Sea Prosperity Limited v Unkovich [2014] NZHC 3125 (9 December 2014)

Last Updated: 16 December 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2014-404-001649 [2014] NZHC 3125

BETWEEN	SEA PROSPERITY LIMITED First Plaintiff SHONA ADAMS Second Plaintiff
AND	ZELJAN UNKOVICH First Defendant QBE INSURANCE (INTERNATIONAL) LIMITED Second Defendant

Hearing:	2 December 2014
Appearances:	P J Napier for Applicants/Defendants W W Peters for Respondents/Plaintiffs
Judgment:	9 December 2014

_{JUDGMENT OF ASSOCIATE JUDGE MATTHEWS}

This judgment was delivered by me at 10.00 am on 9 December 2014 pursuant to Rule 11.5 of the High Court Rules

_{Registrar/Deputy Registrar}

SEA PROSPERITY LTD & ADAMS v UNKOVICH & QBE INSURANCE (INTERNATIONAL) LTD [2014] NZHC 3125 [9 December 2014]

[1] On 29 December 2006 the second plaintiff, as director of the first plaintiff, signed 13 agreements to purchase apartments in Central Auckland, from vendors associated with the Blue Chip group of companies. Four were purchased from Greenstone Pitts Trustees Limited, four from Greenstone Barclay Trustees Limited and five from Turn and Wave Limited.

[2] Although all the agreements were unconditional, Mrs Adams says that at the time she signed the agreements the representative of Blue Chip who orchestrated the transactions told her she would not be bound by the agreements until she sought and had received legal advice.

[3] Mrs Adams consulted the first defendant for advice on the transactions between 8 February and 22 February 2007. In the statement of claim it is alleged that Mr Unkovich explained her obligations and liabilities under the agreements, advised on the low-risk nature of the investments Mrs Adams was making and explained the overall ramifications of the documentation she had signed.

[4] On 23 February 2007 Mrs Adams paid $581,920 to Mr Unkovich as deposits on the transactions she had entered. The same day, Mr Unkovich transferred those deposits to the vendors. Shortly after that the first plaintiff was incorporated. Later it was nominated to complete the purchase of the apartments.

[5] In February 2008 Blue Chip New Zealand Limited went into liquidation and the Blue Chip investment scheme collapsed. Notwithstanding this, Mrs Adams and Sea Prosperity Limited were required to complete the transactions. Negotiations ensued which resulted in an agreed resolution of the rights of the plaintiffs and the Blue Chip group.

[6] Although it is not specifically pleaded, it is the thrust of the case for Sea Prosperity Limited and Mrs Adams that Mrs Adams relied on the advice given by Mr Unkovich in deciding not to cancel the contracts when she had an opportunity to do so, and to pay the deposits. If the case is not struck out the statement of claim can be amended.

[7] The second defendant is the insurer of Mr Unkovich.

[8] Mr Unkovich and QBE apply to strike out the claim under r 15.1 of the High Court Rules. They rely on s 4 of the Limitation Act 1950 and say that the claims against them are frivolous and vexatious as they are time-barred by that section.

[9] In their statement of claim Sea Prosperity Limited and Mrs Adams plead two causes of action. The first is described as negligence. Mr Peters says that this cause of action is in tort, not in contract. The second cause of action is described as breach of duty of care. Again, Mr Peters confirms that this cause of action is in tort also, not by way of an alleged breach of an implied term in Mr Unkovich’s contract of retainer. It is not, therefore, clear that there is any difference between the first cause of action and the second cause of action, but for present purposes nothing turns on the point.

[10] The allegations against Mr Unkovich in the first and second causes of action are:

(a) He endorsed the Blue Chip investment scheme and advised Mrs Adams that the “premium income product”, which describes the transactions by which she had bought the apartments, was a sound investment which carried low risk and was in her best interests.

(b) He advised Mrs Adams that she would never have to fulfil the obligations required of her as provided for in the agreements and related documentation.

(c) He failed to advise Sea Properity Limited or Mrs Adams at any stage of the “realities of the transactions” and the obligations under the agreements and other related documents, nor that she had a legal obligation to complete the transactions.

