Bethell v Papanui Properties Limited
[2019] NZHC 3169
•4 December 2019
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2019-409-336
[2019] NZHC 3169
BETWEEN ANDREW JAMES BETHELL, ANDREW JOHN McKAY and COLIN ANTHONY
GOWER as liquidators of ArrowInternational (NZ) Limited (in liquidation) Applicants
AND
PAPANUI PROPERTIES LIMITED
First Respondent
AND
HAREWOOD INVESTMENTS LIMITED
Second Respondent
AND
NEW ZEALAND SKI LIMITED
Third Respondent
Hearing: 6 and 7 November 2019 Appearances:
K M Paterson and B R McKinnon for Applicants
J V Ormsby and S C Cowan for First and Second Respondents M H O Maling and J R C Addington for Third Respondent
Judgment:
4 December 2019
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me on 4 December 2019 at 3.00pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar 4 December 2019
BETHELL v PAPANUI PROPERTIES LIMITED [2019] NZHC 3169 [4 December 2019]
Background
[1] This proceeding concerns applications for directions by the liquidators of Arrow International (NZ) Ltd (in liquidation) (“Arrow”).
[2] The application is made pursuant to s 284(1)(a) Companies Act 1993 (“the Act”) which provides:
284 Court supervision of liquidation
(1)On the application of the liquidator, a liquidation committee, or, with the leave of the court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the court may—
(a)give directions in relation to any matter arising in connection with the liquidation: …
[3] The directions relate to the status of funds paid to Arrow by six of its clients shortly before Arrow was placed into voluntary administration.
[4] Separate questions arise concerning the status of retentions deducted by Arrow from payments to contractors/suppliers both pre-and post-1 April 2017.
General background
[5] Mr Bethell, Mr McKay and Mr Gower were appointed administrators of Arrow on 28 February 2019 and two related companies (Arrow International Group Ltd (in liq) and Construction Labour and Resources Ltd (in liq)). At that time the companies had approximately:
(a)17 – 20 construction projects in progress;
(b)205 employees;
(c)over 700 unsecured creditors; and
(d)85 secured creditors.
When Arrow was placed in liquidation, Messrs Bethell, McKay and Gower were appointed liquidators.
[6] Arrow acted as agent for the six clients referred to above, under a form of contract known as the “PMCM Contract” standing for Project Management and Construction Management Contract.
[7] Under the PMCM Contract, Arrow acted as agent for its clients to enter contracts with Trade Contractors on behalf of the client for the provision of goods and services for the relevant building project. These were “Construction Management” contracts as opposed to traditional contracts where there is a “head contractor” who then directly engages various subcontractors. The PMCM Contract states that Arrow has no liability to Trade Contractors for amounts due from the Clients under contracts made between Clients and Trade Contractors by Arrow.
[8] The PMCM Contract that Arrow entered into with Trade Contractors reflected that Arrow’s role was as agent only.
[9] While the charging paperwork tendered by Trade Contractors was not always uniform or consistent with what was required by the PMCM Contracts, the intention was that Arrow would receive Payment Claims from Trade Contractors which Arrow would review and collate and then issue a Payment Schedule sent back to the Trade Contractors. Arrow then issued monthly tax invoices to its client which claimed amounts to be paid to Trade Contractors, Arrow’s margin and project management fees.
[10] Also included in this system of invoicing were contracts made by Arrow with Consultants on behalf of clients, albeit such contracts adopted a different form of contract.
[11] In a separate category called “Purchase Order Suppliers” related to suppliers of consumables and some building materials where Arrow contracted with the supplier in its own name. Monthly invoices issued by Arrow to its clients also included amounts Arrow sought to recover for these orders.
[12] The client made payment in one lump sum to Arrow. Arrow then paid Trade Contractors and Consultants and retained its margin, fees and what it had paid or would have to pay to Purchase Order Suppliers who were in a debtor/creditor relationship with Arrow. In paying Trade Contractors and Consultants, Arrow was acting as agent of its client as it was meeting the liability of the client.
[13] Directions are sought, as in January 2019 Arrow had issued its monthly invoices to its clients. The six clients covered by this application had paid their invoices prior to Arrow being placed into administration. At that time, Arrow retained approximately $1.358m that it had received for payment to Trade Contractors. Those funds are held on trust pending the outcome of this application. Annexed to this judgment is a Schedule prepared by the applicants detailing the amounts invoiced by Arrow to its clients, of the amounts received how much had been paid to Trade Contractors before administration, how much of the amount represents Arrow’s fees and margin, the amount the applicants consider is unpaid by Arrow to Trade Contractors and the amount owed by Arrow to Purchase Order Suppliers but not paid out together with retentions.
[14] Because the clients have a direct contractual liability to Trade Contractors in many cases the amounts the applicants record as unpaid to Trade Contractors have now been paid by the clients to clear their contractual obligation in that regard.
[15] The above is only a basic summary of the background. The terms of the PMCM Contracts are essentially the same in regard to those clients for whom the largest amounts are in issue and so I will only refer to Papanui Properties Ltd’s contract as an example.
[16] Under the PMCM Contract the “Client” is Arrow’s client. “Contractor” means “a party engaged by Arrow on behalf of the Client to perform part of the Contract works” and “Consultant” has a similar meaning. “Supplier” means the services to be performed by Arrow in accordance with the agreement.
