision in usual terms. The
confidentiality
agreement was signed at the mediation by all present, save for the
legal advisers. For example, accountants representing McEwan and
Donnelly signed
the agreement, even though they were present only as advisers.
[7] The schedule to the Mediation Agreement referred
only to a claim brought by
McEwan against Donnelly in regard to the sale of a motel business. The agreement
was signed by Mr McEwan,
on behalf of McEwan. Three of the four directors of
Donnelly were present. Those directors (Mrs Campbell, Mr Hurley and Mrs Hurley)
signed the Mediation Agreement on Donnelly's behalf. Mr Campbell, the fourth
director, was unwell and did not attend.
[8] The
mediation began at 9.30am. Twelve hours later, it ended. By that time,
a settlement agreement had been signed.
[9] The terms
of settlement were written up by hand and signed by Mr McEwan
and Mrs Campbell. By the time the agreement was signed, both Mr and
Mrs Hurley
had left the building in which the mediation was being conducted. That left only
Mrs Campbell to sign any documents on
behalf of Donnelly. There is an issue about
whether or not she signed solely on behalf of Donnelly.
[10] The Settlement Agreement
recorded the following terms:
1. Donnelly (or nominee) (the purchaser) will purchase
from McEwan the tenancy and business of the Donhur
Motor Inn at 126 Waihi Road, Tauranga on the terms
attached.
2. Donnelly will waive the claim they have for monies
presently owing to them by McEwan under the lease of
the Donhur Motor Inn premises with the exception
of
the rental for the period 12.08.04 1.09.04 (such rental
is agreed to be the
sum of $6935 plus GST) which will
be paid by McEwan on 1 September 2004. If the
possession date is after 1 September 2004 McEwan will
continue to perform all of its obligations under
the lease
until the date of possession provided however the lease
will be varied
in the following way:
(a) The rental will be calculated and paid on the
basis of $129,000 plus GST per annum
(b) The rent will be paid weekly in advance
from 1 September 2004.
3. The directors of Donnelly hereby guarantee
the
performance of this agreement and the agreement for
sale and purchase by Donnelly
or its nominee.
4. Donnelly consents to the registration of a caveat upon
the date
of possession by McEwan over its land on
which the business is situated at 126 Waihi Road to
protect its interests under this agreement and the
agreement for sale and purchase. McEwan
will provide
Donnelly with registerable release of the caveat
registered to protect
its interest under the lease together
with the associated fee upon date of possession.
Forthwith upon the date of settlement McEwan will
provide a withdrawal of the caveat protecting
its interest
under this agreement together with associated fee to
withdraw the same. McEwan agrees to lift any caveat it
has on the property to enable Donnelly to register any
security in favour of a lending institution.
5. The terms of this agreement and matters discussed at the
mediation shall be
kept confidential to the parties and
their advisers.
6. The parties accept that
this agreement is in full and final
settlement of any claims they may have against each
other or against the directors of either party arising in
any way out of the lease, the agreement
for sale and
purchase of the business and any pre-contractual
statements made,
including any claims in tort or
otherwise at law in the matters in dispute. (my
emphasis)
[11] An annex to the Settlement Agreement recorded special terms to be inserted
into the agreement for sale and
purchase that the parties intended be drawn up to
implement the settlement reached.
[12] The Settlement Agreement shows the parties
as being McEwan and
Donnelly. There is no reference to the directors personally, either in the preamble to
the agreement or in the
attestation clause.
The issues
[13] Mr Holmes, for McEwan, submitted that Sharp Tudhope were negligent in
two respects.
a) First, the solicitor representing McEwan at the mediation failed to
advise the company adequately
on the options available to protect its
position in the event that Donnelly did not perform its side of the
settlement agreement.
b) Second, the solicitors fell below the standard of care required because
they did not ensure that the guarantee to be given by the directors of
Donnelly was drafted adequately
or that Mrs Campbell had authority
to execute on behalf of all four directors.
[14] Mr Holmes submitted the solicitors
ought to have ensured that the guarantees
were adequately documented, either at the mediation itself or in the subsequent
agreement
for sale and purchase. The latter was drafted by someone in the
commercial team at Sharp Tudhope, to whom the Settlement
Agreement was
referred the day after the mediation.