(d) He failed to alert Mrs Adams to “various unusual features of the agreements” which, it is said, independently and combined increase the risk of the transaction to her. In particular it is said that she was not advised:

- that she did not have a caveatable interest to protect her interest, or that of any nominee, and there was no clear way to obtain title;

- the vendor was entitled to make changes to the plan for the apartments without her consent;

- the vendor was not given any warranty as to a date of completion;

- there were no provisions allowing Mrs Adams to compel the vendor to actually undertake the subdivision and development required to create titles for the apartments;

- Mrs Adams was required to enter into substantial mortgages;

- the documents were highly modified versions of a standard Auckland District Law Society form but it was intended to make the documents look as though they were standard transactions; and

- in the case of the agreements with Turn and Wave Limited the deposit was not held by a stakeholder until settlement.

[11] This proceeding was filed on 3 July 2014. Section 4(1)(a) of the Limitation Act 1950 stipulates that the limitation period for actions founded on tort is six years from the date on which the cause of action accrued.¹

[12] The issue for determination on this application is when the cause of action accrued. The dates for key events relevant to limitation issues are these:

(a) The agreements were signed on 29 December 2006.

(b) Mr Unkovich advised Mrs Adams between 8 February and 22 February

2007.

(c) Mrs Adams paid, and Mr Unkovich forwarded to the vendors, the deposits on the contracts on 23 February 2007.

1. The Limitation Act 1950 applies, not the Limitation Act 2010. The latter Act has not materially changed the position: Ross v McKay [2014] NZHC 2694 at [37]- [41].

(d) Blue Chip collapsed on 13 February 2008.

(e) Between March 2009 and June 2009 settlement deeds were entered with the vendor companies and four transactions were settled.

[13] Mr Peters says that the causes of action accrued when the transactions were settled in June 2009. Only at that point were Sea Prosperity Limited and Mrs Adams able to assess and quantify their losses.

[14] Mr Peters says that at no point prior to that did the plaintiffs suffer the losses which they seek to recover. He relies on Smith v Singleton.² Although the pleading could be put more clearly, Sea Prosperity Limited and Mrs Adams contend that although Mrs Adams had entered unconditional agreements prior to seeking advice from Mr Unkovich, the consequence of his advice is that she did not cancel the agreements, and in fact honoured her first obligations under them by paying the

deposits.

[15] In Smith v Singleton the plaintiff investors sued the defendant investment advisors alleging various failings in the advice given to them by the first defendant. Investments in respect of which they suffered losses were made on Mr Singleton’s advice more than six years prior to the proceeding being commenced. The defendants applied to strike out all the causes of action.

[16] Mr Peters relies on the following passage from the judgment:

[42] A critical question in deciding when the loss has occurred might be whether or not the claimant got what he or she should have got on entering into the relevant transaction. If that were the only question to be asked, it would often be a relatively simple matter to say that the loss had been suffered immediately – the fact that a claim has been made at all will normally imply that the claimant considers that he or she did not get what he or she should have got.

[43] However, if the correct measure of loss is the difference between the claimant’s position after entering into the transaction and what it would have been if the claimant 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 claimant, and some evidence may be necessary to show when the claimant was actually in a worse position. ...

² Smith v Singleton [2014] NZHC 2672.

(footnotes omitted)

[17] Mr Peters says it was not clear at the time Mr Unkovich gave advice that the transactions entered by Mrs Adams were other than advantageous to her, and evidence is necessary to show the time at which the position of Sea Prosperity Limited and Mrs Adams altered to their detriment, leading ultimately to the losses claimed.

[18] In Smith v Singleton the Judge later said:

[54] In [Thom v] Davys Burton the Chief Justice considered that the cause of action arises as soon as the plaintiff who relied on the advice is “financially worse off”, even if quantification is difficult, and measure in a particular case may ultimately depend on further contingencies. Is it possible to say that the plaintiffs in this case were “financially worse off” as soon as they made the investments? There is nothing in the evidence which would support such a finding. It appears that there were no defaults in making payments of interest on any of the investments before 14 March

2008, and there is no expert evidence which might have justified a finding that the investments, when they were made, were worth less than their face

value on account of their “risky” nature.

[19] His Honour went on to find that in that case there was nothing to show that the plaintiffs were financially worse off or that their net worth was reduced in some way as soon as they made the investments, nor that any more risk was assumed as a result of entering the transactions than otherwise would have been assumed if entering any other investment. For those reasons he declined to strike out the causes of action based on negligence.

