Trotman, Lindsay --- "Misleading or deceptive conduct after Red Eagle - clearing up the confusion" [2014] OtaLawRw 5; (2014) 13 Otago LR 333

Last Updated: 21 May 2016

Misleading or Deceptive Conduct After Red Eagle – Clearing up the Confusion

Matt Berkahn and Lindsay Trotman^*

Introduction

Since the Supreme Court’s decision in Red Eagle Corporation Ltd v Ellis¹ in March 2010 there have been many New Zealand cases dealing with s 9 of the Fair Trading Act 1986 (NZ) (FTA), the equivalent of s 18 of the Australian Consumer Law 2010 (ACL). Section 9 provides that:

No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

It has been assumed² that the approach to s 9 employed in Red Eagle has entirely superseded the three-step test articulated in 1997 by the New Zealand Court of Appeal in AMP Finance NZ Ltd v Heaven,³ although the Supreme Court did not explicitly state that that was its intention.

We review the New Zealand cases since Red Eagle and consider whether it has indeed spelt the end of the three-step test in Heaven. We also assess whether there is actually any difference between the two in terms of any requirement for “reasonableness” on the part of a claimant.

I Heaven – A Three-step Test for Relief

In AMP Finance NZ Ltd v Heaven⁴ Mr and Mrs Heaven purchased and intended to develop a property on Kawau Island, in the Hauraki Gulf north of Auckland. They borrowed money from a finance company, AMP, and were led to believe by the wording of the loan agreement between the parties that AMP would provide further funding as required. In fact, AMP intended only to provide a single advance of funds. The Heavens, relying on their impression that further funds would be forthcoming, proceeded with the development which was a financial disaster, resulting

^* Senior Lecturer in Law and Associate Professor of Law respectively, Massey University, Palmerston North, New Zealand. This article is based on a paper presented to the 69th Annual Australasian Law Teachers Association Conference, Bond University, Gold Coast, Australia, 10 to

^{12 July 2014.}

^{1 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20; [2010] 2 NZLR 492.}

^{2 See, for example, Lindsay Trotman and Debra Wilson “Stairway from}

^{Heaven: s 9 FTA” [2010] New Zealand Law Journal 310; Matthew Barber}

^{“Red Eagle Corporation Ltd v Ellis: Fair Trading, Reasonableness and}

^{Commercial Transactions” (2010) 16 New Zealand Business Law Quarterly}

^{356; Christopher Walshaw “Red Eagle and Reasonableness” [2011] New}

^{Zealand Law Journal 144; and Jude Antony, “Heaven, Red Eagle and the}

^{Importance of Judicial Discretion in the award of Damages under the}

^{Fair Trading Act” (2014) 20 New Zealand Business Law Quarterly 3.}

^{3 AMP Finance NZ Ltd v Heaven [1997] NZCA 341; (1997) 8 TCLR 144.}

^{4 AMP Finance NZ Ltd v Heaven [1997] NZCA 341; (1997) 8 TCLR 144.}

in a loss of about $750,000. They sued AMP, alleging that the agreement executed by the company amounted to misleading or deceptive conduct. The Heavens succeeded in the High Court⁵ and AMP appealed to the New Zealand Court of Appeal.

The judgment of the Court was delivered by Tipping J. He considered that the question of whether AMP’s conduct was misleading or deceptive should be addressed in three steps:⁶

The first step, which focuses on the conduct in question, is to ask whether that conduct was capable of being misleading. The second step is to consider whether the Heavens were in fact misled by the relevant conduct. This step focuses on the effect of the relevant conduct on the Heavens’ minds. The third step requires consideration of whether it was, in all the circumstances, reasonable for the Heavens to have been misled. This is where, as with the first step, the objective dimension comes in. It is not enough for the Heavens to show they were misled if reasonable people in their shoes would not have been misled.

No authority for this approach was offered by Tipping J. He found that all three of these steps were satisfied: the company’s conduct was capable of being misleading, the Heavens were in fact misled by it and it was not unreasonable in the circumstances for them to have been misled.

The steps were all specifically stated to be directed to the question whether s 9 of the FTA has been breached, and not to the wider question of whether the court should grant a remedy in any given case.⁷ The second and, to some extent the third, of the steps prescribed by the court in Heaven shift the focus away from the defendant’s conduct and onto the effect of the conduct on the claimant, and are therefore more appropriately considered in connection with s 43 of the New Zealand Act.⁸ That section provides that the court may grant a remedy if it “finds that a person ... has suffered, or is likely to suffer, loss or damage by conduct of another person ... that does or may constitute

^{... a contravention of a provision” including s 9.}

Nonetheless, the approach set out in Heaven was, until 2010, considered to be the authoritative test for a court dealing with s 9 of the FTA.⁹

⁵ Heaven v Tetley-Jones (Unreported, High Court Auckland, Morris J, 8 July

^1997).

^{6 AMP Finance NZ Ltd v Heaven [1997] NZCA 341; (1997) 8 TCLR 144, 152.}

^{7 Ibid.}

^{8 See Barber, above n 2, at 357; Walshaw, above n 2, at 144; Lindsay Trotman}

^{and Debra Wilson, Fair Trading: Misleading or Deceptive Conduct (2nd ed,}

^{LexisNexis NZ Ltd, 2013) 101: and Antony, above n 2, at 144.}

^{9 See Trotman and Wilson, above n 2, 311 and 312; Trotman and Wilson,}

^{above n 2, at 311 and 312; Trotman and Wilson, above n 8, at 94 and the}

^{cited cases therein.}

2. Red Eagle – Distinguishing Proof of a Breach from Proof of Loss or Damage

Red Eagle Corporation Ltd v Ellis¹⁰ involved an aquaculture venture initially developed by the defendant Mr Ellis and a Ms Black. Ellis approached Mr Falkenstein, with whom he had a longstanding friendship and business relationship, seeking bridging finance of $250,000 at an interest rate of 25 per cent per annum. Among the communications between Ellis and Falkenstein was an email from Ellis offering security for the loan by way of a personal guarantee from Black and stating that Black had property assets with a net worth around $2 million. Falkenstein agreed that Red Eagle Corporation Ltd, a company that he controlled, would make the loan personally to Black. Black then sent to Falkenstein, at his request, a written breakdown of her assets, including houses worth about

$3 million with an outstanding mortgage liability of about $1 million. Red Eagle loaned Black $250,000 but the loan was never repaid. Black was adjudicated bankrupt and it was then determined that she had been fraudulent and did not own the property that she and Ellis had claimed she did.