[17]Clause 2.4 of the PMCM Contract provides:
2.4 Arrow’s Authority
By this Agreement the Client appoints and gives Arrow the authority to act as its agent for the Project for:
(a)Engagement of Consultants to undertake investigation, design, advisory, and similar services for the Project;
(b)Consent and other regulatory matters;
(c)Engagement of Contractors and Suppliers;
(d)Administration and monitoring of Consultants, Contractors and Suppliers referred to above;
(e)The verification of Payment Claims submitted by Contractors under the Construction Contracts Act 2002;
(f)The issuing of Payment Schedules to Contractors under the Construction Contracts Act 2002;
(g)Financial transactions associated with the above.
Where Arrow has engaged such Consultants, Contractors or Suppliers or any other party for the provision of goods or services in relation to the Project the Client acknowledges that Arrow has made such engagements as agent for the Client and the Client shall be liable for any amount payable pursuant to such engagements.
[18] The amounts the Client was required to pay to Arrow is set out in Appendix C to the agreement as follows:
1.The value of construction works and services (permanent and temporary) undertaken, and goods and services supplied, under contracts and orders entered into for the Project by Arrow on behalf of the Client.
2.The value of preliminary and general costs (project related costs not directly attributable to the contracts and orders referred to in 1 above) including but not limited to site supervision, plant, site facilities, site services, consumables, overheads, contract administration, and off site time and disbursement charges related to the construction and tendering functions.
3.The value of Consultant services provided under engagements entered into for the project plus disbursements and the cost of managing those engagements.
4.The value of any statutory or territorial charges incurred plus disbursements and the cost of managing any statutory process for the project.
5.Any costs incurred by Arrow arising from services provided in relation to Client contracts (third party contracts) for direct supply of systems, process plant, office equipment or similar items (where the Client makes contract payments directly to the supplier).
6.A demolition works only margin of 2% (two percent) this relates to demolition only period of works.1
7.A construction management margin of 4.5% (four and a half percent) on the sum of construction works and services, preliminary and general costs, consultant services, statutory and or territorial charges and direct supply items (the sum of 1 through 5 inclusive above).2
8.The value of GST as an additional charge where applicable.
9.Any costs incurred by Arrow arising from preparing responses to adjudication claims on the part of the Client.
[19] Appendix C of the agreement also provides the basis upon which the amount of each monthly invoice is to be calculated, with cl 3 providing as follows:
3. Progress Invoices
The amount due on each monthly invoice shall be calculated on a basis of percent of work undertaken up to the invoice date plus the value of material on site and any off site payments, together with any fees, disbursements or other project costs incurred, and Arrow’s margin and fee. GST will be added to each invoice as an additional charge.
[20] The terms of the Contract in respect of one Client (Massey University) were different. Arrow was not appointed Massey University’s agent to engage Contractors or Suppliers. Arrow’s role was to assist Massey University to engage Contractors, Suppliers and Consultants directly. The applicants were content to have Massey University treated in the same way as the PMCM Clients as despite the difference in their contracts, as the Massey University projects were run as if they were PMCM Clients. That is an appropriate approach as it gives the benefit of any doubt to Massey University.
Trade Contract Agreement
[21] When contracting with Trade Contractors on behalf of PMCM Clients, Arrow used a standard form trade contract agreement. The Contract recorded that Arrow was acting as agent and recorded the following in respect of payment:
1 Only the Papanui Properties Ltd PMCM Contract has this provision for demolition works.
2 Note that the other PMCM Contracts provided for a construction management margin of 5 per cent.
(a)Clause 18.7 provides that payment claims from the Trade Contractor shall not be in the form of tax invoices, but rather the payment schedules issued on behalf of the PMCM client shall constitute buyer generated tax invoices.
(b)Clause 18.16 provided that Arrow was to provide a payment schedule to the Trade Contractor in respect of each payment claim no later than 20 working days after the end of the claim month.
(c)Clause 18.17 recorded that “The Principal shall pay the Trade Contractor the scheduled amount in any payment schedule no later than 22 Working Days after the end of the claim month.”
[22] There are also standard form Consultant Agreements, which consistent with Arrow’s role as agent, contained the following:
Arrow has been engaged as agent and project manager and this Agreement will be between “the Client” and the Consultant with Arrow acting as the Client’s agent. For the avoidance of doubt, where Arrow is engaged as agent for the Client, Arrow is not liable for any obligation of the Client under the Agreement.
[23] It is not suggested that amounts collected by Arrow for payment to Consultants should be treated differently from Trade Contractor payments and so I will refer only to Trade Contractors in this Judgment. Accordingly, it is common ground that Arrow was agent on behalf of the PMCM Clients in relation to funds collected to pay the PMCM Clients’ creditors. The real controversy is whether Arrow was a trustee in respect of those funds.
The central issue and legal principles
[24] I adopt Fogarty J’s summary of the issue before him in Bambury v Jensen, as an accurate statement of the question to be determined in this application:3
As Millet LJ noted in Paragon Finance Plc v DB Thakerar & Co, there is a distinction between an agent having fiduciary duties and an agent having a trust obligation to keep the trust assets separate.4 It is commonly accepted
3 Bambury v Jensen [2015] NZHC 2384 at [67].
4 Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400 (CA).
that agents in the position of [Arrow] have fiduciary obligations. The issue is always on the facts, the extent of them.
