Ipsofactoj.com: International Cases [2003] Part 6 Case 10 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Wellington District Law Society

- vs -

Price Waterhouse

GAULT J

DOOGUE J

FISHER J

20 MAY 2002


Judgment

Gault J

(delivered the judgment of the court)

  1. The Wellington District Law Society (WDLS) has appealed against the judgment of Master Thomson delivered in the High Court at Wellington on 9 April 2001. The Master dismissed applications by WDLS to strike out claims brought against the Society respectively by the Price Waterhouse Partnership (Price Waterhouse) and by Messrs Vickerman (now deceased) and Campbell.

  2. Setting aside procedural complexities, the substantive proceedings are directed to determining who should contribute to the losses said to have been incurred by certain clients of the law firm Salek Turner Cuttance and Partners. The plaintiffs in the two proceedings immediately in issue (the Johnstons in one proceeding and the Coopers in the other) are four of those clients and claim in respect of losses they incurred as a result of investments made through the solicitors nominee company of that firm.

  3. The losses arise from major misappropriation of funds by one of the partners (Mr. Cuttance). Messrs Vickerman and Campbell were the other partners at the relevant times. Price Waterhouse was the auditor of the firmís trust account having been appointed on the nomination of the firm by the Council of WDLS pursuant to r5 Solicitors Audit Regulation 1987 (the regulations in force at the material times).

  4. In the two separate proceedings the plaintiffs sued Price Waterhouse alleging liability in negligence for failing to conduct audits to the appropriate standard and, in particular, failing to adequately investigate and report in a timely manner to WDLS breaches by the solicitors of the Regulations and the Solicitors Nominee Company Rules 1988. The amended pleadings were formulated after the judgment of this Court in Price Waterhouse v Kwan [2000] 3 NZLR 39 in which an application by Price Waterhouse to strike out the claim of another investor client of the law firm was refused.

  5. Price Waterhouse served third party notices on Messrs Campbell and Vickerman and upon WDLS alleging that WDLS owed duties of care to the plaintiff clients of the law firm and to Price Waterhouse. Price Waterhouse seeks from each contribution to the extent of any successful claim by the plaintiffs against it.

  6. Messrs Campbell and Vickerman served on WDLS a cross-notice claiming breach by WDLS of a duty of care owed to Messrs Campbell and Vickerman as innocent partners of the law firm. In the accompanying statement of claim it was alleged that WDLS breached a duty of care to Messrs Campbell and Vickerman by failing to advise them of complaints received and concerns held by WDLS and irregularities discovered in the audits conducted and by failing to take steps to investigate the conduct of Mr. Cuttance and suspend him from practice as a solicitor. This claim was for contribution to the full extent of any successful claim against Messrs Vickerman and Campbell by Price Waterhouse.

  7. However, in a draft second amended statement of claim appended to the written submissions of counsel for Messrs Vickerman and Campbell, the claim for contribution was recast as against WDLS as a fourth party and alleged breach by WDLS of duties of care owed to Price Waterhouse. Messrs Campbell and Vickerman, in this statement of claim, do not allege any duty of care owed by WDLS to the plaintiff clients of the firm. They nevertheless in argument supported Price Waterhouse in opposition to the application by WDLS to strike out and contended that WDLS did owe duties to the plaintiffs.

  8. The plaintiffs support the joinder of WDLS and have given notice of intention to join WDLS as a defendant in each proceeding.

  9. There is a separate proceeding in which Messrs Vickerman and Campbell have sued Price Waterhouse. That proceeding is to be consolidated with the present proceedings.

  10. For completeness it should be mentioned that Price Waterhouse served a third party notice also on the New Zealand Law Society (NZLS). There is no appeal from the Masterís refusal to strike out that claim.

  11. In its application to strike out the claims against it by Price Waterhouse for contribution WDLS contends that the claims disclose no reasonable cause of action. It is said that the third party notice seeks only contribution under r75(1)(a) High Court Rules in respect of losses claimed by the plaintiffs against Price Waterhouse (even though the statement of claim alleges duties of care owed by WDLS both to the plaintiffs and Price Waterhouse). Therefore, if WDLS satisfies the Court that there is no tenable argument that WDLS owed a duty of care to the plaintiffs, the claim against it by Price Waterhouse for contribution must be struck out.

  12. That is disputed by Mr. Camp for Price Waterhouse who submits that it is sufficient that WDLS owed a duty of care to Price Waterhouse. Where the claim is only for contribution that seems untenable but the point must be determined in any event because, in its separate application to strike out the claim against it by Messrs Vickerman and Campbell for contribution, WDLS contends that no cause of action is disclosed because no duty of care was owed by WDLS to Price Waterhouse.

  13. The essential issues therefore are whether there are tenable arguments that WDLS owed common law duties of care respectively to the plaintiff investors and to the law firmís auditor Price Waterhouse.

