MacDonald v Somerset Smith Partners [2015] NZHC 1839 (5 August 2015)

Last Updated: 14 August 2015

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2013-441-356 [2015] NZHC 1839

BETWEEN	DONALD OWEN MACDONALD, JUDITH MARY MACDONALD, JOHN LAURENCE ARMSTRONG AND WAYNE HENRY HANNA Plaintiffs
AND	SOMERSET SMITH PARTNERS Defendant

Hearing:	24 February 2015
Counsel:	J Long and S L Jackson for the plaintiffs M MacFarlane for the defendant
Judgment:	5 August 2015

_{JUDGMENT OF ASSOCIATE JUDGE SMITH}

Background........................................................................................................................................ [2] The plaintiffs’ claims ....................................................................................................................... [17] The amended statement of defence ................................................................................................ [21] The plaintiffs’ reply ......................................................................................................................... [23] The strike-out application .............................................................................................................. [25] The evidence .................................................................................................................................... [27] The issues for determination .......................................................................................................... [52]

Issue 1: Is it reasonably arguable for the plaintiffs that their negligence causes of action, to the extent that they depend on alleged breaches of duty by the defendants before 19 July 2007, did not accrue until after that date (because no damage was caused by the alleged breaches until after that date)? ............................................................................................................................... [54]

Legal principles ............................................................................................................................ [54] The defendants’ submissions......................................................................................................... [70] The plaintiffs’ submissions............................................................................................................ [72] Discussion and conclusions on issue 1 ......................................................................................... [77]

Issue 2: If and to the extent that the answer to issue 1 is no, and in respect of each of the

_{contract causes of action and the claims under the Consumer Guarantees Act where breaches of}

DONALD OWEN MACDONALD, JUDITH MARY MACDONALD, JOHN LAURENCE ARMSTRONG AND WAYNE HENRY HANNA v SOMERSET SMITH PARTNERS [2015] NZHC 1839 [5 August 2015]

duty are alleged to have occurred before 19 July 2007, have the dates of accrual of the

impugned causes of action been postponed by fraud on the defendants’ part, so that the time for

the plaintiffs to bring their claims was extended by s 28(b) of the Act? ..................................... [82] Legal principles ............................................................................................................................ [82] The plaintiffs’ s 28(b) pleading in this case .................................................................................. [91] The plaintiffs’ submissions............................................................................................................ [92] The defendants’ submissions....................................................................................................... [100]

Discussion and conclusion on issue 2 ........................................................................................... [104] Result .............................................................................................................................................. [130]

[1] The defendants apply to strike out parts of the plaintiffs’ amended

statement of claim. They say that the relevant claims were filed out of time.

Background

[2] The plaintiffs are the trustees of the Donald MacDonald trust. Mr and Mrs MacDonald have a background in farming. Mr Armstrong is a solicitor, and Mr Hanna is a chartered accountant.

[3] The defendants are investment advisors. Between July and August 2006 the plaintiffs consulted them about how they might invest $4 million which they had available for investment.

[4] The plaintiffs say that their main concern was to keep the capital intact, and that they instructed the defendants that their acceptable level of risk was “low/conservative”.

[5] The defendants made certain investment recommendations which the plaintiffs accepted, and between August 2006 and 31 March 2007 the defendants made the investments on the plaintiffs’ behalf. Three quarters of the investments were in interest-bearing securities.

[6] By 2009 the values of the investments had fallen significantly. The plaintiffs began selling their portfolio, and that process was completed in January 2012. By then, the plaintiffs say they had suffered capital losses totalling not less than $1.256 million.

[7] The plaintiffs’ case is that it was not until January 2012, when they consulted another investment advisor, that they found out that their investments had in fact been considerably riskier than the “low/conservative” level of risk they had told the defendants they would accept. They issued the present proceeding on 19 July 2013, claiming damages for their capital losses, interest, and costs.

[8] The plaintiffs rely on a Client Agreement completed on the defendants’ standard form on 25 July 2006. In it, Mr and Mrs MacDonald, as agents for the plaintiffs, stated (by means of placing a tick in the relevant box) that the plaintiffs’ investment objective was “balanced return from income and capital growth”. They ticked a “low/conservative” box to indicate the acceptable level of risk.

[9] On 14 August 2006, the defendants wrote a lengthy letter to the plaintiffs. In it, they recorded Mr MacDonald’s comments that the investment funds were surplus to the plaintiffs’ requirements and that a long term investment horizon should be adopted. The letter noted the plaintiffs’ “inclination” to place a higher weighting on interest-bearing securities, with a view to securing above average income streams.

[10] The defendants referred in the letter to the “prudent” investment approach required of trustees by the Trustee Act 1956, and to their interpretation of that requirement that trustees should invest “prudently and with caution, while recognising that some level of risk must be ventured into, in order achieve a reasonable return.” They proposed that the portfolio be divided between interest- bearing securities and equities in the proportions 75 per cent-25 per cent.

[11] In the section of their 14 August 2006 letter dealing with interest-bearing securities, the defendants referred to the “wide range of interest-bearing securities and maturities offering varying degrees of risk and varying interest rates”. For complete security of capital, they would have recommended government stock. However they considered that investment in corporate bonds “would improve the overall return, while still providing a high degree of security”. They went on to recommend eleven securities with a spread of maturities and interest payment dates, with a view to providing regular income over the next 14 years. They recommended that the $3 million to be invested in interest-bearing securities should be invested in

such securities over the ensuing few months, as and when opportunities for investment arose.

[12] The plaintiffs say that a supplementary agreement was completed with the defendants on 12 October 2006, under which the defendants would provide custodial and portfolio review services to the plaintiffs. The defendants deny that the supplementary agreement ever became operative, although they did in fact provide certain portfolio review services for the plaintiffs over the period from late 2006 to

2012 when their relationship with the plaintiffs ended.

[13] The defendants accept that they made investments for the plaintiffs from about 14 August 2006. Purchases continued after that date until 31 March 2007, when the last purchase was made. At quarterly intervals thereafter the defendant sent the plaintiffs statements of account showing transactions in the preceding quarter and an updated portfolio valuation. The valuations listed each investment separately, with details (in the case of the fixed interest securities) of the investment’s face value, due date, rate, yield, and current market value. The first such valuation appears to have been provided on or about 13 October 2006.

[14] With the quarterly statements of account and updated valuations, the defendants generally sent a covering letter headed “portfolio review”. These letters typically included comments on the financial markets generally, and comments and/or recommendations on the plaintiffs’ portfolio.

[15] Over the years since August 2006, and until the parties’ relationship ended in

2012, Mr MacDonald met from time to time with Mr Pearson, a partner in the defendants’ firm, to discuss the plaintiffs’ portfolio. Mr MacDonald says that Mr Pearson would outline proposed new investments, with a brief description of the investment, and Mr MacDonald had the opportunity to ask questions. He accepted the majority of the defendants’ recommendations.

[16] From around late 2008 Mr MacDonald says that he expressed to the defendants his concerns about the investments. However he accepts that he did not

suggest that the defendants had been negligent. Those allegations came later, after

Mr MacDonald consulted another financial adviser in 2012.

The plaintiffs’ claims

[17] The plaintiffs plead five causes of action. First, they allege that the defendants acted in breach of contract in constructing the initial fixed interest portfolio. Secondly, they say that the defendants acted negligently in the construction of that portfolio.

[18] In their third cause of action, the plaintiffs plead that the defendants acted in breach of contract in failing to properly carry out advisory portfolio review and evaluation services, in accordance with the supplementary agreement the plaintiffs say was made on 12 October 2006. The plaintiffs accept that they did receive pro- forma letters from the defendants from time to time providing general comments on the investments, and that there were two reviews, dated 31 October 2011 and 26

January 2012, which provided individualised comments on the plaintiffs’ portfolio. However, they say the defendants failed to exercise due skill, care and diligence in monitoring the composition and value of the fixed interest portion of the portfolio, and failed either to appreciate that the fixed interest portfolio was not in accordance with their instructions or failed to advise them of that fact. They further allege that the defendants failed to take appropriate steps to advise them to alter the portfolio, and that the defendants failed to respond to significant changes in market conditions which occurred from late 2007 onwards. The various pleaded breaches are said to have been repeated at all material times from 11 December 2006 up to an including the last review, which the defendants provided on 26 January 2012.

