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Court of Appeal of New Zealand |
Last Updated: 2 February 2018
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IN THE COURT OF APPEAL OF NEW
ZEALAND
BETWEEN PREMIUM REAL ESTATE LTD
Appellant
AND MARK MONCRIEFF STEVENS, DEBORAH RUTH STEVENS AND
MELVA BEATRICE WALKER (AS TRUSTEES)
Respondents
Hearing: 25 September 2007
Court: O'Regan, Arnold and Wilson JJ
Counsel: M A Gilbert and P J Napier for
Appellant
W Akel and N M Alley for
Respondents
Judgment: 11 April 2008 at 11.30 am
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JUDGMENT OF THE COURT
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A The appeal against liability is dismissed.
REASONS OF THE COURT
Table of Contents
Para No.
Introduction [1]
Factual background [8]
Discussion [22]
Fair Trading Act
– misleading and deceptive conduct [23]
Breach of fiduciary
duty [57]
Damages [82]
Decision [101]
Introduction
[1] Mr and Mrs Stevens owned a valuable residential property in Auckland (through a family trust of which they and the remaining respondent were trustees). They sold the property to Mahoenui Valley Trust (Mahoenui) for $2.575m in April 2004.
[2] Before the transaction had settled, Mahoenui took steps to resell the property, advertising it with a price guide between $3.8m and $4.8m. In November 2004 Mahoenui sold the property for $3.555m, having undertaken some superficial improvement (such as repainting) in the meantime.
[3] The appellant, Premium Real Estate Limited (Premium), acted for the Stevens on the sale. Premium also acted for Mahoenui on the resale, although another agency also became involved. In particular, one of Premium’s agents, Ms Riley, brought the offer from Mahoenui to the Stevens, and discussed it with them. Soon after the offer was accepted, she was appointed by Mahoenui to act on the resale. Ms Riley had acted for Mahoenui’s principal, Mr Larsen, previously and knew that he was a property speculator who attempted to buy desirable properties at an undervalue and on-sell them soon after at a higher price. In addition, both of Ms Riley’s daughters had a professional association with Mr Larsen.
[4] The Stevens were most upset when they learnt what had happened. They issued proceedings against Premium seeking the return of the real estate commission on the sale ($67,050) and damages ($995,000, being the difference between the sale price ($2.575m) and a contemporaneous valuation of the property ($3.57m)). They alleged breaches of the Fair Trading Act 1986 (FTA), negligence, breach of contract and breach of fiduciary duty.
[5] They succeeded before Courtney J on one aspect of their FTA claim and on their breach of fiduciary duty claim: [2006] NZHC 1521; (2006) 11 TCLR 854. The Judge found that the value of the property as at April 2004 was $3.25m. She summarised her findings as follows:
[138] I have found that:
a) There was no breach of the FTA arising from Premium’s assessment of the value of 23D Beach Road, the marketing campaign or its conduct during the negotiations with Mahoenui;
[6] The Judge also awarded the Stevens interest at 7 per cent on the judgment sum and costs.
[7] Premium appeals against the Judge’s findings on liability, and against the damages awarded. The Stevens cross-appeal against the amount of damages awarded, and support the judgment on grounds other than those relied on by the Judge.
Factual background
[8] The Stevens wished to sell their cliff-top property at Beach Road on Auckland’s North Shore. On the property there was a substantial house, built in the 1970s. There were stunning 180 degree sea views from the property and it had a swimming pool. However, the site was unit titled, which limited its development potential to some extent. In September 2003 an adjacent property had sold for $3.2m. That property had a larger section and a tennis court, and was not on a unit title.
[9] In February 2004 Mrs Stevens contacted Premium. Two Premium agents, Brian and Lewis Guy, visited the property. The Stevens granted Premium a sole agency until the end of April 2004. Premium advertised the property for sale “by negotiation”.
[10] The Judge found that Mrs Stevens had told the Guys that she and her husband wanted $3m for the property (at [39]). She also found that Mr Lewis Guy (Mr Brian Guy does not seem to have played any significant part in the sale) considered that the property was worth somewhere in the mid to high $2m range (at [40]). In the course of discussing the property with interested parties Mr Guy said that the asking price was “around $3m”, “over $2.8m” or “$2.8m plus” (at [48]).
[11] Shortly after it went on the market, Ms Riley showed Mr Larsen over the property. As already noted, Mr Larsen was a property speculator or trader for whom Ms Riley (and other Premium agents) regularly acted on both the purchase and sale of properties. As at April 2004 Ms Riley had acted, or was acting, for Mr Larsen or associated entities in respect of eight property transactions. (After the sale at issue in this case, Ms Riley and other Premium agents acted for Mr Larsen on at least seven further transactions.)
[12] Ms Riley knew that Mr Larsen often purchased properties and then resold them within a short period at a substantial profit. She said in her evidence:
Over time I became familiar with his approach to the property market. Typically, he would buy properties on the basis that they would be his family home for his partner ... and himself. Mr Larsen was an astute buyer and was quite demanding. I would show him many properties before he would put an offer in on a property. Usually if his offer on a property was accepted, he would get a valuation report for the property. He sometimes asked me to organise a valuation, but he always directed which valuer to use... . Often Mr Larsen would get me to meet the valuer at the property to provide him or her with access. He used valuations as a basis for finance or to trade the property. Usually, after a short period of time and perhaps after he had made some alterations to the property, he would re-list it for sale.
[13] In addition, one of Ms Riley’s daughters was Mr Larsen’s personal assistant and another, an architect, had undertaken design work for him on his beach house.
[14] By early March no offers had been received. Mrs Stevens and Mr Guy discussed progress. Mr Guy suggested a change to the marketing approach, namely, advertising the property for sale at “$2.7m or over”. The property was advertised in the North Shore Property Press in this way in March and April. An offer of $2.2m was received. The Stevens counter-offered at $2.8m, but this was rejected and nothing further developed.
[15] On 5 April the Stevens entered into an agreement to buy a residential property in Parnell. The agreement was conditional on the Stevens selling their Beach Road property for $3m or such lesser price as they accepted.
