Anderson v Arnold [1995] CKHC 5; 081.1992 (24 April 1995)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
(CIVIL DIVISION)
Plaint. No: 81/92

BETWEEN

BERT EVALD ANDERSON
of Seattle, United States of America, Businessman
Plaintiff

AND

TIMOTHY PAUL ARNOLD,
TINA PUPUKE BROWN & BRET JOHN GIBSON
all of Rarotonga, Solicitors,
carrying on business under the name of CLARKES
Defendants

AND

REUBEN WILLIAM TYLOR
of Rarotonga, Solicitor
First Third Party

AND

SHORT & TYLOR,
a firm of Barristers & Solicitors
carrying on business in the Cook Islands
and being sued in the name of the firm
pursuant to Rule 58 of the Code of Civil Procedure of the High Court 1981
Second Third Party

Counsel: R.W. Holmes for Plaintiff
M.C. Mitchell for Defendants
A. Manarangi for Third Parties

Hearing: 30 & 31 August & 1 September 1993
Judgment: 24^th April 1995

JUDGMENT OF QUILLIAM C.J.

This action was commenced by the Plaintiff against the Defendants for damages for alleged breaches by the Defendants of their contractual duty to him while acting for him to recover money owing by Auto Marine Ltd and Mr and Mrs Preston, the only shareholders of that company.

The action was heard by Roper C.J. from 30 August to 1 September 1993 except for final submissions of counsel which were to be submitted in writing. Because no doubt of the need for the evidence to be transcribed there was considerable delay in the filing of those submissions. The last of them did not reach the Chief Justice until about 23 February 1994, by which time he was unable by reason of serious illness to write a judgment. He died shortly after and the question of what should happen to the action was referred to me. I pointed out that the only order I could make without the consent of counsel was an order for a new trial. Neither of the parties wanted this and I was asked to complete the case. I agreed to do so on the clear understanding, that both counsel, on behalf of their clients, consented to my doing so, and that the basis on which I should approach the case was agreed between counsel. They have now given their consent and confirmed their request that I complete the case, and have joined in a memorandum setting out an agreed chronology of the main facts. It is upon this basis that I have undertaken to write a judgment

The evidence was recorded on tape and subsequently transcribed. The result has been a full record of the evidence given. I have read the whole of that evidence and have also had available the large amount of documentary evidence and, of course, the submissions of counsel.

On a preliminary reading of the file it was apparent that there remained a conflict of evidence on a number of matters and that such conflict appeared to involve matters of credibility. I accordingly sought and obtained counsel's express consent to my making findings of fact notwithstanding that I had not seen or heard the witnesses. The tapes of the evidence are still available, but upon the view which I have formed of the case I have not found it necessary to listen to them.

The main facts appear from the agreed chronology which I paraphrase as follows:

Auto Marine Ltd wished to import motor vehicles from Japan. For this purpose the Plaintiff agreed to lend it $20,000. The loan was evidenced by an informal agreement prepared by the parties, but more particularly in a document prepared by Short & Tylor, the Solicitors then acting for the Plaintiff, dated 21 January 1986. That document referred to the advance of $20,000 already made and to further advances intended to be made, and provided for repayment of the initial advance of $20,000 and interest thereon, at the expiration of two years. The loans referred to in the document were guaranteed by Mr and Mrs Preston.

Short & Tylor then prepared the security documents in respect of all loans then existing or to be advanced by the Plaintiff. The first of these was a debenture over Auto Marine Ltd which incorporated a guarantee by Mr and Mrs Preston. There was then, as Security for that guarantee, a Deed of Mortgage given by Mr and Mrs Preston over their residential property, although there was a covenant that all remedies against the company were to be exercised before any remedies under the guarantee were exercised. For the purpose of confidentiality the nominal mortgagee under the securities was Short & Tylor Nominees Ltd.

Payments under the loan agreement were made over a period of years but these were not considered satisfactory by the Plaintiff. In January 1989 the firm of Miller, Puna & Co. (the successors to Short & Tylor) were instructed by the Plaintiff to seek recovery of the debt. Notices to pay were issued to Mr and Mrs Preston under their guarantee and a statutory demand was made under the debenture. The Plaintiff left the Cook Islands on 24 February 1989 having instructed Miller, Puna & Co. not to place the company in liquidation except as a last resort. The Plaintiff returned to the Cook Islands in April 1989 and negotiated directly with Mr and Mrs Preston a further agreement. That was evidenced by a letter of 18 April 1989 setting out the basis on which repayment was to be made. This basis was varied by a letter of 8 January 1990 from the Plaintiff. Default continued, however, in the making of repayments.

