|
|
Home
| Databases
| WorldLII
| Search
| Feedback
High Court of New Zealand Decisions |
Last Updated: 29 May 2012
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV 2011-441-398 [2012] NZHC 980
BETWEEN JOJARO INVESTMENTS LIMITED First Plaintiff
AND JOHN RICHARD TOWNSEND GIFFORD AND SUELLEN GIFFORD Second & Third Plaintiffs
AND ROBERT ELVIDGE AND ELIZABETH ANN ELVIDGE
Fourth & Fifth Plaintiffs
AND ASB BANK LIMITED Defendant
Hearing: 8-9 December 2011
Counsel: M T Scholtens QC with J L W Wass for Plaintiffs
M J Tingey with N F D Moffatt for Defendant
Judgment: 10 May 2012
JUDGMENT OF THE HON JUSTICE KÓS
Introduction
[1] A senior insurance company employee steals capital the company has set aside to maintain its credit rating. He does this by transferring the capital into the principal trading account maintained by the company at the ASB Bank in Napier. Then he draws cheques on that account. Over a period of 20 months, he embezzles nearly $4 million. No one notices. Not the directors, not the auditors, and not the bank.
[2] The fraud ruins the shareholders of the insurance company. They cannot afford to replenish the stolen capital. So they sell their shares to a third party for a
JOJARO INVESTMENTS LIMITED v ASB BANK LIMITED HC NAP CIV 2011-441-398 [10 May 2012]
nominal consideration. The new owner will recapitalise the business. Most importantly, it will keep the employees in work. In due course the company, newly owned, sues the auditors and former directors.1 That case is settled. The company does not sue the bank. There is an issue over whether the fraudster was entitled to operate the trading account. But the new owners are not interested in pursuing that claim.
[3] Now the former shareholders say the bank is liable to them, as the shareholders, funders and indirect guarantors of the company. They say there is an implied term in the agreements they have with the bank (contracts of loan and guarantee) and a duty of care (the content of which is substantially the same) that the bank not permit the fraudster to operate the trading account in breach of the mandate given by the company.
[4] The bank applies to strike out those claims against it. Alternatively it seeks summary judgment at this early stage of the case. Failing all that it seeks security for its costs. That is because, as a result of the fraud, the plaintiffs now have very little money.
Background
[5] The Gifford and Elvidge families had been banking with the ASB bank (bank) since the early 1990s. Messrs Elvidge and Gifford had legal backgrounds. They branched out into commerce. Together they owned and directed a company called CRN Group. It administered claims and repairs for self-insuring vehicle fleet owners. That experience led Messrs Gifford and Elvidge to conceive and start a specialist vehicle insurance company – Pioneer Insurance Company Limited (Pioneer). In 2002 they incorporated Pioneer. Jojaro, a company owned and controlled by the Gifford and Elvidge families, had been incorporated in 2000.
[6] Pioneer needed a substantial capital injection. Much of its capital had to be maintained in a reserve capital account to ensure the preservation of a credit rating
issued by a rating agency. The sum required was the order of $4 million. Jojaro was
1 The directors had been shareholders too.
used as a vehicle to capitalise Pioneer. It would borrow some of the $4 million from the bank. The $4 million reserve capital would then be invested: $500,000 in government stock to be held by the Public Trust and $3,500,000 to be held with the bank on term deposit.
[7] The bank entered loan agreements with Jojaro in September 2003. It loaned Jojaro $1.638 million. Guarantees unlimited in amount were given by the Giffords, Elvidges and an associated company they owned. Security was given over their personal residential properties in the Hawkes Bay and Taupo regions.
[8] By 2005 Pioneer was trading very successfully. The volume of business it was generating required an increase of $2 million to its reserve capital if it was to maintain its credit rating. The bank agreed to lend Jojaro $1.8 million of that additional sum. The additional funding was supported by further guarantees including from the Giffords and Elvidges, and by additional mortgage security.
[9] The plaintiffs plead that at this stage the shareholders of Pioneer were: (a) Alan Anderson (via a trust) 3,718,474 (57%)
(b) The Giffords 1,343,698 (21%) (c) The Elvidges 1,012,828 (16%)
(d) Blair Fitzsimons 425,000 (6%)
6,500,000
Of this share capital, $6 million was hard capital held with the Public Trust or ASB, and the remaining $500,000 was goodwill. I note that there is some real controversy as to exactly who held which shares.2 I need not resolve the issue as the bank accepts that each plaintiff was at some point a shareholder in Pioneer. I can proceed
for present purposes on the basis of the plaintiffs’ pleading.
2 See [38] below.
[10] The man Fitzsimons just referred to owned a vehicle rental business, Xpress Vehicle Rentals Limited. Xpress was one of Pioneer’s first customers. At some point Fitzsimons came also to be employed by Pioneer as its general manager. The exact nature of his employment responsibilities is not in evidence. It is clear that he had some financial responsibilities. He obtained access to, and responsibility for operating, some if not all of Pioneer’s cheque accounts. He acquired a small shareholding in Pioneer. At no stage was he a director of Pioneer.
Pioneer’s banking mandate
[11] A central feature of this case is the terms of a mandate given by Pioneer to the bank. Account facilities were set up in October 2002. On 14 October 2002
Pioneer completed a mandate to the bank. It named three authorised signatories – Messrs Anderson and Elvidge, and a Mr Haggerty. They were at that time the three directors of Pioneer. The mandate states:
This authority requires [2] Authorised Signatories to operate the Customer’s
Account and suffix mentioned above.
[12] The account number is 123197002934. That is the “Customer Account”. No suffix is in fact mentioned in the mandate. However it appears to have been treated as establishing a “-00” suffix sub-account. A delay in opening the account ensued while Pioneer was waiting for its credit rating. It was closed by the bank.
[13] In May 2003 an -01 sub-account for the same account number was created. The documentation for that is not before the Court.
[14] More importantly, in October 2003 a further -04 sub-account, again for the same account number, was established. A new mandate was completed. The October 2003 mandate was rather different to the 2002 one. Two authorised signatories were nominated – Mr Gifford and Fitzsimons. Entirely different to those nominated a year earlier
[15] The 2003 mandate provides:
The Customer requests that ASB Bank Limited (“the Bank”) act as its
Banker and authorise the Bank to:
1. (a) debit to any Customers Accounts (whether or not in credit) all cheques or other payment orders;
(b) act upon any request to deal with any property which the Bank may at any time hold on behalf of the Customer;
if signed or initiated electronically in accordance with the method of signing (subject to Business Banking and Rural Banking Terms and Conditions), by any of the Authorised Signatories either listed above, or advised to the Bank at a later date.
A This authority requires [1] Authorised Signatories to operate the
Customers Account mentioned above.
B This authority applies to all suffixes of the Account, and to all channels of access to the Account, including electronic access.
...
H This authority to operate supersedes all previous authorities given by the Customer to the Bank with the exception of any outstanding liabilities and instruments executed under a previous authority.
(Emphasis added)
The mandate was signed by Messrs Elvidge and Anderson, directors of Pioneer at the time.
[16] As a result of the 2003 mandate being executed the bank altered the identities of the authorised signatories (to two) and the number of authorised signatories needed to operate the head 123197002934 account (to one) on 7 October 2003. From that point on Fitzsimons was in a position, in accordance either with the mandate given by Pioneer or the bank’s interpretation of it, to operate its whole account (all suffixes) and withdraw funds.
How Pioneer in fact operated the account
[17] The plaintiffs’ claim is that the 2003 mandate applied only to the new -04 sub-account. They advance that submission in the face of the words of the mandate quoted above. The merits of the argument I will return to later. But the consequence is that the plaintiffs claim the previous 2002 mandate continued to apply to the original -01 sub-account. This is important because Fitzsimons’ fraud – which I am
about to turn to – was undertaken principally by drawing cheques (in favour of his own interests) on the -01 sub-account.
