Ng v Harkness Law Limited [2014] NZHC 850 (29 April 2014)

	Home \| Databases \| WorldLII \| Search \| Feedback High Court of New Zealand Decisions

BETWEEN	ADRIAN HWEE KIAT NG and ALICIA SOCK HOON GO First Plaintiffs MATTHEW HSUN YEAN LIM Second Plaintiff
AND	HARKNESS LAW LIMITED First Defendant JOHN RENWICK HARKNESS Second Defendant STEPHEN JOHN STEEL Third Defendant

Hearing:	26 November 2013
Appearances:	S Barter and R Phillips for Plaintiffs S Shortall and P Roy for Defendants
_Judgment:	_{29 April 2014}

Minter Ellison Rudd Watts (Stacey Shortall/Pearl Roy) Wellington, for Defendants

[1] The plaintiffs have lost money they paid out under agreements to give them interests in residential lots in a proposed development at Gills Road, Albany, Auckland. The first plaintiffs paid $350,969 to Hunter Gills Road Ltd. The second plaintiffs paid $173,694 to Albany Heights Villas Ltd. Both development companies are in insolvent liquidation. Investigations by the liquidators suggest that those behind the companies siphoned off substantial sums paid by purchasers such as the plaintiffs.

[2] As well as claiming in the liquidations, the plaintiffs seek relief from a law practice that acted for the companies. The plaintiffs’ payments went to its trust account. They sue it under the Fair Trading Act 1986. The law practice has applied for summary judgment and strike-out. The question is whether the law practice has shown that the plaintiffs cannot succeed in their claims of accessory liability.

[3] This decision is only on the plaintiffs’ causes of action under the Fair Trading Act. Shortly before the hearing, the plaintiffs filed a new statement of claim adding causes of action of dishonest assistance under the second limb in Barnes v Addy.¹

The defendants could not properly address this new cause of action in the short time given. The new cause of action will require a further hearing.

[5] Harkness Law Ltd is an incorporated law practice in Wellington that specialises in property law. Mr Harkness and Mr Steel are principals in the practice. Mr Harkness acted for the development companies. Mr Steel had peripheral

[6] Promotional material for the proposed development at 125 Gills Road describes “a medium density housing development” and “a 407 multi-staged development set in a carefully planned village setting...” showing terraced and semi- detached townhouses. Hunter Gills Road Ltd was to undertake the development on one lot, Lot 1 DP 418523, with an area of 2.05 hectares; Albany Heights Villas Ltd on an adjoining lot, Lot 2 DP 418523, with an area of 3.55 hectares. Hunter Gills Road Ltd took title to its lot on 7 July 2011. In December 2012, that land was transferred to 125 Gills Road Limited, an unrelated company. Although Albany Heights Villas Ltd apparently entered into an agreement to buy its lot, it never took title. Instead, Albany Heights Residential Ltd, an unrelated company, took title in June 2012 and immediately transferred it on. Both Hunter Gills Road Ltd and Albany Heights Villas Ltd sold “off the plan” before they had title.

[7] The promotional material refers to “key people” in the project team, Mr Paul Bublitz and Mr Chris Cook. Mr Bublitz had been director of a failed finance company, Mutual Finance Ltd, but that was not disclosed. Also associated with the project were Mr Peter Chevin and Mr Roderick Nielsen, but their involvement was

bankruptcy. Hunter Gills Road Ltd and Albany Heights Villas Ltd were corporate trustees. Behind both companies were other companies and trusts. Apart from the references to Mr Bublitz and Mr Cook in the promotional material it would not have been easy to find out the individuals behind the companies. There were also companies with a Singaporean connection, Hunter Sterling & Company Pte Ltd and SQFT Global Properties Pte Ltd, a marketing agent.

[8] The development was marketed in Singapore by Hunter Sterling & Company Pte Ltd and SQFT Global Properties Pte Ltd. While I do not intend any slight to the people of Singapore, they are unlikely to be as well informed as New Zealanders of

_{the risks of investment in residential property in New Zealand and may
be less aware}

²See Re Nielsen [2013] NZHC 1848, in which Mr Nielsen was refused an automatic discharge on the expiry of three years from his adjudication, especially [48]-[58] for Mr Nielsen’s participation in the Gills Road venture.

of protections available to them under New Zealand law. It would not be as easy for them as for New Zealanders to obtain New Zealand legal advice about the proposed development and the developers’ ways of selling units.

[9] Those willing to buy a property in the development did not immediately enter into an agreement for sale and purchase. Instead there was an “Option Program”. Before obtaining title, a purchaser would make four payments: the first on signing a reservation form; the second, an option payment, on entering into an option to purchase; the third, a deposit, on entering into an agreement for sale and purchase, and the fourth, the balance of the purchase price on settlement.

