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Court of Appeal of New Zealand |
Last Updated: 6 December 2017
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IN THE COURT OF APPEAL OF NEW ZEALAND
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BETWEEN
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First Appellant
SYNERGY MANAGEMENT LIMITED
Second Appellant |
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AND
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Respondents |
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Hearing: |
4 September 2017 |
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Court: |
Asher, Courtney and Gendall JJ |
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Counsel: |
First Appellant in Person
SCDA Gollin and M D Pascariu for Respondents |
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Judgment: |
JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by Courtney J)
Introduction
[1] This appeal arises from the sale of a partially completed apartment development in Mount Wellington, Auckland. The first appellant, Brent Clode, had an interest in the company that owned the development. Prior to the sale he entered into a settlement agreement with the purchasers of the development, who are the respondent trustees. They subsequently asserted that they had been induced to enter the agreement by Mr Clode’s misrepresentations that he owned the “intellectual property” in the development and had security over documents that were essential to its completion.
[2] At the relevant time the development was owned by Thompson Park Holdings Ltd (TPHL). Mr Clode was the beneficial owner of 50 per cent of the shareholding in TPHL. The legal owner of the shares was David Jans, TPHL’s sole director. In mid-2014 TPHL’s existing loan fell due. It was unable to either repay or refinance and was served with a default notice under s 119 of the Property Law Act 2007 (PLA).
[3] The respondents, Michael Sullivan and Duthco Trustees (Sullivan) Ltd, were the trustees of the Sullivan Family Trust No 1, a family trust associated with Mr Sullivan. They offered to buy the development for the amount needed to clear the debt. But there would be no ongoing role for Mr Clode, who would lose his share of the potential profit to be made from TPHL’s involvement in the development. He was anxious to extract some financial return on his involvement in TPHL.
[4] Mr Clode negotiated a settlement agreement with the trustees under which he would receive benefits in cash and property to a total value of $1,055,000. That agreement was concluded on 3 July 2014. Initially, he negotiated on the basis that, by virtue of his interest in TPHL, he had the right to influence TPHL’s decision to sell the development. Soon afterwards he also asserted that assets he styled as “intellectual property” associated with the development belonged to him or his company and that TPHL had agreed to buy them from him and, further, that this agreement was secured by a mortgage to him over various “material contracts”, including the resource consent, which were essential to completion of the development. In this regard he put forward documents described as professional services agreements (PSAs) and deeds of assignment by way of mortgage of material contracts. The documents had been executed shortly before the expiry of the PLA notice but were backdated to 2013. One of the PSAs (the Clode PSA) purported to record Mr Clode as the owner of various rights (the so-called “intellectual property”) in the development and conferred on him the right to be paid $5,000,000 in respect of them. The other PSA (the Synergy PSA) was in similar terms except that the owner of the various rights in the development was said to be Mr Clode’s company, Synergy Management Ltd (Synergy).
[5] The settlement agreement with the trustees provided that the trust would pay Mr Clode an initial payment of $150,000 on settlement, and the remainder as the development advanced. The trustees made the initial payment of $150,000 but failed to fulfil the other terms of the agreement. In a claim by Mr Clode against the trustees and a counterclaim by the trustees against Mr Clode, Palmer J held that Mr Clode had induced the trustees to enter into the settlement agreement through misleading and deceptive conduct in breach of s 9 of the Fair Trading Act 1986 (FTA), namely by his reliance on the Clode PSA and associated assignments which the Judge found to be shams.[1] The Judge made an order under s 43(3) of the FTA that the settlement agreement was void. He also held that the trustees were entitled to cancel the agreement and ordered Mr Clode to repay the $150,000 he had received under the settlement agreement.
[6] Mr Clode appeals Palmer J’s judgment.[2] His grounds of appeal can be summarised as follows:
- (a) The Judge’s finding of misleading and deceptive conduct was an error because:
- (i) the PSAs were not shams; or
- (ii) alternatively, Mr Clode honestly believed on reasonable grounds that the PSAs were valid and enforceable.
- (b) the Judge erred in finding that the trustees were misled or deceived.
- (c) The Judge wrongly either assumed or found that the trustees had suffered loss as a result of Mr Clode’s conduct.
