Black v Lagoon Lodges Properties Limited
[2014] NZHC 3336
•19 December 2014
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2013-409-000759 [2014] NZHC 3336
BETWEEN LESLIE ALLAN BLACK and LESLEY
ANN BLACK and ORS First to Thirteenth Plaintiffs
AND
LAGOON LODGES PROPERTIES LIMITED
First Defendant
NEVILLE IAN CANT Second Defendant
DOYLE FINANCIAL SERVICES LIMITED
Third Defendant
STEPHEN MURRAY DOYLE Fourth Defendant
MDS LAW Fifth Defendant
Hearing: 25 November 2014 Counsel:
F B Barton, A M Cunninghame and S L McNeill for Plaintiffs
C R Carruthers QC and D M lester for DefendantsJudgment:
19 December 2014
JUDGMENT OF WHATA J
[1] The plaintiffs in three proceedings claim MDS Law (MDS) acted as solicitors for Lagoon Lodges Properties Limited (Lagoon 1), Lagoon Lodges Properties 2
Limited (Lagoon 2) and Castaway Properties (NZ) Limited (Castaway) in the subscription for and the allotment of securities in relation to a development in the Cook Islands. They also claim that MDS was under a duty, in contract by virtue of
the Contracts (Privity) Act 1982 (CP Act) and/or at common law, to ensure that the
BLACK and ORS v LAGOON LODGES PROPERTIES LIMITED [2014] NZHC 3336 [19 December 2014]
plaintiffs were not deprived of the protection of the relevant provisions of the Securities Act 1978 (Securities Act). In breach of that duty, MDS is then said to have permitted the Plaintiffs to subscribe for the securities and or permitted the securities to be allotted to them when there was no registered prospectus relating to them.
[2] MDS applied to strike out these pleadings.1 MDS submits that MDS could not owe a duty of care to the plaintiffs who are non clients and between whom there was never any form of contract.
[3] MDS also submits that the Lagoon 1 claim should be struck out as it is barred by operation of the Limitation Act 2010.
Background
The pleaded facts
[4] The present application for strike out concerns three proceedings but they all relate to essentially the same background facts.
[5] In response to an offer to the public by way of an information memoranda dated 17 April 2007 and issued by Lagoon 1, Lagoon 2 and Castaway, the plaintiffs subscribed in New Zealand for interests in a development in the Cook Islands known as Lagoon Lodges Stage 2.
[6] The interests for which they subscribed were equity securities for the purposes of the Securities Act and the subscription for and allotment of those securities (“the securities”) were therefore governed by the provisions of the Act. The securities were allotted by the companies to the plaintiffs on a date which is not known to the plaintiffs but in any event after 17 April 2007. At the time the plaintiffs subscribed for the securities there was no registered prospectus relating to them. The allotment of the securities without a prospectus was a contravention of s 37(1) of the Securities Act. By virtue of s 37(4) of the Securities Act the allotment was therefore
invalid and of no effect. Under s 37(5) of the Securities Act the subscriptions of the
1 These pleadings are repeated in the three proceedings subject to this application.
plaintiffs together with such interest, if any, had been earned on them were therefore repayable to them as soon as reasonably practicable. The defendant companies have not repaid the plaintiffs any of their subscriptions or any interest on them.
[7] The second defendant, Mr Cant, is a director of the companies. The third and fourth defendants are Doyle Financial Services Limited and Stephen Murray Doyle. They permitted the plaintiffs to subscribe to the securities. MDS acted as solicitors for the companies in the subscription for and the allotment of the securities. They did not ensure that the plaintiffs were not deprived of the protection of the relevant provisions of the Securities Act. MDS in particular permitted the plaintiffs to subscribe for the securities and/or permitted the securities to be allotted to them when there was no registered prospectus relating to them. The plaintiffs therefore lost funds to which they subscribed.
Affidavit evidence – preliminary issue
[8] Affidavit evidence was filed by both parties on the application for strike out. The admissibility of this evidence is now disputed by MDS. A preliminary issue arises as to whether I may have regard to this additional evidence. Three considerations enable me to take it into account.