Red Eagle claimed a breach of s 9 of the FTA by Ellis. The High Court¹¹ held that Ellis’s statement about Black’s assets was misleading or deceptive, although it was made honestly. The award of damages to Red Eagle was, however, reduced by half because of Falkenstein’s own lack of care in failing to search the titles to the properties to verify that Black was the registered owner and the extent of the mortgages.

Ellis appealed and the Court of Appeal overturned the decision. Applying the three-step Heaven test, the Court concluded that, while Falkenstein had been misled about Black’s financial position, that was not due to Ellis’s conduct but rather to Black’s own statement of her assets (thus not satisfying Heaven’s step two). Nor was it reasonable in the circumstances for Falkenstein to be misled (thus not satisfying Heaven’s step three). The Court held that the amount of “puffery” in Ellis’s communications “should have induced an air of caution on Falkenstein’s part” and that the phrasing in Ellis’s emails:¹²

made plain the information he was passing on was neither generated nor confirmed by him ... The emails contained no hint Mr Ellis had checked or was capable of checking the correctness of the information given him by Ms Black.

Red Eagle appealed to the Supreme Court, which allowed the appeal, reversing the Court of Appeal’s judgment and restoring the High Court’s decision. Blanchard J (delivering the Court’s judgment) did not follow the Heaven approach, but rather held that misleading or deceptive conduct

¹⁰ Red Eagle Corporation Ltd v Ellis [2010] NZSC 20; [2010] 2 NZLR 492.

^{11 Red Eagle Corporation Ltd v Ellis (Unreported, High Court Auckland,}

^{Dobson J, 30 July 2008).}

^{12 Ellis v Red Eagle Corporation Ltd [2009] NZCA 320; (2009) 12 TCLR 449 at 455.}

^{should be assessed by asking the question.13}

whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware – would likely have been misled or deceived. If so, a breach of s 9 has been established. It is not necessary under s 9 to prove that the defendant’s conduct actually misled or deceived the particular plaintiff or anyone else. If the conduct objectively had the capacity to mislead or deceive the hypothetical reasonable person, there has been a breach of s 9. If it is likely to do so, it has the capacity to do so.

Contrasting the judgments of the Court of Appeal and Supreme Court in Red Eagle is instructive. In the Court of Appeal, applying the Heaven test, Falkenstein’s lack of care resulted in the court finding that there had been no breach of s 9 (and therefore no possibility of any remedy), rather than being a factor that might cause the court to reduce or refuse a remedy under s 43. The Supreme Court limited its consideration of s 9 to whether there had been any objectively misleading or deceptive conduct. The reasonableness of the claimant’s conduct was considered only when assessing an appropriate remedy. The claimant’s lack of care, while reducing the damages awarded by half, did not eliminate the availability of relief.

The Supreme Court did not reject the approach employed in Heaven outright, but instead stated that it did not understand the Court of Appeal in Heaven to have intended its formulation to apply in all situations:¹⁴

It is not desirable to attempt to formulate a methodology to be applied prescriptively by a court whenever the application of these provisions is in issue, for the circumstances are too variable. The approach to be taken in a particular case will depend upon the type of situation under scrutiny ...

The following approach commends itself in a relatively simple case like the present where there is no doubt about what was said or about its meaning and all of the loss arose from the same event ...

The Supreme Court did not explain when it thought a different approach – such as the one used in Heaven – might be more applicable. Despite its apparent acceptance that Heaven’s three steps might be appropriate in some cases, the following comments about the desirability of separating the elements of ss 9 and 43 suggest that it really intended a departure from Heaven and the replacement of the earlier approach with a new one:¹⁵

¹³ Red Eagle Corporation Ltd v Ellis [2010] NZSC 20; [2010] 2 NZLR 492, 503, citing the Australian cases Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191, 198 and McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd [1980] FCA 159; (1980) 33 ALR 394 at 413.

^{14 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20; [2010] 2 NZLR 492, 502 and 503.}

^{15 This is certainly how the majority of commentary on the case has treated}

^{the question: see Barber, above n 2, at 356 and 360; and Walshaw, above}

^{n 2, at 145. But compare Andrew Beck, “Contract” [2010] New Zealand Law}

^{Review 215, 225–226, where Red Eagle is merely stated to have “thrown}

Section 9 enacts a prohibition on engaging in misleading or deceptive conduct ‘in trade’. Section 43 begins to operate only when a breach of s 9 ... has been proved. It enables a court to provide a remedy for any existing or future consequence of the breach, where someone has suffered or is likely to suffer loss or damage. It is preferable to deal consecutively with the requirements of each section.¹⁶

It is hard to see a situation where the Red Eagle approach would not apply. It has been noted that, while different considerations might be relevant in claims for injunctive or corrective relief as opposed to actions for damages, those considerations would apply at the stage of assessing a suitable remedy, not when the court is deciding whether the conduct in question is misleading or deceptive.¹⁷

The very fact that the Supreme Court separates their application of s 9 from that of s 43 suggests that their expression of the former could be used for any breach of that section, notwithstanding the remedy sought. Some aspects of the test may be applied differently for different remedies, such as considering the effect of conduct on a target market rather than on a particular individual, but the general approach, it would seem, should be the same ...

Variations on [the] facts may call for some refinement or elaboration of the Red Eagle test, but it would seem to be sufficiently general and robust to be able to deal with any such variations.

III Reasonableness

The approaches in both Heaven and Red Eagle incorporate the concept of reasonableness. Heaven’s third step “requires consideration of whether it was, in all the circumstances, reasonable for the [claimant] to have been misled”; Red Eagle asks “whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware – would likely have been misled or deceived”. Is there any real difference between these two requirements?