- (d) The Judge failed to properly exercise his discretion under s 43 of the FTA to take into account the trustees’ own conduct and the fact that, in entering into the settlement agreement, Mr Clode gave up all his rights against the assets of TPHL and his rights as a shareholder to refuse to consent to the sale of the assets.
[7] The trustees submit that the Judge’s conclusions on the issues raised by Mr Clode were correct. In addition, they seek to support the judgment on other grounds. Because of our conclusion on the appeal, however, it is unnecessary to consider these other grounds.
Relevant background
The history of the development
[8] The development was initially owned by Box Property Investments Ltd (BPIL), the shareholders and directors of which were Mr Sullivan and Mr Jans. In 2011, at Mr Jans’ request, Mr Clode undertook design work on the project to increase the number of apartments and thereby improve the expected profit margin. Mr Clode was bankrupt at that time and rendered invoices totalling more than $20,000 through his company, Synergy, for “development management services”. There were discussions about Mr Clode becoming involved in the development but the parties could not agree on a satisfactory basis for his profit share and Mr Clode’s involvement ceased.
[9] In 2013 Mr Jans and Mr Sullivan agreed that Mr Sullivan would no longer be involved in the development. Mr Jans approached Mr Clode to become involved again. Mr Jans incorporated TPHL to acquire Mr Sullivan’s interest in BPIL and purchase the development from BPIL. Because Mr Clode was recently discharged from bankruptcy, it was agreed that Mr Jans would hold 50 per cent of the shares in TPHL on trust for him. Subsequently a brief written agreement recorded this fact.
[10] The purchase of the development was funded using $400,000 of Mr Jans’ equity in BPIL and a term loan for $3,650,000 from New Zealand Mortgages and Securities Ltd (NZMS) secured by a General Security Agreement (GSA) and mortgage, which Mr Jans guaranteed. The loan was for a term of seven months; TPHL intended to refinance in 2014 at a level sufficient to repay the loan and complete the development.
[11] Over the next several months Mr Clode and Mr Jans worked on the development. This included obtaining resource consent for a further 13 units. Mr Clode (either personally or through Synergy) took some $119,500 in drawings and approximately $51,000 for other unrelated personal expenses. Mr Jans took approximately $60,000.
[12] Efforts to secure further funding were unsuccessful. The NZMS loan fell due in April 2014. TPHL was unable to pay. To keep work on the development going it borrowed $200,000 from Mr Jans’ brother-in-law and $250,000 from an associate of Mr Clode, Mr David Oliphant, the latter secured by a caveat.
[13] NZMS assigned its debt to Dragon Private Capital Ltd (Dragon) and on 4 June 2014 Dragon served the PLA notice.
The PSA agreements
[14] In the face of this very serious situation Mr Clode took steps to protect his position and that of Mr Oliphant. He arranged for TPHL to assign the pre-sale contracts to Mr Oliphant as security for the funds that Mr Oliphant had advanced in May 2014. Then he prepared two documents, the Synergy PSA and an associated deed of assignment using templates provided by TPHL’s solicitor, Matthew Carson.
[15] The Synergy PSA recorded that:
- SML [Synergy Management Ltd] owns the idea, copyright, design, engineering and methodology for the Project described as the intellectual property from inception of the Project (IP); and
- The parties agree to record the sale of the IP and security provided by TPHL to SML by way of this deed.
...
[16] “Material Contracts” was defined in the Synergy PSA as meaning:
[A]ll of the development intellectual property (IP) and all other documents for the purposes of completion of the Project and all the CB Richard Ellis Valuations, quantity surveying reports, resource consents, architectural plans, civil and structural engineering plans, engineering reports and calculations, building consents, PS1 and PS4 Producer Statements, collateral contracts, specifications, drawings, computer images, marketing information, website, sales office and information forming part of or which are required to be prepared and provided for the Project.
[17] The Synergy PSA was dated 16 December 2013 but it is common ground that it was executed on or around 8 June 2014. The deed appeared to have been signed by both Mr Jans and Mr Clode with Lance Gilbertson, a project manager employed by TPHL, as a witness. Mr Jans does not recall signing the document and has never accepted that Mr Gilbertson was present when he did so. Mr Gilbertson did not give evidence at the trial.