In early 1990 the Plaintiff instructed the Defendants to act for him, and gave Mr Gibson, a member of the Defendants firm, a Power of Attorney to act on his behalf. Mr Gibson, by letter of 9 January 1990 made demand on Auto Marine Ltd for repayment of the money owing. Both the Plaintiff's letter of 8 January and Mr Gibson's letter of 9 January 1990 were delivered personally by the Plaintiff to Mr Preston. There were further discussions as a result of which a new arrangement was entered into. The Plaintiff informed Mr Gibson of this but was apparently unable to give details of that new arrangement.

The security documents in respect of the loans were held by Short & Tylor Nominees Ltd (later re-named Tylor Nominees Ltd), and Mr Gibson obtained from that company authority to enforce the securities on its behalf.

On 25 January 1990 Mr Gibson and Mr Preston met following which Mr Preston wrote to Mr Gibson requesting information as to his company's liability. Mr Gibson responded to this on 2 February 1990 setting out the position and saying that the balance due at that date was $75,414.37 with interest on that amount.

On 10 April 1990 a payment of $800 was made by Auto Marine Ltd, and by letter of 18 April 1990 Mr Preston volunteered to pay 40% of the profit on the sale of motorcycles recently purchased as each motorcycle was sold. That profit was expected to total $10,000. On 16 May 1990 Mr Gibson requested from Auto Marine Ltd's accountants confirmation of the amount outstanding and proposals for repayment of the balance. The accountants were unable to give such proposals. Three further payments of $400 each were made by 11 December 1990.

On 28 March 1991 the Plaintiff instructed the Defendants that, unless outstanding interest was paid within 7 days the securities were to be enforced. At the same time the Defendant's file was passed to Mr Moore, an employee of the firm, who had a lengthy interview with the Plaintiff. Mr Moore saw the Plaintiff again on 2 & 3 April 1991 in the course of which the question of a suitable receiver for Auto Marine Ltd was discussed. The Plaintiff, on Mr Moore's recommendation, then authorised the appointment of Mr John Tierney as receiver.

On 4 April 1991 Mr Moore saw Mr Tylor regarding an assignment to the Plaintiff of the debenture and mortgage so as to enable enforcement to proceed. Mr Tylor told Mr Moore that "there was a problem in the securities at some stage". Mr Moore noted his file that it was necessary to "check that out". Mr Moore then prepared the necessary documents, and Mr Tierney provisionally agreed to accept appointment as receiver. The question of the legality of the security was considered at that time by Mr Moore and Mr Arnold who was the Defendant's senior partner.

On 5 April 1991 the security documents were assigned to the Plaintiff who then, on 8 April l991, executed the appointment of Mr Tierney as receiver. On the same day Auto Marine Ltd took legal advice.

Mr Tierney embarked on the receivership on 8 April 1991 but agreed not to take active steps until Auto Marine Ltd had consulted its lawyer because the Prestons were indicating a challenge to the validity of the appointment of the receiver. On 12 April 1991 Mr Tierney reported to the directors of the company advising that trading should cease and steps should be taken to reduce costs. He advised also the sale of assets. On the same day Mr Tierney was advised by Mr Moore as to the relevance to the security documents of the Illegal Contracts Act 1987 and the Development Investment Act 1977. Later that day there was a meeting between the Plaintiff, Mr Tierney and Mr Moore. There is a conflict of evidence. as to what was said at that meeting but there is little doubt that the validity of the securities was discussed.

On 15 April 1991, Mr Tierney received his first indication that the company intended to deny him access to the premises and disputed the authority of the receiver. Auto Marine Ltd acknowledged its indebtedness to the Plaintiff and sought an opportunity to negotiate repayment. On the same day Mr Moore discussed with Mr Tierney the applicability of the Illegal Contracts Act and there was a meeting at Mr Tierney's office between Mr Tierney, Mr Moore, the Plaintiff and a friend of the Plaintiff. There is a conflict of evidence as to what took place at that meeting but again there is no doubt that the validity of the securities was discussed. Mr Moore then wrote to the Plaintiff explaining the possibility of illegality of the loan agreement if the approval of the Monetary Board had not been obtained.

On 17 April 1991 the Plaintiff told Mr Moore that he had agreed to let "the other side" have 21 days to get "approval of CIDB and removal of receiver". This related to a proposal to re-finance through the Cook Islands Development Bank. On the same day Auto Marine Ltd's solicitor, Mr Vincent Ingram, wrote to Mr Tierney saying he did not consider the appointment of a receiver to be valid and that he viewed the transaction as invalid.