[16] About this time it was agreed that the property would be put up for tender, with a closing date of 12 May. Then, on 23 April, Ms Riley presented an offer from Mahoenui. It was for $2.525m.
[17] The Stevens were unhappy with the offer. Mrs Stevens asked Ms Riley whether Mr Larsen would pay more. Ms Riley said that Mr Larsen was determined and not very flexible. She said that there might be a little more money, but not much.
[18] There was some dispute about exactly what happened then. The Judge found (at [73]):
(a) The Stevens intended to counter offer at $2.8m. This finding was based on a contemporaneous hand-written note of Mrs Stevens;
(b) Ms Riley advised the Stevens that $2.575m was the most that Mr Larsen would pay for the property;
(c) Mrs Stevens indicated to Ms Riley that the Stevens would accept $2.575m if that were offered.
[19] Ms Riley presented an amended offer from Mahoenui to the Stevens for $2.575m, which they accepted. The parties entered into an agreement for sale and purchase dated 26 April 2004. The agreement was subject to finance. Mr Larsen engaged a firm of valuers, Sheldons, to provide a valuation. They provided a written report dated 6 May 2004, which valued the property at $3.57m. The agreement became unconditional on 17 May 2004, with settlement due in July 2004. The tender date, which had been extended to 19 May 2004, passed with no other offers being made.
[20] In June 2004, Mr Larsen advised Ms Riley that he wished to resell the property. She was appointed as Mahoenui’s agent on the resale. Advertising of the property commenced in early July, before the Stevens/Mahoenui transaction had settled, with a price guide of between $3.8m and $4.8m. In November 2004, after an international marketing campaign, Mahoenui sold the property for $3.555m to buyers from Hong Kong. The sale was treated as a joint agency sale.
[21] At no stage in the process did Ms Riley tell the Stevens that Mr Larsen was a property speculator or trader. She did not tell them about the nature of her relationship with Mr Larsen or what she knew of his approach to property transactions. She did say that she had dealt with Mr Larsen previously and that despite his “scruffy” appearance he had the money to buy the property. She also said that Mr Larsen and his wife were interested in the property because he was finding it too onerous to travel constantly from their home at Karaka to his office in Takapuna. Ms Riley said that she would have told the Stevens what she knew of Mr Larsen had they asked.
Discussion
[22] We propose to deal first with the issues relating to liability, and then to address damages.
Fair Trading Act - misleading and deceptive conduct
[23] The Stevens had alleged that the appellant had breached both ss 9 and 14(1)(b) of the FTA. Although numerous particulars were given, there were two principal aspects to the FTA cause of action. The first related to the sale, marketing and appraisal of the property, and the second to an alleged conflict between Premium’s interests and those of the Stevens, which Premium did not disclose.
[24] As to the former, the Stevens alleged that Premium had:
(a) Incorrectly assessed the value of the property;
(b) Marketed the property to the wrong market;
(c) Misled the Stevens concerning the operation of the tender process;
(d) Advised or encouraged the Stevens to accept the Mahoenui offer;
(e) Failed to enquire as to the true value of the property once put on notice of it by Mahoenui’s marketing campaign.
The Judge found on the basis of expert evidence that the value of the property in April 2004 was $3.25m, which was considerably in excess of what Mr Lewis Guy considered that the property was worth. But the Judge rejected these FTA claims for various reasons.
[25] However, the Stevens also alleged that Premium had committed deceptive or misleading conduct in breach of s 9 of the FTA, in that it failed to disclose to them what it knew of Mr Larsen and his property dealings.
[26] The Judge found that Ms Riley (at [101]):
... had a high degree of insight into how Mr Larsen operated. In particular, her experience had showed her that he was likely to offer a figure below the asking price but obtain a valuation that indicated a higher value. He was likely to suggest that he was purchasing a property for use as a personal residence but instead re-list it soon after purchase at a higher price. He was likely to use a valuation obtained for finance purposes in future negotiations to support a higher asking price.
[27] The Judge held that had Ms Riley disclosed what she knew about Mr Larsen, Mrs Stevens (and any vendor in her position) would have thought that any offer that Mr Larsen made was likely to be below the market value of the property. This knowledge would have led the Stevens to reconsider their position (at [106]). The Judge concluded:
[109] Looking at the relevant circumstances, I conclude that Premium’s failure to disclose what it knew about Mr Larsen concealed information that the Stevens would have regarded as important and which would have affected their view of the offer. I therefore find that, in the circumstances of this case, Ms Riley’s failure to tell what she knew about Mr Larsen did amount to misleading and deceptive content.
[28] Mr Gilbert (who did not appear at trial) did not challenge the Judge’s summary of the relevant legal principles (at [27] - [29]). Rather, he argued for Premium that the Judge was wrong because:
(a) Both the Stevens and Premium considered that the market value of the property was higher than Mahoenui’s offer. Premium did not mislead the Stevens into thinking otherwise;
(b) In any event, the non-disclosure was not causative of loss. Mahoenui’s offer was the best available at the time. The Stevens had purchased elsewhere and needed to sell to complete the purchase of their new home. They made their own decision to sell despite their belief that the property was worth more.
[29] Mr Akel for the Stevens sought to support the Judge’s finding that there was a breach of the FTA on grounds other than those relied on by the Judge. He argued that the Judge erred in the approach which she took to the FTA claim because she considered each of the matters referred to in [24] above separately and in isolation, rather than looking at them in context as part of a course of conduct.
[30] As to Mr Gilbert’s first proposition, it does not accurately reflect the facts. The Judge found that the Stevens believed that the property was worth at least $3m but that Mr Guy thought it was worth less than that (at [103]). In particular, as noted at [10] above, the Judge found that Mr Guy considered that the property was worth in the mid to high $2m range. Mahoenui’s revised offer was at the lower end of that range. Further, the Judge found that both Mr Guy and Ms Riley advised the Stevens that the Mahoenui offer was worth considering (at [103]), which suggests that they thought the price was a reasonable one.
