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Poplawski v Pryde [2013] NZCA 229 (13 June 2013)

Last Updated: 20 June 2013

     
IN THE COURT OF APPEAL OF NEW ZEALAND
BETWEEN
 Appellants
AND
 First Respondent
AND
 Second Respondent
Hearing:
7 May 2013
Court:
O’Regan P, Arnold and Ellen France JJ
Counsel:
P W Michalik for Appellants M E Parker and A J Nash for Respondents
Judgment:


JUDGMENT OF THE COURT

  1. The appeal is allowed in part.
  2. The decision of the High Court dismissing the appellants’ claim for compensation under s 43 of the Fair Trading Act 1986 (the Act) is set aside.
  1. An order is made under s 43(2)(d) of the Act directing the respondents to pay the appellants the sum of $175,000 plus interest at the rate set by s 87 of the Judicature Act 1908 from 28 July 2009 until the date of payment.
  1. The respondents must pay the appellants 90 per cent of costs for a standard appeal on a band A basis plus 90 per cent of usual disbursements.
  2. Costs in the High Court should, in the absence of agreement between the parties, be set by that Court in the light of this judgment.

  1. The liability of the respondents to pay the amounts referred to in C and D above is joint and several.

____________________________________________________________________

REASONS OF THE COURT

(Given by O’Regan P)

Table of Contents

Para No
Introduction [1]
Issues [4]
Facts [6]
The email [27]

Was it unreasonable for the appellants to rely on the
misleading email? [28]

The High Court approach [28]

The appellants’ argument [38]

Applying Red Eagle to the facts of the present case [51]

Was a breach of s 9 proved? [51]

(a) Due diligence [54]
(b) Knowledge of Mr Thow’s financial position [57]
(c) Access to legal advice [62]
(d) Conclusion – breach of s 9 [63]

Was the first respondent’s conduct the effective cause, or an
effective cause, of the appellants’ loss or damage? [64]
Contribution to loss [67]
Conclusion [73]
Costs [74]

Introduction

[1] This is an appeal from a decision of Whata J in which he dismissed a claim made by the appellants against the first respondent, Mr Thomas Pryde under s 9 of the Fair Trading Act 1986 (FTA), which deals with misleading and deceptive conduct in trade.[1] The appellants, Zbigniew Poplawski and Stefan Poplawski are father and son respectively. The High Court Judge referred to them as “Pop” and “Stefan” respectively, and we will do the same.
[2] The allegation of misleading conduct in this case was centred on an email sent by Mr Pryde to a lawyer acting for the appellants, Mr Maarten Dirkzwager. The appellants said they relied on this email in making an advance of $350,000 to Mr Brendan Thow. The advance was not repaid and Mr Thow is bankrupt.
[3] Whata J found that the email was capable of being misleading, but did not consider that a reasonable person in Stefan’s position would likely have been misled by the email. He made a similar finding in relation to Pop. Therefore, there was no breach of s 9. In case he was wrong to find that a reasonable person in the Poplawskis’ position would not have been misled, the Judge went on to consider questions of loss and contribution. He found that if there had been an actionable breach of s 9, the award of compensation available to Stefan and Pop would have been reduced by 50 per cent to reflect the limited role played by Mr Pryde, the indirect relationship Mr Pryde had with the Poplawskis and the Poplawskis’ contribution to their own loss.

Issues

[4] Not surprisingly, the appellants adopted the Judge’s finding that the email was capable of misleading and challenged his later findings. The respondent also accepted the finding that the email was capable of misleading, and did not crossappeal or seek to support the High Court Judge’s decision on other grounds. The issues that require determination are, therefore, predicated on the assumption that the High Court Judge was correct to find that the email was capable of misleading. The agreed issues before us are:
[5] Before addressing those issues we will set out the factual background. In doing so we largely adopt the summary appearing in the High Court judgment.

