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Law firm found negligent, breached duty of care in high-profile leaky building case

22 May 2023

| Author: Heidi Bendikson

Body Corporate 207624 v Grimshaw & Co [2023] NZHC 979 (Tahana J)

Breach of duty claims against law firm relating to advice on distribution of settlement proceeds – applicable principles – duty of care under contract and professional negligence – scope of duty – duty nexus question – contributory negligence – estoppel – betterment – standing – relevance of litigation funding agreement to current proceeding

The body corporate for the Spencer on Byron apartments in Takapuna had instructed Grimshaw & Co to act in its leaky building claim against its building contractors and North Shore City Council in 2007 (building defects dispute).

In 2010, Grimshaws drafted a conduct and distribution agreement (CDA) between the body corporate and those individual unit owners who had joined the proceedings as second plaintiffs.  Grimshaws had recommended individual unit owners join the proceedings because most defects related to the common property and under the Unit Titles Act 1972, the common property was owned by unit owners as tenants-in-common.

The CDA provided for net settlement proceeds to be divvied up between second plaintiffs only and put towards their share of repair costs. It did not refer to the body corporate or non-plaintiff owners in respect of their loss suffered in respect of the common property.

Over the course of the litigation, the Unit Titles Act 2010 (UTA10) came into force, providing for common property to be vested in the body corporate rather than unit owners.  Grimshaws amended the body corporate’s claim to reflect this change, but the CDA remained as drafted.

In seeking discovery, Grimshaws told approximately 25 non-plaintiff owners it was too late for them to join the proceedings, but that the body corporate had issued a claim on their behalf for all owners (including them) for the common property. Some non-plaintiff owners questioned why they were being levied by the body corporate for the proceedings, to which Grimshaws responded that they expected it related to the common property claim.

In 2013, Grimshaws advised the body corporate to pass a resolution approving the CDA. Following the settlement of the building defects dispute that same year, the body corporate obtained building consent and requested tenders for the repairs.

Grimshaws advised the body corporate to distribute funds only to second-plaintiff owners in accordance with the CDA. They later advised non-plaintiff owners that they were not entitled to proceeds but could apply for a refund of the body corporate levies relating to the litigation.

Non-plaintiff unit owners disputed the distribution arrangements, saying they were entitled to a share in the proceeds in proportion to their ownership interests for the common property, which was owned by the body corporate for the benefit of all unit owners. On Grimshaw’s advice, the body corporate filed interpleader proceedings in which (in 2015) it was found that 80% of proceeds should go to the body corporate with the remainder going to second-plaintiff owners.

Funds were distributed the following year. Works eventually commenced in 2018 under a fresh building consent and at a much higher cost than stipulated by the tenders provided in 2013.

The body corporate now claims the cost of interpleader proceedings and the increase in repair costs from Grimshaws.

Applicable principles –  whether Grimsahws owed a duty of care to body corporate to consider the CDA after UTA10 came into force – discussion of professional negligence precedent – discussion of precedent relating to ongoing obligation to consider terms of contract – discussion of scope of duty – High Court found Grimshaws owed a duty of care to review CDA in light of UTA10 and advise body corporate of any legal risks to it if CDA implemented – considered Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 – whether Grimshaw breached its duty of care – High Court found a competent  practitioner would have considered whether the body corporate could agree to a distribution mechanism that did not allocate any settlement proceeds to the body corporate – body corporate should have been advised of its mandatory repair obligations and obligation of even-handedness under UTA10 – whether Grimshaw’s breach of duty of care caused the damages claimed – whether alternative CDA would have been agreed (High Court found that, if competent advice was given, CDA could have been amended before 2013 and interpleader proceedings could have been avoided) – discussion on evidence as to whether breach caused delay – High Court found construction would have started in 2016 but for Grimshaw’s breach – considered duty nexus – whether particular causes of action too remote – High Court found body corporate entitled to recover only losses that were a consequence of delay – discussion of evidence as to whether there were other effective causes of loss (High Court found there were not) – whether body corporate failed to mitigate losses – High Court found that, if body corporate levying of non-plaintiffs was inappropriate, Grimshaws should have advised them as such in 2008 – High Court found body corporate did not act negligently in trying to mitigate losses – whether claim statute barred – High Court found that, as Grimshaw’s duty to advise on CDA was ongoing, claim not statute barred – discussion of quantum and betterment – discussion of standing  – High Court found change in membership since settlement did not impact standing to bring proceeding – whether plaintiff’s litigation funding arrangements should be disclosed to show which unit owners stood to benefit from current proceedings (High Court found they could not).

Held: Grimshaws liable to the body corporate for breach of contract and negligence.  Damages awarded to body corporate for interpleader costs and increased repair costs brought about by delay, less interest earned on settlement funds.

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