[18] A few weeks later Mr Clode produced the Clode PSA and associated deed of assignment. The Clode PSA was dated 23 September 2013 but was executed on or around 23 June 2014. Mr Jans recalls signing the Clode PSA but has always denied that Joanne Cooper, shown as the witness to both signatures, was present at the time. The Clode PSA was in similar terms to the Synergy PSA and, in particular, provided that:
- From October 2011 (and continuing), [Mr Clode] has provided development management and professional services to BPIL and TPHL for Thompson Park Apartments at 8 Thompson Park Road, Mt Wellington (Project) without compensation;
- [Mr Clode] owns the concept, idea, copyright, design, engineering and methodology for the Project described as the intellectual property from inception of the Project (IP); and
- The parties agree to record the ownership of the IP, payment for the IP and security provided by BPIL and TPHL to [Mr Clode] by way of this deed.
...
[19] Under the Clode PSA the definition of “Material Contracts” was the same as in the Synergy PSA save that it expressly excluded “the land”.
Negotiations with the trustees
[20] Around the time the Clode PSA was executed Mr Sullivan approached Mr Jans with a view to taking over the development. He proposed that his family trust purchase the development at a price that would enable TPHL to clear the Dragon debt and, upon arranging a full funding facility, to clear the debts to Mr Oliphant and Mr Jans’ brother-in-law. Mr Clode was not told about these negotiations until 27 June 2014. By then it was proposed that settlement of the sale to the trustees would take place the following Wednesday, 2 July 2014, the day before the expiry of the PLA notice. Neither Mr Clode nor Mr Sullivan were interested in working with one another; if the sale to the trustees proceeded there would be no place for Mr Clode.
[21] The sale of the property to the trustees would require a shareholder resolution and it is evident that Mr Clode intended to use that fact as a bargaining position. On the afternoon of 27 June 2014 Mr Clode emailed Mr Jans proposing that, in return for his shareholding, he be paid $2,000,000 ($250,000 upon the sale to the trustees, $750,000 upon the first draw-down and the first $1,000,000 profit). Mr Oliphant, who was assisting Mr Clode, forwarded that proposal to Mr Harrison, the trustees’ solicitor.
[22] The next day, Saturday 28 June 2014, Mr Sullivan spoke to Mr Jans about Mr Clode’s shareholding, indicating his view that Mr Clode should be “treated equitably”. Mr Jans told Mr Sullivan that Mr Clode had a 50 per cent shareholding in TPHL with Mr Jans holding that on trust, though he, Mr Jans, did not have the documentation.
[23] On Sunday 29 June 2014, Mr Harrison requested the “base document” upon which Mr Clode was relying. Inexplicably, Mr Clode refused to respond to that request directly, telling Mr Jans to explain instead. He left his offer open until 10 am Monday 30 June 2014. Mr Clode’s deadline passed without response from the trustees.
[24] On the morning of Tuesday 1 July 2014 Mr Oliphant provided Mr Harrison with a copy of the assignment of the pre-sale contracts to him and also a copy of the Clode PSA and assignment. Mr Harrison recalled receiving the documents by email, not from Mr Oliphant in person, as Mr Oliphant asserted.
[25] Mr Harrison immediately perceived that the Clode PSA had the potential to create problems because it suggested priority issues as between it and the Dragon security. He contacted Mr Jans who told him that the documents had not been executed in 2013 but sometime recently, although he could not recall exactly when (Mr Oliphant maintained that he told Mr Harrison about the incorrect dating of the documents but this is not significant).
[26] In the evening of 1 July 2014, Mr Clode emailed Mr Harrison a copy of the Synergy PSA and assignment and advised that he had been approached to sell the assignments and would be doing so at midday on 2 July 2014 should he not receive a settlement offer. Mr Clode copied that email to Mr Jans who responded the following morning, copying in Mr Harrison and Mr Oliphant, asserting that the Synergy documents were fraudulent and threatening to refer the matter to the police. Mr Clode responded in equally strong terms, refuting the allegations.
[27] Mr Sullivan was very concerned about the PSAs and assignments. On their face, they appeared to secure $10,000,000 in debt owed by TPHL but Mr Sullivan did not think that the development would produce a profit of anything like that figure. The matter was of sufficient concern that Mr Sullivan and Mr Jans went to see Ms Cooper, who was shown as the witness to Mr Jans’ signature on the Clode PSA. Ms Cooper told them that she had been present when the documents were signed and that the documents were signed when they were dated. The latter, clearly, was untrue. Ms Cooper did not give evidence at the trial.
