CLEARY v EWART & EWART [2017] NZCA 620

CLEARY v EWART & EWART [2017] NZCA 620 [20 December 2017]IN THE COURT OF APPEAL OF NEW ZEALANDCA82/2017[2017] NZCA 620BETWEEN WILLIAM GEORGE GRAHAMCAMERON CLEARYAppellantAND EWART & EWARTRespondentHearing: 29 November 2017Court: Clifford, Dobson and Collins JJCounsel: L Herzog for AppellantP M Fee and F C Jones for RespondentJudgment: 20 December 2017 at 4 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant is to pay the respondent costs for a standard appeal on a bandA basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Collins J)Introduction[1] The issue in this appeal is whether Edwards J in the High Court erred when shedismissed Mr Cleary's claims against his lawyer Mr Ewart (the principal of therespondent, Ewart & Ewart).1[2] Mr Cleary claims Mr Ewart failed to act in his best interests or comply withhis instructions when he did not submit a deed of release to the vendor of a propertyin Fiji, and when he also discussed with the vendor's solicitor issues associated withan option deed relating to the property.[3] This judgment explains why we are satisfied Edwards J was correct when shefound in favour of Mr Ewart.Background[4] In 2012, Mr Cleary decided to purchase Lot 38 of a beach resort that was beingdeveloped on the island of Malolo in Fiji by Vunabaka Bay Fiji Ltd (the company).Mr Cleary became a "foundation" purchaser in the development, meaning he wasoffered the opportunity to purchase Lot 38 at an advantageous price. The developmentinvolved the construction of a hotel, private residences, shops, restaurants, twomarinas, tennis courts and other facilities.[5] Lot 38 is a leasehold waterfront section which the company offered to sell toMr Cleary for USD 550,000. Under Fijian law, title to Lot 38 could only be passed toMr Cleary with the approval of the iTaukei Land Trust Board or its delegate (Fiji LandTrust Board) which had, under Fijian legislation, "absolute discretion" to determinewhether or not the sale could proceed.2 Mr Cleary paid an initial deposit of USD 5,000on 18 September 2012.[6] On 7 June 2013, Mr Cleary signed an option deed that appears to have beendesigned to address the requirements of Fijian laws governing the control of foreignownership of land in that country. Under the terms of the option deed, Mr Cleary1 Cleary v Ewart & Ewart [2017] NZHC 39.2 Native Land Trust Act 1940 (Fiji), s 12.agreed to pay the company USD 165,000, and the company obtained the option torequire Mr Cleary to purchase Lot 38 after the Fiji Land Trust Board had given itsconsent to the sale and purchase. The option deed required the parties to "do all thingsnecessary and reasonable" to obtain the approval of the Fiji Land Trust Board for thetransaction.[7] Mr Cleary paid the option price to the company in separate stages, with the lastpayment being made in April 2014.[8] In early 2014, Mr Cleary decided he would like to purchase a unit in the resorthotel instead of progressing with the purchase of Lot 38. He mentioned this idea toMr Lucas (a director of the company) and he also had discussions with a real estateagent whom he knew in Fiji. Mr Cleary said in evidence that beachfront sections wereat this time selling for over USD 1,000,000, but that the directors of the company werenot happy with him speaking to a real estate agent (as they did not want "on-salesthrough agents").[9] In early April 2014, Mr Cleary met with Mr Lucas who offered, on behalf ofthe company, to purchase Lot 38 from him. The offer involved the company payingMr Cleary USD 440,000, comprising the return of the USD 165,000 that had beenpaid by Mr Cleary plus an additional payment of USD 275,000, payable when the titleto Lot 38 was issued. It was anticipated the title would be available in October 2014.[10] Mr Cleary engaged Mr Ewart. They met on 10 April 2014 to discuss theagreement reached by Mr Cleary and Mr Lucas. At this stage, Mr Ewart had not seenthe option deed and assumed that it conferred upon Mr Cleary the option to purchaseLot 38. During their meeting Mr Cleary and Mr Ewart telephoned Mr Lucas andlearned that Mr Beca of Beca & Co (an Auckland law firm) would be acting for thecompany.[11] On 16 April 2014, Mr Ewart sent a letter of engagement to Mr Cleary in whichit was recorded that Mr Ewart would peruse the option deed, confer with Mr Beca andprepare the documentation required for Mr Cleary to surrender what were assumed tobe his rights under the option deed.