[18] On the plaintiffs’ case, therefore, any two of Messrs Anderson, Elvidge and Haggerty could operate the -01 sub-account. That is, jointly. Fitzsimons could not. And nor could Mr Gifford.
[19] But is that the way Pioneer (and the plaintiffs themselves) actually operated the -01 sub-account? Plainly they did not.
[20] The bank has produced an analysis of the operation by Pioneer (and the plaintiffs) of the -01 sub-account between May 2004 and October 2007. During this time:
(a) Between May 2004 and April 2007, only five out of 1,201 cheques drawn on the -01 sub-account were the subject of joint signature. I repeat, just five. The plaintiffs’ case, remember, is that two joint signatories (out of three) signing together could operate the account. Notably, those five cheques were signed by Mr Elvidge and Fitzsimons. Fitzsimons was not, of course, on the plaintiffs’ case entitled to be a joint signatory. All the rest of the 1,201 cheques were drawn by a single person. (I do not say “signatory” because some of those who signed were not authorised signatories at all.)
(b) Mr Elvidge, who on the case he now advances should have always had a co-signatory, signed 180 of the 1,201 cheques by himself, alone and without a co-signatory.
(c) Mr Gifford, another of the plaintiffs who on this theory should not have signed any of these 1,201 cheques at all, signed (alone) 52 of them.
(d) A “P Edwards” (not an authorised signatory on either mandate) signed
18 of them.
(e) Fitzsimons (again alone) signed 879 of them – the vast bulk. It seems, however, that his fraudulent use of the -01 sub-account did not begin until August 2005 – by which time he had signed (alone) at least 38 of the cheques drawn on the -01 sub-account. A large number of the 879 cheques appear to have been drawn legitimately in the ordinary course of Pioneer’s trading activity.
[21] It is little wonder in these circumstances that the relevant bank manager, a
Mr Gittings, says in an affidavit:
Based on my dealings with Pioneer I have no reason to question the authority of Mr Fitzsimons to deal with the 01 account. It was Mr Fitzsimons who was the person within Pioneer responsible for day to day contact with ASB. On several occasions ASB was told by Mr Elvidge to contact Fitzsimons in relation to matters relating to account operation.
[22] Only in May 2007 – but a month before Fitzsimons confessed his frauds – did Pioneer (and the plaintiffs) start operating the -01 sub-account using joint signatories.
[23] It follows that the plaintiffs’ own operation of the -01 sub-account was altogether at odds with what they say should have been happening – and which they say the bank was bound to protect them against.
[24] And what of the bank? Well, on its argument the authorised signatories should have been either Mr Gifford or Fitzsimons. Of those 1,201 cheques, 931 were signed that way. That is, by one or other of Mr Gifford or Fitzsimons. But 270 (or 22 per cent) were not. These were mostly signed by either Mr Elvidge (180, or
15 per cent). Either the bank’s sampling system did not pick that up, or the mandate was treated by common consent as having been enlarged to include Mr Elvidge (he being a director of Pioneer throughout the whole of this period). Whatever the case, it does not necessarily follow as a matter of law that the bank had acted in breach of
mandate by honouring cheques signed by Mr Elvidge alone.3
3 London Intercontinental Trust Limited v Barclays Bank Limited [1980] 1 Lloyd’s Rep 241 (QB)
at 249. See at [70] below.
Fraud
[25] Between August 2005 and April 2007 Fitzsimons transferred funds from Pioneer’s capital reserves (held by an associated company) to Pioneer’s -01 sub- account. Pioneer had no legitimate business receiving those moneys in the first place. Nonetheless, but for Fitzsimons’ ability to operate the -01 sub-account, the moneys would have remained within the Pioneer group. He then drew cheques on the -01 sub-account (signing those cheques alone):
16.08.05 cheque number 122816
Payable to Xpress vehicle Rentals Limited $243,846
02.09.05 cheque number 122829
Payable to Xpress Vehicle Rentals Limited $50,000
10.10.05 cheque number 122844
Payable to BJ&MJ Investments Limited $200,000
14.12.05 cheque number 122870
Payable to BJ&MJ Investments Limited $500,000
20.12.05 cheque number 122874
Payable to BJ&MJ Investments Limited $500,000
02.10.06 cheque number 123458
Payable to BJ&MJ Investments Limited $350,000
16.12.06 cheque number 123608
Payable to BJ&MJ Investments Limited $2,000,000
26.04.07 cheque number 124087 payable
To BJ&MJ Investments Limited $17,430
Total $3,861,276
[26] In addition, although little detail is given in the pleadings or evidence, Fitzsimons is said to have stolen a further $1,485,600. All these sums were paid variously to (1) BJ & MJ Investments Limited, (2) Xpress Vehicle Rentals Limited and (3) otherwise to his own benefit. The two former entities were owned and controlled by Fitzsimons and his wife.
[27] When the frauds were first detected by Pioneer is not clear, but Fitzsimons confessed his criminal conduct on 14 June 2007.
[28] Fitzsimons was prosecuted by the Serious Fraud Office for stealing approximately $3 million from Pioneer, and dishonestly obtaining a further $1 million from Marac Finance Limited and Westpac New Zealand Limited. He pleaded guilty to eight fraud charges. He was sentenced on 3 October 2008 by Judge Ongley to four and a half years’ imprisonment. A minimum non-parole period of two and a half years was imposed. He was also ordered to pay $250,000 in
reparation.4
[29] An appeal from Judge Ongley’s sentencing was dismissed by Winkelmann J
on 9 March 2009.5
Aftermath
[30] The frauds were a terrible disaster for the plaintiffs. Pioneer’s capital reserves needed to be replenished. The majority of those reserves had come from borrowing by Jojaro, guaranteed by its shareholders, the other plaintiffs. The loans had to be repaid. The capital had to be replenished if Pioneer was to trade on. The plaintiffs could not afford to replenish the capital needed.
[31] In desperation, to keep Pioneer’s business going and its 40 or so employees in work, Pioneer’s shareholders sold their shares to the New Zealand Association of Credit Unions for a “nominal consideration”. That was on condition that the new owner recapitalise the company. The sale was completed within just nine days of Fitzsimons’ confession. Pioneer continued in business successfully. It is now called Credit Union Insurance Limited.
[32] Over a year later, in late 2008, the bank issued Property Law Act notices on the secured property. Jojaro had defaulted on its loan agreements with the bank. The plaintiffs then issued proceedings in the High Court seeking an interim injunction restraining the mortgagee sales. The allegations made by the plaintiffs to support the application for injunction was similar if not identical to those made in the
current proceedings. The bank counterclaimed for the sums owed by Jojaro and the
4 Serious Fraud Office v Fitzsimons DC Napier, CRI 2008-441-37, 3 October 2008.
5 Fitzsimons v Serious Fraud Office HC Napier CRI 2008-441-37, 9 March 2009.
second and fourth plaintiffs as guarantor. It applied also to strike out the claim and for summary judgment.
[33] On 16 December 2008 Simon France J dismissed the plaintiffs’ application
for interim injunction. The Judge said:6
In terms of the balance of convenience, in my view the apparent strength of the respective cases clearly favours the Bank. The applicants offered the three properties as independent security in return for the bank lending money to Jojaro Investments. They face formidable obstacles in establishing that the Bank’s alleged neglect disregard to Pioneer Insurance, of which Jojaro was not a shareholder, can be a basis to resist liability under a guarantee securing formerly unrelated debt. This is not a decision about whether they should be permitted to try. Rather it is a decision that as a basis for resisting the exercise of powers of sale, it is far from compelling.