[31] But, even if the proposition were factually correct, it would not meet the logic of the Judge’s analysis. “Conduct” is defined in the FTA to include an omission to act (s 2). When discussing Mahoenui’s offer with the Stevens, Ms Riley made various observations about Mr Larsen. She said, for example, that she had dealt with him a few times previously; that despite his “scruffy” appearance, Mr Larsen was able to pay the purchase price; that he was a determined and not very flexible person; and that he would increase his offer only by a small amount. But Ms Riley did not advise the Stevens of other aspects of what she knew of Mr Larsen and his activities that were material to the price that he was prepared to offer and to the Stevens’ consideration of any offer. For example, she did not advise the Stevens that Mr Larsen was a “property investor and trader”, as she described him in her evidence. She did tell them that Mr Larsen wanted the property to live in as he was finding the travelling from his then home at Karaka to his office too onerous. But she did not disclose that part of Mr Larsen’s purchasing strategy was to create the impression that he wanted a property to live in, then, once he had acquired it, to on-sell it quickly (a strategy of which she was aware, as she acknowledged in her evidence). So, Ms Riley told the Stevens only part of what she knew about Mr Larsen.
[32] The effect of Ms Riley’s non-disclosure (or partial disclosure) was to facilitate Mr Larsen’s purchasing strategy. The Stevens were left with the impression that Mr Larsen was interested in the property as his personal home whereas the reality was that he was interested in it for the purposes of deriving a quick profit from a rapid resale.
[33] As noted at [27] above, the Judge considered that the information which Ms Riley had but did not disclose was relevant to the Stevens’ decision-making, and would have been so to any reasonable vendor in their position. This particular aspect of the Judge’s reasoning was not challenged in argument, and we consider it to be right.
[34] As to Mr Gilbert’s second proposition concerning causation, we note first that, although the Stevens had entered into a contract to buy another property in Parnell, that contract was conditional on the sale of the Beach Road property for $3m or such other sum as they might accept. Had they known of Mr Larsen’s background and not wanted to accept his offer they were free (as a matter of contract) to decide not to proceed with the Parnell purchase and to remain in their Beach Road property.
[35] Mr Gilbert submitted that:
The only reasonable inference on the evidence was that the Stevens would have accepted the offer; knowledge of Mr Larsen’s modus operandi would simply have confirmed what the Stevens already knew, namely that the price he was offering was below what they and Premium considered to be the market value.
[36] This raises the question whether, as a matter of fact, the misleading conduct found by the Judge contributed to any damage suffered by the Stevens. That depends on what the Stevens would have done had they been given the undisclosed information.
[37] The Judge’s findings on this aspect are not entirely clear. The Judge said (at [106]) that had Ms Riley disclosed what she knew about Mr Larsen, the Stevens would have concluded that any offer made by Mr Larsen was likely to be below the market value of the property. This would have reinforced their unhappiness about Premium’s appraisal and marketing of the property and would have led them “to a nervous reconsideration ... of their position”. Later, when dealing with relief, the Judge said that if the Stevens had not sold to Mahoenui, they would have retained the property, which, she had found, was worth $3.25m (at [125]). It is implicit in the Judge’s analysis, then, that the Stevens’ “nervous reconsideration” would have led them to decide not to sell to Mahoenui but to retain the property and abandon the Parnell purchase.
[38] The Judge’s analysis was based on the following passages from the evidence. The first is from Mr Akel’s re-examination of Mrs Stevens:
- Now the last part of My Friend’s questioning to you this morning has been with regard to the transactions that are referred to at the end of your brief of evidence involving Mr Larsen. You said in your evidence that you were never told of any of these transactions?
- That’s correct.
- If at the time of the sale of your home you had been told of these transactions what, if anything, would you have done?
- Well I think that if I had been told that Mr Larsen was a trader and an investor in property that I probably wouldn’t have signed, well I know I wouldn’t have signed the agreement and I suppose if I had signed the agreement and found out I would have called my lawyer. I[t] would have kind of rung alarm bells if I knew the guy was such an expert I suppose, yeah.
- Would you have considered taking any other steps with regard to the offer he put forward to purchase the property besides not signing the agreement?
- I probably would have been scared off personally because I wouldn’t have been anywhere near his experience. That’s kind of again why you have an agent I suppose and he helps and negotiates for you and we’re not the best negotiators and I probably would have been frightened.
[39] As this evidence was elicited on re-examination, the Judge allowed Premium’s counsel, Mr Napier, to cross-examine further. The following exchange occurred:
- In answer to the question from My Learned Friend as to what you would have done had you known Mr Larsen was a trader in property you said you wouldn’t have entered into the agreement for sale and purchase didn’t you?
- If I had known Mr Larsen was a dealer in property and investor I probably wouldn’t have entered yes.
Q. Why?
[40] Mr Gilbert said that, as this evidence was elicited in re-examination, it was unsatisfactory and should have been rejected by the Judge. We do not agree. There does not appear to have been any objection at the time and Mr Napier was given, and took, the opportunity to cross-examine further after Mr Akel’s re-examination. Accordingly, we consider that the Judge was entitled to have regard to the evidence.
[41] The evidence supports the Judge’s finding that, had they known all the facts, the Stevens would have reconsidered their position. But that does not mean that they would have refused to sell to Mahoenui (or to anyone else) and would have retained the property, as is implicit in the Judge’s findings on relief. Based on what Mrs Stevens said, the more likely option was that they would have extended the sale period, in the hope that that would have produced a better offer.
[42] We return to this aspect when we discuss relief. It is sufficient to say at this stage that we do not agree with Mr Gilbert that the only reasonable inference on the evidence was that the Stevens would have proceeded with the sale to Mahoenui. The Stevens considered that the property was worth more than Mahoenui offered, but the market was, on the face of it, telling them otherwise. Understandably, this would have caused them to doubt their view, especially as both Mr Guy and Ms Riley urged them to consider Mahoenui’s offer. Had they known the true position, they would have been reinforced in their view as to the value of the property, which was likely to have led them to reassess their sale strategy and to reject Mahoenui’s offer or to counter-offer at a higher price.
[43] To summarise, then, whether deliberately or not, Ms Riley created a false impression in the minds of the Stevens by telling them only part of the story. Had they had full information, the Stevens would have reconsidered their position. In these circumstances we consider that the Judge was correct to conclude that Premium was in breach of s 9 of the Fair Trading Act.