[25] Both counsel referred to Bowstead & Reynolds on Agency, which says whether an agent is a trustee for his principal turns on the particular circumstances of the case. The authors note:5
Often the answer turns on the contract between principal and agent. It is clear in this context and in general that the existence of a contractual relationship of debtor and creditor between the parties does not prevent the existence of a simultaneous trust relationship, or a fiduciary relationship of a less onerous nature, involving nevertheless that certain money or property is held on trust. Thus it may be provided expressly between principal and agent that money received is so held. At other times the intention to create a trust may be inferred; the matter turns on the objective interpretation, according to general principles, of the intentions of the parties.
[26]Later in the paragraph the authors state:
The present trend seems to be to approach the matter more functionally and to ask whether the trust relationship is appropriate to the commercial relationship in which the parties find themselves; whether it was appropriate that money or property should be, and whether it was, held separately, or whether it was contemplated that the agent should use the money, property or proceeds of the property as part of his normal cash flow in such a way that the relationship of debtor and creditor is more appropriate. … At the same time, there is no absolute rule that the absence of a duty to keep the principal’s property separate is fatal to there being a trust.
[27] The relationship between Arrow and its PMCM Clients was not a trust relationship in the purest sense of the word as it was intended that Arrow would profit from the Contracts.6 As set out in Bambury v Jenson:7
The critical criterion, consistent with Millet LJ’s [analysis] in Paragon, once the facts of Nelson v Rye are kept in mind, is that an agent is a trustee only where the contractual terms of the agency forbid the agent to obtain any use or benefit from the proceeds of sale, net of the commission.
[28]Paragon Finance Plc, referred to by Fogarty J in Bambury, discusses
Nelson v Rye and contains helpful statements of principle.8 I set out Fogarty J’s
5 Peter Watts and F M B Reynolds (eds) Bowstead and Reynolds on Agency (21st ed, Sweet & Maxwell, London, 2017) at [6-041].
6 Bambury v Jensen, above n 3, at [71].
7 At [126].
8 Paragon Finance Plc v DB Thakeror & Co, above n 4; Nelson v Rye [1996] 1 WLR 1378.
summary of Nelson v Rye and the passages from Paragon Finance Plc that Fogarty J took into his judgment:9
[113] In Nelson v Rye the plaintiff was a solo musician who appointed his manager on terms that he would collect the fees and royalties which were due to the plaintiff, pay the plaintiff’s expenses and account to him annually for his net income after deducting his own commission. The Judge in that case had held that the defendant manager’s failure to account was either a breach of fiduciary duty which fell outside the Limitation Act or a breach of constructive trust which fell within s 21 of the Act (the same number as our Act).
[114]Millet LJ said:
The law on this subject has been settled for more than a hundred years. An action for an account brought by a principal against his agent is barred by statutes of limitation unless the agent is more than a mere agent but is a trustee of the money which he has received.
He also said:
Accordingly, the [manager’s] liability to account for more than six years before the issue of the writ in Nelson v Rye depended on whether he was, not merely a fiduciary (for every agent owes fiduciary duties to his principal), but a trustee, that is to say, on whether he owed fiduciary duties in relation to the money. (Emphasis in the original.)
Whether he was in fact a trustee of the money may be open to doubt. Unless I have misunderstood the facts or they were very unusual it would appear that the defendant was entitled to pay receipts into his own account, mix them with his own money, use them for his own cash flow, deduct his own commission, and account for the balance to the plaintiff only at the end of the year. It is fundamental to the existence of a trust that the trustee is bound to keep the trust property separate from his own and apply it exclusively for the benefit of his beneficiary. Any right on the part of the defendant to mix the money which he received with his own and use it for his own cash flow would be inconsistent with the existence of a trust. So would a liability to account annually, for a trustee is obliged to account to his beneficiary and pay over the trust property on demand. The fact that the defendant was a fiduciary was irrelevant if he had no fiduciary or trust obligations in regard to the money. If this was the position, then the defendant was a fiduciary and subject to an equitable duty to account, but he was not a constructive trustee. His liability arose from his failure to account, not from his retention and use of the money for his own benefit, for this was something which he was entitled to do.
(Emphasis added)
(footnotes omitted)
9 Bambury v Jensen, abvove n 3.
[29] Both counsel referred to Neste Oy v Lloyds Bank Plc.10 One passage from that case sums up the approach that I need to adopt in this case:11
I have been very greatly assisted by the legal submissions made to me, and there is very little in the submissions of either party on the questions of principle with which I disagree. The problem is not, I think, to ascertain the relevant principles but to apply them to the case in hand. The decided cases provide valuable illustrations of the application of these principles to the differing facts with which they were concerned, but in many of them the outcome appears almost inevitable once the facts are fully understood. How, then, should the principles apply to the facts of this case?
