Burns v ANZ National Bank of New Zealand

[2006] NZCA 323

IN THE COURT OF APPEAL OF NEW ZEALAND

CA269/05

BETWEENEDGAR ALAN MORAY BURNS AND YVONNE JOY BURNS

Appellants

ANDANZ NATIONAL BANK OF NEW ZEALAND

Respondent

Hearing:7 November 2006

Court:William Young  P, O'Regan and Robertson JJ

Counsel:D F Dugdale and K F Crossland for Appellants

D Chan and S Dalziell for Respondent

Judgment:27 November 2006 at 11 am

JUDGMENT OF THE COURT

A        THE APPEAL IS DISMISSED.

BThe respondent is awarded costs of $6,000 together with usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Robertson J)

[1]       This is an appeal against the decision of Wild J dismissing the claims of Mr and Mrs Burns that they should be able to cancel a settlement agreement they made with the respondent (the Bank).  The settlement agreement was entered into in 1996 during the hearing of a case which Mr and Mrs Burns had brought against the Bank in the District Court.

[2]       At the heart of the present case are undiscovered documents in the District Court proceeding.  The issues on appeal are whether:

(a)there were documents which were not discovered by the Bank when they should have been;

(b)the test of intention to induce was satisfied; and

(c)the fact of non-discovery induced the settlement that was entered into.

Background

[3]       The litigation has its genesis in a contractual arrangement between the appellants and Terry Bush and Mike Radburnd who first traded as Horticultural Contact and then operated through a company called Horticultural Contact Limited.  For convenience, we refer to these entities throughout as HC.

[4]       Mr and Mrs Burns supplied fruit trees which HC on-supplied to others.  The nature of the arrangement under which these supplies were made is now a matter of dispute.

[5]       In May 1987, Mr and Mrs Burns supplied fruit trees worth $62,746.95 for which they were not paid.

[6]       The following year they commenced proceedings in the High Court to recover this amount on the basis that HC had purchased the trees as principal and the unpaid purchase price was a debt due and owing.  On 13 June 1988 they obtained summary judgment for the full amount of their claim together with costs.

[7]       The judgment was never satisfied.  Mr Bush and Mr Radburnd were both eventually adjudicated bankrupt.  The only payment Mr and Mrs Burns received was a dividend in the vicinity of $1,000.

[8]       In 1993 Mr and Mrs Burns commenced the proceeding in the District Court against the Bank.  By the time of hearing in 1996, the crux of the case was that HC obtained fruit tree seedlings from the appellants which they would on-sell on their behalf to orchardists who placed orders with HC.  In other words, HC was not purchasing as a principal, but was an agent or broker.

[9]       It was asserted that the Bank knew of this arrangement and that sums received into the HC account at the Bank represented proceeds of sale made on behalf of Mr and Mrs Burns which were required to be held for their benefit.

[10]     Mr and Mrs Burns alleged there was a breach of trust or fiduciary obligation when Mr Bush and Mr Radburnd transferred sums from the HC bank account into other overdrawn accounts they had.  These transfers were said to be made with the knowledge of the Bank, in particular its local manager, Peter Sewell.  Alternatively it was alleged that Mr Sewell (knowing of the brokerage nature of the HC business) acted with reckless indifference or disregard for the rights of Mr and Mrs Burns.  The sums taken from the original account and put into an overdrawn account were knowingly received by the Bank in the knowledge that the transfer was in breach of trust or fiduciary duty.

[11]     It is clear that some of HC’s business involved it selling fruit trees on behalf of its suppliers and there was significant evidence to the effect that the Bank knew this but nonetheless allowed HC to treat as its own the proceeds of such sales.  Although the Bank disputed that it had this knowledge, Mr and Mrs Burns were on reasonably strong ground on this aspect of the case.  Where they were distinctly weaker was on the categorisation of their dealings with HC.

[12]     The claim was for the net loss sustained by Mr and Mrs Burns of $52,296.95 after an allowance of $10,540 achieved in a barter agreement between the original parties, interest at commercial rates, damages of $20,000 for distress, personal hardship and inconvenience, and exemplary damages of $50,000.

The District Court hearing

[13]     Mr and Mrs Burns had to persuade the District Court first as to the existence of a fiduciary duty as between themselves and HC (the agency arrangement), and secondly as to the Bank’s knowledge of the existence of it.  The appellants accepted that, for the fiduciary duty to exist, HC must have been selling as their agent.

