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Court of Appeal of New Zealand |
Last Updated: 21 May 2018
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BETWEEN |
GREGORY JOHN NEALE MCALISTER Appellant |
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AND |
JEFFREY KENG YEW LAI First Respondent ANDERSON CREAGH LAI LIMITED Second Respondent |
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Hearing: |
8 February 2018 |
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Court: |
Winkelmann, Asher and Gilbert JJ |
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Counsel: |
R J Hollyman and T F Cleary for Appellant A C Challis and M A Cavanaugh for First and Second Respondents |
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Judgment: |
7 May 2018 at 3 pm |
JUDGMENT OF THE COURT
___________________________________________________________________
REASONS OF THE COURT
(Given by Asher J)
Introduction
[1] This appeal concerns the point at which a lawyer who is involved in a transaction where the lawyer’s client is misleading the other party can be liable for misleading and deceptive conduct. In this case the lawyer was the first respondent, Mr Jeffrey Lai. He is the director of the company and law firm Anderson Creagh Lai Ltd (ACL), the second respondent. Mr Lai’s clients included a Mr Warren Hurst, now bankrupt, and his companies. The other party to the transaction was the appellant, Mr Gregory McAlister. The transaction was a loan advance of $200,000 from Mr McAlister to Mr Hurst’s interests.
Key facts
[2] In 2012 Mr Hurst had become interested in purchasing all the shares in a telecommunications company, Orcon Ltd (Orcon). The shares in Orcon were owned by Kordia New Zealand Ltd (Kordia). The purpose of Mr McAlister’s loan of $200,000 to Mr Hurst and his companies was to help him finance the purchase of those shares (the Orcon Purchase).
[3] The full details of the Orcon Purchase are complex and are set out in the judgment of Fogarty J appealed from.[1] The purchase price of the shares was $38 million. Mr Hurst had managed to negotiate a $22 million loan from ASB Bank Ltd (ASB) as the prime source of finance for the purchase. Kordia was prepared to provide a $10 million loan as vendor financing. That left Mr Hurst $6 million short. He became involved in what was described by Mr Hollyman, counsel for Mr McAlister, as a desperate scramble to find sufficient funds.
[4] Mr Hurst identified that consumer premises equipment (CPE) such as routers and modems owned by Orcon could be monetised to create funding for the Orcon Purchase. Kordia agreed to purchase the CPE for $3.25 million and lease that equipment back to Orcon to be provided to its customers. This offset the price of the Orcon Purchase by $3.25 million. We will refer to this $3.25 million as the “CPE Finance Funds”.
[5] Nevertheless, despite this further assistance, Mr Hurst was still short of the necessary funds to complete the purchase. It was in this context that he turned to Mr McAlister. Mr McAlister was an experienced businessman who had held various senior positions in telecommunication companies. Mr McAlister was to become the Chief Executive Officer of Orcon once settlement of the Orcon Purchase was completed. On 8 March 2013 Mr McAlister agreed to loan Mr Hurst $100,000 to pay part of the deposit on the Orcon Purchase. The loan was unsecured and has not been repaid. However, it does not form part of the present claim.
[6] In order to make up sufficient funds to complete the purchase, Mr Hurst asked Mr McAlister for a further loan on or around 8 April 2013. Mr Hurst and Mr McAlister in the end agreed that Mr McAlister would advance $200,000 to Mr Hurst to enable the settlement of the Orcon Purchase to proceed. This was to be secured by a convertible note that would give Mr McAlister the option to either seek repayment of the loan plus interest or convert the loan into shares in Semple Investments Ltd (Semple). Semple was a major shareholder in Orcon Holdings Ltd (OHL). The other shareholder was ACL Nominees (No 4) Ltd, of which Mr Lai was a director. OHL was the company that would complete the Orcon Purchase. In due course Mr Lai, on Mr Hurst’s behalf, prepared a draft convertible note and forwarded it to Mr McAlister. Mr Lai received the $200,000 advance but was instructed to hold it in his trust account pending final agreement on the terms of the loan.
