Bank of New Zealand v Deloitte Touche Tohmatsu HC Auckland CIV 2005-404-5095

[2006] NZHC 1082

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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2005-404-5095

BETWEEN  BANK OF NEW ZEALAND First Plaintiff

ANDACCESS BROKERAGE LTD (IN LIQUIDATION)

Second Plaintiff

ANDDELOITTE TOUCHE TOHMATSU First Defendant

ANDNEW ZEALAND EXCHANGE LTD Second Defendant

Hearing:         20-23 June 2006

Appearances: Alan Galbraith QC, Brian Latimour and Simon Ladd for Plaintiffs

Michael Ring QC and Rachel Scott for Second Defendant

Judgment:      21 September 2006

JUDGMENT OF HARRISON J

In accordance with R540(4) I direct that the Registrar endorse this judgment with the delivery time of

2:15 pm on 21 September 2006

SOLICITORS

Bell Gully (Auckland) for Plaintiffs
Simpson Grierson (Auckland) for First Defendant
McElroys (Auckland) for Second Defendant

COUNSEL

Alan Galbraith QC; Michael Ring QC

BANK OF NEW ZEALAND AND ANOR V DELOITTE TOUCHE TOHMATSU AND ANOR HC AK CIV-

2005-404-5095  21 September 2006

Table of Contents

Para No.

Introduction  [1] Background     [6] NZX  [13] Access  [24]

(a)    Terms  [25] (i)     Rules  [27] (ii)    Regulations  [40]

(b)     Breach  [51] (c)         Consequences  [55] (d)         Causation  [57] (i)       Identification   [59]

(ii)    Purpose of Contractual Duties  [70] Access’ Breaches  [74] Inspector’s Duties and Functions  [77] Conclusion  [82]

(iii)    Trading Losses  [87]

(e)     Quantification  [101] BNZ  [109] (a)  Claim        [110]

(b)     Duty of Care

(i)     Principles  [116]

(ii)     Proximity

Statutory Purpose  [120] Special Relationship  [128] Analogous Cases  [132] Reliance and Assumption of Responsibility               [136] Alternative Remedies  [142]

(iii)    Policy  [148]

(iv)    Just and Reasonable  [156] (c)       Causation  [160] Result  [164] Costs       [166]

Introduction

[1]      Access Brokerage Ltd was a stock broker and a member of the New Zealand Stock Exchange Ltd (NZX).    The  company was  placed  in  liquidation  when  its directors advised NZX that it was unable to meet obligations to clients of about

$4.5 million.    Access’  banker,  the  Bank  of  New Zealand,  has  since  settled  that indebtedness and taken assignments of the clients’ rights of action.

[2]      BNZ and Access have now issued a proceeding against the company’s former auditor,  Deloitte  Touche  Tohmatsu,  and  NZX.    Each  alleges  that  NZX,  in  its capacity as an Inspector of the Stock Exchange, owed and breached duties of care in tort  to  protect  them  against  their  losses  suffered  following  Access’  liquidation. Access separately pleads breach of the same duties in contract.  Both claims focus upon NZX’s performance of its statutory functions of inspection of financial information provided by the company in the year prior to its failure.

[3]      NZX has applied to strike out both claims.  Without doubt BNZ’s claim in tort is novel and its consequences may be far reaching.  Mr Michael Ring QC accepts that NZX must show the claims as pleaded are so untenable in law that they could not possibly succeed at trial.  He accepts also that the discretion to strike out a claim in advance of trial is to be used sparingly.   Nevertheless, it should be invoked in appropriate cases where, assuming all factual allegations made in the statement of claim can be proven, the Court is satisfied that there could be no liability in law: Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA) at 267-268.

[4]      The test for determining whether or not a Court should recognise a novel duty of care is well settled.  While it has been formulated and reformulated by our Court of Appeal in a series of decisions since the late 1980s, its essence has remained the same.  I will, of course, discuss it in more detail but, for introductory purposes, the inquiry must centre on whether there is a sufficient degree of proximity or relationship between the parties and, if so, whether policy considerations negate or support the existence of a duty.  The ultimate question is whether or not it is just and reasonable that the duty should be owed.  However, that question must be answered

on a principled basis, after taking account of all relevant factors; it is the last, not the first, step in the analysis.

[5]      As in many recent cases in this area of tort, Access and BNZ rely on the statutory framework within which the parties operated to establish the proximity or relationship said to give rise to duties of care.  Accordingly, my analysis will focus primarily  upon  the  relevant  statutory  and  regulatory  provisions.    I  shall  start, however, with a fuller discussion of the relevant circumstances.

Background

[6]      Access was in business as a broker for some years.  Its chief executive was Mr Peter Marshall.   He was a director together with Messrs William Garlick and Murray Bolton.   Mr Garlick or his interests was the principal shareholder.   The company was both authorised and designated to transact business with NZX and other designated stock holders.

[7]      BNZ and Access allege that between 1 February 2000 and 3 September 2004 the company traded unprofitably, suffered losses and breached its obligations under the relevant NZX rules and regulations by:

(a)Failing to hold its client assets and all amounts required to be paid into a client funds account on trust at all times and to use them only as authorised by the client or as permitted;

(b)Meeting financial obligations to clients and its debts and dividends by unauthorised use of client funds;

(c)      Failing to maintain its liquid capital at or above the prescribed level, rendering it incapable of meeting its financial obligations;

(d)Failing to maintain accounting records prepared in accordance with generally accepted accounting principles so as to give a true and fair view of its ability to meet its financial obligations; and

(e)      Failing to establish and maintain systems of internal control designed to ensure there were procedures to safeguard assets and control liabilities and, so far as was reasonably practicable, ‘to minimise the risk of losses to the business from irregularities, fraud or error, and to identify such matters should they occur’.

[8]      BNZ and Access allege that Mr Marshall in his capacity as a director of the company and its chief executive:

… caused the accounts of Access to be prepared so that they did not show the trading losses Access was suffering and instead showed profitability.

[9]      Mr Ring submits that the thrust of these allegations is that Mr Marshall’s dishonesty caused Access’ downfall.   He finds support in the written synopsis of submissions by Mr Alan Galbraith QC, for Access and BNZ, which opens with the assertion that “Access misappl[ied] clients’ trust funds”.  Mr Galbraith softened that proposition in oral argument, advising that the plaintiffs are not in a position to establish Mr Marshall’s dishonesty at this stage.  I shall proceed on the premise that BNZ and Access allege Mr Marshall and others acted without authority and thus unlawfully in material respects.

[10]     Deloitte was Inspector of the Exchange under the NZSE Rules between May

1996 and 31 December 2002.  Access claims that from 1 February 2000 the firm was negligent in performing its duties relating to inspection of the company’s records. Similar allegations of negligence against NZX start from performance of its regulatory inspection obligations in August 2003 and continue until September 2004.

[11]     Mr Garlick learned of a shortfall in Access’ client assets on 3 September

2004 and immediately reported his knowledge to NZX.  Its inquiries confirmed that Access  was  insolvent.     NZX  declared  Access  a  “defaulter”  under  the  NZX Participant Rules and suspended its designation as an NZX firm with immediate effect.

[12]     Access was placed in liquidation on 6 September 2004.   Its total liabilities including indebtedness to clients exceeded assets by $5.244 million.  The deficit in

client assets was  $4.7 million.    NZX  has  paid  BNZ  $460,000  from  its  Fidelity

Guarantee Fund and the bank has settled all Access’ client liabilities.

NZX

[13]     The   New Zealand   Stock   Exchange   (NZSE)   was   originally   a   mutual organisation owned by its member broking firms.  It was established pursuant to the Sharebrokers Amendment Act 1981 to succeed the Stock Exchange Association of New Zealand and exchanges located in cities around New Zealand.

[14]     The  members  of  the  NZSE  voted  in  2002  to  demutualise  pursuant  to authority given by the New Zealand Stock Exchange Restructuring Act 2002.  They resolved to restructure the exchange as a limited liability company to be known as NZSE Ltd.  Each member broker was issued with 10,000 shares.  The company was and is deemed to be the same body corporate and legal entity as NZSE.

[15]     NZSE Ltd changed its name to NZX in June 2003 when it became listed itself  on  the  NZSE  market.    The  Securities  Markets  Act  1988  (formerly  the Securities Amendment Act 1988) required NZX to register as an exchange (ss 36A-

36F) and to have conduct rules: s 36G.  Two important components were included. One was listing rules relating to listing on the market – that is, parties to listing agreements with the exchange: s 36H(a).  The other was business rules, governing the conduct of business on securities markets operated by the exchange and persons authorised to undertake trading activities there: s 36H(b).  As a broker Access was subject to those rules.

[16]   The Act also obliged the registered exchange to notify the Securities Commission if it took any disciplinary action against a broker for contravention of its conduct rules or knew or suspected that a broker had committed, was committing or was likely to commit a significant contravention of those rules: s 36ZD.

[17]     NZX’s   conduct   rules   came   into   force   on   the   day   of   restructuring,

31 December 2002, and have contractual effect: ss 11 and 36G.  The business rules comprised three separate components; the NZX business rules (the rules), the NZX

regulations (the regulations), and the NZX Code of Practice.  They were replaced on

3 May 2004 by one single set of rules – the NZX Participant Rules.  Counsel agreed that  there  was  no  material  difference  between  the  regulatory  regimes  in  force between 1 January 2003 and 6 September 2004 when Access ceased trading.

[18]     NZX’s  position  is  unique.    It  is  the  only  registered  stock  exchange  in New Zealand.  But, as noted, it is also a listed public company whose performance is subject to the relevant regulatory regime which it enforces.  Its shares are traded on the market like any other public company, although subject to an ownership cap of

10%.  It has a board of professional directors and operates on a substantial scale.

[19]     NZX’s  latest  report  and  financial  statements  were  produced  by  consent. They state, in the jargon common to those in the market, that the company’s core objective is to build market liquidity, reliability and credibility.   NZX’s mission statement is expressed in these terms:

•   We are the frontline market regulator, ensuring an equal playing field for all listed companies and market participants and setting the standard in terms of ethics and integrity.