There are two ways in which the references to reasonableness in the two cases might be interpreted: (1) Was the conduct of the defendant misleading or deceptive, from the point of view of a reasonable person in the claimant’s shoes? and (2) Was there anything that the claimant could reasonably have done to prevent themselves being misled or deceived by the defendant’s conduct?

Some have suggested that Red Eagle represents a change from the

into some doubt” the Heaven test: “It will therefore be necessary to think twice before simply trotting out the formulation from Heaven as a template to be applied in every case”.

^{16 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20; [2010] 2 NZLR 492 at 502.}

^{17 Barber, above n 8, at 360. For a full discussion of the judicial discretion}

^{under s 43 see Antony, above n 2.}

^{second interpretation to the first:18}

The test in Heaven tends to skew the inquiry away from the conduct of the party whose conduct is in question, and ask instead whether the other party has been reasonable ... [This] has now been thrown into some doubt by the Supreme Court decision in Red Eagle.

Barber also sees a difference between the reasonableness referred to in Heaven and that referred to in Red Eagle. He appears to appreciate the distinction between the two interpretations of reasonableness, and concludes that under the Heaven approach, “the plaintiff’s carelessness ... is fatal to an action for damages”.¹⁹ Red Eagle, on the other hand, merely allows it to be taken into account when apportioning a claimant’s loss or damage. This carelessness “is not [concerned with] how the plaintiff responds to the conduct of the defendant, but rather that the plaintiff’s actions are a factor contributing to his or her own loss”.²⁰ Barber thus seems to view Red Eagle’s use of “reasonable” (in the context of s 9) as describing a reasonable person’s response to the defendant’s conduct, while confining Heaven’s third step to the claimant’s own conduct that might contribute to the loss.

Walshaw is critical of the use of the word “reasonable” in both Heaven and Red Eagle. He believes that it risks a shift in focus from the “characterisation of the identified conduct” of the defendant to the conduct of the claimant:²¹

Of course [the assessment of whether conduct is misleading or deceptive] is an objective assessment ... Reasonableness adds nothing to that. The focus is on the conduct of the alleged contravener, not the claimant.

He cites a number of cases decided in the wake of Heaven that he says confirm his fears, but we suggest that his contention that these cases are “stringent in [their] examination of the claimant’s conduct”²² is overstated.

In one of the cases cited by Walshaw, Harrison v Amcor Trading (NZ) Ltd,²³ the High Court held that whether a document was misleading should be judged according to the way it would be interpreted by “a reasonable person in the circumstances of [the claimants]”, making “some qualified allowance for [their] characteristics and experience”. The document in question was a projected revenue statement provided by a franchisor to prospective franchisees. It contained a mixture of nominal, rounded and what the court described as “idiosyncratic” figures, including a substantial annual profit. The court’s summary of the facts included a passing reference to the claimants’ failure to “probe

¹⁸ Beck, above n 15, at 225.

^{19 Barber, above n 2, at 361.}

^{20 Ibid.}

^{21 Walshaw, above n 2, at 146.}

^{22 At 147.}

^{23 Harrison v Amcor Trading (NZ) Ltd (Unreported, High Court Auckland,}

^{Fisher J, 13 May 1999) 9.}

[the franchisor] as to the nature and origins of the various figures” in the statement²⁴ but this failure to act does not appear to have played any part in the court’s decision. No reference is made to any conduct, or lack thereof, by the claimants.

In David v TFAC Ltd,²⁵ some reference is made to the claimants’ failure to take independent legal advice, but those comments are in the context of a finding that the defendants’ conduct was not misleading or deceptive, taking into account the claimants’ knowledge and characteristics (not their conduct), and are accompanied by a statement that “failure to take independent advice in the face of a recommendation or requirement to take it will not excuse conduct that is [otherwise] misleading or deceptive”.²⁶

Similarly, in Janus Nominees Ltd v Fairhall, it is stated that the FTA “is not designed to provide a guarantee to purchasers who fail to look after their own interests in a manner which is reasonable in the circumstances”²⁷ but, again, the context is not one where the claimants failed because of “unreasonable” conduct. Rather, the focus is on the claimants’ knowledge and characteristics, and hence on their response to the defendant’s conduct. The Court of Appeal’s criticism is not that the claimants failed to take independent advice when they should have; it is that the advice they took placed them in a situation where the defendant’s conduct could not reasonably be seen as misleading or deceptive to them:²⁸

This was a transaction between sophisticated commercial people who were independently advised. Not only was there nothing capable of being misleading or deceptive, but it was unreasonable for the Fairhalls to have been misled.

PAE (New Zealand) Ltd v Brosnahan²⁹ is the only case that comes close to confirming Walshaw’s fears. The Court of Appeal, under the heading “Unreasonable Reliance”, upheld the High Court’s finding that “PAE acted unreasonably in relying on the accounts by failing to make proper inquiry into their accuracy”.³⁰ This was however, in response to a criticism by the claimant of the trial judge’s finding that, “if the representation was misleading and deceptive, it did not cause PAE’s loss”.³¹ It was thus probably not a statement that unreasonable conduct by a claimant might prevent the defendant’s conduct from being misleading or deceptive, but rather that such conduct by a claimant might reduce the remedy granted or exclude it altogether.

Walshaw suggests that the Supreme Court’s use of “reasonable” in

²⁴ At 2.

^{25 David v TFAC Ltd [2009] NZCA 44; [2009] 3 NZLR 239, [59] to [67].}

^{26 At [66].}

^{27 Janus Nominees Ltd v Fairhall [2009] NZCA 280; [2009] 3 NZLR 757, [41].}

^{28 At [40].}

^{29 PAE (New Zealand) Ltd v Brosnahan [2009] NZCA 611; (2009) 12 TCLR 626.}

^{30 At [35].}

^{31 At [33].}

Red Eagle was simply an attempt to emphasise objectivity, and that it “may well be that [its] use ... by Tipping J in Heaven should be read the same way”.³² Thus, in Walshaw’s view (with which we agree), both cases should be read as requiring only that it be “reasonable to say” that conduct is misleading or deceptive, rather than requiring the claimant to meet a standard of reasonable conduct.