[15] Mr Barton, for Sharp Tudhope, submitted that the options for settlement
were
explained fully by Mr Beech to Mr McEwan and that the latter made an informed
decision to rely on the guarantee proposed.
[16] Mr Barton responded to the allegation of negligence, in relation to the
drafting and authorisation of the guarantee, by submitting
that, in the circumstances,
Mrs Campbell had actual authority to bind herself to the guarantee and ostensible
authority to bind the
other directors. He submitted that cl 3 of the Settlement
Agreement complied with s 2 of the Contracts Enforcement Act 1956 to
provide
written evidence of the guarantee of each director.
[17] Mr Barton also submitted that the word "hereby" in cl 3 of the
Settlement
Agreement suggested that a formal document recording personal guarantees was not
envisaged by the parties. Mr Barton contrasted
cl 3 with cl 5 of the annex ("Terms
of Sale of the Donhur Motor Inn and Business") which provided expressly for the
parties to enter
into a formal agreement for sale and purchase of the business on
specified terms.
[18] The issue of inadequate advice about the
options available to McEwan to
protect its position can be dealt with briefly. Mr McEwan accepted, in evidence, that
he and his advisers
discussed what options were available to protect McEwans
position, in the event that Donnelly did not complete its side of the agreement.
Mr
McEwan accepted that personal guarantees from the directors provided the best
possible protection. In those circumstances the claims based on alternative
forms of
protection cannot succeed.
[19] Therefore, the sole issue for my determination is whether the solicitors
breached their
implied obligation to exercise reasonable skill and care by not
ensuring that McEwan had enforceable guarantees from Donnelly's directors.
McEwan's proceedings against the directors
[20] When it became clear that the directors disputed the efficacy of the purported
guarantees, Sharp Tudhope prepared a formal "Deed of Covenant and Guarantee"
which was executed by McEwan and forwarded to the solicitors
for Donnelly,
Donhur and the directors for execution.
[21] This document enlarged significantly on cl 3 of the Settlement Agreement.
It
was drafted with the intention of melding the guarantees to the obligations assumed
by Donnelly on settlement. After setting out
the background to the proposed Deed,
the operative provisions stated:
This deed records
1. The Principal
Party and the Covenantor jointly and
severally agree to pay the Caveator on 31 March 2005
the sum of $327,000 (`the Debt") together with interest
calculated at the rate of 5% per annum
calculated daily
from 6 September 2004 to 31 March 2005.
2. The Principal Party
and the Covenantor agree to pay
interest at the rate of 18% per annum calculated daily on
any sum due in terms of clause 1 of this Deed and not
paid on 31 March 2005.
3. Against payment of the sums due in terms of clauses 1
and 2 of this Deed, the Caveator agrees
to deliver a
withdrawal of caveat numbered 6145214.4 to the
Covenantor.
4. The Guarantors:
a. Guarantee due and punctual payment of the Debt
and other sums due to the Caveator; and
b. Guarantee the due performance by the Principal
Party and the Covenantor of their obligations in this
Deed and the Settlement
Agreement; and
c. Agree not to prove in any liquidation of the Principal
Party or the Covenantor; and
d. Agree that the failure of any Covenantor or
Guarantor to sign this guarantee will not invalidate
the guarantee by those who do sign it.
e. Waive all rights as surety, legal, equitable, statutory
or otherwise
and agree to accept responsibility for
the performance of the Principal Party's and the
Covenantor's obligations as if primarily liable for
them.
f. Acknowledge and agree that the guarantee in clause
4 a:
i.
Is a continuing guarantee; and
ii. Is given jointly and severally; and
iii. Will continue until all obligations of the
Principal Party and the Covenantor are
performed; and
iv. Will continue to be binding and at all times
enforceable by the Covenantor notwithstanding
the liquidation
or death or insolvency of the
Caveator.
Those terms can be contrasted with cl 3 of the Settlement
Agreement, set out at para
[10] above.
[22] Donnelly's directors declined to execute the deed in that or any other form.
Proceedings were issued against them on 16
June 2005. An application for summary
judgment was made, with evidence from Mr McEwan in support. Mr Beech gave
evidence before me
(which I accept) that the summary judgment application was
made to flush out any defence.
[23] All four directors disputed liability.
