EDWARDS V PROPRIUS HOLDINGS LTD AND ORS HC AK CIV 2005-404-407 [2009] NZHC 689 (10 June 2009)

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
                                                                    CIV 2005-404-407



                BETWEEN                      ALLISTER CLAUDE EDWARDS
                                             Plaintiff


               AND                          PROPRIUS HOLDINGS LIMITED
                                             Defendant

  
             AND                          RUDOLF PETER GITMANS, ROBERT
                                             GRAHAM AND GAVIN
IAN GARNETT
                                             AS THE TRUSTEES OF THE R P
                                            
GITMANS TRUST
                                             Third Party


Judgment:       10 June 2009 at 2.30 pm(on the papers)


                     JUDGMENT (NO 2) OF WINKELMANN J




         This judgment was delivered by me on 9 June 2009 at 2.30 pm pursuant
to
                           Rule 11.5 of the High Court Rules.




                                 Registrar/ Deputy Registrar




Solicitors:
Lowndes & Associates, Auckland
Smith & Partners, Kumeu

Counsel:
Johann Strauss, Auckland
Michael Keall, Auckland




EDWARDS V PROPRIUS HOLDINGS LTD AND ORS HC AK CIV 2005-404-407 10 June 2009
[1]      I have previously issued judgment in relation
to this proceeding against the
defendant, Proprius Holdings Limited (Proprius). The nature of the claims were
summarised at paragraphs
[1], [2] and [5] of the judgment, which I now set out:

         The plaintiff, Mr Allister Edwards, claims to have lent $300,000
to the
         defendant, Proprius Holdings Ltd, and the RP Gitmans Trust (the Trust). He
         also claims that Proprius and
the Trust guaranteed repayment of a further
         loan of $100,000 made to the Strand Trust by Mr Edwards and which he has
  
      not been repaid.

         Mr Edwards alleges that it was agreed that his return on both loans would be
         a share of
the profit earned on the development the funds were utilised for.
         Subsequently, he agreed with the Trust and Proprius to
accept ownership of
         a unit in the development in lieu of that profit share. He alleges that
         Proprius and the Trust
breached the agreement to transfer the unit to him in
         lieu of this profit share and he seeks damages against Proprius for
that
         breach.

         Proprius has issued a third party claim against the trustees of the Trust.
         Should Mr Edwards
obtain judgment against Proprius, then Proprius seeks
         indemnity or contribution from the trustees of the Trust as co-obligors
in
         respect of the $300,000 Loan, and as co-guarantors in respect of the
         $100,000 Loan. The third parties took no
steps in the proceeding prior to
         hearing.

[2]      As noted above, the trustees took no steps in the proceeding. They were
not
represented at the hearing and called no evidence. However, one of the trustees,
Mr Gitmans, gave evidence for Mr Edwards.


[3]      Following the hearing but before judgment, one of the trustee third parties
Mr Garnett, filed a memorandum which said that
he considered the claim was made
against him solely in his capacity as trustee, and would be enforceable only against
the assets
of the Trust. It was on that basis that he and the other trustees took no
steps.   The memorandum contained argument as to the basis
upon which any
judgment against the trustees should be limited to the assets of the Trust.


[4]      Proprius objected to the memorandum
being read, but asked for an
opportunity to be heard in relation to the point were I minded to receive the
memorandum.


[5]    
 Subsequently I gave judgment for Mr Edwards against Proprius as follows:
        (a)      $300,000 on the loan to Proprius.



       (b)      $100,000 in respect of Proprius' guarantee of the loan to the Strand
                 Trust.


        (c)      $445,000,
being the purchase price paid by Mr Edwards for the unit
                 he was contractually entitled to receive in lieu of profit share.


        (d)      $46,000, being
the interest paid on late settlement of that title.


        (e)      Interest at Judicature Act rates from the date of issue of
proceedings
                 to the date of judgment.


[6]     At paragraph [101] of the judgment I said in relation to the claim
against the
third parties:

        Proprius is entitled to judgment against the third parties for contribution to
        the judgment
sum since the Trust was its co-obligor. Mr Garnett does not
        seek to dispute that. There is however an issue in respect of
the form of the
        judgment against the third party trustees, and in particular whether their
        liability should be limited
to the assets of the Trust. I would be assisted by
        receiving Proprius' submission on the appropriate form of judgment on
the
        third party claim, and consider that Mr Garnett, having sought the right to
        make submissions as to the form of
judgment, should be given an
        opportunity for reply.

[7]     I have now received further submissions from Proprius and additional
submissions filed for the second and third named third parties, Mr Graham and
Mr Garnett.


[8]     In its submissions, Proprius
repeats its objection to the third parties being
heard on any issue at this point. It relies upon what it describes as the "unequivocal
injunctions" of rr 161 and 212 which were the operative High Court Rules both at
the time of trial and the post-trial filing of Mr
Garnett's memorandum.