The Court of Appeal has recently come dangerously close to saying otherwise. In Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd³³ it addressed the question: “What standard of care is to be expected of the consumer?”³⁴

The answer it provided was: “Consumers must exercise a degree of care which is reasonable having regard to all the circumstances including the characteristics of the target group of consumers.”³⁵ This answer suggests that whether conduct is misleading or deceptive depends on whether consumers have exercised reasonable care. That inevitably involves considering the conduct of the claimant in determining whether the conduct of the defendant is misleading or deceptive. This is contrary to Red Eagle – there the claimant failed to exercise a degree of care that was reasonable having regard to all the circumstances, including the characteristics of the claimant. But the Supreme Court was clear that this was a matter for the s 43 inquiry only (that is, relief), not the s 9 inquiry (that is, characterisation of the defendant’s conduct). To impose a standard of care on consumers in the context of the s 9 inquiry is unhelpful and unwarranted.

Read as a whole, we think the judgment of the Court of Appeal in Godfrey Hirst was concerned to ensure that conduct directed at consumers be assessed by considering its impact on reasonable consumers.³⁶ With that we have no quibble. Indeed, it is consistent with our “reasonableness interpretation” (1) above³⁷, ie was the conduct of the defendant misleading or deceptive, from the point of view of a reasonable person in the claimant’s shoes? However, for the Court of Appeal to achieve its objective by imposing a standard of care on consumers is, we think, confusing and unnecessary. Reasonableness or otherwise of conduct by the claimant, such as a failure to exercise reasonable care, should only be considered when a decision is being made about a remedy: “did the claimant’s actions or inaction break the chain of causation?”³⁸

³² Walshaw, above n 2, at 147.

^{33 Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd [2014] NZCA 418; [2014] 3 NZLR 611. See}

^{further discussion of this case below under heading “IV Australian}

^{Influences” and under heading “V Misleading or Deceptive Conduct in}

^{New Zealand After Red Eagle”.}

^{34 At [16], [51]–[54].}

^{35 At [51].}

^{36 See generally [17]–[50].}

^{37 See above, text following note 17.}

^{38 Walshaw, above n 2, at 146. See also Trotman and Wilson, above n 2, at}

^{312; and below under the subheading “Reasonableness of reliance”.}

^{IV Australian Influences}

Walshaw also makes the point that the origins of New Zealand’s s 9 lie in s 52 of the Trade Practices Act 1974 (Cth), now s 18 of the ACL. New Zealand courts dealing with cases under s 9 should therefore “tap into the expertise of Australian judges”.³⁹

The Supreme Court in Red Eagle did note some Australian cases,⁴⁰ although none were very recent. A survey of recent cases from the High Court of Australia dealing with misleading or deceptive conduct⁴¹ reveals, however, that the approach taken in Red Eagle is consistent with the conventional approach in Australia. The recent Australian cases also suggest that “reasonableness”, as part of the test for misleading or deceptive conduct, refers to how a claimant might reasonably respond to the defendant’s conduct, and not to any expectation of a claimant acting reasonably to mitigate his or her loss.

Campbell v Backoffice Investments Pty Ltd⁴² does not use the term “reasonable” as part of its test for misleading or deceptive, but it does say that:⁴³

it involves consideration of a notional cause and effect relationship between the conduct and the state of mind of the relevant person or class of persons. The test is necessarily objective ...

Where the conduct is directed to members of a class in a general sense, then the characterisation enquiry is to be made with respect to a hypothetical individual ‘isolate[d] by some criterion’ as a ‘representative member of that class’. In the case of an individual it is not necessary that he or she be reconstructed into a hypothetical, ‘ordinary’ person. Characterisation may proceed by reference to the circumstances and context of the questioned conduct. The state of knowledge of the person to whom the conduct is directed may be relevant, at least in so far as it relates to the content and circumstances of the conduct.

The court in Campbell also made the point that the question of whether conduct is misleading or deceptive is separate and “logically anterior” to the question of loss or damage for the purpose of assessing an appropriate remedy.⁴⁴

³⁹ Walshaw, above n 2, at 146.

^{40 Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177; Annand and}

^{Thompson Pty Ltd v Trade Practices Commission [1979] FCA 36; (1979) 40 FLR 165; Henville}

^{v Walker [2001] HCA 52; (2001) 206 CLR 459; Hornsby Building Information Centre Pty Ltd}

^{v Sydney Building Information Centre Ltd [1978] HCA 11; (1978) 140 CLR 216; McWilliam’s}

^{Wines Pty Ltd v McDonald’s System of Australia Pty Ltd [1980] FCA 159; (1980) 33 ALR 394;}

^{Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191;}

^{and Wardley Australia Ltd v State of Western Australia [1992] HCA 55; (1992) 175 CLR 514.}

^{41 The cases noted below are all of the cases from the High Court of Australia}

^{that dealt with this issue between July 2009 and June 2014.}

^{42 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304.}

^{43 Ibid [25] to [26] (footnotes omitted), citing Campomar Sociedad Limitada v}

^{Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45, at [101].}

^{44 At [24].}

In Miller and Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd⁴⁵ the claimant alleged that the non-disclosure of certain information was misleading or deceptive. The High Court disagreed, finding that, in light of the commercial experience of the parties, there was no “reasonable expectation” of disclosure:⁴⁶

The judgment which looks to a reasonable expectation of disclosure as an aid to characterising non-disclosure as misleading or deceptive is objective. It is a practical approach to the application of the prohibition [of misleading or deceptive conduct].