[24] Mr Campbell and Mr and Mrs Hurley each deposed, in affidavits in
opposition to the summary judgment application, that the
mediation was not
intended to deal with any personal liability on the part of the directors and no
authority was given to Mrs Campbell
to bind them to any personal obligation.
[25] Mrs Hurley, with whom Mr Hurley agreed, deposed that she was unaware
that the Settlement
Agreement included a reference to a guarantee until she was
served with the application for summary judgment. She said that she did
not recall
any discussion about a personal guarantee at the mediation.
[26] For her part, Mrs Campbell deposed that she and the
Hurleys were not parties
to the mediation in their individual capacities. While accepting that she and the
Hurleys confirmed they
had authority to bind Donnelly to a settlement, Mrs
Campbell disputed that the other directors gave any similar authority to her
to act in
their personal capacities.
[27] In relation to execution of the settlement agreement, Mrs Campbell said:
13.
In paragraphs 7 and 8 of his affidavit, Mr McEwan creates the
impression that the Hurleys and I were parties to
the mediation in
our individual capacities. I do not accept this. The plaintiff and
Donnelly were the
parties to the dispute. The plaintiff was
represented by Mr McEwan and by its solicitors, Mark Beech and
Katie Koppens. Mrs McEwan and an accountant from KPMG,
whose name presentlty escapes me, were also present on
behalf of
the plaintiff.
...
21. Once the settlement agreement had been drawn up, Mr Crombie read
it out to me and the Hurleys and asked us if we agreed with its
contents.
22. I heard Mr
Crombie read out clause 3 of the settlement agreement.
My understanding was that it required the directors to make
sure that
the company performed its obligations.
23. I certainly did not understand the agreement to create
a personal
guarantee on the part of the directors, such that if the company failed
to pay money due
to the plaintiff, Donnelly's directors would
personally be liable to make payment.
24. When Mr Crombie
had finished reading out the settlement
agreement he asked me and the Hurleys whether the terms were
acceptable and we confirmed that they were. He then asked who
was going to sign on behalf of the company, commenting
that
because all three of us were directors, any one of us would do. The
Hurleys nominated me to sign
and I saw no reason not to do so. I
noted that the signature clause indicated that I was signing on behalf
of Donnelly Holdings Limited. To emphasise this, and at Mr
Crombie's suggestion, I wrote the words "director
of Donnelly
Holdings Limited" under my signature.
25. As far as I was concerned, I was signing the agreement
as
representative of the company, Donnelly. I had no intention of
binding myself personally, nor did
I consider that I was signing as
agent for each of the other directors. I had no authority to do so.
Had I thought or been advised differently, I would not have been
prepared to sign the agreement.
[28] The application
for summary judgment failed.
[29] On 29 June 2007, Associate Judge Doogue made an order that security for
costs be given in the sum of $10,000 in favour of each of
the defendants, with the
proceeding being stayed until such time as security was given: McEwan (2003) Ltd v
Campbell (High Court,
Tauranga, CIV 2004-470-407, 29 June 2007).
[30] A fixture was allocated for 23 and 24 October 2007. The proceeding came
before
me on 20 September 2007. I directed that if security were not given by 28
September 2007, in accordance with Judge Doogue's decision,
the fixture was to be
vacated. Security was not given and the hearing dates were vacated.
[31] Subsequently, the directors applied
to strike out the proceeding for non-
compliance with the order for security. That order was made by Judge Doogue on
13 December
2007: McEwan (2003) Ltd v Campbell (High Court, Tauranga, CIV
2005-470-407, 13 December 2007).
The claims against Sharp Tudhope
[32] McEwan claims damages in the sum of $417,000 which it says were caused
by Sharp Tudhope's negligence in failing to ensure
the guarantees by Donnelly's
directors were adequately documented and enforceable. Sharp Tudhope denies the
claims on the grounds
that the guarantees are enforceable and no loss has been
suffered by McEwen that was caused by negligence on its part.
[33] Mr
Beech gave evidence that he understood Mrs Campbell to have asserted
authority to bind each of the directors personally. He also
gave evidence of a
conversation with the solicitor for the Donnelly interests (Mr Crombie) after he had
been told by Ms Ashby-Koppens
that the Hurleys had left the building. Mr Beech
was firm in stating that Mr Crombie had assured him that Mrs Campbell had
authority
to sign on behalf of all directors.