The Judge said that “the apparent strength rests significantly with the bank” and that
“no credible basis for an injunction exists”.7
[34] Simon France J did not consider the strike out and summary judgment applications at that stage. The secured properties were sold by mortgagee sale and the proceeds applied in reduction of Jojaro’s indebtedness. Prior to the strike out and summary judgment applications by the bank being heard, the plaintiffs discontinued their claim. That was in March 2009. On 12 August 2009 judgment was entered by consent on the bank’s counterclaim on the following amounts:
(a) $764,407 against John Gifford and Sue Allen Gifford; (b) $416,857 against Robert Elvidge;
(c) $216,857 against Elizabeth Elvidge; and
(d) $267,455 against Jojaro.
[35] I was informed by the Bar that those payments have not been made. In June
2009 the Giffords and Elvidges signed statements of position showing that, when the
bank’s judgment was taken into account, they were insolvent. Evidently that
6 Gifford v ASB Bank Limited HC Napier CIV 2008-441-713, 16 December 2008 at [34].
7 At [35] and [43].
position has not changed. Jojaro is a shell company. It has no assets of its own. These matters are of course relevant to the application for security for costs.
[36] Pioneer (or, by now, Credit Union Insurance Limited)8 subsequently sued its auditors and directors for failing to identify Fitzsimons’ frauds. The latter had been shareholders and had themselves suffered as a result of those frauds. That claim was settled. Pioneer’s new owner did not, however, seem interested in suing the bank. The former shareholders, including the plaintiffs, had not retained the benefit of such claim rights on sale.
[37] So there that latent claim by Pioneer against the bank lay. Until that is, after the hearing before me, a deal was done. Now Messrs Gifford and Elvidge have taken an assignment of the rights of Pioneer against the bank in relation to the cheques fraudulently drawn by Fitzsimons. They have now issued proceedings in the High Court at Napier alleging breach of contract on the basis the bank was obliged to dishonour any cheques drawn on the -01 sub-account by Fitzsimons, as the required signatories were (two of) Messrs Elvidge, Anderson and Haggerty. A similar claim to that made here, based directly in contract. That claim is advanced in a separate proceeding and I need not refer to it in any further detail. It is unaffected by the bank’s applications in this proceeding.
Present claim
[38] The plaintiffs bring this proceeding against the bank in contract and tort (negligence) on the basis that they were direct or indirect investors in Pioneer. As Mr Murray Tingey for the bank submits, however, there are inconsistencies between pleading and evidence on ownership. The claim that Jojaro “was at all times a shareholder in Pioneer” is inconsistent with the pleading elsewhere summarised at [9] above (excluding Jojaro as a shareholder). The Companies Office records (produced as an exhibit by a bank witness) show something else again. All that being said, however, the statement of defence at least admits that each plaintiff was a
shareholder in Pioneer “at various times”. As I have said, I will proceed for present
8 I will continue to refer to it as “Pioneer” in this judgment.
purposes on the basis that each plaintiff other than Jojaro was indeed a shareholder at the relevant period of time.
[39] In addition of course:
(a) Jojaro was a borrower from the bank of funds used by Pioneer shareholders to capitalise Pioneer; and
(b) various of the plaintiffs were guarantors of that borrowing.
Apart from that, some of the plaintiffs had personal banking relationships with the bank.
[40] It may be noted in passing that the statement of claim pleads that the major shareholding in Pioneer – some 57 per cent – was owned beneficially by Mr Anderson (and legally by his trustees, Messrs Twist and Willis, two Napier solicitors). But they do not appear to be participating in this litigation. So the claim is brought only by minority shareholders of Pioneer.
Claim in contract
[41] The first cause of action is in contract. It pleads:
For the purpose of the loan agreements, guarantees and mortgages in respect of loans 4, 5, 6 and 7 it was an implied term that the ASB would not pay away the loan monies on unauthorised cheques to fraudsters.
[42] It claims that by paying the sub-account -01 cheques drawn by Fitzsimons in breach of terms of the mandate, the bank was in breach of that implied term.
[43] Losses claimed are the loan moneys stolen by Fitzsimons, the value of the shares in excess of the loans, the loss of the Gifford and Elvidge houses and other general damages for loss of employment, disruption and embarrassment. In all a sum of $16.4 million.
[44] By way of defence the bank pleads that there is no such implied term. It relies on the express agreements entered in 2005, and the October 2003 mandate terms. This, it says, meant that the -01 sub-account could be operated by either Mr Gifford or Fitzsimons. It also pleads that in contract at least, any loss caused by Fitzsimons is actually only by Pioneer, and not by the plaintiffs.
Claim in tort
[45] The plaintiffs’ second claim is in tort. It is that the bank and the plaintiffs were in a special relationship by virtue of their history and roles, including the bank’s role as banker to Pioneer and the plaintiffs personally. They plead:
40. At all material times ASB knew that loss of the deposit monies was loss of the loan monies and all the plaintiffs’ interest in the companies.
41. In that relationship ASB owed the plaintiffs a duty of care not to so act or fail to act that the loan monies would be lost by the ASB to a fraudster.
In argument Ms Mary Scholtens QC (for the plaintiffs) put it as a “duty to safely house the pool of funds” borrowed by Jojaro and guaranteed by the other plaintiffs.
[46] The plaintiffs plead the bank was negligent and in breach of duty in:
42.1 paying out the cheques as pleaded at paragraphs 31 and 32, and
42.2 failing to warn the plaintiffs or Pioneer that Fitzsimons was signing large round figure Pioneer -01 cheques, operating the -01 account, and in particular that his dealings with the account were self- interested.
[47] Precisely the same losses are sought in tort as in contract.
[48] The bank by way of defence denies the existence of such a duty. It says it would be inconsistent with its contractual relationship with Pioneer. Again it pleads that any loss claimable in tort is Pioneer’s loss, not the plaintiffs.
Present applications
[49] The bank applies, first, for orders either striking out the plaintiffs’ claim or granting summary judgment to the bank in its defence. This on the basis that neither cause of action can succeed, and its defence on the other hand must succeed. The bank pleads on its application:
2(i) there is no basis for the Court to imply the term sought by the plaintiffs;
(ii) there is no duty of care owed by the defendant to the plaintiffs in respect of the operation of the accounts of Pioneer Insurance Company Limited (Pioneer);
(iii) any claim against the defendant in respect of the fraud committed by Blair Fitzsimons against Pioneer belongs to Pioneer, not the plaintiffs; and
(iv) in any event, there is no valid claim against the defendant that could be made by either the plaintiffs or Pioneer as all payments made out of Pioneer’s accounts on or after 7 October 2003 were made in accordance with the mandate executed on that date.
[50] The bank also seeks security for costs. A sum of $115,172, being its estimate of the total scale of costs calculated on a category 2 band B basis. It accepts that any such order would be staged. That is to say, an initial security sum for interlocutory attendances, a second for pre-trial preparation and a third for trial itself. Each would need to be paid before the plaintiffs could proceed with that stage. It is convenient to defer discussion of that application to the end of this judgment.
Legal principles – strike out and summary judgment
[51] There is no argument between the parties over the legal principles applying to strike out and summary judgment.
[52] Rule 15.1 of the High Court Rules provides:
15.1 Dismissing or staying all or part of proceeding
(1) The court may strike out all or part of a pleading if it–
(a) discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b) is likely to cause prejudice or delay; or
(c) is frivolous or vexations; or
(d) is otherwise an abuse of the process of the court.