[44] Accordingly, we reject this aspect of the appeal.
[45] Before leaving the FTA claim, however, we must address Mr Akel’s submission supporting the judgment on other grounds. While we do not need to deal with it in terms of liability given the conclusion just expressed, it may be relevant to the assessment of damages.
[46] Mr Akel posed the issue for determination in this way:
Was the overall course of conduct objectively speaking such that it misled and deceived the Stevens into selling their property at a gross under-value?
[47] There is a question as to whether this submission should have been made in the context of a cross-appeal rather than a notice to support the judgment on other grounds, given that it may affect the assessment of damages. However, we will address it on its merits.
[48] Mr Akel’s formulation of the issue raises the question of the reach of s 9. Section 9 is undoubtedly a broad provision, but it does have limits. Elias J made this point, albeit in a different commercial context, in Des Forges v Wright [1996] 2 NZLR 758 at 764 (HC):
Section 9 is not to be turned into a general warranty by a vendor of the expectations of the purchaser.
Similarly, s 9 does not provide a mechanism to deal with every situation in which parties consider that they have suffered loss as a result of accepting, or being influenced by, the (mistaken) views of those acting for them. Decisions that have proved unwise in hindsight, and against which other advisors might have counselled, may well cause regret, but they will not necessarily be capable of remedy through s 9.
[49] Mr Akel is right that in a case of this type the conduct as a whole should be considered rather than discrete elements of it. But we consider that the Judge did adopt an overall approach, in that she recognised that the key element of the various complaints against Premium (excluding that concerning the tender process) lay in Premium’s view of the value of the property (at [61] and [76], for example). Mr Guy considered that the property was worth in the mid to high $2m range, and that view affected what he subsequently did in terms of presenting the property and the advice he gave the Stevens. Everything flowed from that.
[50] As the Judge rightly said, Mr Guy’s view of the value of the property was a matter of opinion. There has been some debate about whether, and if so in what circumstances, expressions of opinion can be said to constitute misleading or deceptive conduct for the purposes of s 9. The position is discussed in McGechan J’s judgment in Phillips v King Pie New Zealand Limited HC AK CP165/98 17 September 1999 at 6–7; Brooker’s Gault on Commercial Law (looseleaf) at FT9.30; and Burrows, Finn and Todd Law of Contract in New Zealand (3ed 2007) at [11.3.2(a)(ii)].
[51] The orthodox or narrow view is that there must be some misrepresentation of a past or current fact to found liability. So, consistently with the common law as to misrepresentation, a person is liable as a result of the expression of an opinion which subsequently proves to be incorrect only where he or she does not honestly hold the opinion at the time it is expressed or (possibly) if there is no reasonable basis for it. That is, an expression of opinion may be said to involve two representations of fact – one that it is honestly held and another that there is a reasonable basis for it. The wider view is that s 9 should be approached in accordance with its terms, untrammelled by concepts such as “misrepresentation” imported from the law of tort or contract. The focus should simply be on asking whether in all the circumstances the impugned conduct was misleading or deceptive.
[52] The Judge adopted the orthodox view. She held that there was no liability because there was no suggestion that Mr Guy’s opinion was not honestly held, and he had a reasonable basis for it (at [43]).
[53] As we have said, the wider view rejects the need for any misrepresentation as that term is traditionally understood in the law. Presumably on this view, all that is necessary to establish liability is that the requirements set out in AMP Finance NZ Ltd v Heaven (1997) 8 TCLR 144 at 152 (CA) be met – ie, the plaintiff must, reasonably, be misled by conduct capable of being misleading. Mr Akel’s argument was that, looking at the matter objectively, Premium’s conduct misled the Stevens into thinking that the value of their house was less than it was, and they suffered loss as a consequence.
[54] While the wider view has the attraction of simplicity, there are difficulties in applying it in an unconstrained way to the expression of opinions. A person may, in trade, express an opinion that is honestly held and reasonably based at the time it is expressed or relied upon but which subsequent events show to be wrong. In this respect, an expression of opinion may be unlike a misrepresentation of fact, which will be capable of being shown to be wrong at the time it is made. It is difficult to see why an honestly held, reasonably based opinion should be actionable under s 9 simply because it is not borne out by subsequent events. The person expressing the opinion may have done all that could sensibly be done to reach an informed view but would still be liable, even if the subsequent events or circumstances were unforeseeable. As it is not possible to contract out of the operation of the FTA (at least directly - see Burrows, Finn and Todd at [7.5.7]), the implications of imposing liability on the basis of the expression of an opinion that is not demonstrably wrong at the time it is expressed or relied upon are significant. Accordingly, we consider that there is a fundamental difference between asserting a present fact and expressing an opinion, at least in the present context.
[55] In our view, to impose liability on a real estate agent on the basis urged by Mr Akel in the circumstances of this case would be to cast the net of liability under s 9 too widely. Accordingly we reject this part of Mr Akel’s submission supporting the judgment on other grounds.
[56] Mr Akel also sought to support the judgment on the grounds that the Judge was wrong to reject the Stevens’ claims that Premium had breached the duty of care it owed the Stevens in tort and contract. That argument would also have been more appropriately brought by way of cross appeal rather than a notice supporting the judgment on other grounds. In any event, Mr Akel made very brief submissions on this aspect, and we do not consider that there is any substance to them.
Breach of fiduciary duty
[57] The Judge’s findings in relation to breach of fiduciary duty are summarised in the following extracts from her judgment:
[115] The duty of disclosure exists in respect of both actual and potential conflicts: Phipps v Boardman [1966] UKHL 2; [1967] 2 AC 46 at 124 per Lord Upjohn. In my view, the relationship between Ms Riley and Mr Larsen created an actual conflict between the Stevens’ interests and those of both Premium and Mr Larsen. There was no evidence to suggest that Ms Riley did prefer Mr Larsen over the Stevens or that she provided Mr Larsen with information which might have assisted him at the Stevens’ expense. However, the extent to which Ms Riley benefited from her relationship with Mr Larsen inevitably raises doubts over Premium’s ability to give its undivided loyalty to the Stevens in relation to this particular transaction.