•   We are the market advocate, ensuring the structure and operation of the markets are such that companies want to list and people want to invest. We are a promoter of education and knowledge, ensuring the future of New Zealand’s markets.

•   We are the market infrastructure and technology provider, with a fully electronic trading, clearing and settlement system that facilitates trading nationwide.   We aim to ensure this technology continues to facilitate liquid markets.

•   We  are  a  product  and  service  provider,  not  only  of  savings  and investment   products,   ensuring   investing   in   the   markets   is   more accessible for more New Zealanders, but also of technology products and services that brokers and listed companies use on a daily basis. NZX holds a firm conviction that New Zealand’s capital markets have much more room to develop and improve.  NZX’s assets – our people, our brand and our technology – are dedicated to this development and to capturing value from it.

[20]     NZX describes its core business as listing and trading cash equities but says it will seek opportunities for growth.   It identifies the markets in which it operates, including the stock market, the alternative market and the debt market.   It also highlights its role in regulating the New Zealand Stock Exchange in these terms:

Running an exchange is in reality about running well regulated businesses. As the frontline regulator of the markets, NZX works closely with the Securities Commission to enhance and optimise the regulatory environment in New Zealand.  The goal: a transparent and efficient marketplace designed to protect investors, provide a cost-effective means of raising capital and facilitate growth for participants.  We regulate companies as well as market participants – issuing our brand to those that meet the standards we set.  And we monitor their performance to ensure confidence and integrity are maintained.

[21]     NZX’s  total  transactions  increased  in  2004.    Its  transaction  revenue  is generated by three types of fees applying to each trade – a value fee, an execution fee,  and  a  clearing  and  settlement  fee.     Income  from  these  sources  totalled

$5.75 million.

[22]     NZX’s  listing  revenues  in  2004  were  $5.8 million.    Also  relevant  is  its participant revenue of $1.7 million, described as:

… an increase of 30.8% in 2004.  Participant fees cover a range of largely fixed compliance, surveillance and infrastructure fees.  This figure includes revenue attributed to ‘Regulatory’ in the detailed Financial Statements.

In May 2004, NZX introduced a new set of Participant Rules that better reflect Participant activity and lower barriers to entry for firms focusing on specific areas of market activity.   For example, under the previous rules Participants wishing to trade also had to clear and settle the trades.  Firms that  wished  to  trade  directly  into  the  market  and  ‘hand-off’  trades  to specialist clearing and settlement providers were faced with the untenable option  of  changing  their   business   models  to   accommodate   outdated Participant  Rules.    A thorough  review  of  Participant  structures  in  other mature markets drove changes at NZX.

[23]     On 31 December 2004 NZX’s shareholders funds totalled $37.328 million, including a share capital of $16.733 million.  Its earnings after tax in that year were

$4.562 million, an increase on $2.943 million from the previous year.  The company paid premia for a range of policies including directors’ and executive employees’ liability insurance.

Access

[24]     Mr Ring’s submissions in support of NZX’s applications to strike out focused first on the claims in tort.   However, in my judgment, NZX’s challenge to the tenability of Access’ claim in contract is the logical starting point.   It was that

relationship which arguably brought NZX into contact with the Access clients.   It was constituted by the rules and regulations upon which the Access clients rely in large part to support the existence of a duty of care owed by NZX.

(a)      Terms

[25]     Mr Ring accepts the existence of a contract between NZX and Access entered into on or about 1 January 2003.  Its terms were constituted by Part A of the rules and regulations.   They were superseded on 3 May 2004 by the NZX Participant Rules.    NZX  charged  Access  an  annual  fee  of  $20,000  for  its  inspection  and reporting services.

[26]     It is necessary to recite the relevant parts of the rules and regulations at this stage in order to follow Access’ claims of breach of duty.  I shall later refer again briefly to some of those same provisions when discussing the competing causation arguments.

(i)       Rules

[27]     The rules provided that NZX was bound to designate or authorise a firm as an NZX firm once it satisfied express criteria including provision of satisfactory evidence that: R2.3(a)(iii):

It will carry out its responsibilities as an NZX Firm and Broker honestly and diligently, and in particular, will at all times fully comply with the Rules, the Regulations and the Code of Practice, and will at all times observe Good Stockbroking Practice.

[28]     Each principal of the firm was required to deliver a statutory declaration that he or she will ensure the firm’s compliance with the rules and regulations: R2.3(b).

[29]     The rules formed a binding contract between NZX and the firm once the latter  was  designated:  RR2.3(a)(v)  and  2.4.    The  firm  covenanted  within  its continuing requirements to: R3.1(a):

At all times observe proper ethical standards and act with honesty, integrity, fairness, due skill and care, diligence and efficiency, and within NZX Firm’s competence.

[30]     The Managing Principal, in this case Mr Marshall, accepted responsibility for ensuring the broker’s compliance with R3: R3.13.

[31]     The NZX Board’s powers included jurisdiction to designate a firm as an NZX broker or to review or revoke that designation: RR5.2, 5.3, 5.4 and 5.5.  The Board was also empowered to bring charges against a firm and impose penalties: RR5.6, 5.7 and 5.8.

[32]     The  rules  covered  a  number  of  other  subjects  including  contracts  when dealing  as  a  principal:  R9;  obligations  regarding  delivery  and  settlement  of securities: R10; trading activities and transaction reporting: R11; and discipline: R12.   Also they provided for the circumstances in which an NZX firm shall be deemed to be a defaulter including where: R14.1(b) and (d):

… the Board has made such inquiries (if any) as it thinks fit and resolves that, in its opinion, it is in, or is reasonably likely to become, in difficulties and has failed or is reasonably likely to fail to meet its actual or prospective (including contingent) liabilities; …

… the Board has made such inquiries (if any) as it thinks fit and resolves that, in its opinion, other circumstances exist which justify such NZX Firm being considered a Defaulter in order to protect the financial interests of all other NZX Firms or of the investing public or for such other reasons as may be considered to be relevant in the interests of the well-being and proper conduct of NZX.

[My emphasis]

[33]     An NZX firm was bound to:R16.1:

…  keep  books  of  account  and  records  containing  complete  and  correct records and explanations of the affairs and transactions of its stockbroking business [which] … must be sufficient to enable an auditor to supply the certificate of audit and report as required by R16.2…

The Board had power to require an NZX firm to supply to its chair a certificate of audit and report from a practising chartered accountant, dealing with such financial matters as the Board shall from time to time determine: R16.2.

[34]     The  Board  was  bound  to  appoint  an  individual  or  individuals  or  an appropriate firm who were not NZX brokers or NZX firms: R17.1(a):

… who in each case, in the Board’s reasonable opinion, has suitable qualifications and experience to be or to provide appropriate personnel to carry out the duties of the Inspector of NZX.

The Inspector: R17.1(c):

… shall be directly responsible for work carried out by that Inspector under these Rules.

[35]     The Inspector had wide powers.  He or she may inspect whatever financial records and related documents of each NZX firm he or she may consider necessary; require an explanation from an NZX firm; access information concerning a firm’s assets; and meet and question firms’ employees, contractors and consultants: R17.2. The firm was obliged to satisfy the Inspector that: R17.3:

(a)its accounts and related subsidiary records are being maintained in a satisfactory and systematic manner and are being kept regularly up to date; and

(b)       it has in place reasonable internal systems and checks…

[36]     It was also bound to: R17.4:

… supply to the Inspector on a continuing basis such information as may be requested…

[37]     An NZX firm was bound at all times to maintain its Liquid Capital at or above the Prescribed Level so that it was capable of meeting its financial obligations: R18.1.  Those phrases had the meaning provided by the regulations, to which I shall refer next, but in summary the level was the sum of $100,000 or 5% of gross external liabilities.   The Board had the power to suspend if an NZX firm was unable to comply with its capital adequacy requirements: R18.4.

[38]     Finally, the Board was bound to arrange a Fidelity Guarantee Fund.   Its purpose was to meet: R19.1:

… just claims from persons who have suffered pecuniary loss from a stockbroking transaction as a result of an NZX Firm being unable to meet its financial obligations, provided that nothing in this Rule or in establishing

and  maintaining  the  Fidelity  Guarantee  Fund  shall  constitute  a  legal obligation for any such claimant.

[39]     The Board managed and controlled the fund solely.  NZX firms were to pay an annual contribution to the fund on such terms and on such times as fixed by the Board provided that the total amount of all contributions and additional levies paid by firms in any one year did not exceed in the aggregate $1 million: R19.5.  Claims were  limited  to  $20,000  (or  such  greater  amount  as  the  Board  in  its  absolute discretion determined) for any loss suffered as a result of an act or default of an NZX broker or firm and the total amount payable to meet claims arising out of a firm’s default were limited to the lesser of the amount claimed or $500,000 or such greater amount as the Board in its discretion determines shall be met: R19.8, 19.9 and 19.10.

(ii)      Regulations

[40]     The regulations were to be read in conjunction with the rules.  They covered the manner in which NZX firms were required to deal with client funds, capital adequacy, maintaining accountancy records and audit and inspection of books.

[41]     In summary, Access was required to:

(a)      ensure that total client assets (securities held by the firm in its transfer accounts or in its client fund accounts, securities purchased or sold for or on behalf of a client, funds received and held by it for undelivered buy contracts, and funds received and held on account) matched or exceeded its total outstanding broker obligations: Regs 3.1, 3.2 and

3.3(a);

(b)pay into its Client Funds Account (a trust account held by it at a bank for the benefit of its clients for its outstanding broker obligations) all amounts received from or on account of any person for securities purchased  or  to  be  purchased;  all  amounts  received  for  and  on account of any person for securities sold and not paid for as directed by that person; and all application or call monies payable or any other

payment received from or on account of any person and not paid direct: Reg 3.6;

(c)      hold its clients assets on trust for its clients at all times, Reg 3.3(a), and open and maintain a Client Funds Account: Reg 3.4;

(d)obtain from the bank holding the Client Funds Account a written acknowledgement of the trust status of the account: Reg 3.5(a), to ensure that Client Funds Accounts are not overdrawn: Reg 3.5(b), and not to use funds in their Client Funds Accounts as security for any obligation of the firm or of any other person: Reg 3.5(c);

(e)      hold all accounts required to be paid into a Client Funds Account upon trust and apply them in ‘reimbursing [the] firm for any amount paid by it in settling the purchase of Securities for clients: Reg 3.8(a);

‘in  payment  to  selling  clients  of  the  sale  price  for  Securities transferred into [the] firm’s transfer account by the client’; and ‘in payment of brokerage and other charges properly payable to [the] firm by its clients for transactions’: Reg 3.8(d);

(f)       establish in-house policies and rules to control the level of business transacted to ensure that Liquid Capital requirements are met at all times and ‘whenever requested by the Inspector, demonstrate to the satisfaction of the Inspector that these policies and rules are in place and working effectively’: Reg 10.14;

(g)      notify the NZX Inspector immediately if its ‘Liquid Capital level … falls below a threshold of 20% in excess of the Prescribed Level’: Reg 10.15(b).