[30] The extent of the fiduciary duties owed by Arrow to PMCM Clients is determined by the terms of their Contract both express and implied, by the context and by the nature of the tasks Arrow committed to undertake. Context is important as it plays a role in interpretation of the meaning of the Contract. The importance of context is highlighted by the following passage from Hospital Products Ltd v United States Surgical Corporation:12
That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.
Discussion
[31] The following factors are relied on by the respondents as indicating that Arrow owed fiduciary obligations in relation to the money, that is, it was intended that Arrow would hold the money on trust.
[32] The respondents’ primary submission is that Arrow held all funds it was paid by the PMCM Clients, other than money intended to pay Arrow’s fees, margin and
10 Neste Oy v Lloyds Bank Plc [1983] 2 Lloyd’s Rep 658.
11 At 664.
12 Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, (1984) 156 CLR 41 at 97.
Purchase Order Suppliers on trust for the respondents until the remaining money was paid to Trade Contractors the respondents were indebted to.
[33] Mr Ormsby for Papanui Properties Ltd and Harewood Investments Ltd submitted that express trusts are founded on the express or inferred intention of the settlor.13 The respondents submitted there was an express trust in their favour and placed primary weight on cl 2.4(g) set out at [17] above.
[34] The respondents also argued for the existence of a constructive trust and I will address that submission once I have addressed what, in my opinion, was the intention of the parties as that may well be determinative of the matter.
Indicators of trust relationship
[35] The respondents say that reading the Contract between the PMCM Clients and Arrow and the Contract between Arrow and Trade Contractors together shows that Arrow was intended to simply pass through the Trade Contractors Payment Claims (once vetted/approved by Arrow). Just as Arrow was to pass through the Payment Claim, it was to pass through, that is be a conduit only, for the payment due from the PMCM Contractor to the Contract Supplier.
[36] Trade Suppliers were obliged to raise their Payment Claim on a “Total to Date” basis. That charging basis is the same as between Arrow and a PMCM Client – see cl 3 of Appendix C of the PMCM Contract set out at [19].
[37] I interpose here that Mr Gower, one of the liquidators, has in his research discovered that there was not always an exact correlation between the amount charged by Trade Contractors and the amount on-charged by Arrow to PMCM Clients. There were “unders and overs” so that at times it seems PMCM Clients were in credit with Arrow, that is, they had paid more than was owed to Trade Contractors but that credit was “absorbed” in later Arrow invoices so that on the final wash up the PMCM Clients only paid what was due to the Trade Contractors. This was a factor relied on by Ms Paterson for the liquidators to indicate that the relationship between Arrow and its
13 Lynton Tucker, Nicholas Le Poidevin and James Brightwell Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [7-002].
PMCM Clients was that of debtor/creditor in relation to all payments received. I do not accept that argument.
[38] The contractual obligations are clear. Arrow had an obligation to charge on the basis set out in its own contract. There is no suggestion that it made it expressly known to the PMCM Clients that Arrow was deviating from the terms of its own contract in adopting the “unders and overs” approach. Ms Paterson correctly pointed out that because the invoices raised by Arrow to the PMCM Clients were accompanied by the invoices/Payment Claims from the Trade Contractors, that it was open to PMCM Clients to discover what was occurring. It is for the party wishing to depart from their contractual obligations to make that desire clear to the other contracting party and seek their consent. Arrow cannot assert that had PMCM Clients checked Arrow’s documentation thoroughly, they would have picked up Arrow’s breach of contract. There is some analogy with it being no defence to a misrepresentation claim that the innocent party could with diligence have discovered the misrepresentation.14 I do not consider this unilateral departure by Arrow from what was required by the PMCM Contract is capable of changing the character relationship between the parties.
[39] The next point in my view is a compelling, commercial and practical one. For what purpose was the money paid to Arrow? It was the PMCM Clients that had the liability to the Trade Contractors. Arrow agreed to collect the amount required to clear that liability from the PMCM Clients and to pay it on their behalf to the Trade Contractors. I here note that the contract between Arrow and the Trade Contractors refers to payment being made by the principal (see [21](c) above). However, there was undoubtedly a course of conduct agreed to by all parties that it was Arrow that made the payments to the Trade Contractors as “paying agent” for the PMCM Clients.
[40] In my opinion, the purpose of the PMCM Clients paying the amount they owed to third parties to Arrow was for Arrow to fulfil its role as paying agent to those third parties. Rhetorically, what other purpose could there be?
14 Dodds v Southern Response [2019] NZHC 2016 at [78(c)]: “… it is no defence to misrepresentation to assert that the Dodds could have discovered the truth with reasonable due diligence”.
[41] Could it have been intended that the PMCM Clients would be making what would amount to an interest free loan of the funds to Arrow for it to use as it saw fit? The liquidators’ position would require it to be accepted that it was the mutual intention of the parties that the PMCM Clients were prepared to risk their funds on an unsecured no return basis.
[42] The respondents’ proposition is that the idea of a debtor/creditor relationship cannot be reconciled with the general nature of the contractual relationships or the PMCM Contract’s specific terms. In a traditional building contract where the building company engages the sub-trades and suppliers directly there is no question that once the client pays its invoice that the money becomes the property of the building company to do with as it wishes.
