GREENMOUNT MANUFACTURING LTD V SOUTHBOURNE INVESTMENTS LTD HC AK CIV 2005-404-6675

GREENMOUNT MANUFACTURING LTD V SOUTHBOURNE INVESTMENTS LTD HC AK CIV 2005- 404-6675 20 November 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2005-404-6675BETWEEN GREENMOUNT MANUFACTURING LTD Plaintiff AND SOUTHBOURNE INVESTMENTS LTD Defendant Hearing: 18 November 2008 Appearances: Tim Herbert for Plaintiff Julian Miles QC and Sandra Grant for Defendant Grant Nicholson for New Zealand Law Society Judgment: 20 November 2008JUDGMENT OF HARRISON JIn accordance with R540(4) I direct that the Registrar endorse this judgment with the delivery time of 10:00 am on 20 November 2008_________________________________________________________________________________ SOLICITORS Lee Salmon Long (Auckland) for Plaintiff Foley & Hughes (Auckland) for Defendant Kensington Swan (Auckland) for NZLS COUNSEL Julian Miles QC; Sandra GrantIntroduction[1] Southbourne Investments Ltd has applied under urgency to review a decision of Associate Judge Doogue delivered on 11 November 2008. The Judge dismissed Southbourne's application for an order that the company's solicitor in this proceeding, Mr Michael Foley, who is also to be called as a witness at trial, should be excused from compliance with the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (the Rules). The Judge proceeded on the premise that Mr Foley's evidence would be 'fiercely contested': at [25]. As a result, trial of Greenmount's claim for an order for specific performance was adjourned at the last moment from 16 November 2008 until, provisionally, 1 December 2008 before me. [2] Associate Judge Doogue undertook a comprehensive analysis of the legal principles relating to the Court's jurisdiction to disqualify or debar a solicitor from acting in litigation where he or she will give contentious evidence at trial. He was satisfied that the continuation of a solicitor/client relationship is inimical to the duties owed by a lawyer who intends to give evidence: at [30]. In his opinion the solicitor should not continue to act on the record for the party intending to call him unless the character of the evidence is non-controversial or uncontested: at [33]. [3] I record now my respectful agreement with Associate Judge Doogue's analysis of the Rules. However, the issue, as it evolved in argument, is whether Mr Foley's evidence is likely to be fiercely contested, as the Judge understood, or whether it is more likely to be in substance non-controversial or uncontested.Background[4] The essence of the dispute between the parties is whether or not Greenmount validly exercised an option to purchase a commercial property owned by Southbourne in East Tamaki, Auckland for $3.5m. Greenmount applied unsuccessfully to the High Court for summary judgment of its application for specific performance: Greenmount Manufacturing Ltd v Southbourne InvestmentsLtd (High Court, Auckland, CIV 2005-404-6675, 13 April 2006). However, the company successfully appealed to the Court of Appeal: Greenmount Manufacturing Ltd v Southbourne Investments Ltd (Court of Appeal, CA90/06, 21 November 2006). It held that Greenmount's delivery of a personal cheque for payment of the deposit of $350,000 was not valid legal tender; only a bank cheque or cash would suffice. [5] The Supreme Court allowed Southbourne's appeal and effectively remitted Greenmount's substantive application for determination at trial: Southbourne Investments Ltd v Greenmount Manufacturing Ltd [2007] NZSC 62. While agreeing with the Court of Appeal that Greenmount's delivery of a personal cheque for the deposit did not constitute valid legal tender, the Supreme Court was satisfied that Greenmount may be able to assert Southbourne's estoppel by conduct or representation in failing to object promptly to Greenmount's tender of a personal cheque: at [18]-[25]. This issue was not apparently raised in the lower Courts. [6] I respectfully adopt the Supreme Court's summary of the relevant and undisputed facts as follows:[4] On 9 February 2004 Southbourne leased warehouse premises at 13 Polaris Place to Greenmount. The lease contained this provision:47.1 Option to PurchaseThe Landlord hereby grants to the Tenant or its nominee an option to purchase the property on the following terms:– (a) The option can only be exercised at any time within the first eighteen (18) months of the commencement date of the initial lease term in this Lease (time being of the essence). (b) To exercise the option the Tenant or its nominee shall present to the Landlord within the aforesaid time limit, a signed and dated unconditional Sale & Purchase Agreement ('Agreement') with the following terms: i. The form of the Agreement shall be the then current form of Sale & Purchase Agreement published by the Auckland District Law Society and the Real Estate Institute of