[42]     Access was required to: Reg 11.1(a):

… maintain accounting records in respect of its business activities and in respect of assets, liabilities and transactions in its control or for which it is accountable.  These records shall be prepared in accordance with generally accepted accounting principles so as to give a true and fair view of the

ability of [the] Firm to meet its financial obligations.   It shall be the responsibility of [the] Firm’s management to ensure that this Regulation 11 is complied with at all times.

[43]    The requirements for record keeping covered all aspects of the broker’s activities  so  that,  among  other  things,  it  could  monitor  the  performance  of  its business:  Reg 11.1(c)(iii),  and  safeguard  the  Firm’s  assets,  including  ‘…  assets belonging to other parties and other persons for which [the] Firm is responsible’: Reg 11.1(c)(v).  The records were required to ‘… disclose with reasonable accuracy, at any time, the financial position of [the] Firm at that time’: Reg 11.1(d)(i).   The contents of an audit certificate and report, referred to in R16.2, were specified in detail: Reg 12.1.

[44]     The inspection provisions were very detailed.   Access was subject to 15 specific duties, including taking out and forwarding to the Inspector on a monthly basis a copy of trial balances as at the last day of the month providing details as to the name and nature of each balance: Reg 13.1(b), and preparing a profit and loss account and balance sheet within two months of the end of its financial year, and advising the Inspector immediately the task had been completed: Reg 13.1(f).

[45]     The firm was obliged also to: Reg 13.1(j):

establish and maintain systems of internal control …  It is the responsibility of NZX Firms’ management to ensure that this regulation is complied with at all times.

[Emphasis added]

[46]     In  particular,  the  internal  control  was  to  be  designed  to  ensure  that: Reg 13.1(k):

(viii)     there are procedures to safeguard assets and control liabilities; and

(ix)there are measures, as far as is reasonably practicable, to minimise the risk of losses to the business from irregularities, fraud or error  and  identify  such  matters  if  they  occur  so  that  prompt remedial action may be taken by management.

[Emphasis added]

[47]  The Inspector, when ensuring that Access was complying with its responsibilities under RR17.3 and 17.4 of the rules, was bound to do these things: Reg 13.2:

(a)       record the receipt of trial balances for the purposes of ensuring that, prima facie, accounting records were written up to date;

(b)inspect the separate accounting and internal control records of every NZX Firm at least once in each calendar year to determine if NZX Firms  are carrying out  their  duties  under  these  Regulations.    In particular, the Inspector shall test the records to the extent he or she considers necessary to enable  him or  her to form a  prima  facie opinion as to the effectiveness of the system in operation and the accuracy of the accounting and internal control records;

(c)       on each visit, review the Security trading records, and where NZX Firm’s solvency depends on the present value of Securities held on each visit, consider the current market value of such investments in relation to their book value;

(d)review the procedures relating to reconciliations, internal systems and Management of portfolios to become satisfied that the Regulations are in all respects being complied with;

(e)       inspect  and/or  access,  at  any  time,  such  information,  network, system, equipment or process of any NZX firm as the Inspector in his or her discretion considers necessary to ensure any NZX Firm, or its employees, observes and complies with, the Rules, the Regulations, the Code of Practice and with Good Stockbroking Practice;

(f)        carry out sample verification (the extent to be at the Inspector’s discretion), based on audit procedures, of clients’ accounts; and

(i)report to NZX each month in terms of these Regulations.   These reports shall identify such trends in NZX Firms and industry performance  and  anticipated potential  unsatisfactory  situations  or breaches of these Regulations as well as assist NZX to continually assess, review and/or enhance the effectiveness of these Regulations and the role of the Inspector.

[48]     Reg 13.3 further provided:

Situations giving rise to possible claims against the Fund: where for any reason the Inspector becomes aware of any unsatisfactory feature, or any situation which in his or her opinion could give rise to a claim on the Fund, the Inspector shall:

(a)       require NZX firm concerned immediately to correct the situation or otherwise satisfy the Inspector that the Fund is not at risk; and

(b)       at the same time, promptly report the matter to the Chair [of NZX]

or in the Chair’s absence, the Managing Director.

[49]     The Inspector in carrying out his or her duties “… shall exercise normal professional care and skill …”: Reg 13.5.

[50]     Finally: Reg 13.6:

NZX Firms’ liability for costs: Any NZX Firm shall be liable for the full costs of the Inspector and NZX for any and all work carried out by or on behalf of the Inspector and NZX in ensuring compliance with these Regulations.  The administrative liability under these Regulations is not in any case to prevent the bringing of disciplinary charges…

(b)      Breach

[51]     Access alleges that NZX breached its obligations by failing to:

(a)appoint individuals or an appropriate firm who were suitably qualified or experienced ‘to carry out the duties of Inspector of NZX’ and who were independent of it;

(b)conduct  its  annual  inspection  of  Access  in  August  2003  with reasonable skill, care and competence and, in particular, to identify accounting errors and misstatements (ongoing since Deloitte’s engagement) relating to treatment of the accounts payable account as an asset, rather than  expending the amount to the  profit  and  loss account, incorrect calculating and reporting of Access’ liquid capital as a surplus rather than a deficit, and unusual items; and

(c)      having identified serious issues and breaches of the NZX business rules and regulations, take satisfactory or any steps to require Access to correct the situation or to suspend its designation as an NZX firm.

[52]     In more detail, Access says that following its annual inspection in August

2003 NZX identified a number of serious issues relating to the company’s systems and financial reporting, and breaches of the NZX regulations.  NZX prepared a draft

report dated 15 September 2003 which it finalised on 24 October.   Copies of both were sent to Access.

[53]     In particular, Access says the report identified its ongoing breaches of NZX Regulations  3  and  10,  relating  to  client  fund  accounting  and  liquid  capital calculations respectively; and a high risk rating for Access having regard to the absence of a daily process to determine the amount of client assets which had to be maintained in trust and the company’s liquid capital methodology, resulting in an overstatement of actual liquid capital.

[54]     NZX’s final report set out an agreed implementation timetable for corrective action.  However, according to Access, NZX was in breach of its contractual duties in failing to:

(a)      require  Access  immediately  to  correct  the  situation  or  otherwise satisfy NZX that the Fidelity Guarantee Fund was not at risk;

(b)require Access to comply with the corrective actions according to the timetable;

(c)      require Access to provide daily reports on client funds; (d)     undertake a comprehensive review of Access;

(e)      notify  the  Securities  Commission  that  it  knew  or  suspected  that Access had committed a significant contravention of the rules and regulations: s 36ZD Securities Markets Act 1988; and

(f)       send a copy of both reports to Access’ non executive directors.

(c)      Consequences

[55]     Access alleges that if NZX in its capacity as Inspector had not been negligent in  August  2003  it  would  have  taken  various  steps  designed  to  ensure  that  the

company’s breaches were remedied or corrected and reported on the situation to NZX’s chair and to Messrs Garlick and Bolton; that if NZX had complied with its obligations between September 2003 and 6 September 2004 similar steps would have  been  taken  including  removal  of  Mr Marshall  from  his  directorship  and management roles; and that NZX would have declared Access a defaulter for failing to  maintain  its  liquid  capital  at  the  prescribed  level  and  suspended  Access’ designation as an NZX firm.

[56]     Access alleges that as a consequence of NZX’s breach of duty it continued after August 2003 to trade with a liquid capital deficit, to meet its liabilities by unauthorised use of client funds, and incur losses so that following liquidation it had unpaid creditors of $5,244,703.   NZX has paid BNZ $460,000 from its Fidelity Guarantee  Fund,  being a  contribution  of  $20,000  for  the  loss  suffered  by  each Access client.  This sum must be off-set against Access’ gross claim, leaving a net loss of $4.77 million.

(d)      Causation

[57]     Mr Ring accepts that NZX owed Access concurrently in tort the same duties imposed in contract.   It is thus unnecessary for me to undertake an analysis of whether or not NZX owed Access a duty of care in tort.  Its existence is a given for these purposes.  Those two causes of action can be considered in tandem, and will stand or fall together.

[58]     Mr Ring’s argument of legal untenability is based upon Access’ inability to show a sufficient causative link between any breach of duty by NZX, whether in contract or tort, and its losses.   His arguments fall into three separate causation categories.  The first is based upon Mr Marshall’s identification with Access.  The second is that NZX’s contractual duties did not extend to protect Access against the type of loss it claims.  The third is that NZX’s breach of contract, if proven, was not the cause of Access’ loss.

(i)       Identification

[59]     Mr Ring submits that Access’ losses were primarily caused by Mr Marshall’s dishonesty or unlawful acts or omissions.  According to the rules of attribution or identification, Mr Marshall’s conduct and state of mind counted as Access’; he was, for all intents and purposes, the company.  His dishonesty or unlawful acts must be attributed  to  the  company:  Meridian  Global  Funds  Management  Asia  Ltd  v Securities Commission [1995] 3 NZLR 7 (PC). As there is no duty of care to protect a person from his own dishonesty or negligence, Access is unable to recover its loss from NZX if Mr Marshall constituted the company for this purpose: Wellington District Law Society v Price Waterhouse [2002] 2 NZLR 767 (CA) per Gault J at [74].