[10] The Option Program was to work this way. An interested purchaser would first sign a “reservation form” and make a payment called a deposit (the first payment), to SQFT Global Properties Pte Ltd as consideration for the “developer”, Hunter Sterling & Company Pte Ltd, to offer an option to purchase a lot in the development. The reservation form showed that if the purchaser signed the option to purchase, the purchaser would pay a further sum, called a second deposit (the second payment), in New Zealand currency to the first defendant’s trust account. If the purchaser did not sign the option, the first payment was forfeited.

[11] I use “option agreement” to refer to the option to purchase. The developers used that term in the documents for the Hunter Gills Road Ltd development. For the Albany Heights Villas Ltd development, it was called a first right of refusal, but there was little difference in substance between the two forms. While there are minor differences in the wording, the effect of both was to confer an option, not a right of first refusal. Neither side contended otherwise. Under the agreement, the purchaser paid an “option price” (the second payment) – it was not called a deposit. That gave the purchaser the right to buy a given unit within the development within the option period of 18 months. The option price was typically NZ$65,000 but Mr Lim negotiated a discount. The option price took into account the first payment made under the reservation form. If the purchaser later exercised the option, an agreement for sale and purchase in the developer’s standard form would then be signed. The purchaser would pay a further sum, called an additional deposit, “equal to 10% of the difference between the Property Purchase Price and the Option Price”.

That was the third payment. The first two payments would be applied as part payment of the purchase price. The Property Purchase Price was the value of the property as fixed in a named valuation report less a discount. The standard discount was $50,000, but Mr Ng negotiated a greater discount, $56,000.

[12] While the purchaser had 18 months in which to exercise the option, the developer could also give written notice calling on the purchaser to exercise the option earlier. If the purchaser did not exercise the option in response to the developer’s notice, he was entitled to a refund. The right to a refund also arose if the purchaser did not exercise the option during the option period (that is, even if the developer did not make a call). The developer’s refund obligation was to pay the purchaser the option price plus half of the discount sum, but not until 14 days after the date of issue of a code compliance certificate for that part of the development. The option agreement has an entire agreement clause and an acknowledgement by the purchaser that they have not been induced to enter into the agreement by any representation by the developer and that they have read and understood the terms of the agreement. The option price was to be paid into the trust account of the first defendant. The option agreement does not expressly say what is to happen to the funds paid as the option price pending the exercise of the option or payment of the refund. Notably, it does not provide that the first defendant was to hold the payment as stakeholder.

[13] A template agreement for sale and purchase has been put in evidence, but the plaintiffs do not say that it was provided to them when they signed the option agreements. The template is said to be a fairly typical form of agreement for sale and purchase for the sale of units off the plan. The developer was required to seek all necessary consents, carry out construction, deposit a unit title plan and arrange for the issue of separate titles for each unit. There was a condition date of 30 May 2011 for obtaining all necessary financial accommodation and consents and a sunset date,

_{three years after the condition date, for obtaining a separate
title for the unit.}³

³The agreement was also subject to s 225 of the Resource Management Act 1991, which allows for cancellation by a purchaser within 14 days of signing, or for rescission two years after the grant of resource consent or one year after the agreement if the vendor has not made reasonable progress towards submitting a survey plan or has not deposited the plan within a reasonable time after its approval.

Settlement was required on the seventh working day after the purchaser had received a certificate of practical completion, a code compliance certificate and notice that a guaranteed search of the new title was available. This agreement does provide for the developer’s lawyer to hold the deposit (comprising the first, second and third payments) as stakeholder in an interest-bearing trust account until settlement. Under the template the first defendant was to act for the developer on the agreement, but in the event it did not.

[14] The first plaintiffs did enter into an agreement but in slightly different terms. For this case it is not necessary to go into the details of the differences, other than to note that it provides for an Auckland law practice to act for the developer.

[15] Mr Nolan, an Auckland property lawyer, has given expert evidence for the plaintiffs, including these points:

(a) Overall the purchase arrangements were most unusual. Reservation forms and option agreements are not standard for sales of residential units off the plans.

(b) It is usual on sales of residential units off the plans to provide for the vendor’s lawyer to hold the deposit as stakeholder until settlement to protect the purchaser against settlement not occurring and the vendor not being able to refund the deposit.

(c) The purchasers were at risk because there was no provision in the option agreement for the option price to be held by a stakeholder.

17.85% of the purchase price after the discount was taken into account. Commercially this was higher than a fee for an option; it had the character of a deposit and a high one at that. Once the option was exercised, the first plaintiffs were to pay an additional sum by way of deposit. Combined, these prepayments were much more than normal

deposits (usually 10%, but sometimes increased up to 15% for sales off the plan).