New Zealand. ii. The purchase price shall be $3,500,000.00 plus GST if any. iii. The deposit shall be $350,000.00 and shall accompany the Agreement. iv. The settlement date shall be twenty-eight (28) days after the date of the Agreement.v. The interest rate for late settlement shall be 11%. vi. If the nominee of the tenant fails to complete the Sale & Purchase Agreement the Tenant will remain liable for all the obligations on the part of the purchaser under the said Agreement. vii. The Agreement shall be subject to this within Lease. [5] The lease ran from 1 May 2004 and so the last day of the 18 months for exercising the option (time being of the essence) was Monday 31 October 2005, by which time the value of the property is said to have considerably exceeded the purchase price. [6] Several days earlier, on Wednesday 26 October, Greenmount's solicitor, Mr Doughty, spoke by telephone with Southbourne's property manager, Mr Douglas, and told him that Greenmount intended to exercise the option. Mr Douglas asked Mr Doughty to send the agreement form and deposit cheque to Southbourne's solicitor, Mr Foley. That was done by courier the next morning. What was sent was an agreement form approved by the Real Estate Institute of New Zealand and the Auckland District Law Society (Seventh Edition (3) July 1999) completed and signed by Greenmount, together with Greenmount's personal cheque for $350,000. Alongside the heading on the front page of the agreement, 'Deposit: (refer clause 2)', there had been typed in '$350,000.00 paid to the vendor'. The printed general conditions included: 2.1 The purchaser shall pay the deposit to the vendor or the vendor's agent immediately upon execution of this agreement by both parties and/or at such other time as is specified in this agreement time being of the essence as to each such time. 2.2 The vendor shall not be entitled to cancel this agreement for non-payment of the deposit unless the vendor has first given to the purchaser three working days' notice of intention to cancel and the purchaser has failed within that time to remedy the default. No notice of cancellation shall be effective if the deposit has been paid before the notice of cancellation is served. [7] In a covering letter Mr Doughty asked Mr Foley to acknowledge receipt of the agreement and the cheque. Later that day Mr Foley faxed Mr Doughty a copy of the letter on which Mr Foley had written 'RECEIVED 27/10/05' above his signature. [8] The affidavits, particularly those on behalf of Southbourne as vendor, give only a limited account of what occurred thereafter. Mr Doughty telephoned Mr Foley on the morning of Friday 28 October and was told that Mr Foley had not yet looked through the agreement in detail but would do so shortly as he was to meet the principal of Southbourne, Mr Dickie, that day. The solicitors spoke again that afternoon. There are significant differences between their versions of what was said which cannot be resolved on the basis of the affidavits and which must therefore be disregarded for present purposes. It is uncontroversial that Mr Doughty was told that Mr Foley had not yet had the meeting with Mr Dickie.[9] The next conversation between the solicitors was not until about 2:00 pm on Monday 31 October (the last day for exercising the option). Mr Foley told Mr Doughty that Mr Dickie's father had had heart surgery on the Friday and that therefore Mr Dickie had not been able to meet with Mr Foley on that day. (Mr Dickie's affidavit confirms his father's ill-health and says that he died some five weeks later.) Mr Foley advised that he was meeting Mr Dickie that afternoon, 31 October. That meeting did occur but the affidavits do not indicate at what time. Neither Mr Foley nor Mr Dickie give any account of it save to say that Mr Foley was instructed to request counsel's opinion on the validity of the exercise of the option. [10] Mr Foley did not communicate with Mr Doughty on 31 October after meeting Mr Dickie. It was not until Tuesday 1 November, when the option period had expired, that Mr Doughty was informed by faxed letter from Mr Foley that there were questions about the validity of the exercise of the option. On Friday 4 November he was told that according to counsel's opinion the option had not been validly exercised. Southbourne subsequently took the position that no contract of sale existed. Greenmount then sought specific performance.Evidence[7] Both Messrs Foley and Doughty have provided full briefs of evidence. Initially Mr Tim Herbert for Greenmount advised, as he had before the Associate Judge, that Mr Foley's evidence would be the subject of substantial and prolonged challenge. He identified many prospective areas of challenge. He raised the spectre of wide ranging cross-examination which not only threatened to jeopardise the tenability of a fixture of three days