On 18 April 1991 the Defendant's costed their file and in a letter to the Plaintiff said:

"We confirm that your instructions are that we are not to concern ourselves at this stage with whether or not the securities are enforceable. We are to proceed with recovering loan monies pursuant to the powers under the securities ....

We confirm that you do not require us to do anything further in the matter for the time being".

On 24 April 1991 the Plaintiff wrote to the Defendants saying the loan transaction had been carried out in New Zealand and did not therefore require the approval of the Monetary Board.

On 8 May 1991 the 21 day period agreed to by the Plaintiff expired, and on 10 May the receiver wrote to Auto Marine Ltd regarding the question of re-financing. A copy of that letter was not sent to the Defendants who by then had been asked by the Plaintiff to make up their account and send it to Auto Marine Ltd. On 22 May 1991 the Defendants wrote to the Plaintiff to seek further instructions but no reply was received.

On 12 June 1991 the receiver wrote to the Plaintiff advising him of progress and recommending that realisation of assets should be proceeded with. On 26 June 1991 he attempted to enter the premises for that purpose but was resisted and on the same day Mr Ingram wrote to the receiver suggesting that he apply to the High Court for "an appropriate order" and advising that such application would be opposed. Mr Moore was then instructed by the receiver to apply to the Court for an order for possession of the assets charged under the debenture.

On 28 June 1991 the Development Investment Amendment (No.2) Bill was introduced into the House and received its first reading. On 1 July 1991 it was given its second and third readings and passed and; as a matter of urgency, became effective on that day.

The receiver's application to the Court (Action No. 7/91) was filed on 6 July 1991. In a judgment delivered by Roper C.J. on 22 November 1991 it was held that the Development Investment Act 1977 applied to the transaction which was accordingly unenforceable. The Chief Justice then went on to consider whether an application could be made for relief under the Illegal Contracts Act. He concluded that, as the illegality had existed from the outset, and before the passing of the 1991 Amendment, relief could be granted. He therefore granted relief and validated the contracts.

On appeal, the Court of Appeal held that the question of granting relief could not be considered retrospectively, and accordingly the 1991 Amendment precluded the granting of any relief.

The Plaintiff then commenced the present action in which he alleged breaches of duty in a number of respects by the Defendants as his solicitors. In general terms the allegations were that the Defendants had failed to advise the Plaintiff that the approval of the Monetary Board pursuant to the Development Investment Act was required, had failed to advise him to apply for such approval, and had failed to proceed with due diligence to take steps on behalf of the Plaintiff to apply for relief under the Illegal Contracts Act, and to recover the amount owing to him. The Plaintiff accordingly claimed by way of damages:

(a) The balance owing under the loans made by the Plaintiff to Auto Marine Ltd and interest thereon.

(b) The costs incurred by the Plaintiff in determining his rights in the High Court and Court of Appeal

(c) The amounts claimed by the receiver against the Plaintiff.

(d) Such further amounts as are payable by the Plaintiff to the receiver pursuant to the Deed of Indemnity.

(e) The legal costs paid by the Plaintiff to the Defendants.

(f) Any further losses.

The Defendants have counterclaimed for the balance of fees and disbursements said to be owing by the Plaintiff and totalling $4,590.

The Defendants joined as Third Parties Mr R.W. Tylor in his individual capacity and Short & Tylor, the firm which acted for the Plaintiff on the preparation of the security documents.

As evidenced by a joint memorandum of counsel, it was agreed that the hearing, should be in two parts. The first part was to relate to the question of the liability of the Defendants to the Plaintiff. In the event of liability being found to exist then the second part should proceed in order to determine the quantum of damages, the extent of contributory negligence, if any, and any question of liability by the Third Parties to the Defendants. This judgment relates only to the first part.

Subsequently the receiver commenced a separate action (No. 104/93) against Mr Anderson claiming his fees and costs pursuant to the Deed of Indemnity entered into by Mr Anderson at the time of the receiver's appointment. It was agreed between counsel at the hearing before Roper C.J. that the two actions should be determined together as the issues for determination and the relevant facts were largely the same. For the sake of clarity, however, there will be a brief separate judgment in action 104/93

The relationship between the Plaintiff and the Defendants was one of contract and the obligation of the Defendants was to exercise all due care and skill while acting for the Plaintiff. This, of course, required to be considered in the light of all the circumstances, and in particular of the Plaintiff's instructions to the Defendants and his own actions and conduct in the matter.