  14. There was some argument that WDLS owed a duty of care to Messrs Vickerman and Campbell but that is no longer material in the present appeal in view of Messrs Vickerman and Campbellís proposed amended pleading (which was not before the Master). The separate proceedings, which may be consolidated for trial, in which Messrs Vickerman and Campbell have sued Price Waterhouse in negligence do not include any application to join WDLS as a third party. If there were, that would raise the issue of whether WDLS owed a duty of care to Messrs Vickerman and Campbell but it is not presently before us.

    THE MASTER'S JUDGMENT

  15. We refer only to those parts of the Masterís judgment as are relevant to the present appeal.

  16. The argument as presented to the Master was that WDLS had no duty to the clients of a solicitorsí firm and so, ŗ fortiori, could have no duty to auditors or to the solicitors. The Master noted first that this Court in Price Waterhouse v Kwan (at 45) left open the question whether a District Law Society could be liable for losses to solicitorsí clients for negligently failing to act on an auditorís report. He then referred to Law Society v KPMG Peat Marwick [2000] 1 All ER 515, 522 in which Sir Richard Scott VC determined that in England accountants owe a duty to the Law Society, in its capacity as trustee of the Compensation Fund, when reporting to the Law Society on compliance by solicitors with rules governing the handling and recording of clientsí money. In the course of his reasoning the Vice Chancellor agreed with a submission that the Law Society does not owe a duty of care to solicitorsí clients as to the manner in which it carries out its functions as regulator of the solicitorsí profession.

  17. The Master referred also to the judgment of Lord Woolf CJ on appeal in the same case ([2000] 1 WLR 1921), but the Lord Chief Justice there seems to have simply recounted the reasoning of the Vice Chancellor in the court below.

  18. The Master seems to have construed a comment by Lord Woolf, to the effect that in a claim by the Law Society against reporting accountants liability might be reduced if the Law Society was also at fault, as indicating a reciprocal duty of care. That does not follow, nor do we understand the passage quoted as indicating that it does. Reduction of a remedy for contributory negligence does not require a separate reciprocal cause of action: Helson v McKenzies Ltd [1950] NZLR 878, 920.

  19. The Master reasoned as follows:

    (a)

    Auditors can have a duty of care to a solicitorsí clients. Price Waterhouse v Kwan.

    (b)

    Auditors can have a duty of care to innocent partners of solicitors firms. Stringer v Peat Marwick & Co (2000) 1 NZLR 450 where Chisholm J at p461:

    There does not appear to be any reason why a duty in favour of the solicitor could undermine or weaken any duty in favour of the Law Society and/or client.

    ....

    (c)

    Auditors can have a duty of care to Law Societies and Law Societies can be liable for contributory negligence to auditors if they fail to act on their reports: Law Society v Peat Marwick.

    Given (a) (b) and (c) above, I do not think it would be a big step for a New Zealand Court to hold that Law Societies in the administration of the Act and Regulations could have duties of care to auditors and to innocent partners of the solicitorís firm, and possibly, even clients of the firm.

  20. The Master went on to deal with an argument advanced on behalf of WDLS distinguishing between the powers and duties of Councils of District Law Societies and those of the societies themselves. He did not see that the structure of the Act and Regulations in this respect militated against the common law duties of care contended for. That was supported by the views expressed in England in the case of Law Society v KPMG by both Sir Richard Scott VC (525) and Lord Woolf CJ (546-7).

  21. Having expressed himself satisfied that a duty of care upon WDLS to auditors "and possibly, even clients of the firm" could be found, the Master concluded that:

    All in all I am satisfied that in order to resolve this long running litigation it is important to have all parties who might be liable to contribute to the plaintiffsí losses, in the event that they are successful, before the Court.

  22. He refused the applications to strike out the claims against WDLS.

    THE APPEAL

  23. In her argument in support of the appeal, Mrs. Andrews for WDLS relied on decisions in England and in Canada. In addition to the obiter view expressed by Sir Richard Scott VC in Law Society v KPMG already referred to, she relied on Wood v The Law Society ([1993] TLR 435) in which Otton J, in a long judgment, held that the Law Society owed no duty of care to the client of a solicitor in the investigation of complaints by her against the solicitor. That judgment was upheld on appeal (Court of Appeal, Civil Division, 27 February 1995) but on the different ground that a causal link between the loss and the alleged negligence by the Law Society was not established.

  24. Reliance was also placed on Peasegood v The Law Society (Court of Appeal, Civil Division, 3 October 1996) in which leave to appeal was refused to a litigant in person. The Court held, after referring to the judgment of Otton J in the Wood case, and another unreported decision at first instance, that:

    My conclusion is that these cases represent this difficult area of the law as it now is and that there is no general duty of care owed to clients, or opponents, of solicitors on the part of the Law Society, as to the manner in which they exercise their duties and discretions under the Solicitorís Act.