(e) Developers who sell off the plans typically aim to obtain a certain number of pre-sales which are unconditional from the purchaser’s side (apart from any right of cancellation under s 225 of the Resource Management Act 1991). These provide a level of commitment to satisfy the developers’ financiers. The option agreement would not count as a pre-sale until the option was exercised. The purchaser had

18 months to exercise the option, unless the developer used the power to call on the purchaser to exercise earlier. If the purchaser did not exercise the option, the developer could resell but it was also liable to refund the option price plus half the discount. That liability could only be off-set if the developer re-sold the unit at an increased price from which the sum for the discount could be recouped.

(f) Even if the purchaser did exercise the option, the discounting of the relatively low sale price ($420,000 for the first plaintiffs) was unusual.

(g) There is a difference of opinion between Mr Harkness and Mr Nolan as to the character of the option payment. Mr Harkness says that it is only an option fee because the provisions of the agreement of sale and purchase as to stakeholding do not apply until the parties enter into that agreement. On the other hand, Mr Nolan notes the reference to “additional deposit” in the option agreement as indicating that the payment was something more.

(h) While the developers’ refund obligations were guaranteed, no store could be placed on the guarantees.

[16] Mr Ng says that he and his wife attended a presentation in Singapore by SQFT and Mr Cook in January 2011. The promotional materials they were given included a brochure describing the development. A page headed “Our Team” lists various professional practices, financiers and contractors. The list includes the first defendant. Its logo is used in the brochure. A Ms Wong of SQFT told them that all money they paid would be safe because it was to be paid to a solicitors’ trust account, not to the developer. Believing that, they signed two options, for lots

50 and 51, and made the initial payments of SGD$5,000 for each. The next day they came back and signed option agreements for three more lots - 8, 9 and 83. They negotiated a fee for their options of $56,000. A few days later they accessed the website for the Gills Road project (having obtained a username and password) and downloaded the template agreement for sale and purchase. Later in the month they paid NZ$296,086.29 to the first defendant’s trust account. The first defendant’s trust account receipt shows that the payment was for the credit of Hunter Gills Road Ltd. Mr Ng and his wife came to New Zealand in November 2011 and dealt with a Mr McCormack, a property consultant representing Hunter Gills Road Ltd. They calculated that by waiving four of the options, they could use the credits, including half the discounts, to pay for one unit and have change left over. So they entered into an agreement to buy lot 50.

[17] The statement of claim also pleads that Mr Ng and his wife paid a further sum of $54,898 on 28 May 2011 to the first defendant’s trust account for an option agreement for lot 58 in Stage 2A of the development, apparently in the Albany Heights Villas Ltd area. Mr Ng’s evidence does not cover this other than to exhibit a SQFT document setting out details for the payment. Mr Harkness’ affidavit includes a copy of the relevant option agreement.

[18] Mr Ng and his wife claim as their losses the sums they paid under the option agreements. They have also lodged a caveat against the title to the land on which the development was to be carried out, but I do not deal with that aspect.

[19] They plead that they made their investments in reliance on representations by

(b) The money paid to the first defendant’s trust account would be treated as deposit moneys in the option agreements and agreement for sale and purchase.

[20] Mr Lim attended a presentation in Singapore in May 2011. The development by Albany Heights Villas Ltd was promoted. He dealt with Ms Yap of SQFT. In response to his inquiry as to the funds paid to the first defendant, she told him the money could be used only to buy materials to build units in the development. He signed reservation forms for three units, 167, 168 and 169, after negotiating a NZ$2,000 discount on each unit. He signed option agreements for each unit. He paid the second portion of the option prices in two instalments (of NZ$97,344 and NZ$76,350) to the first defendant’s trust account. He did not exercise any of the options. He claims as his losses the sums he paid under the option agreements.

[21] Mr Lim pleads that he made his investment in reliance on representations by

[22] I do not set out the entire pleading against the defendants. The alleged acts of the defendants are:

(a) Because they allowed their name and trust account to be used by the developers in the promotional materials, they assumed responsibility for ensuring the correctness of statements made in those materials, assumed responsibility to hold payments in their trust account on a stakeholder basis, accepted that purchasers such as the plaintiffs would rely on them to act as stakeholders and accepted that SQFT as the developers’ sales agent was likely to promote and market the option agreements making the representations in [19] and [21] above.

(b) They knew or ought to have known that at the material times Hunter Gills Road Ltd and Albany Heights Villas Ltd did not own the land proposed for development.

(i) they were to hold the deposits as stakeholder and could not disburse those funds except as provided in the agreements or on the joint instructions of the plaintiffs and the developers;

(ii) as the developers did not own the land at the material times, the first defendants could not treat the option agreements as an authority to disburse.