[116] Ms Riley enjoyed an ongoing relationship with Mr Larsen, which was significant for her in a financial sense. She was in a very good position to assess the likely purpose for which Mr Larsen might be purchasing the property. If it was for the purposes of investment then Ms Riley would almost certainly benefit from that fact through the re-listing of the property. I have already found that the circumstances were such that this must have been a real possibility and one that was apparent to Ms Riley, regardless of what Mr Larsen said.
[117] I am therefore satisfied that a conflict existed that required Ms Riley to disclose the extent of her relationship with Mr Larsen. She was not required to speculate as to his purpose in purchasing but she should have provided sufficient information for the Stevens to decide whether Mr Larsen was someone they wanted to deal with.
[58] While accepting that Premium owed fiduciary duties to the Stevens, Mr Gilbert argued that it was an implied term of the contract of agency between them that Premium was not required to disclose information that it acquired in confidence from other principals. The information about Mr Larsen and the way in which he approached property transactions was, Mr Gilbert said, confidential information gained by Premium as a result of its work for him. Mr Gilbert relied on r 13.9 of the Real Estate Institute of New Zealand Code of Ethics (the REINZ Code), and also on Kelly v Cooper [1993] AC 205 (PC) and a decision of the High Court of Singapore which applied Kelly, ERA Realty Network Pte Ltd v Puspha Rajaram Lakhiani [1999] 1 SLR 190.
[59] We make two preliminary points:
(a) First, we note that this line of defence to the breach of fiduciary duty claim was not foreshadowed in the statement of defence. Nor did the Judge did address it, which presumably indicates that it was not advanced at trial. This creates obvious difficulties for us.
(b) Second, Mr Gilbert’s submission that the Judge had found that the appellant was in breach of fiduciary duty because it failed to disclose to the Stevens its “knowledge of Mr Larsen’s modus operandi” does not, in our view, accurately reflect the basis for the Judge’s finding. The Judge found that Premium faced a conflict of interest between its own interests (as a result of its on-going relationship with Mr Larsen) and those of the Stevens. This meant that Premium had to disclose its relationship with Mr Larsen to the Stevens (see [117] and [138](d)). While we accept that in disclosing that relationship, Premium would inevitably have revealed that Mr Larsen was a person who bought and sold property regularly (ie, that he was a property speculator or trader), we do not accept that Premium would also have been required (in this context) to disclose the details of the way in which Mr Larsen worked. The Judge said (at [117]) that Ms Riley was not required to speculate on Mr Larsen’s purpose for purchasing the Stevens’ property. We accept that the Judge did appear to suggest that the Ms Riley was obliged to disclose all she knew about Mr Larsen when she referred to Ms Riley disclosing “her knowledge about Mr Larsen” (see [120]). But it is clear from the judgment overall that it was the non-disclosure of the relationship that was the basis of the Judge’s liability finding on the breach of fiduciary duty claim.
[60] Accordingly, Mr Gilbert’s argument was not addressed to the Judge’s principal concern, namely conflict of interest. Indeed, Mr Gilbert did not challenge that aspect of the Judge’s reasoning in any effective way. Despite this, we will address Mr Gilbert’s argument as he presented it, and the authorities upon which he relied.
[61] We begin with Kelly. The plaintiff instructed a firm of real estate agents to sell his beachfront property. The owner of an adjacent beachfront property (the neighbouring property) instructed the same firm to sell his property about the same time. The firm showed both properties to a prospective purchaser, a wealthy American, Mr Ross Perot. Mr Perot made an offer to buy the neighbouring property, which the owner accepted. Mr Perot then made an offer on the plaintiff’s property, which the plaintiff ultimately accepted. The firm did not advise the plaintiff before he accepted the offer that Mr Perot had already bought the neighbouring property. When he learnt of this, the plaintiff refused to pay the firm’s commission and issued proceedings alleging that the firm had breached their duty to him in failing to disclose material information.
[62] The Privy Council accepted that the information that Mr Perot had purchased the neighbouring property was material to the plaintiff’s assessment of the price at which he was prepared to sell his property. But their Lordships held that the real estate firm was under no duty to disclose this information to the plaintiff. Delivering their Lordships’ advice, Lord Browne-Wilkinson said (at 213-214):
In the view of the Board the resolution of this case depends upon two fundamental propositions: first, agency is a contract made between principal and agent; second, like every other contract, the rights and duties of the principal and agent are dependent upon the terms of the contract between them, whether express or implied. It is not possible to say that all agents owe the same duties to their principals: it is always necessary to have regard to the express or implied terms of the contract. ...
In a case where a principal instructs as selling agent for his property or goods a person who to his knowledge acts and intends to act for other principals selling property or goods of the same description, the terms to be implied into such agency contract must differ from those to be implied where an agent is not carrying on such general agency business. In the case of estate agents, it is their business to act for numerous principals: where properties are of a similar description, there will be a conflict of interest between the principals each of whom will be concerned to attract potential purchasers to their property rather than that of another. Yet, despite this conflict of interest, estate agents must be free to act for several competing principals otherwise they will be unable to perform their function. Yet it is normally said that it is a breach of an agent’s duty to act for competing principals. In the course of acting for each of their principals, estate agents will acquire information confidential to that principal. It cannot be sensibly suggested that an estate agent is contractually bound to disclose to any one of his principals information which is confidential to another of his principals. The position as to confidentiality is even clearer in the case of stockbrokers who cannot be contractually bound to disclose to their private clients inside information disclosed to the brokers in confidence by a company for which they also act. Accordingly in such cases there must be an implied term of the contract with such an agent that he is entitled to act for other principals selling competing properties and to keep confidential the information obtained from each of his principals.
Similar considerations apply to the fiduciary duties of agents. The existence and scope of these duties depends upon the terms on which they are acting.
[63] This reasoning was applied in ERA Realty Network.
[64] We make the following comments about Kelly.
