Derek Nicholas Blackwell and Charles Basil Blackwell as Executors and Trustees of The Estate of Ross Winston Blackwell v Edmonds Judd

JurisdictionNew Zealand
CourtSupreme Court
JudgeGlazebrook J
Judgment Date22 April 2016
Neutral Citation[2016] NZSC 40
Date22 April 2016
Docket NumberSC 30/2015

[2016] NZSC 40

IN THE SUPREME COURT OF NEW ZEALAND

Court:

Elias CJ, William Young, Glazebrook, Arnold and O'Regan JJ

SC 30/2015

Between
Derek Nicholas Blackwell And Charles Basil Blackwell As Executors And Trustees Of The Estate Of Ross Winston Blackwell
Appellants
and
Edmonds Judd
Respondent
Counsel:

C T Gudsell QC for Appellants

M R Ring QC and J R Parker for Respondent

Appeal against the Court of Appeal's (CA) decision that the respondent law firm's negligence in respect of an option to purchase farm land had not caused loss to the appellant — the appellant had been diagnosed with an inoperable brain tumour — he entered into a lease and an option to purchase with his neighbour — in order to make the farm affordable, he agreed to a discounted fixed price for the option — the option was varied and renewed without valuations and without including a clause that it not be exercised during the appellant's lifetime — the agreed option price was less than half the current market value — the respondent law firm acted for both parties — the CA said that the respondent firm's negligence in advising on the option was not a material and substantial cause of, or had not had a real influence on, the loss suffered by the appellant as he would still have acted in the same way even if he had received competent advice — whether the appellant would have acted differently had he been properly advised.

The issue was whether RB would have acted differently had he been properly advised.

Held: Edmonds Judd should have explored with RB in 2004 the reasons for the three year option period and the market value option exercise price after that period. The firm should also have inquired more generally about the reasons for the transaction. Had this been done, the firm would have known that RB did not want the option to be exercised in his lifetime and most likely about the informal understanding with W in this regard. It was also likely that RB would have told the solicitors of his wish to benefit AC and the reasoning behind that wish.

It was a major failing of Edmonds Judd not to recognise the conflict of interest and ensure that RB had independent advice on what was, on its face, not a run of the mill transaction and which was in addition very different from the lease with a right of first refusal granted in 2000. Further, while the standard of advice fell short of what would have been expected had RB been in perfect health, special care was needed because of RB's known health issues (even if, as was found to be the case, he was capable of managing his own affairs).

RB's main objectives were that the farm be affordable for AC (both as to rental and the option price) and to retain the farm during his lifetime. The agreement as entered into did not deal at all with the second of these objectives. Contrary to the conclusion of the courts below, it would not have been contrary to the “personal nature” of the arrangement overall that this be dealt with formally in the agreement. The dangers of relying on an informal arrangement of this sort for achieving a primary objective of the transaction were well illustrated in this case.

A competent legal advisor would have strongly advised that a term that the option could not be exercised while RB was alive should be included in the agreement. RB would have been warned that there would be difficulties in enforcing any understanding that the option would not be exercised in his lifetime (including the difficulty of proving the understanding existed). There was a major risk that the understanding would not protect him in the event C, despite their friendship, decided to exercise the option while RB was still alive.

The time limited application of the $1.5m purchase price was antithetical to RB's purpose of retaining the farm during his lifetime, as it created an incentive for C to exercise the option while the fixed purchase price remained, even if RB was still alive. Competent legal advice would have pointed that out.

Given the importance of RB's objective of keeping the farm while he was still alive, he would have accepted advice to include a condition that the option not be exercised in his lifetime. C would have accepted this condition. Had he refused, this would have been tantamount to admitting that he wished, despite his friendship with RB, to retain the flexibility to breach their informal understanding. They would likely have requested an extension of the option exercise period at a favourable price. However, assuming competent advice, RB would not have accepted an extension of the $1.5m exercise price past 2007.