[60]     To illustrate his thesis, Mr Ring observes that Access’ claim would doubtless fail if it was a sole trader and not a company.  In causation terms, a loss of this nature is not reasonably foreseeable.   The result would be no different, Mr Ring says, if Mr Marshall was Access’ sole director and shareholder.

[61]     Conversely, Mr Ring accepts there would be no attribution if Access was a public company and Mr Marshall was simply one of its directors.  In that situation, by analogy, Access could recover from a negligent auditor because a purpose of the audit was to protect the company from loss caused by a director acting dishonestly or unlawfully:  Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30. The position is different, Mr Ring says, if the dishonesty or unlawfulness is of the company itself.

[62]     It must be noted that Meridian was decided in a very different context.  The Courts were dealing with a statute which imposed a duty of disclosure on every “person” who became a substantial security holder.  The Securities Commission had cause to suspect that Meridian, a company, had failed to give the requisite notice upon obtaining a substantial security interest in a public issuer.   As the relevant statute referred solely to a “person”, the question was what knowledge of individuals within the company could be attributed to its persona.

[63]     The Privy Council focussed in Meridian upon the statutory policy or purpose in  concluding  that  the  person  or  agent  in  charge  of  market  dealings  was  the company.    In  delivering the Board’s  judgment,  Lord  Hoffman  held  that  it  was

unnecessary to rely on the traditional test of whether or not  the agent  was  the company’s directing mind and will.   Instead he developed rules of attribution or identification for this purpose, “tailored as [they] must always be to the terms and policies of the substantive rule”: at 16.  A company’s primary rules of attribution are found in its constitution, supplemented by general principles of agency and vicarious liability: at 11-12.

[64]     Mr Ring advances three alternative arguments in support of his identification thesis.   On analysis, though, all are variations on the one theme.   He relies on Access’  appointment  of  Mr Marshall  as  its  managing  principal,  responsible  for ensuring the company’s compliance with R3.  Mr Ring says that, because NZX was entitled to look to Mr Marshall on Access’ behalf when issues of compliance arose, he was the company: Meridian at 11(45-53); 12(10-15) and (50-55).

[65]     I disagree.  As Lord Hoffman concluded in Meridian at 16:

…   Their   Lordships   would   wish   to   guard   themselves   against   being understood to mean that whenever a servant of a company has authority to do an  act  on its  behalf,  knowledge  of  that act  will for all purposes  be attributed to the company. It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company.

[66]     Lord Reid observed to similar effect in Tesco Supermarkets Ltd v Nattrass

[1972] AC 153 at 170:

It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company’s servant or agent.

[Emphasis added]

[67]     Meridian emphasises that it is only necessary to resort to the identification rule of attribution where agency based rules are inappropriate.   Mr Marshall was Access’ employee appointed to perform the specific task of compliance with R3. His provision of information to NZX, whether false or not, was plainly for and on behalf of the company.  He was its agent when performing this task.  The ordinary principles  of  agency  apply.    Moreover,  the  attribution  rules  were  developed  in

Meridian to determine criminal liability.  In contrast, this inquiry is not into Access’

liability, but into its rights, if any, of recovery for breach of contract.

[68]     The principle that there is no duty to take care to protect a person from his own dishonesty or unlawfulness is merely an illustration of the broader principle that liability does not attach where the party suing places no reliance on the other party’s acts or omissions.  The reason a one person firm or company acting dishonestly or unlawfully cannot sue for loss arising from NZX’s breach of contract is because that entity does not rely on the Inspector to advise it of what it knows.   There is no causative link between breach and loss.

[69]     Thus the key question is not whether Mr Marshall was the company.   It is whether the company was  entitled to  rely on  NZX’s  proper  performance of  its contractual duties to protect it from the loss which it now seeks to recover.

(ii)      Purpose of Contractual Duties

[70]     Alternatively, Mr Ring submits that, while NZX owed Access contractual duties, they were not to protect the company against the kind of loss which it has suffered: South Australian Asset Management Corporation v York Montague Ltd [1997] AC 191, applied in Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA) per Gault J at 683-684.

[71]     Mr Galbraith submits to the contrary.   He accepts that the relevant inquiry must refer to the scope and purpose of NZX’s contractual duty.  On this approach, he says, the duty of inspection was intended to protect Access against insolvency and its associated losses of clients’ funds.

[72]     In support Mr Galbraith  refers  to  the  liquid  capital  requirements  and  the Inspector’s obligations to inspect accounting records: Reg 13.2(b), and consider the current market value of Access’ security where the firm’s solvency depends on it: Reg 13.2(c).  Also he cites the Inspector’s powers to ‘access information concerning [Access’] assets, either private or of another business if, in the Inspector’s opinion, such  information  is  necessary  to  demonstrate  [Access’]  overall  solvency’,  Rule

17.2(c).  On this basis, Mr Galbraith submits, protection again Access’ insolvency and its associated losses were clearly within the scope of NZX’s duty of inspection and were in the reasonable contemplation of the parties.

[73]     In my view, determination of this question requires a comparative analysis between Access’ relevant breaches and the NZX Inspector’s powers and duties.

Access’ Breaches

[74]     The rules and regulations contained Access’ contractual covenants in NZX’s favour.  Three rules are of particular importance.  One was the company’s ongoing covenant, for itself and its employees, to ‘act with honesty, integrity, fairness, due skill and care, diligence and efficiency …’ and to ‘comply fully with the rules, the regulations and the code of practice’ and to ensure the same for its employees.

[75]     Another relevant covenant was Access’ assumption of a particular duty to ‘at all times maintain its liquid capital at or above the prescribed level’ and to hold its client assets on trust for its clients at all times, using them only as authorised.   A third was its duty to establish and maintain systems of internal control, designed to

‘minimise the risk  of  losses  to  the business  from  irregularities,  fraud  or  error’. Regs 3 and 10, which I have already summarised, particularise and reinforce these obligations.

[76]     Access’ statement of claim alleges that it breached these duties in a number of material respects.  As a result, the company says that it met financial obligations to clients, and its debts and dividends, by unauthorised use of client funds.

Inspector’s Duties and Functions

[77]     The Inspector’s functions were exercised for a different purpose.  His or her duty was to ensure that Access was complying with its responsibilities under RR17.3 and 17.4.   Access had to satisfy the Inspector that, first, its accounts and related subsidiary records were being maintained in a certain manner and, second, it had in

place reasonable internal systems and checks ‘both in respect of the activities of employees able to initiate and control Securities transactions and also in respect of principals, partners, shareholders and directors’: R17.3.  It was also bound to supply the Inspector ‘on a continuing basis such information as may be requested by the Inspector’: R17.4.  The Inspector was given wide powers for these purposes: R17.2.

[78]     The Inspector’s primary function was to inspect each firm’s accounting and internal control records annually ‘to determine if NZX firms are carrying out their duties under these regulations …’: Reg 13.2.  In particular, the Inspector was bound to test the records to the extent he or she considered necessary to form a prima facie opinion of the effectiveness of the system and the accuracy of the accounting and internal control records.

[79]     The Inspector’s ultimate duty was to report to NZX each month identifying

‘… such trends in NZX firms and industry performance and anticipated potential unsatisfactory situations  or  breaches  of  these  regulations  as  will  assist  NZX  to continually assess, review and/or enhance the effectiveness of these regulations and the  role  of  the  Inspector’.    Independently  ‘where  for  any  reason  the  Inspector becomes aware of any unsatisfactory features, or any situation which in his or her opinion could give rise to a claim on the Fund’ he or she shall require the firm to take immediate corrective steps and promptly report the matter to the NZX chair.

[80]     The rules and regulations recognised a distinction between the functions of an Inspector, on the one hand, and  an auditor, on the other; “the functions of  the Inspector are not  to  be  regarded  for  any purposes  as  an  audit”:  Reg 13.5.    An Inspector was charged with forming a prima facie opinion: R13.2(a) and (b), and had a discretion in carrying out sample verification: R13.2(f).

[81]     By contrast, the regulations imposed express requirements on every NZX firm  to  maintain  proper  accounting  records  and  controls:  Reg 11.1,  and  more particularly required the broker to obtain an audit certificate and report in accordance with R16.2: Reg 12.1.   The audit certificate and report were required to cover 12 particular circumstances.  Moreover, the broker was bound to supply the NZX Chair with a copy: R16.2.

Conclusion

[82]     In my judgment the scope of an Inspector’s duties performed for and on behalf of NZX did not extend to protecting Access from its claimed losses for these reasons:

(1)      Access is effectively seeking to sue NZX for the adverse financial consequences of its failure to perform its own contractual duties in accordance with the rules and regulations.  Responsibility for Access’ many and substantial breaches rested squarely with the company, its directors and management.  The law does not allow a party in breach of  its  contractual  obligations  to  take  advantage  of  its  wrongs: New Zealand  Shipping  Co  v  Societe  des  Ateliers  et  Chantiers  de France [1919] AC 1 per Lord Finlay LC at 6-8;

(2)By comparison, NZX did not participate in any way whatsoever in Access’ management or control, in particular in its use of client funds or maintenance of liquid capital at or above the prescribed levels.  Nor was NZX responsible for Access’ failure to establish and maintain systems of internal control to minimise the risks of loss to it from irregularity, fraud and error;

(3)Access’  principal  allegation  of  breach  of  contract  is  that,  having identified breaches of the regulations in its draft and final reports and agreed  with  the  company  upon  corrective  action,  NZX  failed  to require the company to immediately correct the situation or otherwise satisfy it that the fund was not at risk or provide daily reports on client funds.     However,  it  cannot  have  been  within  the  scope  of  an Inspector’s duties to protect a broker from its own failure to perform an agreement to correct or remedy its own pre-existing breaches. Again, the same principle applies that the law does not allow a party in  breach  of  its  contractual  obligations  to  take  advantage  of  its wrongs;

(4)      The Inspector’s function was one of inspection, review and oversight.