[34] Sharp Tudhope accepts that it owed a duty to exercise reasonable skill and to
take reasonable
care in carrying out its obligations as solicitor for McEwan.
[35] The standard of care required of a solicitor is dependent on
the circumstances
of the particular case and the nature of the problem with which the practitioner is
confronted. The duty is to
exercise the reasonable care and skill to be expected of a
prudent practitioner acting in the same circumstances: see Bannerman,
Brydone
Folster & Co v Murray [1972] NZLR 411 (CA).
[36] In Doughty-Pratt Group Ltd v Perry Castle [1995] 2 NZLR 398 (CA), the
Court of Appeal considered a claim for negligence brought by a company that had
instructed its solicitors to check and
approve three drafts of an agreement to lease.
The client's intention was that directors of the proposed sublessee company sign as
guarantors, as well as on behalf of the company.
[37] Giving the judgment of the Court of Appeal, Hardie Boys J described the
claim as having arisen from "some particularly inept drafting" but, because the Court
considered that the directors signed the agreement
in dual capacities (as directors and
as guarantors), the guarantee was enforceable. For that reason, the solicitors were
not negligent.
[38] The present case is more complex. Unlike Doughty-Pratt Group Ltd v Perry
Castle, all directors that McEwan believed would
be bound by the guarantee did not
sign the agreement. Leaving to one side Mrs Campbell's position, so far as the
remaining three
directors are concerned their liability turns on Mrs Campbell's
authority (actual or ostensible) to bind them and whether the solicitor
representing
Donnelly gave any assurance (with actual or ostensible authority) to Mr Beech that
Mrs Campbell had authority to bind
her co directors. I do not consider that Doughty-
Pratt Group Ltd is determinative of the present case.
[39] None of Donnelly's
directors gave evidence before me, so assertions
contained in their affidavits on the summary judgment application have not been
tested. In those circumstances, I propose to place little weight on the evidence given
by the directors in those affidavits. That
evidence was set out earlier (see paras [24]-
[27] above) to provide background to the present dispute.
Actual authority: What happened
at the mediation?
[40] I am satisfied that, during the course of the mediation, the issue of personal
guarantees from the directors
of Donnelly was raised. At that stage, however, the
parties and their representatives were cloistered in separate rooms. On
some
occasions the solicitors would discuss issues with the mediator; on other occasions
the mediator would caucus with either the
McEwan or Donnelly interests. I find that
there was no direct discussion about guarantees between Mr McEwan (on the one
hand) and
Mr and Mrs Hurley and Mrs Campbell (on the other).
[41] Ms Ashby-Koppens gave evidence about the way in which execution of the
Settlement Agreement took place. It appears that Mr Crombie (representing the
Donnelly interests) and Mr Beech had a copy of the
Settlement Agreement and took
their respective clients through it on a "clause by clause" basis. At that stage the
draft contained
a guarantee, in the form set out in cl 3 of the Settlement Agreement:
see para [10] above.
[42] Ms Ashby-Koppens went to collect
the signed copy of the Settlement
Agreement from the Donnelly representatives, who were located on a different floor
in the building.
Ms Ashby-Koppens saw, in the corridor to the boardroom, two of
the directors of Donnelly leaving the premises. I am satisfied
that those two
directors were Mr and Mrs Hurley.
[43] Ms Ashby-Koppens, after collecting the signed Settlement Agreement from
Mr Crombie, returned to the McEwan room and told Mr Beech about Mr and Mrs
Hurley leaving the building.
[44] Mr Beech gave evidence
that he was aware of the potential problem with the
guarantee being executed only by Mrs Campbell. For that reason, he "stormed
down"
to find out what had happened, confronted Mr Crombie but was told by him
that Mrs Campbell had authority to sign.
[45] Mr Crombie
gave evidence that he could not recall such a discussion, but did
not dispute Mr Beech's general veracity. Mr Crombie acknowledged
that he
received instructions to act for at least three of the directors during the course of the
mediation, after the issue of personal
guarantees had been raised. It was unclear to
me, at the end of Mr Crombie's evidence, whether he obtained actual instructions
from
Mrs Campbell and Mr and Mrs Hurley that they would sign a settlement
agreement in their personal capacities for guarantee purposes or, having regard to
the
way in which the mediation unfolded, he assumed that he had those instructions.