By way of brief recapitulation, the Plaintiff's instructions to the Defendants arose out of the failure by Auto Marine Ltd to make repayments as required by the Plaintiff of money which he had advanced to it. It is of the first importance to an understanding of the Defendants' duty to the Plaintiff to appreciate that they had no part in the loan transaction and were not for a considerable time supplied with the relevant loan documents. The Plaintiff maintained virtually throughout that the transaction took place in New Zealand because the initial loan money was paid to Mr Preston's New Zealand bank account. It is clear, however, that this was not so. The debenture and mortgage which were given as security were documents to which the Development Investment Act 1977 applied and required the approval of the Monetary Board. That approval was never sought or obtained and the Plaintiff's then solicitors, Short & Tylor, were at fault in this regard. The Plaintiff was advised by Mr Arnold that his proper course was to take proceedings against Short & Tylor but he refused to do so. This appears to have been mainly because of the Plaintiff's firmly held belief that the approval of the Monetary Board had not been required.

The Defendants were first instructed by the Plaintiff in January 1990 and Mr Gibson was given by him a Power of Attorney to act on his behalf. The Plaintiff's normal place of residence was in the United States of America. Mr Gibson made written demand on Auto Marine Ltd by a letter of 9 January 1990. Almost at once, however, the Plaintiff intervened and made his own arrangement with Auto Marine Ltd as to the basis of repayment. Several payments in reduction of the debt were made in 1990 and it was not until March 1991, after the Plaintiff had been absent from the Cook Islands for over a year, that he gave instructions for any further action to be taken. By then Mr Gibson found himself in what he felt to be a situation of conflict regarding the Plaintiff's affairs and handed over the matter to Mr Moore who was temporarily employed by the Defendants.

On 3 April 1991 the Plaintiff authorised Mr Moore to proceed with the appointment of a receiver and it was then that the position of the validity of the security documents first came into question. It appears that Mr Tylor had by then recognised that the approval of the Monetary Board ought to have been obtained, and he told Mr Moore of a possible problem in this regard. The appointment of the receiver duly proceeded and Mr Tierney, the receiver who was appointed, enquired as to the validity of the debenture under which he was appointed.

There was a considerable amount of evidence as to what occurred between early April 1991 and July 1991 when the passing by Parliament of the Development Investment Amendment Act 1991 put an end to any prospect of the Plaintiff recovering the balance of the debt.

I have not found it necessary to traverse in great detail the various meetings, discussions and correspondence which took place during that period because in the end I consider the decision in this case must be approached on a different and broader basis.

The principal allegation against the Defendants is that they failed in their duty to the Plaintiff by not advising him of the illegality of the securities, and by not taking appropriate steps to insist on proceedings being taken to validate the documents. In a consideration of this allegation the sudden intervention of the 1991 Amendment must be looked at in the proper context.

There are undoubtedly conflicts in the evidence, and in particular between the evidence of Mr Moore and the Plaintiff as to what occurred at a number of meetings. Reading the evidence of each of them there are certainly some unsatisfactory features. Mr Moore insisted that the Plaintiff had been present at one meeting when the surrounding evidence makes it plain that he was not. This inevitably weakens the overall impact of his evidence.

On the other hand the Plaintiff's evidence shows very clear signs of a determination not to agree with anything which might tend to weaken his case. The Plaintiff is described as an experienced and astute businessman, and yet he purported not to be able to understand simple propositions that were put to him and was plainly reluctant to answer a number of questions. He had also persisted with an obstinate insistence that the security documents were valid when all the legal advice he was receiving was that they were not or that at least there was a serious doubt about it.

It is unnecessary for me to make any greater evaluation of those witnesses because the salient facts necessary for a determination of this case emerge clearly without having to make express findings regarding the credibility of the individual witnesses.

The burden of the Plaintiff's complaint is that, between April and July 1991, the Defendants (and for practical purposes that means Mr Moore) had not advised him of the illegality of the securities and had not got on with action for recovery. It is abundantly clear that the validity of the documents was a matter raised and discussed with the Plaintiff or in his presence, on a number of occasions during this period. His reaction was the same throughout. He preferred his own view of the law which was that there was no invalidity. He also showed a reluctance at all times to become involved in court proceedings because of the likely expense. More particularly, he effectively withdrew his instructions to the Defendants by about 18 April 1991. Any complaint as to the Defendants actions or neglect of duty must accordingly relate to the period prior to that time. Thereafter the Plaintiff dealt mainly with the receiver and his communication with the Defendants was in the latter's capacity as solicitors for the receiver.

As a result of meetings between the Plaintiff and Mr Moore on 15 and 16 April 1991 Mr Moore wrote to him on 18 April putting on record the position at that time. I have set out earlier the relevant extracts from that letter. In reply the Plaintiff wrote on 24 April saying again that the transaction had been completed in New Zealand and that "the law in force when transaction was done is valid".