[65] First, the Privy Council did not go in any detail through the analysis typically undertaken where a term is to be implied into a contract (see Burrows, Finn and Todd at [6.3]). Their Lordships may have regarded the outcome as so obvious that such an analysis was unnecessary. More importantly, it has been suggested (in Butler Equity and Trusts in New Zealand (2003) at [14.3.5(3)]) that:
...the implication of a term to relieve real estate agents of the need to avoid a conflict is contrary to fiduciary law. In many cases, the courts have emphasised that implied exemptions from the scope of fiduciary duties will not be permitted – it is for the fiduciary to specifically negotiate for them. This is consistent with the notion of fiduciary law as a default system. However, the effect of Kelly is to reverse the negotiating stance. The principal, who is entitled to expect undivided loyalty, will not receive it unless the agent specifically agrees.
(Footnotes omitted.)
[66] It is, of course, well accepted that contractual and fiduciary relationships may co-exist and that parties may, by contract, modify (to the point of eliminating) the fiduciary duties that might otherwise apply (see, for example, Amaltal Corporation Ltd v Maruha Corporation [2007] NZSC 40; [2007] 3 NZLR 192 at [19] - [21] (SC), AUAG Resources Ltd v Waihi Mines Ltd (1995) 5 NZBLC 103,601 at 103,604 (CA) and Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963, especially at [276] - [281]). While agreements to modify or eliminate fiduciary duties arising from particular relationships should not readily be implied, we accept that the structure of relevant markets may require some such implication, as occurred in Kelly. The need for an approach that recognises that real estate agents act for vendor principals who are selling properties in competition with one another seems obvious enough. But how the relevant principle is articulated, and how it is applied to particular facts, are matters that are likely to be more contentious. The Privy Council’s decision in Kelly has been taken to suggest an undesirable “downscaling” of fiduciary duties in a commercial context (see Getzler “Inconsistent Fiduciary Duties and Implied Consent” (2006) 122 LQR 1; and Brown “Divided Loyalties in the Law of Agency” (1993) 109 LQR 206 at 209).
[67] Second, as Mr Akel argued, Kelly did not, like the later case of Hilton v Barker Booth & Eastwood [2005] UKHL 8; [2005] 1 WLR 567 (HL), involve an agent (in that case a solicitor) acting for opposing parties on the same transaction. Rather, the Privy Council was able to treat the two agencies as separate and distinct. As one commentator put it, “the Privy Council’s analysis was that the unrelated agencies were to be kept in water-tight compartments” (Brown at 208). Further, Kelly did not involve an alleged conflict between the real estate firm’s interests and those of its client(s).
[68] By contrast, in Hilton a firm of solicitors acted for a builder/developer client who was undertaking a development. Another client of the firm, who had been declared bankrupt, convicted of fraud and recently released from jail, wished to purchase the completed development. (The firm knew of the purchaser’s past because it had acted for him on the prosecution.) The firm agreed to act for both parties on the transaction. It did not advise its builder/developer client of what it knew of the purchaser’s background, nor did it advise him that the firm had advanced its own funds to the purchaser to enable him to pay the deposit. The purchaser defaulted and the builder/developer was ultimately made bankrupt as a consequence. He sued his solicitors, alleging that they had breached their duty to him by failing to advise him of the purchaser’s background. He succeeded in the House of Lords.
[69] Lord Walker of Gestingthorpe delivered the leading opinion. In relation to the facts that the purchaser had been adjudicated bankrupt, convicted of fraud and had served a term of imprisonment, Lord Walker said that this information was not “confidential” as it was a matter of public record. But his Lordship said that to disclose it would have been a breach of the solicitors’ obligation to act in the best interests of their client (ie, the purchaser) (at [33] - [34]; see also Lord Scott of Foscote at [7]). The solicitors had put themselves in a position where they had irreconcilable duties to both of their clients, as well as a personal interest (as a result of the loan made to the purchaser), and they had to accept the consequences of that (at [41]; see also Lord Scott at [8]).
[70] As to ERA Realty Network, that case involved an alleged conflict of interest on the part of a real estate agent. The defendants appointed the plaintiff real estate company as one of their agents on the sale of an apartment which they owned in an apartment building. One of the company’s agents approached the defendants on behalf of a purchaser who, the agent disclosed, was her sister in law. The defendants granted the sister in law “and/or nominee” an option to purchase the apartment. A property development company (which already owned two other apartments in the building) ultimately exercised the option as nominee of the sister in law. The sister in law was an executive officer of the property development company and the agent’s husband was one of its directors. He was the “controlling mind” behind the purchase.
[71] As it happened, there was potential for an en bloc sale of the apartments in the building. Sold as part of an en bloc transaction, the defendants’ apartment would have realised more than it realised when sold on a “stand alone” basis. The defendants refused to pay the plaintiff’s commission, on the basis that the agent had not disclosed her relationship with the ultimate purchaser and had failed to advise the defendants of the en bloc sale potential. The real estate company sued for its commission. It failed at trial but succeeded on appeal.
[72] On the appeal, the Court accepted that the agent knew of the property company’s interest in purchasing the apartment and knew also of the en bloc sale potential. Having cited Kelly, the Judge said that the agent was not obliged to disclose her relationship with the initial or ultimate purchaser, nor was she required to divulge the ultimate purchaser’s plans for the property. The defendants had advised that they were looking for a price of $3.8m for the apartment. The agent had presented an offer of $3.6m, which the defendants had accepted. The Judge said that there was nothing wrong with this and that to uphold the defendants’ arguments would not reflect the reality of market practices within the real estate industry in Singapore.
[73] This appears to be a case where there was a conflict between the agent’s personal interests and those of the clients. Despite that, the Court found that the agent was not in breach of fiduciary duty. While the fact situation is analogous to that in the present case, we do not see the decision as providing assistance. We note that Butler (at [14.3.5(2)]) contrasts the decision with earlier New Zealand authority, in particular Galloway v Pedersen (1915) 34 NZLR 513 (SC), Brown v Thornes [1920] 39 NZLR 306 (SC) and Christie v Harcourt & Co [1973] 2 NZLR 139 (SC). Further, the decision reflects market practices in Singapore, which seem to differ from those in New Zealand.
[74] Turning to the REINZ Code, Mr Gilbert relied on r 13.9. It provides:
13.9 Information communicated to a member by a principal, or otherwise received by a member on behalf of a principal, is confidential, and must not be disclosed unless permitted by the principal, or by operation of law.