[9] First, MDS filed an affidavit of Mr Tutty in support of its application to strike out. Mr Tutty was a solicitor involved in the securities transactions. He deposes that “MDS was not instructed to provide any advice in relation to whether or not an investor was an eligible person under the [Securities] Act”. The plaintiffs produced documentary evidence that Mr Tutty wrote to a director of the first plaintiffs stating that agreement had been reached that MDS would not release investor funds until it was fully satisfied and given an opinion as to the investors satisfying the eligible persons criteria. Mr Tutty also conceded in reply that the investors paid monies directly to MDS. In these circumstances, it is not available to MDS to complain about the admissibility of this or related evidence.
[10] Second, the evidence is essentially based on documentation produced via discovery, the source of which is not disputed. The affidavit evidence does not by itself enlarge or contradict the pleaded causes of action. It does however fill in some
of the factual gaps in the pleadings and includes information that is relevant to the central issue as to whether this matter can be resolved without a fact based inquiry. More specifically it enables the key events to be chronicled, identifies salient steps taken by the key actors and clarifies MDS’s contractual obligations as solicitors for the transactions. The evidence is therefore relevant and prima facie admissible.
[11] Third, Mr Barton accepted that a chronology of events provided by the plaintiffs based on discovered information is accurate. I will shortly come to that chronology, but it has long been settled authority that it is appropriate to consider evidence which was not contradicted and which itself did not contradict the
allegations in the pleadings.2
A chronology of events
[12] The chronology produced by the plaintiffs states:
· November 2006 – Plaintiffs approached about investing.
·15 December 2006 – 10 January 2007 – plaintiffs pay deposit into MDS trust account titled “Lagoon Lodges Properties Limited”.
· 20 December 2006 – Investors certify that they meet criteria
·22 December 2006 – $202,500.00 deposit paid to Knight Coldicutt Trust account – Tepaki 5 Holdings Limited: part deposit on purchases of units Lagoon Lodges by Lagoon Lodges Properties Limited.
· 12-16 January 2007 – investors pay balance of investment into
MDS trust account titled “Lagoon Lodges Properties Limited”.
· 30 March 2007- MDS pays interest to individual investors.
· 17 April 2007 – independent advice is given to investors.
·19 April – MDS Letter to Investment Management Limited “agreement has been reached that we will not release any funds (castaway or lagoon) until we are fully satisfied and have given our opinion as to investors satisfying the eligible persons criteria.”
2 Peerless Bakery Limited v Watts and another [1955] NZLR 339 (CA) at 351; Attorney-General v McVeagh [1995] 1 NZLR 558 (CA).
·19 April 2007 – Email from IML to MDS Law “… I have now read the document and will sign and return the relevant pages immediately on receipt of confirmation from you that you have examined the eligibility certification of each of the investors and that in your opinion, each of the investors meets the eligibility standards as specified in the Securities Act, and that the certifications have been carried out in a manner which will satisfy the Securities Commission.”
·20 April 2007 – independent advice by financial planners is acknowledged by the investors.
·16-24 April 2007– Mr Steven Doyle rings investors and provides a written statement outlining why investors are “experienced” in a letter.
·24 April 2007 – Email from IML to MDS, handwritten notes of conversation between Mr Cant and Mr Tutty as to compliance with Act.
· 26 April 2007 – Neville Cant letter to MDS Law.
“I have been advised by MDS law that investor certifications reviewed by MDS Law do not satisfy the “eligible persons” criteria specified in the Securities Act, 1978.
Notwithstanding that advice I am of the opinion as a financial planner and following discussions with the independent financial service provider that the correspondence does satisfy the criteria detailed above.
I will be procure (sic) Lagoon Lodges Properties Limited to immediately issue and allot the shares.
I instruct MDS Law to advance funds to Lagoon Lodges Properties (Cook Islands) Limited and then forward settlement proceeds … to Knight Coldicutt McMahon Butterworth or their appointee to enable settlement to be completed.
Lagoon Lodges Properties Limited, Investment Management Limited, Combined Financial Services Limited and I, Neville Cant, indemnify MDS Law in relation to any loss arising from this matter and waive any claim we may have against MDS Law.”
· 27 April 2007 – $1,200,000.00 transferred to Lagoon Lodges
Properties (Cook Islands) Limited.
·27 April 2007 – $799,050.85 paid to Knight Coldicutt trust account- Tepaki 5 Holdings from Lagoon Lodges (Cook Islands) Limited.