[7] There was then a critical meeting on 11 April 2013, attended by Mr McAlister, Mr Hurst and Mr Lai, where it is alleged by Mr McAlister that he was misled as to Mr Hurst’s equity in the Orcon Purchase. Mr McAlister gave evidence that he was told prior to going into the meeting that Mr Hurst’s equity was $6 million, and at the meeting the representation as to equity was increased to $8.5 million. Mr McAlister said he agreed, on this understanding, to his $200,000 loan being used by Mr Hurst in the Orcon Purchase. He also said that the convertible note that secured the loan was calculated using a formula reflecting the represented amount of equity.
[8] At the conclusion of the meeting on 11 April 2013 Mr McAlister signed the convertible note, and later that day he instructed ACL to release the $200,000 to the use of Mr Hurst and his companies.
[9] The purchase of the shares took place the next day on 12 April 2013. Mr McAlister became the CEO of Orcon. In due course he discovered that there had been little, if any, equity provided by the Hurst interests to complete the Orcon Purchase, which had been almost fully funded by debt. The Hurst interests in fact may have provided no funds of their own at all, save possibly for a $1 million contribution to the deposit.
[10] Ultimately Mr Hurst went bankrupt and Semple went into liquidation, leaving the money loaned by Mr McAlister unpaid. The convertible note was of little value. However, there is reference to Mr McAlister receiving $7,864 from the liquidators of Semple in partial repayment of his $200,000 loan.
The pleadings
[11] Mr McAlister then brought these proceedings against Mr Lai under s 9 of the Fair Trading Act 1986 (the Act). He alleged that Mr Lai engaged in misleading and deceptive conduct at the meeting on 11 April 2013. Mr McAlister claimed that Mr Lai was present when Mr Hurst made false representations as to equity, and did not object or clarify that they were inaccurate. Mr McAlister further pleaded that Mr Lai prepared the convertible note that would serve as security for the loan based on Mr McAlister’s contribution to the total equity in the Orcon Purchase, represented at the meeting as $8.5 million. Mr Lai explained to Mr McAlister that the convertible note had a value of 2.85 per cent of the total equity in OHL. Mr McAlister says that Mr Lai knew or was reckless as to whether these representations were untruthful. In particular, it was alleged that both Mr Hurst and Mr Lai treated the CPE Finance Funds of $3.25 million as equity, when these were in fact proceeds of the sale of assets formerly owned by Orcon.
[12] The statement of claim expresses the misleading and deceptive conduct both as a direct breach of s 9 of the Act by Mr Lai, or alternatively, that Mr Lai was a party to Mr Hurst’s breach of s 9. Mr Lai is said to have been acting at all relevant times in his capacity as director of ACL, making ACL liable for the breach of s 9. Orders were sought under s 43 of the Act directing Mr Lai and/or ACL to pay Mr McAlister $200,000 together with interest.
The High Court decision
[13] The crucial factual issue was what happened at the meeting of 11 April 2013 and the extent of Mr Lai’s involvement in the alleged misleading and deceptive conduct. From this arose the issue of law and fact of whether Mr Lai’s actions amounted to misleading and deceptive conduct under s 9, or whether Mr Lai was a party to such conduct under s 43(1)(d).
[14] Fogarty J, having traversed what happened at the meeting of 11 April 2013, made two important findings in relation to Mr Lai’s conduct and whether it amounted to a breach of s 9. He held:
[63] With reference to Red Eagle I am satisfied that examined objectively the utilisation of the $8.5 million of equity was factored into the equations by Mr Lai who knew it was not equity, at least as to the CPE component. He did not, however, caution or alert Mr McAlister. Objectively, the failure to caution contributed to Mr Hurst’s misleading conduct, in breach of s 9. This conclusion does not rest on Mr Lai’s omission to warn Mr McAlister of a misleading or deceptive statement by Mr Hurst. Rather, by completing the calculation in this way, whilst explaining and negotiating the terms, Mr Lai himself contributed to conduct that was in breach of s 9.
[15] Later he concluded:
[80] I find that Mr Hurst engaged in conduct in breach of s 9 and that Mr Lai through his silence contributed unwittingly to that breach. This breach caused Mr McAlister’s loss. ...