  25. A number of Canadian cases were referred to in the judgment of Otton J in the Wood case. His account of them records consistent findings that law societies in Canada do not owe duties of care in exercising disciplinary and regulatory powers. In so doing they perform discretionary and quasi-judicial functions in respect of which private duties of care should not be imposed. In Edwards v Law Society of Upper Canada (2001) 206 DLR (4th) 211 and Cooper v Hobart (2001) 206 DLR (4th) 193, which are to be read together, the Supreme Court of Canada held that, on the grounds both of lack of proximity and of policy, the Law Society did not owe a duty of care to plaintiffs who deposited money in a lawyerís trust account not as clients but as participants in a third person business promotion.

  26. Mrs. Andrews also relied on the decision of this Court in Fleming v Securities Commission [1995] 2 NZLR 514 in which the Securities Commission, responsible for regulating offers of securities to the public, was held not to owe duties of care to members of the public who lost money invested in response to advertisements which did not comply with the Securities Act.

  27. Counsel drew upon these authorities by analogy and highlighted factors identified in them said to be present also in the circumstances of this case. It was submitted that in the consideration of whether duties of care should be found in the novel situations presented, they pointed away from the imposition of duties upon district law societies in favour of solicitorsí clients and auditors.

    Factors relied upon going to the issue of proximity were:

    • That WDLS is required to exercise a legislatively delegated discretion involving myriad objectives all consistent with public rather than private law duties.

    • That the law already provides safeguards to protect and compensate clients as members of the public. Part IX of the Law Practitioners Act provides for the Fidelity Fund and the Regulations require auditors to carry professional indemnity insurance.

    • That the class of people who might complain about solicitors is unascertained and unidentifiable.

    • That district law societies do not have any power of control over the day to day activities of solicitors.

    • That the Councils of different district law societies have a wide range of functions carried out by unpaid volunteers unsupported by parliamentary appropriation funds.

    The structure of the Act and Regulations indicates clear and precise allocation of liabilities in respect of the operation of trust accounts and solicitorsí nominee companies including, under r71, provision for offences.

  28. The policy factors said to point away from the imposition of duties of care were:

    • That the language of the Act is permissive or empowering rather than mandatory. A factor which although not necessarily precluding the imposition of duties of care was influential in B v Attorney-General [1999] 2 NZLR 296.

    • Any decision by a Council of a District Law Society to invoke powers of investigation or intervention requires the exercise of judgment in the light of facts disclosed and such discretionary activity is inconsistent with a common law duty of care.

    • The functions of district law societies in the relevant areas involve quasi-judicial determinations inappropriate for common law duties of care.

  29. Further, in respect of duties alleged to be owed by district law societies to auditors, it was submitted that in the circumstances of this case the scope of any relevant duties would extend to requiring district law societies to protect auditors against their own negligence. Reference was made by analogy to cases in which in building liability claims local authorities do not owe duties of care to builders to protect them against their own negligence: JW Harris & Son Ltd v Demolition & Roading Contractors (NZ) Ltd [1979] 2 NZLR 166; Morton v Douglas Homes Ltd [1984] 2 NZLR 548, 614. It was submitted further that the purpose of the provisions of the Act was to protect clients who invest money with solicitors not to protect auditors and that auditors are in the best position to protect themselves because of their powers and obligations in respect of audits. They are required to carry professional indemnity insurance.

  30. Mrs. Andrews also repeated the submission made before the Master that the separate statutory roles of District Law Societies and their Councils strongly detract from any common law duties of care on the societies. She analysed the Act and Regulations and referred to the specific protection in s137 for Societies, their officers and employees in matters under Part VII relating to discipline and to the immunity provision for Councils and others in s189 Ė see McCutcheon v New Zealand Law Society (High Court Auckland CP543/92, 23 November 1992 Wallace J and CA16/93, judgment 18 May 1993).

  31. Finally it was submitted on behalf of WDLS that even if it should be held that the Society owed duties as alleged, neither Price Waterhouse nor Messrs Vickerman and Campbell has alleged a sufficient causative link between the losses for which they claim and the alleged breaches of duty by WDLS. There was said to be alleged a mere "but for" link Ė that but for the failure by WDLS to act sooner to prevent Mr. Cuttance from practising the losses or part of them would not have been incurred. We were referred to the judgment in Price Waterhouse v Kwan ([27]) and to the separate judgments in Sew Hoy & Sons Ltd (In Receivership and in Liquidation) v Coopers & Lybrand [1996] 1 NZLR 392.

    SUBMISSIONS FOR THE RESPONDENTS

  32. For the defendant Price Waterhouse, Mr. Camp supported the Masterís conclusions. He argued that the circumstances disclosed in the pleadings satisfy the established criteria for the existence of a duty of care. He submitted that because auditors may owe duties of care to clients of solicitors (Price Waterhouse v Kwan), if no duty is owed to auditors by a District Law Society, auditors will be left in the position of being exposed to a clientís suit where the client losses may have been aggravated by the failure of the Law Society to intervene following information made available by the auditor. The auditor cannot report to the client in terms of the existing regulatory framework. The report can be only to the Law Society.