(d) The defendants breached their stakeholder obligations and acted contrary to the various contractual arrangements and the representations by SQFT by making unauthorised payments to Hunter

[23] These lead to the allegation of breaches of s 9 of the Fair Trading Act in paragraph 34 of the amended statement of claim:

(i) Lending the First Defendant’s name for use by the Developers in association with the development of the 125 Gills Road land (and the Further development land); and

(ii) Allowing Hunter Gill and Albany Heights to use the First Defendant’s trust account to receive deposits when they did not (at the material times) own the land to be developed; and

(iii) In receipting deposits from the Plaintiffs identified to specific lots/units when no such lots/units existed; and

[24] In response Mr Harkness says that the first defendant’s work involved drafting the option agreements, receiving option payments into the trust account, disbursing them under clients’ instructions and ancillary work including drafting the guarantees for repayment of the option payments and dealing with inquiries from interested purchasers. In 2012 he began receiving inquiries from purchasers as to the funds paid into the trust account and he arranged a standard response. The first defendant did not act for the developers on the acquisition of the Gills Road land, but he was advised of progress. It did not draft the template agreement for sale and purchase but he did receive a copy. He reviewed it but on instructions did not change it. He had anticipated that he would act on the sales of units, but that did not happen.

[25] Mr Harkness denies that the first defendant was privy to or had knowledge of representations made by overseas agents as to the option arrangements. As to the option documents he says that they contain no stakeholder provisions. They are an agreement between the purchaser and the developer for the payment of a fee with the payment to be made through the first defendant’s trust account. The first defendant

acted for the developers, not for the purchasers. It receipted the payments into its trust account as for the credit of its clients, not for the credit of purchasers. It paid those funds out in accordance with its clients’ instructions, as it was required to. It no longer held any of those funds in its trust account. He also makes the point that the stakeholder provisions of the template agreement for sale and purchase do not apply until the parties enter into that agreement and therefore cannot apply to the earlier option agreements. He is also aware from his experience as a property lawyer that it is not uncommon for a developer to enter into a conditional agreement to buy land, then sell units off the plan, with the contract confirmed and the purchase settled once sufficient sales are made to ensure that the project is viable.

[27] I record an issue identified by Mr Nolan that I do not decide: whether the first defendant was required to hold the option payments as stakeholder. While Mr Harkness maintains that the stakeholding provisions of the template agreement for sale and purchase cannot apply until a purchaser actually enters into such an agreement, there is a contrary argument. The option agreement provided for the parties to enter into an agreement for sale and purchase on the developers’ standard terms. The template agreement was accessible on the Hunter Sterling website within

agreement for sale and purchase refers to first, second and third deposits being held by the lawyers as stakeholder. In the circumstances these are the first, second and third payments in [9] above. It may be arguable for the purchasers that, because the option agreement refers to the developers’ standard agreement, the stakeholder provisions of the agreement for sale and purchase were incorporated into the option agreement and the developers were contractually bound to have their lawyers hold those funds on that basis. The matter was not fully argued. It is likely to be important for the new cause of action for knowing assistance: some of the allegations under that cause of action go to payments the defendants made from their trust

_{account. A finding is not required for the Fair Trading Act claim. I
assume, without}

deciding, that under the option agreements, the option payments were to be held subject to the stakeholder terms of the template agreement for sale and purchase, even though Mr Harkness may not have been alive to the point.

[28] In a typical case under s 9 of the Fair Trading Act for misleading or deceptive conduct in trade, there will often be a two-stage inquiry of the sort set out in the decision of the Supreme Court in Red Eagle Corporation Ltd v Ellis.⁵After deciding whether the defendant has breached s 9, the court considers under s 43 whether the plaintiff has proved that they have suffered loss or damage by the conduct of the defendant. An inquiry into the defendant’s knowledge or intention is not ordinarily required (unless the defendant’s representation goes to their state of mind, as with forecasts and opinions).⁶However, proof of some communication by the defendant is required. After all it is hard to see how anyone could be misled or deceived by a defendant’s conduct without communication in some form by that defendant. The alleged misleading or deceptive conduct by the defendant takes place before the plaintiffs act to their detriment, not afterwards.

[29] This is not that typical case. Putting the matter generally, the claim against the defendants is not so much that they misled or deceived the plaintiffs, but that they became involved in misleading and deceptive conduct by other people. The only relevant direct communications by the defendants to the plaintiffs were the issue of receipts for payments made into the trust account, but it is not alleged that the receipts were misleading or deceptive. There were also indirect communications: the defendants must have given their trust account details to be used by those marketing the developments in Singapore to pass onto purchasers. By itself that information was not deceptive or misleading. Instead one of the allegations against the defendants goes to the use that others made of the defendants’ name to promote the developments. The allegations as to the receipt of the option payments and

_{paying them out are not intended to show that the defendants misled or
deceived the}

⁶Bonz Group Pty Ltd v Cooke (1996) 7 TCLR 206 (CA) and Neumegen v Neumegen and Co

plaintiffs. By that stage the plaintiffs had already acted to their detriment by making the payments into the trust account. Instead the defendants’ receipt and disbursal of the funds are to be the factual foundation against which the alleged misleading or deceptive conduct of others is to be measured.

