SD v WP [2018] NZLCRO 91 (20 February 2018)

Last Updated: 30 October 2018

	LCRO 57/2017
CONCERNING	an application for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006
AND
CONCERNING	a determination of the [Area] Standards Committee
BETWEEN	SD Applicant
AND	WP Respondent

DECISION

The names and identifying details of the parties in this decision have been changed

Introduction

[1] Ms SD has applied for a review of a decision by the [Area] Standards Committee (the Committee) to take no further action in respect of her complaint concerning the conduct of Ms WP who acted for Ms SD on the negotiation of a relationship property agreement with her husband, Mr HB.

[2] Ms SD’s complaint is that Ms WP did not advise [Ms SD] of the circumstances in which the Court could set aside a relationship property agreement.

[3] Ms SD and Mr HB had been married for 17 years at the time of their separation on 4 June 2011. Both had been in previous relationships from which each had a child. They had one child, KL, from their relationship. At the time of their separation KL was in his mid-teens.

[4] Before their marriage Ms SD and Mr HB each owned a residence, which they sold to purchase a jointly owned residence.

[5] In 2006, Mr HB’s company purchased a franchised coffee shop business (the business) in [city], and commenced setting up another coffee shop in [town]. Bank funding for both coffee shops was secured over their second family home in [city]. The [town] coffee shop was unsuccessful and closed in February 2011.

[6] Pressure from the bank resulted in the [city] residence being sold in July 2011. The bank funding was repaid.

[7] From mid-October 2011, Ms SD sought Ms WP’s assistance to negotiate a relationship property agreement with Mr HB who was separately represented. Having lost her home, Ms SD’s desire was to purchase another residence for her and KL.

[8] The relationship property agreement entered into by Ms SD and Mr HB in February 2012 (RPA) provided that as between them Mr HB would “be solely responsible for servicing and repaying the home loan” borrowed by them to enable Ms SD to purchase the residence in

.

[9] Ms SD became concerned that Mr HB would not carry out his obligations under the RPA. During October and November 2012, Ms WP informed Mr HB’s lawyer about Ms SD’s concerns. She referred to the possibility of enforcement action.

[10] From January 2013, Mr HB began acting for himself. Until June 2013, when Ms WP referred Ms SD to another lawyer for advice about possible enforcement proceedings, Ms WP continued to respond to Ms SD’s concerns that Mr HB would not carry out his obligations under the RPA.

[11] In November 2013, Ms SD, with new lawyers acting for her, commenced enforcement proceedings against Mr HB in the Family Court to require Mr HB provide Ms SD with internet access to the financial information of the business, and to make principal and interest payments under the home loan. In December 2013, Mr HB filed his notice of defence, in which he referred to the possibility of him applying to have the RPA set aside.

[12] Eight months later the Family Court heard both applications. In October 2014, the Court issued its decision setting aside the RPA, and making orders concerning the sale of assets and the division of property.1

1 _.

Complaint

[13] Ms SD lodged a complaint with the New Zealand Law Society Complaints Service on 14 April 2016. In essence, she alleged that Ms WP failed to advise her of the possibility that the RPA could be set aside or overturned. She sought reimbursement of the legal costs she incurred with Ms WP negotiating and concluding the RPA, child support that she “missed out on” and her half share of the business.

[14] In particular, she claims that “[a]t no stage was [she] told that an [RPA] ... could be overturned”. She understood that the RPA was “binding through death, bankruptcy” or “applies whether any such claims or rights are under the provisions of the Property (Relationships) Act”. She states that the “only risk that [she] knew about was [Mr HB] running down the business, which [was] what [she] was trying to prevent and [she] thought [she] had every right to do so”.

[15] In support of her complaint she states that:

• (a) she understood “that the [RPA] protected [her] from [Mr HB] having complete control of the business”;
  
• (b) the “security of [her house was everything to her]” and to that end “having access to [the business] accounts was really important so that [she] could keep an eye on things”.
  