[12] On 28 April 2014, Mr Ewart and Mr Beca conferred. Neither had seen theoption deed at this time. Soon thereafter, Mr Ewart read the option deed andimmediately appreciated that it conferred on the company the option to requireMr Cleary to purchase Lot 38. Mr Ewart sent Mr Cleary an email on 29 April 2014 inwhich he pointed out that the option deed conferred rights upon the company, and thatMr Cleary had paid USD 165,000 "for the privilege of not much at all". Mr Ewartadvised Mr Cleary that he was in a difficult position because he had "no rights to giveup".3[13] On 30 April 2014, Mr Cleary emailed Mr Ewart instructing him not to sharehis concerns with others and said that Mr Lucas was an honourable person who knewthat the company could "cancel" with Mr Cleary but that would be contrary to whatMr Lucas and the company were trying to achieve with the development. Mr Clearyalso said that he was going to be away overseas and that he would not return to NewZealand until 13 May 2014.[14] There were further brief email exchanges between Mr Cleary and Mr Ewartduring the first week of May 2014. On 6 May 2014, Mr Ewart sent an email toMr Cleary in which again he pointed out the difficulty of preparing a deed of releasein favour of Mr Cleary when the option deed did not provide him with a right topurchase Lot 38. Mr Ewart also said it would be advisable to consult withMr McCurrach of WHK Gosling Chapman (Mr Cleary's accountant). Mr Ewart toldMr Cleary that he was concerned the proposed arrangements were "likely to create taxnasties" for Mr Cleary. On 7 May 2014, Mr Cleary sent an email to Mr Ewartinstructing him to "run it past" Mr McCurrach.[15] On 9 May 2014, Mr Ewart said in an email to Mr Cleary that he was awaitingMr McCurrach's input and that he was concerned about what would happen when thevendor realised that, by not exercising its option it would gain a significant windfall.Mr Cleary responded that same day saying that if the vendors had "wished to havescrewed [him] they would have before now", that the vendor "[knew] what their option3 A strike out decision of Associate Judge Christiansen confirmed the option deed did not provideMr Cleary with a right to compel the company to enter into an agreement to sell the property:Cleary v Ewart & Ewart [2015] NZHC 3259 at [40].[was]" and that they had "behaved with integrity in all dealings to date". Later thatday, Mr Ewart sent another email to Mr Cleary proposing that he confer with Mr Beca,explain the problem openly and draft a deed that would give effect to the oralagreement between Mr Cleary and the company. Mr Ewart told Mr Cleary that heshould not "hide anything because the problem is so obvious". Mr Cleary respondeda few minutes later instructing Mr Ewart to draft up a deed of release but not contactMr Beca at that stage. Mr Ewart responded with a draft deed of release on the provisoit needed to be "checked".[16] On 13 May 2014, Mr Cleary met with Mr Ewart, Mr McCurrach and aMs Tyrell from Mr McCurrach's office. Mr Ewart's file note recorded his concern thatthe deed of release created a gift for Mr Cleary, which Mr Ewart erroneously thoughtcould incur gift duty. His file note also recorded:Long discussion about how to best proceed. Preferred option is to have [thecompany] exercise the option and then surrender agreement. [Mr Ewart] totalk to [Mr] Beca.[17] Mr Cleary did not recollect agreeing to this approach. On 14 May 2014,Mr Ewart spoke to Mr Beca. In his reporting email to Mr Cleary the following day,Mr Ewart said that it took Mr Beca about 10 minutes to suggest in "a joking way" thatthe company "simply not exercise the option and walk away". On 15 May 2014, MrEwart sent Mr Beca a copy of the option deed. After reading that document, Mr Becasent an email to Mr Ewart on 19 May 2014 which said: as you say, my client has no obligation to sell the section to your client, norfor that matter, if it does not exercise the option, does it appear to have anyobligation to refund the [option price].[18] Mr Ewart forwarded Mr Beca's email to Mr Cleary warning that Mr Beca'semail "sounds ominous". In an email sent to Mr Ewart on 19 May 2014, Mr Clearysaid the best way forward was to "politely turn down" Mr Lucas' offer and continueto purchase Lot 38. Mr Ewart conveyed Mr Cleary's revised position to Mr Beca on19 May 2014.[19] A file note of Mr Ewart dated 20 May 2014 records that Mr Beca hadtelephoned Mr Ewart saying that his client had decided that "as there [was] some badblood between" his client and Mr Cleary, they would not exercise the option butinstead pay back the option deposit, even though the company was not obliged to repaythat sum to Mr Cleary. Mr Ewart conveyed this news to Mr Cleary, who acknowledgedthat at least his capital would remain intact.[20] On 5 June 2014, Mr Cleary and the company executed a deed terminating theoption deed. The company then repaid Mr Cleary the option deposit of USD 165,000.