Facts

[6] Pop is an orthopaedic surgeon and his son, Stefan is a chief pilot for a helicopter company, Alpine Choppers Ltd, which is owned by Mr Thow. Mr Thow wanted to buy the assets of South West Helicopters Ltd (South West). Stefan and Pop wanted to buy a helicopter from Mr Thow (or a business associated with him) and lease it back to the seller.
[7] The first respondent is Thomas Pryde, a solicitor practising in Queenstown as a partner of the second respondent, Cruickshank Pryde. Mr Pryde acted for South West during the relevant events.
[8] From around 2006 to 2008, Mr Ian Buick and the other directors and owners of South West decided to sell the company. Mr Thow expressed an interest in purchasing South West in 2008. Mr Throw and South West signed a heads of agreement for sale and purchase dated 23 November 2008. The agreement was conditional as to finance until 30 November 2008, and provided for settlement of the purchase price of $3,900,000 by way of payments of:
[9] Mr Thow and South West almost immediately looked to alter the agreement and further negotiations ensued. This culminated in a second sale and purchase agreement dated 9 January 2008 (an error for 9 January 2009). This agreement was unconditional as to finance and provided for a settlement and possession date of 31 March 2009 (or such earlier date as Mr Thow might settle the sale of his helicopter ZK-lllT). The purchase price of $2,400,000 had been reduced due to the exclusion of one helicopter (HlH) from the purchase, and was payable:
[10] Mr Thow paid the initial $100,000 deposit due under the agreement on 12 January 2009, but failed to pay the second deposit of $50,000 when it was due on 9 February 2009 and then failed to settle the purchase on 31 March 2009. Nevertheless, South West informally allowed the settlement date of 31 March 2009 to run on to the end of May. However by 19 May 2009, South West was becoming concerned about whether the sale would go through and Mr Pryde wrote to Mr Thow on behalf of South West giving three days notice of South West’s intention to cancel the contract if the additional $50,000 deposit was not paid.
[11] Mr Thow responded to South West that he was having difficulties arranging funds to achieve settlement, because among things, the timing and cash/sales of helicopters were against him. He made a further proposal to restructure the purchase, including removal of the agricultural side of the business and deferral of settlement on land. South West rejected Mr Thow’s proposals and Mr Thow paid the additional $50,000 deposit on 22 May 2009.
[12] South West then wrote to Mr Thow on 27 May recording, among other things, that Mr Thow had confirmed there was no possibility of settlement by 29 May. South West also reminded Mr Thow about how it had modified the agreement to accommodate Mr Thow with the result that the purchase price was reduced from $4.15m to $2.4m. The letter also referred to other potential buyers who were waiting in the wings.
[13] At about the same time, Mr Thow wrote to the appellants confirming that he wanted to free up some equity to complete a purchase of South West’s concessions and good will. He outlined a proposal to sell them one of his BA helicopters for $1,250,000 with a lease back at $900 per hour for a guaranteed 300 hours per year. But the deal could not be done without the purchase of the South West business as this would secure the additional flying hours needed.
[14] As Pop was due to travel overseas in late June, Stefan was left to negotiate a possible purchase with Mr Thow. Pop also left instructions with his lawyer, Mr Richard Walton, to arrange payment of $900,000 if necessary. Stefan then signed a heads of agreement with Alpine Choppers on 20 July 2009 with a purchase price of $1,200,000 with $900,000 to be paid on settlement day and the balance to be paid after Pop’s return. It was also agreed that the helicopter would be leased back for 300 hours per year at $900 per hour insured and dry.
[15] On the same day, Mr Thow and South West signed a variation of the 9 January sale and purchase agreement. This variation amended the purchase price to $3,610,000, based on the re-inclusion of helicopter H1H and provided for payment of this by:
[16] While it is not exactly clear when, Mr Thow approached Stefan about releasing $350,000 of the purchase price for the BA helicopter to enable the purchase of South West. Stefan suggested to Mr Thow that he get Mr Thow’s lawyer to record what was proposed.
[17] On 22 July 2009, Mr Thow visited Mr Pryde’s office. As a result of that visit, and also on 22 July 2009, Mr Pryde sent an email which the appellants say contains the misrepresentations on which their claim is based. This email is recorded in full at [27]. The email was sent to Mr Dirkzwager, the lawyer for Stefan, of Timpany Walton in Timaru, and to Peter Garden, a director of South West, and copied to Stefan personally, to Mr Buick, a director of South West, to Mr Thow, and to Mr Pryde himself.
[18] Stefan then called Mr Dirkzwager. Mr Dirkzwager’s notes of this call refer to the proposed purchase of the helicopter and the acquisition of South West. They also refer to Mr Thow’s prior deposit of $150,000, the need for another $350,000 and that “once the sale locked, then can go to finance company to get funds to settle”. On the purchase of the helicopter, the notes record that clear title cannot be obtained as it “belongs to finance company”. They then refer to the company which owns all of South West and Alpine, and “(your 50% shareholder).” The following notes also appear:

Query: 1. How can we secure the funds?

2. + what happens if fall through.

1. SAA of BA in US.

2. or Sth West falls through.