[53] The usual principles that apply to strike out applications are well established. They were confirmed by the Court of Appeal in Attorney-General v Prince.9 The Court proceeds on the basis that the facts pleaded in the statement of claim are true. The causes of action will be struck out where they are so untenable that they cannot possibly succeed. The jurisdiction is to be exercised sparingly. Difficult questions of law requiring extensive argument do not oust the jurisdiction.
[54] As to summary judgment for the defendant r 12.2(2) of the High Court Rules provides:
12.2 Judgment when there is no defence or when no cause of action can succeed
...
(2) The court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff’s statement of claim can succeed.
[55] On an application under r 12.2(2), the defendant must prove on the balance of probabilities that the plaintiff cannot succeed.10 Usually, summary judgment for a defendant will arise where the defendant can offer evidence that is a complete defence to the plaintiff’s claim.11 It is not necessary for the plaintiff to put up evidence. But if the defendant supplies evidence showing on a prima facie basis that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence on its own.12 The Court is not required to accept uncritically evidence inherently lacking in credibility. For instance, evidence inconsistent with undisputed contemporary documents or other statements by the same deponent, or otherwise
inherently improbable.13
9 Attorney General v Prince [1998] 1 NZLR 262 (CA) at 267.
10 Westpac Banking Corporation v M M Kembla New Zealand Limited [2001] 2 NZLR 298 (CA) at
[62].
11 Westpac Banking Corporation v M M Kembla New Zealand Limited at [62].
12 Westpac Banking Corporation v M M Kembla New Zealand Limited at [64]. See also Jowada
Holdings Limited v Cullen Investments Limited CA248/02, 5 June 2003 at [28].
13 Krukziener v Hanover Finance Limited [2008] NZCA 187; (2008) 19 PRNZ 162 (CA) at [26].
Issues – strike out and summary judgment
[56] The bank’s application for strike out or summary judgment raises the following issues:
(a) Issue 1: Is the alleged implied term reasonably arguable in the first place?
(b) Issue 2: Is the alleged breach of contract reasonably arguable (and if so, does the bank have a complete and irrefutable defence to it)?
(c) Issue 3: Is the alleged duty of care reasonably arguable?
(d) Issue 4: Is the alleged breach of duty of care reasonably arguable (and if so, does the bank have a complete and irrefutable defence to it?)
(e) Issue 5: In the case of either cause of action, is there an actionable loss?
Issue 1: Is the alleged implied term reasonably arguable?
Submissions
[57] For the bank Mr Tingey submits that it cannot have been an implied term of the plaintiffs’ collateral contracts (i.e. Jojaro’s loan agreement and the guarantees) that the bank would not improperly honour cheques drawn on the account of a different customer. He submits that there is no reason for such a term to be implied to give business efficacy to either the loan or guarantee contracts. They are workable without such a term. Nor is the term so obvious that it goes without saying.
[58] Mr Tingey submits that such a term would also give rise to serious issues of double recovery. If the bank had honoured unauthorised cheques, Pioneer would have a claim for breach of mandate. If the term contended for by the plaintiffs was implied into the collateral contracts, the plaintiffs would have a claim for the same
loss. The result thus could be that the bank would be required to pay more than was lost through the honouring of the unauthorised cheques.
[59] Mr Tingey notes that no authority for the implication of such a term into the collateral contracts can be identified. The decision of the Court of Appeal in Westpac Banking Corporation v MM Kembla New Zealand Limited14 implied a term into the primary contract between bank and customer imposing a duty on the bank to notify customers, in certain limited circumstances, of possible frauds carried out by an authorised signatory on the customer’s account. No duty to warn anyone other than that customer, however, should be implied. That would “cut across” the duty of confidence the bank owed to Pioneer (as customer) not to disclose information
learned from conducting Pioneer’s account: Tournier v National Provincial and
Union Bank of England.15
[60] Mr Tingey accepts there are contractual duties to the customer to conform to the mandate given. But he says that no contractual duty to pay only authorised cheques in accordance with the mandate extends to persons who stand behind the customer – its shareholders or beneficial owners, for example.
[61] For the plaintiffs, Ms Scholtens submits that an implied term may reasonably be construed in a contract of loan or guarantee where the borrower is, to the bank’s knowledge, borrowing the funds to on-lend to the bank’s primary customer. The submission relies on the decision of the Court of Appeal in Lipkin Gorman v Karpnale.16
[62] Ms Scholtens submits that when considering the relationship between bank and customer, it does not matter whether the duty is framed as an implied term or independently in tort. “The duty of care is such a crucial element in the relationship that it meets the test for the implication of a term.”
[63] Ms Scholtens submits, further, that the bank was aware of the plaintiffs’
vulnerability. It knew the liability to which the plaintiffs would be exposed if the
14 Westpac Banking Corporation v MM Kembla New Zealand Limited [2001] 2 NZLR 298 (CA).
15 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 (CA) at 473.
16 Lipkin Gorman v Karpnale [1989] 1 WLR 1340 (CA).
bank did not act in accordance with the mandate given it by Pioneer. To the bank’s
knowledge all the banking transactions were interrelated. Ms Scholtens submits:
It was necessary that the contracts contained this implied term. The scheme was dependent on the money being placed on term deposit by Pioneer and staying there (or at least in Pioneer’s account) to provide the necessary reserve capital. The entire scheme of which the loan and guarantee contracts were an integral part depended on the safe housing of the money, just as the effective operation of the contract between bank and customer relies on an implied term that the bank will exercise reasonable care and skill.
[64] Ms Scholtens submits that in those circumstances it goes without saying that the plaintiffs would have expected the bank to protect the funds from predation. Ms Scholtens puts it this way:
If the officious bystander had asked the plaintiffs (and the bank) at the time of signing the contract, “do you expect [the Bank] to hold these funds in such a way as to prevent them being paid out on unauthorised cheques to fraudsters?” The answer would have been, “of course.”
Analysis
[65] I am satisfied that an implied term in the form pleaded cannot be derived from the plaintiffs various contracts with the bank.
[66] The plaintiffs advance the term on the basis that it is both necessary to make the contract work, and so obvious that it goes without saying. The plaintiffs thus call upon the classic formulation of the test for the implication of a term omitted by the contracting parties in the express agreement, set down by the Privy Council in BP Refinery (Westernport) Pty Limited v Shire of Hastings.17 The plaintiffs say the five part test posited by the Privy Council can be “boiled down” into the two key elements noted in the first sentence of this paragraph. They may be the more important and commonly contested elements, but also critical is another: that the
clause does not contradict any express term of the contract. In my view that extends, too, to non-contradiction of any term that might be implied into the primary contract between Pioneer and the bank. I regard it as the primary contract, because it sets the
terms of the banking mandate to the bank governing its operation of Pioneer’s
17 BP Refinery (Westernport) Pty Limited v Shire of Hastings [1977] HCA 40; [1977] 16 ALR 363 (PC).
account. It thus determines what is and what is not “authorised” for the purposes of
the proposed implied term.
[67] At the end of the day the essential overriding question is what a reasonable person would understand the contract to mean.18
[68] The most fundamental difficulty with the proposed implied term is with the very necessity for implying it. Does such a clause exist (expressly or by implication) in the primary banking contract between Pioneer and the bank? If so, then why is it needed in the collateral contracts of loan and guarantee entered by the plaintiffs with the bank? A breach of that clause by the bank would result in the right of a primary customer (Pioneer) to recover, with the consequence that the plaintiffs should recoup either all, or substantially all, their loss. If, on the other hand, it is not part of the primary contract then how can it be right instead to imply it within the collateral contracts to which the plaintiffs are party?
[69] In the present case, the primary contract between the Pioneer and the bank, whichever mandate applied, required the bank to effect payment of cheques “if signed ... in accordance with the method of signing ... by any of the authorised signatories either listed above, or advised to the bank at a later date”. The bank is bound, contractually, to adhere strictly to that mandate.