· 8 May 2007 – $32,293.29 transferred to Lagoon Lodges
Properties (Cook Islands) Limited.
·8 May 2007 – $420,927.44 paid to Knight Coldicutt trust account- Tepaki 5 Holdings from Lagoon Lodges Properties (Cook Islands) Limited.
·7 June 2007 – IML reimburses sends $60 cheque to plaintiffs as reimbursement for the invoice sent from Mr Doyle. Letter requests that plaintiffs make out their own cheques to Mr Doyle and send to IML
The relevant cause of action
[13] The third cause of action is repeated across the three proceedings. The key allegations are recorded at [1] and the salient features are addressed below at [22] and [25]. The central pleaded issue is whether, on the facts as pleaded, MDS was under a duty in contract by virtue of the Contracts (Privity) Act 1982 or at common law to ensure that the allotment was not made unless the plaintiffs were eligible investors.
Argument for MDS Law
[14] Mr Barton submits:
(a) The plaintiffs cannot point to any contract between MDS and any other party which purported to confer a benefit on them.
(b) The retainer between MDS and IML and/or the three companies did
not “designate” the plaintiffs as recipients of any benefit.
(c) There is no express or implied contract and nor can there be any privity of contract.
(d)The plaintiffs cannot be allowed to expand their claims as it is now outside the limitation period with the subscriptions received between November 2006 and July 2007 and allotments made in July and August 2007.
(e) As to the broader claims to duty at common law, a duty of a solicitor to a non client is exceptional but is not impossible.3 The key issue is whether the lawyer assumed responsibility for the non client.
(f) Unlike leading authority where a duty has been found between solicitor and non client, there is nothing in the pleadings to show that the requisite proximity or special relationship exists that might otherwise justify the imposition of a duty of care at law as between MDS and the plaintiffs.4
(g)Rather, the issuers, promoters and financial advisers owed a duty to the investors under the Securities Act. MDS only owed a duty to its client namely Mr Cant, the second defendant and the first defendants who are not making any claim against MDS.
(h) There is a real risk that imposing a duty would be at odds with MDS’s
duty to its client.
Plaintiffs’ case
[15] Mr Carruthers QC emphasised:
(a) The need for a full understanding of the facts before a conclusion about a duty of care can be reached;
(b)The pleaded facts alleging the essential ingredients needed to show proximity, including:
(i)Identification of the defendants, including MDS Law, as having provided advice as to compliance with the Securities
Act;
3 Citing Gartside v Sheffield, Young & Ellis [1983] NZLR 37 (CA); Attorney-General v Prince & Gardner [1998] 1 NZLR 262, [1998] NZFLR (CA); Bartle v GE Custodians [2010] 1 NZLR
802 (HC); Groom v Crocker [1939] 1 KB 194.
4 Ibid.
(ii)Identification of the plaintiffs as affected beneficiaries in terms of the Securities Act;
(iii)MDS acted as an adviser on the subscription for and allotment of the securities; and
(iv)MDS permitted the plaintiffs to subscribe for the securities and permitted the securities to be allotted to them without a registered prospectus and in breach of the Securities Act.
(c) MDS must have known and been alert to the fact that the funds had been solicited in breach of the Securities Act to the foreseeable detriment of an identified class of persons.
Jurisdiction
[16] The Courts are slow to strike out claims that assert novel duties of care, but defendants must not be subject to the substantial cost of defending untenable claims.5
Whether a duty of care did exist in the circumstances outlined is however a matter of law.6
[17] Furthermore the Supreme Court in Couch v Attorney-General noted:7
… It is a commonplace of the strike-out jurisdiction that the Court will consider not only the basis upon which the claim is presently pleaded but also any other basis upon which the claim might be pleaded.
(footnotes omitted)
[18] I propose to deal first with the claim based on a general duty of care.
Duty of Care
[19] As the majority said in North Shore City Council v Attorney-General it is of utmost importance to identify and examine the salient features of the claim to
5 Attorney-General v Body Corporate 200200 [2007] 1 NZLR 95 (CA), (2005) NZCPR 841 at
[50]-[51].
6 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [118].