[43] In this case, Arrow provides no additional value for the receipt of the funds to be paid to the debtor of the PMCM Clients. Arrow is paid a fee for a number of tasks, including to pay the money it receives to the PMCM Clients’ creditors. The PMCM Clients did not pay Arrow a fee for the pleasure of allowing Arrow to use money paid for the purpose of paying PMCM Clients’ creditors.15
[44] Ms Paterson argued that the fact that the Contract provides that Arrow would issue invoices with many components, some of which were accepted as being debtor/creditor payments (for example, Arrow’s margin and fee and Purchase Order Suppliers), was some indicator that all components in the invoice were paid on a debtor/creditor basis. I do not accept that submission.
[45] That invoices could contain a mix of the components set out at [18] above was presumably for administrative convenience. As already indicated, Arrow’s charges were accompanied with details of the Payment Claim/Invoices from each Trade Contractor for whom payment was being collected and the Payment Schedules issued by Arrow. That, in my view, reinforces that the payment being sought by Arrow was in respect of each Trade Contractor’s charge on a pass-through basis. Arrow did not
15 I accept that in Angove’s Pty Ltd v Bailey [2016] UKSC 47, WLR 3179 at [24] that the payment to the agent was gratuitous was not considered material but in my opinion the absence of benefit to the PMCM Clients is relevant to determining what was intended.
charge an unparticularised lump sum, rather it detailed the amounts it would be paying each Trade Contractor.
[46] In support of the contrary argument, Ms Paterson emphasised that the PMCM Contract did not require Arrow to keep separate funds to be paid to PMCM Client’s creditors, nor does the Contract expressly refer to there being a trust in respect of those payments. I have already noted the submission that the charges were all included in one invoice and Mr Gower’s evidence, that at times there was not a direct correlation between creditors’ claims and Arrow’s claim to the PMCM Clients as indicating an absence of a direct pass-through of funds.
[47] In Westpac Banking Corporation v Savin, the Court of Appeal accepted that the sale proceeds of a boat being sold on behalf of its owners would have to be paid into the selling agent’s account in order for the agent to deduct commission before paying the balance to the seller:16
It is necessarily implicit in the contracts …. that Aqua Marine would have to pay the purchase moneys … into a bank account in order to deduct its commission before paying over what was due to the seller. It does not follow that the owner agreed that Aqua Marine could blend its principal’s money with its own and apply the balance for its private or trading purposes. Less still that it could pay it into a bank account which was overdrawn, with the result that the property in those moneys would cease to exist. There is nothing in their contracts or for that matter in their evidence to suggest that had it been drawn to his attention [the owners] would have agreed to something so potentially adverse and in the result so actually disadvantageous. On the contrary there is every reason for concluding that each would have refused to do so and would have insisted as a term of the contract that moneys received on his behalf by Aqua Marine should be kept separate from Aqua Marine’s own funds whether placed in a single account for that owner or in an account limited to “on behalf of” transactions. In short, it could not be implied either as a matter of construction from the express provisions of the agreement or as being necessary to give business efficacy to the transaction that Aqua Marine was authorised to pay the moneys received on behalf of [the owners] into the trading account, at least in its overdrawn state.
[48] In my opinion, adopting the above passage: “it could not be implied either as a matter of construction from the express provisions of the agreement or as being necessary to give business efficacy to the transaction”, that Arrow was entitled to use as part of its cash flow, funds it received for the purposes of paying Trade Contractors.
16 Westpac Banking Corporation v Savin [1985] 2 NZLR 41 at 45.
[49] Fogarty J’s judgment in Bambury v Jensen is authority that the existence of a trust does not depend on an express contractual term to maintain a separate bank account: “Whether an agent holds proceeds on trust does not depend on a positive duty to bank the proceeds into a trust account.17
[50]Also, in Bambury, his Honour said:18
It is trite law that a trust obligation in respect of funds is not lost if the funds are mixed. See Re Hallett’s Estate and also Lord Millett in Foskett v McKeown.19 I note this reasoning is also consistent with a case recently brought to my attention, Re Lehman Brothers International (Europe).20
[51]In this case, the funds were intact in the account at the date of administration.
[52] Ms Paterson referred to the fact that in the past, the account into which the funds were paid by PMCM Clients sometimes went into overdraft. There is, however, no evidence as to the timing of when the account went into overdraft compared to when payments were made by PMCM Clients. I do not consider that this point carries any weight. If the true nature of the relationship between PMCM Clients and Arrow meant the funds were trust funds, then if they were used for purposes other than paying the creditors of PMCM Clients, then that was a breach of trust by Arrow, albeit one that in the past came to nothing because Arrow was able to meet the creditors from other funds.
[53] In the absence of knowledge on the part of PMCM Clients that their funds were being paid into an account that may at the time have been overdrawn, in my view, that fact does not advance the task of determining what the parties’ intention was. The PMCM Contract does not expressly permit Arrow to use for its own purposes funds intended for Trade Contractors. There is in fact no evidence that the PMCM Clients were aware that the account into which they were paying funds was a standard current account used for Arrow’s normal trading operations. The Arrow invoices designated
17 Bambury v Jensen, above n 3, at [119]. See also [128].
18 At [119].
19 Re Hallett’s Estate (1879) 13 ChD 696 (CA) and Foskett v McKeown [2011] 1 AC 102 (HL).20 Re Lehman Brothers International (Europe) [2010] EWHC 2914 (Ch) at [250]-[260], on appeal Re Lehman Brothers International (Europe) (in administration) (No 6) [2011] EWHC Civ 1554, [2012] 2 BCLC 151 at [68].
an account. It is true that the account is not styled as a trust account, but neither is it labelled as a current account. I consider this last point neutral.