[9]     At the time r 161(1) provided:

        If the third party makes default in filing his statement
of defence, he shall be
        deemed to admit the validity of and be bound by any judgment given in the
        proceeding, whether
by consent, default, or otherwise, and by any decision
       therein on any question specified in the defendant's statement of
claim; and
       when contribution or indemnity or any relief or remedy is claimed against
       him in such statement of claim,
he shall be deemed to admit his liability in
       respect thereof.

[10]   Rule 212 provided:

       Until a party to a contentious
proceeding has given an address for service in
       terms of these rules, he shall not be entitled to be served with notice of
any
       step in connection with the proceeding or with copies of any further
       documents filed in the proceeding or to address
the Court.

[11]   Proprius says that by virtue of r 161, the third parties are deemed to admit
their liability in respect of the
claimed contribution or indemnity against them, and as
a matter of law, although sued as trustees, that is an unlimited personal
liability.


[12]   As to the form of claim against the third parties as trustees, Proprius makes
the following points:


      
1.      The intituling of the pleadings describes the third parties as joined in
               their capacities as trustees of the
RP Gitmans Trust. Mr Gitmans
               acknowledged that they were the trustees when he gave his evidence.


       2.     
Paragraph 12(b) of the plaintiff's third amended statement of claim
               alleges that Mr Gitmans represented the RP Gitmans
Trust in relation
               to the $300,000 loan.


       3.      Paragraph 15 of the plaintiff's third amended statement of
claim
               alleges that Mr Gitmans represented the RP Gitmans Trust in relation
               to the $100,000 guarantee.


       4.      Paragraph 20(b) of the plaintiff's third amended statement of claim
               alleges that Mr Gitmans represented
the RP Gitmans Trust in relation
               to the 1997 variation of the $300,000 loan and $100,000 guarantee.


       5.  
   Paragraph 46 of the defendant's statement of claim against the third
               parties, dated 21 March 2007, defined Mr Garnett,
Mr Gitmans and
               Mr Graham as the "Gitmans Trust" before rehearsing the plaintiff's
                allegations that the Gitmans Trust was a party to the
$300,000 loan,
                $100,000 guarantee and the 1997 variation of those agreements.


       6.       Paragraph 53 of the
defendant's statement of claim against the third
                parties, dated 21 March 2007, claims indemnity and contribution
from
                the third parties. There is no suggestion of that claim being limited to
                the assets of the RP
Gitmans Trust or otherwise.


       7.       Under r 161, the third parties are deemed to have admitted all of these
          
     matters including the relief claimed.


[13]   The defendant emphasises that I have already determined that the third
parties
are liable to the defendant for contribution. The only outstanding question is
the form of judgment and, in particular, whether the
third parties' liability is limited
to the assets of the Trust. Proprius argues that the settled law is that trustees are
personally
liable for all trust debts owed to third parties unless the third parties agree
that the liability of the trustees is limited to
the assets of the trust or in some other
way. Sovereign Homes Ltd v Meurant (HC AK CIV 2006-404-7394 15 May 2007,
Associate Judge
Doogue) is cited as authority for that proposition.                 Proprius
therefore submits that in the absence of a contractual
limitation to the third party
trustees' liability in the agreements, there is no basis for limiting their liability to the
assets
of the Trust or in any other way.


Discussion and decision


[14]   Proprius mis-states the law when it asserts that trustees are
personally liable
for all trust debts owed to third parties unless the third parties agree that the liability
of the trustees is
limited to the assets of the trust or in some other way. The law is
succinctly stated by the learned authors in Equity & Trusts in
New Zealand, Butler
2003 page 155 para 5.2.4:

       A trust is not an independent entity with a separate legal personality in the
       way that a limited liability company is. The trust is constituted by the rights
       and obligations in relation to the
trust property attaching to the trustee in a
       personal capacity. Liabilities to third parties who are not beneficiaries can
       be incurred by the trustee because of the nature of the property the trustee
       holds. For example, where land is concerned,
the trustee, as registered
       proprietor of the land, will incur a personal obligation to pay rates on it. A
       trustee can
also incur liability by contract. A trustee who chooses to enter
       into a contract for the trust normally incurs unlimited personal
liability,
       unless liability is expressly limited in the contract.

[15]   Sovereign Homes, and the authorities referred to
in that decision, take the
matter no further than the last sentence in that quote. There is no general principle of
law that a trustee
incurs unlimited personal liability for contractual commitments
entered into on behalf of the trust by a fellow trustee. For a trustee
to have personal
liability in respect of such a contractual commitment, it must be shown that the
trustee entered into the contract
(in the sense of being a signatory), or had in some
way sanctioned, approved or ratified the contract in question on behalf of the
trust.
That was the principle applied in Lang v Southern (HC CHCH AP15/01 24 July
2001.) In that case, Pankhurst J found that Mr
Lang, who was a professional trustee,
had sanctioned and approved a contractual commitment entered into by another
trustee on behalf
of the trust.       Mr Lang has therefore personally liable for it.
Pankhurst J adopted the following quotation from the 16th Ed
of Lewin on Trusts at p
181:

       In the case of co-trustees of a private trust, the office is a joint one. Where
       the administration
of the trust is vested in co-trustees, they all form as it were
       but one collective trustee and therefore must execute the duties of the office
       in their joint capacity.
Sometimes, one of several trustees is spoken of as the
       acting trustee, but the court knows of no such distinction: all who
accept the
       office are in the eyes of the law acting trustees ...However, the act of one
       trustee done with the sanction
and approval of a co-trustee may be regarded
       as the act of both, though such sanction or approval must be strictly proved.