Forrest v Australian Securities and Investments Commission⁴⁷ was a case brought under a provision in the Corporations Act 2001 (Cth) that prohibits misleading or deceptive conduct in relation to financial products or services. The High Court applied a very similar test to that used by the New Zealand Supreme Court in Red Eagle in finding that conduct should be judged according to what it conveys to an “ordinary or reasonable” member of its target audience.⁴⁸ While there has been some criticism of the court’s decision on the basis that it ascribed too high a “degree of sophistication to reasonable investors”,⁴⁹ the approach taken is acknowledged to be “the accepted orthodoxy in misleading or deceptive conduct cases”.⁵⁰ It is exactly the approach taken in the two most recent cases to reach the High Court of Australia, Google Inc v Australian Competition and Consumer Commission⁵¹ and Australian Competition and Consumer Commission v TPG Internet Pty Ltd.⁵² In the former, the Court noted that it was a “well-established proposition” that:⁵³

where an issue ... is the effect of conduct on a class of persons such as consumers who may range from the gullible to the astute, the court must consider whether “the ‘ordinary’ or ‘reasonable’ members of that class” would be misled or deceived.

The Australian cases were recently considered by the Court of Appeal in Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd,⁵⁴ the Court noting

⁴⁵ Miller and Associates Insurance Broking Pty Ltd v BMW Australia Finance

^{Ltd (2010) 241 CLR 357.}

^{46 At [20].}

^{47 Forrest v Australian Securities and Investments Commission (2012) 247 CLR}

^486.

^{48 At [43], [50], [59] and [69].}

^{49 John Humphrey and Stephen Corones, “Forrest v ASIC: A ‘Perfect Storm’”}

^{(2014) 88 Australian Law Journal 26, 37.}

^{50 At 28.}

^{51 Google Inc v Australian Competition and Consumer Commission (2013) 249}

^{CLR 435.}

^{52 Australian Competition and Consumer Commission v TPG Internet Pty Ltd}

^{[2013] HCA 54; (2013) 304 ALR 186.}

^{53 Google Inc v Australian Competition and Consumer Commission (2013) 249}

^{CLR 435, [6] and [7].}

^{54 Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd [2014] NZCA 418; [2014] 3 NZLR 611. See}

^{further discussion of this case below under heading “V Misleading or}

^{Deceptive Conduct in New Zealand After Red Eagle”.}

that “consistency with the Australian cases is important because the legislation in the two countries is substantially the same and because of the trans-Tasman trade ties.”⁵⁵ In relation to the effect of conduct directed at consumers, the Court concluded that there is no real divergence between Australian and New Zealand cases on the answer to the question of who “the consumer” is.⁵⁶ The Court of Appeal’s answer to this question was all the consumers in the class targeted except “outliers”. Outliers were identified as consumers who are unusually stupid or ill equipped, or those whose reactions are extreme or fanciful.⁵⁷ The Court of Appeal regarded this as no different to considering the effect of the conduct on all the “average” or “ordinary” or “reasonable” or “typical” members of the targeted class.⁵⁸

V Misleading or Deceptive Conduct in New Zealand After Red Eagle

A review of the New Zealand cases after Red Eagle reveals widespread adoption of the Red Eagle approach and little or no attention given to Heaven. There are four exceptions, two of which have been reversed on appeal, effectively leaving two decisions that have applied the Heaven approach.

Perhaps the most worrying of the exceptions is Pegasus Town Ltd v Draper.⁵⁹ It is worrying because it is a Court of Appeal decision devoid of reference to Red Eagle. The “requirements for liability under s 9”⁶⁰ are said to be “as discussed by this Court in AMP Finance New Zealand Ltd v Heaven”.⁶¹ Pegasus Town has not been referred to in the context of its comments on s 9.⁶² It is best regarded as a per incuriam decision as regards the requirements for liability under s 9.

The other decision to have adhered to Heaven is Bloor v IAG New Zealand Ltd.⁶³ This High Court decision is also devoid of reference to Red Eagle. Heaven is referred to for the “elements that must be established to prove misleading or deceptive conduct”.⁶⁴ This must also be regarded as a per incuriam decision on this point. Unlike Pegasus Town, there appears to be an explanation for the lack of reference to Red Eagle. The hearing in Bloor preceded the Supreme Court’s judgment in Red Eagle, and the judgment in Bloor was delivered just seven days after the

⁵⁵ At [49].

^{56 At [43]–[49].}

^{57 At [20].}

^{58 At [48].}

^{59 Pegasus Town Ltd v Draper [2011] NZCA 140.}

^{60 At [45], per Stevens J for the court.}

^{61 Ibid.}

^{62 Pegasus was also concerned with the Contractual Remedies Act 1979}

^{(NZ) and it has been referred to twice in connection with s 7 of that Act:}

^{Narayan v Arranmore Developments Ltd [2011] NZCA 681; (2011) 13 NZCPR 123, [26]; Fowler}

^{Developments Ltd v Robertson [2012] NZHC 1218, [41].}

^{63 Bloor v IAG New Zealand Ltd (Unreported, High Court Rotorua, Stevens J,}

^{19 March 2010).}

^{64 At [125], per Stevens J.}

Red Eagle judgment.⁶⁵

^{At trial in Poplawski v Pryde66 the claimants contended for the Red Eagle}

^{approach whereas the defendants contended for the Heaven approach.67}

^{Whata J considered that “[t]here is no fixed route for assessment under}

^{s 9”68, that neither the Red Eagle or the Heaven approach was ideal and}

^{that “a slightly nuanced approach”69 was called for in the case at hand.}

^{Pursuant to the nuanced approach he held that the impugned conduct}

^{was capable of being misleading70 and was actually misleading,71 but}

^{that the conduct did not breach s 9 because a reasonable person in}

^{either of the claimant’s positions would not likely have been misled.72}

^{On appeal, the nuanced approach was rejected in favour of the Red}

^{Eagle approach. Applying Red Eagle, the Court of Appeal said “the}

^{judge ought to have concluded that the misleading [conduct] did}

^{constitute a breach of s 9 of the FTA because it was misleading and it}

^{was reasonable for [the claimants] to rely on it”.73 It must follow that}

^{once conduct is characterised as misleading or deceptive, there is a}

^{breach of s 9. However, for the Court of Appeal to say that there was}

^{a breach of s 9 not just because the conduct was misleading, but also}

^{because “it was reasonable for [the claimants] to rely on [the conduct]”74 is}

^{unhelpful. This is because reliance is unnecessary to prove a breach of s 9.}

^{We return to this point below.75 Despite the unhelpful linking of reliance}

^{to s 9, Poplawski is important in that an attempt to depart from the Red}

^{Eagle approach was firmly rejected by a unanimous Court of Appeal.}

In Sharma v Cool Cars (Wholesale) Ltd⁷⁶ the High Court directed that the proceeding be remitted to the District Court for re-hearing because the District Court judge had failed to follow Red Eagle. The first District Court judgment was another per incuriam decision: Red Eagle was not referred to the judge and had not been addressed by the parties in the course of the hearing.⁷⁷ The High Court direction was that the re-hearing “be limited to the elements of the claim under ss 9 and 43 ... with particular emphasis to the approach set out at [26] to [31] of Red

