Carr v Gallaway Cook Allan

The decision of Carr v Gallaway Cook Allan [2016] NZHC 2065 [1 September 2016] follows the Supreme Court decision in Carr v Gallaway Cook Allan [2014] NZSC 75 [20 June 2014].

Introduction

This dispute arose from a failed property transaction centred on a dairy farm known as Big Sky Farm (BSF). Gallaway Cook Allan (GCA) acted for Mr Carr in the sale, which culminated in an Amended Settlement Agreement (ASA) designed to settle all disputes between the parties.

The SC decision concerned the validity of an arbitration agreement with a clause allowing appeal on questions of law and fact. The SC found there to be no statutory basis for allowing appeals on questions of fact, and ruled that the parties could not lawfully provide a contract allowing this.

In a 4-1 majority (with Arnold J dissenting) the SC allowed the appeal and set aside an earlier award made by the arbitral tribunal. Following this, the plaintiffs brought a claim in the High Court against their lawyers for negligence and breach of contract.

In the HC, Mr Carr argued that GCA’s failure to settle the transaction and ASA resulted in various losses totalling $33 million.  Shortly before trial, GCA conceded liability, but disputed the amounts at stake. The trial therefore went ahead to establish what the appropriate quantum was.

The judgment, in five parts, looks at the values and costs at stake in Mr Carr’s claim. It covers:
a)    The various water rights at the property;
b)    The market value of the property at the relevant date;
c)    The value of various assets in the agreement;
d)    The consequential costs incurred by the failure of the agreement;
e)    General damages, interest, and other costs.

As the defendant had admitted they were liable for the plaintiffs’ losses, the result was always going to be an award in favour of the plaintiffs. However, Thomas J ultimately awarded the plaintiffs a total of $9,532,842 – approximately 29% of the total claim quantum sought.

The award was resolved as follows:

Part I: Water rights

There were several sources of water available for BSF. They included the Sowburn Creek, the Taeiri River, and the Maniototo East Side Irrigation. Water rights were subject to water permit allotments and ongoing local community arrangements.

Each party called upon expert witnesses to give evidence on water availability. The case for the defence was that the BSF only had enough water availability to irrigate 878 hectares, whereas the plaintiffs contended that there was adequate irrigation to sustain a 1200 hectare milking platform. On the whole, Thomas J preferred  the plaintiff’s evidence.

Part II: Market value

Thomas J then turned to assess the market value of BSF at the relevant period, noting that the value of a dairy farm is derived from the production rates. Despite some management and interpersonal difficulties over the 2002-2008 period, it was evident that BSF was producing at a relatively high rate.

Expert valuation evidence was called from each party. The plaintiffs’ expert, Mr Mills, had his evidence peer reviewed by another expert Mr Crighton, who deemed Mr Mills’ valuation appropriate. Mr Mills valued BSF at $29,090,000.

However, Mr Mills’ evidence was criticised on several aspects. This included his use of a template from another property, erroneous reference to facilities not present at BSF, and the fact that he had been briefed by Mr Carr prior to his valuation.

For the defence, Mr Larmer valued BSF at $25,400,000 with sufficient water availability and $19,450,000 without. Another defence expert valuer Mr Armstrong put the values at $25,990,500 and $19,141,200 respectively.

Other factors affecting the valuation were the effect of Fonterra’s forecasting, tenders received for the sale of the property, and the sale of the nearby property Stationview.  Although Stationview was relatively similar to BSF, the sale price was not given great consideration by Thomas J.

Thomas J measured the loss involved by weighing the evidence of the value of BSF to Mr Carr, given his unique position in relation to his knowledge, experience and relationships with the property. This approach was favoured over the use of an investment value assessment. Following some discussion as to water availability, Thomas J concluded by finding that the market value of BSF was $24,949,152.

Thomas J resolved to adopt the value of damages “which is the most appropriate, fair and reasonable in this particular context to compensate the plaintiffs for not acquiring the assets”.

Although the plaintiffs had calculated damages at $27,941,090 (the “investment value” of $48,128,144 less the cost of the shares, land and buildings $20,187,054), the Court adopted a different approach.