[54] A further point made by Ms Paterson is that the PMCM Contract at cl 4.2 has a provision for interest on late payment of invoices. Ms Paterson said this is an indicator that the invoices intended to create a debtor/creditor relationship.
[55] However, I accept Mr Ormsby’s submission that Arrow could not claim interest on something it had not supplied and in which it had no interest. Had, for example, a PMCM Client paid a Trade Contractor direct and deducted that payment from the amount to be paid to Arrow, could Arrow have claimed interest on that payment? In my view, the answer is obvious. Arrow was never entitled to enjoy the money it was to pay on to creditors. Arrow suffers no loss in not receiving that money.
[56] If a PMCM Client had paid a Trade Contractor direct could Arrow have sued the PMCM Client for the unpaid part of Arrow’s invoice? Whether a PMCM Client doing so would be a breach of its contract with Arrow is not the point – Arrow would suffer no loss as it was not entitled to the funds.
[57] In respect of New Zealand Ski Ltd, there is an additional factor it relies on, not present in relation to Papanui Properties Ltd or Harewood Investments Ltd. Documents it received from Arrow in respect of the payments to Trade Contractors were labelled “Client paid direct recommendations”. It seems that title was generated on the documents sent to New Zealand Ski Ltd. On copies of the documents printed by the Administrators (as confirmed by “Voluntary Administration” appearing in the name of the company), the document is labelled “Payment Schedule”.
[58] Ms Paterson did not question that New Zealand Ski Ltd had received documents with the “Client paid direct recommendations” label. Sending to a PMCM Client such a document is some reinforcement that the purpose of the payment being sought by Arrow was for a payment being made direct by the PMCM Client via Arrow.
[59] In my view, it was not the intention of the parties that funds sought by Arrow for the purpose of meeting PMCM Clients’ indebtedness to third parties would become
the property of Arrow. There is no commercial sense in, as I have said, PMCM Clients paying Arrow for the privilege of Arrow using their funds at their risk.
[60] Ms Paterson analysed the inter-relationship of the obligations in respect of the timing of payments under the PMCM Contracts and the Trade Contractor Agreement. One Contract uses working days and the other calendar days. At best, under the Contracts the funds for Trade Contractors may have been in Arrow’s hands for a little under two weeks. In practice, the evidence is that Arrow’s invoice was paid by PMCM Clients around the 20th of the month and Arrow then paid Trade Contractors by the end of the same month. Given the risk that a PMCM Client may be a little late in paying and the need to be sure the payment had cleared, the timing of payments in practice does not suggest that Arrow intended there to be any meaningful period of time during which it could use the funds as part of its cash flow. I consider this factor more consistent than not with the money being paid on a pass-through basis.
[61] My focus on the purpose for which the payments for Trade Contractors were made by PMCM Clients is similar to the enquiry that takes place in considering whether there is a Quistclose trust. Lewin on Trusts says that if the money is intended to be at the free disposal of the recipient and may be used as part of his cash flow then there is no trust:21
The question in every case is whether the parties intended the money to be at the free disposal of the recipient, and his freedom to dispose of the money is necessarily excluded by an arrangement that the money should be used exclusively for the stated purpose.
[62] It is not necessary in order to find an implied express trust that the word “trust” is used. The commercial context, the purpose for which the money was sought and the purpose for which the money was paid, makes it clear that the funds were only to be used to pay the Trade Contractors.
[63] Accordingly, I conclude that there was an implied express trust in favour of the PMCM Clients in respect of all funds paid to Arrow by PMCM Clients for payment to Trade Contractors under contracts made by Arrow on behalf of Clients.
21 Tucker, Le Poidevin and Brightwell, above n 13, at [8-048]. (emphasis added).
[64] In the terms used in Bowstead and Reynolds on Agency at [25] above, I consider a trust relationship was appropriate to the commercial relationship between the PMCM Clients and Arrow and reconciles to the obligations on Arrow under cl 2.4(g) set out at [17] above, the method of invoicing and payments by Arrow and the commercial context, by which I mean that in an arms-length commercial contract it is inherently unlikely that PMCM Clients would inherit funds paid for the purpose of paying Trade Contractors to become part of Arrow’s cash flow.22
[65] Arrow was the agent of the PMCM Clients for the financial transactions associated with assessing claims by Trade Contractors. Arrow accepts that it was paying agent for the Clients in relation to the Trade Contractors. Arrow accepts that it owed fiduciary duties as agent in respect of those roles.
[66] However, Arrow seeks to draw a bright line when it comes to one of the most important subjects of those duties being the money. Where the line cutting off Arrow’s fiduciary duties end in respect of those roles was not fully explained by Ms Paterson. In my view, attempting that task highlights that it is artificial to say that Arrow’s fiduciary duties in respect of those roles did not extend to dealing with the funds which were central to Arrow’s roles.