• (c) she had spent $900 on legal fees to obtain a bank statement in respect of the business and still Mr HB refused her “internet access” to the business records;
  
• (d) the RPA provided that if the principal of the home loan had not been reduced by 20 February 2013, one year after the date of the RPA, the parties would “apply to have the loan put on a reducing/table basis for as short a term as possible”. This enabled her to insist that Mr HB do so despite the loan document providing for an initial interest free period of two years; and
  
• (e) Ms WP advised her that “costs would be claimed” if it was necessary for her to apply to the court to require Mr HB to place the NBS home loan repayments on “a table reducing loan”. She would not have spent the time and money on legal fees both “setting up” and enforcing the RPA if she had known that the RPA “wasn’t enforceable”.

Standards Committee decision

[16] The Committee delivered its decision on 10 February 2017 and determined, pursuant to s 138(2) of the Lawyers and Conveyancers Act 2006 (the Act), that no further action on the complaint was necessary or appropriate.

[17] The Committee concluded that:2

• (a) “no fault [could] be attributed to Ms WP” in her advice provided to Ms SD concerning Mr HB’s failure to meet his obligations pursuant to the RPA; and
  
• (b) whilst Ms SD acknowledged that there was a risk that Mr HB might not make the loan payments, [Ms SD] nonetheless entered into the RPA on that basis.
  

[18] In reaching its decision the Committee’s findings were that:3

• (a) Mr HB had agreed to make the home loan payments “as it gave him the opportunity and time to grow the business and sell it at the parties’ expected sale price”.
  
• (b) Ms WP had advised Ms SD to sell the business, and had pointed out to her the risks of relying on Mr HB to make the home loan payments.
  
• (c) Mr HB’s later refusal to provide Ms SD with details of the business’ finances had been “an issue that had existed well before the end of the relationship”. Ms WP had advised Ms SD “both before and after the signing of the [RPA] that [this] information could be obtained by application to the Court”, but would be costly.
  
• (d) The RPA contained the parties’ acknowledgement that the “significant unequal sharing in Ms SD’s favour ... was intended to provide insulation from challenge on such grounds”. However, Ms WP had “emphasised to [Ms SD] the unusual nature of the [RPA] ... and the risk ... being reliant on Mr HB to meet the mortgage outgoings”.
  

2 Standards Committee determination, 10 February 2017 at [6.8].

3 At [6.1]–[6.5].

(e) Ms WP had “identified” for Ms SD that “the arrangements of the nature contemplated by the parties would place her house at considerable risk” being dependent on Mr HB keeping up with the mortgage payments.

Application for review

[19] Ms SD filed an application for review on 9 March 2017. She repeats that she seeks reimbursement of legal fees paid by her in the negotiation and completion of the RPA, and steps taken by her, including her enforcement proceedings, to have Mr HB comply with the RPA.

[20] She reiterates that her main complaint is that her decision to enter into the RPA, whereby Mr HB agreed to take full responsibility for the home loan, was made without Ms WP having advised her of the possibility of the RPA “being set aside or overturned”. She states that the result of the RPA having been set aside was that her separate property, as agreed in the RPA, became relationship property, entitling Mr HB to one half of the sale proceeds of [property]. Also, because the business’ debts had increased Ms SD became liable for a one-half share of that increase.

[21] Ms SD explains that she entered into the RPA “in the mistaken belief that [she] would eventually be protected by the [RPA] and the law”. She says that her decision was made “on the understanding that the worst case for [her] was to have to take over the [ home loan] in the event of [Mr HB’s] bankruptcy” and to “sell the house if [she] couldn’t take over the [ home loan] payments”.

[22] In support of her application she states that:

• (a) Although she knew that there were risks to her, she relied on the enforceability of the RPA, which contained Mr HB’s agreement to make the home loan payments, to provide her direct online access to the business’ financial information and the knowledge that the RPA was binding on Mr HB’s successors.
  