[19] In their fourth cause of action, the plaintiffs allege that the defendants were negligent in the performance of the portfolio reviews. They say that the defendants owed them a duty to exercise reasonable care and skill in giving investment advice, and that the defendants failed to perform that duty (generally in the same respects as are said to have constituted breaches by the defendants of their contract to perform portfolio review services).

[20] The plaintiffs’ last cause of action alleges breach of the Consumer Guarantees Act 1993, both in respect of the construction of the portfolio and the subsequent portfolio review services. In this cause of action, the plaintiffs say that the defendants did not achieve the result that the plaintiffs had made known they wished to achieve, in that the investment portfolio recommended and implemented by the defendants did not have the features which they had required, either individually or in the aggregate.

The amended statement of defence

[21] The defendants deny liability, saying (among other defences) that Mr and Mrs MacDonald ticked the “balanced return from income and capital growth” box to indicate the plaintiffs’ investment objective. They also rely on a disclaimer in the Client Agreement signed on 25 July 2006.

[22] Relevant to their strike-out application, the defendants say that the bulk of the plaintiffs’ claims are statute-barred under s 4 of the Limitation Act 1950 (the Act), as the proceeding was filed more than six years after the alleged breaches and/or damage occurred. They say that each of the investments was made on or before 29

March 2007, and that any damage arising from the construction of the investment portfolio was suffered prior to 19 July 2007, being the date six years before this proceeding was filed. The defendants say that the plaintiffs’ breach of contract and negligence claims are also statute-barred insofar as they allege breaches of contract and/or negligence in the conduct of portfolio reviews conducted before 19 July 2007.

The plaintiffs’ reply

[23] In a Reply document dated 21 May 2014, the plaintiffs say that the accrual of all of their causes of action was postponed by the operation of s 28(b) of the Act. That section applies where a plaintiff ’s right of action has been concealed by the

_{fraud of the defendant or its agents.}¹

¹ Paragraph 28 of the Act materially provides: “Where, in the case of any action for which a period of limitation is prescribed by this Act ... [t]he right of action is concealed by the fraud of any such person as aforesaid ... the period of limitation shall not begin to run until the plaintiff has discovered the fraud or the mistake, as the case may be, or could with reasonable diligence have discovered it”.

[24] In this case the fraud is alleged to have been equitable fraud, the defendants having allegedly breached an ongoing duty to disclose to the plaintiffs the real nature of the investments. The plaintiffs say that they were unaware of their right of action until around January 2012, when they met and discussed their portfolio with the other financial advisor.

The strike-out application

[25] The defendants ask for orders striking out the first cause of action (breach of contract), the second cause of action (negligence), so much of the third and fourth causes of action (breach of contract and negligence in respect of portfolio service review obligations) as apply to breaches allegedly occurring before 19 July 2007, and all of the fifth cause of action (Consumer Guarantees Act), excluding review obligations which occurred on or after 19 July 2007. The defendants rely on s

4(1)(a) of the Limitation Act 1950 in relation to the tort and contract causes of action and s 4(1)(a) and (d) of that Act in relation to the claims under the Consumer Guarantees Act 1993.²

[26] In their notice of opposition, the plaintiffs say that their causes of action (insofar as they relate to acts or omissions before 19 July 2007) are not so clearly statute-barred that they should be struck out without the opportunity to argue them at trial. In the alternative, they say that there is an arguable case that the accrual of their causes of action was postponed by the operation of s 28(b) of the Act. They say that deciding whether the accrual of their causes of action was postponed by the operation of s 28(b) of the Act is a matter which requires the determination of contested facts, and as such is not capable of being resolved in a strike-out

_application.

² 4 Limitation of actions of contract and tort, and certain other actions

(1) Except as otherwise provided in this Act ... the following actions shall not be brought after the expiration of 6 years from the date on which the cause of action accrued, that is to say –

(a) Actions founded on simple contract or tort;

...

(d) Actions to recover any sum recoverable by virtue of any enactment...

The evidence

[27] Affidavits in support of the strike-out application were provided by Mr Pearson and by Mr Sabiston, another partner in the defendants’ firm. Mr Sabiston who dealt with Mr MacDonald on occasions when Mr Pearson was not available.

[28] Mr Pearson’s evidence is that at no time during the period when his firm was engaged by the plaintiffs did the defendants think they had done anything wrong in connection with their services provided to the plaintiffs. He says that it never occurred to him that the defendants might have been negligent, or that the plaintiffs might have thought they had been negligent. He says that at no time did the defendants fail to disclose information to the plaintiffs, deliberately or otherwise, and the plaintiffs never raised any concerns or criticisms of the defendants’ services during the time the defendants were engaged by the plaintiffs.

[29] He produced with his affidavit a bundle of documents comprising what was said to be a complete written record of the defendants’ exchanges with the plaintiffs in the period from 9 June 2006-18 January 2013.

[30] Mr Sabiston states that the plaintiffs gave him no reason to think they believed that the defendants had acted negligently. He also says that it never occurred to him during the time the defendants were engaged by the plaintiffs that the defendants might have been negligent in providing their services. The plaintiffs’ allegations came as a complete surprise to him.

[31] Mr Sabiston says that the boxes in the Client Agreements which clients are asked to tick are regarded by the defendants as being for information purposes only. The information is used by the defendants to discuss with the client what they mean, and what they want from their investments, so that the defendants can better understand their risk profiles. From there, the defendants make investment recommendations and the client decides on his or her choice of investment.

[32] Mr MacDonald says that he was a farmer for much of his life. When the

farm was sold in 2005, the plaintiffs’ trust was left with a substantial amount of

money to invest. As he had very little experience of investing, Mr MacDonald discussed how to go about making investments with his lawyer and co-trustee, the plaintiff Mr Armstrong. Mr Armstrong advised him to split the money between two firms of investment advisors. He took that advice, choosing the defendants and one other firm.

[33] Mr MacDonald describes a meeting he and Mrs MacDonald had with Mr Pearson on 17 July 2006. At this meeting he says that he told Mr Pearson that the plaintiffs’ key concern was to protect the capital which would be invested, so the level of investment risk should be low. The trustees were prepared to accept less income if that was what was required to ensure that the capital remained intact. Mr MacDonald says that he told Mr Pearson that his family’s needs were modest, and that they would not need much income from the capital in the short term. He and Mrs MacDonald had other sources of income which would provide about half of what they required.

[34] Referring to the Client Agreement, Mr MacDonald rejects Mr Sabiston’s evidence that the boxes which he ticked were “for information purposes only”. He says that he does not recall any discussion to that effect.

[35] Mr MacDonald produced with his affidavit a handwritten file note made by Mr Pearson dated 10 August 2006 headed “Client Profile – Summary”, which the defendants had produced on discovery. After setting out details of the trust and the trustees, the file note set out what appears to have been Mr Pearson’s evaluation of the plaintiffs as investors. He noted that the plaintiffs:

• Are experienced in money matters/business activities & have substantial asset base

• Have experienced professional advisors as Co-Trustees

• But they make the decisions – like to hands-on will sit over desk

• Are comfortable making own decisions, but will discuss matters with [the defendants]

...

• Also no levels of income specified on Form...yet discussions

indicate looking for $150,000 after tax

• Also will likely take $100,000 off this over the next 12 months

...

• Answers on Form are contradictory over discussions – too simplistic on Form & not enough detail

[36] Under the heading “Our view” in his 10 August 2006 file note, Mr Pearson noted that the plaintiffs would not need access to capital, and that they “will need/require income of min $100k”. Any surplus would be used to increase the equities component of the portfolio. Mr Pearson noted also that there would be a higher weighting given to interest-bearing securities than the defendants would recommend.