duration but which also appeared irrelevant to what is now truly in issue. On reflection, Mr Herbert later compressed the areas of prospective challenge into two categories. [8] First, Mr Herbert identifies Mr Foley's denial of Mr Doughty's evidence that in a telephone discussion between the two lawyers on 28 October 2005 Mr Foley stated that Greenmount had done 'all that it was required to do'. Greenmount pleads this statement in its amended statement of claim dated 7 September 2007. Its significance is not easy to discern. I construe the pleading as an allegation of a representation for and on Southbourne's behalf that the company had accepted or would accept Greenmount's tender of a personal cheque in lieu of a bank cheque or cash as required by law. Greenmount's prejudice was its loss of the opportunity to offer tender of a bank cheque in substitution.[9] Whether or not Mr Doughty's statement if accepted provides the necessary factual foundation for that proposition will be a matter for submission at trial. But, accepting for these purposes that Greenmount wishes to challenge Mr Foley's denial, the scope of that challenge will be extremely limited. Issues of credibility will not arise. It will simply be a contest between two witnesses, determined on the reliability of Mr Doughty's assertion and Mr Foley's denial that he spoke about eight words. Its resolution will not raise a fierce conflict but a brief point of difference. [10] Second, Mr Herbert identifies the terms of Mr Foley's agency for Southbourne as a likely area of cross-examination, within the context of an argument about whether or not Mr Foley had knowledge that the cheque was of a personal nature and if so whether that knowledge should be attributed to Southbourne. [11] Greenmount submits that at the time of their telephone discussion on 28 October 2005 the two solicitors were acting respectively as agents for the principal parties. Southbourne affirmatively denies the allegation of agency. Two points are relevant. One is that the agency allegation immediately precedes the allegation of Mr Foley's statement that Greenmount had 'done all that it was required to do'; that is, the agency pleading falls within a narrow compass. The other is that the Supreme Court has accepted what, with respect, must be the correct position in law; that Mr Foley was acting as Southbourne's agent throughout including when accepting delivery of the cheque: at [18]. Southbourne's denial of agency appears misconceived. [12] It is common ground that at 3.07 pm on 27 October 2005 Greenmount through its agent, Mr Doughty, tendered delivery of a personal cheque for $350,000 to Southbourne's agent, Mr Foley, along with the agreement for sale and purchase. Mr Foley said that he did not 'study the documents in any detail'; that he simply checked that the contents were as described in the latter; and that he 'did not register at this time that the deposit cheque was a company cheque'. Mr Julian Miles QC advises that this rather enigmatic statement should be treated as Mr Foley's acknowledgement that he saw the cheque but a denial that he turned his mind to whether or not the instrument was of a personal or bank nature.[13] Questions for determination at trial will be, provisionally, whether Mr Foley can be treated as having knowledge of the true nature of the cheque and, if so, whether that knowledge can be constructively attributed to Southbourne. However, a wider issue is likely to arise for determination; that is, irrespective of whether Mr Foley paid attention to the nature of the cheque, Southbourne is nevertheless estopped by its inactivity from relying on its legal tender defence given that the company failed to raise any issues about the cheque's acceptability until after 31 October when the time for exercising the option had expired. In a discussion between the two of them on 31 October Mr Dickey of Southbourne raised, apparently for the first time, the validity and effect of a company cheque, to which Mr Foley said he replied that 'this was a fair question'. [14] In my judgment cross-examination of Mr Foley on the nature of the agency and of his inattention to the character of the cheque and his failure to take issue with Greenmount would be largely irrelevant to the real agency issue which is of a predominantly legal nature.Decision[15] Southbourne's application was necessitated by the introduction of new rules of conduct and client care for lawyers on 1 August 2008, consequential upon the coming into force of the Lawyers and Conveyancers Act 2006 on that date. The statute affirms, first, the fundamental obligation of independence imposed on a lawyer in providing regulated services and, second, the lawyer's overriding duty as an officer of the Court, subject to the obligation to act in the client's best interests. Clause 13.5 of the Rules, which replaced R8.06 New Zealand Law Society Rules of Professional Conduct, materially provides:Independence in litigation 13.5 A lawyer engaged in litigation for a client must maintain his or her independence at all times. 