[46] Mr Crombie gave evidence in unusual
circumstances. During the course of
Mr Barton's closing address, I indicated some concern about the state of the
evidence on the
issue of authority to bind the directors personally. I indicated that, if
either counsel sought leave to call either Mr Sharp or
Mr Crombie, I would allow
that to happen, subject to any rulings on issues of privilege that might have been
required.
[47] Mr
Barton, after taking instructions, indicated that Sharp Tudhope wished to
call Mr Crombie. A subpoena was issued. Mr Crombie took
time, overnight, to
refresh his memory of events that occurred some five years ago. No waiver of
privilege had been given by Donnelly
or its directors, so Mr Crombie's evidence was
necessarily restricted in its scope.
[48] Mr Crombie made the valid point that
it was five years since the mediation
and that his evidence should be considered in that context. On the other hand, Mr
Beech made
a fair point also: he has been living with the claim for some time and is
likely to have a better recollection of what was said than
Mr Crombie.
[49] Having considered the evidence of Mr Crombie and Mr Beech, I make the
following findings of fact:
a)
Mrs Campbell knew that the question of personal guarantees had been
raised and had actual authority to enter
into them on behalf of herself.
b) Mrs Campbell did not have actual authority to bind her husband and
Mr and Mrs Hurley, as guarantors.
[50] Mr and Mrs Hurley had proceeded on the basis that the mediation concerned
McEwan's claim
against Donnelly. They left the mediation before the Settlement
Agreement was signed. However, I am unable to draw an inference,
from the
evidence, that when they left they gave actual authority to Mrs Campbell to sign the
Settlement Agreement on their behalf,
in their personal capacities.
[51] So far as Mr Campbell is concerned, when his wife left home to go to the
mediation, the dispute
was between McEwen and Donnelly. There was no
suggestion that personal guarantees might be given. Hence, at that
stage, he cannot
have given any actual authority to his wife to bind him to give personal guarantees.
[52] Nor is there any evidence
to indicate that Mrs Campbell, at any stage during
the mediation, contacted her husband to obtain his authority to enter into personal
guarantees. I am not prepared to treat Mr Campbell's position any differently from
that of Mr and Mrs Hurley.
[53] I am also
satisfied that there was a discussion between Mr Beech and Mr
Crombie, of the type described by Mr Beech. However, I consider
there is a
reasonable likelihood that they were at cross-purposes when they spoke.
[54] Mr Beech said in his witness statement
(confirmed on oath at the hearing):
In answer to a direct question from myself, Mr Crombie said to Mr Sharp
and I
that Mrs Campbell had the authority to sign on behalf of all the absent
directors, including Mr Campbell. This expressly confirmed
what had been
said at the start of the mediation.
[55] Mr Beech's reference to what had occurred at the start of the mediation
can
only be a reference to confirmation of authority to bind Donnelly. The directors
were not, at the start of the mediation, parties.
Their potential liability arose out of
discussions that occurred during the course of the day.
[56] In those circumstances, I
find it is more probable than not that Mr Beech
asked Mr Crombie whether Mrs Campbell had authority to bind the absent directors
(directing himself to authority to bind personally) but that when Mr Crombie
responded affirmatively, he believed he had been asked
about Mrs Campbell's
ability to bind the company.
[57] I find that Mrs Campbell had no actual authority to bind Mr and Mrs Hurley
and her husband to give personal guarantees.
Ostensible authority
(a) Two issues
[58] There are two separate issues in respect of ostensible authority:
a)
The first is whether Mrs Campbell had ostensible authority to bind the
other directors personally to a guarantee.
b) The second is whether, by words or conduct, Mr Crombie bound all of
Donnelly's directors to the guarantee.
(b) Mrs Campbell's authority
[59] I have held that Mrs Campbell did not have actual authority to bind her co
directors as guarantors.
It follows, therefore, that she had no implied authority to do
whatever was necessary for, or ordinarily incidental to, the execution
of actual
authority.