[19] The notes also refer to the fact that Stefan has worked for Mr Thow for “a lot of years”, and then state “$3–4m in assets, but borrowed to the hilt”.
[20] Mr Pryde called Mr Dirkzwager on 23 July. Mr Dirkzwager’s notes record that Mr Pryde informed him that he did not act for Mr Thow in relation to the transaction but rather that he acted for South West. It does not appear that the details of the proposal were discussed further, although Mr Dirkzwager’s notes suggest that Mr Thow was likely to ask Mr Pryde to draft the required documents.
[21] Mr Dirkzwager then spoke to Mr Thow. It is evident from the notes that security on the advance was discussed, including a second mortgage over a house and a personal guarantee. It is further recorded that Mr Thow “had to have the money today”. Mr Dirkzwager then spoke with Stefan again. The advice apparently given was that it “was not good if rushed. Ideally have security (esp if Brendan [Mr Thow] not ‘of substance’.)”
[22] On 27 July 2009, at Mr Thow’s request, Mr Buick of South West emailed Stefan to provide South West’s bank account for payment of the $350,000. On 28 July 2009, Stefan arranged to pay the $350,000 into South West’s bank account by bank transfer.
[23] Mr Thow and South West signed a further variation of the sale and purchase agreement dated 31 July 2009. This variation allowed Mr Thow until 7 August 2009 to pay the settlement sum of $1,500,000 that had been due on 29 July 2009, and allowed him to take possession of South West’s business and assets on 1 August 2009 under a tenancy and bailment arrangement, terminable at the will of the vendor. On 1 August 2009, Mr Thow took possession of the South West business and assets.
[24] Mr Thow made no further payments to South West, on 7 August 2009 or on any other date, and on 17 August 2009 South West issued Mr Thow with:
[25] On 2 September 2009, South West cancelled the agreement for sale and purchase and kept the deposits it had received, including the $350,000 paid by Pop and Stefan. On the same day, South West then sold the business to Helicopters Otago Balclutha Ltd.
[26] As noted earlier, Mr Thow has been made bankrupt. There were third party proceedings against him but they have been stayed.

The email

[27] The key email, sent on 22 July 2009 and referred to at [17] above, stated:

Hi Marrten (sic)

I am the lawyer for South West Helicopters Ltd, and am writing this letter in the presence of Brendan Thow.

Your client Stefan Poplawski is aware that this letter is being written, and copied to him, and I believe that you and Stefan have discussed this situation already.

Anyway, I have been asked to write to you to confirm as follows:

l .. South West and Brendan have been negotiating for months about the sale to Brendan of the whole business of South West.

2 .. The sale is documented in signed agreements that are unconditional, and contemplate Brendan taking possession of the business on 29 August 2009.

3 .. Brendan and Stefan have tentatively agreed on the sale by Brendan to Stefan of BA-Squirel (sic) S/N 1572.

4 .. Stefan asked for some information about the assets being purchased before he committed to the release of his $350000.00 funds on his purchase.

5 .. Attached hereto is a schedule extracted from the sale agreement listing all those assets. You will see that near the foot of page 2 HIH (sic) is excluded. However a variation agreement executed subsequently has included this machine back in Brendan’s purchase.

6 .. Brendan has also asked me to formally record the agreement made with Stefan for him to have, as a temporary security pending completion of his deal with Brendan, a 50% shareholding in the new company South West Helicopter Group Ltd. This company is already formed, and will be the vehicle that will be purchasing and owning all the SW and Alpine Choppers concessions and bases, and leasing in the helicopters including Stefan’s.

Hopefully this information is what you and Stefan require. Please let Brendan or me know if there is anything else that might be needed.

As Stefan has probably told you, there is some considerable commercial urgency about you and Stefan discussing this, and Stefan paying over the $350000.

Regards

Tom

Legislative provisions

[28] Section 9 of the FTA prohibits misleading or deceptive conduct in trade:

9 Misleading and deceptive conduct generally

No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

[29] Section 43 of the Act sets out the orders that can be made in response to breaches of the provisions of the FTA, including s 9. This can include an order that the person who engaged in misleading or deceptive conduct pay to the person who has suffered loss or damage the amount of that loss or damage.

Was it unreasonable for the appellants to rely on the misleading email?

The High Court approach

[30] Whata J recorded that the basis on which the parties argued the case in the High Court differed. The appellants contended that the Judge should follow the approach to s 9 of the FTA adopted by the Supreme Court in Red Eagle Corp Ltd v Ellis,[2] whereas the respondents contended for the approach set out by this Court in AMP Finance NZ Limited v Heaven.[3] We will come back to Red Eagle later. The Judge determined that neither approach was ideal and that a nuanced approach was required because:[4]
[31] The Judge noted that this combination of factors brought into frame “the extent to which the potential intervention of legal advisers should colour the objective assessment of the conduct and/or the [appellants’] reliance on it”.[5] He expressed the view that it should. Having considered these factors, the Judge said that he had come to the view that in order to properly satisfy the purpose of the FTA, it was necessary to approach the issue of the breach of s 9 in two parts, namely to assess:[6]
[32] He added that if a breach were established, then it would be necessary to determine whether the breach was an effective cause of loss.
[33] The Judge then dealt with the question of whether the email was capable of being misleading. He began by stating that a person in the position of the appellants would have reasonably expected accurate detail on the background to the transaction involving the sale and purchase of South West, especially given the factors of:
[34] The key finding as to the misleading nature of the email is contained in [50][52] of the judgment, which we reproduce:

[50] More specifically, the email is misleading in the following ways:

(a) The email records that Mr Thow and South West had been “negotiating for months”. But “negotiating” is an inapt description of what in fact occurred. Over a seven month period at least three agreements had been executed. Mr Thow did not meet the payment conditions of any of them, except one deposit of $100,000 on 9 January 2009. A payment of $50,000 in late May was well overdue and made under threat of cancellation of the agreement.