[37] Mr MacDonald challenges much of what he has read in the defendants’ file notes of meetings with him. He says that, reading the notes, he finds it difficult to believe that he was present at the same meetings as Mr Pearson. The file notes do not reflect his memory of what was discussed.

[38] Referring specifically to Mr Pearson’s notes of 10 August 2006, Mr MacDonald draws attention to the passage “Answers on Form are contradictory over discussions...too simplistic on Form & not enough detail”, and says that he has no recollection of Mr Pearson drawing the apparent conflict between the form and their discussions to Mr MacDonald’s attention, or seeking clarification of Mr MacDonald’s instructions in light of the perceived conflict.

[39] Mr MacDonald also challenges the statement in the notes that the plaintiffs’ aim was to generate $150,000 per annum after tax in income from the investments. He says that he has no recollection of ever communicating such a requirement to the defendants, and that he finds it implausible that he would have done so in light of his family circumstances at the time. He also says that he does not recall saying anything at his meetings with Mr Pearson that might have justified an assessment that Mr and Mrs MacDonald were experienced in money matters.

[40] Mr MacDonald says that on reading the defendants’ letter dated 14 August

2006 he felt that his instructions had been listened to and understood. He refers to the passage in the letter in which the defendants advised that the recommended asset allocation was more conservative than they would usually recommend, and to the advice in the letter that the recommended interest-bearing securities were marketable. He says that he was impressed with the reference in the letter to security of capital, and that nothing in the letter suggested to him that the defendants had any different understanding of the plaintiffs’ requirements from his own understanding. Nothing alerted him to any possible inconsistency between the requirements he had communicated at his meetings with Mr Pearson and the boxes which he had ticked on the Client Agreement.

[41] Referring to the portfolio review documents which the plaintiffs received on a quarterly basis after they began investing with the defendants, Mr MacDonald says that there was never any mention or analysis of the plaintiffs’ requirements and whether or not the portfolio satisfied those requirements. The letters never suggested that any adjustment to the portfolio was required, or that there was any cause for concern about the trust’s portfolio. Mr MacDonald only began to feel some concern in late 2008 and 2009 following the collapse of Strategic Finance (in which the plaintiffs had invested $250,000 on 16 August 2006) and the global financial crisis in late 2008 and 2009. From that point on he frequently went to see Mr Pearson, or telephoned him with questions.

[42] Mr MacDonald says that he got little in the way of clear direction or advice in response to his queries. As he put it in his affidavit: “There never seemed to be any specific analysis of the product. I never got a specific answer.”

[43] Mr MacDonald says that throughout the period when he had concerns with the investments and was putting questions to Mr Pearson, he could not put his finger on what he now believes was the root of the problem – the portfolio had not been constructed in line with the plaintiffs’ instructions about the level of risk they wanted.

[44] Mrs MacDonald also provided an affidavit in opposition to the application. She states that she remembers discussing with Mr Pearson at the 17 July 2006 meeting the MacDonalds’ preference to invest in low-risk and lower-return, as opposed to high-risk and higher-return, investments. She says that she recalls her husband stressing that retaining the capital was the most important thing for the MacDonalds, and she confirms Mr MacDonald’s evidence that no specific requirement for income from the investments was discussed at the meeting.

[45] Mrs MacDonald says that she was aware of her husband’s anxiety when he became concerned about the investments, and that she shared that anxiety. Her evidence is that she also was unaware of what she refers to as the “root cause” of the problem (that the portfolio had not been constructed in accordance with the MacDonalds’ instructions as to the acceptable level of risk).

[46] There was one further affidavit filed in opposition to the application. The affidavit was that of Mr White, an Auckland chartered accountant instructed to advise the plaintiffs. Mr White expresses the opinion that, even if the plaintiffs’ requirements were as set out in Mr Pearson’s file note of 10 August 2006, those requirements could still have been achieved consistently with an instruction to invest in a low risk/conservative portfolio with a balanced return from income and capital growth. He notes that a requirement for an income return of $150,000 per annum after tax implied a gross return of around $223,000 per annum, or a return of 7.4 per cent on a $3 million portfolio. He refers to various fixed interest investments available at the time which he consideres were “low risk” but would have met the return criteria. He acknowledges that the split between fixed interest securities and equities which the defendants recommended was at the conservative end of the asset allocation spectrum, and would have been entirely appropriate for a low risk/conservative portfolio.

[47] Having analysed the portfolio of investments that the defendants recommended and purchased on the plaintiffs’ behalf, Mr White’s evidence is that the portfolio was in fact at the high risk end of the risk spectrum. He says that, on any measure, the portfolio was materially different from what he would have expected a conservative fixed interest investment portfolio to look like. In his view,

the deficiencies in the portfolio were so manifest that it is difficult to believe that any reasonably competent financial advisor could have believed the portfolio met the plaintiffs’ requirements.

[48] In Mr White’s opinion, the general tenor of the portfolio reviews was not such as would have given the plaintiffs any cause for concern, although a reasonably competent financial advisor faced with this portfolio would have been alarmed at the high level of risk to which the portfolio was exposed, and would have immediately taken steps to attempt to re-balance the portfolio to more accurately reflect a conservative risk profile.

[49] Mr White concluded his affidavit by saying:

All of this suggests to me that [the defendants] may have been aware that the portfolio constructed was not in line with the plaintiffs’ instructions but concealed from the plaintiffs that this was the case.

[50] That paragraph was the subject of an objection made by Mr MacFarlane at the hearing, on the grounds that the statement was speculation and outside the expertise claimed by Mr White.

[51] The defendants did not file any evidence in reply.

The issues for determination

[52] The plaintiffs acknowledge that their claims for breach of contract and breach of the Consumer Guarantees Act, insofar as they allege breaches occurring before 19

July 2007, were filed after the six year limitation period had expired. For these causes of action to survive the strike-out application, the plaintiffs accept that they will have to show that they have an arguable case for an extension of time under s

28(b) of the Act.

[53] The following issues therefore fall to be determined:

(1) Issue 1: Is it reasonably arguable for the plaintiffs that their negligence causes of action, to the extent that they depend on alleged breaches of duty by the defendants before 19 July 2007, did not

accrue until after that date (because no damage was caused by the alleged breaches until after that date)?

(2) If and to the extent that the answer to issue 1 is no, and in respect of each of the contract causes of action and the claims under the Consumer Guarantees Act where breaches of duty are alleged to have occurred before 19 July 2007, have the dates of accrual of the impugned causes of action been postponed by fraud on the defendants’ part, so that the time for the plaintiffs to bring their claims was extended by s 28(b) of the Act?

Issue 1: Is it reasonably arguable for the plaintiffs that their negligence causes of action, to the extent that they depend on alleged breaches of duty by the defendants before 19 July 2007, did not accrue until after that date (because no damage was caused by the alleged breaches until after that date)?

Legal principles

[54] A cause of action in the tort of negligence arises only when loss or detriment has been suffered by a plaintiff by reason of breach of the duty of care owed by the defendant.³

[55] Section 4 of the Act relevantly provides:

Limitation of actions of contract and tort, and certain other actions

(1) Except as otherwise provided in this Act ... the following actions shall not be brought after the expiration of 6 years from the date on which the cause of action accrued, that is to say,—

(a) actions founded on simple contract or on tort: ⁴

...

_{[56] In Murray v Morel the Supreme Court said:}⁵

³ _{Thom v Davys Burton [2008] NZSC 65, [2009] 1 NZLR 437 at [2].}

⁴ Notwithstanding the enactment of the Limitation Act 2010, the provision applicable to limitation of the plaintiffs’ claims in negligence in this case is s 4 of the Act – under s 59 of the Limitation Act 2010, the Act continues to apply in respect of acts or omissions which occurred prior to

_{1 January 2011.}

⁵ Murray v Morel & Co Ltd [2007] NZSC 27, [2007] 3 NZLR 721.

[33] In order to succeed in striking out a cause of action as statute-barred the Defendant must satisfy the Court that the Plaintiff’s cause of action is so clearly statute-barred that the plaintiff’s claim can properly be regarded as frivolous, vexatious, or an abuse of process. If the Defendant demonstrates that the Plaintiff’s proceeding was commenced after the period allowed for the particular cause of action by [the Act], the Defendant will be entitled to an order striking-out that cause of action unless the plaintiff shows that there is an arguable case for an extension or postponement which would bring the claim back within time...