[60] The nature of "ostensible" authority was discussed in Savill v Chase Holdings
(Wellington) Ltd [1989] 1 NZLR 257 (HC, CA and PC). In the leading judgment in
the Court of Appeal, McMullin J discussed the ambit of that type of authority. His
Honour
referred to the judgment of Diplock LJ, in Freeman and Lockyer v Buckhurst
Park Properties (Mangal) Ltd [1964] 2 QB 480 (CA) at 503, in which the Lord
Justice said:
An 'apparent' or 'ostensible' authority, on the other hand, is a legal
relationship between the principal and the contractor created by a
representation, made by the principal to the contractor,
intended to be and in
fact acted upon by the contractor, that the agent has authority to enter on
behalf of the principal
into a contract of a kind within the scope of the
'apparent' authority, so as to render the principal liable to perform any
obligations imposed upon him by such contract. To the relationship so
created the agent is a stranger. He need not
be (although he generally is)
aware of the existence of the representation but he must not purport to make
the agreement
as principal himself. The representation, when acted upon by
the contractor by entering into a contract with the agent, operates
as an
estoppel, preventing the principal from asserting that he is not bound by the
contract. It is irrelevant whether
the agent had actual authority to enter into
the contract.
[61] McMullin J also referred to Armagas Ltd v Mundogas SA [1985] UKHL 11; [1986] AC 717
(HL) at 777 in which Lord Keith of Kinkel described the concept in these terms:
Ostensible general authority may also arise
where the agent has had a course
of dealing with a particular contractor and the principal has acquiesced in
this course
of dealing and honoured transactions arising out of it. Ostensible
general authority can, however, never arise where the contractor
knows that
the agent's authority is limited so as to exclude entering into transactions of
the type in question, and
so cannot have relied on any contrary
representation by the principal: Russo-Chinese Bank v Li Yau Sam [1910]
AC 174.
[62] McMullin J, at 305, stressed that it is the principal's representation that
creates authority, not the agent's assertion
that he or she has that authority: see also
New Zealand Tenancy Bonds Ltd v Moonie [1986] 1 NZLR 280 (CA) at 283.
Neither Casey J nor Bisson J dissented from the statements of principle contained in
McMullin J's judgment.
[63]
Although the unsuccessful party in Savill appealed to the Privy Council,
Their Lordships dismissed the appeal in short order, on
the grounds that the appeal
turned on concurrent findings of fact in both Courts. There was no suggestion, in the
Privy Council judgment
(at 319), that the Court of Appeal had made any error in the
way in which the principles of ostensible or apparent authority had
been expressed or
applied.
[64] When viewed from the perspective of authority from the principal, the
suggestion that Mrs Campbell
had ostensible authority to bind the remaining
directors fails on the same basis as the actual authority claimed. There
is no
evidence from which an inference can be drawn that the principals did, in fact, clothe
Mrs Campbell with authority to bind
them to a personal guarantee. On that basis, I
hold that Mrs Campbell had no ostensible authority to bind the remaining directors
to the guarantees.
(c) Mr Crombie's agency
[65] While representations by an agent will not be sufficient to establish authority
to act for a principal, different rules have been developed to deal with the position of
a solicitor (or counsel) engaged in contentious
business on behalf of a client.
[66] In Carrell v Carrell [1975] 2 NZLR 441 (SC), Cooke J held that where
counsel has entered into a compromise for which he or she had no authority and,
unknown to the other
party, his or her usual authority had been limited by
instructions, the court could exercise a discretion to set aside the compromise
and
any orders based thereon in very limited circumstances. Otherwise, the client was
bound by his or her lawyer's agreements. At
446, Cooke J said:
As to the second main contention, a number of authorities were reviewed by
Watkins J in Marsden
v Marsden [1972] Fam 280; [1972] 2 All ER 1162.
The Judge held that in cases where, unknown to the other party, the usual
authority of counsel has been limited by
express instructions and counsel has
nonetheless entered into a compromise for which he had no authority, the
Court
has power to interfere and may in the exercise of its discretion set
aside the compromise and orders based on it, if grave
injustice would be
done by allowing the compromise to stand. In that case it was found that
certain undertakings given
by a wife's counsel as part of a compromise were
important matters to her and that grave injustice might be visited on her
if
the orders were to stand. Finding that the undertakings and the compromise
were contrary to counsel's express instructions,
Watkins J accordingly set the
orders aside. The jurisdiction exercised in Marsden v Marsden is an
exceptional one and
only to be invoked when there is plain evidence that
counsel has acted without actual authority and that an injustice would
be
done by holding the client to any orders agreed to by counsel. (my
emphasis)
The discretion is exercisable at the
instigation of the client of the solicitor who has
entered into the binding arrangement, not the other party. The discretion is exercised
sparingly.