He or she was bound to report monthly to NZX but not to a broker on the results of an inspection.   The only occasion when the Inspector was obliged to deal with a broker were on becoming aware of ‘any unsatisfactory feature or any situation which in his or her opinion could give rise to a claim on the Fund’.   In that event the Inspector was bound to require the broker to ‘correct the situation or otherwise satisfy the Inspector that the Fund is not at risk’.  The purpose of this duty was plainly to protect the fund, not the broker responsible for creating the unsatisfactory feature or situation;

(5)The Inspector’s function cannot be compared to that of an auditor whose purposes include protection of a company from loss caused by a director acting dishonestly or unlawfully.  The statutory inspection regime involved a more superficial analysis of an NZX’s accounting records than an audit.  It did not purport, for example, to give a true and fair view of the company’s accounts.  It was carried out for the significantly more limited purpose prescribed by the rules and regulations.

[83]     In my judgment the type of loss which Access might foreseeably suffer as a result of an Inspector’s failure to exercise normal care and skill, and against which it was entitled to protection, was provision of a negligently prepared opinion and report to the NZX Board having the ultimate effect of classifying the broker as a defaulter.

[84]     For the sake of completeness, I refer to Access’ allegation that NZX was bound to send a copy of its draft and final reports to the company’s non-executive directors, Messrs Garlick and Bolton.  I can deal with this point shortly.

[85]     The statutory obligation is to require the ‘NZX Firm  concerned’ to take corrective action or satisfy the Inspector there is no risk.  The managing principal, Mr Marshall, had delivered a declaration to NZX stating that he would ensure that the firm at all times fully complied with the rules and regulations.   He was also Access’ managing director and the person whom the company held out as its agent

for this purpose: RR2 and 3.   Both the rules, R1.3, and the regulations, Reg 1.4, provided that notices to an NZX firm were to be sent to its Principal Stockbroking Office.  In the absence of an express obligation to that effect, NZX was not bound to send copies of the Inspector’s reports to Messrs Garlick and Bolton.

[86]     Accordingly, I am satisfied that the scope of NZX’s contractual duty, even if breached, did not extend to protecting Access from financial harm in the form of increased liability to clients.

(iii)     Trading Losses

[87]     Alternatively, Mr Ring submits that, at best for Access, NZX’s breach of contract if proven did no more than provide an opportunity for the occurrence of the company’s loss.  Strictly speaking it is unnecessary to decide this argument, but I shall express a view upon it in case the proceeding goes further.

[88]     Mr Ring submits that Access’ loss, in the form of increased liability to clients after September 2003, is not attributable to NZX’s breach of duty, even if proven, and thus did not justify the Court in imposing responsibility upon it: Sew Hoy & Sons Ltd v Coopers & Lybrand [1996] 1 NZLR 392 (CA) per Henry J at 402; Price Waterhouse v Kwan [2000] 3 NZLR 39 (CA) at [28]. Mr Ring accepts that, while causation may be difficult to determine on an application to strike out because it often involves a thorough assessment of the facts, the Court should take that course where, on the facts alleged, the causation argument is clearly untenable: Saunders & Co v Bank of New Zealand [2002] 2 NZLR 270 at [81]-[83].

[89]     In answer Mr Galbraith relies principally upon Sew Hoy.  He submits that, as a  direct  consequence  of  NZX’s  breach,  Access  continued  with  its  practice  of misusing trust funds.  He repeats his submission that loss of client trust funds was exactly the type of loss against which NZX’s inspection regime was designed to protect.

[90]     Tipping J explained the difference between causing a loss and providing the opportunity for its occurrence in Kwan in this way:

[28]      There is a material, indeed a crucial, difference between causing a loss and providing the opportunity for its occurrence. The line between these concepts can often be difficult to draw but the distinction is vital. The point was addressed in the judgments delivered in this Court in Sew Hoy & Sons Ltd (In Receivership and in Liquidation) v Coopers & Lybrand [1996] 1

NZLR 392. Plaintiffs in this field must show that the defendant’s act or omission constituted a material and substantial cause of their loss. It is not

enough that such act or omission simply provided the opportunity for the

occurrence of the loss. The concept of materiality denotes that the act or omission must have had a real influence on the occurrence of the loss. The concept of substantiality denotes that the act or omission must have made a more than de minimis or trivial contribution to the occurrence of the loss. Looking at the question in this dual way is both a reminder of the difference between opportunity and cause, and a touchstone for distinguishing between them. In some instances the words used have been material or (as opposed to and) substantial. It is preferable, for the reasons just mentioned, to focus on both concepts for they are each relevant to causation issues. No form of words will ultimately provide an automatic answer to what is essentially a question of commonsense judgment.

[91]     It is well settled that a negligent professional is not liable simply on the basis that  a  plaintiff’s  loss  would  not  have  occurred  but  for  the  breach:  Fleming  v Securities  Commission  [1995] 2 NZLR 514 per Cooke P at 523; New Zealand Guardian Trust Co Ltd at 681-686; Price Waterhouse at [71]-[72].   Creation or preservation of the circumstances in which a loss can be incurred is not enough to impose liability.  Something more is required.  The ‘but for’ test is insufficient for both causation and remoteness in contract and tort: New Zealand Guardian Trust Co Ltd at 681(21-25).

[92]     In my judgment, this is a classical ‘but for’ claim.   According to its own statement of claim, Access had been misapplying client funds and failing to maintain its liquid capital at or above the statutorily prescribed level since at least 2000.  This practice continued unabated before and after NZX’s statutory appointment as Inspector in 2003.  Its financial consequences are solely attributable to the company.

[93]     As already noted, NZX did not contribute to the way Access ran or managed its business.  An Inspector’s failure to enforce a programme of corrective action or, after September 2003, to identify further breaches of the rules and regulations perpetrated by its agents did not have a causative effect.   It merely preserved the existing opportunity for  Access  to  continue  in  business  as  before,  and  to  incur increasing liabilities.  The company’s losses arose from a cause independent of any

negligence by the Inspector: New Zealand Guardian Trust per Gault J at 683(20-25). The circumstances are materially the same as those which led the English Court of Appeal  to  strike  out  a  claim  by  a  company  for  damages  against  an  allegedly negligent auditor: Galoo Ltd v Bright Grahame Murray [1995] 1 All ER 16. Glidewell LJ’s summary of the relevant principles in Galoo  at 24-30 has been consistently applied here: Fleming per Cooke P at 523-525; Sew Hoy per McKay J at

397-399.

[94]     Mr  Galbraith  relies  particularly  on  this  passage  from  the  judgment  of

Thomas J in Sew Hoy at 411:

The  auditor’s  breach  caused  the  company  to  believe  that  it  was operating profitably.  This mistaken belief in turn led it to continue to trade in a way which was in fact unprofitable.  It did not take the steps which it would otherwise have taken to cease trading or reverse or minimise the ongoing trading losses because it did not know those steps were required. If  it  had  not  continued to trade in  the  way which it  did,  based  on  the mistaken belief that the company was trading profitably, and had obtained the opportunity to cease trading or reverse or minimise the ongoing trading losses, it would not have incurred the further losses and deficit in its assets which resulted.  Without doubt this chain of effects provides a tenable causal connection.

[Emphasis added]

[95]     I  do  not  think  Sew  Hoy  assists  Access’  case.    If  anything,  Thomas J’s statement emphasises its untenability.  In Sew Hoy the liquidator alleged breaches of duty by the auditor in overstating stock values, surpluses of assets over liabilities, and net operating profits.  As a result, the company said it was induced to believe that it was operating profitably when it was not.

[96]     By contrast to Sew Hoy, NZX did not lead Access to believe that it was complying with the rules and regulations.  It expressly pointed out the contrary.  It placed Access on notice of its breaches.  Moreover, Access’ managing agent knew, as the company pleads, that its accounts incorrectly showed profitability.  He caused them to be prepared in that way.

[97]     In terms of Thomas J’s statement, NZX’s report gave Access the opportunity to rectify its contractual breaches.   The company cannot blame the financial consequences of its failure to take that opportunity on NZX.  It must bear the loss.

[98]     Appellate Judges, most recently Thomas J and Tipping J, have endorsed the

‘common sense judgment’ approach.  A first instance Judge cannot be so sanguine about its value.   Familiarity with the appellate process exposes the unsettling tendency of common sense to lead Judges to diametrically opposed conclusions on the same facts.   There is also a natural reluctance to describe one’s own sense of judgment in such bold terms.

[99]     Notwithstanding these reservations, I record that common and commercial sense lead me inexorably to the conclusion that Access should not be entitled to recover from NZX losses in the form of increased liabilities to clients which were caused by its own unlawful conduct.

[100]   In my judgment Access’ claims for damages for breach of duties of care in contract and in tort are untenable and should be struck out.  I add, in deference to Mr Galbraith’s submissions, that the deficiencies in Access’ case, as illustrated by its own pleadings, are so fundamental that they could not be cured by the provision of evidence at trial.

(e)      Quantification

[101]   However, even if this conclusion is wrong, I am satisfied that the amount of Access’ claim would have to be substantially reduced.   On its own pleading the company had suffered most of its ultimate loss before August 2003 when NZX’s Inspectors carried out their first inspection.   Mr Galbraith estimates this figure at about  $3 million.    Access’  losses  were  allegedly  the  consequence  of  Deloitte’s earlier negligence in performing its function as Inspector.   The loss increased by about $1.6 million during NZX’s tenure.

[102]   It is trite law that a party cannot be liable for losses pre-existing at the date of breach: South Australian Asset Management Corporation; New Zealand Guardian Trust.  However, Mr Galbraith is not prepared to concede the point.  He foreshadows an argument that, because he is effectively bringing this claim on behalf of all creditors, Access’ liquidator may be entitled to sue for all their losses: Marshall Futures Ltd v Marshall [1992] 1 NZLR 316, Tipping J.

[103]   With respect, this argument is unsustainable.  The facts of Marshall Futures are  far  removed  from  this  case.    The  plaintiff,  MFL,  was  a  member  of  the New Zealand  Futures  Exchange.    It  was  placed  in  liquidation.    The  liquidator claimed that before liquidation MFL breached its trust obligations by paying client monies of $1.16 million to two related companies.   Three of the defendants were officers of one of those two companies.