[57] In an appropriate case, the Court may receive affidavit evidence on a strike- out application, but it will not attempt to resolve genuinely disputed issues of fact. Generally, affidavit evidence admitted on a strike-out application will be limited to matter which is undisputed. Each cause of action is to be considered separately, and if the Court concludes that it clearly cannot succeed, it may be struck out.⁶

[58] The leading authority in New Zealand on when a cause of action in negligence accrues is the Supreme Court decision in Thom v Davys Burton, a case of negligence by solicitors advising a client who was about to enter into a pre-nuptial agreement. Through the negligence of the solicitors, the agreement was not properly witnessed by their client’s future wife and was of no legal effect. Eight years later the parties separated, and the Family Court subsequently declined to uphold the agreement. Mr Thom sued his solicitors, who applied to have the claim struck out on the grounds that it was time-barred.

[59] The Supreme Court upheld the solicitors’ submission that Mr Thom had suffered “actual and quantifiable loss” when he obtained a damaged asset, namely an agreement that was not legally enforceable. That was held to be the case even though the extent of the resultant damage would not become clear until later. Contingencies relating to the failure of the marriage and the Family Court declining to validate the agreement went only to the valuation of the loss, and not to the question of whether a loss was suffered when the agreement was signed.

[60] In Thom, the Chief Justice considered the cause of action arose as soon as the

_{plaintiff, relying on the solicitors’ advice, was “financially worse off”, even if the}

⁶ Smith & Martin & Anor v Singleton & Anor [2014] NZHC 2672 at [17]- [19].

quantification of his loss was difficult, and the measure of loss might in a particular case ultimately depend on further contingencies.⁷

[61] The majority in Thom noted that the damage would be contingent, and therefore not actual for limitation purposes, if the plaintiff would suffer no damage at all unless and until a contingency was fulfilled. An example of that situation would be where a plaintiff is exposed to a liability which is contingent on the occurrence of a future uncertain event, such as the liability of a guarantor which is contingent on default by the principal debtor. If on the other hand there is an immediate reduction in the value of an asset, whether tangible or intangible, there will be actual damage

as soon as the asset becomes less valuable.⁸ On the facts of the case in Thom,

Wilson, McGrath and Tipping JJ concluded that the damage was quantifiable as soon as the advice was acted on by Mr Thom, either on the straightforward basis of what it would have cost Mr Thom 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.⁹

[62] In a judgment on facts very similar to those in the present case, I declined to strike out the plaintiffs’ claims against their investment advisor in the recent case of Smith & Martin & Anor v Smith & Singleton & Anor.¹⁰ The plaintiffs in that case were unsophisticated investors, who relied on the defendant investment advisors to recommend low risk investments that met their investment criteria. They alleged that the defendants acted negligently in advising them to invest in certain finance

companies which failed.

[63] In refusing the defendants’ strike-out application based on s 4 of the Act, I referred to Thom, the House of Lords decision in Law Society v Sephton & Co,¹¹ the decision of the High Court of Australia in Wardley Australia Ltd v State of Western Australia,¹² and to a number of decisions of the Court of Appeal of England and

_{Wales. On the facts, I was not persuaded that the evidence justified striking out the}

⁷ _{At [16].}

⁸ _{At [46].}

⁹ _{At [49].}

¹⁰ _{Smith & Martin & Anor v Singleton & Anor, above n 6.}

¹¹ _{Law Society v Sephton & Co [2006] UKHL 22, [2006] 2 AC 543.}

¹² Wardley Australia Ltd v State of Western Australia [1992] HCA 55; (1992) 175 CLR 514.

negligence causes of action on limitation grounds. I referred to the view of the Chief Justice in Thom that the cause of action arises as soon as the plaintiff who relied on the advice was financially worse off, and concluded that the evidence did not justify a finding that the plaintiffs were clearly financially worse off when the various investments were made. I concluded that the case was a “benefits and burdens” type of case, in which it might not be possible to ascertain whether loss or damage was suffered at the time when the investment was made: on the evidence, it was not possible to look at the investments and conclude that the plaintiffs’ net worth had

been reduced in some way.¹³ I considered that the contingencies in the case were

contingencies as to whether the plaintiffs would suffer any loss at all, rather than contingencies affecting the quantum of a loss which had been suffered at the outset.¹⁴

[64] As in this case, the plaintiffs in Smith & Martin contended that they had not received what they bargained for – they wanted “secure” investments but they got “risky” investments. I considered that that submission appeared to conflate the alleged breach of duty with the claimed damage, and that “risky” in the context meant no more than subject to the contingency that loss in the form of a lost or depreciated investment might be suffered some time in the future. I considered that the situation was no different from that described in the High Court of Australia in Wardley, where, as a result of a defendant’s negligent representation, a claimant enters into a contract which exposes him or her to a contingent loss or liability, and the plaintiff suffers no actual damage until the contingency is fulfilled and the loss

becomes actual.¹⁵

[65] Since the hearing of the defendants’ strike-out application in this case, Toogood J has delivered judgment on an application to review my judgment in Smith

& Martin.¹⁶ His Honour upheld the review application insofar as it related to the

_{plaintiffs’ claims based in negligence, relying on the United Kingdom}

¹³ _{Smith & Martin & Anor v Singleton & Anor, above n 6, at [57] and [58].}

¹⁴ _{At [59].}

¹⁵ _{At [60].}

¹⁶ Smith & Martin & Anor v Singleton & Anor, [2015] NZHC 1643.

Court of Appeal decision in Shore v Sedgwick,¹⁷ which was cited with approval by the New Zealand Court of Appeal in Westland District Council v York.¹⁸

[66] Toogood J summarised the facts in Shore as follows:¹⁹

In Shore v Sedgwick Financial Services, the plaintiff began proceedings in

2005 alleging negligence on the part of the defendant (“SFS”). Mr Shore claimed that SFS breached its duty of care in relation to advice it gave to him which led to his transferring the benefits from his existing pension scheme to a less advantageous scheme, causing him loss as a result. SFS argued that Mr Shore first suffered loss in 1997 when he changed pension schemes, so the claim was limitation barred. Mr Shore argued that his claim was brought within time because he suffered the loss either in 2005 when he first suffered a cumulative loss of income, or in 2000 when he became aware of the fact that the pension scheme he had transferred into would be less advantageous than his original scheme.

[67] His Honour then cited the following passages from the judgment of Dyson LJ

in Shore:²⁰

[37] ... It is Mr Shore’s case (assumed for present purposes to be established) that the PFW scheme was inferior to the Avesta scheme because it was riskier. It was inferior because Mr Shore wanted a secure scheme: he did not want to take risks. In other words, from Mr Shore’s point of view, it was less advantageous and caused him detriment. If he had wanted a more insecure income than that provided by the Avesta scheme, then he would have got what he wanted and would have suffered no detriment. In the event, however, he made a risky investment with an uncertain income stream instead of a safe investment with a fixed and certain income stream which is what he wanted.

[39] The analogy with the investor who is negligently advised to buy shares rather than Government bonds does not assist [counsel for Mr Shore]. In my judgment, an investor who wishes to place £100 in a secure risk-free investment and, in reliance on negligent advice, purchases shares does suffer financial detriment on the acquisition of the shares despite the fact that he pays the market price for the shares. It is no answer to this investor’s complaint that he has been induced to buy a risky investment when he wanted a safe one to say that the risky investment was worth what he paid for it in the market. His complaint is that he did not want a risky investment. A claim for damages immediately upon the acquisition of the shares would succeed. The investor would at least be entitled to the difference between the cost of buying the Government bonds and the cost of buying and selling the shares.