[16] There was some debate in submissions as to what exactly the Judge was saying in these two paragraphs. Was he finding Mr Lai to be in breach of s 9 by his own conduct? Or was he finding that Mr Lai was a party to the breach of s 9 by Mr Hurst? We do not traverse all the relevant paragraphs in Fogarty J’s judgment, but we interpret his statements as a finding that Mr Lai, by his own conduct, breached s 9. We regard this to be plain from [63] of the judgment[2] where Fogarty J finds that the $8.5 million of equity was “factored into the equations by Mr Lai” for the convertible note, and that by explaining and negotiating the terms on that basis, “Mr Lai contributed to conduct that was in breach of s 9”. Although the Judge used the words “contributed to”, given the other sentences in the paragraph we consider that in context this means “engaged in”. That this was Fogarty J’s finding is also clear in the following passage of his judgment:
[71] For all these reasons I conclude that the plaintiff has made out its case that s 9 was breached by Mr Lai in trade engaging in conduct that was misleading or deceptive, by omitting to clarify that there was no injection of equity as in a sum of money not bearing interest in the purchase price in the sums either of $6 million or $8.5 million.
[17] Despite finding that Mr Lai had breached s 9, the Judge did not order Mr Lai or ACL to pay damages under s 43 of the Act. He did so on the basis that Mr Lai was not “knowingly concerned” in the breach of s 9 for the purposes of s 43(1)(d).
The issues
[18] Mr Hollyman submitted that the Judge erred in declining to make an order under s 43. He advanced two grounds of appeal on behalf of Mr McAlister:
- (a) Given the finding that Mr Lai himself breached s 9, it was not necessary for Mr McAlister to establish that Mr Lai was “knowingly concerned” in the breach under s 43(1)(d).
- (b) Even if Mr Lai himself did not directly breach s 9, Mr Lai knew that Mr Hurst’s representations as to equity were false and was therefore “knowingly concerned” in Mr Hurst’s breach of s 9, thereby meeting the requirements of s 43(1)(d).
[19] The respondents, represented by Ms Challis, accepted the first ground. However, they have cross-appealed against Fogarty J’s finding that Mr Lai himself engaged in misleading and deceptive conduct. On the second ground, the respondents submit that Mr Lai lacked the requisite knowledge for an order under s 43(1)(d).
Error in relation to s 43
[20] Mr McAlister’s claim failed because Fogarty J considered that an order could not be made under s 43(1)(d) of the Act. Section 43 provides:
43 Other orders
(1) This section applies if, in proceedings under this Part or on the application of any person, a court or the Disputes Tribunal finds that a person (person A) has suffered, or is likely to suffer, loss or damage by conduct of another person (person B) that does or may constitute any of the following:
(a) a contravention of a provision of Parts 1 to 4A (relevant provision):
(b) aiding, abetting, counselling, or procuring a contravention of a relevant provision:
(c) inducing by threats, promises, or otherwise a contravention of a relevant provision:
(d) being in any way directly or indirectly knowingly concerned in, or party to, a contravention of a relevant provision:
(e) conspiring with any other person in the contravention of a relevant provision.
(2) The court or the Disputes Tribunal may make 1 or more of the orders described in subsection (3)—
(a) whether or not the court grants an injunction, or the court or the Disputes Tribunal makes any other order, under this Part; and
(b) whether or not person A made the application or is a party to the proceedings.
(3) The orders are as follows:
...
(f) an order directing person B to pay to person A the amount of the loss or damage:
...
...
[21] Given Fogarty J’s finding that Mr Lai himself breached s 9, the relevant provision is s 43(1)(a). However, the Judge interpreted s 43(1) in the circumstances of the case before him as requiring Mr Lai to have been directly or indirectly “knowingly concerned” in the contravention under s 43(1)(d) of the Act, before any order could be made under s 43(1)(a). In other words, Mr Lai’s contravention under the Act, although it fell under s 43(1)(a), could not of itself give rise to an order unless Mr Lai qualified under s 43(1)(d). He held:
[74] There is an argument that (d) is a qualifier to (a) because the matters in (d) could be regarded as a contravention yet they have been separated out into a separate paragraph. Any relief is discretionary. In my judgment conduct which falls within s 43(1)(d) is obviously best applicable to a person who was not the prime actor but was rather concerned in, or party to a contravention. For these reasons I think that any relief in response to Mr Lai’s conduct, properly falls to depend upon the application of s 43(1)(d). It is necessary under s 43(1)(d) to find that he was knowingly concerned. So far I have found he caused loss, by an objective analysis of his conduct. But to recover damages under s 43(1)(d) his state of mind must be proved. The word “knowingly” invites a finding of culpability, an awareness of being party to a contravention of the Fair Trading Act.