[104]   The liquidator’s claim in Marshall Futures was brought in equity, to recover the $1.16 million for breach of the directors’ fiduciary obligations.   The directors applied to strike out the claim on the ground that MFL itself had unclean hands. With respect, Tipping J’s decision to dismiss the application is hardly surprising. There was no suggestion that the liquidator’s hands were tainted.  He was bringing the claim for the benefit of MFL’s clients whose funds had been lost.   Tipping J drew this distinction because those who suffered the loss were not parties to the company’s fraud perpetrated through the directors’ misconduct.

[105]   There are only two points of similarity between Marshall Futures and this case.  One is that the liquidator is bringing the claim for and on behalf of investor clients in the company’s name.  The other is that clients’ monies were applied in an unauthorised way by the company’s agent.  But the similarities end there.

[106]   Unlike Marshall Futures, Access is not suing the party whose  dishonest conduct was allegedly the cause of its loss.  So equitable principles do not come into play.  And Access is not attempting to prove, as the essence of its case against NZX, that ‘the hands of those who were controlling it at the material times were unclean in such a way as to make it, the plaintiff, fraudulent’: Marshall Futures at 331. This is simply a claim for breach of contract.

[107]   Moreover, in Marshall Futures Tipping J at 331 was careful to disclaim a general principle that ‘a company in liquidation is in law a different person from the company before its liquidation’. He emphasised that the unusual nature of a claim for fiduciary duty, based on dishonesty, constituted the company in liquidation in essence the agent of its creditors. His decision has no bearing upon the orthodox principle that the legal status of Access in liquidation is no different from what it was

beforehand, and it cannot recover pre-existing losses which were not caused by

NZX’s breach.

[108]   Accordingly, if I had not struck out Access’ claim in contract and tort, I would have directed it to file an amended statement of claim limiting its claim for damages to loss suffered after 1 August 2003.

BNZ

[109]   Against this contractual background, it is now necessary to consider NZX’s alternative application to strike out BNZ’s claim in tort.

(a)      Claim

[110]   BNZ alleges that, when carrying out Access’ annual inspection in August

2003 and subsequently after identifying breaches of the rules and regulations, NZX owed Access’ clients a duty in tort to exercise reasonable professional skill, care and competence on the basis that there was a proximity or relationship between the two entities.

[111] BNZ identifies a number of relevant factors.   One was the legislative environment contained in the rules and regulations under which  Access’ clients invested money through the broker, and NZX carried out its inspections.  A related factor was that:

The purpose of the rules and regulations was to protect clients from loss as a result of any conduct of Access in breach of the [rules and regulations] in relation to the management and administration of the monies invested by clients through Access, and to enable clients to rely generally on the inspection regime rather than having to make their own inquiry.

BNZ also refers to NZX’s rights of access to the broker’s financial records, which clients did not enjoy; NZX’s public statements and advice; and a ‘reasonable Inspector’s’ realisation that Access clients would place reliance upon him or her.

[112]   BNZ  relies  upon  breaches  of  duty  by  NZX  similar  to  those  pleaded  in Access’ claim  in  contract.    The  bank  pleads  extensive  consequences  of  NZX’s alleged breaches from September 2003 onwards.  In particular it says that the NZX Board and Access’ non-executive directors would have become aware of the firm’s statutory breaches, of fundamental deficiencies and flaws in its internal procedures and systems, and the company’s liquid capital deficit and insolvency; that the non- executive directors would immediately have intervened and implemented systems which would have prevented any further losses; that NZX would have declared Access a defaulter and suspended its designation as an NZX firm; and that Access would have ceased to trade, and “… members of the public, including clients of Access, would not have invested further through Access”.

[113]   In oral argument in support Mr Galbraith surveyed the relevant rules and regulations, and emphasised two provisions of the Securities Markets Act pointing to the existence of a duty as pleaded.  One was s 36ZD which provides that a registered exchange must notify the Securities Commission if it takes any disciplinary action in contravention of its conduct rules against any person, where it knows or suspects that a person  has  committed, or  is  committing,  or  is  likely to  commit  a  significant contravention of the exchange’s rules or relevant statutory provisions.  The other is s 47 which provides that:

(1)       A registered exchange is not liable for anything it may do or fail to do in the course of the exercise or intended exercise of its functions or duties under Part 2 or Part 2B, unless it is shown that it acted in bad faith or without reasonable care.

[114]   Mr Galbraith submits that:

(1)NZX owed a common law duty of care to Access’ clients because it is a commercial  entity,  participating  in  the  securities  market  for  the purpose of making a profit for its shareholders, and it is not a statutory regulatory body representing the general public interest.  That role is performed by the Securities Commission.    On this basis he distinguishes the two Privy Council authorities upon which Mr Ring placed considerable reliance: Yuen Kun Yeu v Attorney-General of Hong Kong [1988] AC 175; Davis v Radcliffe [1990] 2 All ER 536;

(2)Consistent  with  this  commercial  purpose,  NZX  imposed  terms  of trade in the form of the rules on market participants.  Included among them were the requirement to maintain client trust accounts and for inspections to ensure compliance.   They were publicly promoted to give confidence in the operation of NZX and its broker participants, thereby encouraging investors to participate in NZX’s market for its financial benefit.  The immediate purpose of these terms, particularly those requiring trust funds and minimum liquidity levels, was to protect broker’s clients.  And the purpose of inspection was to ensure that these trust funds and liquidity levels were maintained for the benefit of broker’s clients;

(3)It was clearly foreseeable that Access’ clients might suffer loss if NZX’s Inspectors failed, first, to adequately verify the company’s account records and internal control systems to ensure trust funds were held and liquidity maintained and, second, to take timely action when defaults were identified;

(4)      It was generally desirable to have an effective sanction for negligence.

No policy reasons were operating to protect a commercial entity such as NZX from liability for its negligence.   There was no risk of indeterminate liability.   NZX will only be liable to those who participate in its market through entities which it has authorised and through which it charged for its commercial services.

[115]   Within the proximity realm, Mr Galbraith also seeks to derive analogous assistance from decisions relating to the duties of auditors of solicitors trust accounts and nominee companies.

(b)      Duty of Care

(i)       Principles

[116]   As noted at the start of this judgment, the ultimate question is whether or not it is just and reasonable that a duty be imposed.   But that question can only be answered after undertaking a well settled two-stage inquiry.  The first or threshold stage is to determine whether there is the necessary degree of relationship or proximity between Access’ clients and NZX, sufficient to justify imposing a duty of care of the type pleaded in the latter’s performance of its inspection functions.  The second stage is to decide whether wider policy considerations tend to negative or support the existence of a duty in the particular circumstances.

[117]   The proximity inquiry reflects a balancing between moral claims and  an assessment of the nexus between the alleged negligence and loss.  Included within it is a recognition of the prospect of indeterminate liability, to meet the risk that the financial consequences of imposition of a duty may be disproportionate to fault: Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA) at [59]-[60]. The indeterminacy factor was considered at the second or policy stage in Kwan.  But nothing turns on this delineation.  Frequently both stages of the inquiry merge into one.

[118]   Foreseeability  of  loss  is  relevant  but  not  determinative.    Other  material factors are the nature of the loss – whether physical or economic; reliance and assumption of responsibility, if any; an analogy with decided cases, which is particularly important where the Court is called upon to determine whether to impose a duty in a novel situation, sometimes called the incremental approach; the availability of other remedies; and the contractual or statutory background: Rolls- Royce at [61]-[65].   This last factor often falls for consideration at the second or policy stage.

[119]   In England the test is expressed slightly differently but its application should lead to the same result.   The House of Lords has recently identified three complementary tests: first, whether the defendant  assumed responsibility for  his conduct or words or is to be treated by the law as having done so; second, whether loss was reasonably foreseeable, whether the relationship was sufficiently proximate, and whether it is fair, just and reasonable to impose a duty; and, third, consideration of analogous cases or the incremental test: Rolls-Royce at [97]-[100]; Her Majesty’s

Commissioners of Customs and Excise v Barclay’s Bank plc [2006] UKHL 28 per Lord Bingham at [4]-[8]. All these factors are included within the two-stage inquiry favoured in New Zealand. The difference is more semantic than real.

(ii)      Proximity

Statutory Purpose

[120]   A brief review of NZX’s function within the securities market provides the necessary starting point for considering Mr Galbraith’s primary submission that the dominant  purpose  of  the  inspection  regime  was  to  ensure  that  trust  funds  and liquidity levels were maintained for the benefit of brokers’ clients.

[121]   I accept Mr Ring’s submission that the market’s integrity and efficiency is based upon a constant expectation that booked transactions for traded securities will be promptly settled between all parties.   Trades are carried out on a principal to principal basis between brokers.   This interdependence is the cornerstone for a statutory  requirement  that  each  broker  will  operate  honestly,  efficiently  and profitably.   A default by one broker in settling its obligations to another will inevitably have an adverse consequence for all participants including other brokers, investors and listed companies.  The purpose of the comprehensive regime of rules and regulations was to impose strict financial obligations and collective responsibilities on all brokers.

[122]   Within this framework, the Inspector’s predominant function was to provide NZX with the information necessary to fulfil its statutory duty of oversight of the market as a whole.  The immediate purpose of the Inspector’s engagement was to report monthly to NZX on two different issues.  One was trends in NZX firms and industry performance; the other was anticipated unsatisfactory situations or breaches of the regulations.

[123]   The Inspector’s ultimate purpose was to assist NZX in its evaluation of the effectiveness of the regulations and the Inspector’s own role.  An incidental purpose was to take positive steps for the purpose of protecting the fund.

[124]   An adverse report from an Inspector might lead to a broker being deemed to be a defaulter.  As noted, that event occurs where the Board, after making inquiries, has resolved either that the firm is reasonably likely to fail to meet its actual or prospective liabilities or where other circumstances exist which justify that result: R14.1(d):

… in order to protect the financial interests of all other NZX Firms or of the investing public or for such other reason as may be considered to be relevant in the interests of the wellbeing and proper conduct of NZX.

[125]   Nomination as a defaulter would be the ultimate sanction for a broker’s failure to correct a situation which in the Inspector’s opinion could give rise to a claim on the fund or otherwise satisfy the Inspector that the fund was not at risk. This power exists, in my view, for the benefit of the market as a whole.  Included within its participants are other NZX firms, their clients, the defaulting broker, its clients and listed companies.  All may suffer loss as a result of a broker’s failure.