[21] In his evidence, Mr Cleary said that Lot 38 was subsequently sold by thecompany for what Mr Cleary understood to be USD 1,300,000.The claim[22] In his fifth amended statement of claim, Mr Cleary pleaded two causes ofaction against Ewart & Ewart. First, he alleged Mr Ewart was negligent when he failedto carry out his instructions and protect his interests. The second and alternative causeof action alleged Mr Ewart breached the fiduciary duties he owed Mr Cleary. It isaccepted there is no material difference between the two causes of action.[23] In relation to both causes of action, Mr Cleary alleged Mr Ewart breached theduties he owed Mr Cleary by failing to draft and present to the company an agreementthat complied with Mr Cleary's instructions, and by proffering "unsolicited advice" toMr Beca on 14 May 2014 that was contrary to Mr Cleary's instructions and hisinterests.[24] It was Mr Cleary's case that the company would have executed the deed ofrelease if it had been presented to the company. Mr Cleary quantified his loss byseeking damages in the sum of USD 275,000, being the difference between the optionprice that was repaid to Mr Cleary and the sum of USD 440,000 that the company,through Mr Lucas, offered to pay Mr Cleary.[25] There is no dispute Mr Ewart owed Mr Cleary a duty of care and fiduciaryobligations. Mr Ewart denied breaching the duties he owed Mr Cleary or that anybreach on his behalf caused the loss Mr Cleary claimed to have suffered.High Court judgment[26] Edwards J heard evidence from Mr Ewart, Mr Cleary, Mr McCurrach, Mr Becaand two expert witnesses who provided different opinions as to whether Mr Ewartbreached any duties.4 In relation to the claim that Mr Ewart had breached his duty ofcare to Mr Cleary by failing to follow instructions, Edwards J found:(a) Mr Cleary's instructions to Mr Ewart were not confined to preparingthe deed of release.5 Mr Cleary's instructions included the need forMr Ewart to examine the option deed and confer with Mr McCurrachin relation to tax issues.6 Mr Ewart's duties extended to advisingMr Cleary on any issue that he considered to be pertinent.7(b) Mr Cleary's instruction on 9 May 2014 to not contact Mr Beca wasrevoked during the meeting on 13 May 2014 between Mr Cleary,Mr Ewart, Mr McCurrach and Ms Tyrell.8 Mr Ewart was actingconsistently with Mr Cleary's instructions when he contacted Mr Becaand discussed with him the issues caused by the terms of the optiondeed.9(c) Mr Cleary authorised Mr Ewart to discuss with Mr Beca the possibilityof the company exercising its option under the option deed so as toconfer rights upon Mr Cleary that he could then surrender.10(d) Mr Ewart did not tell Mr Beca the company had no obligation to refundthe option price.11[27] In relation to the claim Mr Ewart pursued a strategy that was flawed andcontrary to Mr Cleary's interests, Edwards J concluded:4 The expert evidence was from Mr Nolan and Mr Haynes. Mr Rendell, a licenced real estate agentalso gave evidence on the Lots and sale prices.5 Cleary v Ewart & Ewart, above n 1, at [35].6 At [35].7 At [38].8 At [43].9 At [51].10 At [55].11 At [55].(a) It was reasonable for Mr Ewart to candidly discuss with Mr Beca theobvious difficulties facing Mr Cleary because of the terms of the optiondeed.12(b) The strategy of inviting the company to exercise its option so thatMr Cleary would acquire rights that he could surrender was reasonablein the unusual circumstances of this case.13(c) Mr Ewart was not specifically concerned with gift duty. He was,however, concerned about the tax implications arising from Mr Clearyreceiving USD 440,000 in circumstances where he was notsurrendering any rights.14[28] In relation to the claim that Mr Ewart's acts and alleged omissions caused theloss that Mr Cleary claimed to have suffered, Edwards J concluded:(a) The company's decision not to exercise its option was due to"bad blood" between the company and Mr Cleary. That "bad blood"arose from Mr Cleary's attempts to list Lot 38 with a real estate agent.15(b) Mr Beca would have advised the company of the legal effect of theoption deed regardless of his discussions with Mr Ewart.16(c) Upon being advised by Mr Beca of the legal effect of the option deed,the company would have decided not to proceed with the dealdiscussed by Mr Cleary and Mr Lucas.17[29] In summary, Edwards J concluded that Mr Ewart had not breached the duty ofcare or the fiduciary obligations he owed Mr Cleary. She held Mr Ewart acted inaccordance with Mr Cleary's instructions when he told Mr Beca to discuss the12 At [62].13 At [62].14 At [64].15 At [73].16 At [78].17 At [81].problems caused by the terms of the option deed. The approach to Mr Beca did notinvolve any error of judgment on the part of Mr Ewart and was not contrary to MrCleary's interests. Edwards J also concluded Mr Ewart's acts and alleged omissionsdid not cause the loss that Mr Cleary claimed to have suffered.18Grounds of appeal[30] The grounds of appeal are confined to the findings made by Edwards J inrelation to the claim based in negligence. The claim based upon breach of fiduciaryduty is no longer pursued.