[28] Later that day Mr Clode offered to sell his “50% shareholding in [TPHL] and the project IP (established from 17 October 2011)” for $1,771,000. Mr Sullivan counter-offered with two options, one totalling $1,120,000 and the other $955,000.
[29] Mr Jans, who was under tremendous stress by this time, was hospitalised the following day. He took no further part in the negotiations.
[30] Early on 3 July 2014 Mr Clode advised that he would accept $1,430,000 for his “50% shareholding ... and the project IP (established from 17 October 2011)”. Mr Sullivan said in evidence that although he did not believe that Mr Clode’s “shareholder claim” would prevent the trustees acquiring the development and considered the level of Mr Clode’s claim completely unjustified, the rights to the key documents now claimed under the assignments and PSAs could potentially derail the development; the trustees could not obtain the finance necessary to complete the development without them and the existing sale and purchase contracts for the apartments contained sunset clauses which would permit purchasers to cancel if the development was not finalised by 31 December 2015.
[31] In the circumstances, Mr Sullivan considered that he had to accept the PSAs and assignments at face value as granting Mr Clode and Synergy the rights to the key documents. He offered Mr Clode a package totalling $1,055,000, which Mr Clode accepted. The letter from Mr Harrison in which the settlement offer was made noted “[w]e must record that we do not accept Mr Clode’s claims in respect of shareholdings and this is without prejudice to our own client’s position”. Mr Clode was to receive $150,000 on 3 July 2014 and $300,000 on the first draw-down of the project finance. In addition, the trustees were required to cause a sale and purchase agreement to be entered into in respect of Unit 80 for the sum of $505,000 (including GST). The terms of the sale and purchase agreement were to include that no deposit would be payable and that on the date of settlement the trustees would pay $100,000 as a full and final payment (including GST). Apart from paying Mr Clode $150,000 on 3 July 2014, however, the trustees failed to perform the agreement.
Misleading and deceptive conduct?
[32] At trial Mr Clode’s position was that the PSAs were valid and enforceable, created with the intention of providing him with a second-ranking security interest to protect his position or, alternatively, that any expression by him as to the validity of the PSAs was merely a statement of opinion that was not a misrepresentation. The trustees argued that the PSAs were shams and any opinion expressed by Mr Clode as to their validity could not have been honestly and reasonably held. The Judge found for the trustees on both points.
The finding of sham
[33] Palmer J took as the relevant statement of principle the Supreme Court’s description of a sham in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue:[3]
In essence a sham is a pretence. It is possible to derive the following propositions from the leading authorities. A document will be a sham when it does not evidence the true common intention of the parties. They either intend to create different rights and obligations from those evidenced by the document or they do not intend to create any rights or obligations, whether of the kind evidenced by the document or at all.
[34] Against that statement the Judge analysed the evidence regarding the circumstances in which the PSAs had been produced and the parties’ intentions. Mr Clode said that the documents were intended to be effective and to provide him with a security interest over the work that he had created which both he and Mr Jans referred to as “intellectual property”, whilst acknowledging that this was their lay view rather than one that reflected a legal definition of intellectual property. He expected to obtain a second-ranking security interest that would protect him if there were issues with other creditors. There was no intention to defeat Dragon’s interest or to prevent a mortgagee sale.
[35] Mr Jans, however, said that when Mr Clode proposed the PSAs he put the idea on the basis that the agreements would provide leverage with Dragon if they were backdated, enabling Mr Clode and Mr Jans to “run interference” with the intended mortgagee sale. Mr Jans was clear that TPHL had no means of paying $5,000,000 under either of the PSAs and that, in any event, Mr Clode’s interest in the development had always been limited to his 50 per cent shareholding in TPHL and, through that, a share in the profits of the development if any were realised.
[36] The Judge also heard from Mr Carson (the solicitor from whom Mr Clode obtained the template for the PSAs). Mr Carson said that Mr Clode telephoned him on 6 June 2014 and told him that he was intending to assign the pre-sale contracts and “intellectual property” relating to the development to Mr Oliphant. He stated that his intention was to create “running interference” for the anticipated mortgagee sale. Mr Carson expressed reservations about the effectiveness of that strategy given that TPHL’s assets were already subject to a first-ranking security interest, but nevertheless forwarded Mr Clode a draft deed of assignment by way of mortgage over material contracts and a draft general security agreement.
