The Court of Appeal in Black & Ors v Lagoon Lodges Properties Limited & Ors [2016] NZCA 127 (PDF) recently dismissed an attempt by the solicitors for an issuer of securities to strike out a claim against them for losses suffered by the investors in those securities on the basis that the law firm could not owe duties of care to the investors who were not its clients.
The solicitors acted for the issues of securities in a Cook Island resort property investment. The solicitors received funds from the investors on trust. The investors were not eligible to invest in the securities unless they satisfied an exemption under the Securities Act 1978 for persons able to invest without a prospectus if they were experienced investors, eligibility to be confirmed by an independent financial advisor.
The law firm disagreed with advice from an interested financial advisor that the eligibility existed. The promotor of the investment directed the firm to advance the funds on trust it had to pay for the issue of shares in the investment company. The solicitors required an indemnity from the promoter before they would do this.
The solicitors failed in an application to the High Court to strike out the claim, although part of it was struck out as time barred. The solicitors appealed. The central argument was that the solicitors did not owe a duty of care to the investors who were not its clients. The Court accepted that it would only be in exceptional circumstances that a solicitor could assume a duty of care to a non-client. The solicitors asserted that such a duty of care would be novel, but the Court held this would not be a reason sufficient to strike out the claim; the issue of whether a duty arose would require the hearing of all facts at a trial.
The investors’ cross-appeal against the High Court’s striking out of part of the claim on the basis of limitation was also overturned by the Court of Appeal, as also being fact specific and therefore incapable of determination summarily.
The case illustrates the Court’s reluctance to dispose of claims on a summary basis, the success of the claim may well depend on factual findings which can only occur at a trial, even when the duty of care alleged is novel.
Given the solicitors had disagreed that the investors did satisfy the exemption, and disbursed the funds they held on trust only after receipt of an indemnity from their client, suggests that if a duty can be established, there may be grounds on which a court could find breach of that duty.