[75] There are other relevant rules, however. In particular:
- 13.8 Whenever a conflict of interest arises, it shall be the duty of the member to disclose the conflict of interest to the member’s clients.
...
13.12 A member shall render services with absolute fidelity, honour and courtesy.
13.13 A member must be fair and just to all parties in negotiations and in the preparation and execution of all forms and agreements, and protect the public against unethical practices in connection with real estate transactions.
[76] Given that the focus of the Judge’s reasoning was on conflict of interest, it is r 13.8 that has greater relevance than r 13.9.
[77] But even if the use of confidential information was the issue, so that r 13.9 was relevant, we do not consider that Mr Gilbert has made out his case. He submitted that the information about who Mr Larsen was and the way he operated was confidential and could not properly be disclosed. But it is difficult to see how the information that Mr Larsen was a property investor and trader (or a property speculator) could be regarded as confidential. Ms Riley did not consider that it was confidential. She said in her evidence that she did not provide the Stevens with further details about Mr Larsen because they did not ask. But she made it clear that, had they asked, she would have told them what she knew. When Mahoenui was selling the property, Ms Riley did advise some prospective purchasers that Mr Larsen was a property speculator.
[78] However, as Mr Gilbert submitted, Ms Riley’s view cannot be determinative, so we must consider the matter more broadly. The evidence showed that Mr Larsen used the services of numerous real estate agencies, and had completed many property transactions, both in a personal capacity and through the various entities he operated. Presumably he was well known in the Auckland real estate world. The property transactions in which he had been involved over time were a matter of public record. In this respect, the information concerning his occupation was public information, like the information that the solicitors in Hilton failed to disclose.
[79] Mr Gilbert argued that even if the information was “public”, the fact that Ms Riley knew it as a result of her work for Mr Larsen meant that she was obliged to treat it as confidential. But that view is not consistent with what was said in Hilton at [34].
[80] We do accept, however, that the information as to Mr Larsen’s method of working may have been confidential information, although that may depend on Mr Larsen’s attitude to it and he did not give evidence at trial. But, as we have said, failure to disclose that was not the basis on which the Judge concluded that there was a breach of fiduciary duty. What the Judge focussed on was Premium’s on-going commercial relationship with Mr Larsen. The existence of that relationship put Premium in a position where its commercial interests conflicted with its fiduciary obligation of outmost loyalty to the Stevens, an obligation which is the “distinguishing obligation of a fiduciary” (Chirnside v Fay [2006] NZSC 68; [2007] 1 NZLR 433 (SC), per Elias CJ at [15]) and is reflected in rr 13.8 and 13.12 of the REINZ Code. We do not see Kelly as having any relevance to this situation.
[81] We agree with the Judge that Premium’s failure to disclose its relationship with Mr Larsen to the Stevens was a breach of its fiduciary obligation to them. We do not accept Mr Gilbert’s submission that this conclusion has far-reaching consequences for real estate agents. He suggested that if the Judge’s finding was upheld the consequence would be that real estate agents would be required to step aside from a transaction whenever a potential buyer for whom they had previously acted wished to present an offer. As should be apparent, that is not the effect of the Judge’s decision. And where there is an on-going relationship of the type at issue in this case, what is required is disclosure to the client.
Damages
[82] In relation to the breach of the FTA, the Judge said that, although the Stevens had been misled into thinking that their property was worth less than $3m when in fact it was worth more by Premium’s failure to disclose what it knew about Mr Larsen, there were also other factors which contributed to that belief (at [123] – [124]). Given her finding that the true value of the property in April 2004 was $3.25m, the Judge identified the Stevens loss as $675,000 (the difference between the true value and the sale price of $2.575m). She awarded the Stevens $337,500, on the basis of her assessment of the extent to which the misleading conduct had contributed to the loss (at [125]). The Judge did not allow the claim for the refund of the commission (at [126]).
[83] In relation to the breach of fiduciary duty claim, in reliance on Chirnside, the Judge approached the matter initially on the basis that the appropriate remedy was an accounting of profits. On that basis, Premium had to disgorge the commission received from the Stevens.
[84] However, the Stevens also argued that Premium should account to them for an amount equivalent to the amount of profit made by Mahoenui on the transaction. Having considered Chirnside and Warman International Limited v Dwyer [1995] HCA 18; (1995) 182 CLR 544, the Judge said:
[135] The object of the rule [requiring an account of profits] is to prevent unauthorised gains by a fiduciary, whether by profit or other benefit. Where the profit on a transaction has gone to a party unrelated to the fiduciary I do not see how it can serve the purpose of the rule to require the fiduciary to account for that profit.
[136] In this case, save to the extent of the commission received on the re-sale, Premium did not benefit from the sale to Mahoenui. It had no connection with Mahoenui in a way that could have conferred any further benefit on it. In those circumstances, the purpose of an order for an account could not be served by requiring Premium to account for Mahoenui’s profit.
[85] Accordingly, the Judge held that damages in the present case should be based on the loss suffered by the Stevens, which she said was the difference between the value of their property and the sale price, namely, $675,000 (at [137]).
[86] Mr Gilbert criticised the Judge’s assessment of quantum on three grounds. He submitted that the Judge:
(a) Started in the wrong place by asking what the value of the property was in April 2004 and ignoring the best available evidence of market value at the time, namely the sale price achieved after a competent marketing programme;
(b) Made erroneous findings on the basis of the valuation evidence;
(c) Incorrectly ordered both disgorgement (of the commission) and equitable damages (compensation for loss suffered).
[87] The Stevens cross-appealed on the basis that they were entitled to a refund of the commission and payment of $980,000 (representing the difference between the sale price to Mahoenui ($2.575m) and the sale price achieved by Mahoenui on the resale ($3.555m)) under either or both of the FTA or breach of fiduciary duty claims. In relation to the breach of fiduciary duty claim, they said that a fiduciary is obliged to account for profits derived by a third party which has a close commercial connection with the fiduciary. They relied in particular on Chirnside, Warman and CMS Dolphin Ltd v Simonet [2001] EWCA Civ 1545; [2001] 2 BCLC 704. In relation to the FTA claim, the Stevens argued that the words “loss or damage” in s 43(2)(d) of the FTA were sufficiently broad to allow a claim for these amounts.