[67] In Thompson v Howley [1977] 1 NZLR 16 (SC), Somers J was obliged to
determine whether a solicitor who had commenced a proceeding had ostensible
authority to settle. The
Judge held that the client is bound by a compromise effected
by his solicitor unless the limitation on authority was expressed to
the other party
before settlement is reached. At 23-24, Somers J said:
The ability of a solicitor to bind his client to a
compromise and his liability
to his client in respect of the entry into that compromise are two different
matters.
It might be supposed that the ostensible authority of the solicitor to
settle corresponds with the authority which impliedly
accompanies his
retainer - that the apparent authority reflects the actual authority. I doubt
whether it is so. The
client's authority to issue proceedings, while
representing to the other party (unless the contrary is brought to his
attention) the solicitor's authority to settle, does not as between solicitor and
client necessarily involve the same authority.
The considerations affecting
the two situations are not the same. Thus, for myself, I accept the view of
McCardie J
in Welsh v Roe (1918) 87 LJKB 520 that despite express
instructions the client is bound by a compromise effected by his solicitor
unless the limitation
on authority is expressed to the other party before
settlement is reached. A contrary view was expressed by Lord Coleridge
J in
Little v Spreadbury [1910] 2 KB 658, 665 (see, generally, Cordery on
Solicitors (6th ed) 109 and the cases referred to in footnote (a)). The cases,
however,
indicate that the solicitor may be liable to his client in respect of a
compromise contrary to express instructions and for
negligence in effecting
the compromise Necessarily, then, apparent authority need not be co-
extensive with actual
authority.
See also Waitemata City Council v MacKenzie [1988] 2 NZLR 242 (CA) and Re
Archer [1990] 3 NZLR 737 (HC).
[68] Sharp Tudhope's problem is that, on my finding of fact, Mr Crombie did not
intend to convey to Mr Beech that he had
instructions from all directors that Mrs
Campbell was authorised to sign the Settlement Agreement on their behalf, in their
personal
capacities. If I had been satisfied, on a balance of probabilities, that such an
assurance, in unequivocal terms, had been given
by Mr Crombie to Mr Beech, I
would have found that both McEwen and Sharp Tudhope were entitled to rely on
that assurance.
[69]
I have real sympathy for the position in which Mr Beech found himself. I
have no doubt that, when the agreement was negotiated,
Mr Beech honestly believed
that Mr Crombie had instructions from both the company and the directors.
However, that belief was incorrect,
in fact. It follows that Mr Crombie could not
bind all directors to the guarantee arrangements.
Was Sharp Tudhope negligent?
[70] In the absence of a legal basis on which it could safely be assumed that Mrs
Campbell had authority to bind all other directors
personally, I hold that Sharp
Tudhope (as a firm) was negligent in failing to ensure enforceable guarantees
(satisfying the requirements
of s 2 of the Contracts Enforcement Act 1953) were
given, as an integral part of the settlement. As I see it, the guarantees were
the most
important component of the settlement.
[71] My finding of negligence rests on three foundation stones. First, Mr Beech
was alerted to the problem of execution (and, therefore, compliance with s 2 of the
Contracts Enforcement Act) by the time the mediation
was over. Second, the
potential problem was not drawn to the attention of the commercial team when the
Settlement Agreement
was handed to them to complete the intended transactions.
Third, members of the commercial team failed to identify the problem when
documenting the transaction fully. It was the systemic failure to identify the problem
and to attempt to rectify it that provides
the basis for the finding of negligence. To
avoid being held to be negligent, it was necessary for the firm to seek and obtain
signed
(properly executed) guarantees, before settlement was implemented on the
basis agreed at mediation. If guarantees were not forthcoming
the status quo, prior
to the mediation, ought to have been restored.
[72] It is axiomatic that in any dispute with a company,
if personal guarantees are
to be obtained it is necessary for the solicitor in whose client's favour the guarantees
are sought to
satisfy himself or herself that authority exists.