[70] The bank will be liable if it wrongfully dishonours (i.e. in breach of its mandate). It will be liable if it makes an unauthorised payment (by debiting its customer’s account, again in breach of its mandate). I have noted already that the honouring of cheques drawn on the -01 sub-account signed by Mr Elvidge, while inconsistent with the October 2003 mandate, would not render the bank liable if in
fact Mr Elvidge was authorised by Pioneer to sign the cheques he signed.19
[71] So, it is a term expressed or implied in the primary contract between customer and bank that the bank will not pay unauthorised cheques. Other implied
terms may supplement that duty. For instance, that recognised by the English Court
19 See at [24] above.
of Appeal in Lipkin Gorman v Karpnale Limited20 to the effect that a bank owes a duty of care not to pay an apparently authorised cheque without inquiry where it knows facts that a reasonable bank would raise a serious possibility that a customer was being defrauded.21 (In that case a solicitor’s clerk was authorised to operate a trust account by drawing cheques on it on his sole signature. But he was using the money to gamble at the Playboy Club in Park Lane). That duty is wider again than the duty to act in accordance with mandate. A point noted by the Court of Appeal in Westpac Banking Corporation v MM Kembla NZ Limited.22
[72] The decision in Lipkin Gorman23 was restricted to the primary banking contract between bank and customer. Further, it concerned the “duty to warn” line of authority, as opposed to a duty to comply with mandate. Conceptually those are quite different duties. Some of the arguments advanced by the bank in opposition to the implied term contended for here seemed to be on the basis that it required the bank to warn the guarantors. But that is not the implied term pleaded. Ms Scholtens confirmed that the proposed term is more narrowly cast than the alleged tort duty of care. The implied term pleaded in this case is not a “duty to warn” term. Rather (as set out at [41]), a duty not to pay unauthorised cheques. It is only the tortuous duty that is said to give rise to a duty to warn in this case.
[73] If the bank is bound under the primary contract not to honour unauthorised cheques, on what basis is it necessary to imply such an obligation to the collateral contracts of loan and guarantee entered by the customer’s principals? What is the effect (if such a term is implied) of the customer conferring authority beyond the original mandate – as here it seems to have done with Mr Elvidge? Is the collateral contract equally elastic? More fundamentally, to whom is the bank liable in the event of an unauthorised payment? Just the customer, or the collateral interests also? Why would the bank ever accede to such extended liability? Why is it necessary for
efficacy of the collateral contracts of loan and guarantee to provide such recovery?
20 Lipkin Gorman v Karpnale Limited [1989] 1 WLR 1340 (CA) at 1378 per Parker LJ.
589 (CA).
22 Westpac Banking Corporation v MM Kembla NZ Limited [2001] 2 NZLR 298 (CA).
23 Decided on different grounds in the House of Lords: Lipkin Gorman v Karpnale Limited [1991]
2 AC 548.
Recoupment of loss by the customer should substantially restore the guarantors to their original position. Certainly, while their losses may be different, especially consequential losses, there can be no just basis for double recovery. Any such impost would be a systemic inefficiency. It would represent a cost conveyed to all customers in the banking system.
[74] I conclude that the proposed term cannot legitimately be implied within the
context of the plaintiffs’ collateral contracts. The answer to Issue 1 is no.
Issue 2: Is the alleged breach of contract reasonably arguable?
[75] Given my conclusion that there is no implied term as alleged by the plaintiffs, it is unnecessary to consider Issue 2.
[76] On the one hand the bank has an apparently strong argument that the 2003 mandate supersedes the 2002 one, and applies to all suffixes on the 123197002934 account. I have cited the relevant provision in the 2003 mandate at [15] above. The form is signed by Mr Elvidge (and Mr Anderson). As a solicitor Mr Elvidge no doubt read the form before signing it. In addition, the bank can point to the fact that the plaintiffs (or at least Messrs Elvidge and Gifford) were not operating the -01 sub- account in accordance with the 2002 mandate to which they say the bank should have adhered. I have set out the relevant facts at [20] above. These considerations are entirely apart from any issue of contributory negligence on their part in relation to Fitzsimons’ operation of the -01 sub-account.
[77] In response, the plaintiffs challenge the validity of the 2003 mandate. Mr Elvidge deposes that neither he nor Mr Anderson instructed the bank “either verbally or in writing to carry out any action other than to open a new suffix account for the purpose of a claims account”. Be that as it may, clearly Messrs Elvidge and Anderson signed the 2003 mandate. That leaves the plaintiffs with an argument that the mandate is in its own terms precisely and exactly confined to the -04 sub- account. Such argument is based in part on the fact that the customer’s name set out in the mandate is “Pioneer Insurance Company – Claims Account”. None of that answers the bank’s evidence as to the actual operation of the -01 sub-account by the
plaintiffs. That is, that they did so in a way that did not conform to the very 2002 mandate they say applies. So far as it goes the argument raises issues of factual conflict which perhaps may not have been suitable for determination by summary judgment. However, I express no final view on that because the bank’s summary judgment application is moot.
Issue 3: Is the alleged duty of care reasonably arguable?
Submissions
[78] The duty of care contended for is set out at [45] above. Mr Tingey for the bank submits that no comparable case advancing such a duty of care owed to a customer’s collaterals (i.e. its funders and guarantors) can be found. Certainly, he says, none has been pointed to by the plaintiffs. Following the approach in Couch v
Attorney General24 the question in deciding whether a novel duty of care should be
recognised is whether it is just and reasonable in all the circumstances that such a duty be imposed. The Court must look first at the degree of proximity between the parties, and then at the wider policy implications.25
[79] As to proximity, Mr Tingey submits that the alleged “special relationship” between the plaintiffs and the bank cannot be sustained on the evidence. Few of the plaintiffs had a significant direct interest in Pioneer. As I have already said, this issue, on which there was a marked disparity between the parties, went unresolved at the hearing. But for present purposes I was prepared to proceed on the basis that the plaintiffs were shareholders of Pioneer during the course of Fitzsimons’ frauds.
[80] Even assuming the bank had knowledge of the intended application of the funds lent to Jojaro, it had no control over their fate. Mr Tingey submitted that it was uncontested that there was no obligation that the funds ultimately advanced by it to Pioneer be held with the bank. The instruments themselves support that
submission. Mr Tingey submitted:
24 Couch v Attorney General [2008] NZSC 45, [2008] 3 NZLR 725 at [78].
25 Rolls Royce New Zealand Limited v Carter Holt Harvey Limited [2005] 1 NZLR 324 (CA) at
[58].
On any analysis the relationship is not a close one and it could not be said on any view that the lenders were relying on ASB or that the ASB’s link was proximate. The mere fact that there was a related entity, Pioneer, that ASB owed a contractual duty to does not mean a wider duty should be imposed on third parties. The parties in this case could have set up contractual arrangements which required the money to flow as it did. They chose not to.
[81] Turning to policy, Mr Tingey submits that the imposition of a duty would effectively replicate contractual duties the bank owes Pioneer. It would “cut across and add to” the obligations of the bank in a context where, Mr Tingey submits, there is a need for commercial certainty. He submits, applying the Court of Appeal’s decision in Rolls Royce New Zealand Limited v Carter Holt Harvey Limited,26 that Pioneer and the bank had set out the governing risk allocation under their contract. That should not be disturbed by the Court imposing additional duties to third parties. In any case, the alleged duty is effectively that the bank take reasonable care in performing its contract with Pioneer. That, he submits, is essentially a contractual duty, and cannot be owed to a person who is not party to the contract.27
[82] These submissions apart, Mr Tingey submits that the alleged duty is objectionable as a claim for economic loss, involving a real problem of potential double exposure.