A competent lawyer would have advised RB to include a market adjustment mechanism if the option exercise period were extended, given that farm values were generally expected to rise. The need to consider the position of RB's wife and her likely future needs, would have been stressed. In terms of RB's objectives of affordability, a competent lawyer would have pointed out that rising farm prices would increase affordability insofar as that concept was related to the ability to borrow on the security of the farm

RB would also, however, have been advised that, to the extent affordability rested on the land being used for dry stock farming (as he wished), there would be no practical way it could be ensured post sale that there would not be a dairy conversion either by C or by a subsequent purchaser. Setting an exercise price on the basis of dry stock farming was thus likely to confer an unwarranted advantage on C.

The possibility that, assuming competent independent advice tailored to RB's objectives and taking account of his vulnerability because of the state of his health, the option might have been abandoned altogether and the transaction structured in some other manner. The nature of any restructuring would affect the extent of any loss.

RB would have accepted that advice. The situation had to be assessed as at 2004. RB had shown himself not impervious to advice at that time, having accepted advice that he could not leave his farm to AC in his will as that would be unfair to his wife. While his personal feelings for AC were important, RB had also sought advice from a valuer as to the market value of the farm. There were indications RB had paid attention to commercial concerns, including raising the rent. It was more likely than not that RB would have extended the option period (conditional on the lease being renewed) but there would have been a market adjustment mechanism after 30 April 2007.

Had there been competent advice, the 2005 variation extending the $1.5m price would not have occurred and therefore the $1.5m price would only have been for the first three year period. It was not accepted that RB would, assuming competent legal advice, have agreed to an extension of the $1.5m exercise price for a period beyond the original three year period.

There was evidence to support the view that RB would have accepted advice to seek a rental valuation. There was nothing in the evidence that suggested what a fair market rental would have been, not taking into account the dairy farmer phenomenon. There was thus no basis in the evidence for assessing what the rental would have been assuming competent advice. The claim for loss of any additional market rental failed for want of proof of the quantum of loss.

The HC found that RB never wavered from the $1.5m exercise price. This could not be reconciled with the terms of the option entered into in 2004. The $1.5m was time limited and the exercise price reverted to market value after 30 April 2007. Any unwavering attachment to the $1.5m exercise price was held in the absence of proper independent legal advice. Had RB been given competent advice in 2004, the option agreement would have provided that the option would not be exercised during RB's lifetime but that the parties would have agreed, after the initial three year period, that the option price would be at a discount of between 15 and 25 per cent on market value. The 2005 variation would not have taken place and that the option would have been extended on the same terms in 2007 past 30 April 2010 but with an ability to exercise the option on that date if the lease were not renewed.

The market value at 2010 was $3,222,500. It was more likely than not that a midpoint (20 per cent) of the 15 to 25 per cent discount range would have been agreed as the percentage discount in 2004 for the period post 30 April 2007. That gave, with rounding, an option exercise price of $2,500,000, which was $1,000,000 higher than the price actually paid by C, meaning a proved loss of $1,000,000.

The appeal was allowed. Judgment for the appellants in the sum of $1,000,000 was ordered.

JUDGMENT OF THE COURT
  • A The appeal is allowed. Judgment is given for the appellants in the sum of $1,000,000.

  • B Interest of five per cent is ordered from the date of settlement by Mr and Mrs Chick of the purchase of the farm.

  • C The respondent is to pay costs of $25,000 to the appellants plus all reasonable disbursements, to be fixed if necessary by the Registrar.

  • D The costs order in the Court of Appeal (CA476/2013) is set aside. Costs in that Court and in the High Court should be set by those Courts in light of this judgment.

REASONS

(Given by Glazebrook J)

Table of Contents

Para

Introduction

[1]

Factual background

[5]

The farm and marriage

[6]

Health

[8]

The lease

[11]

Lease renewal and option

[14]

Variation in 2005

[26]

Lease renewal in 2007

[31]

Later events

[33]

High Court findings on negligence

[34]

Lease renewal and option

[37]

The 2005 variation

[39]

The 2007 renewal

[42]

The Court of Appeal judgment

[44]

Our assessment

[51]

Lease renewal and option

[55]

2005 Variation

[72]

2007 Renewal

[74]

Conclusion on the option exercise price

...

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