[14]     The alternative categorisation advanced by the Bank was that in each transaction there were two contracts of sale.  The first was from Mr and Mrs Burns to HC, and then a second from HC to the ultimate recipient.

[15]     The two classifications were treated as mutually exclusive.

[16]     Prior to the hearing, there had been a laborious process of obtaining discovery from the Bank which involved the production of five lists of documents between 1993 and 1996.

[17]     The hearing had not proceeded far when it became apparent that the District Court Judge was indicating at least a preliminary view that he had concerns as to whether it had been established that the relationship between Mr and Mrs Burns and HC was other than one of debtor and creditor.

[18]     Counsel for Mr and Mrs Burns concluded that there was a risk of judgment being entered against them at the conclusion of their case without the Bank being called upon at all.  He was anxious about costs, particularly as they had been substantially swollen by the interlocutory applications.  Mr and Mrs Burns decided to abandon their claim against the Bank for a payment of $15,000 on the basis that costs lay where they fell.

The aftermath

[19]     Matters might have rested there, but Mr Burns was asked by a Mr and Mrs Walker (who operated a fruit tree nursery business) to give evidence in a case they were bringing against the Bank.  This he did.  In Walkers Nurseries Ltd v National Bank of New Zealand Ltd HC NAP CP45/95 CP22/97 2 August 2001, Ellis J held that HC had agreed to hold money on trust for the Walkers and that a transfer to another account within the Bank was a breach of fiduciary duty.  Because the Bank had the requisite knowledge, the Walkers were entitled to relief by way of constructive trust against the Bank.

[20]     In the Walkers Nurseries proceedings, the Bank discovered documents which were not included in any of the five tranches of discovery which had occurred in Mr and Mrs Burns’ proceedings.  There were 557 documents which they said should have been discovered in their litigation which were not disclosed.

[21]     Mr and Mrs Burns commenced the current proceedings against the Bank to have the settlement cancelled.  They applied for summary judgment which was refused.  The refusal was confirmed on appeal to this Court:  Burns v National Bank of New Zealand Limited [2004] 3 NZLR 289.

[22]     A hearing on the merits occupied eight days in October and November 2005 before Wild J.  He trimmed down the scope of documents in contention and concluded there were some documents which had not been discovered which should have been disclosed.  However, he held that there had been no intention in the non-discovery to induce Mr and Mrs Burns to settle, and the non-discovery would have had no influence on the appellants’ decision to settle.

[23]     Although not necessary for his finding, the Judge noted that if he had been satisfied that documents which the Bank failed to discover may have influenced Mr and Mrs Burns’ decision to settle, he would have been inclined to set the settlement aside.

Appeal

[24]     The case was further refined by the time of the hearing before us and just three issues require adjudication being the three issues earlier identified:  see [2] above.

Were one or more of the undiscovered documents discoverable?

Correspondence

[25]     Wild J held that two letters written by Mr Bush on 27 May 1987 should have been discovered as being relevant to the classification of the relationship between Mr and Mrs Burns and HC.  The appellants support this conclusion while the respondent contends they were not discoverable for two reasons. 

[26]     First, they did no more than show that Mr Bush and Mr Radburnd used funds generated in the HC business for other businesses they owned, a fact which was admitted in the pleadings.  It was therefore not a matter in dispute.

[27]     Secondly, the two letters were not about the relationship between HC and Mr and Mrs Burns, but the relationship between HC and one of its purchasing clients.  The Judge held they should have been discovered as they were relevant to the allegation that HC’s account with the Bank was a brokerage account. 

[28]     Mr Burns asserted that the letters had a broader significance than this.  Wild J considered this aspect at [50] and [51] of his judgment.  He rejected these because they added nothing to the knowledge that Mr and Mrs Burns and their advisers had as to their ability to call Mr Radburnd in their litigation, as the Walkers did in their case.  The Judge saw the letters as having the limited value noted.

[29]     We are not satisfied that Wild J was wrong and confirm that these should have been discovered and were not.

Memorandum of 11 November 1988

[30]     A memorandum dated 11 November 1988 was sent from Mr Sewell (the Bank Manager) to Mr Ferguson (the Bank’s solicitor) as the start of instructions to prepare an affidavit for Mr Sewell to swear in matrimonial property proceedings between Mr and Mrs Bush.