(b) The email states that the sale was “unconditional.” While I accept that the agreement was unconditional as to finance,[7] there is no mention that Mr Thow had not in fact been able to obtain finance to achieve settlement over the span of several months. In addition, the final compromise reached on 20 July, just two days prior to the email, contemplated immediate payment of $350,000 and then $1,500,000 in nine days, that is, by 29 July 2009; a most unlikely proposition in light of Mr Thow’s previous inability to obtain finance.

(c) The settlement date was recorded as 29 August 2009 when the actual date was much earlier, namely 29 July 2009. This was an unintentional error. But it meant that the Poplawskis were not aware of the tight constraints that South West had in fact placed on Mr Thow.

(d) A H1H helicopter was listed to be received on 29 August 2009 worth approximately $1,500,000, when that was not so. Settlement on the helicopter had been deferred for 12 months. This gave the erroneous impression that the transaction was more substantial than it really was and afforded more surety than it really did.

(e) The email recorded that Stefan will have as “temporary security” “50% of the shares of the new company” that “will be the vehicle ... purchasing and owning all the South West... concessions and bases ... ”. While that was also literally true, the scale of the risk that this “temporary security” may never eventuate was never signalled. Furthermore, it appears that the transaction was not advanced through the new company, with the effect that the Poplawskis were never made aware of the 29 July deadline or extension to 7 August or otherwise of the fragility of the transaction until after notice of cancellation.

[51] It was also clear on available documentation that South West were anxious about Mr Thow’s previous non compliances. Compelling in this regard is a draft letter dated 27 May 2009 (only one month prior to the email) recording the following:

As you are aware and would expect, considerable uncertainty and anxiety has occurred as a result of the delays and uncertainties that have occurred, and will remain as a consequence of the non settlement on Friday. This has placed our company in a very awkward situation to say the least. ....

I have kept our lawyer Tom Pryde informed of developments and have spoken to him again today about this. He is happy that we negotiate with you around any new proposal you might have, but said that we should make clear to you that the existing contract is still in existence and binding and any negotiation is accordingly without prejudice and does not alter the legal situation until we might reach any new agreement with you.

[52] This was then followed by the July agreement, with its very short timetable for deposit and settlement. I accept there was evidence that South West thought by this stage Mr Thow might secure cash from sale of his helicopter to Pop and from the sale of a helicopter in the United States. Nevertheless achieving settlement on the sale of the South West assets within seven days of the email and then within a day of its payment was obviously far from secure given the prior failures to settle. The significance of that is twofold. First, objectively assessed, the risk to the Poplawskis was very significant. Second, the shares in the new company to buy the assets could not possibly provide “temporary security” of any kind, at least until settlement had been achieved. But the (unintended) impression left by Mr Pryde’s email is that there is no reason to suspect settlement would not be achieved and thus the shares would afford a form of security.

(footnote omitted.)

[35] Having determined that the email was capable of misleading, the Judge then asked whether a reasonable person in the position of either of the appellants would be likely to have been misled by the email. (It is clear from what the Judge said later in his judgment that he accepted that the Poplawskis had in fact been misled by the email.) The Judge found that a reasonable person in either of the appellants’ positions would likely not have been misled, and his reasoning for reaching that conclusion is the subject matter of the first issue to be resolved in this appeal.
[36] The Judge considered it was reasonable for Mr Pryde to assume that Mr Dirkzwager would recommend appropriate due diligence in the context of a substantial commercial transaction, which he said would inform the objective assessment of the nature of Mr Pryde’s conduct. He found that this factor strongly militated against the finding that a person in either of the appellants’ positions, properly advised, would likely have been misled by the email.[8]
[37] The Judge said it was reasonable to deduce from Mr Dirkzwager’s file notes that Mr Dirkzwager cautioned Stefan against a hasty loan without security. He said it was evident from Mr Dirkzwager’s notes that both Mr Dirkzwager and Stefan knew that Mr Thow did not have finance to complete the transaction, and that he would be approaching a finance company to get the funds to settle. Another file note recorded that Mr Thow was “borrowed to the hilt”, while a further one recorded Mr Dirkzwager’s observation that, ideally, there would be security for the loan, especially if Mr Thow was possibly not “of substance”.
[38] The Judge considered that the knowledge that Mr Dirkzwager and Stefan had about Mr Thow’s financial circumstances and what he characterised as “the direct advice to take separate security” offset the key omissions in the email about the transaction’s troubled history. This led him to conclude that a reasonable person in Stefan’s position would have been on inquiry, aware of the risks and would not have transferred the $350,000 to South West without formal security, and thus a reasonable person in Stefan’s position would likely not have been misled by Mr Pryde’s email. He said, however, that his position might have been different had the misleading conduct involved a positive misrepresentation rather than a half truth or omission.[9]
[39] He then turned to the position of Pop. He considered that, although Pop had no contact with Mr Dirkzwager and was not aware of any of the facts that Mr Dirkzwager and Stefan knew about, Pop should be imputed with the knowledge possessed by Stefan. He said Mr Pryde could not be expected to have knowledge of Pop’s circumstances independently of Stefan’s interests and legal representation. Because Pop was imputed with the same knowledge as Stefan, the Judge reached the conclusion that a reasonable person in Pop’s position would also not likely have been misled by the email.[10] Therefore, there was no breach of s 9 with regard to either of the appellants.