  33. Counsel emphasised that on an application for strike out, when the facts are not known, a claim should be denied only when it is clearly untenable. That is plainly correct: Attorney-General v Prince and Gardner [1998] 1 NZLR 262, 267. Mr. Camp referred also to Barrett v Enfield London Borough Council [2001] 2 AC 550 in which the House of Lords emphasised that except in the clearest cases an investigation of the facts should precede a determination of whether a duty of care is owed. Their Lordships also made the point in that case that because a public authority defendant is exercising discretionary statutory powers does not necessarily preclude a duty of care.

  34. It was submitted that the authorities relied upon by WDLS do not extend to the circumstances prevailing in New Zealand with which this case is concerned; that a duty of care by WDLS to Price Waterhouse should not be excluded at this stage; and that issues of causation are better left for trial.

  35. Ms Ullrich QC for Messrs Vickerman and Campbell supported in oral argument her comprehensive written submission analysing the statutory and regulatory framework for the functions of auditors of solicitorsí trust accounts and of District Law Societies in their supervision of the profession. Her argument was that at the strike out stage it cannot be said to be untenable that WDLS owed duties of care to the plaintiffs and to Price Waterhouse. Messrs Vickerman and Campbell are therefore entitled to have tried their claims for contribution to any losses by the plaintiffs to which Messrs Vickerman and Campbell may be held liable to contribute on claims brought against them either by the plaintiffs or by Price Waterhouse.

  36. We were referred to the familiar authorities directed to determining whether duties of care are to be imposed in novel situations: 

    • South Pacific Manufacturing Co Ltd v NZ Security Consultants & Investigations Ltd [1992] 2 NZLR 282;

    • Caparo Industries Plc v Dickman [1990] 2 AC 605;

    • Gartside v Sheffield Young & Ellis [1983] NZLR 37; and

    • First City Corporation Ltd v Downsview Nominees Ltd [1990] 3 NZLR 265.

  37. Drawing upon these authorities, it was submitted that there was a close and direct relationship between Price Waterhouse and WDLS in the framework of the Solicitorsí Audit Regulations; that auditors are clearly foreseeable by a District Law Society as persons who may suffer harm if the Society does not act on information conveyed to it by the auditors; that merely because the harm is economic harm is not disqualifying because it is exactly what is envisaged by the overall regulatory scheme; that if auditors did report defalcations or mismanagement of trust monies there would be an immediate risk of harm to clients and the risk would be increased the longer no action was taken; and that the district law societies have responsibility to investigate and take action in appropriate circumstances in accordance with the Act.

  38. Similarly, it was submitted that the necessary requirement of proximity existed between a District Law Society and clients of a solicitorís firm. As was held in Price Waterhouse v Kwan the purpose of the audit of solicitorsí trust accounts, at least in significant part, is to protect solicitorsí clients from loss resulting from improper conduct so that the law society in the discharge of its functions must have those clients in contemplation and loss to them is foreseeable. There are specific allegations by the plaintiffs of reliance on the fact that trust accounts and nominee companies are governed by regulations and audit requirements and that there is no reason for distinguishing in this respect between the position of auditors and of district law societies in their respective functions in relation to the auditing and supervision of solicitorsí trust accounts.

  39. Counsel acknowledged that the scope of the alleged duty owed by auditors to clients of solicitors differs from that of the duty owed by a District Law Society to auditors. It was said that the duty owed by auditors to clients is limited to audits of the particular accounts in respect of that client whereas the duty owed by the District Law Society to the auditor must necessarily extend to the audit of the whole of the solicitorís practice as it effects any of the clients.

  40. Counsel also referred to four elements identified as necessary for imposing a duty of care on a public body exercising statutory powers in Todd, The Law of Torts in New Zealand (3rd ed) 210-211, which she submitted were satisfied in the present case. They are:

    1. The defendant authority was in a position of control and was under a statutory obligation, or at least had specific power, to protect the plaintiff from the danger.

    2. The defendant knew or ought to have known of the risk of harm to a specific, known plaintiff or a specific class including the plaintiff.

    3. The plaintiff was in a position of special vulnerability or dependence on the defendant. He or she could not reasonably have been expected to have safeguarded himself or herself from the danger.

    4. On a policy overview there is no good reason for denying a duty. In particular, a duty of care can be seen as consistent with and complementary to the performance by the public body of its statutory functions.

  41. For Messrs Vickerman and Campbell Ms Ullrich submitted also that questions of causation should be dealt with at trial in light of the facts as they emerge.

    DUTIES OF CARE

  42. The submissions were formulated by reference to the two broad fields of enquiry followed in New Zealand cases over the past 20 years or so, being the degree of proximity or relationship between the parties and policy considerations tending to negative or restrict, or strengthen the existence of a duty of care. Proximity in that context is a broad concept not confined to the closeness of the relationship. That is only one aspect. It is not possible to determine whether the law should impose a duty of care in the abstract or merely by reference to the nearness or distance of the relationship between the parties. To the extent that there are incorporated into the concept of proximity aspects of foreseeability and reliance (appropriately limited by remoteness policies) it is necessary to focus on the potential scope of any duty. What is it that should have been foreseen, whom was it likely to harm, and in what way? In what circumstances is it said that there was a duty to take reasonable care? This can be approached by asking of the duty contended for what is there a duty to protect against. That in turn extends into aspects of causation and damage.