[30] The Fair Trading Act deals with participation in misleading and deceptive conduct by distinguishing between liability as a principal and as an accessory. The distinction is found in s 43(1):

This section applies if, in proceedings under this Part or on the application of any person, a court or a 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:

(b) aiding, abetting, counselling, or procuring 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.

Section 43(1)(a) applies to principal infringers, s 43(1)(b)-(e) to accessories. The distinction is important because the courts have applied a mens rea requirement to establish liability against accessories, but not against principals. This requirement of mens rea for accessories is a test for criminal liability applied in a civil context. The

High Court of Australia first drew the distinction in Yorke v Lucas.⁷It has been

applied in New Zealand. In Specialised Livestock Imports Ltd v Borrie the Court of

The equivalent language to that of s 43(1)(b) and (d) in the Trade Practices Act 1974 (Cth) was considered by the High Court in Australia in Yorke & Another v Lucas [1985] HCA 65; (1985) 158 CLR 661. The joint judgment of Mason ACJ, Wilson, Deane and Dawson JJ observed that “the words...´aiding, abetting, counselling or procuring’ are taken from the criminal law where they

⁸Specialised Livestock Imports Ltd v Borrie CA72/01, 20 September 2002 at [155]-[156].

designate participation in a crime as a principal in the second degree or as an accessory before the fact” (p667). In New Zealand the principal parties provisions [sic] in the criminal law is s 66(1) of the Crimes Act 1961 which uses each of the 4 terms. In R v Samuels [1985] 1 NZLR 350, 356 this Court said of s 66(1): “The essence of aiding and abetting is intentional help.”

As s 43(1)(b) and (d) import the requirements of the criminal law, it follows that the Bendall parents will only be liable under that provision for their “intentional help” to Philip Bendall in his contravening acts – that is they must know of their son’s contraventions and intentionally participate in them. That knowledge must extend to all the essential facts which made Philip Bendall’s acts in relation to the 5 respondents contraventions of s 9. Giorgianni v R (1985) CLR 473, 487 - 488 per Gibbs CJ.

Although it was a prosecution for a breach of s 13 of the Fair Trading Act, not a civil proceeding, Megavitamin Laboratories (NZ) Ltd v Commerce Commission gives helpful guidance on the test for an accessory’s knowledge and intent.⁹Tipping J

I think it would be wrong in principle if a mere junior employee could be held strictly liable for helping to draft some publicity material which turned out to be misleading without any knowledge that this was so. Another case might be an advertising agent who in good faith assists in the production of material which contains a false representation. It hardly seems right that such a person should be found criminally liable without knowledge of falsity.

Therefore even if the offence in question is one of strict liability, a secondary party must have mens rea. To establish mens rea the prosecutor must show that the secondary party:

(ii) Had knowledge of the essential factual features of the offence (eg the falsity of the representation), whether or not he knew they constituted the offence;

(iii) Intended the conduct constituting the actus reus to assist the principal to perform the conduct constituting the offence.

Step (ii) is a necessary precondition to step (iii) because unless the secondary party has the required knowledge he could hardly intend his conduct to amount to qualifying assistance.

⁹_{Megavitamin Laboratories (NZ) Ltd v Commerce Commission
(1995) 6 TCLR 231 (HC).}

[31] The Court of Appeal’s decision in New Zealand Bus Ltd v Commerce Commission can be put to one side.¹²That was a decision under s 83(1) of the Commerce Act 1986, which is in similar terms to s 43(1) of the Fair Trading Act. The Court of Appeal declined to apply the criminal law analogy for cases under s 83. Hammond J proposed a test of “dishonest participation”.¹³The basis for the rejection was the difficulty of applying the criminal test for liability in the context of a competition case, which requires the court to make evaluative assessments. That consideration does not arise in cases under s 43 of the Fair Trading Act. While the Court of Appeal referred to cases under the Fair Trading Act (and under Australian legislation), it did not suggest that the test for liability should be changed for that statute.

[32] It is accordingly necessary to look more closely at the plaintiffs’ allegations in paragraph 34 of the amended statement of claim to see whether they are directed at the defendants as principals or accessories.

(i) Lending the First Defendant’s name for use by the Developers in association with the development of the 125 Gills Road land (and the Further development land)

[33] The allegation of allowing the developers to use the defendant’s name goes to accessory liability only. The use of the defendant’s name is said to have assisted the developers in deceiving purchasers, but allowing that use is not by itself an infringement of s 9. Liability can arise only if the defendants were in on the deception.