The appellants’ argument

[40] For the appellants, Mr Michalik argued that the approach taken by the Judge departed from the authorities, particularly Red Eagle. He said that the three key findings underpinning the Judge’s conclusion that it was not reasonable for the appellants to rely on the email were all wrong. They were:
[41] Before dealing with the specifics of this submission, we first deal with the question of the approach to be taken, in light of the authorities.
[42] Mr Michalik began his oral submissions by comparing the position of the appellants in the present case with the position of the party to whom the misleading representation had been made in Red Eagle. He argued that, given the similarity of the two cases, Whata J should have adopted the same approach as the Supreme Court adopted in Red Eagle. In order to evaluate that submission it is necessary to consider Red Eagle in some detail.
[43] The facts of Red Eagle are summarised in the New Zealand Law Reports headnote to the Supreme Court’s decision as follows:

Mr Ellis, Mr Falkenstein and Ms Black were all business people. Mr Ellis knew each of the others well and Mr Falkenstein had had some previous dealings with Ms Black. Mr Ellis and Ms Black were engaged in an aquaculture venture. Finance which had apparently been agreed to was not transferred from London owing to a terrorist bombing. Mr Ellis contacted Mr Falkenstein and requested urgent bridging finance at a rate of 25 per cent. He said that Ms Black owned properties in Sydney worth over $2m. Mr Falkenstein said that he was happy to offer the finance at that rate and subsequently agreed to raise the amount to $250,000 as that was well within the value of the “security”, namely a personal guarantee from Ms Black. Ms Black sent to Mr Falkenstein at his request a breakdown of her assets which showed houses owned worth over $3m and a mortgage liability of over $1m. Mr Falkenstein met Mr Ellis and Ms Black and gave her a cheque for $250,000, drawn on his company, Red Eagle Corporation Ltd. Subsequently it became apparent that Ms Black had been fraudulent and did not own the assets concerned. The money was not recoverable.

[44] The Supreme Court said it was not desirable to formulate a methodology that was to be applied prescriptively in every case in which the application of ss 9 and 43 of the FTA is an issue, but the Court did suggest a simple two stage approach which, it said, was particularly applicable in cases where there was no doubt about what was said or about its meaning, and all the loss arose from the same event. This approach involved the following two stages:[11]
[45] In dealing with the first stage, the Court said that whether a breach of s 9 has been established will depend upon the context, including the characteristics of the person or persons said to be affected. A breach will occur only where it was objectively reasonable for the claimant to be misled in all the circumstances. To use the Supreme Court’s words:[12]

The question to be answered in relation to s 9 in a case of this kind is accordingly whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware – would likely have been misled or deceived. If so, a breach of s 9 has been established.

[46] If a breach is established attention then switches to s 43, which deals with the remedies available for breaches of the FTA, including of s 9. The provision of s 43 that is at the forefront of both Red Eagle and the present case is s 43(2)(d), which provides that a court may direct the person who engaged in the misleading conduct to pay to the person who suffered a loss or damage the amount of the loss or damage.
[47] The second stage of the process outlined in Red Eagle is directed at the question as to whether the claimants suffered loss or damage “by” the conduct of the defendant. In determining this, the court must first decide whether the claimant was actually misled or deceived by the conduct. If it answers that question affirmatively, then it must consider whether the breach of s 9 was an operating cause of the claimant’s loss or damage. In determining that issue, the claimant’s own carelessness does not disqualify the claim for damages but might reduce it.[13]
[48] In Red Eagle, Blanchard J explained this as follows:

[30] Another operating cause of loss or damage may perhaps have been the claimant’s own conduct in failing to take reasonable care to look after his or her own interests. The court should therefore ask itself whether the claimant’s carelessness, if there were any, should be regarded as the sole or a contributory operative cause of the loss. The fact that the claimant may have contributed by carelessness to his or her own downfall does not disqualify the claim. Gleeson CJ remarked in Henville v Walker:

The purpose of the legislation is not restricted to the protection of the careful or the astute. Negligence on the part of the victim of a contravention is not a bar to an action under [the Australian equivalent to s 43] unless the conduct of the victim is such as to destroy the cause or connection between the contravention and loss or damage.