7 At [123].
determine whether the relational conditions or proximity exist to establish a actionable duty.8 If so, I must also decide whether it is fair, just and reasonable to impose legal liability for its breach.9
[20] In a novel claim, foreseeability of damage is a useful screening mechanism to exclude claims that must obviously fail because no reasonable person could have foreseen the loss.10 If damage is foreseeable, then I must examine whether the relationship was sufficiently proximate so that the defendant assumed a responsibility to take care to secure the avoidance of the damage to the plaintiff.11
[21] The Securities Act provides the wider frame for the claim in this case and any duty of care must not be inconsistent with the Act’s objectives or requirements. But if there is a reasonable prospect that specific conduct establishes requisite proximity, and the statute does not exclude a finding of proximity, the matter should be allowed to proceed to trial unless policy considerations negate the prima facie duty of care.12
Salient features
[22] The salient features of the claim can be stated succinctly. The key pleaded facts are:
(a) In response to an offer to the public, the plaintiffs subscribed to securities issued by the first defendants (in the three proceedings);
(b)At the time the plaintiffs subscribed for the securities there was no registered prospectus relating to them;
(c) The allotment of the securities therefore contravened s 37(1);
8 North Shore City Council v Attorney-General [2012] NZSC 49, [2012] 3 NZLR 341.
9 At [156].
10 At [157].
11 At [158], [188] and [220].
12 At [166], citing R v Imperial Tobacco Canada Ltd [2011] 3 SCR 45 at [21].
(d)By virtue of s 37(5) the subscriptions of the Plaintiffs together with such interest (if any) as has been earned on them were therefore repayable as soon as reasonably practicable;
(e) The plaintiffs have not been repaid;
(f) MDS advised the First Defendant on the subscription and allotment of the securities; and
(g) The plaintiffs lost funds which they subscribed.
[23] The pleadings then assert:
…the Fifth Defendant was under a duty, in contract (by virtue of the Contracts (Privity) Act 1982) and/or at common law, to ensure that the Plaintiffs were not deprived of the protection of the relevant provisions of the Act
[24] In my view, the allegations are too broad brush in terms of r 5.26. It is not clear what terms of the contract between the first defendant and MDS establish the requisite statutory privity. It is also not clear what facts give rise to a duty of care at common law. The simple assertion that the solicitor advised on a securities transaction that went wrong does not obviously establish the requisite foreseeability or proximity to the affected investors.
[25] But the affidavit evidence reveals particulars that, in my view, clarify the proper factual basis for the claim, namely:
(a) MDS acted for the First and Second Defendants in the subscription for an allotment of the equity securities;
(b) MDS recorded in a letter to a director of the first defendants:
Agreement has been reached that we will not release any funds (Castaway or Lagoon Lodges) until we are fully satisfied and have given our opinion as to investors satisfying the eligible persons criteria.
(c) MDS provided advice to the Second Defendant that the plaintiffs were not eligible persons under the Securities Act;
(d) Notwithstanding this advice, the first and second defendant instructed
MDS to proceed with the allotment and indemnified:
MDS Law in relation to any loss arising from this matter and waived any claim we may have against MDS Law.
(e) MDS accepted the plaintiffs’ funds into its trust account for the purpose of allocating those funds to securities to be issued by the First Defendant;
(f) MDS released the plaintiffs’ funds to a third party for the purpose of
the allotment of the securities to the plaintiffs; and
(g) The securities were allotted to the plaintiffs in breach of s 37 of the
Securities Act.
[26] These additional facts place MDS at the centre of the impugned securities transactions. Before examining the significance of this in terms of the pleaded claims, it is necessary to explain the obligations imposed by the Securities Act.
Securities Act 1978
[27] For present purposes s 37(1) is key. It states:
37 Void irregular allotments
(1) No allotments of a security offered to the public shall be made unless at the time of the subscription for the security there was a registered prospectus relating to the security.
[28] Allotments made in contravention of s 37(1) are invalid and of no effect.13 It follows from the proscription at s 33(1)(c):
33 Restrictions on offer of securities to the public
(1) No security shall be offered to the public for subscription, by or on behalf of an issuer, unless—
…
(c) the offer is made in, or accompanied by, a registered prospectus that complies with this Act and regulations.