(ii) Allowing Hunter Gill and Albany Heights to use the First Defendant’s trust account to receive deposits when they did not (at the material times) own the land to be developed

[34] The plaintiffs’ complaint here is that they were misled into paying the option

payments on the misrepresentations that Hunter Gills Road Ltd and Albany Heights

_{Villas Ltd owned the land proposed for development. There is no
allegation that the}

¹²_{New Zealand Bus Ltd v Commerce Commission [2007]
NZCA 502, [2008] 3 NZLR 433.}

defendant itself made any such communications to the plaintiffs before they paid their money into the trust account. The allegation goes to accessory liability only.

(iii) In receipting deposits from the Plaintiffs identified to specific lots/units when no such lots/units existed.

[35] This also goes to accessory liability and for similar reasons. The defendants’ conduct in receipting the payments is not alleged to have induced the payments and it could not have. The alleged deception is that the plaintiffs were led to believe wrongly that lots already existed (rather than being indicative lots shown on a developer’s plan). If that is the deception, the defendants can only be liable as accessories. They would need to be in the know that these sales off the plans involved a deception.

[36] This is an allegation of breach of the Fair Trading Act, not breach of trust as a stakeholder. The alleged deception is that the plaintiffs were led to believe, contrary to the fact, that the defendants would hold their payments as stakeholders. It is not alleged that the defendants made any such representation to the plaintiffs before they made their option payments. The fact that the defendants did pay the money out on their clients’ instructions might go to show the falsity of any representations made by others to the plaintiffs before they made their payments. Again, however, this goes to accessory liability only and therefore the defendants can be liable only if they were knowingly involved in the initial deception.

[37] There is another matter that was not pleaded. That is the defendants’ drafting of the option agreement which the developers used in their promotions. In carrying out that work, the defendants were in the same position as the junior employee or the advertising agent in the examples given by Tipping J in Megavitamin. Their role was preparatory only, but did not involve actual misleading or deceptive conduct. Again it is a matter of accessory conduct. I have referred to this so as to cover off other aspects on which the plaintiffs might amend their pleading.

[38] All the allegations of misleading or deceptive conduct under s 9 go to accessory liability under s 43(1)(b)-(e). To establish liability as an accessory, the plaintiffs need to establish guilty knowledge and intent as in a criminal prosecution, although only to the civil standard. Under Tipping J’s test in Megavitamin, that requires proof that the defendants knew of the essential features of the misleading or deceptive conduct by the developers and their marketing agents and that the defendants intended their conduct to assist the developers in their breaches of the Fair Trading Act. In short, the plaintiffs have to prove fraud and dishonesty on the part of the defendants.

[39] As Harkness Law Ltd is a company, it is also necessary to make the point that, to establish that it had the requisite knowledge, under s 45(1) of the Fair Trading Act it is sufficient to show that a director, servant or agent had that knowledge. In this case if anyone in Harkness Law Ltd could have had that knowledge, it was Mr Harkness.

[40] Under r 5.17(2) of the High Court Rules, a party alleging a state of mind of a person must give particulars of the facts relied on for that allegation. Under r 5.26 a statement of claim must not only show the general nature of the plaintiff’s claim to the relief sought, but it must also give sufficient particulars of time, place, amounts, names of persons, nature and dates of instruments, and other circumstances to inform the court and the party against whom the relief is sought of the cause of action.

[41] Where a cause of action involves fraud, dishonesty or other reprehensible conduct as one of the matters to be proved, plaintiffs are required to make sure that they have a proper basis for alleging fraud, to plead it clearly and to give adequate particulars. The Court of Appeal stated the standard approach in Schmidt v Pepper

Allegations of fraud or dishonesty are very serious. They must be pleaded with care and particularity. As the authors of Bullen & Leake & Jacobs

Precedents of Pleadings emphasise, counsel must not draft any originating process or pleading containing any allegation of fraud unless they have reasonably credible material which, as it stands, establishes a prima facie case of fraud – that is, material of such a character which would lead to the conclusion that serious allegations could properly be based upon it. Fraud cannot be left to be inferred from the facts – fraudulent conduct must be distinctly alleged and as distinctly proved. General allegations, however strong the words may appear to be, are insufficient to amount to a proper allegation of fraud.

[42] In a different context (a proceeding to set aside a judgment on the grounds that it was fraudulently obtained), the Supreme Court has taken a similar position on allegations of fraud, saying that “[t]he plaintiff’s claim of fraud must be one that is fully and precisely pleaded and particularised and of sufficient apparent cogency that it should go to trial.”¹⁵It also indicated that the adequacy and cogency of the pleadings could be tested by a strike-out application under r 15.1 of the High Court Rules:¹⁶

So where a defendant in a proceeding involving the fraud exception applies to strike it out, the plaintiff is required to discharge the onus of showing it has a case with an evidential foundation amounting to a prima facie case of fraud.