As the Goldsbro case has established, the court has a discretion under s 43 (it “may” make an order), and the proper exercise of that discretion may lead it to decide that part only of the amount of the loss or damage should be paid by the defendant to the claimant (or, in some cases of reckless behaviour by the claimant, even no order for payment should be made).

[49] The significance of the Red Eagle approach in the present case is that the question as to whether the claimant took reasonable care to look after their own interests is relevant to the decision on the provision of relief (and if so, the quantum) under s 43. It does not, however, bear on whether the court determines that there has been a breach of s 9. Rather the focus in the s 9 context is on whether a reasonable person in the claimant’s situation would likely have been misled or deceived.
[50] Given the similarity of the features of the present case with those in Red Eagle we consider there is considerable force in Mr Michalik’s argument that the Judge ought to have adopted the Red Eagle approach in this case. Although the Supreme Court was careful not to be prescriptive about the approach that should be adopted in cases involving claims under s 9, it said that the approach it adopted in that case “commends itself in a relatively simply case like the present where there is no doubt about what was said or about its meaning and all of the loss arose from the same event, namely the advancing of the money. The loss did not have different components”.[14] That formulation accurately describes the present case as well. In our view, therefore, the Judge was in error in adopting his nuanced approach which differed in material respects from the Red Eagle approach.

Applying Red Eagle to the facts of the present case

Was a breach of s 9 proved?