¹⁷ _{Shore v Sedgwick Financial Services Ltd [2008] EWCA Civ 863, [2008] PNLR 37.}

¹⁸ _{Westland District Council v York [2014] NZCA 59.}

¹⁹ Smith & Martin & Anor v Singleton & Anor, above n 16, at [40] citing Shore v Sedgwick

_{Financial Services, above n 17.}

²⁰ At [41], citing Shore v Sedgwick Financial Services, above n 17.

(emphasis added).

[68] Applying that reasoning Toogood J concluded that the plaintiffs in Smith & Martin suffered a loss when they first invested in the various finance companies on the advice of the defendant “because they received an investment that was riskier than they wanted”. His Honour considered that the plaintiffs could have claimed for damages immediately upon making the investments, and they would at least be entitled to the difference between the cost of investing in the less risky finance

company and the cost of calling in the more risky investments.²¹

[69] Toogood J also referred to the view expressed by the Court of Appeal in Westland District Council, that the relevant loss may consist in “disappointment in the value of an asset acquired”.²² On the statement of claim in Smith & Martin, Toogood J regarded the case as one where the plaintiffs were disappointed in the value of the asset acquired “in that they wanted to invest in a less risky finance company.”²³

The defendants’ submissions

[70] Mr MacFarlane submitted that I erred in my decision in Smith & Martin in not following the Shore line of cases in the United Kingdom. He submitted that those cases support the proposition that, in a professional advice transaction involving risk, it will almost always be the case that loss will be able to be inferred as at the date of the subject transaction. He submitted that the cost of changing from the wrong investment to the right kind of investment (or to having no investment at all) constitutes sufficient damage or detriment to qualify as “loss”, completing the cause of action for limitation purposes.

[71] The plaintiffs say that they suffered a degree of exposure to risk which was unacceptable; if so, their immediate remedy was the replacement of what they say was a bad set of investments with other investments which met their requirements, or the exiting from the bad investments altogether. Mr MacFarlane submitted that in

_{either event the plaintiffs would have suffered measurable loss.}

²¹ _{Smith & Martin & Anor v Singleton & Anor, above n 16, at [42].}

²² _{Westland District Council v York, above n 18, at [29].}

²³ Smith & Martin & Anor v Singleton & Anor, above n 16, at [44].

The plaintiffs’ submissions

[72] Mr Long relied on my decision in Smith & Martin in submitting that this is a “benefits and burdens” case, in which it was not possible to ascertain whether, at the time of purchase, the burden or benefit was greater. He pointed out that the plaintiffs’ investments may have actually risen in value.

[73] Mr Long submitted that each case must be analysed on its own facts. While in many professional advice cases it will be clear that there has been no benefit to the plaintiff at the time of entering a transaction, and that there is immediately detriment (Thom is an example of such a case), the situation with investments that fluctuate in value over time is different. It is not possible to say at the time of purchase that there is no benefit: in many cases there may be.

[74] Specifically in respect of Shore, Mr Long submitted that, on the facts of the case, the Court found that it was not necessary to wait to see what happened to determine whether Mr Shore was financially worse off. From the outset, the rights Mr Shore obtained by transferring to the new pension scheme were less valuable to him. Mr Long submitted that was not the case here.

[75] Mr Long further submitted that if the plaintiffs’ loss in this case could have been assessed (at the time of the transaction) as the costs of exiting the investments and purchasing more suitable ones, the plaintiffs’ loss would most likely have been zero or close to zero: they could presumably have recovered the market value of the investments, and the defendants may well have been prepared to arrange that for the plaintiffs at no cost to them (for reasons concerned with the relationship and the defendants’ concern for their firm’s reputation).

[76] Finally, Mr Long submitted that the limitation issue on the negligence causes of action should be determined at trial, with the benefit of full evidence, including expert evidence as to loss.

Discussion and conclusions on issue 1

[77] Neither counsel sought leave to make further submissions following the delivery of the judgment of Toogood J on the review application in Smith & Martin.²⁴ It was known at the hearing that that application was pending, and there was full argument on the issue of whether or not my decision in Smith & Martin was correct.

[78] In those circumstances, I have not considered it necessary or appropriate to

seek further submissions from counsel on the effect of Toogood J’s judgment.

[79] I do not see any basis on which the decision of Toogood J on review in Smith

& Martin can be distinguished, and I consider that I should follow the review decision. The first instance decision in Smith & Martin has been overruled, after carefully consideration, and it can no longer be regarded as stating the law on the relevant point. Mr Long did endeavour to distinguish Shore on the basis that, in that case, it was clear from the outset that the rights Mr Shore obtained by transferring to the new pension scheme were less valuable to him. But Toogood J rejected that very same basis for distinguishing Shore on the (materially identical) facts in Smith & Martin.

[80] Mr Long also submitted that there may have been no loss to the plaintiffs in exiting the investments and acquiring more suitable ones, because the defendants might have elected to bear any such costs. But if Shore is correct on the point, some loss would already have been suffered by that point – according to Shore, the loss in these cases is said to arise immediately on the acquisition of the relevant “risky” asset.

[81] On the basis of the decision on review in Smith & Martin, then, I find that material loss was suffered by the plaintiffs as soon as the relevant investments were made and the plaintiffs were “disappointed in the values” of the assets they had

_{acquired, because they had wanted to invest in “less risky” investments. The}

²⁴ Under the Practice Note at [1968] NZLR 608, application to make further submissions after the hearing must be made to the Judge. It is only in exceptional circumstances that leave will be granted.

negligence causes of action, to the extent that they rely on alleged breaches of duty occurring before 19 July 2007, will therefore be struck out unless the plaintiffs can made out their case for an extension of time under s 28(b) of the Act.

Issue 2: If and to the extent that the answer to issue 1 is no, and in respect of each of the contract causes of action and the claims under the Consumer Guarantees Act where breaches of duty are alleged to have occurred before

19 July 2007, have the dates of accrual of the impugned causes of action been postponed by fraud on the defendants’ part, so that the time for the plaintiffs to bring their claims was extended by s 28(b) of the Act?

Legal principles

[82] Section 28(b) of the Act materially provides:

28 Postponement of limitation period in case of fraud or mistake

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

...

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

The period of limitation shall not begin to run until the plaintiff has

discovered the fraud...or could with reasonable diligence have discovered it.

[83] The leading New Zealand decision on the application of s 28(b) in a strike- out application, is the Supreme Court decision in Murray v Morel.²⁵ In that case, the Supreme Court said:²⁶

In the end the Judge must assess whether, in such a case, the plaintiff has presented enough by way of pleadings and particulars (and evidence, if the plaintiff elects to produce evidence), to persuade the Court that what might have looked like a claim which was clearly subject to a statute-bar is not, after all, to be viewed in that way, because of a fairly arguable claim for extension or postponement. If the plaintiff demonstrates that to be so, the Court cannot say that the plaintiff’s claim is frivolous, vexatious, or an abuse of process. The plaintiff must, however, produce something by way of pleadings, particulars, and if so advised, evidence, in order to give an air of reality to the contention that the plaintiff is entitled to an extension or postponement which will bring the claim back within time. A plaintiff cannot, as in this case, simply make an unsupported assertion in submissions

²⁵ Murray v Morel & Co Ltd, above n 5, at [56].

that s 28 applies. A pleading of fraud should, of course, be made only if it is responsible to do so.

[84] A defendant will be liable if it would be unconscionable for him or her to be able to rely on the lapse of the limitation period to avoid liability, ²⁷ but the defendant must know all the facts which together constitute the cause of action,²⁸ and he or she must have wilfully concealed the cause of action.²⁹ The cause of action may have been concealed dishonestly or passively, but fraudulent concealment will only exist

where, first, there was a duty of disclosure created by a fiduciary or other special

duty and secondly, the plaintiff’s right of action was concealed from him or her.³⁰

Where the defendant was unaware of his or her breach, the limitation period will not be postponed.