The Judge did not think the necessary knowing state of mind had been established in relation to Mr Lai.[3]
[22] With respect to the learned Judge, the approach he adopted in relation to s 43 was in error. Section 43 sets out the orders that can be made if there is a breach of the Act. Section 43(1) requires the person claiming to have suffered loss or damage by the conduct of another person to establish any of the conduct that is listed. The listed actions in s 43(1) comprehend breaches of various sections of the Act either directly or by aiding and abetting, inducing, conspiring or being “directly or indirectly knowingly concerned in or party to” a contravention. There are no words in s 43(1) which indicate that any of the paragraphs in s 43(1)(a)–(e) qualify each other. Each s 43(1) item is a separate type of conduct that may give rise to a s 43(3) order, and is independent of the others.
[23] Ms Challis responsibly agreed with Mr Hollyman that s 43(1)(d) does not qualify s 43(1)(a). Given Ms Challis’ concession, in our view rightly made, the central question in this appeal is whether the Judge’s assessment that Mr Lai’s conduct amounted to a breach of s 9 was correct. This issue, the subject of the crossappeal, is strongly contested. It turns on what happened at the meeting of 11 April 2013.
Did Mr Lai engage in misleading and deceptive conduct?
[24] Mr Hollyman defended Fogarty J’s finding that Mr Lai’s own conduct was misleading or deceptive in breach of s 9. In contrast, Ms Challis argued that Mr Lai did not make any representations as to equity or calculate the convertible note on the basis of the represented equity, and that the Judge’s findings that he did so were unsupported by the evidence. Ms Challis further submitted that, even if Mr Lai did so, in the circumstances this did not amount to misleading or deceptive conduct.
The principles
[25] Section 9 of the Act provides:
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.
[26] As has been frequently stated, the statutory wording of the Act is straightforward and does not call for extensive judicial gloss.[4] Section 9 of the Act makes a simple statement on primary liability. It does not require a duty of care or relationship as in most torts, or an equitable obligation as is required in equitable causes of action. There is no need for a transactional relationship as in contract. All that is required is that, viewed objectively in the context in which it occurred, there was misleading or deceptive conduct.[5] Importantly, in relation to misrepresentations, it is not necessary to prove that the person making the false representation knew of its falsity. If a representation is made in circumstances that qualify under s 9, it is false whatever the state of knowledge of the representor.[6]
[27] Silence in certain contexts can amount to a misrepresentation, and indeed, literal truth can on occasions amount to a misrepresentation. The question is whether in context the meaning affirmatively conveyed by the defendant in one way or another is false.[7]
[28] New Zealand decisions on occasions refer to the Australian test of reasonable expectation of disclosure.[8] This was raised by Ms Challis to assert that there was no breach of s 9. While the expectations of the parties can be relevant, this Court in Hanover Group Holdings Ltd v AIG Insurance New Zealand Ltd had reservations about applying this as a test.[9] To superimpose such a concept would be unnecessarily prescriptive and complicate the simplicity of the s 9 words. The issue is whether a reasonable person in the claimant’s situation, with the characteristics known to the defendant or of which the defendant should have been aware, would have been likely to have been misled or deceived.[10]
[29] An innocent agent who merely acts as a conduit for information, and purports to do no more than that, is not responsible for anything misleading in the information passed on.[11] However, an agent who passes on information inaccurately or purports to adopt it or add to it may engage in misleading or deceptive conduct.[12]
The meeting of 11 April 2013
[30] This meeting was held at Mr Lai’s office. As we have set out, there were three people present: Mr McAlister, Mr Hurst and Mr Lai. All three gave evidence at the trial. The meeting occurred in the context of settlement of the Orcon Purchase being proposed for the next day, and Mr Hurst being under pressure to have his finance all arranged and available. Prior to the meeting Mr McAlister, at Mr Hurst’s request, had paid the proposed loan of $200,000 into the trust account of ACL, to be held in trust pending finalisation of the terms of the loan. The money needed to be put into ACL’s trust account in advance of settlement so that an assurance as to funds being held by ACL could be given on behalf of Mr Hurst’s interests to Kordia’s lawyers.