[83] For the plaintiffs, Ms Scholtens submits that the bank owes duties in contract and tort to Pioneer to exercise reasonable care and skill in implementing Pioneer’s mandate. She submits:
It was a breach of those duties for [the bank]:
(a) to pay cheques that were not drawn in accordance with the valid and operative mandate, and
(b) even if the cheques were drawn in accordance with a valid and operative mandate, to pay the cheques in circumstances where [the bank] knew facts that put it on inquiry, or ought to have put it on inquiry, that the cheques may have been drawn fraudulently.
26 Rolls Royce New Zealand Limited v Carter Holt Harvey Limited [2005] 1 NZLR 324 (CA) at
[118].
27 Rolls Royce New Zealand Limited v Carter Holt Harvey Limited [2005] 1 NZLR 324 (CA) at
[66].
[84] As Ms Scholtens put it, the bank “already owed a duty of care to Pioneer, and the plaintiffs simply submit that it owed that duty to the plaintiffs as well”. Specifically, she submits that the duty of care to the plaintiffs as borrowers and guarantors “is not inconsistent with or wider than, the duty [the bank] owed to its customer, Pioneer”. But she submits, that the plaintiffs do not allege that the bank owes them a duty to perform the bank’s contract with Pioneer. Rather that the bank “owed them a duty to exercise reasonable care and skill in or while performing the contract”. That, she submits, is permissible in terms of the decision of the Court of Appeal in Rolls Royce.
[85] Turning to the question of proximity, Ms Scholtens submits there was a special relationship here that put the bank in a position to control the acts of Fitzsimons, and thereby protect the plaintiffs. She points to evidence suggesting that the bank knew that the money borrowed by the plaintiffs would be held by Pioneer on term deposit to secure the insurance rating. Second, the expectation or understanding (if not obligation) that these funds would be held by Pioneer at the bank. The important consideration being that it was in fact held, whether obligatory or not. Thirdly, she points to the fact that the plaintiffs were a small and sufficiently delineated class of persons particularly exposed to the risk of predation on the Pioneer account by Fitzsimons.
[86] As to policy, Ms Scholtens submits that the co-existence of the pleaded duty with the bank’s duties to Pioneer does not create difficulties. The duty the plaintiffs are owed “would be more constrained than (or at most co-extensive with) the duty to Pioneer”. It would not require the bank to adopt a different standard of conduct. Nor would it place the bank in a position of conflict.
Analysis
[87] As a preliminary observation, it is necessary to confine the potential duty advanced by the plaintiffs in one respect. The bank cannot have been bound to warn collateral interests such as the plaintiffs of perceived misconduct by Fitzsimons in the operation of Pioneer’s accounts. Any such duty must in law be limited to a duty to warn Pioneer. Such a duty exists as a matter of contract as between the bank and
Pioneer. The law in this respect has remained reasonably settled for almost 100 years, since the decision of the Court of Appeal in Tournier v National Provincial and Union Bank of England.28 To oblige the bank also to warn those standing behind Pioneer – its creditor and shareholders – would place the bank in an irreconcilable conflict with its duty of confidence as banker to Pioneer. It is clear that the duty of confidence extends to all information the bank obtains in the course of, or otherwise arising out of, the banking relationship between banker and customer.29 That would include Fitzsimons’ actions in operating the account, including the nature of cheques drawn by him on the account, payee information and indeed generally the terms of Pioneer’s mandate.
[88] Ms Scholtens was scrupulous in submitting that the proposed duty of care by the bank direct to the plaintiffs was neither to extend beyond nor to conflict with the bank’s extant duties to its primary customer, Pioneer. As noted earlier, the source of those primary duties is contractual.
[89] In these circumstances any duty of care to warn based on information arising from the bank’s knowledge of the operation of Pioneer’s account must be confined to a duty to warn Pioneer. There could be no duty to warn the plaintiffs themselves.
[90] Secondly, it is by now clear that in New Zealand the common law will not recognise a duty of care owed to A by B if the content of which is no more than a duty by B to perform its contract with C. That much was made clear by the court of Appeal in Rolls Royce NZ Limited v Carter Holt Harvey Limited.30
[91] In that case the plaintiff Carter Holt Harvey (CHH) contracted with ECNZ for the purchase and installation of a co-generation plant at its Kinleith Mill. ECNZ subcontracted Rolls Royce to design and build the plant. CHH had no contractual relationship with Rolls Royce. The plant did not work properly. CHH said it did not conform to the ECNZ/Rolls Royce contractual specifications. CHH issued
proceedings against both Genesis Power Limited (assignee of the rights of ECNZ)
28 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 (CA).
29 Tournier v National Provincial and Union Bank of England at 481 per Scutton LJ and at 485 per
Atkin LJ.
30 Rolls Royce NZ Limited v Carter Holt Harvey Limited [2005] 1 NZLR 324 (CA).
and Rolls Royce. Its cause of action in negligence against Rolls Royce was pleaded on this basis: that Rolls Royce owed a duty to take reasonable care to ensure that the plant was designed, manufactured, constructed, installed, erected and commissioned in accordance with the ECNZ/Rolls Royce contract specifications.31 Rolls Royce applied to strike out that cause of action, on the basis that it was unsustainable at law. The High Court dismissed the application.32 The Court of Appeal however struck that cause of action out.33
[92] The Court of Appeal said:
[66] Before proceeding further, we note that the claim could not succeed in its present form. To recap, the main duty alleged in this case is a duty to take reasonable care to ensure that the plant was constructed in accordance with contractual specifications contained in a contract to which Carter Holt was not a party. There is no duty in tort to take reasonable care to perform a contract. At most, there is a duty to take reasonable care in or while performing the contract, which is quite a different concept. Carter Holt's pleadings mainly assert the former. A duty formulated in such terms is essentially contractual in nature and therefore cannot be owed to one who is not a party to the contract.
[67] Even where the duty alleged is couched in the statement of claim in more general terms, the loss is linked for the most part to losses arising from the failure to meet the contractual specifications. This raises the related issue of the relevant standard of care. The difficulty in setting a standard of quality, if tort liability is imposed, has long been a reason put forward for not imposing a duty of care in this type of case – see for example Lord Brandon's dissent in Junior Books Limited v Veitchi Co Limited [1983] 1 AC 520 at 551–
552.
[93] Once it was thought (based on conceptions of contract privity) that when B was in breach of a contractual obligation to C, B could not also be liable to a non- party A for negligence in the performance of what otherwise was a contractual duty.34 Such thinking stopped product liability dead in the 19th century. It was thought it would impose an unjust burden upon manufacturers. But all that was
swept aside by the House of Lords decision in Donoghue v Stevenson in 1932.35
31 At [24].
32 Rolls Royce NZ Limited v Carter Holt Harvey Limited [2003] 1 NZLR 272 (HC).
33 Rolls Royce NZ Limited v Carter Holt Harvey Limited [2005] 1 NZLR 324 at [155].
35 Donoghue v Stevenson [1932] UKHL 100; [1932] AC 562 (HL).
[94] It is clear now that there may be superconcurrent liability by B to C in contract and to A in tort, for the same act of misfeasance.36 The common law is more ready to recognise superconcurrent liability in tort to A where there is physical rather than economic loss, and where there is misfeasance rather than non-feasance. Even then a duty of care may still exist. The disappointed legatee cases are good examples. The primary breach is of the solicitor B’s contractual duty to his client C
(the intending testator); the action brought by the intended (but thwarted) legatee A (who has missed out because of the solicitor’s dilatoriness) must be in tort.37 The duty of care to the thwarted beneficiary has been explained as based upon a solicitor’s “assumption of responsibility” to a small and determinate class.38
[95] Defective buildings (leaky or subsiding) are a more mainstream example because the initial loss is physical, albeit the ultimate loss sued for – the cost of repair or lost value – is economic.39 Defective buildings have caused the law of tort more difficulty than any other issue in recent years. A policy-based distinction has emerged between superconcurrent liability in tort for residential construction (permitted) and commercial construction (largely not).