  43. It is important to keep in mind the comments of Lord Pearson in Dorset Yacht Co v Home Office [1970] AC 1004, 1052:

    The form of the order assumes the familiar analysis of the tort of negligence into its three component elements, viz., the duty of care, the breach of that duty and the resulting damage. The analysis is logically correct and often convenient for purposes of exposition, but it is only an analysis and should not eliminate consideration of the tort of negligence as a whole. It may be artificial and unhelpful to consider the question as to the existence of a duty of care in isolation from the elements of breach of duty and damage. The actual damage alleged to have been suffered by the plaintiffs may be an example of a kind or range of potential damage which was foreseeable, and if the act or omission by which the damage was caused is identifiable it may put one on the trail of a possible duty of care of which the act or omission would be a breach. In short, it may be illuminating to start with the damage and work back through the cause of it to the possible duty which may have been broken.

  44. However the assessment is undertaken, the conclusion should be the same. There can be considered first the relationship in which a duty is said to arise and then, after ascertaining that the parties are sufficiently close to give rise to obligations to take care, the scope of that for which it is reasonable that they should bear legal liability and whether that extends to what occurred. Alternatively, the claimed cause of liability can be identified and then examined to determine whether the "proximity" of the parties is such that the law should impose that liability.

  45. The second alternative tends to highlight the limits of the strike out jurisdiction because it requires early focus on the facts of the case which may not be sufficiently clear to warrant dismissal without further investigation.

    WHAT IS ALLEGED IN THIS CASE

  46. The plaintiffs, whose moneys were invested in mortgages through the solicitorsí nominee company, allege in their respective statements of claim that Price Waterhouse as auditors failed "to expeditiously and/or adequately investigate and report to WDLS" numerous specified breaches by Mr. Cuttance of requirements of the Solicitors Audit Regulations 1969 and 1987, the Solicitors Trust Account Rules 1969 and the Solicitors Nominee Company Rules 1988. It is further alleged that had the breaches been expeditiously investigated and reported, the full extent of the Cuttance wrongful activities would have been promptly discovered, he would have been removed from control of the trust moneys and investments thereby preventing losses, or further losses, to the plaintiffs. The plaintiffsí allegations of breaches by the auditors of their duties of care are all of negligent omissions Ė of failure to discharge the duty to exercise the care reasonably required of professional auditors in carrying out their audit functions.

  47. The allegations against WDLS by Price Waterhouse are also of failure or omission. Although the pleading appears to allege both common law negligence and breach of statutory duties, it was made clear that the claim is in respect only of the former. It is alleged that WDLS failed to intervene in the solicitorsí practice and investigate its affairs after advice from Price Waterhouse in audit reports of deficiencies in the practice and failure to comply with the regulatory regime (the audit reports) and also after complaints from clients. This is said to have contributed to the losses suffered by the plaintiffs and claimed against Price Waterhouse.

  48. There is no suggestion that the audit reports made by Price Waterhouse notified matters directly identifying the particular plaintiff clients of the solicitorsí firm or advised of circumstances from which their losses flowed. The allegations are that had the matters that were reported been investigated there would have been uncovered the full scope of the misappropriations and misconduct which resulted in the losses.

  49. Price Waterhouseís claims against Messrs Vickerman and Campbell allege failure to properly supervise and manage the firm to ensure Mr. Cuttance complied with the regulatory regime and did not steal or misuse clientsí funds. In particular, it is said, they failed to act on matters brought to their attention in the audit reports.

  50. The allegations against WDLS by Messrs Vickerman and Campbell are that on receipt of the audit reports and complaints from clients of the solicitorsí firm WDLS failed to initiate further and full investigations, to adequately advise Messrs Vickerman and Campbell, to require Price Waterhouse to satisfy both WDLS and Price Waterhouse in relation to the solicitorsí practice, and to prevent Mr. Cuttance from continuing in practice. Had WDLS not failed as alleged, it is said, losses consequent upon the Cuttance activities would have been prevented or reduced. Any losses by Price Waterhouse claimed against Messrs Vickerman and Campbell therefore should be contributed to by WDLS.

  51. The duties upon WDLS that must be established to impose liability may therefore be identified as follows:

    • First, a duty owed to the plaintiff clients of the solicitorsí firm who have invested moneys through the firmís nominee company. The duty is to investigate complaints by other clients and matters notified to the Society by the auditors even though those matters are not directly referable to the plaintiffs. That duty is to protect the clients from losses which would not have been suffered if reasonable investigations would have disclosed other conduct justifying suspension of the practitioner responsible.