⁶⁵ The dates were 12 March 2010 (Red Eagle) and 19 March 2010 (Bloor). The

^{Bloor hearing took place on 4–18 May 2009 and 18–19 February 2010.}

^{66 Poplawski v Pryde [2012] NZHC 2011.}

^{67 At [43].}

^{68 Ibid.}

^{69 At [44].}

^{70 At [49].}

^{71 At [50].}

^{72 At [59], [61] and [67].}

^{73 Poplawski v Pryde [2013] NZCA 229; (2013) 13 TCLR 565, at [63].}

^{74 Ibid.}

^{75 See below under the subheading “Reasonableness of reliance”.}

^{76 Sharma v Cool Cars (Wholesale) Ltd [2012] NZHC 2015.}

^{77 Ibid [9] and see Cool Cars (Wholesale) Ltd v Sharma (Unreported District}

^{Court Hamilton, Judge Marshall, 3 April 2012) (the first District Court}

^judgment).

Eagle”.⁷⁸ The Red Eagle approach was followed in the judgment delivered after the re-hearing.⁷⁹

The Court of Appeal was called upon to consider conduct alleged to be in breach of ss 9 and 13(i) in Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd.⁸⁰ The Court did not expressly adopt the Red Eagle approach, but, subject to what we have said above,⁸¹ nonetheless followed it by maintaining a clear distinction between breach or otherwise of the provisions and relief, if any. Only after determining that the impugned conduct was misleading or deceptive, did the Court turn its attention to the separate issue of appropriate relief.⁸² In the Court of Appeal there was no challenge to the High Court adoption⁸³ of the “well established”⁸⁴ legal principle, attributed to Red Eagle, that “whether conduct ... is misleading or deceptive is to be determined objectively in the context of the particular circumstances, including the characteristics of the persons said to be affected”⁸⁵. The Court of Appeal, like the High Court, made no reference to Heaven or to the three-step test articulated in that case. The appeal was essentially confined to what is to be expected of consumers faced with headline representations in advertising, and qualifiers to them,⁸⁶not something that either Red Eagle or Heaven was concerned with.

With the exception of Pegasus Town, every Court of Appeal decision after Red Eagle concerned with s 9 has followed Red Eagle.⁸⁷ Numerous High Court decisions have also followed Red Eagle.⁸⁸ In summary, the

⁷⁸ Sharma v Cool Cars (Wholesale) Ltd [2012] NZHC 2015, at [11].

^{79 Cool Cars (Wholesale) Ltd v Sharma (Unreported District Court Hamilton,}

^{Judge Marshall, 20 December 2012).}

^{80 Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd [2014] NZCA 418; [2014] 3 NZLR 611, an appeal}

^{from Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd [2013] NZHC 1907.}

^{81 See above under the heading “III Reasonableness”, where we point out}

^{that considering the conduct of the claimant in determining whether the}

^{conduct of the defendant is misleading or deceptive is contrary to Red}

^{Eagle. See text following note 3435.}

^{82 See [1]–[89] for consideration of the conduct and determination that it was}

^{misleading or deceptive and [90]–[93] for consideration of the appropriate}

^relief.

^{83 Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd [2013] NZHC 1907, at [20].}

^{84 At [20] and [2014] NZCA 418, [14].}

^{85 Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd [2014] NZCA 418; [2014] 3 NZLR 611, [14]–[15].}

^{86 At [5].}

^{87 See Symons v Wiltshire Investments Ltd [2011] NZCA 397 (an appeal was}

^{allowed, but the FTA was not part of the appeal: see Symons v Wiltshire}

^{Investments Ltd [2012] NZSC 70; Hanover Group Holdings Ltd v AIG}

^{Insurance New Zealand Ltd (2013) 18 ANZ Ins Cas 61–988; NZ Tax Refunds}

^{Ltd v Brooks Homes Ltd [2013] NZCA 90; Narayan v Arranmore Developments}

^{Ltd [2011] NZCA 681; [2011] 13 NZCPR 123; Kipling v Van Kan [2012] NZCA 163 and Godfrey}

^{Hirst NZ Ltd v Cavalier Bremworth Ltd [2014] NZCA 418; [2014] 3 NZLR 611.}

^{88 See for eg WaikatoLink Ltd v Comvita New Zealand Ltd (2010) 12 TCLR 808;}

^{Leigh v The Macennovy Trust Ltd (HC) [2010] NZHC 577; (2010) 12 TCLR 790; Tasman Insulation}

^{New Zealand Ltd v Knauf Insulation Ltd [2014] NZHC 960.}

weight of authority for the Red Eagle approach is overwhelming. Given that the two decisions that have adhered to the Heaven approach are both per incuriam decisions, the demise of the Heaven test would seem now to be complete.

A Reasonableness

The Court of Appeal in Poplawski v Pryde⁸⁹ addressed the two interpretations of the concept of reasonableness postulated above.⁹⁰

^{O’Regan P, for the Court, said:91}

The significance of the Red Eagle approach in the present case is that the question as to whether the claimant took reasonable care to look after their own interests is relevant to the decision on the provision of relief (and if so, the quantum) under s 43. It does not, however, bear on whether the court determines that there has been a breach of s 9. Rather the focus in the s 9 context is on whether a reasonable person in the claimant’s situation would likely have been misled or deceived.