[37] Palmer J preferred Mr Jans’ evidence as to the intended purpose of the PSAs:
[90] I find Mr Jans’ evidence that they did not intend to give effect to the documents is more credible than Mr Clode’s evidence that they were intended to provide Mr Clode with a second ranking security interest protecting him if there were issues with other creditors.
[91] The backdating and the witnessing of the documents does not boost their credibility ... Mr Clode, supported by Mr Oliphant, says they were backdated to the point in time at which the intellectual property in the project “crystallised” and just before the transfer of the development from BPIL to TPHL. Mr Clode acknowledges he may not be using the term “intellectual property” in its legal sense. But that purpose and timing lends weight to the suggestion that they were generated in order to throw a spanner in the works of a potential purchaser of the development, rather than representing genuine proprietary rights owned by Mr Clode and Synergy.
[38] The Judge went on to reject the suggestion that either Mr Clode or Synergy had copyright in any of the handwritten drawings Mr Clode had produced and been paid for on commission for BPIL or had any other intellectual property in the legal sense in the development.[4] In any event, he considered that Mr Clode could not have had any intellectual property rights prior to 9 March 2012 because he was bankrupt until then. He also rejected as not credible Mr Clode’s suggestion that he had not been paid for his “intellectual property”.
[39] He concluded that:
[98] I am satisfied that the PSAs and associated assignments did not evince a true common intention on the part of Mr Jans via TPHL (in respect of both PSAs and assignments) and BPIL (in respect of the Clode PSA and assignment) to create or assign intellectual property rights to Mr Clode or Synergy. These documents do not reflect the true nature of what the parties agreed. Instead, they were designed by Mr Clode, and agreed to by Mr Jans, as a means of “running interference” with a potential mortgagee sale by Dragon. The PSAs and assignments meet the legal definition of a sham.
[40] Mr Clode argued that Palmer J had not actually made an adverse finding regarding his credibility or reliability but merely found that Mr Jans’ evidence was “more credible”. Further, the Judge’s reasoning suggested that the PSAs were not genuine because they were generated “to throw a spanner in the works” and/or because Mr Clode had no legitimate claim to intellectual property connected with the development. He submitted that this reasoning was wrong because:
- (a) the PSAs were entered into for the purpose of protecting Mr Clode’s financial interest in the development, not just to interfere with the mortgagee sale;
- (b) in any event the two purposes would not have been mutually exclusive;
- (c) even if the documents had been created for an illegitimate purpose, in terms of Ben Nevis they fulfilled the requirements for legally valid documents and were therefore not shams; and
- (d) that the parties had made their own definition of what constituted “intellectual property” in the development so that Mr Clode did have a legitimate right in that regard.
[41] We do not accept any of these arguments. First, it is plain that the Judge accepted Mr Jans’ evidence and did not accept Mr Clode’s evidence regarding their respective intentions as to the effect of the PSAs and assignments, a finding that was certainly open to him. In the face of that finding, it is not tenable to suggest that Mr Clode emerged from the trial with his credibility intact. Mr Clode is therefore precluded from arguing that a purpose of the documents was to protect his legitimate interest in the development.
[42] This leaves only the argument that even if the documents were created for an illegitimate purpose, they fulfilled the requirements for legally valid documents and therefore were not shams. This argument was, essentially, that the Judge’s finding of a sham failed to distinguish between the meaning and effect of the PSAs and associated assignments on the one hand and the purpose for which those documents might be used on the other. Because the PSAs recorded a legitimate financial interest and created a legitimate security for that interest, the purpose for which they were created did not matter. The submission was based on the fact that in Ben Nevis the insurance contracts entered into by the parties to the Trinity scheme were found not to have been shams despite contributing to the scheme that, overall, was characterised as a tax avoidance arrangement.
[43] We do not see that this comparison with Ben Nevis assists Mr Clode. The insurance contracts in Ben Nevis were regarded as genuine because they created actual obligations by a licensed insurer in respect of an insurable asset for which part of a premium was paid. The fact that these obligations were created as part of the tax avoidance arrangement did not detract from these features. In comparison, the evidence did not support Mr Clode’s claim that he and Mr Jans had agreed that the items that were the subject of the PSA were to be treated as “intellectual property” or that they belonged to him. To the contrary, under the Clode PSA, TPHL purported to purchase from Mr Clode assets that, in truth, mostly belonged to TPHL itself when the company had no means of paying the specified “price”. As a result the PSA could not have created valid and enforceable obligations. Moreover, under the GSA with NZMS, which pre-dated the PSA, TPHL undertook not to use its property as security or to dispose of it so that the purported obligations assumed by TPHL under the PSAs placed TPHL in breach of its existing obligations.