[31] The gravamen of Mr Cleary's appeal is that Edwards J's findings that Mr Ewartdid not breach his duty of care to Mr Cleary, and that his conduct did not cause anyloss to Mr Cleary, were contrary to the weight of the evidence.[32] We shall analyse the grounds of appeal by focusing upon the following threequestions:(a) Did Edwards J err when she concluded Mr Ewart complied with theduties he owed to Mr Cleary by not presenting a deed of release to thecompany?(b) Did Edwards J err when she concluded Mr Ewart complied with hisduties when he discussed with Mr Beca the legal effect of theoption deed?(c) Did Edwards J err when she found Mr Ewart's conduct did not causethe loss claimed by Mr Cleary?Failure to present a deed of release[33] Mr Cleary maintains his instructions to Mr Ewart were simply to prepare adeed of release in accordance with the agreement he and Mr Lucas had discussed. It18 At [83].was also claimed Mr Ewart needed to act promptly so as not to lose the agreement MrCleary had negotiated.[34] We agree with Edwards J that the evidence clearly demonstrated Mr Ewart'sinstructions encompassed much more than simply preparing a deed of release. Ourreasons for reaching this conclusion can be distilled to the following three points.[35] First, the letter of engagement sent by Mr Ewart to Mr Cleary on 16 April 2014clearly recorded Mr Ewart's instructions included "pursuing option deed; discussionswith vendor's solicitor about form of transaction; documentation of surrender of rightsin return for payment; attending to settlement ".[36] Mr Cleary took no issue with the terms of his instructions to Mr Ewart at thetime he instructed Mr Ewart. His claim that Mr Ewart was instructed to simply preparea deed of release conflicts with the contemporaneous written record of the terms ofMr Ewart's engagement. We agree with Edwards J that the written record is to bepreferred over Mr Cleary's assertions.[37] Secondly, there can be no doubt Mr Ewart's duty to Mr Cleary involved himadvising Mr Cleary on issues associated with his instructions. It was incumbent uponMr Ewart to advise Mr Cleary on the legal consequences of the option deed and theissues that arose from Mr Cleary not having any rights that he could surrender underthe proposed deed of release. Mr Ewart also had a duty to alert Mr Cleary to thepossibility of him incurring a tax problem if the proposed arrangements were carriedthrough.[38] Thirdly, Mr Cleary's instructions to Mr Ewart evolved in response to thedevelopments that occurred during the period of engagement. The most significantchange of instructions occurred on 13 May 2014, when Mr Cleary and Mr Ewart metwith Mr McCurrach and Ms Tyrell to develop a sensible strategy. Mr Ewart'scontemporaneous file note records that they had a "long discussion about how to bestproceed". That discussion resulted in Mr Cleary accepting that the best solution to theproblem caused by the terms of the option deed was for the company to exercise itsoption and for Mr Cleary to surrender the rights he would then have acquired.Mr Cleary gave Mr Ewart instructions to pursue that strategy and to talk to Mr Becaabout the proposal to deal with the problems generated by the option deed.[39] Against the background to these facts, most of which are recorded in file notesand emails, Edwards J was correct to conclude Mr Ewart complied with hisinstructions from Mr Cleary.[40] Mr Herzog, counsel for Mr Cleary, suggested in oral submissions Mr Ewartdid not act quickly enough once Mr Cleary had instructed him to prepare a deed ofrelease. That criticism was not pleaded as a particular of negligence. In any event,we see little merit in this point. The six week timeframe between instructions havingbeen given to Mr Ewart and the company electing not to exercise its option was notexcessive, particularly as the key strategy meeting on 13 May could not occur earlierbecause Mr Cleary was overseas.[41] Mr Herzog also submitted Mr Ewart's misunderstandings as to tax implicationsformed the basis of his decision not to present the draft deed of release, resulting in anerror of judgment and a breach of his duty to act in Mr Cleary's best interests.[42] In cross-examination Mr Ewart acknowledged that he would never havespoken to Mr Beca if there was not a tax issue associated with the proposed deed ofrelease. That acknowledgement was not, however, as profound as Mr Herzog wouldhave us believe.