It is clear from Red Eagle, and now Poplawski, that the reasonableness or otherwise of the claimant’s conduct has nothing to do with s 9 of the FTA. The question presented in interpretation (2) above is an aspect of the s 43 inquiry. The question presented in interpretation (1) above is the key component of the s 9 inquiry.

B Reasonableness of reliance

Despite Red Eagle’s clear distinction between a s 9 and a s 43 inquiry, some confusion remains over reasonableness of reliance. Reliance, reasonable or otherwise, is not an aspect of the s 9 inquiry because s 9 does not require reliance. It requires “conduct that is misleading or deceptive or likely to mislead or deceive”. Conduct can be so characterised whether or not anyone has been actually misled or deceived by it.⁹² Thus, it is not necessary that anyone has relied on conduct in order for that conduct to be characterised as misleading or deceptive. “[R]easonableness of reliance does not feature in the elements of liability but in fixing compensation.”⁹³

Reliance is relevant to the s 43 inquiry, the object of which is to determine whether the claimant suffered loss or damage “by” misleading or deceptive conduct. Red Eagle made it clear that the first step in determining this is to decide whether the claimant was actually misled or deceived by the conduct. This is where reliance figures. It is hard to see how anyone could be actually misled or deceived by conduct they

⁸⁹ Poplawski v Pryde (2013) TCLR 565.

^{90 See above under the heading “III Reasonableness”.}

^{91 Poplawski v Pryde (2013) TCLR 565, at [49].}

^{92 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20; [2010] 2 NZLR 492, at [28], citing Parkdale}

^{Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 and}

^{McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980)}

^{[1980] FCA 159; 33 ALR 394.}

^{93 WaikatoLink Ltd v Comvita New Zealand Ltd (2010) 12 TCLR 808, [168] per}

^{Harrison J.}

did not rely on. Thus, reliance is at the core of being actually misled or deceived. Any kind of reliance, reasonable or unreasonable, will suffice to show that a claimant was actually misled or deceived. The reasonableness or otherwise of reliance has no bearing on whether the claimant was misled or deceived.⁹⁴

The question is simply whether [the claimant] was actually misled or deceived by [the defendant’s] conduct; the reasonableness or otherwise of [the claimant’s] reliance falls within the compensation inquiry.

If the claimant was actually misled or deceived by the conduct the next question to be addressed is:⁹⁵

whether the defendant’s conduct in breach of s 9 was an operating cause of the claimant’s loss or damage. ... The impugned conduct, in breach of s 9, does not have to be the sole cause, but it must be an effective cause, not merely something which was, in the end, immaterial to the suffering of the loss or damage.

The focus here is again on “the defendant’s conduct”, the conduct “in breach of s 9”. Is the claimant’s reliance, reasonable or otherwise, on that conduct relevant to this aspect of the s 43 inquiry? Logically it is not, because reliance concerns the claimant’s conduct, not the defendant’s conduct.

Whether conduct was either the or an effective or operating cause of the claimant’s loss or damage is a question of fact, to be determined by the court, usually by drawing an inference from the evidence as a whole. In Red Eagle the Supreme Court referred to “an inescapable inference” that the claimant acted as he did (the cause of his loss) because of the defendant’s conduct.⁹⁶ The issue is whether “it can fairly be said that [the conduct] was an operating or effective cause of [the claimant’s] loss”.⁹⁷ The relationship between the conduct and the loss must “make it reasonable to say that the loss or damage is the consequence of the conduct”.⁹⁸ Once a court has decided that a person was actually misled or deceived by conduct, and that loss flowed from being misled or deceived, it will often not be difficult for the court to infer that the conduct was an effective, if not the effective, cause of the loss. Thus, in Leigh v The Macennovy Trust Ltd⁹⁹ the judge remarked that an affirmative answer to the question of whether purchasers were actually misled “dictates an affirmative answer to the [next] question”.¹⁰⁰ Having found that purchasers were actually misled by misleading statements they had relied on, he continued: “It follows, ... that the statements were an effective or

⁹⁴ At [85].

^{95 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20; [2010] 2 NZLR 492, [29].}

^{96 At [36].}

^{97 At [34].}

^{98 Cox and Coxon Ltd v Leipst [1998] NZCA 202; [1999] 2 NZLR 15, 38 per Tipping J, approved}

^{in Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [29], n 19.}

^{99 Leigh v The Macennovy Trust Ltd [2010] NZHC 577; (2010) 12 TCLR 790.}

^{100 At [53].}

operating cause of the purchasers’ loss.”¹⁰¹ None of this has anything to do with whether it was reasonable for the claimant to have relied on the defendant’s conduct. The reasonableness or otherwise of reliance has no bearing on whether the defendant’s conduct was an operating cause of the claimant’s loss.

Affirmative answers to the questions, whether the claimant was actually misled or deceived and whether the conduct was an effective cause of the loss, means that the claimant suffered loss or damage “by” the defendant’s conduct. This enlivens the court’s discretion to award relief under s 43 of the FTA. It is in the exercise of this discretion that the court may consider the conduct of the claimant, including unreasonable reliance on the defendant’s conduct. “Where a plaintiff’s conduct is in question, the law of contributory negligence provides analogous guidance, given its conformity with the discretionary nature of the s 43 jurisdiction.”¹⁰² The court uses its discretion to fix compensation that is just in all the circumstances. The appropriate relief, having regard to, for example, unreasonable reliance on the part of the claimant, may be less than the full amount of the loss or damage suffered.

Confusion arises because of a tendency to use the word reliance, and even the phrase “reasonable reliance” in connection with the s 9 inquiry. For example, the majority in Narayan v Arranmore Developments Ltd¹⁰³ stated that conduct “will not be actionable if it was of such a kind that no reasonable person having the [claimant’s] characteristics would have relied upon it”.¹⁰⁴ This of course is not saying that it had to be reasonable for the claimant to have relied upon the conduct. But use of the words “reasonable” and “relied” in the same sentence can quickly import a false notion of reasonable reliance. This is illustrated by the minority in this case referring to the majority’s “finding about reasonable reliance”.¹⁰⁵

The minority also referred to “[t]he issue of reasonable reliance”¹⁰⁶ and “whether reliance was reasonable”¹⁰⁷ in connection with breach of s 9. It is suggested that what both the majority and the minority were actually referring to was whether a reasonable person would likely have been misled or deceived.