[31] Prior to the meeting Mr Lai had prepared the convertible note which was intended to provide the agreed security for the $200,000 advance. Mr McAlister was coming into his office to finalise its terms and to sign it. It is to be noted that while the convertible note was over the shares in Semple, Semple was not the purchaser of the shares in Orcon. The purchaser of the shares was another Hurst company, OHL, and Semple was a shareholder in OHL. Mr Lai explained that the note was structured in this way to avoid the need to seek ASB’s consent to a change of shareholding in OHL at that late stage, although there was some conflict in the evidence on this point.[13]
[32] There were a number of issues discussed at the meeting and we do not propose traversing them all. There was a discussion as to when the choice of converting the note into shares or a payment of the secured amount with interest should arise. At one point, Mr McAlister asked Mr Lai if the convertible note was safe for him to sign. Mr Lai told him that if he wanted advice on whether to enter the transaction he should seek his own independent legal advice as he, Mr Lai, was not Mr McAlister’s lawyer. It is also to be noted that Mr Lai’s evidence was that he was not at the meeting the whole time and went outside of the office on occasions.
[33] Importantly, it was Mr McAlister’s evidence that at the meeting he said he was not prepared to sign the convertible note, as it was drafted on the basis of the total purchase price of the shares, $38 million. He deposed that the convertible note was redrafted during the meeting, with a formula based not on the price of the shares but on the basis of Mr McAlister’s contribution to the total equity in the Orcon Purchase, represented by Mr Hurst at the meeting as $8.5 million. The conversion rate would be based on Mr McAlister’s contribution of $200,000 divided by the total equity in the transaction minus 10 per cent. Semple’s percentage shareholding in OHL was also taken into account. Mr McAlister’s evidence was that Mr Lai performed these calculations and the parties ultimately arrived at a conversion rate of 2.85 per cent. The convertible note was redrafted on that basis. Mr McAlister, after reviewing that redrafted convertible note, signed it and left.
[34] Mr Lai’s evidence was that there was no discussion as to the total equity in the Orcon Purchase at the meeting whilst he was present. He denied that the equity formed any part of the calculations for the convertible note. However, he could not be precise about how the figure of 2.85 per cent was reached. He deposed that all parties were aware of the use of the CPE Finance Funds in the funding of the Orcon Purchase. Although his involvement in the funding aspects of the Orcon Purchase increased as the transaction progressed, Mr Lai deposed that, at the time of the meeting, he did not know the full details of how the purchase was being funded.
Fogarty J’s findings
[35] Fogarty J preferred Mr McAlister’s evidence as to the events at the meeting. In particular he found that Mr Hurst referred to the equity figures of $6 million and $8.5 million in the presence of Mr Lai. There was no evidence that either Mr Hurst or Mr Lai communicated that those figures had been reached by including the $3.5 million in CPE Finance Funds. He accepted Mr McAlister’s evidence that the convertible note was redrafted at the meeting to reflect Mr McAlister’s contribution to the total equity in the Orcon Purchase. As the Judge noted, there was doubt among the parties at the meeting as to how the ultimate percentage figure of 2.85 per cent was calculated.[14] Mr Lai indeed was not entirely sure how he had computed the final figure and no one was able to entirely work it out. Fogarty J did not find it possible to resolve precisely how the figure was reached.[15] However, crucially, the Judge found that Mr Lai was personally involved in calculating the new convertible note on the basis of an equity of $8.5 million.
[36] Fogarty J found that Mr Lai was aware that Mr Hurst’s representation as to the equity in the Orcon Purchase was inaccurate. However, the Judge considered that the evidence fell short of establishing that Mr Lai knew that the representation was likely to mislead or deceive.[16] Rather, in the course of a busy day before settlement, Mr Lai did not consider whether the representations as to equity were misleading Mr McAlister.