• (b) She instructed another lawyer to assist her to enforce the RPA because Mr HB had told her that “he had no intention of paying any principal on [the NBS home loan]” required from 20 February 2013, however, Ms WP had not informed her that the home loan document itself did not provide for commencement of payments until the following year.
  
• (c) Although Ms WP had advised her that an application to the Court to require Mr HB to provide her with the business’ financial information was

outweighed by the cost of doing so, Ms WP had given her an expectation that those costs could be recovered from Mr HB.

(d) When Ms WP informed her of the possibility of obtaining legal aid in respect of an application to the Court. [Ms WP] did not alert her to the possibility that the RPA might be set aside or overturned.

Ms WP’s response

[23] In summary, Ms WP states that when she commenced acting for Ms SD, she emphasised the risks associated with Ms SD’s proposal whereby the residence she purchased would be mortgaged as security for the home loan borrowed for that purpose by Mr HB and Ms SD.

[24] She states that:

• (a) She advised Ms SD that [Ms SD’s] and Mr HB’s net worth was insufficient to enable her “to achieve her goal of securing the house without considerable risk” to her.
  
• (b) Ms SD had acknowledged this risk when she first instructed Ms WP on 2 November 2011 and later in the RPA itself.
  
• (c) Ms SD was aware that to be able to purchase a house there would be “significant unequal sharing” between her and Mr HB. This was acknowledged in cls 12.1 and 12.2 of the RPA, the purpose of which was “to provide some insulation from a challenge to the [RPA] because of the very apparent unequal sharing”.
  
• (d) Whilst she concedes that she “did not detail all the risks that Ms SD could face”, she advised Ms SD that if she proceeded with the proposal whereby the house was mortgaged as security for the home loan then “in such a situation, ... ultimately this will be out of [Ms SD’s] control and would be dictated by [ ]”.
  
• (e) Ms SD was aware of the possibility of the RPA being “open to challenge in the future one way or another”.
  
• (f) She preferred not to apply to the Court for an order requiring Mr HB to provide financial information on the business, unless and until he defaulted on the home loan payments.

• (g) Ms SD had been advised by another law firm when she made application to the Court to enforce the RPA.
  
  • (h) The deterioration in Mr HB’s financial position after the RPA had been signed led to him not being able to meet his obligations under the RPA, thereby “exacerbat[ing] the notion of unequal sharing”.
    

Review on the papers

[25] The parties have agreed to the review being dealt with on the papers. This review has been undertaken on the papers pursuant to s 206(2) of the Act, which allows a Legal Complaints Review Officer (LCRO) to conduct the review on the basis of all information available if the LCRO considers that the review can be adequately determined in the absence of the parties.

[26] I record that having carefully read the complaint, the response to the complaint, the Committee’s decision and the submissions filed in support of and in opposition to the application for review, there are no additional issues or questions in my mind that necessitate any further submission from either party. On the basis of the information available I have concluded that the review can be adequately determined in the absence of the parties.

Nature and scope of review

[27] The nature and scope of a review have been discussed by the High Court, which said of the process of review under the Act:4

... the power of review conferred upon Review Officers is not appropriately equated with a general appeal. The obligations and powers of the Review Officer as described in the Act create a very particular statutory process.

The Review Officer has broad powers to conduct his or her own investigations including the power to exercise for that purpose all the powers of a Standards Committee or an investigator and seek and receive evidence. These powers extend to “any review” ...

... the power of review is much broader than an appeal. It gives the Review Officer discretion as to the approach to be taken on any particular review as to the extent of the investigations necessary to conduct that review, and therefore clearly contemplates the Review Officer reaching his or her own view on the evidence before her. Nevertheless, as the Guidelines properly recognise, where the review is of the exercise of a discretion, it is appropriate for the Review Officer to exercise some particular caution before substituting his or her own judgment without good reason.