    • Secondly, a duty owed to the auditors of the solicitorsí trust account to act on and investigate matters notified by the auditors and complaints by the solicitorsí clients. The duty is to uncover matters not reported or complained of and to suspend the practitioner responsible. The duty is to protect the auditor from losses they may incur, not from the matters notified but from the matters which would be uncovered by investigation.

  52. When formulated in this way it can be seen that the duties said to be owed by WDLS differ considerably from the duties it has been held auditors may owe. Certainly they do not rest on misstatements as is frequently the case in claims against auditors (though that is not how Price Waterhouse v Kwan was argued). They do not involve the provision of services for which fees are paid directly or indirectly by the party to whom the duty is said to be owed. The alleged failures are in respect of matters involving considerably more complex issues of forseeability. The losses to be protected against flow not from the conduct said to require examination but from other independent conduct.

  53. We accept of course that liability should not hinge on the manner in which a defendantís conduct is characterised. For example a claim against a valuer can characterise the conduct as negligent misstatement (erroneous valuation report) negligent act (valuing the property negligently) or negligent omission (failing to consider material matters). That of course applies only where an obligation is assumed. Negligent omissions are not otherwise actionable (see Todd para 4.7.1). In this case the negligent failures by WDLS can only be characterised as omissions. They occurred in the context of statutory powers rather than duties. Such circumstances do not present fertile ground for the emergence of common law duties of care of the scope contended for.

    THE REGULATORY REGIME

  54. We can immediately dispose of the claims against WDLS so far as they seek to invoke a duty of care to act on or investigate complaints about the conduct of a practitioner. Section 137 of the Act provides (absent bad faith, which is not alleged) that a District Law Society shall not be under any civil liability in respect of anything done, or omitted to be done, in connection with any investigation of a practitionerís conduct or affairs or accounts under Part VII of the Act.

  55. Any duties must therefore arise in this case out of the regulatory regime for the supervision of practitionersí conduct in the handling of clientsí moneys. Responsibilities in respect of both audit reports and in the supervision of practitionersí conduct need to be considered.

  56. The audit procedures were at the material times governed by the 1987 Regulations. Auditors, once appointed by the Council of a District Law Society on the nomination of a firm of solicitors to audit that firmís trust account, had responsibilities to the solicitors by whom the auditorís fees were paid (r20). The auditors were required to audit the trust account in the manner prescribed (r44) at least three times each year (r47). Matters to be checked and verified were prescribed (rr50, 51), though generally qualified by what the auditors considered necessary. On completion of the audit for the year the auditors were required to report in the prescribed form to the Secretary of the District Law Society (r55) certifying compliance with the relevant provisions of the Act and Regulations (including those applicable to any nominee company) or highlighting irregularities. There is a requirement (r54) for special reports forthwith on discovery of failure of compliance, apparent dishonesty and certain other matters signalling improper practices.

  57. The auditorís reports in the present case were reports required by r55. They were not special alerts contemplated by r54. We infer that at some point they did notify that there were a number of mortgages seriously in default and seriously under-secured.

  58. Rules 63 and 64 provided:

    63.

    Certain reports to be laid before President of Society Ė

    Every report furnished to the Secretary of the District Law Society in accordance with regulation 54 of these regulations, and every report under regulation 55 of these regulations that includes any matter that in the opinion of the auditor as stated therein should be communicated to the Council of the District Law Society, shall forthwith be laid before the President of the Society by the Secretary, and the President shall cause the matter to be considered by the Council of the Society; and the Council may investigate that matter and, if necessary, institute proceedings against the solicitor concerned.

    64.

    Duty to report to New Zealand Law Society

    The Council of the District Law Society shall forward a report to the New Zealand Law Society on every matter considered by the Council of the District Law Society pursuant to regulation 63 of these regulations, stating what action, if any, has been taken in regard to that matter.

  59. Except as provided for in the Regulations, auditors cannot disclose any information obtained in the course of an audit (r66).

  60. It is Part V of the Act that deals with the relevant responsibilities of the law societies in connection with trust moneys and practitionersí conduct in relation to them. District Councils are empowered to take over trust moneys (s82) and take possession of solicitorsí records (s83) in the event that there is reasonable cause to believe that there has been theft or improper conduct by a solicitor in relation to clientsí money. District Councils also have broad powers to appoint any officer or member of the society or an accountant to examine and report on the accounts of any solicitor. The powers include those of requiring production of and inspecting all records relating to trust moneys (s85). There are restrictions on disclosure of information obtained. The Council may communicate information only to partners of the firm concerned, the auditor, the President of the New Zealand Law Society, a chartered accountant or the police. So much of a report as relates to the affairs of a client of the firm may be disclosed to that client (s85(9)).

  61. As counsel pointed out, where irregularities in the handling of trust moneys by a solicitor are found by the auditor of the trust account, they must be reported to the District Law Society (r63) and only to the District Law Society (r66). The Council of the Society must consider the matter (r63) and must report to NZLS what action if any has been taken (r64). The District Council may investigate the matter and if necessary institute proceedings against the solicitor concerned.