13.5.1 A lawyer must not act in a proceeding if the lawyer may be required to give evidence of a contentious nature (whether in person or by affidavit) in the matter.13.5.2 If, after a lawyer has commenced acting in a proceeding, it becomes apparent that the lawyer or a member of the lawyer's practice is to give evidence of a contentious nature, the lawyer must immediately inform the court and, unless the court directs otherwise, cease acting. 13.5.3 A lawyer must not act in a proceeding if the conduct or advice of the lawyer or of another member of the lawyer's practice is in issue in the matter before the court. This rule does not apply where the lawyer is acting for himself or herself, or for the member of the practice whose actions are in issue.[16] In summary, I respectfully agree with Associate Judge Doogue that the policy underlying the Rules is founded on the recognition that a lawyer places himself or herself in a position of conflict where he or she acts concurrently in the role of solicitor for a party and as a witness for the client in the same proceeding: at [29]. The conflict is obvious and fundamental, and must always be resolved in favour of the obligations which the witness assumes to the Court. The solicitor's instruction of independent counsel does not mitigate this conflict. [17] I gave the New Zealand Law Society leave to appear. Mr Grant Nicholson of Kensington Swan filed an informed, constructive and helpful memorandum of submissions in support of Associate Judge Doogue's analysis of clause 13.5 and his conclusion that: at [33]: unless the character of the evidence that the solicitor intends to give is non-controversial or uncontested, or unless there is some other compelling reason, a solicitor who intends to give evidence at trial should not act as the solicitor for the party who intends to call him to give evidence.[18] Significantly, also, Mr Nicholson accepted this Court's retention of an inherent jurisdiction under s 268 over lawyers, consistent with the power to allow a solicitor on the record to continue acting where it becomes apparent that he or she 'is to give evidence of a contentious nature' after the lawyer has actually commenced acting. [19] I would add that as a general rule it is inappropriate for a lawyer to act as solicitor on the record wherever he or she is likely to be required to give evidence in the same proceeding, irrespective of whether or not that evidence is to be 'of a contentious nature'. The very existence of duality of roles gives the appearance of undermining the cardinal importance of a solicitor's independence. In recognition ofthis observation, Mr Miles offered to review Mr Foley's ongoing role even if I exercised a discretion to allow him to continue acting in this case. While the decision is ultimately for Southbourne, I confirm that the appearance of a conflict will not bear in any way on my substantive decision following trial. However, the practice of acting in two capacities is generally undesirable, and should not require the sanction of a formal rule to that effect. [20] The question in this case comes down to an assessment of whether or not Mr Foley's evidence will be of a truly contentious nature, to the extent necessary to justify disqualification. The only currently identified area of conflict, and thus of contention, between Messrs Foley and Doughty is whether the former spoke the eight words pleaded during their discussion on 28 October. The compass of the evidential dispute is extremely narrow. The area for cross-examination must be correspondingly narrow. Its resolution will require a finding on reliability, not credibility. And, as I have noted, a finding on the difference may ultimately be irrelevant to the result. [21] I am satisfied that the nature and extent of Mr Foley's contentious evidence will be minimal. Coupled with the factors identified by Mr Miles, principally the timing of the Associate Judge's decision on the eve of trial and Mr Foley's participation as solicitor on the record since 2005, the Court should exercise its discretion, whether inherent or under Rule 13.2, to grant Mr Foley leave to continue to act as solicitor for Southbourne and excuse him from compliance with the Rules. There is little scope for a real conflict in Mr Foley's formal roles. On this narrow ground I allow Southbourne's application to review and set aside Associate Judge Doogue's decision made on 11 November 2008. [22] Mr Miles seeks costs. In the circumstances I am satisfied that each party should bear its own costs and no order is necessary. ______________________________________ Rhys Harrison J