[85] In Wrightson Ltd v Blackmount Forests Ltd,³¹ the Court of Appeal applied Murray v Morel. Chambers J, delivering the judgment of the Court, noted that the focus of s 28(b) is not on whether or not the non-disclosure was wilful, but on the defendant’s knowledge of relevant facts and on its knowledge of the duty to disclose them. If, despite such knowledge, the defendant decides not to disclose the facts, then almost always that decision will be worthy of the epithet “wilful”. Applying that test to the facts in Wrightson, the question was whether someone within Wrightson, who knew of the duty to disclose, had decided not to disclose.³²

[86] The Court concluded that Blackmount had done “enough by way of pleadings and particulars and evidence” to persuade it that those parts of its contract claim which appeared to be statute-barred might not after all be statute-barred, “because of a fairly arguable claim for extension or postponement”.³³

[87] In Newlands v Sovereign Assurance Company Ltd & Ors, Associate Judge Sargisson dealt with a defendant’s application for summary

²⁷ _{Applegate v Moss [1971] 1 QB 406.}

²⁸ _{Inca Ltd v Autoscript (NZ) Ltd [1979] 2 NZLR 700 (SC) at 711.}

²⁹ _{At 711.}

³⁰ _{At 711.}

³¹ _{Wrightson Ltd v Blackmount Forests Ltd [2010] NZCA 631.}

³² At [47]-[48].

judgment against Mr Newlands on limitation grounds.³⁴ Mr Newlands invoked ss 4 and 28 of the Act in response.

[88] The Associate Judge considered that the onus was on Mr Newlands to show that the defendants knew the essential facts constituting the cause of action. It was not enough to support a claim of fraudulent concealment that the defendant should have had knowledge.

[89] If it is established that the cause of action was concealed by the defendant’s fraud, the limitation period does not being to run until the plaintiffs have discovered the fraud, or could with reasonable diligence have discovered it.³⁵ “Reasonable diligence” in this context is highly fact-dependent. In Paragon Finance Plc v DB Thakerar & Co (a Firm), Millett LJ asked:³⁶

How a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency.

[90] If the plaintiff has attempted to make enquiries that could have led to the discovery of the fraud, only to be reassured or “deflected” by the defendant, it is likely that the plaintiff can reasonably rely on the assurances.³⁷ The Courts have found this to be the case even where it would not have been especially onerous for the plaintiff to have made further enquiries.³⁸

The plaintiffs’ s 28(b) pleading in this case

[91] The plaintiffs’ relevant s 28(b) pleading appears in their amended reply dated

21 May 2014. It reads:

55...the accrual of all causes of action in this proceeding was postponed [by the operation of s 28(b)], in that the plaintiffs’ right of action was concealed by the fraud of the Defendant...as follows:

³⁴ _{Newlands v Sovereign Assurance Company Ltd & Ors [2014] NZHC 803.}

³⁵ _{Section 28(b) of the Act.}

³⁶ _{Paragon Finance Plc v DB Thakerar & Co (a Firm) [1998] EWCA Civ 1249; [1999] 1 All ER 400 (CA).}

³⁷ Amaltal Corporation Ltd v Maruha Corporation [2006] NZCA 112; [2007] 1 NZLR 608 (CA) at [154]; Inca Ltd v

_{Autoscript Ltd, above n 28.}

³⁸ Amaltal Corporation Ltd v Maruha Corporation above n 37 at [170].

(a) The Defendant owed the Plaintiffs a duty to disclose the facts giving rise to the Plaintiffs’causes of action. This duty arises out of the following facts and circumstances:

(i) There was a fiduciary relationship, or a special relationship of trust and reliance akin to a fiduciary relationship, between the Plaintiffs and the Defendant.

(ii) This relationship arose because the Plaintiffs relied on the Defendant’s expertise to recommend investments that met with their Investment Requirements.

(iii) The Plaintiffs were vulnerable in that they did not have the expertise to protect their own interests.

(iv) The Defendant knew that this trust and reliance was being placed on it.

(v) Under the express term of the Client Agreement...the Defendant was obliged to recommend and construct an investment portfolio in accordance with the Plaintiffs’ Investment Requirements.

(vi) It is a necessary corollary of that express term that if the Defendant recommended and constructed an investment portfolio that was not in accordance with the Plaintiffs’ Investment Requirements, it ought to have immediately disclosed this fact to the Plaintiffs.

(b) The Defendant breached its duty of disclosure, in that:

(i) At all material times the Defendant by, at least, Andrew Pearson acting as its agent, was, or ought to have been aware, of the Plaintiffs’ Investment Requirements.

Particulars

1. Meeting between Andrew Pearson, Donald MacDonald and Judy MacDonald on 17 July 2006.

2. Client Agreement executed on 26 July 2006 where the Plaintiffs ticked “balanced return from income and capital growth” as their investment objective, and “low/conservative” as their level of acceptable risk.

3. Handwritten file note entitled “Client Profile – Summary” by Andrew Pearson, apparently prepared on or around 10 August 2006.

4. Letter from Somerset Smith Partners to Donald

MacDonald Trust dated 14 August 2006;

(ii) At all material times the Defendant by, at least, Andrew Pearson acting as its agent, was or ought to have been aware that the investments [set out in Schedule One to

the statement of claim] were not in accordance with the

Plaintiffs’ Investment Requirements.

(iii) At no time did the Defendant take steps to draw this to the

Plaintiffs’ attention.

(iv)At all material times the Defendant was or ought to have been aware that by not meeting the Plaintiffs’ Investment Requirements the Plaintiffs were being exposed to a greater risk of loss.

(v) Instead of alerting the Plaintiffs to the fact that the investment portfolio it had recommended and purchased on their behalf was not in accordance with their Investment Requirements, when the Plaintiffs raised concerns about their investment portfolio, Mr Pearson as agent for the Defendant reassured them that there was no need for concern.

(vi)The Defendant also sent correspondence reassuring the

Plaintiffs that the portfolio did not require adjustment.

Particulars

Portfolio Review dated 11 December 2006, Portfolio

Review dated 5 January 2007, Portfolio Review dated

16 April 2007, Portfolio Review dated 27 July 2007, Portfolio Review 17 September 2007, Portfolio Review

dated 29 January 2008, Portfolio Review dated

23 April 2008, Portfolio Review 4 July 2008, Portfolio

Review dated 28 October 2008, Portfolio Review dated

19 January 2009, Portfolio Review dated 23 April 2009, Portfolio Review dated 27 July 2009, Portfolio Review

dated 28 October 2009, Portfolio Review dated

13 January 2010, Portfolio Review dated 29 April 2010, Portfolio Review dated 27 July 2010, Portfolio Review

dated 19 October 2010.

(c) As a result of the Defendant’s breach of its duty of disclosure, the Plaintiffs were unaware of their right of action until around January 2012 when they met and discussed their portfolio with another financial advisor, Mr Stephen Rogers.

The plaintiffs’ submissions

[92] Mr Long submits that the plaintiffs were not in a position to protect their own interests, and that it is in the very nature of an advisor/client relationship that the client is unlikely to be able to accurately evaluate the merits of the advisor’s investments recommendations. It was implicit in the parties’ contractual relationship that the defendants had a duty of disclosure.

[93] As it was an express term of the plaintiffs’ contract with the defendants that the defendants would recommend and then invest in a portfolio with a “low/conservative” level of risk which would achieve a “balanced return from income and capital growth”, the corollary must be that if the defendants recommended and then implemented a portfolio that did not meet those requirements, they had an obligation to immediately disclose that fact to the plaintiffs so that they would have the opportunity to adjust the portfolio.

[94] The plaintiffs submit that there is an evidential foundation to support the inference that the defendants knew that the portfolio they recommended, and then purchased, was not in line with the plaintiffs’ requirements as set out in the Client Agreement. They say that those requirements were clear from the initial meeting between Mr Pearson and Mr and Mrs MacDonald on 17 July 2006, and from the references in the Client Agreement to “low/conservative” as the acceptable risk, and “balanced return from income and capital growth” as the investment objective. They further submit that the letter from the defendants dated 14 August 2006 conveyed the impression that the defendant would invest in a conservative manner.

[95] The plaintiffs acknowledge that certain handwritten notes made by the defendants may appear to show that the plaintiffs’ requirements were in fact different from what was recorded in the Client Agreement. They submit that these notes do not appear to have been taken at the time of the meeting they purport to record, and are very different from Mr and Mrs MacDonald’s recollections of the initial meeting.