Another illustration of confusion is provided by Poplawski v Pryde.¹⁰⁸

^{Reference has already been made to the judgment of the court stating}

^{that there was a breach of s 9 because conduct “was misleading and it}

^{was reasonable for [the claimants] to rely on it”.109 Furthermore, the}

¹⁰¹ Ibid.

^{102 WaikatoLink Ltd v Comvita New Zealand Ltd (2010) 12 TCLR 808, [168] per}

^{Harrison J.}

^{103 Narayan v Arranmore Developments Ltd [2011] NZCA 681; [2011] 13 NZCPR 123.}

^{104 At [40].}

^{105 At [67].}

^{106 At [66].}

^{107 At [65].}

^{108 Poplawski v Pryde (2013) TCLR 565.}

^{109 At [63].}

judgment, at a point where breach of s 9 is about to be considered, has a bold heading, “Was it unreasonable for the appellants to rely on the misleading email?”¹¹⁰ The judgment did record that once the trial judge had found that the conduct was misleading or deceptive, “that should have disposed of the first stage of the Red Eagle analysis”;¹¹¹ that is, a proven breach of s 9. Despite this, the judgment proceeded to evaluate the trial judge’s reasons “for determining that it was not reasonable for a person in the appellants’ position to rely on [the conduct]”.¹¹² The danger in this is the credence it gives to the false notion that reasonable reliance is an aspect of the s 9 inquiry.

VI Conclusions

Heaven has gone to hell. This is to be celebrated because conflating the existence of objectively misleading or deceptive conduct (s 9) and consideration of relief (s 43) is contrary to the wording of the Act, unhelpful and confusing. The comment of the High Court of Australia in Campbell v Backoffice Investments Pty Ltd, that the question of whether conduct is misleading or deceptive is “logically anterior” to the question of loss or damage for the purpose of assessing a remedy¹¹³ is compelling. The approach of the Supreme Court in Red Eagle is much cleaner, keeping the requirements of each section separate and distinct. A breach of s 9 does not necessarily generate a remedy;¹¹⁴ nor should a remedy under s 43 be precluded by considerations that are not relevant to s 9.

Whether a claimant acted reasonably or otherwise has no part to play in the s 9 inquiry. We are troubled by the Godfrey Hirst notion that, in the context of the s 9 inquiry, consumers must exercise a reasonable degree of care.

Section 9 does not require people to take action to avoid being misled or deceived. Rather, s 9 is a prohibition on engaging in certain conduct. Our “reasonableness interpretation” (2) above¹¹⁵, ie was there anything that the claimant could reasonably have done to prevent themselves being misled or deceived by the defendant’s conduct, is unsustainable vis-à-vis s 9. But the question it presents is highly relevant to the exercise of the court’s remedial discretion under s 43. It would, however, be more accurate to refer to prevention of loss or damage than to prevention of misconception or deception.

Our “reasonableness interpretation” (1) above¹¹⁶, ie was the conduct of the defendant misleading or deceptive, from the point of view of a reasonable person in the claimant’s shoes, is no more than a statement of the Red Eagle approach to determining a breach of s 9. All subsequent

¹¹⁰ See bold heading preceding [30].

^{111 At [51].}

^{112 At [52].}

^{113 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, [24].}

^{114 Trotman and Wilson, n 2, at 312.}

^{115 See above, text following note 17.}

^{116 See above, text following note 17.}

cases, bar two per incuriam decisions, are consistent with this approach.¹¹⁷

Clarity of thought and understanding would be enhanced by eschewal of the words “relied” and “reliance” in connection with s 9. They suggest that reliance is needed for conduct to be characterised as misleading or deceptive when this is not so. It is notable that the Supreme Court in Red Eagle did not use either of these words in connection with s 9.

There is force in Walshaw’s point that reasonableness adds nothing to objective assessment. Clarity of thought and understanding might also be enhanced if New Zealand courts borrowed from the High Court of Australia and used the word “ordinary”¹¹⁸ rather than (or along with) “reasonable” in connection with s 9. Would there be any damage to the Red Eagle approach if the courts substituted “ordinary” for “reasonable” in para [28]¹¹⁹ of the Red Eagle judgment? What is wrong with “an ordinary person in the claimant’s situation” or “the hypothetical ordinary person”? Elimination of both the terms “reasonable” and “reliance” from s 9 discourse might assist understanding that neither reasonable conduct on the part of a claimant, or reliance, are part of the s 9 inquiry.

Notwithstanding Godfrey Hirst, we are at one with Barber ’s¹²⁰ conclusion that after Red Eagle there is no “requirement that the plaintiff acts reasonably either in being misled by the defendant’s conduct, or in relying on [the defendant’s conduct]”. We are also at one with Barber ’s conclusion¹²¹ that the claimant’s role in the loss suffered is a legitimate consideration for the court in the exercise of its remedial discretion under s 43.

¹¹⁷ Godfrey Hirst is problematic but, read as a whole, the judgment of the

^{Court of Appeal is not at odds with this approach, see above text at notes}

^{36 and 37.}

^{118 Or perhaps “typical”. In Godfrey Hirst, the Court of Appeal noted that}

^{“the description ‘reasonable’ is used in many of the cases synonymously}

^{with ‘average’ or ‘ordinary’” but expressed a preference for “typical”:}

^{[2014] NZCA 418; [2014] 3 NZLR 611, at [45] and [48].}

^{119 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20; [2010] 2 NZLR 492, at 503.}

^{120 Barber, above n 2, at 362. See also Matthew Barber, Entire Agreement (and}

^{Acknowledgement) Clauses, Misrepresentation and the Fair Trading Act}

^{(2011) 17 New Zealand Business Law Quarterly 393, at 403–404.}

^{121 Ibid.}