[96] Rolls Royce fell into the latter camp, as it concerned construction of a sophisticated engineering facility. The contractual context, sophistication of the parties, potential (but unadopted) availability of a direct contractual relationship, potentially inconsistent performance standards,40 existence of embedded (and distinct) limitation clauses and the need for commercial certainty were all relevant factors in precluding CHH from stepping over Genesis to maintain a right of action
in tort against its sub-contractors.
[97] What however the common law does not countenance is a duty of care owed
by B to A, simply to perform B’s contractual duty to C. In other words a purely
36 I use the expression “superconcurrent” to distinguish the tripartite situation described from the more common instance where B is liable concurrently in contract and tort to C, and A does not feature.
37 Gartside v Sheffield Young & Ellis [1983] NZCA 37; [1983] NZLR 37 (CA). A 19th century text suggesting such a duty to disappointed legatees was cited in Winterbottom v Wright, but was described there by
counsel as “very questionable”: Winterbottom v Wright (1842) 10 M&W 109 (Ex) at 111.
38 White v Jones [1995] 2 AC 207 (HL) at 268 per Lord Goff.
39 See Todd Law of Torts in New Zealand (5th ed, Brookers,Wellington, 2009) at 266–267.
40 As to which see the dissenting speech of Lord Brandon in Junior Books Limited v Veitchi
Limited [1983] 1 AC 520 at 551–552.
parasitic duty of care. There are a number of reasons for that. One is that it is simply a means of avoiding the inconvenient fact of the absence of contractual privity. A second is that as a matter of policy, parasitic obligations create exactly the objections Lord Brandon expressed in Junior Books.41
The effect of accepting the [plaintiffs] contention with regard to the scope of the duty of care involved would be, in substance, to create as between two persons who are not in any contractual relationship with each other, obligations of one of those two persons the other which are only really appropriate as between persons who do have such a relationship between them.
While there is in that observation a faint echo of Winterbottom, it is a point most fairly made in a case like Junior Books where the loss claimed was economic in nature, unlike in Donoghue v Stevenson. As Professor Todd has noted in explaining economic loss in the context of Donoghue v Stevenson, such a claim “is equivalent to the purchaser of the bottle of adulterated ginger beer suing the manufacturer not for injury caused by drinking the contents, but for the money wasted in buying it”.42 A third reason is that the recognition of such a duty serves no real purpose. Other, that is, than enlarging the number of persons to whom the contract-breaker may be liable
and thereby perhaps further discouraging it from that course of conduct. A fourth reason is that it creates a risk of enlarged (and potentially inconsistent) recovery for contract breach beyond the potential scope contemplated in setting the contract terms (and risk allocation) in the first place. Exactly how do you bargain for the potential interests of non-parties? So, altogether apart from the inescapable fact that the decision of the Court of Appeal in Rolls Royce is binding on this Court, sound policy reasons plainly underlie it.
[98] That said, there may still be a superconcurrent duty of care in tort owed by B to A alongside B’s primary contractual duty to C. That will be so where the circumstances involve such a degree of assumption of responsibility by B for the interests of A that it is just and reasonable to invoke that duty alongside the primary contractual duty to C. While the focus of that enquiry still involves the two stage
Anns-based framework retained in New Zealand, the assumption of such
41 Junior Books Limited v Veitchi Limited [1982] UKHL 4; [1983] AC 520 at 551.
42 Todd Law of Torts in New Zealand (5th ed, Brookers,Wellington, 2009) at 267.
responsibility must be a particular aspect of the proximity enquiry.43 Both proximity and policy evaluation require consideration of whether the alleged duty of care is purely parasitic to the contract, or genuinely engages a distinct duty which of itself arises alongside contractual duties owed elsewhere.
[99] Cases involving disappointed legatees or defective dwellinghouses may fall on the side of the line where such a duty may be recognised. The latter category has been recognised in this jurisdiction for almost four decades, since the 1976 decision of the Court of Appeal in Bowen v Paramount Builders (Hamilton) Limited.44
[100] On the other hand superconcurrent liability is less likely to arise in a commercial context. The well-known case of Simaan General Contracting Co v Pilkington Glass Ltd (No 2)45 is a good example. Sheik Al-Obeida contracted Simaan to build him a commercial building in Abu Dhabi. Simaan sub-contracted Feal to supply the curtain walls. Feal sub-sub-contracted Pilkington to supply the glass for the walls. There was a problem with the colour of the glass supplied by Pilkington. The Sheik withheld part of the construction price from Simaan. The latter sued Pilkington, on the basis that it owed it a duty “to take reasonable care to avoid
defects” in its products supplied to the building. The Court of Appeal (Lord Donaldson MR, Bingham and Dillon LJJ) held (on a preliminary issue) that no such duty existed. One factor in its reasoning was the policy difficulty of reconciling inconsistent duties in a contractual chain, and multiple jurisdictions. As Dillon LJ observed:46
If the plaintiffs have a direct claim against the defendants so equally or a fortiori has the Sheikh. Feal has its claim in contract also. All three claims should be raised in separate proceedings, whether by way of arbitration or litigation, and possibly in separate jurisdictions. The difficulties of awarding damages to any one claimant would be formidable, in view of the differing amounts of retentions by the Sheikh against the plaintiffs and by the plaintiffs against Feal and other possibilities of set off, and in view, even more, of the fact that none of the parties has yet actually incurred the major cost of replacing the defendants' (assumedly) defective glass panels
43 As the Court of Appeal recognised in Rolls Royce at [99]. See also Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 QB 758 (CA) at 781 per Bingham LJ and 784 per Dillon LJ.
44 Bowen v Paramount Builders (Hamilton) Limited [1977] 1 NZLR 394 (CA).
45 Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 QB 758 (CA).
46 At 785.
with new panels of the correct colour. It would not be practicable, in my view, for the court to award damages against the defendants in a global sum for all possible claimants and for the court subsequently to apportion that fund between all claimants and administer it accordingly.
Moreover, if in principle it were to be established in this case that a main contractor or an owner has a direct claim in tort against the nominated supplier to a sub-contractor for economic loss occasioned by defects in the quality of the goods supplied, the formidable question would arise, in future cases if not in this case, as to how far exempting clauses in the contract between the nominated supplier and the sub-contractor were to be imported into the supposed duty in tort owed by the supplier to those higher up the chain.
[101] Bingham LJ would have found a superconcurrent duty owed by Pilkington to Simaan to avoid physical injury to persons, or damage to property.47 Such a duty might arise if, for example, the glass was prone to explode in the harsh gulf state climate. But it was not thus prone. It was merely miscoloured. It was a case where there was no meaningful reliance by Simaan (A) on Pilkington (B). There was no technical discussion between A and B. A had not vetted, selected or nominated B. As Bingham LJ said:48
I do not, however, see any basis on which the defendants could be said to have assumed a direct responsibility for the quality of the goods to the plaintiffs: such a responsibility is, I think, inconsistent with the structure of the contract the parties have chosen to make.
Nor was there any gap in responsibility that the common law should respond to. There was no reason to depart from the ordinary contractual chain of responsibility. The same reasoning underlies the decision of the Court of Appeal in New Zealand in Rolls Royce.