[29] Part 5 of the Securities Act lists exemptions from the Act. By way of relevant example, s 5(2CB) excludes offers of securities if the only persons to subscribe for the security are eligible persons. A person is eligible if they have one or more of the following characteristics:14
(a) wealthy;
(b) experienced in investing money;
(c) experienced in the industry or business to which the security relates. [30] Section 5(2CE) places responsibility for ensuring that an investor is
experienced on an independent financial service provider.
[31] All of this sets the frame for the proximity assessment.
Foreseeability
[32] It must have been known to MDS that the objective of s 37 is to ensure that persons in the plaintiffs’ shoes are properly informed of the risks associated with investment in securities. MDS was then in a key position as events unfolded when it accepted responsibility to ensure eligibility. In short (on the plaintiffs’ case), MDS knew that the plaintiffs were vulnerable investors, was actively involved in the receipt of the plaintiffs’ funds, the depositing of those funds with third parties and then the allotment of the securities with the plaintiffs in breach of s 37. In these circumstances, the potential for harm arising to the plaintiffs was reasonably foreseeable. This basic test is satisfied.
The alleged duty of care
[33] The duty of care is pleaded as a duty to ensure that the plaintiffs were not deprived of the protection of the relevant provisions of the Securities Act. The alleged breach of the duty is said to have occurred when MDS permitted the securities to be allotted to the plaintiffs.
[34] I accept Mr Barton’s submission that the existence of a duty of care by a solicitor to a non-client is exceptional. As Mr Barton also noted, in Bartle v GE Custodians Randerson J observed that a duty of care can arise in tort independently of a contract of retainer provided that the solicitor can be said to assume or should be
deemed to assume responsibility to the non client. He said:15
[136] Nevertheless, a duty of care in tort may arise irrespective of any contract of retainer between the parties. Such a duty is not limited to cases of negligent misstatement falling within the narrower cause of action established by the House of Lords in Hedley Byrne v Heller & Partners Ltd
8982 [1964] AC 465, but extends more widely to cases where the
defendant’s conduct is such as to enable a court to conclude there has been an assumption of responsibility for the performance of a task. In some cases this may be a voluntary assumption of responsibility and, in others, a deemed assumption of responsibility where the court finds the imposition of a duty of care is fair, just and reasonable (see the discussion by Tipping J in Attorney-General v Carter [2003] 2 NZLR 160 (CA) at [22] – [32]). If the defendant negligently performs or omits to perform the task then, subject to issues of foreseeability and remoteness, he may be liable for losses flowing from the breach.
[35] For my part, it is arguable that MDS assumed or should be deemed to have assumed a responsibility when Mr Tutty agreed to retain the plaintiffs’ funds until satisfied that they were eligible investors and actively facilitated the allotment knowing the implications and the risks to the plaintiffs of the allotment. By this stage, the plaintiffs were members of an identifiable and sufficiently delineated class, known by MDS to be the subject of a distinct and special risk of suffering harm of the kind that they in fact sustained with the unlawful allotment and MDS was (and placed itself in) in a position to protect the plaintiffs from that harm while it retained their funds.
[36] Dean v Allin & Watts (cited in Bartle) is an apt illustration of the careful extension of the duty of care to non clients by solicitors.16 The solicitors in that case were found to have assumed responsibility for putting in place an effective security for a series of loans which the plaintiffs had made to the clients of the firms. Lightman J imposed a duty of care towards the plaintiff to provide an effective security, the benefit of which to his knowledge the borrowers wished to confer on the
plaintiff and which was fundamental to the loan transactions. Similarly, MDS was engaged by the First and Second Defendants to facilitate the allotment of securities only to eligible investors, but instead ignored its own advice and went ahead and gave effect to an ineffective and unlawful security to ineligible investors.
[37] Conversely, this is not like Brownie Wills v Shrimpton where there was no basis to conclude the solicitor assumed responsibility toward the non-client guarantor when under instructions from a bank to explain the nature of the guarantee.17 There was no suggestion in that case that Brownie Wills or the Bank knew that the guarantor was potentially or actually disqualified from guaranteeing the loan and vulnerable to an unlawful exposure to loss. As Blanchard J observed the bank “had no purpose of benefiting or protecting the guarantors”.18 By contrast, the First and Second Defendants had an obligation to be sure that the plaintiffs were eligible investors. MDS then placed itself in a position of advising on the eligibility of the plaintiffs and facilitating (it appears) non compliance with the requirements of the Securities Act designed to protect vulnerable investors. The degree of proximity is therefore much more immediate in this case.