[51] As noted earlier, Whata J found that the email was misleading and deceptive in that the appellants were misled by it. At [49] he found that a person in the appellants’ position would have reasonably expected accurate detail in the email, which led to his finding that the email was misleading in a number of material respects. In our view that should have disposed of the first stage of the Red Eagle analysis, and led to a finding that a reasonable person in the appellants’ position would have been misled by the email. It is hard to see how, if a reasonable person in their position could have expected the email to be accurate but the email was in fact inaccurate and misleading in a number of respects, a reasonable person in their position would not be misled by it.
[52] The Judge’s reasons for determining that it was not reasonable for a person in the appellants’ position to rely on an email were:
[53] We will evaluate each of these in turn.
(a) Due diligence
[54] Whata J considered that Mr Pryde’s entitlement to assume that Mr Dirkzwager would recommend appropriate due diligence informed the objective assessment of the nature of Mr Pryde’s conduct, and militated against the finding that a reasonable person in the position of the plaintiff, properly advised, would likely have been misled.
[55] We disagree. Whether or not it was reasonable for Mr Pryde to assume that the appellants would take legal advice does not seem to us to make any real difference. It was reasonable for Stefan (and Mr Dirkzwager) to rely on the contents of the email. If anything, the fact that the email was sent from one lawyer to another would engage the expectation that communications between lawyers will be full and frank. And the email provided the context in which Mr Dirkzwager gave his advice and in which Stefan decided to proceed without further involvement to Mr Dirkzwager. Both the legal advice and the decision to proceed were likely to have been influenced by the misleading nature of the email.
[56] We do not consider that the possibility of due diligence being undertaken leads to a conclusion that a reasonable person would not be misled by the email.
(b) Knowledge of Mr Thow’s financial position
[57] Whata J considered that it was reasonable to deduce from Mr Dirkzwager’s file notes that he cautioned Stefan against making a hasty decision to advance money. He noted that Mr Dirkzwager had recorded in one note that Mr Thow’s intention, once the deposit was paid, was to get the remaining funds to settle from a finance company. He also noted that Mr Thow was “borrowed to the hilt” and that Mr Dirkzwager had said that “ideally” there would be security for any loan made by the appellants, especially if Mr Thow was not “of substance”. He said that the objective information available to Mr Dirkzwager and Stefan about Mr Thow’s financial circumstances and the direct advice to take separate security offset the key omissions about the transaction’s troubled history. He said his decision may have been different if there had been positive misrepresentations rather than omissions in the email. He saw Pop’s position as the same as Stefan’s because Pop was imputed with Stefan’s knowledge.
[58] We disagree with this analysis in so far as it led the Judge to conclude that the email did not constitute misleading and deceptive conduct.
[59] First, it overstates the nature of the advice about the taking of security. All Mr Dirkzwager said was that ideally security would be taken. Any lawyer advising a person making an unsecured loan is likely to make the same comment, because obviously an unsecured loan involves greater risk than a secured loan. We think it is overstating the position to say that that constituted advice to Stefan not to make the loan unless he obtained security.
[60] Secondly, it seems to us that the Judge’s finding that, given Mr Thow’s financial situation, an unsecured loan should not have been made or at least should have been the subject of greater consideration and care is a matter which falls within the second stage of the Red Eagle approach, namely whether the misleading and deceptive conduct was an effective cause of the loss. The fact that Stefan was, to use the words of the Supreme Court in Red Eagle, “very neglectful of his own interests” in making the loan does not alter the fact that Stefan was misled by the email and, in light of the Judge’s finding that Stefan was entitled to rely on the email, it was reasonable for him to be misled. We will come back to the question as to whether the fact that Stefan was neglectful of his own interests should disqualify him from receiving compensation under s 43(2)(d) or lead to a reduction in the award to which he would otherwise be entitled.
[61] For present purposes, we conclude that the Judge was wrong to determine that the email did not constitute misleading and deceptive conduct because of Stefan’s knowledge about Mr Thow’s financial position and the advice he received about the need for caution and that the ideal position was that a secured loan would be better than an unsecured loan.
(c) Access to legal advice
[62] We see this factor as also falling within the s 43 stage of the Red Eagle analysis, rather than bearing on the question as to whether a reasonable person would have been misled and/or whether Stefan was in fact misled. We think that, if the Red Eagle approach is followed, it is inescapable that, in light of the Judge’s findings, Stefan, having received a misleading email which he was entitled to expect would be truthful and comprehensive, was misled in fact. Because he was entitled to rely on the truth and comprehensiveness of the email, it was reasonable for him to be misled. The fact that he could have obtained further advice from his lawyer (albeit that advice would also have been affected by the fact that Mr Dirkzwager was also the recipient of the misleading email) bears on the question as to whether compensation should be awarded under s 43. The Court in Red Eagle did not regard the fact that the person to whom the misleading representation was made could easily have checked the true position, either himself or by obtaining advice, as meaning that a reasonable person in his position would not have relied upon the representation.
(d) Conclusion – breach of s 9
[63] We conclude therefore that on the Judge’s findings of fact, which were not subject to challenge in this Court, the Judge ought to have concluded that the misleading email did constitute a breach of s 9 of the FTA because it was misleading and it was reasonable for Stefan to rely on it. As Pop is treated as being in essentially the same position as Stefan, the finding applies indirectly to him as well. The Judge also found that Stefan was, in fact, misled by the email. We agree. In those circumstances there was a basis for an award of compensation under s 43. We turn, therefore, to the second stage of the Red Eagle analysis.

Was the first respondent’s conduct the effective cause, or an effective cause, of the appellants’ loss or damage?

[64] On this aspect of the case we see an irresistible similarity between the facts of this case and those of Red Eagle. Just as the claimant in Red Eagle was neglectful of his own interest, so was Stefan in the present case. He allowed himself to be pressured into making the loan without the proper consideration and without complying with his father’s instructions to act in accordance with legal advice. He did not give Mr Dirkzwager the chance to provide further advice and did not investigate the possibility of obtaining security.
[65] However, things may have been quite different if Stefan had known the real position. If, for example, he had known that his father’s $350,000 was being used to pay a deposit for a transaction that had to be settled only days later when no arrangements were in place to fund the remainder of the purchase price, he may have taken a different view of the risk involved. Similarly, if he had known the tortured history of the transaction involving South West and Mr Thow, he may have been far less casual about the risks he was taking with his father’s money in making an unsecured loan an anticipation of a successful completion of the South West transaction.
[66] In our view, the misleading email amounted to an effective cause of Stefan’s decision to make the loan and, ultimately, the loss of the amount advanced. We find accordingly.