The receiver was unable to got on with the receivership because any action by him was resisted by Auto Marine Ltd on the advice of its solicitor, Mr Ingram. The illegality of the securities was expressly raised by Mr Ingram and it became apparent that, notwithstanding the Plaintiff's own views, this was a question requiring determination by the court. The receiver then commenced the proceedings in the High Court to which I have referred earlier.

There then intervened the passing of the 1991 Amendment in circumstances so remarkable that particular reference must be made to them.

There were differing views amongst the solicitors as to the effect on the loan transaction of the failure to obtain the approval of the Monetary Board, but the validity of the transaction was regarded as being at least doubtful. On 26 June 1991 the receiver attempted to take possession of the premises of Auto Marine Ltd in pursuance of his appointment as receiver, but this was resisted; and the same day Mr Ingram on the company's behalf wrote to the receiver challenging his authority and suggesting that an application should be made to the High Court for "an appropriate order" which, he said, would be opposed.

There seems no doubt, and the High Court subsequently held as much, that the securities were illegal and unenforceable, but that an application for relief under the Illegal Contracts Act 1987 could be expected to be successful. This was in fact what happened later, although the Court of Appeal held that the passing of the 1991 Amendment precluded any relief being granted in this case.

However, on 28 June 1991 the amending Bill was introduced into the House and given a first reading, and then passed through all subsequent stages and became effective on 1 July 1991.

The amendment, although in general terms, was plainly directed at this present loan transaction and, as the Court of Appeal subsequently held, effectively prevented any action for recovery being taken against Mr Ingram's client. The fact that Mr Ingram was himself a Member of Parliament who spoke in support of the Bill throws a sharp perspective on what occurred.

With this sequence of events in mind it is necessary to consider the allegations against the Defendants of delay and breach of duty. It is true that if application for relief under the Illegal Contracts Act had been made before the passing of the 1991 Amendment relief would almost certainly have been granted, and steps could have been taken by the receiver (and, if necessary, under the mortgage) to recover the amount owing to the Plaintiff. The Plaintiff, however, had continued to prefer his own view of the law and was plainly reluctant for an application to be made.

It has been argued for the Plaintiff that a change in the legislation was something which is always possible and should have been anticipated so as to have required prompt action on the part of the Defendants. Such an argument is specious and, indeed at the hearing it was conceded on behalf of the Plaintiff that the 1991 Amendment was neither foreseen nor foreseeable by the Defendants. That was a proper concession to have made. No solicitor, no matter how cautious, could have anticipated that an amending Act aimed specifically at a particular private transaction, would be rushed through Parliament as this one was. The inference that this is what occurred is so strong as to be irresistible. There was, therefore, no basis upon which it should be said that the Defendants ought to have acted more promptly or any differently from what they did. It is also clear that the question of validity of the security documents was by no means a simple one and required a good deal of research by the Defendants who had not acted on the original transaction. Mr Gibson held a Power of Attorney from the Plaintiff but it would have been improper for him to have acted in pursuance of that document in the face of the Plaintiff's repeated assertions that the securities were valid, and in view also of his reluctance to commence court proceedings.

It may well be that the Defendants were slow to recognise the possible invalidity of the security documents and to obtain copies so that this matter could be considered. It was also the case that they may have been wise to have delayed the appointment of the receiver while the question of validity had been determined. The Plaintiff's claim, however, is based upon the contention that it was the failure of the Defendants to recognise and advise as to the question of validity which caused the Plaintiff's loss. That was not the case. That loss was directly attributable to the altogether unexpected event of the 1991 Amendment.

I am satisfied that the allegations against the Defendants of breach of contractual duty have not been made out and that there is no liability on them to the Plaintiff.

This is the decision on the first part of the action as set out in counsel's Agreement as to Procedure. That Agreement contains no reference to the Defendant's counterclaim and I therefore do not deal with it at this stage.

Upon the question of liability there will be judgment for the Defendants on the claim. As the action is not concluded there will be leave reserved to the parties to have the counterclaim determined by the Court if agreement upon it is not reached. For similar reasons the costs will at this stage be reserved.

I add a brief word as to the position between the Plaintiff and Auto Marine Ltd. It was conceded throughout the hearing that the loans made by the Plaintiff were still owing. Notwithstanding that the repayment of them cannot now be enforced it is to be hoped that Auto Marine Ltd and Mr and Mrs Preston will now act responsibility [sic] and see that repayment is made. It would be less than honest of them not to do so.

QUILLIAM C.J.