Sentencing by Ellen France, Harrison and White JJ in:

Sherwin Chan & Walshe Ltd (in liq)  and WHK (NZ) Ltd
v Sir Robert Jones and Yorgen Holdings Ltd  [2012] NZCA 474,  Court of Appeal

Counsel:

• LJ Taylor, OM Meech and JM Peterson for Apellants
• MP Reed QC and MG Colson for Respondents

Summary

In its judgment of 15 October 2012, the Court of Appeal dismissed Sherwin Chan and Walshe’s (SCWL) appeal against Whata J’s decision that SCWL pay Sir Robert Jones’ trust, damages of $4.285 million for breaches of professional duties which gave rise to liability in contract and tort. Judgment was also entered against Sherwin Chan and Walshe for interest and costs of nearly $900,000.

Background

Sherwin Chan and Walshe Ltd (SCWL) were the trust’s former accountants and tax advisers. In the course of acting for the trust they gave it negligent advice by failing to continually advise it about the effect of a discrete tax regime on annual increases in intercompany debt and by advising the trust to enter into a corporate restructuring transaction designed to eliminate that debt. The result was the trust incurred a substantial and unexpected tax liability. The trust sued SCWL for breach of contract and tort and sought an indemnity against its tax liability. SCWL admitted its negligence but denied liability. SCWL essentially said that they were able off-set the value of the benefits that had accrued to the trust which had come about as a result of their competent advice against the losses flowing from the negligent part of their advice and that that the advise received from the trust’s newly appointed tax advisers who advised on the mistake and also gave bad advice.

Whata J in the High Court did not accept SCWL’s contentions. In the context of the transaction as a whole the subsequent accountant’s advice did not break the link between SCWL’s advice and the resulting loss. Further, the trust was an innocent party that had relied on negligent professional advice. As a result the trust irrevocably changed its position and by doing so it was not required to take away the related benefits it received from the loss that was suffered, not unless the trust could be put into the position it would have been in, had the advice been correct. 

SCWL’s grounds of appeal

SCWL appealed the High Court decision on three grounds:

1. The trust had unnecessarily incurred a tax liability by relying on the unreasonable, negligent or wrongful advice given to it by its new tax adviser, Ernst & Young (EY) . Alternatively, EY's unreasonableness or negligence broke the chain of causation between the SCWL's negligence and the trust's adjusted liability to tax;
2. If SCWL had given timely advice to the trust of the potential tax liability, the trust necessarily would have incurred costs in eliminating its taxation exposure. Such costs should be offset against that liability; and
3. The benefit the trust obtained from the restructuring transaction completely offset

The damages award of $4.285 million.

The Court of Appeal decision

(1)    Causation

The Court of Appeal determined that SCWL’s negligence was the “operative or proximate cause” of the trust incurring the tax liability. The chain of liability was not broken by any later events.

SCWL’s contentions

The events relied on by SCWL was that the trust unnecessarily incurred an additional taxation liability of $1.667 million on annual repatriated dividend payments. It was contended that was because EY acted unreasonably, wrongfully or negligently by either;

(i) advising the trust to make voluntary disclosure to the CIR in the terms made;
(ii) it failed to pursue arguments available to it which would have reduced the liability and
(iii) it failed to advise the trust to challenge the CIR’s reassessment.

As a result EY’s unreasonableness, wrongfulness or negligence must be attributed to the trust; alternatively the tax adviser’s unreasonableness broke the chain of causation between SCWL’s negligence and the trust’s adjusted tax liability.

The Court of Appeal’s findings on this issue

SCWL’s focus on the trust’s voluntary disclosure to the CIR was misplaced. The issue was not whether the subsequent tax advisers advice to make voluntary disclosure was wrong, negligent or unreasonable but whether the trust’s additional tax liability of $1,667 million was caused by or was attributable to SCWL’s negligence. To resolve this issue based on previous authorities the Court focused on the nature and scope of SCWL’s duty and the influence of its breaches on the trust’s loss.

The scope of SCWL’s duty to the trust was to prepare the financial accounts (for 2003-2007); provide tax advice and prepare and file the tax returns ; and provide structural advice including a proposal to restructure in March 2007. SCWL’s retainer was a proactive one – to manage  the trust’s financial accounting, to ensure tax efficiency and compliance with the tax legislation. It was to advise the trust on the best course of action to efficiently manage its tax liability. It was obliged to protect the trust against the risk of paying more tax than it otherwise may have been liable to pay.

SCWL’s negligent failure to advise caused the continuation of the same type of lending arrangement and escalating levels of indebtedness, to incur a tax labiality which it would not have been otherwise imposed. It was a foreseeable consequence of that negligence that the CIR would reassess the intercompany lending to tax and adjust the trust’s liability. The trust voluntary disclosure had no material causative effect on its loss. It was one step in a process which culminated in the CIR’s decision to adjust the tax liability.

The trust could not reasonably be required to challenge the CIR’s adjusted assessment by litigating arguments which its advisers considered to be unsustainable. To do so could mean that the trust would expose itself to the real risk of incurring shortfall penalties, statutory interest liability and costs and damage to its reputation. It was not for the trust to have to second guess or question their subsequent tax adviser’s specialist advice in a technical and problematic areas of law. Further the trust did not have reason to prefer the conflicting opinions of SCWL which was admittedly negligent in its advice over a number of years concerning the inter-company lending.

Even if (contrary to the Court of Appeal’s view) the reasonableness inquiry extended to the adviser’s conduct, and Whata J was correct that EY erred in advising the trust that the loan had not matured, the Court of Appeal held that EY was exercising its professional judgment. The fact that its opinion might be proved wrong later did not equate with negligence or unreasonableness.

(2)    Costs

SCWL contended that its liability should be reduced to $1.286 million representing the costs which the trust would have incurred had it taken alternate steps (known as a counterfactual -a reconstructed or hypothetical set of facts to what actually occurred). The Court of Appeal rejected this, stating that the trust was not obliged to prove a negative (it would not have incurred costs to be offset against the loss). Nor was it bound to lead its own evidence to disprove a contingent hypothetical. The trust was entitled to take the view that it would not have incurred any costs which SCWL might properly set off against the normal measure.

(3)    Benefits

The Court of Appeal did not accept SCWL’s contention that a restructuring transaction (which took place in 2007) actually resulted in a benefit to the trust (a saving of $5.339 million) with the result that the trust’s claim against SCWL was completely off-set and the damages claim failed. SCWL could not say that the alleged benefit would not have been received but for its breach. Any benefit was an incident of the service which it provided, not a result of its omission to consider the CFC rules. The benefit was a separate or independent gain which was not to be offset; it was part of the bargain arrived at between the parties. Therefore, if the benefit was present on the facts, it would not be attributable to the breach. The Court of Appeal did not in any event, accept such benefit was ever available or indeed ever existed.

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