4 Deliu v Hong [2012] NZHC 158, [2012] NZAR 209 at [39]–[41].

[28] More recently, the High Court has described a review by this Office in the following way:5

A review by the LCRO is neither a judicial review nor an appeal. Those seeking a review of a Committee determination are entitled to a review based on the LCRO’s own opinion rather than on deference to the view of the Committee. A review by the LCRO is informal, inquisitorial and robust. It involves the LCRO coming to his or her own view of the fairness of the substance and process of a Committee’s determination.

[29] Given those directions, the approach on this review, based on my own view of the fairness of the substance and process of the Committee’s determination, has been to:

• (a) consider all of the available material afresh, including the Committee’s decision; and
  
• (b) provide an independent opinion based on those materials.
  

Issues

[30] The issues on this review are whether:

• (a) Ms WP failed to inform Ms SD of the possibility that the RPA, on the application by either party, in particular Mr HB, could be set aside by the Court?
  
• (b) If so, whether Ms WP had breached or contravened any professional obligation or duty?
  

Analysis

(1) Duty to inform

[31] A lawyer must disclose to his or her client information that is relevant to the retainer, take reasonable steps to ensure that the client understands the nature of the retainer, keep the client informed about progress, and consult the client about steps to be taken to implement the client’s instructions.6

5 Deliu v Connell [2016] NZHC 361, [2016] NZAR 475 at [2].

6 Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008, rr 7, 7.1.

[32] Where the lawyer is unsure about the client’s instructions then:7

....it is incumbent on the lawyer to obtain clarification of those instructions. The lawyer may not proceed on an assumption the client agrees to a certain course of action.

[33] A lawyer providing information to a client in compliance with these requirements must do so in a clear manner, not be misleading, and take into consideration the identity and capabilities of the client, and the nature of the information being provided.8

(2) Duty to act competently

[34] The purposes of the Act include maintaining public confidence in the provision of legal services, and protecting the consumers of legal services.9 To this end r 3 states that:10

In providing regulated services to a client, a lawyer must always act competently and in a timely manner consistent with the terms of the retainer and the duty to take reasonable care.

[35] Rule 3 applies when a lawyer is providing “regulated services” to a client.11 The duty to be competent has been described as ‘the most fundamental of a lawyer’s duties’ in the absence of which “a lawyer’s work might be more hindrance than help”.12 Relatedly, the definition of “unsatisfactory conduct” includes “conduct that falls short of the standard of competence and diligence that a member of the public is entitled to expect of a reasonably competent lawyer”.13

(3) Discussion

[36] This review highlights the dangers to a lawyer who does not provide clear advice to a client about the financial aspects of a proposed relationship property agreement,

7 Duncan Webb, Kathryn Dalziel and Kerry Cook, Ethics, Professional Responsibility and the Lawyer (3rd ed, LexisNexis, Wellington, 2016) at 291, citing Ismail bin Ibrahim v Lim & Oon [1998] 1 AMR 339.

8 Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules, r.1.6, see also discussion in Sandy v Kahn LCRO 181/2009 (25 December 2009) at [38].

9 Lawyers and Conveyancers Act 2006, s 3(1).

10 Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules, r 1.2: “retainer” — “an agreement under which a lawyer undertakes to provide or does provide legal services to a client” is described as the recipient of legal services from a lawyer. The term “client”, although not defined, is included in the definition of the term “retainer” in r 1.2.

11 Lawyers and Conveyancers Act, s 6 “regulated services” is defined as including “legal services” and “conveyancing services”, which are themselves defined.

12 Duncan Webb, Kathryn Dalziel and Kerry Cook, above n 7, at 301.

13 Lawyers and Conveyancers Act, s12(a). See also Duncan Webb “Unsatisfactory Conduct” (2008) 717 Lawtalk 18.

and, as in this case where the RPA provided for an unequal sharing of assets, the risk of the agreement being set aside.14 The parties hold opposing views as to whether Ms WP provided that advice. In particular, in such circumstances that either party could at a later stage apply to the Court to have the RPA set aside.