[20] Mr Peters says that the same position applies in this case. The negligence of Mr Unkovich did not cause a loss until settlement was achieved in relation to the transactions Sea Prosperity Limited and Mrs Adams had entered, in 2009. Therefore the causes of action arose within a period of six years prior to the proceeding being filed.

[21] In response to this submission Mr Napier says that as soon as Mr Unkovich’s advice was given, Mrs Adams was worse off, because at that point they took steps to comply with their obligations under the contracts rather than taking steps to cancel

them. This is analogous to entering the contracts as a consequence of

Mr Unkovich’s advice.

[22] Developing his argument, Mr Napier referred to the decision in Shaw v Macalister Todd Phillips,³ in which Associate Judge Osborne marshalled the authorities in this area of the law.

[23] In Shaw, the plaintiffs had established, operated and then sold a tourist lodge. The sale contract provided for Mr and Mrs Shaw to be granted seven days of accommodation at the lodge every year without charge, but a subsequent purchaser of the lodge declined to honour this obligation. They sued the solicitors who acted for them on the sale of the lodge. They said that their personal right to accommodation was a contractual licence, which could have been made binding and enforceable by including in it a requirement that a memorandum of encumbrance be registered against the title, creating a defeasible rent-charge which would not be enforced as long as the contractual licence was observed. Mr and Mrs Shaw said that the solicitors were negligent in failing to ensure that such a provision was included in the sale contract.

[24] Associate Judge Osborne referred first to Newlands v Sovereign Assurance

Company Ltd.⁴ In that case the learned Judge said:

[36] A cause of action in negligence accrues when the plaintiff first sustains loss attributable to the breach of duty of the defendant.

[37] Actual loss may occur in two ways:

a) Immediately when the alleged negligence occurs. If one party receives a damaged asset as a result of another’s negligence, they will suffer an immediate loss; or

b) At a later point in time if the loss is contingent on another event occurring.

[38] If one party receives a damaged asset as a result of another party’s

alleged negligence, then it will suffer an immediate loss.

(footnotes omitted)

[25] Associate Judge Osborne adopted that summary and the following passage from Professor Stephen Todd in The Law of Torts in New Zealand:⁵

We can summarise the position in this way. There is actual loss where a person incurs an existing liability or suffers an existing diminution in value of land or personal property or a chose in action. A cause of action accrues at that date even though there has been no demand on the liability, or the loss has not crystallised, or there has been no out-of-pocket expenditure. There is only a potential loss where a right or liability is subject to a contingency which may or may not occur. A cause of action accrues only when it does occur and actual damage is suffered.

[26] Associate Judge Osborne then analysed the Supreme Court decision in Davys Burton v Thom.⁶ In that case Mr Thom was represented by Davys Burton, a firm of solicitors, in relation to executing a matrimonial property agreement. Under the agreement, his house was to remain his separate property, even if he and his wife moved into it and used it as a matrimonial home. Davys Burton failed to advise on the correct execution of the agreement. It was subsequently found by the Family Court to be void for non-compliance with the certification requirements of the Act. His wife became entitled to a half share in the house. The majority in the Supreme

Court rejected an argument that the case involved contingent liability, such as the parties later separating, and the Court later finding that the agreement was invalid. The Court found that there was an existing liability once the agreement was incorrectly executed. Wilson J said:

[49] This is therefore a damaged asset case, not one of exposure to a contingent liability. The asset in question is the prenuptial agreement under which the plaintiff was supposed to obtain full protection against claims by his future wife for a share in the matrimonial home. The asset which the plaintiff acquired was, as a result of the combined negligence of his solicitors and himself, defective in that it did not give him the protection which it was his purpose to obtain. The product which he instructed his solicitors to procure for him was created with an inherent flaw. That flaw represented actual damage or harm which was suffered by the plaintiff from the moment the defective prenuptial agreement came into existence. The damage was quantifiable at that stage, either on the straightforward basis of what it would have cost the plaintiff to obtain or attempt to obtain a valid agreement or on the more difficult basis of the difference in value between a defective agreement and one which was not defective.