[102] In the present case, the proposed superconcurrent duty proposed by the plaintiffs is advanced on the basis that it is in effect “the same duty as owed to Pioneer”, and not inconsistent with, or wider than, that duty. It thus appears to provoke the very objection identified by the Court of Appeal in Rolls Royce. In other words, what is advanced is a duty of care on the part of the bank to the plaintiffs, to perform contractual duties owed already to Pioneer. A duty in such
terms is as a matter of law unsustainable. While counsel for the plaintiffs contend
47 At 781.
48 At 781.
that in fact and law the alleged duty is a duty to “exercise reasonable care and skill in or while performing the contract”, an examination of the substance suggests that the alleged duties are utterly co-extensive. And that the proposed superconcurrent duty is purely parasitic to the primary contractual duty already owed by the bank to Pioneer.
[103] As the Court of Appeal decision in Rolls Royce shows, that does not automatically rule out the possibility of a superconcurrent duty to the plaintiffs. A proximity and policy evaluation is still required. But the fact that the proposed duty is entirely co-extensive or parasitic makes its derivation less likely.
[104] There are some factors here that might point to a superconcurrent duty to these plaintiffs. First, harm to Pioneer’s shareholders from a failure to conform to its mandate is foreseeable. As however it would be to the shareholders of any banking customer. Their vulnerability as shareholders of a banking customer was not in any sense unusual. Secondly, the bank here was at least aware of the lending arrangements and interconnection between Pioneer and the plaintiffs. It knew the funds lent to Jojaro were destined to go to Pioneer. It knew the funds would be placed on term deposit with the bank (albeit that was not mandatory). It knew that interest paid on the term deposits could be redistributed back to the borrowers to assist them meet their interest obligations. And it knew that the individual plaintiffs were guaranteeing that borrowing. Those guarantees clearly increased the plaintiffs’ vulnerability. But again not in a manner that might be said to be unusual in nature. It is important to recall that throughout the relevant period the plaintiffs Mr Elvidge (as director) and Mr Gifford (who continued to sign cheques) continued to retain practical day to day direction of Pioneer, including of its banking arrangements. Thirdly, the plaintiffs represent a relatively small class of persons to whom the duty might be owed. The “small class” point must not be taken too far, however. In this instance the number of shareholders is relatively small in number. But the principle contended for by the plaintiffs would necessarily apply in a wider range of cases where banking customers’ shareholders might wish (in addition to or instead of the customer) to advance a claim against a bank. I do not regard the second factor noted above as sufficiently distinctive to readily confine the potential scope of the duty contended for.
[105] Considerations against the derivation of a duty are in this case persuasive. First, the fact that the duty is formulated in a wholly co-extensive or purely parasitic manner is a significant objection. The proposed duty simply subverts privity. Secondly, a parasitic superconcurrent duty creates difficult issues of risk allocation. In the example referred to earlier, if C settles with B (or, as here, decides not to bother suing) should B remain exposed to claims directly brought by C’s shareholder A? I note later the apparent conflict between the Court of Appeal decision in
Christensen v Scott49 and the more recent House of Lords decision in Johnson v
Gore Wood & Co.50 There is obviously force in the observation of Lord Bingham (approved by Lord Goff, and echoed by Lord Millett) that no action should lie at the suit of a shareholder to make good diminution in value of a shareholding where that merely reflects the loss suffered by the company.51 In this case it is exactly that loss of value which is at the heart of the plaintiffs’ claim. Such loss is more properly claimable by the company, to whom the primary contractual duty is owed. The scope of any remaining duty to the shareholders then falls, more remotely, to loss of a consequential nature. Thirdly, in what is a purely commercial context (as opposed,
for instance, to the drafting of a will or the building of a dwellinghouse), it is difficult to readily identify any deliberate assumption of responsibility (beyond the terms of the banking contract) on the part of the bank. Neither as a matter of proximity nor policy do strong reasons appear to exist to effectively enlarge the contractual obligations to include non-parties such as the plaintiffs. In this respect the statutory liberalisation of privity in New Zealand in the Contracts (Privity Act)
1982 should be borne in mind. In the present case there is simply insufficient to distinguish the circumstances of the plaintiffs from a very substantial number of other banking customers’ shareholders who are themselves customers of the bank and who engage in inter-party lending, or who stand security for the customer’s borrowing. Finally, the absence of comparable authority, while not conclusive, suggests that the derivation of such a duty may well be a step too far. Particularly in an area, banking transactions, in which commercial certainty is desirable legally for
immediate contracting parties, and economically for society more generally.
49 Christensen v Scott [1996] 1 NZLR 273 (CA).
50 Johnson v Gore Wood & Co [2002] 2 AC 1 (HL).
51 Johnson v Gore Wood & Co at 35 per Lord Bingham; at 38 per Lord Goff; and at 62 per Lord
Millett.
Relevantly the common law has resisted developing a general duty of care as between secured creditor and guarantor in a commercial context.52
[106] Viewed overall, I consider these reasons persuasive against the imposition of the duty of care contended for. Fundamentally, the present relationship (involving commercial lending, associated security, sophisticated parties and continued direction of the customer by the plaintiffs) cannot justify the necessary inference of assumed responsibility for the interests of the customer’s shareholders. Accordingly, and consistent also with the conclusion reached by the Court of Appeal in Rolls Royce, I conclude the duty of care contended for by the plaintiffs is unsustainable as a matter of law, and must be struck out.
Issue 4: Is the alleged breach of duty of care reasonably arguable?
[107] Given my conclusion that there is no duty of care in the terms pleaded by the plaintiffs, it is unnecessary for me to consider Issue 4. Given the identity of content in the alleged duty, the observations made under Issue 2 would apply also. But they need not trouble us now.
Issue 5: In the case of either cause of action, is there an actionable loss?
[108] Given my findings on Issues 1 and 3, it is unnecessary for me to consider Issue 5 either. I accept, as the plaintiffs submit, that a proportion of their loss is inherently personal as opposed to merely reflective of damage done to Pioneer. Loss of value to the shares held in Pioneer, on the other hand, is reflective of the damage done to Pioneer. This is not the occasion for this Court to grapple with the reflective
loss principle, and the inconsistent decisions in Christensen v Scott53 and Johnson v
Gore Wood & Co.54 I decline to enter the lists on this issue with some regret, but it is something the Court of Appeal will need to resolve at another time. I am
nonetheless appreciative of the careful submissions on this issue from Mr Wass (who
52 China & South Seas Bank Limited v Tan [1990] 1 AC 536 (PC); Westpac Securities Limited v
Dickie [1991] 1 NZLR 657 (CA).
53 Christensen v Scott [1996] 1 NZLR 273 (CA).
54 Johnson v Gore Wood & Co [2002] 2 AC 1 (HL).
argued this part of the case for the plaintiffs). Indeed I must express my appreciation of the very high standard of submissions presented by all counsel who appeared.
Security for costs
[109] In light of the conclusion reached on the strike-out application, the application for security for costs is also moot.
Conclusion
[110] As a matter of humanity, it is impossible to look upon what has happened to the plaintiffs without a very great sense of sympathy. As a matter of law, however, the direct rights of action they wish to maintain against the bank are unsustainable. The proper plaintiff in this case is Pioneer. Happily, as I have already noted, Messrs Elvidge and Gifford have secured an assignment of Pioneer’s rights of action against the bank. Thus fortified, they have issued separate proceedings in the High Court at Napier. That action may proceed. This one may not.
Disposition
[111] The plaintiffs’ claim in this proceeding is struck out.
[112] The bank is entitled to costs on its application on a category 2 band B basis.
Stephen Kós J
Solicitors:
Sainsbury Logan & Williams, Napier for Plaintiffs
Bell Gully, Auckland for Defendant
NZLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.nzlii.org/nz/cases/NZHC/2012/980.html