[31]     In the High Court, Mr Ferguson said that he had overlooked the memo as it had been prepared five years previously and because it was privileged.  Wild J doubted that it was privileged and held it was properly discoverable. 

[32]     This memo was privileged and not discoverable.

[33]     Lord Halsbury in Bullivant v Attorney-General for Victoria [1901] AC 196 summarised the principles of lawyer-client privilege when he stated at 200-201:

… for the perfect administration of justice, and for the protection of the confidence which exists between a solicitor and his client, it has been established as a principle of public policy that those confidential communications shall not be subject to production.

This statement was affirmed by this Court in Commissioner of Inland Revenue v West-Walker [1954] NZLR 191 and more recently in R v Uljee [1982] 1 NZLR 561. Mr Sewell was seeking legal assistance when he prepared the memo and sent it to the Bank’s solicitor. It was never discoverable.

HC terms of trade

[34]     In a letter dated 1 May 1997 from Mr Radburnd to an orchardist client in the South Island, a passing comment was made about HC’s operational framework.  Wild J held that the letter and its attached order form from HC was relevant to the brokerage issue and ought to have been discovered.  This finding is not appealed.  It is accordingly treated by us as a discoverable document which was not disclosed.

Was the appropriate test for intention to induce satisfied?

[35]     The Judge noted at [82]:

… I would not have held that the Bank, by not discovering documents, intended to induce the Burns to settle.  Such an intention is one of the elements of the Burns’s cause of action under the Contractual Remedies Act: Savill v NZI Finance Ltd [1990] 3 NZLR 135 at 145 (CA).

[36]     We do not agree.  When a party to litigation seeks discovery, affidavits filed in response are representations upon which the serving party is entitled to rely.  It is a sworn assertion that the respondent party has made full and proper discovery of all documents which are relevant.

[37]     Section 7(3) of the Contractual Remedies Act 1979 relevantly provides:

7        Cancellation of Contract

…

(3)       Subject to this Act, but without prejudice to subsection (2) of this section, a party to a contract may cancel it if –

(a)he has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to that contract.

…

[38]     Mr and Mrs Burns’ position is that they and their legal adviser acted on the basis that the discovery which had been concluded was comprehensive and complete.  Whether that representation was innocent or fraudulent, it was wrong and thus the provision was engaged.

[39]     Contrary to the submissions of Mr Chan, and the reasoning of Wild J, we do not consider that Savill is against the argument of Mr and Mrs Burns. 

[40]     Hardie Boys J succinctly outlined the inducement requirement thus (at 145-146):

Therefore I consider that it remains the law that it is not enough for a party to say that a representation caused him to act in a particular way.  He must also show either that the representor intended him to do so, or that he “wilfully used language calculated, or of a nature, to induce a normal person in the circumstances of the case to act as the representee did”.  I quote from Spencer Bower & Turner at p 132.  To view the Act in this way is to be consistent with the objective approach generally taken in regard to the law of contracts.

In Savill the representation in issue had not been made to the party who later sought to rely on it.  So it could not be said that the representation was intended to be relied on by him.  The remarks of Hardie Boys J just cited must be read in that light.  In the present circumstances, the Bank represented to Mr and Mrs Burns that discovery was complete.  Thereby it can be taken to have induced the appellants’ actions in relation to the litigation which were associated with that representation.

[41]     The inducement requirement is satisfied by a finding of actual or constructive intention:  Burrows, Finn and Todd Law of Contract in New Zealand (2ed 2002) at 338.  An intention can be presumed or inferred from the behaviour of the representor.  The intention to induce requirement is not limited to a subjective intention to induce on behalf of the representor.

[42]     We are satisfied that an intention to induce was established in this case.  The language used in the affidavits filed by the Bank were worded so as to induce a “normal person in the circumstances of the case” to believe that the discovery had been complete and that future decisions relating to the conduct of the litigation (including settlement) could be made in reliance on it.  Discovery was in fact inadequate and incomplete.

Did this inducement influence the appellant’s decision to settle?