[43] While Mr Ewart was mistaken if he thought the proposed arrangements mayhave generated a gift duty problem, there were nevertheless potential tax issues withthe proposed arrangements that needed to be fully considered. On the basis of whatwas understood at the time, the strategy agreed upon at the meeting of 13 Mayprovided a reasonable solution to any potential tax problem.The legal effect of the option deed[44] In the High Court Mr Cleary argued that Mr Ewart had inappropriatelyinformed Mr Beca about two matters. First, that the option deed conferred upon thecompany the option to require Mr Cleary to purchase Lot 38. Secondly, that under theoption deed, the company could retain the option price if the company elected not toexercise its option.[45] Edwards J concluded that Mr Ewart had only informed Mr Beca of the first ofthese matters. Mr Cleary challenges that finding as being against the weight of theevidence.[46] In our assessment, the email sent by Mr Beca to Mr Ewart on 19 May 2014,the relevant part of which we have set out in [17], supports the conclusion reached byEdwards J.[47] Nothing, however, hinges on Mr Cleary's suggestion that Mr Ewart informedMr Beca about the company's ability to retain the option price. The reason for this isthat any lawyer reading the option deed would have immediately appreciated the onlyoption created in the option deed was in favour of the company and that the optiondeed did not provide for a refund of the option price in the event of the company notexercising its option. Moreover, Mr Cleary had told Mr Ewart that Mr Lucas knewhow the option worked, but would not take advantage of that. As it transpired, thecompany elected to refund Mr Cleary the option price in circumstances where it maynot have had to do so.[48] The contemporaneous file notes and emails demonstrate Mr Ewart'sdiscussions with Mr Beca on 14 May 2014 occurred after it was agreed at the strategymeeting on 13 May 2014, that Mr Ewart would candidly discuss with Mr Beca theproposed way forward. That was in the circumstances a reasonable strategy that waspursued in Mr Cleary's best interests and did not constitute negligent conduct on thepart of Mr Ewart.Causation[49] Mr Cleary argues that Edwards J was wrong to conclude the company electednot to exercise its option because of "bad blood" between Mr Cleary and the company.[50] Mr Ewart's file note of 20 May 2014 recording Mr Beca's advice that therewas some "bad blood" between the company and Mr Cleary was confirmed byMr Beca, who explained in his evidence that the directors of the company harbouredill-feelings towards Mr Cleary because he had attempted to sell Lot 38 through areal estate agent. The evidence from Mr Beca demonstrates the directors took a dimview of Mr Cleary when they learned he was attempting to take advantage of thecapital gain on Lot 38 before he had title to that property. There was no evidence fromthe directors of the company to refute Mr Beca's evidence. In these circumstances,Edwards J was entitled to conclude the directors elected not to exercise the company'soption because of their negative views about Mr Cleary's conduct. Mr Herzogsuggested that any bad blood would have dissipated when Mr Lucas and Mr Clearyagreed the terms of the release of the option. There is no evidence to support thatproposition, beyond the fact of that agreement itself. Even if that were the case, it isequally possible that bad blood may have reappeared when Mr Cleary instructedMr Ewart that he would not proceed with that agreement but would go ahead and sellhimself. At the end of the day, Mr Ewart's evidence is what it is.[51] We are also satisfied that the causation analysis conducted by Edwards J whichwe have set out in [28](b) and (c) was entirely correct. Once the directors of thecompany appreciated that all the cards were in their hands, it was highly likely theywould have acted in the way they did. There was therefore no need to quantifydamages.19[52] In reality, the genesis of Mr Cleary's grievance lies in the fact that he chose tosign the option deed and pay the company the option price. He has to shoulder theresponsibility for those decisions. Edwards J was correct when she concluded that MrEwart could not be liable for Mr Cleary's inability to secure what would have been agratuitous payment of USD 275,000 from the company.Result[53] As there is no merit in any of the grounds of appeal advanced on behalf ofMr Cleary, the appeal is dismissed.19 Benton v Miller & Poulgrain (a firm) [2005] 1 NZLR 66 (CA) at [50], referred to in Cleary vEwart & Ewart, above n 1, at [75].[54] The appellant must pay the respondent costs for a standard appeal on a band Abasis and usual disbursements.Solicitors:Smith & Partners, Auckland for AppellantFee Langstone, Auckland for Respondent