Alpha Club New Zealand Limited v Stuart Mark Baldwin

[2001] NZCA 85

IN THE COURT OF APPEAL OF NEW ZEALAND CA 110/00

BETWEEN	ALPHA CLUB NEW ZEALAND LIMITED
First Appellant

AND	STUART MARK BALDWIN
Second Appellant

AND	VLADISLAVA BUHA
Third Appellant

AND	GERRARD JOSEPH BYRNE
Fourth Appellant

AND	ALISON ELEANOR TWIST
Fifth Appellant

AND	WIKI JOSHUA AH-CHEE
Sixth Appellant

AND	CELIA ELLICE BAKER
Seventh Appellant

AND	DEBORAH DAWSON-RENAHAN
Eighth Appellant

AND	VICTORIA REI MANIHERA
Ninth Appellant

AND	RENE MOORBY
Tenth Appellant

AND	CHRISTO MULLER
Eleventh Appellant

AND	GARNET GOLIARD SEPHTON
Twelfth Appellant

AND	MATHEW SWASBROOK
Thirteenth Appellant

AND	THE COMMERCE COMMISSION
Respondent

Hearing:	20 March 2001
Coram:	Keith J Fisher J Paterson J
Appearances:	S J Mills for Appellants R M Lithgow and G M Searancke for Respondent
Judgment:	21  March 2001

RESERVED JUDGMENT OF THE COURT DELIVERED BY FISHER J

Introduction

1. In High Court proceedings which are yet to come to trial the Commission alleges that the appellants promoted and operated a pyramid selling scheme in breach of s 24 of the Fair Trading Act 1986. On the joint application of the parties the Court ordered the pre‑trial determination of several legal questions under R 418 of the High Court Rules. Two of the questions were determined at a subsequent hearing before Doogue J. For various reasons he declined to determine the others. The appellants appeal against the refusal to determine one of those which remain outstanding.

Background

1. For the purpose of answering the preliminary questions of law only the parties adopted the following facts:

   [a]The first defendant sells memberships in Alpha Club that provide for a 10 year membership at a fee of $6750 (GST inclusive).

   [b]That membership entitles a member to utilise the first defendant’s benefits programme.

   [c]It also gives the member the option to become an Alpha Club agent. As an agent the member is then entitled to sell memberships in Alpha Club to others.

   [d]the benefits programme is a closed buying group that provides goods and services to members at a discount from the normal retail price.

   [e]The benefits programme currently offered by the first defendant provides a range of domestic and international goods and services.

   [f]New suppliers of benefits are being added to the benefits programme all the time. About 20 people worldwide are engaged by Alpha Club International to enlist new suppliers to be part of the benefits programme.

   [g]The range and quality of the goods and services and the size of the discounts is expected to increase as the size of the first defendant’s membership grows. This has been the overseas experience.

   [h]The discounts have financial value. With some of the benefits referred to the value is substantial.

   [i]As an agent a member receives a payment for each new membership sold. Of the $6750 paid for a membership, $1350 is paid to the agent who sold the membership (referred to as a “Silver Agent”) and $750 is paid to a “Gold Agent” (who is described as being at the “next level” to the Silver Agent).

2. The Commission alleged that that arrangement amounted to a breach of s 24 of the Act which materially provides:

Pyramid selling schemes –

(1)       No person shall promote or operate a pyramid selling scheme.

(2)       For the purposes of this section, the term “pyramid selling scheme” means

(a)       A scheme –

(i)        That provides for the supply of goods or services or both for reward; and

(ii)       That, to many participants in the scheme, constitutes primarily an opportunity to sell an investment opportunity rather than an opportunity to supply goods or services; and

(iii)      That is or is likely to be unfair to many of the participants in the scheme in that –

(A)      The financial rewards of many of those participants are dependent on the recruitment of additional participants (whether or not at successively lower levels); and

(B)      The number of additional participants in the scheme that must be recruited to produce reasonable financial rewards to participants in the scheme is not attainable or is not likely to be attainable by many of the participants in the scheme:

High Court hearing

1. The questions referred for determination under R 418 included the following:

   (d) Is any representation to an intending participant in a scheme about the level of income that might be achieved by a participant in the scheme relevant to the meaning of “reasonable financial rewards”?

2. The Judge declined to answer that question, stating the following:

   The plaintiff prefers that this question not be answered and submits that it must be a question of fact for the trial Judge after the hearing of the case as to whether or not any representation may be a relevant factor in determining the meaning of “reasonable financial rewards”. The defendants submit that the question is a real one and that the better answer is “no”. It is submitted for the defendants that any representation to an intending participant in a scheme about the level of income that might be achieved by a participant in the scheme is irrelevant to the meaning of the words “reasonable financial rewards”. It is submitted that this is supported by legislative history and, more importantly, by the provisions of s 9 of the Act which make specific provision for misleading and deceptive conduct or conduct that is likely to mislead or deceive. It is accordingly submitted for the defendants that if the conduct is not a misrepresentation or otherwise misleading it would not lead to an adverse finding in respect of reasonable financial rewards in any event. If the promotion of a scheme involves a representation about prospective income that is misleading or deceptive, the issue is one of misleading and deceptive conduct.

   Once again I prefer not to answer the question. That is particularly so when the plaintiff does not seek an answer to the question and when on the face of it it is unnecessary at this stage to determine the question. The plaintiff has submitted that what are reasonable financial rewards must be determined objectively, which would appear to be correct. The issue will undoubtedly clarify itself. There is no agreement or assumption at the present time that there have been relevant representations to intending participants in the scheme. The answer to the question posed may or may not be relevant to the substantive hearing. I accordingly refrain from answering the question.

Position in this Court

1. Whether to determine a question before trial involves the exercise of a judicial discretion. This Court will not interfere with the way in which it is exercised unless the case is brought within one of a number well‑established exceptions. After discussion in this Court it emerged that one of the exceptions applied in this case. The position presented to this court has critically changed from that which had been presented to Doogue J.

2. The appellants now formally concede that as part of their scheme, representations were made by the appellants as to the prospective earnings of anyone who joined the scheme. In addition the appellants agree that question (d) is to be determined on the factual hypothesis that at its sales presentations Alpha Club told prospective members that within ten months of joining Alpha Club they could make a return of $71,700 from recruiting new members. For the removal of doubt it should also be recorded that although the appellants are willing to have question (d) considered on that hypothesis it would remain subject to proof at trial.

3. Given the position which the appellants now take on those matters the Commission withdraws its opposition to having question (d) determined as a separate question under R 418. That determination must be made in the High Court if a right of appeal with the benefit of reasons in the court below is to be preserved.

Result

1. The appeal is allowed. Question (d) is remitted to the High Court for pre‑trial determination under R 418 on the basis recorded earlier in this judgment. Costs in this Court will lie where they fall.

Solicitors:

Chapman Tripp Sheffield Young, Auckland for Appellants
The Commerce Commission, Wellington for Respondent