[73] I have no doubt that Mrs Campbell signed the guarantee knowing that she
was assuming a personal obligation. The suggestion that she made in her affidavit
on the summary judgment application that no personal
obligation was undertaken to
guarantee that Donnelly performed its side of the bargain is disingenuous. The fact
that McEwan was
entitled to sue at least one of the directors has a bearing on the
quantum of any claim that might properly be brought.
Causation
and quantum
[74] McEwan did not proceed with its claim against Donnelly's directors, so
whether it would or would not have succeeded
is unknown. Because there is no
certainty on that issue, any damages caused by Sharp Tudhope's negligence must be
assessed by reference
to "loss of chance" principles: see Benton v Miller and
Poulgrain (A Firm) [2005] 1 NZLR 66 (CA).
[75] In Benton, Glazebrook and William Young JJ, in a joint judgment, explained
how any uncertainty should be addressed
in a claim for negligence made against a
firm of solicitors: in particular, see paras [44], [47], [48] and [50]. In the context of
this case, observations made by Stuart-Smith LJ in Allied Maples Group Ltd v
Simmons & Simmons [1995] EWCA Civ 17; [1995] 4 All ER 907 (CA) at 914-915, are relevant:
In these circumstances, where the plaintiffs' loss depends upon the actions of
an independent
third party, it is necessary to consider as a matter of law what
it is necessary to establish as a matter of causation, and
where causation ends
and quantification of damage begins.
...
(2) If the defendant's negligence consists of
an omission, for example ... to
give proper ... advice, causation depends, not upon a question of historical
fact,
but on the answer to the hypothetical question, what would the plaintiff
have done if the ... advice [had been] given. This
can only be a matter of
inference to be determined from all the circumstances. . . .
Although the question is a hypothetical
one, it is well established that the
plaintiff must prove on the balance of probability that he would have taken
action
to obtain the benefit or avoid the risk. But again, if he does establish
that, there is no discount because the balance is
only just tipped in his
favour. . . .
[76] Applying those principles, I find:
a) There is, at least, a degree
of uncertainty as to whether directors of
Donnelly would have all executed guarantees had steps been taken by
Sharp Tudhope to have the remaining three directors execute the
Settlement Agreement, in their personal capacities.
b) If proper documentation had been signed, it was virtually certain that
judgment would have been obtained
by McEwan against the four
directors of Donnelly.
c) There is uncertainty as to the amount which could
have been
recovered, if proceedings had been taken against all directors.
d) There is uncertainty about
whether judgment against Mrs Campbell
(who had signed the guarantee) could have been enforced in full.
There was no cogent evidence about the extent of her assets.
[77] On the basis that there is no evidence on which I can determine
whether
McEwan was likely to recover in full from all four directors, I must approach the
issue on the basis of "loss of chance"
described by Stuart-Smith LJ in Allied Maples
Group Ltd, to which reference is made in the joint judgment in Benton, at [48].
[78]
The evidence from Mr McEwan on loss was sparse. There seemed to be an
underlying assumption that, if guarantees had been executed
and enforced, all losses
would have been recovered. I do not think that follows from the evidence.
[79] Nothing more than a broad
brush appraisal of the amount that might have
been recovered is possible. The claim was for the total loss suffered by McEwan,
namely
$417,000 plus interest, in accordance with the intended agreement for sale
and purchase. The claim also covers wasted costs incurred
in pursuing claims
against the directors of Donnelly on the advice of Sharp Tudhope.
[80] I consider that a conservative estimate
of what might have been recovered is
$100,000. That is the amount in which I propose to enter judgment. I reach that
figure on the
basis that Mrs Campbell was likely to have some assets of value against
which judgment could be executed.
Result
[81] For
the reasons given, judgment is entered in favour of McEwan against
Sharp Tudhope in the sum of $100,000. Interest is
awarded on that sum at
applicable Judicature Act rates from the date of issue of the proceeding to the date of
judgment.
[82]
Costs are awarded in favour of McEwan on a 2B basis, together with
reasonable disbursements. Both costs and disbursement
shall be fixed by the
Registrar.
[83] I thank counsel for their assistance.
_________________________________
P R Heath J
Delivered
at 2.00pm on 15 June 2009
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