[38] All of this will of course need to be proven on the evidence, but on the pleadings and the information available to me, the relationship between MDS and the plaintiffs was very close and arguably sufficiently proximate to find that MDS assumed or should be deemed to have assumed responsibility to the plaintiffs to be
satisfied that they were eligible investors prior to the release of their funds.
16 Dean v Allin & Watts [2001] EWCA Civ 758, [2001] PNLR 39.
17 Brownie Wills v Shrimpton [1998] 2 NZLR 320 (CA).
18 At 326.
Fair, just, reasonable
[39] The duty of care to the plaintiffs is nevertheless difficult to reconcile with MDS’s fiduciary duty to the First and Second Defendants. A duty to retain the funds for the plaintiffs or to refuse to complete the allotments is prima facie incompatible with the duty carry out the instructions of their clients to facilitate the allotment. It also appears that the second defendant exercised an independent judgment, based on the third defendants’ advice to conclude that the plaintiffs were eligible investors. The Securities Act reposes the responsibility for the eligibility assessment in
financial advisors, not solicitors. Unlike Gartside and other cases19 where the client’s
instructions complemented the imposition of a duty of care, the imposition of the
alleged duty of care is ostensibly in conflict with MDS’s duty to its clients.
[40] But a curious feature of this case is that the duty to retain the funds until satisfied that the plaintiffs are eligible investors is entirely compatible with s 37 of the Securities Act, the Second Defendant’s duty as a director of the First Defendant, and the Third Defendant’s duty as financial adviser. A conflict arises only because, if the facts pleaded are accepted as true, the Second Defendant promoted a non compliant allotment and this was facilitated by MDS who must have at least suspected they might be non compliant. Is it then part of our law that a solicitor may ignore the apparent statutory non compliance and shelter behind the instructions given by his or her client? In other contexts, for example consumer protection,
acting on client instructions is no defence to a claim.20 For my part I am not prepared
in this context to foreclose the potential for a duty of care claim concerning a Securities Act breach via strike out. While the Court of Appeal doubted the existence of a broader moral duty in Brownie Wills,21 the present facts, in my view, provide a compelling basis for careful consideration of whether a moral and or legal duty of care arose in this case.
[41] Accordingly, the significance of any apparent conflict between the solicitor/client duty and any duty of care to an investor to be resolved on a full
19 Gartside v Sheffield, above n 3. See also Suharnan v Brookfields [2013] NZHC 191 and cases cited therein.
20 Refer Poplawski v Pryde [2013] NZCA 229, (2013) 14 NZCPR 528.
21 Brownie Wills v Shrimpton, above n 17, at 325.
examination of the facts rather than by way of strikeout. I also see nothing in the Securities Act per se that would preclude a finding of proximity. If anything, the imposition of a duty of care on a solicitor in the circumstances of this case would further the Securities Act’s implicit objective of protecting ineligible investors.
[42] For completeness, I do not consider that there is even a prima facie case for the imposition of a wider general duty of care on MDS to protect the plaintiffs from an unlawful securities transaction. Approaching the pleaded and supplementary facts as generously as I can, there is nothing to suggest that MDS reasonably contemplated that it had a general duty simpliciter to protect the plaintiffs’ from loss. It is the agreement to retain the plaintiffs’ funds that objectively placed MDS in a central role in securing the position of the plaintiffs. The evidence that MDS then considered that the plaintiffs were not eligible shows that it was aware that the plaintiffs were vulnerable to foreseeable harm. It is these critical facts that raise a prima facie case for a duty of care. There is otherwise an insufficient connection to establish the requisite jural relationship.
[43] In the result, I am satisfied that there is sufficient proximity on the assumed facts to establish a prima facie duty to be satisfied that the plaintiffs were eligible investors prior to the release of their funds. I turn then to examine the claim based on statutory privity.
Statutory Privity
[44] Section 4 of the CP Act states:.