    THIS CASE

  62. For the purpose of the present appeal we must take as capable of proof that, had the audits of the law firmís trust account been carried out properly, or had investigation been undertaken by or on the instruction of the District Council, there would have been disclosed facts triggering all the powers of the Law Society to wrest control of trust moneys from Mr. Cuttance.

  63. It is not clear to us at this stage whether the matters that were highlighted in the audit reports to WDLS from Price Waterhouse in the relevant period were of a kind that should have triggered the required consideration by the WDLS Council and report to NZLS. Nor do we know whether they were such as to warrant the exercise of the statutory powers of intervention or investigation conferred on the District Council. We will assume that they were.

  64. Accordingly, when a matter giving grounds for concern is reported to a District Law Society by an auditor, the only way the solicitorsí client can learn of it is from the Council (s85(9)). But such disclosure can be made only so far as the report relates to the affairs of that client. We do not need to decide whether there could ever be circumstances in which a District Council might owe a common law duty of care to clients following receipt of an auditorís report. It is sufficient for this case to say that where information received by a District Law Society does not relate to particular clients the prohibition on disclosure is a significant factor in the assessment of whether there is a duty of care upon the society to clients. Further, any such duty necessarily would be to all clients of the firm and would require investigation of all matters that might bear upon their affairs. Such wide and indeterminate duties should not readily be imposed upon a regulatory (but not closely controlling) body which receives no fees from solicitorsí clients, has limited resources and has no links with solicitorsí clients similar to those of professional service providers such as valuers, surveyors and auditors.

    THE ALLEGED DUTY TO CLIENTS

  65. In conventional terms of proximity, we would not necessarily hold the relationship between a District Law Society and clients of a solicitorís firm created by the regulatory regime described to be too distant to support common law duties of care in all situations. But we are satisfied that in the circumstances presented by the pleadings in this case there is no duty which can avail those seeking joinder of WDLS. Whether analysed in terms of forseeability, remoteness or scope of duty, WDLS should not be held to be under a duty to act to protect clients of solicitorsí firms from losses suffered as a result of matters not brought to the attention of the Society merely because an investigation would have disclosed those matters.

  66. This Court has considered the issue of the appropriate reach of the law of negligence in several recent cases having some similarities to this one. In Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 it was held that the trustee under a debenture trust deed did not owe a duty to protect a bank lender from losses which would not have been incurred if the trustee had reported earlier breaches which, if known, would have enabled the bank to exit before the losses were suffered.

  67. In Fleming v Securities Commission it was held that the Commission, even after being made aware of the contravening advertisements, did not owe a duty to protect investors from losses suffered from investing in response to the advertisements which would not have been published had the Commission taken proper steps against the publisher.

  68. In Price Waterhouse v Kwan, employing the language of causation (though it is perhaps rather remoteness) it was said:

    The basis of the claim, save for two allegations of a more direct kind, seemed broadly to be that if the auditor had taken appropriate care at times earlier than those relevant to the Hughesí investments, the solicitorsí trust account would or should have been closed down. It followed in terms of the Hughesí allegations that their money would not have been lost, because there would have been no opportunity for the occurrence of the defaults which are later said to have occurred. In couching their claim on this basis, the Hughes claimants were stretching the proper concept of causation in this field beyond breaking point. They were seeking to apply a literal "but for" approach, which is not appropriate in claims based on tortious negligence.

  69. In Boyd Knight v Purdue [1999] 2 NZLR 278 auditors negligently provided a certificate included in a prospectus. The prospectus would not have issued but for the negligence. The auditors were not held liable to investors who, though they did not rely on the erroneous information in the prospectus, would not have invested (and lost) if the prospectus had not issued.

  70. Hill v Chief Constable of West Yorkshire [1989] AC 53 (HL) is treated by Todd (para 4.7.1) as a clear illustration of the general rule that normally one person is not personally liable for failing to prevent another from causing harm to a third. In that case the police were held not to owe a duty to take reasonable care to apprehend a criminal before he struck again.

  71. In this case the claims against WDLS can be characterised as no more than that but for the negligent failure of WDLS to investigate, the misappropriations would have been discovered before the losses (or some of them) were incurred. The losses were caused by the conduct of Mr. Cuttance not by WDLS. The simple "but for" linkage was not enough in the cases mentioned and it is not enough in the circumstances of this case.

  72. The whole regulatory regime rests upon a system of audits by qualified professionals whose task it is to ensure there is no improper handling of trust moneys. Auditors are required to carry professional indemnity insurance. Where moneys are stolen by solicitors, their employees or agents the Solicitorsí Fidelity Guarantee Fund maintained by NZLS and contributed to by solicitors (who are in a position to spread the costs among clients), provides further protection to clients. We do not consider there can be said to have been statutory contemplation of additional common law duties to solicitorsí clients in the position of the plaintiffs of the kind and scope contended for.