[44] Even to the extent of assets other than “intellectual property” ie “cash flow funding, input and experience of [Mr Clode] from October 2011” there was no basis on which to conclude that the PSAs could have created valid and enforceable obligations. Mr Clode was bankrupt until March 2012 and had no right to acquire further property until after then. Further, he was remunerated (either personally or through Synergy) for his work prior to the sale of the development so there is insufficient evidence to suggest that he had any asset that could have been the subject of the PSA.
Honest belief on reasonable grounds that the PSAs were valid and enforceable?
[45] It is generally accepted that a statement of opinion is not actionable under s 9 of the FTA if it is honestly held and has a reasonable basis.[5] Mr Clode argued that he honestly believed on reasonable grounds that the Clode PSA and associated assignment were valid and enforceable documents and his reliance on them was merely a statement of his opinion to that effect. The Judge did not accept that assertion:[6]
But the representation by Mr Clode was not that his claims to the intellectual property in the development were uncertain. He was assertive in claiming they were valid ... And he was in a better position than was Mr Sullivan. An integral element of his representation to Mr Sullivan must be taken to have been that Mr Clode knew of no reason why they would be invalid. Alternatively, which may amount to the same thing, I consider Mr Clode’s asserted opinion that the PSAs and assignments were valid was not honestly held and reasonably based.
...
I do not need to determine whether Mr Clode intended to mislead or deceive in negotiating with Mr Sullivan on the basis that the PSAs and assignments were valid. But, for the reasons canvassed above, I consider either Mr Clode must have known they were not or a reasonable person in his position would have known that.
[46] On appeal Mr Clode argued that these findings were based on the earlier finding that neither he nor Synergy had any intellectual property claim to the project because the drawings had been produced by them on commission and paid for. He argued that this was irrelevant because (reiterating his previous submission) his claim was not limited to non-payment for drawings but represented his whole contribution to the project.
[47] This argument cannot stand in the face of the Judge’s finding that Mr Clode and Mr Jans did not intend the documents to be valid and enforceable but simply to interfere with the mortgagee sale process. But, in addition, Mr Clode’s argument is contrary to the real nature of Mr Clode’s interest in the development; the evidence was clear that Mr Clode’s interest in the development was only through his shareholding in TPHL. There was no evidential foundation on which to find that Mr Clode had any other interest in the development that would found a direct claim for the contribution he had made to it and therefore no basis on which he could honestly have believed that he had any different entitlement.
Did Mr Clode’s conduct cause the trustees loss?
[48] Under s 43 of the FTA relief is available to a person who has or is likely to suffer loss or damage “by conduct of another person” in contravention of the Act. Mr Clode submitted that the Judge did not properly address the issue of whether the trustees suffered loss as a result of his conduct but instead assumed that by entering into the settlement agreement in reliance upon Mr Clode’s representation loss or damage was suffered. Such an assumption would, he argued, be contrary to the evidence.
[49] On this issue the Judge said:[7]
To rely on s 43(3)(a) of the Fair Trading Act Mr Sullivan has to show, according to s 43(1), that he has suffered loss “by conduct” of Mr Clode. This is the inevitable outcome of my findings above. Mr Clode’s representation that he had valid intellectual property rights in the development that he was willing to give up for compensation induced Mr Sullivan to enter into the Agreement.
[50] We think it is fair to say that the Judge did proceed on the basis that entering into the settlement agreement necessarily led to loss for the trustees. We therefore turn to consider Mr Clode’s argument that the evidence did not show that the trustees suffered loss as a result of his conduct.