[37] Ms SD claims that Ms WP did not provide this advice. She insists that she and Mr HB “had always agreed between [them] that [he] would finance a house for [her]”. She is adamant that:

had [she] been [advised] that there was the slightest possibility that the [RPA] could at any stage be overturned, and [property] would be considered relationship property then [she] absolutely would not have gone ahead with [RPA].

[38] For her part, whilst Ms WP concedes that:

[she] did not go into detail of all the risks and challenges that Ms SD could face, what [she] did make plain was that the arrangements Ms SD had in contemplation put the residence at “considerable risk ... ultimately ... out of [Ms SD’s] control.

[39] In putting forward Ms SD’s position to Mr HB’s lawyer, Ms WP expressed the view that it was “not at all manifestly unfair that a home for [Ms SD] be the priority for the application of the [business] sale proceeds before [Mr HB] receives anything”. Also, that if Mr HB was unable to borrow the funds to purchase [property], then the business “will need to be sold as soon as possible”.

[40] Ms WP states that she is:

confident that Ms SD was only too aware of the risks involved in entering [into the RPA] ... that it was open to challenge by Mr HB at some stage in the future, and in a number of ways including an application by Mr HB to the Court to have the agreement set aside.

[41] She refers to Ms SD’s communication to her on 19 January 2012 that “to trust that [Mr HB] will do his best and believe that he won’t try his hardest to get out of [the RPA] is unrealistic”.

(4) Conclusion

[42] The goal of obtaining a residence for herself and KL appears to have been uppermost in Ms SD’s mind when negotiating the terms of the RPA. This persuaded her to pursue a settlement whereby Mr HB met the necessary home loan payments, whilst the business was being built up for sale and distribution of the net sale proceeds.

14 Property (Relationships) Act 1976, s 21J.

[43] It is evident from Ms WP’s written communications to Ms SD that from the outset and throughout the course of the negotiations Ms WP alerted Ms SD to the risk of:

• (a) a loan to her and Mr HB being secured over the home she wished to purchase coupled with [Ms SD] being reliant on Mr HB to make the NBS home loan payments; and
  
• (b) a property settlement which would provide her with “a far greater sum of money than a normal 50/50 division”.
  

[44] As I noted earlier, not only is it good practice for a lawyer to ensure that the client understands the nature of legal services required for the client’s matter, this is required by the rules. For this reason, in my view the prudent and sensible approach for the lawyer is to provide written advice to the client which, depending on the subject matter of the retainer and nature of the instructions, may include the issues, a synopsis of the relevant law and the lawyer’s intended approach to advance the client’s matter.

[45] Whilst Ms WP has not produced any evidence of what might be described as formal written advice to Ms SD along these lines, and acknowledges that she did not “detail ... all of the risks and challenges” of the proposed RPA, she does state that she is confident that she provided Ms SD with the necessary advice. She says that she:

• (a) “... emphasised to [Ms SD] the unusual nature of the [RPA]... and the risk that these arrangements could fail one way or the other and her ability to retain a house was at risk”; and
  
• (b) “... Ms SD was only too aware ... that [the RPA] was open to challenge by Mr HB at some stage in the future, ... including an application by [him]

... to have the [RPA] set aside”.

[46] Although I have some misgivings about the extent of the advice Ms WP provided to Ms SD, considered overall Ms SD has not demonstrated that to the degree required, namely, the balance of probabilities,15 that Ms WP did not inform [Ms SD] of the risk that Mr HB may later apply to the Court to have the RPA set aside, and the likely outcome if that was to occur.

15 Z v Dental Complaints Assessment Committee [2008] NZSC 55.

Decision

[47] For these reasons, pursuant to s 211(1)(a) of the Lawyers and Conveyancers Act 2006, the decision of the Standards Committee is confirmed.

DATED this 20th day of February 2018

B A Galloway

Legal Complaints Review Officer

In accordance with s 213 of the Lawyers and Conveyancers Act 2006 copies of this decision are to be provided to:

Ms T SD as the Applicant Ms K WP as the Respondent

Mr Farr as the Related Person [Area] Standards Committee The New Zealand Law Society