[126]   As Mr Ring points out, other brokers could be most at risk in that situation consequent upon the regime of principal to principal obligations created by the rules. Another broker would be exposed to a declaration as a defaulter if it failed to deliver securities or settle transactions.  A duty of care of the type alleged to Access’ clients could not credibly or logically be regarded as discrete from a broad and untenable duty of care to other brokers, their clients and listed companies relating to performance of NZX’s inspection functions: Attorney-General v Body Corporate No.200200 CA30/05 1 December 2005 at [46].  Such a prospective extension of the pleaded duty of care counts against the tenability of the BNZ’s case.

[127]   Thus I disagree with Mr Galbraith that a critical purpose of the inspection provisions of the rules and regulations was to protect clients from loss through misappropriation of their funds or a broker’s insolvency, or that the predominant purpose of the inspection regime was to ensure that trust funds and liquidity levels were maintained for the benefit of a broker’s clients.

Special Relationship

[128]   This discussion leads to an important factor, sometimes overlooked.  It is a prerequisite to recognition of a duty of care in tort that the relationship between the two parties is special.  In the words of Lord Atkin, it must be “so close that the duty arises”: Donoghue v Stevenson [1932] AC 562 at 582. At times there is a tendency by those advocating a duty to ignore this fundamental point.

[129]   The need to prove not just a relationship, but a special relationship, is critical in a case like this.   That is because it is: Smith v Leurs (1945) 70 CLR 256 per Dixon J at 262:

… exceptional to find in the law a duty to control another’s actions to prevent harm to strangers. The general rule is that one man is under no duty of controlling another man to prevent his doing damage to a third. There are, however, special relations which are the source of a duty of this nature. It appears now to be recognized that it is incumbent upon a parent who maintains control over a young child to take reasonable care so to exercise that control as to avoid conduct on his part exposing the person or property of others to unreasonable danger. Parental control, where it exists, must be exercised with due care to prevent the child inflicting intentional damage on others or causing damage by conduct involving unreasonable risk of injury to others.

[130]   One such exceptional case was Dorset Yacht Co Ltd v Home Office [1970] AC 1004 where the House of Lords found that probation officers in charge of young borstal inmates were under a duty to take care to prevent the boys from interfering with and causing physical damage to yachts on an island. But, to my knowledge, recognition of that type of duty has been restricted to analogous cases where the State or a local authority has a real power of control over the party causing harm. I am unaware of any New Zealand decision upholding such a duty in a claim in the commercial arena for purely economic loss, except perhaps for Kwan which I shall discuss shortly.

[131]   In my judgment, two factors are determinative against a finding of special relationship in this context.  One is that neither the Inspector nor NZX had power to control Access’ day to day activities; NZX’s only effective power was to stop the company carrying on business by declaring it a defaulter.  The other is that prior to investing with Access, there was no relationship of any kind between its clients and NZX; no special relationship could exist between NZX and “those unascertained members of the public who might in future become exposed to the risk of financial

loss through depositing money with the company”: Yuen Kun Yeu per Lord Keith at

196.

Analogous Cases

[132]   In my judgment there is no analogous authority available to support BNZ’s case or to provide a platform for an incremental development of the law in this area. The truly analogous authorities, Yuen Kun Yeu and Davis v Radcliffe, are against Access’ clients.

[133]   I think Kwan, which is really the centrepiece of Mr Galbraith’s argument, is distinguishable on a number of grounds.   In that case Price Waterhouse was the auditor  of  a  law  firm.    Some  of  its  clients  invested  money through  the  firm’s nominee company.  The investments were lost due to the fraudulent misconduct of one of the partners.  The clients sued the auditor on the basis that they were unlikely to recover their losses either from the solicitors or the nominee company.

[134]   By extensive reference to the relevant legislative environment, the Court of Appeal in Kwan identified parallel purposes of the auditor’s report – to protect the interests of those whose money may be at risk, the firm’s clients, and to initiate disciplinary proceedings.  Mr Galbraith relies particularly on Tipping J’s conclusion on proximity, at [16]:

Against  that  background,  and  in  light  of  the  relationships  between  the auditor, the solicitor, and the latter’s clients, there is in our view sufficient proximity between the auditor and the clients to justify the imposition of a duty of care in tort, subject to such policy considerations as may suggest otherwise.   The regulatory regime, under which audits of solicitors’ trust accounts are conducted, confirms what is inherent anyway, that the purpose of the audit, at least in significant part, is to protect solicitors’ clients from loss  as  a  result  of  improper  conduct  in  relation  to  the  solicitors’  trust accounts. If everything were intended to rest on solicitors’ contractual duties to their clients, there would be less point in having an audit regime.   It is axiomatic that if serious problems are encountered in the administration of a trust account, the solicitor or solicitors concerned may well be unable to compensate the clients for the losses involved.   In our view, clients of a solicitor are entitled to rely generally on the audit regime, and specifically on the  individual  auditor  to  conduct  the  audit  with  due  care  and  skill. Reasonable auditors will realise that such reliance is being placed upon them.  They must accordingly be deemed to have assumed the responsibility envisaged by such reliance.   In these circumstances we consider that the

clients have shown, prima facie at least, that the proximity requirement for a duty of care in tort is satisfied.  For strike-out purposes there can be no doubt that there is a sufficiently arguable case for qualifying proximity.

[135]   In  my  view  the  following  differences  between  Kwan  and  this  case  are decisive, and illustrate the absence of the necessary degree of proximity and relationship:

(1)The  NZX  rules  and  regulations  emphasise  that  the  Inspector’s functions ‘are not to be regarded for any purposes as an audit’.  The functions of an auditor appointed to audit a solicitor’s trust account and nominee company are very different: Kwan at [9]-[13];

(2)The primary purpose of the audit in Kwan was to protect solicitors’ clients  from  loss  as  a  result  of  improper  conduct  relating  to  a solicitor’s trust account.   Here the purpose of the Inspector’s appointment and function was related to protection of the market as a whole, without distinction between and reflecting the divergent interests of its range of participants;

(3)An  Inspector  is  engaged  to  inspect  the  management  systems  and internal controls of every NZX firm, rather than performing a contract of engagement for a particular client.   The necessarily broader and more superficial inquiry undertaken by an Inspector must reduce or eliminate the amount of reliance which a broker’s clients could reasonably place upon the Inspector or NZX;

(4)As Mr Ring notes, NZX brokers are under obligations to disclose to each client in advance of an investment a description of their procedures for handling clients’ assets including: s 3(2) Investment Advisers (Disclosure) Act 1996:

(d) Whether or not the receipt, holding, and disbursement of the money and the receipt, holding, and distribution of the property, by the … broker will be audited by an auditor and, if so, the name of the auditor …

Reliance and Assumption of Responsibility

[136]   This last mentioned statutory obligation undermines BNZ’s general reliance argument.  BNZ pleads that a purpose of the rules and regulations is:

… to enable clients to rely generally on the inspection regime rather than having to make their own inquiries.

[Emphasis added]

The plain purpose of this plea of general reliance is to bring the clients’ claim within

Kwan’s case.

[137]   It is rare for a plaintiff to succeed in proving a duty in the absence of actual reliance.  It is a critical element of the discrete tort of negligent misstatement.  The only recognised exceptions, presenting unique conceptual difficulties, are the cases arising from a solicitor’s negligent preparation of a will: White v Jones [1995] 2 AC

207.  The decision in Kwan is another, although for special reasons arising from the statutory relationship and also because it was apparently a case of negligent commission.

[138]   Otherwise, where a negligent omission is at issue, a plaintiff must prove actual reliance.  The law is as follows: Brownie Wills v Shrimpton [1998] 2 NZLR

320 at 324 per Gault and Blanchard JJ:

… A plaintiff who sues in tort alleging economic loss arising from negligent advice given to the plaintiff by the defendant, including a failure to give advice, needs to prove actual reliance upon the defendant’s advice or that the absence of advice from the defendant led the plaintiff to believe it was safe to proceed. Of greater importance in this case, the plaintiff must also show that it was reasonably foreseeable in the circumstances that the plaintiff would rely on the defendant as adviser in the way and to the extent that he did; and that it was accordingly reasonable for the plaintiff to do so. Whether that was so in turn depends upon whether the reliance was induced by the conduct of the defendant in assuming or appearing to assume responsibility for advising the plaintiff. Foreseeable reliance is thus an element in proximity…

[139] As this statement illustrates, the factors of reliance and assumption of responsibility are  essentially two  sides  of  the  same  coin.    The  absence  of  one normally points to the absence of another.

[140]   In  my judgment,  reliance on  the  existence of  an  inspection  regime  as  a guarantee of a broker’s soundness, to excuse or justify a client’s failure to make his or her own inquiries about its financial situation and reputation, would not be reasonable in these circumstances; it would provide unjustifiable absolution for an elementary failure to accept personal responsibility.  And nor should the Inspector reasonably be expected to know of such reliance: Yuen Kun Yeu at 197(A-C). It must follow that an NZX Inspector cannot objectively be treated as having assumed a responsibility to an investor who did not actually rely on his or her acts or omissions.

[141]   I should add my doubts that the factor of vulnerability, which has enjoyed comparatively recent recognition, is relevant: Rolls-Royce at [61] and [62]. With respect, I do not detect the emergence of this discrete factor from the judgments in South  Pacific  Manufacturing  Co  Ltd  v  New Zealand  Security  Consultants  & Investigations Ltd [1992] 2 NZLR 282 (CA) of Cooke P, at 296, Richardson J, at

307,  or  Hardie  Boys J,  at  317.    In  my view  the  traditional  factors  of  reliance, assumption of responsibility and availability of other remedies, all identified by Hardie Boys J, are sufficient.  In any event, it could hardly be said that those who elect to invest their funds through a broker are in a state of vulnerability as against NZX, or deserving of its special or particular care and protection.