    THE ALLEGED DUTY TO AUDITORS

  73. The alleged duties said to be owed by WDLS to Price Waterhouse as auditors can be dealt with briefly. Keeping in mind that we are dealing at this stage with unproved allegations, the claim rests on the tenuous foundation that on receipt of reports from Price Waterhouse of matters that were discovered in the course of audits WDLS should have initiated investigations that would have uncovered the matters which the auditors negligently did not uncover and would have taken steps to prevent further losses for which Price Waterhouse may be liable in negligence. Any losses already incurred, of course, would have remained. The allegations seem to rest also on the assumption that WDLS, armed with the same information as the auditors, would have been in a better position to uncover the more serious conduct.

  74. We accept the submission of Mrs. Andrews that such a duty could not be reconciled with cases in the building and related fields where it has been held that a duty of care does not extend to protect a person who brings about his or her own loss by negligence: Anns v London Borough of Merton [1978] AC 728, 758 per Lord Wilberforce; JW Harris & Son Ltd v Demolition & Roading Contractors (NZ) Ltd (at 180); Morton v Douglas Homes Ltd (at 615). The underlying reason is that anyone in the position of a District Law Society receiving an auditorsí report will not reasonably foresee that the auditor, while reporting some matters, will have negligently failed to do so in other respects. It could not reasonably be foreseen that further damage from the auditorís unknown negligence may be avoided by investigating the matters actually reported.

  75. For the same reasons as we have held that the scope of any duty could not extend to protect clients of the solicitors, we consider there can be no duty extending to protect Price Waterhouse from losses which would not have occurred "but for" WDLS not instituting an investigation leading to the suspension of Mr. Cuttance before he could perpetrate further misappropriation.

  76. We do not find in the regulatory regime contemplation that District Law Societies should owe common law duties of care to save auditors from liability for which, under the Regulations, they are required to carry professional indemnity insurance.

  77. We are satisfied that it would not be just and reasonable in all the circumstances to find duties of care upon WDLS in either of the situations contended for.

  78. Having reached that view, it is unnecessary for us to decide the point argued by Mrs. Andrews that, because the statutory responsibilities are those of District Councils and not the District Law Societies themselves, the claims against WDLS are untenable. We simply comment that having considered the statutory scheme and the judgments in McCutcheon v NZLS, we incline to the views expressed at first instance and on appeal in Wood v Law Society that the Council is just a designated organ by which responsibilities of the Society are carried out and that there is no justification for not attributing acts of the Council to the Society. The immunity provided in s189 of the Act does not extend to the Society.

  79. In the result the appeal is allowed. The applications by WDLS to strike out the claims against it are granted. The third and fourth party notices served on WDLS are set aside.

  80. The appellant is entitled to costs in this Court and in the High Court. Costs in the High Court can be fixed if necessary by that Court. In this Court we award costs to the appellant of $4,000 against each of the first and second respondents who shall share equally the appellantís disbursements, including the costs of preparing the case on appeal.


Cases

Price Waterhouse v Kwan [2000] 3 NZLR 39; Law Society v KPMG Peat Marwick [2000] 1 All ER 515; Helson v McKenzies Ltd [1950] NZLR 878; Stringer v Peat Marwick & Co (2000) 1 NZLR 450; Wood v The Law Society [1993] TLR 435; Peasegood v The Law Society (Court of Appeal, Civil Division, 3 October 1996); Edwards v Law Society of Upper Canada (2001) 206 DLR (4th) 211; Cooper v Hobart (2001) 206 DLR (4th) 193; Fleming v Securities Commission [1995] 2 NZLR 514; B v Attorney-General [1999] 2 NZLR 296; JW Harris & Son Ltd v Demolition & Roading Contractors (NZ) Ltd [1979] 2 NZLR 166; Morton v Douglas Homes Ltd [1984] 2 NZLR 548; McCutcheon v New Zealand Law Society (High Court Auckland CP543/92, 23 November 1992 Wallace J and CA16/93, judgment 18 May 1993); Sew Hoy & Sons Ltd (In Receivership & in Liquidation) v Coopers & Lybrand [1996] 1 NZLR 392; Attorney-General v Prince and Gardner [1998] 1 NZLR 262; Barrett v Enfield London Borough Council [2001] 2 AC 550; South Pacific Manufacturing Co Ltd v NZ Security Consultants & Investigations Ltd [1992] 2 NZLR 282; Caparo Industries Plc v Dickman [1990] 2 AC 605; Gartside v Sheffield Young & Ellis [1983] NZLR 37; First City Corporation Ltd v Downsview Nominees Ltd [1990] 3 NZLR 265; Dorset Yacht Co v Home Office [1970] AC 1004; Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664; Boyd Knight v Purdue [1999] 2 NZLR 278; Hill v Chief Constable of West Yorkshire [1989] AC 53 (HL); Anns v London Borough of Merton [1978] AC 728

Authors and other references

Todd, The Law of Torts in New Zealand (3rd ed)

Representations

KPMG Legal, Wellington, for Appellant

B A Gibson, Wellington, for First Respondent

McGrath Vickerman, Wellington, for Second Respondent


all rights reserved