Donald Owen MacDonald, Judith Mary MacDonald, John Laurence Armstrong and Wayne Henry Hanna v Somerset Smith Partners

• Jurisdiction: New Zealand
• Judge: SMITH
• Judgment Date: 05 August 2015
• Neutral Citation: [2015] NZHC 1839
• Docket Number: CIV-2013-441-356
• Court: High Court
• Date: 05 August 2015

Between

Donald Owen Macdonald, Judith Mary Macdonald, John Laurence Armstrong And Wayne Henry Hanna

Plaintiffs

and

Somerset Smith Partners

Defendant

[2015] NZHC 1839

Associate Judge Smith

CIV-2013-441-356

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

Application to strike out parts of the plaintiffs' amended statement of claim under s4 Limitation Act 1950 (“LA”) (limitation of actions of contract and tort — 6 years from the date on which the cause of action accrued) — the defendants were investment advisors — plaintiffs alleged they had instructed the defendant to invest in low/conservative risk investments but the defendants had invested in high risk investments — whether the cause of action accrued at the date of the transactions — whether the causes of action were postponed under s28 LA (postponement of limitation period in case of fraud or mistake) as a result of a fraudulent concealment of the cause of action — whether it was arguable that a fiduciary relationship existed - whether a contention that a defendant ought to have been aware of the facts constituting the cause was a sufficient standard for a finding of concealment by fraud.

Counsel:

J Long and S L Jackson for the plaintiffs

M MacFarlane for the defendant

JUDGMENT OF ASSOCIATE JUDGE SMITH

Background	[2]
The plaintiffs' claims	[17]
The amended statement of defence	[21]
The plaintiffs' reply	[23]
The strike-out application	[25]
The evidence	[27]
The issues for determination	[52]
Issue 1: Is it reasonably arguable for the plaintiffs that their negligence causes of action, to the extent that they depend on alleged breaches of duty by the defendants before 19 July 2007, did not accrue until after that date (because no damage was caused by the alleged breaches until after that date)?	[54]
Legal principles	[54]
The defendants' submissions	[70]
The plaintiffs' submissions	[72]
Discussion and conclusions on issue 1	[77]
Issue 2: If and to the extent that the answer to issue 1 is no, and in respect of each of the contract causes of action and the claims under the Consumer Guarantees Act where breaches of duty are alleged to have occurred before 19 July 2007, have the dates of accrual of the impugned causes of action been postponed by fraud on the defendants' part, so that the time for the plaintiffs to bring their claims was extended by s 28(b) of the Act?	[82]
Legal principles	[82]
The plaintiffs' s 28(b) pleading in this case	[91]
The plaintiffs' submissions	[92]
The defendants' submissions	[100]
Discussion and conclusion on issue 2	[130]

1 The defendants apply to strike out parts of the plaintiffs' amended statement of claim. They say that the relevant claims were filed out of time.

Background

2 The plaintiffs are the trustees of the Donald MacDonald trust. Mr and Mrs MacDonald have a background in farming. Mr Armstrong is a solicitor, and Mr Hanna is a chartered accountant.

3 The defendants are investment advisors. Between July and August 2006 the plaintiffs consulted them about how they might invest $4 million which they had available for investment.

4 The plaintiffs say that their main concern was to keep the capital intact, and that they instructed the defendants that their acceptable level of risk was “low/conservative”.

5 The defendants made certain investment recommendations which the plaintiffs accepted, and between August 2006 and 31 March 2007 the defendants made the investments on the plaintiffs' behalf. Three quarters of the investments were in interest-bearing securities.

6 By 2009 the values of the investments had fallen significantly. The plaintiffs began selling their portfolio, and that process was completed in January 2012. By then, the plaintiffs say they had suffered capital losses totalling not less than $1.256 million.

7 The plaintiffs' case is that it was not until January 2012, when they consulted another investment advisor, that they found out that their investments had in fact been considerably riskier than the “low/conservative” level of risk they had told the defendants they would accept. They issued the present proceeding on 19 July 2013, claiming damages for their capital losses, interest, and costs.