[67] There are some issues between the parties in respect of the exact quantum of claims and leave is reserved to apply if counsel are unable to resolve those issues. Leave is also reserved to apply if the manner in which I have formulated the terms of the trust requires some attention.
[68] Where a respondent has paid the Trade Contractors amounts they have already paid Arrow, the funds paid by the respondents to Arrow in respect of such Trade Contractors are to be repaid to them.
Institutional constructive trust
[69] I comment only briefly on the alternative claim for an institutional constructive trust. The respondents submit that Arrow breached fiduciary duties it owed to the
22 Bowstead and Reynolds on Agency, above n 5.
respondents (assuming there was no fiduciary duty in relation to the cash), and equity will not permit Arrow to retain any benefit it received as a result of such breaches. The fiduciary duties said to have been breached are in general terms:
(a)that an agent must not place himself in a position where his duty and his interests may conflict; and
(b)that an agent has a duty to keep his principal informed of matters material to their relationship.
[70] On 15 February 2019, a construction adjudication determined that Arrow had a liability for $4.5m in respect of a claim made against it. It seems this adjudication was the catalyst for voluntary administration on 28 February 2019.
[71] The respondents say that if there was a debtor/creditor relationship then once Arrow was aware of the adjudication outcome and its impact on its viability, as agent it should have either:
(a)informed its PMCM Clients of that fact; or
(b)placed payments from PMCM Clients into a trust account for their benefit.
[72] Ms Paterson said that had Arrow taken the first option then it would have inevitably spelt the end of Arrow as it would have signalled to the market that it was insolvent, or sent such a negative commercial signal that doing so would have prejudiced other clients and creditors. The commercial reality of that submission is hard to rebut but the submission is not an answer for option (b).23 If there was a debtor/creditor relationship at the point that Arrow’s ability to trade on was in doubt, then Arrow stood to benefit at its principal’s cost by receiving funds that became part of Arrow’s property. Having got to that position, the submission is that there was a conflict between Arrow’s interest in getting in the funds which on the liquidators’
23 As was the course adopted in Re Kayford Ltd (in liq) [1975] 1 WLR 279.
case could be used for Arrow’s cash flow and Arrow’s obligations to fulfil its duties as agent to pay the funds collected to Trade Contractors.
[73] The respondents submit that in the circumstances an institutional constructive trust will arise to prevent Arrow benefitting from its breach of fiduciary duty.
[74] Immediately prior to the commencement of the hearing, there was a request by the respondents for further discovery as to the impact of the adjudication decision on Arrow and the view the directors took of its effect on Arrow’s solvency and ability to trade on. On the one hand, that approximately two weeks passed between the adjudication and the voluntary administration may suggest that the adjudication did not signal immediate insolvency. Indeed, the fact that voluntary administration rather than voluntary liquidation was adopted may suggest otherwise. The exact impact of the adjudication decision on 15 February 2019 and whether reasonable directors would have recognised that they were entering a position where there was a conflict between the interests of Arrow and the PMCM Clients before the payments were made by the respondents on 20 February 2019, cannot be determined on the present evidence.
[75] The only comment I make is that there is a reasonable argument for an institutional constructive trust, but it would require a more detailed analysis of Arrow’s position.
[76]I make no comments about a remedial constructive trust.
Retentions
[77]The position with retentions was less controversial.
[78] Arrow had deducted retentions from funds it received from PMCM Clients for the purposes of paying Trade Contractors.
[79] The submissions presented by the liquidators addressed retentions pre-31 March 2017 which totalled $469,408.00. The liquidators advise:
Retentions “held” for pre-31 March 2017 contracts were paid into Arrow’s main trading account and are not held on any express trust. Furthermore, Arrow’s main account was in and out of overdraft between 2016 and 2018. Any funds “held” in that account do not have any separate identity capable of sustaining a tracing remedy.
[80] The status of a retention pre-1 April 2017 which has been paid to a current account which has gone into overdraft, was the subject of comment by Churchman J in Bennett v Ebert Construction Ltd (in rec and liq):24
[24] The significance of 1 April 2017 is that is the date on which the provisions of the [Construction Contracts] Act came into effect that required the respondent to hold retentions on trust. Retentions in relation to contracts entered into prior to that date had been deducted by the respondent but it had not been obliged to hold them on trust and they had been held in the firm’s general account and therefore had ceased to exist given the absence of funds in that account as at the date of the receivership.
[81] It will be recalled that in this case, Arrow’s trading account from time to time did go into overdraft. Retentions “held” in that account were therefore spent/lost. It follows pre-31 March 2017 retentions are not held on trust as such no longer exist. Given my earlier finding that funds paid by PMCM Clients to Arrow for Trade Contractors were subject to an implied express trust, the implications in respect of that finding for the pre-31 March 2017 retentions utilised by Arrow as part of its trading are a separate issue.
[82]The post-31 March 2017 retentions are in an entirely different category:25
[4] The Construction Contracts Act 2002 (“the Act”) provided that, in relation to commercial construction contracts (CCC’s) entered into after 31 March 2017, the head contractor (such as [Ebert Construction]) withholding sums which would otherwise be required to be paid to a subcontractor (retentions, must hold those funds on trust for the subcontractor.