[43] Lord Millett set out the pleading requirements more fully in Three Rivers

It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake, 7th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney General for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.

¹⁵Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94, [2013] 1

¹⁷Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 (HL), the judgment of

22 March 2001, at [184]-[189]. Lord Millett was in the minority, but he and Lord Hobhouse differed from the majority on the application of the principles in that case, not on the principles to be applied. Lord Hope, one of the majority, gave a similar summary at [55]. The value of the dissenting judgments is that they were later vindicated when the case went to trial: see the costs judgment of Tomlinson J in Three Rivers District Council v Bank of England [2006] EWHC 816 (Comm).

It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means "dishonestly" or "fraudulently", it may not be enough to say "wilfully" or "recklessly". Such language is equivocal...

The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.

In Davy v Garrett 7 Ch D 473, 489 Thesiger LJ in a well known and frequently cited passage stated: "In the present case facts are alleged from which fraud might be inferred, but they are consistent with innocence. They were innocent acts in themselves, and it is not to be presumed that they were done with a fraudulent intent." This is a clear statement of the second of the two principles to which I have referred.

In Armitage v Nurse [1998] Ch 241 the plaintiff needed to prove that trustees had been guilty of fraudulent breach of trust. She pleaded that they had acted "in reckless and wilful breach of trust". This was equivocal. It did not make it clear that what was alleged was a dishonest breach of trust. But this was not fatal. If the particulars had not been consistent with honesty, it would not have mattered. Indeed, leave to amend would almost certainly have been given as a matter of course, for such an amendment would have been a technical one; it would merely have clarified the pleading without allowing new material to be introduced. But the Court of Appeal struck out the allegation because the facts pleaded in support were consistent with honest incompetence: if proved, they would have supported a finding of negligence, even of gross negligence, but not of fraud. Amending the pleadings by substituting an unequivocal allegation of dishonesty without giving further particulars would not have cured the defect. The defendants would still not have known why they were charged with dishonesty rather than with honest incompetence.

It is not, therefore, correct to say that if there is no specific allegation of dishonesty it is not open to the court to make a finding of dishonesty if the facts pleaded are consistent with honesty. If the particulars of dishonesty are insufficient, the defect cannot be cured by an unequivocal allegation of dishonesty. Such an allegation is effectively an unparticularised allegation of fraud.

[44] It follows that a plaintiff must be able to show a proper case, that is, a prima facie case, for alleging fraud or dishonesty at the time of filing the pleading.

A plaintiff cannot get by in the hope that something might turn up in discovery or on cross-examination.¹⁸

[45] As a claim of accessory liability under s 43(1)(b)-(e) of the Fair Trading Act involves allegations of knowing complicity in deception or misleading conduct, it raises issues of fraud, dishonesty and other reprehensible misconduct. The pleading requirements set out above apply.

[46] The defendants have applied under r 15.1 of the High Court Rules on the ground that the amended statement of claim does not disclose a reasonably arguable cause of action. I apply the standard assumption that the plaintiffs will be able to prove what they have pleaded. I consider the statement of claim under these heads: adequate particulars, clarity of the allegation and prima facie case.

[47] For accessory liability, the defendants needed to know the essential features of the developers’ deception of the plaintiffs. Those seem to be the marketing of the development in Singapore by representing that the developers owned the properties in Gills Road (rather than these being pre-sales off the plan), that the option fees paid to the defendants’ trust account would be safe, that the option fees would be used only for specified purposes and that the defendants would hold the funds as stakeholder. Pleadings as to what the defendants ought to have known are not enough and can be set aside. Allegations of actual knowledge are required.

[48] There is an attempt to fix the defendants with knowledge of the developers’ marketing in Singapore because the defendants gave their trust account details to be used in that marketing. But giving the trust account details is consistent with honesty. That pleading does not suffice to allege the requisite knowledge. The defendants are said to have known that the developers did not have title to the land at

explanation consistent with honesty, the practice of pre-selling off the plan. The defendants are said to have known that they were required to hold the option payments as stakeholder and could not pay the funds to the developers without the plaintiffs’ consent. While the pleading does not state it, the potential sources of that knowledge are the marketing in Singapore and the contractual documents. For the reasons given above, the pleading does not fix the defendants with knowledge of the marketing in Singapore. The documents are the option agreements and the template agreement for sale and purchase. But knowledge of those documents is consistent with honesty, given Mr Harkness’ explanation that the stakeholder provisions of the agreement for sale and purchase do not apply until the parties enter into such an

agreement and there is no stakeholder provision in the option agreement.¹⁹The

knowledge allegations in the statement of claim do not extend to a proper pleading

[49] In addition to knowledge, the statement of claim must also plead that the defendants intended to assist the developers in their deception. There is no such allegation in the statement of claim. The required particulars of knowledge and intent are missing.