4 Deeds or contracts for the benefit of third parties
Where a promise contained in a deed or contract confers, or purports to confer, a benefit on a person, designated by name, description, or reference to a class, who is not a party to the deed or contract (whether or not the person is in existence at the time when the deed or contract is made), the promisor shall be under an obligation, enforceable at the suit of that person, to perform that promise:
provided that this section shall not apply to a promise which, on the proper construction of the deed or contract, is not intended to create, in respect of the benefit, an obligation enforceable at the suit of that person.
[45] Section 8 then states:
8 Enforcement by beneficiary
The obligation imposed on a promisor by section 4 may be enforced at the suit of the beneficiary as if he were a party to the deed or contract, and relief in respect of the promise, including relief by way of damages, specific performance, or injunction, shall not be refused on the ground that the beneficiary is not a party to the deed or contract in which the promise is contained or that, as against the promisor, the beneficiary is a volunteer.
[46] A reasonably coherent picture emerges from the salient features of this case (listed at [22] and [25]): a three way relationship between director, legal adviser and investor, working together to give effect to the securities allotment. The “agreement reached” that MDS would not release the plaintiffs funds until satisfied that they were eligible to invest must be seen within this broader factual matrix.
[47] But does this establish a proper basis for a claim under s 4? Yes. I consider that the central concepts employed by s 4 are prima facie engaged: 22
(a) There was a promise to confer a benefit, that is not to release the
plaintiffs’ funds unless the plaintiffs are eligible investors; and
(b)There was a designation of a beneficiary evident from the object of the agreement, namely the plaintiffs through the safekeeping of their funds until Securities Act requirements are satisfied.
[48] I am fortified in this view (especially for strike out purposes) by the approach taken by Gallen J in New Zealand Guardian Trust Co Ltd v Peat Marwick.23 In that case the Judge was satisfied that s 4 CP Act was engaged in circumstances where the holders of debenture stock brought an action against the auditor of Cory Wright and Salmon Ltd alleging that the auditor contract with Cory Wright and Salmon Ltd
contained a term that the defendant would diligently research and report to the
22 Burrows, Finn and Todd Law of Contracts in New Zealand (4th ed, LexisNexis, Wellington,
2012) at 571-573.
23 New Zealand Guardian Trust Co Ltd v Peat Marwick (1991) 5 NZCLC 67,129 (HC).Unfortunately this authority was not cited by the parties. I did not however consider it was necessary to invite further submission as the authority is noted in the leading text, Burrows, Finn and Todd, above n 22, at 572. Moreover it simply provides an analogy and is not cited on the basis that it is authoritatively on point.
trustee so that the trustee could monitor the extent of indebtedness. The defendant denied that there was any reporting obligation. But the Court concluded nevertheless that the obligation, if established, conferred an actionable benefit on the Trust under s 4. MDS placed itself in a similar position when it undertook to hold onto the plaintiffs’ funds until it was satisfied that the plaintiffs were eligible investors.
[49] I also consider that the present facts can be distinguished (again only for strike out purposes) from the different result reached in Gartside. The Court rejected a CP Act claim in relation to advice by solicitors on a will. The beneficiaries there could not rely on s 4 as there was no express promise of a benefit from the solicitors to the claimants. The benefit to the plaintiffs in that case was the corollary of a properly drafted will so that benefit derived from the testator not the lawyers. But here the agreement that MDS would not release the plaintiffs’ funds unless compliant with Securities Act requirements conferred a direct benefit on the plaintiffs in the form of the safekeeping of their funds. The requisite benefit to the plaintiffs was
inherent in the undertaking and is not ancillary to it.24 By contrast, the benefit to the
Second Defendant was ancillary insofar as the agreement secured a lawful securities transaction.
[50] Difficult issues remain as to whether MDS or Mr Cant in fact intended to confer a benefit on the investors, and even if they did, could they then later agree not to confer it, as appears to be the case. But the answer in my view inevitably depends on the wider factual matrix and in particular whether, objectively assessed Mr Cant and MDS agreed to confer a benefit on the plaintiffs so that MDS assumed responsibility to ensure that the benefit was in fact conferred. Only after that assessment is made can it be said or denied that the plaintiffs should be treated “as if” they were parties to the agreement for the purposes of s 8 and entitled to the benefit of the undertaking given to manage their funds in accordance with the Securities Act. Notably MDS contemplated that it might be exposed to liability for not strictly enforcing its agreement to retain the funds. Hence it sought and obtained
a written indemnity from the Second Defendant. This tends to suggest that MDS
24 The difference is helpfully explained in Brian Coote “Implied Conferral and “Benefit” under the
Contracts (Privity) Act 1982” (2006) 12 NZBLQ 13.
considered it was bound to protect the investors’ interests and potentially liable for
not doing so.