Thomas J calculated the final measure of value for Mr Carr’s damages by deducting the liabilities the plaintiffs would have incurred ($19,700,000) from the value of BSF and shares ($28,295,144), resulting in a final award of damages of $8,595,144.

Part III: Costs incurred as a result of the failed ASA

The Court awarded Mr Carr $250,000 for losses incurred as a result of his need to continue the litigation, and in particular the need for a loan from South Canterbury Finance.

Mr Carr claimed other costs, including $85,000 owed to Mr Le Fleming and $60,000 owed to Mr Stewart Herron. These debts related to Mr Carr’s borrowing towards early litigation costs in attempting to enforce the ASA. The Court awarded $75,000 for the Le Fleming debt, but did not award any of the Herron debt as no evidence was provided in support.

Additional litigation costs were also claimed - $43,583 owed in fees to GCA, and $2,812 owed to Mr Les Taylor. The Court awarded $45,114 for the GCA/Taylor fees,

Mr Carr also claimed $395,437 in costs to Mr Carr’s accountant, Mr O’Connell. Of this amount, the Court found $18,000 was a conditional success fee and therefore not recoverable. Some discrepancies and lack of precision meant that the Court reduced the O’Connell claimable fees to $110,000.

The wasted costs of arbitration formed another part of Mr Carr’s claim. A total of $850,694 was sought. Part of this was $700,000 owed to GCA, and Thomas J found that as there was no obligation on Mr Carr to pay this to GCA, the amount was not lost. The remainder, comprising $66,952 and $81,105 for experts’ costs, was awarded to Mr Carr.

IV: Counterclaim, liabilities not assumed or incurred, general damages and interest

GCA counterclaimed against Mr Carr for misapplication of loaned funds. Of the amount claimed, the Court awarded $215,471 to GCA, deducting that amount from the damages award.

GCA was also able to counterclaim its share of the arbitrator’s costs, being a deduction of $97,198 from the damages.

GCA also pointed to liabilities not incurred by Mr Carr due to the failure of the ASA, totalling $919,,054. These included a sum received from Mr Humphries, finance on farm equipment, arrears of rent and rates, liquidators fees, and unpaid GCA attendances. The Court awarded the total to the counterclaim, to be offset from the damages.

Some debate was had on the appropriate amount of general damages. While GCA did not dispute that an award was appropriate, GCA challenged the $100,000 sought by Mr Carr. The Court found that $50,000 was an appropriate award for general inconvenience, distress, and disruption, and noted that this went beyond the levels appropriate in leaky building negligence cases.

When claiming interest, Mr Carr used a global amount on all individual heads of loss pleaded, from 31 May 2007. GCA disputed this, saying that it was too simplistic, and that each head of loss should be considered separately when assessing interest.

For ease of calculation the Court decided to award interest globally, based on an average interest rate of 6.5% for the period from 2007. This was awarded for the assets (from the date of payment, or from the invoice date in the case of money not yet paid). Interest was also awarded on the general damages sum, from the date of breach.

Interest was also awarded at the same rate for the amounts counterclaimed by GCA.

Total claim

The total amounts claimed were summarised as follows:

Loss of BSF

$8,595,144

Patearoa House

$136,000

Creek Block

$647,150

ASA cows

$458,100

Plant and Equipment

$250,000

Litigation and other costs

$628,171

General damages

$50,000

Sub total

$10,764,565

Less:
ASA expenditure

$919,054

Counterclaim

$215,471

50% arbitrator’s costs

$97,198


$9,532,842


Thomas J acknowledged that interest was yet to be calculated on those amounts, and that costs were yet to be agreed upon.

Conclusions

The complexity of the proceeding was vastly reduced by the fact that GCA accepted liability before the hearing. The effect of this was that the decision focused on value and evidence supporting amounts claimed rather than on tortious and contractual liability.

The Court rejected “investment value” rejected as the correct measure of damages, instead adopting a “market value” approach with an uplift to reflect the value of BSF to Mr Carr. However, instead of applying an uplift factor to an established value, the Court used Mr Mills’ valuation figures (described as having over-estimated water availability) as the uplifted value. Mr Carr may have benefited from a higher award of damages had his expert evidence been more independent and free from errors, and therefore treated more favourably by the Court.