[27] Mr Napier says that in the present case the flaws in the agreements, as pleaded by the plaintiffs, meant that the agreements were defective in that they did not give Mrs Adams (or therefore Sea Prosperity Limited) the protection they should have had. Mrs Adams’ decision not to cancel them, but to pay the deposits in part- satisfaction of her obligations, on the basis of Mr Unkovich’s advice, committed her to inherently flawed transactions. At that point Mrs Adams suffered a loss, as in Davys Burton v Thom.

[28] Mr Napier next refers to Gilbert v Shanahan.⁷ In that case the plaintiff entered into a guarantee on his solicitor’s advice. The Court of Appeal rejected an argument that loss was not incurred until demand was made under the guarantee, because it was possible that the guarantee would never be called on. The Court found that liability arose as soon as the guarantee was entered, because under it the plaintiff became a principal debtor, not simply a guarantor, and thus he had a present liability for the obligation which he was guaranteeing, even though he was not called on to meet that obligation until the principal obligor defaulted.

[29] Tipping J said:⁸

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.

[30] Based on these principles, Mr Napier says that on paying the deposits rather than cancelling the contracts, as a result of the advice of Mr Unkovich, Mrs Adams incurred a present liability to perform the contracts. There was no contingency on that obligation.

[31] In my opinion, Mr Napier is correct in this submission. Acting on the advice of Mr Unkovich Mrs Adams committed to agreements which were inherently flawed. The position is well-explained in the following passage from the judgment of Elias CJ in Davys Burton v Thom:

[20] The present case is therefore comparable to cases such as Iron Trades Mutual Insurance Co Ltd v J K Buckenham Ltd, Bell v Peter Browne & Co, D W Moore, and Knapp v Ecclesiastical Insurance Group plc. They are cases where the plaintiff, through the negligence of the defendant, did not obtain the rights he should have obtained or had imposed on him liabilities or obligations that should not have been imposed.

(footnotes omitted)

[32] If the allegations against Mr Unkovich were proved, at the time his advice was given Mrs Adams did not obtain the rights she should have obtained and committed to binding obligations to her significant detriment. For the reasons identified by Mr Napier she should have been advised to cancel the contracts, not to pay the deposits instead. Relying on Mr Unkovich’s advice, she took opposite steps.

[33] The decision in Smith v Singleton is distinguishable. In that case, the advice given, was not inherently flawed. At the time it was given and for some time subsequently, the plaintiffs did not suffer any loss. In the present case, however, the transactions were flawed from the outset, as with the matrimonial property agreement in Davys Burton v Thom. It was not until events unfolded that the losses became quantifiable, but the loss – the commitment to pay monies in return for unsatisfactory obligations on the part of the vendors – was incurred immediately after the advice was given. The pleaded advice, and the pleaded omissions in advice, led to the contracts remaining on foot with the pleaded flaws. Mrs Adams elected to honour the contracts which did not give her the contractual position she was advised she had.

[34] For these reasons I find that the claims by Sea Prosperity Limited and

Mrs Adams are statute-barred and must be struck out.

[35] Mr Napier argued that if I found that the cause of action against Mr Unkovich did not arise in February 2007, it certainly arose no later than the date on which the Blue Chip companies failed, February 2008. Mr Napier did not elaborate on this position in detail. He referred only to the fact that once the Blue Chip companies failed, they were no longer able to “undertake the purchase of the subject units or support the plaintiffs in doing the same, and the plaintiffs received notice that the obligations in the agreements were still binding”.

[36] There is no evidence before the Court to explain the factual premises upon which this submission appears to be based. In particular, it is unclear how the failure of the Blue Chip companies adversely affected the plaintiffs. I discern from the pleadings that the plaintiffs paid for and took title to some of the units but reached a settlement agreement in relation to some of the other contracts. There is no material on whether the arrangements which were made and the steps that were taken were the consequence of the altered position of the vendor companies or whether they would have been open for negotiation by Sea Prosperity Limited and Mrs Adams in any event.

[37] Mr Napier’s alternative position is not clear from the pleadings and is not the subject of evidence; had it been necessary for me to do so, I would have found that it was not established.

Outcome

[38] This proceeding is struck out.

[39] The plaintiffs will pay costs to the defendants (together) on a 2B basis plus disbursements fixed by the Registrar.

J G Matthews

Associate Judge

Solicitors:

Keegan Alexander, Auckland. Wayne Peters Lawyers, Whangarei.