[16]   I note the last sentence has been deleted from the latest edition of Lewin on
Trusts, but I do not consider that this suggests
the principle there articulated does not
represent the law.


[17]   The approach that a trustee will not be liable on a contract
entered into by
another trustee, unless it is entered into with his sanction or approval, is consistent
with equity and common sense.
A party who chooses to contract on behalf of the
trust has an opportunity to exclude his personal liability. A trustee who is not
party
to the contract does not have that opportunity. Such an approach is also consistent
with the principle embodied in s 38(1)
of the Trustee Act 1956 which provides:
       A trustee shall be chargeable only for money and securities actually received
  
    by him, notwithstanding his signing any receipt for the sake of conformity,
       and shall be answerable and accountable only
for his own acts, receipts,
       neglects, or defaults, and not for those of any other trustee, nor for any bank,
       broker,
or other person with whom any trust money or securities may be
       deposited, nor for the insufficiency or deficiency of any securities,
nor for
       any other loss, unless the same happens through his own wilful default.

[18]   In this case no evidence was offered
at trial of any delegation by the trustees
of the power to act on behalf of the Trust in respect of these transactions to
Mr Gitmans
alone. Nor was there evidence that the other trustees knew of the
transactions in question, or that the trustees knew that Mr Gitmans
was using the
Trust as a contracting entity in his business dealings. It follows that there was no
evidence of any sanction, approval,
or ratification of the transactions in question by
Mr Garnett or Mr Graham.


[19]   The next issue that arises is whether, notwithstanding
the evidential and legal
position in relation to the individual trustees, they have by reason of failing to file a
statement of defence
to the third party claim against them, admitted personal liability
under r 161. I do not consider, at least in the case of Mr Graham
and Mr Garnett,
that they have. There is no allegation in the statement of claim against these two
trustees that they entered into
the contracts in question or approved or sanctioned
them. In the third amended statement of claim against Proprius it is alleged
that
Mr Gitmans entered into the agreements on behalf of the Trusts. Proprius' statement
of claim against the third party alleges
that the individuals are trustees of the
Gitmans Trust, and then details Mr Edwards' allegations against Proprius and the
Trust.
The only operative pleading against the third party in Proprius' statement of
claim is as follows:

       In the event that the
plaintiff obtains judgment against the defendant in
       respect of its claim under the alleged $300,000 loan agreement and/or
the
       alleged $100,000 loan and/or the alleged October 1997 agreement and/or the
       9 June 2000 agreement then the defendant
claims indemnity in contribution
       from the third party as a joint contractor under the alleged $300,000 loan and
       as
a co-guarantor in relation to the alleged $100,000 loan and as a joint
       contractor under the alleged October 1997 agreement
and alleged 9 June
       2000 agreement to the extent of the plaintiff's judgment against the
       defendant or such other proportion
thereof as the Court may determine.

[20]   Therefore, on the basis of the pleaded claim against Mr Garnett and
Mr Graham, they are deemed by reason of r 161
to admit that the Trust is liable to
indemnify or make contribution to Proprius, and not that they are personally liable to
do so.


[21]     In relation to Mr Gitmans, sufficient has been alleged and proved against him
to establish personal liability.    Mr Edwards
proved (through Mr Gitmans) that
Mr Gitmans personally entered into the contracts on behalf of the Trust. Mr Gitmans
took no steps
to limit his personal liability, and indeed the tenor of his evidence at
trial was that the Trust was the vehicle through which he
did business.


[22]     As to the form of judgment, I determined in my judgment of 15 December
2008 that Proprius is entitled to
judgment against the third parties for contribution to
the judgment sum, on the basis the Trust was Proprius' co-obligor. As submitted
by
counsel for Mr Garnett and Mr Graham, the general principle is that co-obligors and
co-sureties must bear any loss equally.  
     The amount of an obligor or surety's
contribution is assessed by dividing the amount of the common debt by the number
of solvent
co-obligors (see for example Goff & Jones, Law of Restitution, 7th Ed
2007 at 14005 and the authorities cited at 14012). Liability
of the third party Trust
under the $300,000 agreement, the $100,000 guarantee and for the damages flowing
from the breach of the
variation to the $100,000 loan (the variation to the effect that
Mr Edwards would receive a unit in lieu of profit share), is limited
to 50% of the
judgment amount. The same is true of interest as allowed for in paragraph [97] of
the judgment.


[23]     In relation
to Mr Gitmans' liability, the judgment is against him personally
and in his capacity as trustee. His liability is not limited to
the assets of the Trust.


[24]     The liability of Mr Garnett and Mr Graham is in their capacity as trustees
only. Their liability
is limited to the assets of the Trust; they have no liability
beyond that.




                                                 
      Winkelmann J