[88] Dealing first with the cross appeal on damages for breach of fiduciary duty, there seem to us to be two difficulties with it.
[89] First, Mr Akel was unable to refer us to any decision which took as expansive a view of the obligation to disgorge as that which he urged on us. In Warman two third parties (companies) were ordered to provide an account of profits in circumstances where they had knowingly participated with the fiduciary in the breach of fiduciary duties. There is no such claim against Mr Larsen or Mahoenui in the present case. In CMS Dolphin Ltd the errant fiduciary was liable to account for the profits of a third party, a company which was the vehicle through which the fiduciary effected his breach of duty. The company itself was unable to account as it had gone into liquidation for other reasons. But these cases do not meet the present situation, and we were not referred to any other case in which the court has ordered an errant fiduciary to account for profits received by an unrelated third party who has not participated in the fiduciary’s breach in an unconscionable way. No compelling policy reason was put to us to justify such an extension.
[90] Second, in any event, even if Premium were required to account for the profit received by Mahoenui, it would be inequitable that it account for the full amount. The authorities establish that where an errant fiduciary has expended effort, skill and enterprise in making the profit at issue, some allowance can properly be made for that (see, for example, Chirnside per Tipping and Blanchard JJ at [122]). In the present case, some allowance would have to be made for the fact that the price which Mahoenui achieved reflected in part work which had been undertaken on the property and an aggressive and effective international marketing campaign. In addition, over the short period that Mahoenui owned the house, there was a significant increase in house prices.
[91] In the result, we agree with the Judge that this is a case where the proper measure of damages is compensation for loss rather than disgorgement of profit (see Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299 at 301 (CA)). In relation to causation, a plaintiff alleging a breach of fiduciary duty must show that he or she has suffered loss arising out of (in a case such as the present) a transaction to which the breach was material. The defendant may resist the plaintiff’s claim by showing that the loss would have occurred in any event, without any breach on the defendant’s part. These principles, which constitute a relaxation of the strict approach exemplified by Brickenden v London Loan & Savings Co [1934] UKPC 25; [1934] 3 DLR 465 (PC), are discussed in Gilbert v Shanahan [1998] 3 NZLR 528 at 535 – 6 (CA).
[92] We agree with the Judge that Premium did not establish that the Stevens would have gone ahead with the transaction in any event and so did not suffer any loss. However, we disagree with the Judge as to the amount of the loss suffered by the Stevens.
[93] In summary, the Judge considered that the proper measure of loss was the difference between the sale price and the value of the property at the time of sale, as assessed on the basis of expert evidence after the event. We consider that the proper measure is the difference between the sale price and the price that the Stevens were otherwise prepared to accept for the property. We do not consider that the evidence shows that the Stevens would have retained the property had full disclosure been made. Rather, it shows that, apart from any breach of fiduciary duty by Premium, they were prepared to sell for $2.8m. In accordance with the applicable principles, their recoverable loss cannot extend to “losses” that they would have incurred in any event.
[94] At the time of their initial discussions with Premium it appears that the Stevens thought that the property was worth in the region of $3m. At that point, there was no question of any breach of fiduciary duty by Premium (or of any deceptive or misleading conduct in terms of s 9). That they were willing to sell for $3m is reinforced by the agreement for sale and purchase of the Parnell property, which was conditional on the Stevens selling their Beach Road property for $3m or such lesser sum as they were prepared to accept.
[95] When they received the offer of $2.2m for the property in April 2004, the Stevens counter-offered at $2.8m. That counter-offer was rejected, but it reveals the price at which the Stevens were prepared to sell the property in a transaction which must be treated as untainted (given the Judge’s rejection of the cause of action in negligence and of the other aspects of the FTA claim). Further, the Judge found that the Stevens had intended to make a counter-offer to Mahoenui at $2.8m, before Ms Riley convinced them that Mr Larsen would not offer anything above $2.575m.
[96] As we have said, it is implicit in the Judge’s finding as to remedy that she considered that the Stevens would not have sold their property to Mahoenui had they known the full facts, but would have retained it (and, presumably, abandoned the purchase of the Parnell property). But in our view the evidence does not go that far. Rather it shows that the Stevens would have reconsidered their position and would probably have rejected the Mahoenui offer and extended the sale period. But the likelihood is that they would ultimately have been prepared to accept $2.8m.
[97] We consider, then, that as a matter of compensation, the loss which the Stevens suffered as a result of Premium’s breach was the difference between the sale price of $2.575m and what they had indicated they were prepared to sell the property for, namely $2.8m. That difference is $225,000.
[98] We agree with Mr Gilbert that if the Stevens are compensated on this basis, Premium should not also be required to account for the commission. The Stevens are entitled to an account of profits or damages calculated on the basis of their loss, but not to both. If the Stevens had sold their property for $2.8m they would have paid commission.
[99] The same analysis as to compensation applies, in our view, in relation to the FTA claim. The Stevens were worse off as a result of Premium’s misleading conduct. Because of it they accepted less than they otherwise would have for their property. The figure that they would otherwise have accepted was $2.8m. See generally Harvey Corporation Ltd v Barker [2002] NZCA 34; [2002] 2 NZLR 213 at [13] - [14] (CA).
[100] We do not need to deal with Mr Gilbert’s submission that the Judge’s finding as to the value of the property at April 2004 was wrong.
Decision
[101] Accordingly:
(a) We dismiss the appeal against liability.
(b) We allow the appeal, and dismiss the cross-appeal, against the damages award.
(c) We set aside the High Court’s judgment on damages. We award damages to the respondents (jointly) of $225,000, together with interest on that sum at 7 per cent from the date of settlement of the Stevens/Mahoenui sale.
[102] The appellant has succeeded in part in the appeal. It is entitled to a modest award of costs in this Court. The respondents (jointly) will pay the appellant costs of $3,000, plus usual disbursements. We certify for two counsel.
Solicitors:
Keegan Alexander, Auckland for Appellant
Simpson Grierson,
Auckland for Respondents
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