Contribution to loss

[67] Having made that finding, the question which then needs to be dealt with is the contribution of Stefan to the loss that was incurred. In Red Eagle, the Supreme Court upheld the High Court Judge’s conclusion that the claimant’s contribution to his own loss should be treated as a factor equal to the misinformation given to him by the provider of the misleading information. The Supreme Court said that this was “necessarily a broad-brush assessment”.[18] Having found that the claimant was very neglectful of his own interests, the Supreme Court considered it was open to the High Court Judge in that case to make a 50:50 apportionment of blame.
[68] In the present case, Whata J addressed the contributions of the parties to the loss, even though, on his analysis, it did not affect the outcome. Whata J found that the email was “an effective cause of the decision to make the deposit” and that the decision by Stefan and Pop to invest was in part due to the erroneous impression left by the email. But he also found that Stefan and Pop should have pursued the transaction with more care, particularly given independent legal advice to seek security and the fact that Stefan was aware that Mr Thow was “borrowed to the hilt” and did not have funding arranged to complete the purchase of South West.[19]
[69] Whata J concluded that Stefan and Pop had assumed a significant risk of failure notwithstanding the false hope generated by the email and that the main contributor to their loss was their failure to secure their investment properly. He concluded that, if he had found an actionable breach, he would have reduced the award by 50 per cent to reflect the limited role played by the respondents (as compared to Mr Thow), their indirect relationship to the appellants (via the appellants’ legal adviser, Mr Dirkzwager) and the appellants’ contribution to their own loss.
[70] Mr Michalik argued that the Judge erred in this assessment. He said that if the appellants had had the information that was omitted from the email, they would not have made the loan and so would have lost nothing. When asked to justify that submission in light of the Supreme Court’s assessment of the same issue in Red Eagle, he argued that the Supreme Court had simply upheld what it described as a discretionary decision of the High Court but had not set out any discussion of the test to be applied and should not therefore be taken as determining any point of principle.
[71] Mr Michalik argued that a factual determination was called for in each case, and that this Court’s reasoning in Premium Real Estate Ltd v Stevens should be applied.[20] The Court’s decision on the quantification of damages was reversed on appeal: Premium Real Estate Ltd v Stevens,[21] but the aspect of this Court’s decision relied on by the appellants was not the subject of discussion in the Supreme Court decision. The passage from this Court’s decision in Premium Real Estate Ltd v Stevens on which Mr Michalik relied deals with the issue of causation. It asked whether, as a matter of fact, the relevant misleading conduct contributed to any loss or damage suffered by those misled. The Court noted that this required consideration of what they would have done if given the undisclosed information. But this was in the context of a discussion about causation, not a discussion about whether the claimants had contributed to their own loss. We do not see it as assisting us in determining the contributions made by the respective parties to the appellants’ loss.
[72] Even if it did, we can see no good reason to depart from the approach taken by the Supreme Court in Red Eagle, given that it is a recent decision of our highest Court and it related to a case which has considerable similarities to the present case. Like the Supreme Court in Red Eagle, we can see no reason to interfere with the trial Judge’s assessment of the relative contributions to the loss sustained by the appellants in the present case. In our view his broad-brush assessment that Stefan’s neglect of his own interests was a 50 per cent contributor is a proper reflection of the facts of this case. While it may well be true that Stefan would not have made the loan if he had been in possession of all of the facts, the same could be said of the claimaint in Red Eagle. The analysis at this stage of the case is not a “but for” analysis, but an assessment of all of the factors contributing to the loss incurred and a broad-brush analysis ensuring that the claimaint and the provider of the misleading information are required to bear their fair share of the loss incurred.

Conclusion

[73] We conclude that the respondents were in breach of s 9 and therefore amenable to orders under s 43. We make an order that the respondents pay to the appellant one-half of the appellants’ loss of $350,000, namely $175,000. The appellants are entitled to interest on that sum from the date on which the loss was incurred (being the date on which the advance was made) at the Judicature Act 1908 rate. The liability of the respondents is joint and several.

Costs

[74] The appellants have been substantially, but not entirely, successful and costs should follow the event. We consider that the normal costs award should be reduced slightly to reflect that the appellants succeeded in their main argument but not in their argument that the respondents should pay 100 per cent of their loss. We therefore order that the respondents must pay to the appellants 90 per cent of costs for a standard appeal on a band A basis plus 90 per cent of usual disbursements. Costs in the High Court should be determined by that Court in light of this judgment if the parties are not able to agree.




Solicitors:
Morrison Kent, Wellington for Appellants
Parker Cowan Lawyers, Queenstown for Respondents

[1] Poplawski v Pryde [2012] NZHC 2011 [High Court judgment].

[2] Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 [Red Eagle].

[3] AMP Finance NZ Ltd v Heaven (1997) 8 TCLR 144 (CA).

[4] High Court judgment, above n 1, at [44].

[5] At [45].

[6] At [47].

[7] I accept this is what was meant by Mr Pryde when he used the term “unconditional”.

[8] At [55].

[9] At [57]–[59].

[10] At [61].

[11] Red Eagle, above n 2, at [26]–[29].

[12] At [28].

[13] At [29]–[30].

[14] At [27].

[15] At [55].

[16] At [56]–[57].

[17] At [55]–[62], read in light of the Judge’s observations at [4].

[18] At [39].

[19] At [63]–[64].

[20] Premium Real Estate Ltd v Stevens [2008] NZCA 82, [2009] 1 NZLR 148.

[21] Stevens v Premium Real Estate Ltd [2009] NZSC 15, [2009] 2 NZLR 384.

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