Our analysis
[37] We agree with the findings of Fogarty J. There can be no doubt that there was a discussion about the amount of equity in the Orcon Purchase, because it was unchallenged that Mr McAlister made a contemporaneous file note referring to the $8.5 million, the 10 per cent discount and the final figure of 2.85 per cent.
[38] Moreover, Mr Hurst in his evidence agreed that he explained the structure of the transaction as involving $6 million of equity, and that he mentioned an equity of $8.5 million. Indeed he said he used that figure and other figures consistently in his discussions with all investors. The figures are also consistent with what the primary funder, ASB, was told about equity. Mr Hurst said that he did indeed consider at the time of the meeting that the equitable value of the business after purchase would be $8.5 million. Mr Hurst also appeared to accept in his evidence that the calculation which resulted in the 2.85 per cent figure in the convertible note was based on Mr McAlister’s contribution as a proportion of equity.
[39] We think that Fogarty J was correct to reject Mr Lai’s assertion that he did not use equity in his conversion rate calculation.[17] Mr Lai’s evidence on this in the High Court was confused and at times contradictory, and he accepted that he must have calculated matters differently from what he had stated in his brief of evidence. It was at odds with Mr Hurst’s evidence (whom Mr Lai called), and that of Mr McAlister.
[40] Mr Lai was involved in the sale of the CPE assets in early April 2013. Because of the arrangement that had been reached to transfer the CPE assets to Kordia, the $3.25 million CPE Finance Funds should have been deducted from the equity being discussed. Mr Lai was privy to all aspects of the transaction from Mr Hurst’s point of view and, viewing the facts and context objectively, must have known that the represented equity of $6 or $8.5 million was wrong. If the CPE Finance Funds were removed, the equity was considerably less.
[41] It is relevant in this regard that the primary financier, ASB, and its lawyers, Buddle Findlay, were also unaware that the CPE Finance Funds were being used to finance the Orcon Purchase. At the trial this proposition was resisted by Mr Lai and ACL, but there was strong evidence to the contrary and the Judge accepted the evidence from ASB witnesses to the effect that at no point prior to settlement was ASB informed of the use of the CPE Finance Funds to fund the Orcon Purchase.[18] This is further support for the allegation that Mr Hurst was making misrepresentations about his equity to prospective lenders.
[42] In summary it is our assessment, consistent with Fogarty J’s findings, that at the meeting of 11 April 2013:
(a) Mr Hurst represented to Mr McAlister that he was contributing $8.5 million in equity to the Orcon Purchase.
(b) This was false. At least $3.25 million had to be subtracted because the CPE Finance Funds were not equity.
(c) Mr Lai knew that the equity was not $8.5 million, at least as to the CPE Finance Funds component.
(d) Mr Lai worked nevertheless on the formula and the convertible note at the meeting on the basis of an equity of $8.5 million. That figure was incorrect, the equity being considerably less, and indeed less than the $6 million represented earlier.
[43] It is clear that the direct oral representations about equity came from Mr Hurst. The issue we must decide is whether Mr Lai, by calculating the value of the convertible note on the basis of that equity and presenting it to Mr McAlister, adopted or endorsed the misrepresentation.
[44] The question of whether Mr Lai adopted the misrepresentation as to equity cannot be considered in the vacuum of the meeting on 11 April 2013. It must be considered in the light of Mr Lai’s involvement in the Orcon Purchase as a whole. As we have set out above, Mr Lai had been involved in the transaction from its outset and was involved in the arrangements concerning the CPE Finance Funds. He therefore would be expected to know, and in our assessment did in fact know, that the equity figure of $8.5 million was incorrect, at least insofar as it included the CPE Finance Funds. In these circumstances, when Mr Lai did the calculation for the convertible note in Mr McAlister’s presence using an equity figure which he knew was false, and presented the result of his calculation to Mr McAlister, Mr Lai was by his conduct representing the accuracy of the equity figure. That was misleading. The equity was significantly less than the represented $8.5 million.