[83] While at least one of the Contracts in this case (Harewood Investments Ltd) was entered into on 16 March 2015, the liquidators advise that retentions relating to the January 2019 Payment Claims in issue in this application were transferred to Arrow’s separate retentions bank account. Accordingly, whether the Harewood Investments Ltd’s contract was caught by the Construction Contracts Act 2002
24 Bennett v Ebert Construction Ltd (in rec and liq), [2018] NZHC 2934.
25 Bennett v Ebert Construction Ltd (in rec and liq), above n 23.
(“CCA”) or not, Arrow treated its retentions as being trust property and paid them into a retentions bank account.
[84] Ms Paterson submitted that notwithstanding the banking provisions in the CCA that departed from conventional trust principles, Churchman J in Bennett was satisfied that the retentions held in that case satisfied the three certainties for a trust. Churchman J commented that:26
While it is clear that the purpose of the Act relating to retentions was to provide a greater security for subcontracts than existed previously, there were gaps in the legislation and the language used was imprecise.
[85] With respect, I agree with his Honour. Section 18C(1) of the CCA provides that “All retention money must be held on trust by party A, as trustee, for the benefit of party B”, party B here being the Trade Contractors.
[86] It is common ground that New Zealand Ski Ltd, one of the two PMCM Clients affected, has now paid Trade Contractors in full including retentions. The trust created by s 18C of the CCA has come to an end and it is agreed that there is a resulting trust back for the benefit of New Zealand Ski Ltd.
[87] The position in relation to Harewood Investments Ltd is that the Trade Contractor with the benefit of the retention has not yet been paid. Accordingly, the retention funds are held for the benefit of that Trade Contractor. Should Harewood Investments Ltd pay that Trade Contractor directly, there would then arise a resulting trust in favour of Harewood Investments Ltd.
Summary of Directions
[88]A summary of directions are as follows:
(a)Funds paid to Arrow by PMCM Clients for the purpose of paying Trade Contractors are held on trust for the respective PMCM Clients.
26 Bennett v Ebert Construction Ltd (in rec and liq), above n 23 at [63].
(b)Funds paid to Arrow by PMCM Clients, for the purpose of paying their indebtedness to Arrow in respect of Arrow’s fees, margin and Purchase Order Suppliers are not held on trust for the PMCM Clients and are Arrow’s funds, subject to the liquidation.
(c)Pre-1 April 2017 retentions paid into Arrow’s main trading account, where that account went into overdraft after 1 April 2017, lost their status as trust funds as the retentions ceased to exist as separate trust property.
(d)Post-1 April 2017 retentions paid into a separate retention account are held on trust for the Trade Contractor entitled to the retention or where the Trade Contractor has been paid direct by the PMCM Client on trust for that Client.
[89]Costs of the application are reserved.
[90] Leave is reserved generally. I do not consider an application for directions by the liquidators is the correct forum to consider the claim made by the first and second respondents for additional financing costs or the claim for interest by the third respondent. Given I have determined that the funds held on trust are trust moneys, I consider that the beneficial owner of those funds is entitled to the interest those funds have generated. Whether there are other claims over and above the interest earnt, will require the respondents to properly formulate the basis of that claim and put it to the liquidators for their consideration.
Associate Judge Lester
Solicitors:
Buddle Findlay, Christchurch (Applicants)
Cavell Leitch, Christchurch (First and Second Respondent) Lane Neave, Auckland (Third Respondent)
SCHEDULE
| Client | Invoice numbers | Amount invoiced to client | Paid to Trade Contractors | Arrow PM fee/margin | Unpaid to Trade Contractors | Unpaid to Purchase Order Suppliers | Variance | Retention withheld | Variance (after retention) |
| Papanui Properties Limited | 211821 211820 211819 | 1,296,241.62 | (196,621.96) | (71,969.62) | (967,352.13) | (27,961.00) | 32,336.91 | - | 32,336.91 |
| Harewood Investments Limited | 211864 | 137,281.25 | (80,341.59) | (31,136.25) | (25,499.46) | (4,987.06) | (4,683.11) | (5,285.69) | (9,968.80) |
| Resolute Investments 2016 Limited | 211835 | 59,243.92 | - | (16,775.45) | (35,602.29) | (1,380.00) | 5,486.18 | - | 5,486.18 |
| NZ Ski Ltd | 211815 | 386,390.93 | (13,731.00) | (41,824.61) | (309,404.65) | (7,700.85) | 13,729.82 | (16,230.74) | (2,500.92) |
| Du Velle Properties Limited | 211863 211802 | 78,462.20 | (40,135.00) | (9,717.50) | (18,759.38) | (32,782.72) | (22,932.40) | - | (22,932.40) |
| Massey University | 211845 | 11,749.46 | - | (3,063.60) | (2,052.51) | (1,395.73) | 5,237.62 | - | 5,237.62 |
| Massey Uni School of Music | 211846 | 3,063.60 | - | (6,440.00) | - | (2,364.63) | (5,741.03) | - | (5,741.03) |
| Totals | 1,972,432.98 | (330,829.55) | (180,927.03) | (1,358,670.42) | (78,571.99) | 23,433.99 | (21,516.43) | 1,917.56 |