[51] Mr Clode argued that, on Mr Sullivan’s own evidence, the amount the trustees agreed to pay Mr Clode ($1,055,000) was simply deducted from payments that would otherwise have been made to other creditors to that level, so that there was no actual loss as a result. In evidence Mr Sullivan had explained that negotiations started (at Mr Jans’ request) on the basis that the trustees would pay a figure that would enable as many of TPHL’s creditors to be paid as possible. Mr Sullivan, however, said that this became difficult to achieve once Mr Clode began to assert his claims under the PSAs. Initially, the trustees had worked on a figure of $750,000 for the TPHL creditors and $400,000 to pay out Mr Jans’ original equity. Mr Sullivan said that if the trustees had to pay more money to Mr Clode then there would be less money for the creditors.
[52] Mr Clode argued that the amount that the trustees agreed to pay him was produced by deducting payments that they would otherwise have made to TPHL’s creditors so that they paid no more as a result of Mr Clode’s conduct than they would have paid in any event. We do not accept this argument. Whether, and to what extent, the trustees would have spent the money they were induced by Mr Clode’s misrepresentations to spend on the settlement agreement is not relevant to the causation inquiry under s 43(1). In Red Eagle Corp Ltd v Ellis the Supreme Court described the approach for causation under s 43 in the following terms:[8]
The language of s 43 has been said to require a “common law practical or common-sense concept of causation”. The court must first ask itself whether the particular claimant was actually misled or deceived by the defendant’s conduct. It does not follow from the fact that a reasonable person would have been misled or deceived (the capacity of the conduct) that the particular claimant was actually misled or deceived. If the court takes the view, usually by drawing an inference from the evidence as a whole, that the claimant was indeed misled or deceived, it needs then to ask whether the defendant’s conduct in breach of s 9 was an operating cause of the claimant’s loss or damage. Put another way, was the defendant’s breach the effective cause or an effective cause? Richardson J in Goldsbro spoke of the need for, or as he put it, the sufficiency of, a “clear nexus” between the conduct and the loss or damage. The impugned conduct, in breach of s 9, does not have to be the sole cause, but it must be an effective cause, not merely something which was, in the end, immaterial to the suffering of the loss or damage.
[53] It does not lie with a party who, by his misleading and deceptive conduct, induced a payment higher than would otherwise have been made to him to say that the other party suffered no loss because he would have spent the money in any event.
Was the relief granted appropriate?
[54] The Judge made an order that the agreement was void from the date it was entered into, 3 July 2014, though he did not provide any reasoning for his decision on this point:
[154] Since Mr Sullivan suffered loss from Mr Clode’s misleading and deceptive conduct (and contractual misrepresentation) I agree it is appropriate to make the order he seeks.
[55] Mr Clode submitted that the Judge failed to exercise the discretion required by s 43 to grant relief in a principled manner and that the order that the settlement agreement was void was inappropriate in the circumstances.
[56] Section 43 confers the discretion to make a variety of orders including “an order declaring all or part of a contract made between person A and person B ... to be void”. The wording of s 43(3)(a) reflects the intention that the Court have broad and flexible powers to do justice in the particular case. In Goldsbro v Walker Richardson J put it like this:[9]
The Fair Trading Act is important economic and social legislation. In exercising the powers under the statute it is a matter of doing justice to the parties in the circumstances of the particular case and in terms of the policy of the Act. In many cases there may be no reason why the plaintiff should not obtain full recovery in respect of his or her loss but in others the culpability of third parties, the gross carelessness of the consumer, the minor role of the contravener of s 9, may lead to the conclusion that the justice of the case does not require that the full loss sustained by the consumer be visited on the contravener.
[57] Goldsbro v Walker was, of course, decided in the context of a money claim. But the same approach will apply in the context of orders declaring a contract void; it is not necessarily an “all or nothing” approach.
[58] Mr Clode argued that there were three relevant factors that the Judge should have taken into account in considering the appropriateness of the remedy he granted and that, had he done so, a proper exercise of the discretion would have resulted in the payments due by the trustees under the settlement agreement simply being reduced rather than eliminated altogether. At the very least, Mr Clode ought to have been entitled to retain the $150,000 actually paid under the settlement agreement.
[59] The first factor is that, by their nature, settlement agreements reflect the compromise of a claim known to be doubtful either in fact or law. Such compromises are nevertheless binding save where the party asserting the claim was not acting in good faith. In Couch v Branch Investments (1969) Ltd Richardson J adopted the following statement of principle from Corbin on Contracts:[10]
He [the claimant] must be asserting his claim ‘in good faith’; but this does not mean that he must believe that his suit can be won. It means that he must not be making his claim or threatening suit for purposes of vexation, or in order to realize on its ‘nuisance value’. And if there is no reasonable ground for making the claim, this factor generally justifies (without going so far as to say that it requires) a finding that the claim was vexatious and made in bad faith.