[96] The plaintiffs submit that the fundamental dispute between the parties as to what their requirements were must be resolved with the benefit of full evidence and cross-examination at trial.

[97] The plaintiffs further submit that the deficiencies in the portfolio of investments actually made by the defendants are so manifest that it is difficult to believe that any reasonably competent financial advisor could have believed that what was implemented met the plaintiffs’ requirements. On that basis, the defendants must have been aware that the portfolio they constructed for the plaintiffs was not in line with their requirements. If the defendants were not so aware, they

must have been wilfully blind to the plaintiffs’ requirements, or reckless as to whether they had a correct understanding of those requirements.

[98] If the defendants believed that the requirements outlined by Mr and Mrs MacDonald at the original meeting were inconsistent with the boxes ticked in the Client Agreement, there is no evidence of the defendants taking any steps to draw that claimed inconsistency to the plaintiffs’ attention, or to clarify the plaintiffs’ requirements. This suggests that the defendants proceeded with a reckless disregard for their duty to invest in a portfolio in line with plaintiffs’ requirements.

[99] All of these matters can only be resolved with the benefit of evidence given under cross-examination at trial. Furthermore, New Zealand cases have not expressly considered whether recklessness is sufficient for a finding of equitable fraud; that is a further factor which makes it inappropriate to rule on the plaintiffs’ s 28(b) arguments on a strike-out application.

The defendants’ submissions

[100] Mr MacFarlane submits that the plaintiffs’ s 28(b) case reduces to the single proposition that the defendants knew that they got it wrong, should then have told the plaintiffs that much, but deliberately did not do so. He refers to the absence of any allegation that any particular document or information relevant to the portfolio was withheld or concealed from the plaintiffs, and to what he describes as extensive reporting and communications provided to the plaintiffs.

[101] Mr MacFarlane further submits that the plaintiffs have failed to explain in their pleading why the alleged fraud could not, with reasonable diligence, have been discovered earlier. Two of the plaintiffs, Messrs Armstrong and Hanna, are professional trustees, and Mr MacDonald was regularly engaged in managing the trust’s investments.

[102] Mr MacFarlane submits that, if the plaintiffs’ s 28(b) argument succeeds, the consequence will be that it will always be sufficient for a plaintiff to survive a strike- out application based on limitation grounds to allege that the defendant had knowledge of, and a duty to self-report, a breach of duty, even if there is no evidence

of such knowledge and the alleged knowledge is unsupported by the contemporary record and is denied.

[103] He stresses the “air of reality” approach applied by the Supreme Court in Murray v Morel, and submits that the plaintiffs’ pleadings and affidavits fail to show any such air of reality. He submits that there is only a bare assertion of knowledge and fraudulent non-disclosure, and the contemporary documents show that there was no such knowledge. Instead, there were open explanations for the kinds of investment necessary to obtain a particular outcome, which the plaintiffs then approved. There is no sufficient pleading or document by which it could be said that, from the very outset, the defendants knew that the investments had been obtained negligently and should have notified the plaintiffs of that negligence.

Discussion and conclusion on issue 2

[104] I accept that it is reasonably arguable for the plaintiffs that there was a fiduciary or other “special relationship” between the plaintiffs and the defendants at the times the defendants made the relevant recommendations, subsequently made investments in accordance with the plaintiffs’ instructions, and thereafter provided reports to the plaintiffs on the portfolio. Whether such a relationship in fact existed is properly a matter for trial, where the evidence can be properly tested in cross- examination.

[105] In the plaintiffs’ favour on this question, I think it reasonable to assume that they relied on the defendants’ expertise to recommend investments that met with their investment requirements, and that to some degree they were or may have been vulnerable in the relationship, in that they may not have had sufficient detailed expertise to appreciate that the interest-bearing security investments that were recommended to them did not match the risk profile which Mr MacDonald had communicated to the defendants. (At least it is not possible to conclude on the limited evidence available on the strike-out application that the plaintiffs were not vulnerable in that sense).

[106] The fact that Mr Armstrong and Mr Hanna were respectively a solicitor and a chartered accountant will no doubt be a relevant consideration on the question of

whether a fiduciary or other special relationship existed between the parties, but I do not think their professions alone can be dispositive on the issue against the plaintiffs, at least at this stage of the proceeding.

[107] The main issue on this part of the argument is whether the plaintiffs have produced enough by way of pleadings and particulars, and the evidence of Mr and Mrs MacDonald and Mr White, to persuade me that their allegations of knowledge of breach by the defendants, and decision not to disclose, have a sufficient “air of reality” about them that the parts of the claim which would otherwise be out of time should survive the strike-out application.

[108] In my view the plaintiffs’ pleading that at all material times the defendant by, at least, Mr Pearson, “was or ought to have been aware that the investments...were not in accordance with the plaintiffs’ investment requirements”, does lack the “air of reality” required by Murray v Morel. I reach that view for the following reasons.

[109] First, the plaintiffs plead that the defendants were or ought to have been aware that the investments made on the plaintiffs’ behalf did not comply with their investment requirements “at all material times”. If and to the extent the pleading means that Mr Pearson and/or others at the defendant firm were actually aware that the investments would not meet the plaintiffs’ requirements at the times the investments were made, it is difficult to see any reason why the defendants would have proceeded with the investments. There is nothing to suggest that they would have had any incentive to do so.

[110] Secondly, there is no specific event pleaded, occurring after the investments were made, which would have alerted the defendants to the fact that Mr MacDonald had a different belief from them on what the plaintiffs’ investment requirements were. Mr MacDonald acknowledges that he never suggested to the defendants, in the course of the investment advisor/client relationship, that he considered that the investments made were not in accordance with the plaintiffs’ original instructions on the issue of risk.

[111] Thirdly, Mr Pearson’s handwritten notes dated 10 August 2006 tell against

the plaintiffs on the fraudulent concealment issue. What the notes show is that by

10 August 2006 Mr Pearson considered that the boxes ticked on the Client Agreement form were too simplistic and lacking in detail, and did not reflect the instructions received from Mr MacDonald in the subsequent discussions. (I put on one side for the moment the issue raised by the plaintiffs that the defendants ought to have clarified the apparent discrepancy between the boxes ticked on the Client Agreement and the instructions Mr MacDonald conveyed to them in the course of subsequent discussions.)

[112] Fourthly, the defendants’ 14 August 2006 letter to the plaintiffs clearly recorded the plaintiffs’ wish to secure “above average income streams”. The letter went on to record the defendants’ view that a trustee should invest prudently and with caution, while “recognising that some level of risk must be ventured into, in order to achieve a reasonable return”.

[113] The 14 August 2006 letter attached a schedule setting out details of each of the 11 recommended interest-bearing securities, with the proposed amounts of the investments, the yield, and the annual estimated income from each investment. The total annual income from the 11 investments was shown as $240,800 before tax, with individual interest rates ranging between 7 per cent and 8.75 per cent per annum. The recommended interest-bearing securities would produce an after-tax annual income for the plaintiffs roughly in accordance with the minimum $150,000 figure which Mr Pearson had noted on 10 August 2006.

[114] The references in the 14 August 2006 letter to the plaintiffs wanting to secure “above average income streams’, and the projected annual income from interest- bearing securities shown in the schedule to the letter, appear to be consistent with the plaintiffs’ requirements (as to income) recorded in Mr Pearson’s 10 August 2006 file note.

[115] In his affidavit, Mr MacDonald says that he has no recollection of ever communicating the $150,000 per annum after tax income requirement to the defendants, and that he finds it “implausible” that he would have done so in light of

his family circumstances at the time (no mortgage, not big spenders, and with work available that would provide enough income to live on in the short to medium term). But he and Messrs Armstrong and Hanna would have appreciated that there would likely be a broad correlation between higher income returns and the level of risk associated with the investments, and the letter made it perfectly clear what annual income the proposed investments would generate.