8 The plaintiffs rely on a Client Agreement completed on the defendants' standard form on 25 July 2006. In it, Mr and Mrs MacDonald, as agents for the plaintiffs, stated (by means of placing a tick in the relevant box) that the plaintiffs' investment objective was “balanced return from income and capital growth”. They ticked a “low/conservative” box to indicate the acceptable level of risk.

9 On 14 August 2006, the defendants wrote a lengthy letter to the plaintiffs. In it, they recorded Mr MacDonald's comments that the investment funds were surplus to the plaintiffs' requirements and that a long term investment horizon should be adopted. The letter noted the plaintiffs' “inclination” to place a higher weighting on interest-bearing securities, with a view to securing above average income streams.

10 The defendants referred in the letter to the “prudent” investment approach required of trustees by the Trustee Act 1956, and to their interpretation of that requirement that trustees should invest “prudently and with caution, while recognising that some level of risk must be ventured into, in order achieve a reasonable return.” They proposed that the portfolio be divided between interest- bearing securities and equities in the proportions 75 per cent-25 per cent.

11 In the section of their 14 August 2006 letter dealing with interest-bearing securities, the defendants referred to the “wide range of interest-bearing securities and maturities offering varying degrees of risk and varying interest rates”. For complete security of capital, they would have recommended government stock. However they considered that investment in corporate bonds “would improve the overall return, while still providing a high degree of security”. They went on to recommend eleven securities with a spread of maturities and interest payment dates, with a view to providing regular income over the next 14 years. They recommended that the $3 million to be invested in interest-bearing securities should be invested in such securities over the ensuing few months, as and when opportunities for investment arose.

12 The plaintiffs say that a supplementary agreement was completed with the defendants on 12 October 2006, under which the defendants would provide custodial and portfolio review services to the plaintiffs. The defendants deny that the supplementary agreement ever became operative, although they did in fact provide certain portfolio review services for the plaintiffs over the period from late 2006 to 2012 when their relationship with the plaintiffs ended.

13 The defendants accept that they made investments for the plaintiffs from about 14 August 2006. Purchases continued after that date until 31 March 2007, when the last purchase was made. At quarterly intervals thereafter the defendant sent the plaintiffs statements of account showing transactions in the preceding quarter and an updated portfolio valuation. The valuations listed each investment separately, with details (in the case of the fixed interest securities) of the investment's face value, due date, rate, yield, and current market value. The first such valuation appears to have been provided on or about 13 October 2006.

14 With the quarterly statements of account and updated valuations, the defendants generally sent a covering letter headed “portfolio review”. These letters typically included comments on the financial markets generally, and comments and/or recommendations on the plaintiffs' portfolio.

15 Over the years since August 2006, and until the parties' relationship ended in 2012, Mr MacDonald met from time to time with Mr Pearson, a partner in the defendants' firm, to discuss the plaintiffs' portfolio. Mr MacDonald says that Mr Pearson would outline proposed new investments, with a brief description of the investment, and Mr MacDonald had the opportunity to ask questions. He accepted the majority of the defendants' recommendations.

16 From around late 2008 Mr MacDonald says that he expressed to the defendants his concerns about the investments. However he accepts that he did not suggest that the defendants had been negligent. Those allegations came later, after Mr MacDonald consulted another financial adviser in 2012.

The plaintiffs' claims

17 The plaintiffs plead five causes of action. First, they allege that the defendants acted in breach of contract in constructing the initial fixed interest portfolio. Secondly, they say that the defendants acted negligently in the construction of that portfolio.

18 In their third cause of action, the plaintiffs plead that the defendants acted in breach of contract in failing to properly carry out advisory portfolio review and evaluation services, in accordance with the supplementary agreement the plaintiffs say was made on 12 October 2006. The plaintiffs accept that they did receive pro- forma letters from the defendants from time to time providing general comments on the investments, and that there were two reviews, dated 31 October 2011 and 26 January 2012, which provided individualised comments on the plaintiffs' portfolio. However, they say the defendants failed to exercise due skill, care and diligence in monitoring the composition and value of the fixed interest portion of the portfolio, and failed either to appreciate that the fixed interest portfolio was not in accordance with their instructions or failed to advise them of that fact. They further allege that the defendants failed to take appropriate steps to advise them to alter the portfolio, and that the defendants failed to respond to significant changes in market...