[60] Subsequently in Moyes & Groves Ltd v Radiation NZ Ltd Cooke J, commenting on Couch, observed:[11]
The case and the authorities there collected indicate, putting the point at its lowest, that the Courts are very slow to reject a compromise of a bona fide claim as consideration on the mere ground that on subsequent analysis it may be seen to have had small prospects of success.
[61] Mr Clode asserted that he had acted in good faith and the trustees should therefore be bound by the settlement agreement. The difficulty with this argument is the Judge’s finding regarding the purpose for which the PSA documents were used; Mr Clode cannot claim to have been acting in good faith as regards that aspect of the negotiation. It is true that, to the extent that he advanced his claim on the basis of his status as a shareholder, he was acting in good faith (he did hold the beneficial interest in 50 per cent of the shares of TPHL and may well have believed himself entitled to exert some control over TPHL’s decision to sell the development to the trustees). But the evidence was clear that Mr Sullivan was not induced by this aspect of Mr Clode’s claim. He said that he put no weight on it because he had had legal advice that, even if Mr Clode did have a beneficial interest in the shareholding, the trustees were nevertheless entitled to deal with Mr Jans as the sole registered shareholder and director.
[62] The second factor is Mr Sullivan’s decision to proceed without investigating the validity of Mr Clode’s claims. Mr Clode argued that Mr Sullivan knew from his discussions with Mr Jans that the Clode PSA had only been signed recently and that Mr Jans was certain that Ms Cooper, the witness, had not been present when they were signed. We see no merit in this argument. Mr Sullivan did, in fact, make enquiries. In particular, he and Mr Jans visited Ms Cooper, who clearly misled them as to the date on which the agreements had been signed. Given the apparent validity of the agreements on their face and the fact that Mr Clode was proffering them as valid (even to the point of suggesting that someone else had offered to purchase the assignments) Mr Sullivan had few options in the very short time available to him before the PLA notice expired.
[63] The third factor was that the effect of the judgment was to relieve the trustees of paying anything to Mr Clode so that Mr Clode’s genuine claims as a shareholder and any possible claim under the PSAs have been eliminated. This does not take matters any further than the previous factors already discussed. Mr Clode had no real leverage against the trustees and seriously overplayed his hand in using the backdated PSAs and assignments. It is clear from the evidence that, in the absence of those documents, the trustees would not have paid Mr Clode anything.
Result
[64] We conclude that the Judge did not err in finding Mr Clode’s conduct was misleading and deceptive. It was open to the Judge to find that the parties did not intend the rights and obligations evidenced by the PSAs. In light of these findings, Mr Clode’s contention that the PSAs were not shams and that, regardless, he had an honest and reasonable belief as to their validity cannot stand. Nor did the Judge err in finding that the trustees were misled or deceived by Mr Clode’s conduct. We are further satisfied that the trustees suffered loss as a result of that conduct and that the relief granted by Palmer J was justified.
[65] The appeal is dismissed.
[66] The appellants must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
MinterEllisonRuddWatts, Auckland for
Respondents
[1] Clode v Sullivan [2016] NZHC 1561.
[2] Mr Clode appeared in person to argue the appeal but had the benefit of full written submissions filed by his counsel beforehand.
[3] Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [33] (footnotes omitted).
[4] Clode v Sullivan, above n 1, at [93].
[5] Premium Real Estate Ltd v Stevens [2008] NZCA 82, [2009] 1 NZLR 148 at [51]. For a recent example see Prattley Enterprises Ltd v Vero Insurance NZ Ltd [2015] NZHC 1444 at [184]–[186].
[6] Clode v Sullivan, above n 1, at [96] and [100].
[7] At [152].
[8] Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [29] (footnotes omitted), citing Goldsbro v Walker [1993] 1 NZLR 394 (CA) at 401.
[9] Goldsbro v Walker, above n 8, at 404.
[10] Couch v Branch Investments (1969) Ltd [1980] 2 NZLR 314 (CA) at 327.
[11] Moyes & Groves Ltd v Radiation NZ Ltd [1982] NZCA 65; [1982] 1 NZLR 368 (CA) at 371.
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