Alternative Remedies

[142]   This is not a case where Access’ clients are without an alternative remedy against third parties who may be responsible for their losses.  There is no lacuna of the type identified in Kwan, where the clients were unlikely to recover from the solicitors or nominee company due to insolvency.  Access’ clients have settled rights of recovery incidental to their contractual relationships with Access.

[143]   One right lies clearly against Access’ directors.  The company’s statement of claim alleges its own numerous and extensive breaches of its obligations under the rules and regulations.    Cumulatively they paint a picture of prolonged mismanagement and lack of governance and control.  Access’ pleadings establish a strong prima facie case of breach of duties of care owed by all directors: ss 128-137

Companies Act 1993.  For example, Access’ directors were expressly responsible for ensuring the company’s compliance with its obligation to ‘establish and maintain systems of internal control’: Reg 13.1(j).   The investors would also arguably have independent rights of claim, based upon a director’s obligations to creditors at common  law:  Dairy  Containers  at [79]-[80], Thomas J; Re  Barings  plc  (No.5) (1999) 1 BCLC 433 at 489; Mason v Lewis CA267/04 30 March 2006 at [115]. There is no suggestion that the directors lack financial substance.

[144]   Both  Access  and  its  clients  are  represented  by  the  same  solicitors  and counsel.  That decision must have been made on the premise that there is no conflict between the interests of the two entities.  It may require revision if BNZ wishes to pursue its rights of recovery further.

[145]   The investors second potential right of recovery is against BNZ, although the bank has actually settled their claims and is proceeding as lawful assignee of their rights of action.   BNZ had been Access’ banker and had also used the firm as a broker when effecting instructions from its own clients through its website share trading  facility.    Shortly  after  Access  was  placed  in  liquidation,  according  to Mr Galbraith, “… it had become apparent to BNZ that some Access clients wrongly believed that they had their funds in trust in their own name with BNZ”.  He advised that the bank then “… stepped in to provide certainty for Access’ clients …”.

[146]   In taking an assignment, Mr Galbraith said, BNZ “… took upon its own shoulders the cost, the delay and the uncertainty involved in sorting out rights to claim in the liquidation and any rights of recovery against parties responsible”.  This may be construed as a coded acknowledgement of legal responsibility for clients’ claims, given that Access’ banker was likely to act more on an assessment of its own potential risk to claims by Access’ clients than out of altruism.

[147] In summary, at this first or proximity stage, I do not think that the circumstances  relied  upon  by  Mr Galbraith  establish  the  necessary  degree  of closeness, proximity or relationship to justify imposition of a duty of care.

(iii)     Policy

[148]   If I am wrong at the first stage, I am satisfied that three interrelated policy factors are decisive against BNZ’s claim.  First, there is, as Mr Ring submits, a real risk of indeterminate liability if a Court recognised the existence of a legal duty of care from NZX to a broker’s clients.  Within his policy inquiry in Kwan, Tipping J was careful to limit the number and thus the amount of potential plaintiffs to those who had trust account investments at the time of the auditor’s alleged negligence: at [18]-[19]:

… prima facie, favour there being a duty of care owed by auditors to solicitors’ clients, rather than pointing in the opposite direction…

… The principal purpose of the audit regime is to protect the clients.  The number of potential plaintiffs is circumscribed by being limited to those with trust account investments at the time of the negligence.   There is also the desirability of an effective sanction for negligence which would not necessarily be present if the liability of the auditors was to be limited to claims in contract by the solicitors or their assignees in bankruptcy, the latter being a cumbersome prospect in any event…

[My emphasis]

[149]   BNZ alleges NZX’s ongoing negligence from August 2003 to September

2004.   However, NZX’s real or significant negligence occurred, if at all, in its alleged failures to conduct a proper investigation in August 2003 and to require effective remedial action in September or October 2003.  There is no evidence that any or all of the clients were then investors in Access.  They were truly strangers to NZX.  A duty of the type asserted by BNZ would be owed to an indeterminate class for an unlimited amount: Yuen Kun Yeu and Davis v Radcliffe.

[150]   Within the proximity inquiry, I have already referred to the logical extension of a duty owed by NZX to a broker’s clients to all other participants in the market who might suffer loss.  And, even if it was logically possible to limit the duty to a broker’s clients, that would inhibit NZX’s proper discharge of its regulatory powers; when exercising them, NZX would have to be constantly wary of its obligation to safeguard the interests of particular one sector of the market.  It would be ‘constantly looking over [its] shoulder at the prospect of claims against [it], and [its] activities would be likely to be conducted in a detrimentally defensive frame of mind’: Yuen Kun Yeu at 198(E-F).

[151]   Second, related to indeterminacy, imposition of a duty of care to the clients of all brokers would impose an unjustifiable burden on NZX.   The NZX is a market linking buyers of securities with sellers.  This business is transacted through brokers.

[152]   In essence, the stock market is a game. NZX provides the forum and its rules and regulations are the rules of the game.  In its regulatory capacity NZX is not an active market participant but is the market itself.  To attribute responsibility to the forum provider for all breaches of rules and resulting losses is unduly onerous and, in my judgment, misconstrues NZX’s functions.

[153]   Third, imposition of a duty on NZX would cut across the settled mechanism for allocation of market risk.  Parties investing in the securities market are or should be capable of looking after their own interests.  Investment decisions are based upon a range of factors and must be assumed to include the risks of insolvency whether of an intermediary such as a broker or a listed company: Rolls-Royce at [118].

[154]   Once a decision is made, the contract governs the rights and obligations between client and broker.   The client places its trust, faith and reliance in the broker’s skill, honesty and integrity.  In the event of breach and loss, his or her rights of recourse lie against the broker and its directors and management.   The client’s position is subject to a degree of additional protection through the provisions of the Investment Advisers (Disclosure) Act 1996, particularly s 3(2), and the existence of the Fidelity Fund.

[155]   There can be no basis for effectively constituting the NZX a surrogate insurer of the market; that is, a body which steps in and bears the loss whenever market participants default in fulfilling their contractual obligations.  In my judgment, this would amount to a massive and unjustifiable shift in the market’s allocation of financial risk.  A broker’s clients do not qualify for the protection of a special safety net?  These observations serve to emphasise the Court’s reluctance to impose a duty of care to guard against purely economic loss.

(iv)      Just and Reasonable

[156]   Finally, I am not satisfied that it would be just and reasonable to impose a duty for two related reasons.   First, I have already concluded when dealing with Access’ discrete claim that the loss attributable to any contractual breach by NZX must be limited to the increase in its liability in client funds between August 2003 and September 2004.  Access claims that its liability to clients in August 2003, when NZX commenced performance of its duties, was in the range of $3 million and was caused by Deloitte’s negligence.

[157]   Access’ clients’ aggregate losses are $4.77 million after BNZ’s receipt of

$460,000 from the Fund.  The net effect is that, if a duty is recognised to Access clients,  NZX  will  be  exposed  to  liability  for  aggregate  losses  which  were  in substance pre-existing at the date of its alleged negligence.   The amount of that liability remained the same between August 2003 and September 2004.   Only the composition of the $3 million would have differed as investors changed.   A result that imposes liability on a party for the loss caused by another party’s breaches cannot be just or reasonable.

[158]   Second, Access’ directors fall into a similar category to Deloitte but for different reasons.  I have already referred to the rights of both the company and its clients to recover these losses.   Access and its clients must assume the financial burden of BNZ’s tactical decision to omit the directors as defendants in this proceeding.  In my judgment it would be unjust and unreasonable to impose a duty of care on a party exercising a secondary monitoring or supervision function where those  suffering  loss  do  not  seek  recovery from  the  parties  who  were  primarily responsible for mismanaging their investments.

[159]   On these grounds I am satisfied that BNZ’s claim against NZX based upon the existence of a duty of care owed to Access’ clients is untenable in law and could not succeed at trial.

(c)      Causation

[160]   NZX has applied to strike out BNZ’s claim on the alternative ground that, even if a duty of care existed, Access’ clients are unable to prove that any breach by NZX caused their losses.

[161]   I would have allowed NZX’s application on this discrete ground even if I had found that a duty of care existed.  The reasons are similar to those which led to my conclusion that Access is unable to prove that any breach of duty by NZX caused its losses.   While pleaded in a slightly different way from the company’s chain of causation, BNZ says in essence that if NZX had not been negligent from August

2003 onwards the Board and Access’ non-executive directors would have intervened and closed the company down.  As a result, Access would have ceased to trade at the relevant time and “members of the public, including clients of Access, would not have invested further through Access”.

[162]   The investors are simply saying that but for the Inspector’s negligence after August or September 2003 they would not have invested.  That argument must fail. Moreover, it fails to deal adequately with the position of those who invested before the Inspector’s alleged negligence.

[163]   Access’ prolonged and unlawful mismanagement was the primary, real or substantial cause of the company’s failure and the investors funds.   NZX’s negligence, if proven, did not cause or contribute to it.  The claim must accordingly fail on this ground also.

Result

[164]   In  summary  I  make  an  order  striking  out  this  proceeding  for  failure  to disclose an arguable cause or causes of action against NZX on the grounds that:

(1)      Access’ alternative claims in contract and tort are untenable for the reason that it is unable to show that NZX’s breach of duty, if proven, caused its loss.   Alternatively, if Access was able to establish a causative link or nexus between breach and damage, its claim would be limited to loss suffered after 1 August 2004;

(2)BNZ’s claim in tort on behalf of Access’ investors is untenable in that it fails to establish the necessary degree of proximity or relationship to recognise a duty of care.   Additionally or alternatively, reasons of policy negate the existence of a duty, and it would not be just and reasonable to impose one.  Alternatively, Access’ investors are unable to show that NZX’s negligence, if proven, caused their loss.

[165]   Accordingly, NZX is entitled to judgment on all causes of action.

Costs

[166]   Costs must follow the event in NZX’s favour.  I am satisfied that, because of its complexity and significance, this proceeding required counsel to have special skill and experience in the High Court.   The quality of the argument to which I was treated from both counsel, on a novel and important issue, bears out that judgment. Accordingly, category 3B applies.   I certify for the costs of two counsel and disbursements.

[167]   As I have struck out the proceeding, it is unnecessary for me to list it for further mention in the Commercial List.

Rhys Harrison J