[45] It would have been different if Mr Lai was fresh to the transaction and plainly just working off figures that had been given to him by the parties, and did not know if they were correct or incorrect. Looking at such actions objectively, Mr Lai would have been a mere conduit, who was not engaged in the misrepresentation. Instead, Mr Lai was closely involved in the misrepresented transaction. Mr McAlister was aware that Mr Lai had been acting for Mr Hurst’s interests throughout the transaction, including in dealings with financiers. Mr McAlister could therefore reasonably expect that Mr Lai would know whether the figures that he was using as to the equity in the transaction were correct or incorrect. By using the figure of $8.5 million in his calculations for the convertible note, Mr Lai adopted that figure as accurate.
[46] Ms Challis raised the issue of privilege and Mr Lai’s duty to his client, Mr Hurst. Arguably, a conflict of interest issue may have arisen if Mr Lai had interrupted Mr Hurst in Mr McAlister’s presence and, without notice to Mr Hurst, said the equity figure he was using was wrong. This could have unfairly damaged his client’s efforts to obtain agreement.
[47] However, there are other options available to a lawyer in a situation where it is realised in the course of a negotiation that the client is misleading the other party to the transaction. It was open to Mr Lai, when it became clear that Mr McAlister was relying on incorrect figures provided by his client, to have asked to have a word with Mr Hurst in private. He could then have informed Mr Hurst that he should correct Mr McAlister’s misapprehension. If Mr Hurst would not do so, Mr Lai and his firm could fairly say they would not carry out any action that directly or indirectly reinforced the misrepresentation. Mr Lai could have refused to have participated further in the misleading conduct. Doing this would be awkward for his professional relationship with Mr Hurst, but against the alternative of actively participating in a transaction where a party was being misled, it was the required option. The simple way out was for Mr Hurst and Mr Lai to go back into the meeting and correct Mr McAlister’s misapprehension. Failing Mr Hurst’s agreement to do so, Mr Lai could withdraw. In contrast, he took no steps and carried on.
[48] Although duty of care and fiduciary duty are irrelevant in considering a s 9 claim, the professional duty of lawyers puts in context the issues of privilege and confidentiality raised by Ms Challis. Rule 11.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 specifically provides, in wording identical to that used in s 9 of the Act:
Misleading and deceptive conduct
11.1 A lawyer must not engage in conduct that is misleading or deceptive or likely to mislead or deceive anyone on any aspect of the lawyer’s practice.
(Footnote omitted.)
Similarly, r 12 requires a lawyer to act with integrity in all professional dealings with third parties.
[49] We conclude that Mr Lai’s conduct in calculating the formula for the convertible note in Mr McAlister’s presence using an equity figure of $8.5 million was misleading and deceptive in breach of s 9 of the Act.
[50] There is no need for us to review Fogarty J’s finding that Mr Lai was not “knowingly concerned” in the misrepresentation in the sense of a culpable awareness that Mr McAlister was being misled. We do not need to consider the application of s 43(1)(d) as this is not a party case as we see it.
Loss
[51] Mr McAlister deposed, and Fogarty J accepted, that he would not have advanced the $200,000 if he had known that the equity was not the represented figure.[19] Indeed it can be expected that any commercial person looking to invest in a company would be concerned to know that the company will have a significant net asset value after purchase.
[52] When there is a clear infringement of s 9 resulting in loss, it is ordinarily in accord with the policy of the Act to grant a remedy.[20] An order for compensation can be made in the court’s discretion under s 43. It is a matter of doing justice to the aggrieved party in the circumstances of the particular case and in terms of the policy of the Act.[21] The appropriate order is to require Mr Lai to compensate Mr McAlister for the loss he has suffered due to the breach.
Contribution
[53] It is clear that an operating cause of loss or damage may be the claimant’s own conduct in failing to take reasonable care to look after his or her own interests.[22] The court must ask whether the claimant’s carelessness, if there was any, should be regarded as the sole or a contributory operative cause of the loss. Such negligence on the part of the claimant is not a bar to an action unless it destroys the causal connection between the contravention and loss or damage.[23]
[54] Ms Challis points out that Mr McAlister was advised to take independent advice and did not. He had already loaned some money to Mr Hurst which had not been repaid, which might have put him on alert. He made no particular inquiry into the nature of funds Mr Hurst asserted he had tied up in a trust fund and he was happy to accept the word of Mr Hurst as to the amount of the equity. He knew that there was some desperation in Mr Hurst’s search for funds in advance of settlement.