[51] I am therefore satisfied that the pleadings and affidavit evidence provide a factual basis for a claim based on s 4 of the CP Act in the following terms or something similar:
The Fifth Defendant promised not to release the plaintiffs funds until it was satisfied that the plaintiffs were eligible investors pursuant to s 5(2CC) of the Securities Act 1978.
Limitation
[52] Section 11 of the Limitation Act 2010 provides:
11 Defence to money claim filed after applicable period
(1) It is a defence to a money claim if the defendant proves that the date on which the claim is filed is at least 6 years after the date of the act or omission on which the claim is based (the claim's primary period).
(2) However, subsection (3) applies to a money claim instead of subsection (1) (whether or not a defence to the claim has been raised or established under subsection (1)) if—
(a) the claimant has late knowledge of the claim, and so the claim has a late knowledge date (see section 14); and
(b) the claim is made after its primary period.
(3) It is a defence to a money claim to which this subsection applies if the defendant proves that the date on which the claim is filed is at least—
(a) 3 years after the late knowledge date (the claim's late knowledge period); or
(b) 15 years after the date of the act or omission on which the claim is based (the claim's longstop period).
[53] MDS seeks to strike out the plaintiffs’ claims concerning deposits into or releases out of MDS’s trust account in December 2006 and January 2007 as these deposits or releases occurred more than six years prior to the commencement of proceedings on 13 April 2007. Mr Barton submits that any breach of s 37 occurred when the funds of ineligible investors were received by MDS for the purpose of an unlawful allotment. Mr Barton also makes the point that on 22 December 2006 MDS
caused $202,500 to be paid for the purchase of the Lagoon Lodges Unit. This alienated the plaintiffs’ funds so that they were no longer under the control of MDS. Mr Carruthers, however, submits that the cause of action did not crystallise until the allotments occurred and up until this point MDS remained obliged to protect the plaintiffs’ monies.
[54] As the proceedings were not commenced until 11 April 2013 any cause of action resulting from the deposits or releases in December 2006 and January 2007 (over six years before the proceedings were commenced) are time barred for the following reasons.
[55] First, the statutory privity claim is premised on an agreement to confer a benefit on a third party. The agreement is recorded in a letter dated 19 April 2007. It is very difficult to say that this agreement attached to plaintiffs’ funds deposited with and or released by MDS in December 2006 and 2007. In any event, even had the agreement applied, the operative promise was to “not release any funds”. Any breach of this promise therefore occurred on the release of the funds. It follows that the December 2006 release of funds is time barred insofar as concerns the statutory privity claim. Conversely, any release of funds after the agreement is not time barred.
[56] Second, the common law duty of care is also factually underpinned by MDS’s agreement to retain the funds and to be satisfied that the plaintiffs were eligible investors. Indeed, as foreshadowed above, the two claims are broadly co- extensive and any broader duty is simply too amorphous. I consider therefore that any claim to December 2006 funds must also be time barred under this head of claim.
[57] Accordingly I am satisfied that MDS is only potentially liable for any loss arising from a release of funds after 13 April 2007.
Result
[58] The application to strike out proceedings Lagoon 2 and Castaway is dismissed.
[59] The claim in the Lagoon 1 proceeding is time barred insofar as it concerns the funds transferred out of MDS’s hands prior to 13 April 2007. To the extent that relevant funds were transferred after this date the balance of the application for strike out in those proceedings is also dismissed.
[60] It will be evident that I consider that the pleadings need to be amended without enlarging or expanding the causes of action. This decision is premised on the pleading of the salient features listed at [22] and [25].
Solicitors:
Hope & Associates Legal, Oamaru
Gresson Dorman, Timaru
Duncan Cotterill, Auckland
Heartland Law Limited, Timaru
Anderson Lloyd, Dunedin
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