[116] On its own, the apparent correlation between Mr Pearson’s 10 August 2006 note on the required income level and the projected income shown in the schedule to the 14 August 2006 letter is clearly not decisive on the question of whether the defendants had actual knowledge that the proposed investments did not meet the plaintiffs’ requirements. But it does tend to confirm that, by the time the investments were made, the defendants had a different understanding of what those requirements were, at least on the issue of how much annual income was required, from what the plaintiffs now say was their requirement or expectation.

[117] After the investments were made, the defendants’ quarterly portfolio reviews included valuations which compared the face value and cost price for each security with its then-current market value. There appears to have been fully transparent reporting on the performance of each investment, right through to 2012, when the plaintiffs’ relationship with the defendants ended. At no time in this period of over five years did the plaintiffs give the defendants any reason to believe that they considered the risk profiles of the investments did not conform to their original requirements. (Whether the plaintiffs had the ability to make that assessment is beside the point – the point is that the defendants, who had no apparent reason to make the investments if they did not believe that they would comply with the plaintiffs’ requirements, were never given any reason by the plaintiffs to form any different belief.)

[118] Having regard to all of those circumstances, I find that the plaintiffs have failed to provide sufficient to satisfy the necessary “air of reality” test on the question of whether the defendants were, or at some material time became, actually aware that the investments did not meet the plaintiffs’ investment requirements.

[119] I turn to consider the plaintiffs’ alternative contention that the defendants “ought to have been aware” that the investments were not in accordance with their investment requirements, and were either wilfully blind in that regard or were reckless as to whether the plaintiffs’ requirements would be (or had been) met.

[120] In my view “ought to have been aware” would set too low a standard for a finding of concealment by fraud under s 28(b) of the Act. The cases make it clear that the defendant must know all the facts which together constitute the cause of action,³⁹ and that someone within the defendant organisation who was aware of the breach and the duty to disclose must have made a decision not to disclose.⁴⁰

Associate Judge Sargisson dealt with the issue directly in Newlands, when she held that it was not enough to support a claim of fraudulent concealment that the defendant should have had the requisite knowledge.⁴¹

[121] In Reynolds v Calvert, Dunningham J noted that the Courts have never endeavoured to lay down rigid guidelines as to what amounts to fraud. The learned Judge noted, however, that it is clear that the term should be given its ordinary meaning which encompasses “moral turpitude”, “something dishonest and morally wrong”, and “actual and deliberate dishonesty”.⁴² The Judge did note that it has been said that there will be fraud where a false representation is made knowingly, without belief in its truth, or recklessly, careless whether it be true or false.⁴³ But the allegation in this case is not that the recommendations made by the defendants were made fraudulently – there is no allegation of fraud, just breach of contract, negligence, and breach of obligations owed under the Consumer Guarantees Act. Nor is there any allegation that the defendants acted fraudulently in providing the subsequent portfolio reviews – again, the allegations are limited to breach of contract, negligence, and breach of the Consumer Guarantees Act. The relevant fraud which is alleged here is not the making of a reckless misrepresentation, but the

_{breach of an alleged duty to disclose.}

³⁹ _{Inca Ltd v Autoscript (NZ) Ltd, above n 28 at 711.}

⁴⁰ _{Wrightson Ltd v Blackmount Forests Ltd, above n 31.}

⁴¹ _{Newlands v Sovereign Assurance Company Ltd & Ors, above n 34, at [63].}

⁴² _{Reynolds v Calvert [2015] NZHC 400 at [82].}

⁴³ At [82].

[122] In the end, I think the question is the simple one posed by the Court of Appeal in Wrightson, namely whether someone within the defendant firm knew that the firm had acted in breach of duty to the plaintiffs, knew that the firm was under a duty to the plaintiffs to disclose that breach, but decided not to disclose it. There is no evidence of any particular document or information relevant to the portfolio having been withheld or concealed from the plaintiffs, and I have seen nothing (whether in the plaintiffs’ pleading or in the evidence) which might suggest that the defendants ever believed, in the course of their engagement as financial advisors to the plaintiffs, that they had breached their contract with the plaintiffs, or acted negligently, in the manner now alleged. The plaintiffs, including the two experienced professionals who were trustees with Mr MacDonald, never suggested to the defendants that their requirements in respect of the level of risk they were prepared to accept had not been met.

[123] The defendants could have had no duty to disclose a breach of which they were unaware, and nothing has been produced to suggest that they wilfully “averted their eyes”, to avoid discovering any breach of duty, or that they otherwise acted in respect of the claimed duty of disclosure in any way which might be characterised as “reckless”. The submission that the defendants ought to have clarified with the plaintiffs any perceived discrepancy between the ticked boxes in the Client Agreement and the subsequent instructions given by Mr MacDonald in the course of his discussions with Mr Pearson can be no more than another allegation of negligence: it cannot form the basis for any finding that the defendants were aware that they were in breach and deliberately decided not to disclose that fact to the plaintiffs, or that they had no honest belief that the investments they made conformed to the plaintiffs’ requirements.

[124] I have not overlooked Mr White’s opinion that a reasonably competent financial advisor should have appreciated that the investments were not in line with the plaintiffs’ requirements. Mr White speculates that the defendants “may have been aware that the portfolio constructed was not in line with the plaintiffs’ instructions but concealed from the plaintiffs that this was the case”, but that is pure speculation, and I can give it no regard.

[125] And if the defendants had that knowledge at the outset they would not have made their recommendations to the plaintiffs and purchased the various investments

– there would have been no reason for them to do so.

[126] Mr White’s opinion appears to be at least in part dependent on the defendants believing that the plaintiffs had never deviated from their “low/conservative” level of risk indication or requirement. But Mr Pearson’s notes of 10 August 2006 suggest that was not his understanding, and Mr Sabiston’s evidence is that the defendants regarded the ticked boxes in the Client Agreement forms as no more than useful information, to assist the defendants to understand a client’s risk profile. If the defendants in fact regarded the ticked boxes in the Client Agreement form in that way, there would have been no reason for them to think they were acting (or had acted) in breach of duty by recommending investments simply because the investments did not match the particular risk profile which had been ticked in the Client Agreement form.

[127] The alleged deficiencies in the portfolio were apparently not obvious enough for any of Mr and Mrs MacDonald, Mr Armstrong or Mr Hanna to pick them up in the period of over five years between August 2006 and 2012. And in circumstances where the defendant’s understanding of the plaintiffs’ requirements appears to have differed from what the plaintiffs now say those requirements were, the assertion that the defendants did pick up the existence of a breach of duty in the original construction of the portfolio, and held it back, is no more than a bare assertion. Something more than that is required to meet the “air of reality” test stated in Murray v Morel.

[128] Whether the defendants should or should not have gone back to the plaintiffs to clarify the level of risk they would accept might raise a question of possible negligence, but (if the defendants were negligent in that respect) the negligence could not in my view be elevated to the status of somehow fixing the defendants with knowledge that they had acted in breach of a duty owed to the plaintiffs in making and implementing their recommendations, so as to engage any disclosure obligation.

[129] Having regard to those considerations, I find for the defendants on issue 2.

Result

(1) The plaintiffs’ first cause of action, alleging negligence in the

construction of the portfolio, is struck out.

(2) The plaintiffs’ second, third, and fifth causes of action are struck out to the extent that they allege breaches of contract or breaches of the Consumer Guarantees Act occurring before 19 July 2007.

(3) The plaintiffs’ fourth cause of action, alleging negligence by the defendants in the conduct of portfolio reviews, is struck out to the extent that it alleges any breach or breaches of duty giving rise to loss occurring before 19 July 2007.

(4) An amended statement of claim is to be filed and served within 21 days of the date of this judgment, limited to those parts of the plaintiffs’ claims which have not been struck out by the foregoing orders.

(5) The defendants’ application has been successful, and they are entitled to costs, which I fix on a 2B basis, plus disbursements as fixed by the Registrar. If counsel are unable to agree on costs, the defendants may file a memorandum within 21 days of the date of this judgment. The plaintiffs may file a memorandum in reply within 21 days after service of any such memorandum from the plaintiffs.

Associate Judge Smith