[50] The pleading must make it clear that this is a claim for accessory liability under the Fair Trading Act. That falls under the requirement to state the general nature of the claim under r 5.26(a) as well as the need to plead a claim of dishonesty unequivocally. The statement of claim does not allege accessory liability. The defendants were not alive to the point that the case against them involved imputations of dishonesty.

[51] The point reached now is that the statement of claim is defective under both the above heads. It does not disclose a reasonably arguable cause of action.

¹⁹Whether his explanation is legally correct is another matter and one that I have not decided here:

[52] This aspect goes to the court’s exercise of its discretion when the pleading has been shown to be defective. The strike-out power is exercised sparingly so as to allow a plaintiff to have a hearing in court if possible. If the claim can be amended, it ought not to be struck out without giving an opportunity for that. In Marshall Futures Ltd v Marshall, Tipping J spoke of a cause of action “which is a write off and one which is deficient but capable of reasonable repair”.²⁰Following Schmidt v Pepper New Zealand (Custodians) Ltd and Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd, to be allowed to undertake repair work, the plaintiffs

[53] The plaintiffs responded to the strike-out application with affidavits from them and Mr Nolan. They intended to respond fully to the application. Adducing expert evidence in response to a strike-out application shows an intention to address seriously the merits of the case. It was their opportunity to show what their case was about. While they took that opportunity, none of their evidence showed a basis for believing that the defendants had acted dishonestly (as opposed to negligently or in breach of alleged stakeholder obligations) or had been knowing parties to deception by the developers. Although they were required to have that information, they have not shown it. I conclude that they do not have it. They do not have a prima facie case of accessory liability. There is therefore no point in giving them time to amend their statement of claim. It cannot be repaired.

[54] On a defendant’s summary judgment application under r 12.2(2) of the High Court Rules, the defendant is required to satisfy the court that none of the plaintiff’s causes of action can succeed. This decision deals with only the Fair Trading Act cause of action and will therefore give only a partial answer on the summary

[55] The defendant has the burden of proof on its summary judgment application. On the other hand, in Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd²¹the Supreme Court indicated that in a strike-out application in a proceeding alleging fraud, the plaintiff had to show a prima facie case, so putting the burden of proof on that side. That suggests a difference of burden according to whether the application is to strike-out or for summary judgment. It seems odd that there should be such a difference. There is no persuasive reason why a defendant accused of fraud should have to clear his name absolutely in a summary judgment application

but in a strike-out, can throw the challenge to the plaintiff to show its case. The matter can be addressed by shifting the evidential burden to the plaintiff in cases where fraud or other reprehensible conduct is alleged. I did that in Official Assignee v Menzies:²²

In a defendant’s summary judgment application against a cause of action alleging reprehensible conduct, where the evidential onus moves to the plaintiff, the case for the plaintiff to show the evidence for liability is more compelling. If the plaintiff cannot show at summary judgment stage that he or she has evidence of the defendant’s liability for the alleged reprehensible conduct, the allegation should not be allowed to stand.

[56] As Mr Harkness has deposed that he did not know of the marketing in Singapore, that he dealt with the funds paid into his trust account as funds of clients and that pre-sales off the plan was an accepted practice, he has given an account consistent with acting honestly. There is also Lord Millett’s comment in Three

It is not unfair to observe that, in the absence of some financial or other incentive, a charge of dishonesty against professional men and public officials is possible but inherently improbable.

Mr Harkness says that the fee for drafting the option agreement was about $2,500. Admittedly he believed that there would be more lucrative conveyancing later after titles issued, but that does not seem to be the financial incentive Lord Millett had in

²²_{Official Assignee v Menzies (No 4) HC Auckland CIV
2009-404-3391, 4 May 2011 at [57].}

[57] These matters are enough to throw an evidential onus on the plaintiffs to show a basis for alleging that the defendants were knowing participants in the developers’ deception. As with the strike-out application, I find that the plaintiffs have not shown grounds for a case of accessory liability. Accordingly the defendants have satisfied me that the Fair Trading Act causes of action cannot succeed.

[58] The defendants have shown that the Fair Trading Act claims cannot stand. It is still necessary to deal with the second cause of action. Directions are required for a further hearing.

(b) On the summary judgment application I declare that the cause of action under the Fair Trading Act cannot succeed.

(d) I reserve costs to await the outcome of the application on the knowing assistance cause of action.

(e) I direct the Registrar of the Auckland High Court to arrange a telephone case management conference for 15 May 2014 to give directions to complete the hearing of the applications. Mrs Susan Parker will be the contact person. If the parties can agree on directions, a joint memorandum may be filed for my consideration. Otherwise the plaintiffs are to file and serve their memorandum one week before the conference, the defendants two working days before.

High Court of New Zealand Decisions

Ng v Harkness Law Limited [2014] NZHC 850 (29 April 2014)