[55] However in most misrepresentation cases, the representee could in hindsight have made more inquiries and carried out more research. We do not see Mr McAlister’s conduct in accepting the representation of Mr Hurst, confirmed as it was by Mr Lai’s conduct, as being in any way reckless or indeed out of the ordinary. Mr Hurst’s company was to be Mr McAlister’s employer, so he had reason to have confidence in him. Mr McAlister took security for his investment by way of a convertible note. Independent advice is unlikely to have changed anything, as it would not have uncovered the true position regarding the equity, the details of which were private to Mr Hurst and his advisors. There was no independent way in which Mr McAlister could check Mr Hurst’s financing arrangements.
[56] Fogarty J did not consider the issue of contribution, given his finding that the claim fell at the barrier of s 43(1)(d). However, we see no need to remit this issue back to the High Court. The evidence does not show Mr McAlister’s actions in relying on the representation to have been unreasonable and warranting any deduction in the damages to be awarded.
[57] There is however the question of the amounts that Mr McAlister has received from the liquidator. The exact net figure that Mr McAlister would be entitled to in the event of success was not addressed in submissions. For this reason we must remit the question of the quantum of damages back to the High Court.
Result
[58] The appeal is allowed.
[59] Mr McAlister is entitled to recover $200,000 from the respondents, less any payments received in deduction of that amount. We remit the case back to the High Court for the calculation of the quantum of damages owed by the first and second respondents to Mr McAlister. The question of interest can also be determined at that hearing.
[60] As to costs in this Court, the parties were agreed that costs must follow the event. The first and second respondents are jointly and severally liable to pay the appellant one set of costs for a standard appeal on a band A basis and usual disbursements.
[61] Any costs order made in favour of the respondents in the High Court is set aside. We would expect the High Court costs to be agreed between the parties, but if not we also remit the case back to the High Court for the making of a suitable costs award, reflecting Mr McAlister’s success on appeal.
Solicitors:
Spencer Legal, Auckland
for Appellant
McElroys, Auckland for First and Second Respondents
[1] McAlister v Lai [2017] NZHC 791 at [1]–[10].
[3] McAlister v Lai, above n 1, at [79].
[4] Unilever New Zealand Ltd v Cerebos Gregg’s Ltd (1994) 6 TCLR 187 (CA) at 192.
[5] Goldsbro v Walker [1993] 1 NZLR 394 (CA) at 401. See also Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177 (FCA) at 199 and 202.
[6] Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [28]; and Megavitamin Laboratories (NZ) Ltd v Commerce Commission (1995) 6 TCLR 231 (HC) at 245.
[7] See Smythe v Bayleys Real Estate Ltd (1993) 5 TCLR 454 (HC); Guthrie v Taylor Parris Group Cossey Ltd (2002) 10 TCLR 367 (HC); and Unilever New Zealand Ltd v Cerebos Gregg’s Ltd, above n 4.
[8] Hieber v Barfoot & Thompson (1996) 7 TCLR 301 (HC) at 308.
[9] Hanover Group Holdings Ltd v AIG Insurance New Zealand Ltd [2013] NZCA 442, (2013) 13 TCLR 702 at [41].
[10] At [40(b)].
[11] Goldsbro v Walker, above n 5, at 398.
[12] At 398.
[13] In contrast, Mr McAlister maintained that Mr Lai told him that OHL had given an undertaking to ASB not to incur any more debt. It is not necessary for us to determine which explanation is correct.
[14] McAlister v Lai, above n 1, at [33]–[36].
[15] At [37].
[16] At [78].
[17] At [63].
[18] At [50].
[19] At [69].
[20] Goldsbro v Walker, above n 5, at 403.
[21] At 404.
[22] Red Eagle Corp Ltd v Ellis, above n 6, at [30].
[23] At [30].
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