[43]     Wild J, faced with a more extensive array of material than in issue before us, relevantly concluded at [81]:

The other categories of documents all go to the knowledge of the Bank, and in particular of Mr Sewell, at material times, about the nature of the Horticultural Contact account.  For the reasons I have given, I consider Mr McKenzie had available plenty of documentary material to challenge Mr Sewell’s proposed evidence about that.  But none of that material dealt with the primary or threshold issue: did the Burns deal with Horticultural Contact as their broker or agent?  As both counsel accepted, the “label” attached by a Bank to an account is not determinative of the basis on which funds in that account are held.  Trust funds can be held in an ordinary account, and non-trust funds in a trust account.  I am left quite unpersuaded that discovery of the documents in issue would have made any difference to the Burns’s decision to settle.

[44]     Mr Dugdale accepted that, when Mr and Mrs Burns were advised to settle and accepted that advice and did settle, the critical issue was agency as noted in [13] and [14] above.  Could Mr and Mrs Burns prove that their relationship with HC was not vendor and purchaser, but that HC had been selling as their agent?

[45]     Section 7(4) of the Contractual Remedies Act 1979 provides:

7        Cancellation of contract

...

(4)       Where subsection (3)(a) or subsection (3)(b) or subsection (3)(c) of this section applies, a party may exercise the right to cancel if, and only if,- 

(a)       The parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to him; or 

(b)The effect of the misrepresentation or breach is, or, in the case of an anticipated breach, will be,- 

(i)Substantially to reduce the benefit of the contract to the cancelling party; or 

(ii)Substantially to increase the burden of the cancelling party under the contract; or 

(iii)In relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.

The only way in which Mr and Mrs Burns could both establish inducement and satisfy s 7(4) was to show that the litigation risk which they faced without the discovered documents were materially (for inducement) and substantially (for s 7(4)) different from what they would have been if the documents had been discovered.

[46]     We can see no basis upon which it can be asserted that the two letters of 27 May could have assisted Mr and Mrs Burns on the nature of the relationship between them and HC.  The letters may have been further evidence about the Bank’s knowledge or belief regarding the actions of HC, but as this Court noted in the previous round in the litigation at [19] “that is beside the point if there was not in fact a brokerage arrangement”.

[47]     We accept Mr Dugdale’s submissions that a party in litigation is entitled to make its own decisions about how much evidence it needs in support of a critical aspect of the case.  However that is not relevant to this case.  This non-disclosed material went to an issue which was not the primary problem for Mr and Mrs Burns when the settlement was negotiated. 

[48]     The letters were in fact about arrangements with people other than Mr and Mrs Burns, and the fact that the Bank might have known that Walkers Nurseries had brokerage arrangements with HC throws no light on the nature of Mr and Mrs Burns’ transactions - an issue which had been highlighted by the District Court Judge in questions he asked Mr Burns during the hearing.

[49]     As Mr Chan submitted, there has been a degree of confusion between the label applied on HC’s bank account and the actual contractual relationship which existed between HC and Mr and Mrs Burns. 

[50]     The other document left in contention is the HC order form which contains a number which the appellant said would unlock HC’s computer entries and show the stock supplied by HC to their clients was sourced from a number of suppliers including Mr and Mrs Burns.  This is not a matter which was in contention either.  It was common ground that some HC stock supplied by Mr and Mrs Burns was alongside stock from others which may have been on account.  Both categories were being sold to third parties.   The existence of the two categories is unremarkable.

[51]     The broader context is important.  The first port of call for Mr and Mrs Burns when they were not paid for their trees was their claim in the High Court against HC on the basis of simple sale and purchase.  The documentation which Mr and Mrs Burns sent with the supply required deposits to be paid.  It included a GST component.  Interest at 3% per month on accounts outstanding after the 20^th of the following month was part of the financial arrangements.  All of this is entirely consistent with purchaser/vendor relationship, but not with an agency relationship.

[52]     Mr and Mrs Burns were on notice at the time that they made their decision to settle their litigation, that proof of the first leg of their claim was seen by the District Court Judge as problematic.  Had there been undiscovered material which supported or bolstered their assertion of being an agency relationship which had not been disclosed, then like Wild J we may well have been persuaded to permit the appellants to cancel their settlement.  It could have been said, in those circumstances, that it had been induced in a material way by the representation implicit in the assertion that discovery was complete.

[53]     Factually that is not the case.  Although we differ from Wild J and substantially accept the legal analysis advanced by Mr Dugdale for the appellants, on the facts of this case the appeal cannot succeed.

Result

[54]     The appeal is dismissed.  The respondent is entitled to costs of $6,000 together with usual disbursements.

Solicitors:
Stace Hammond, Hamilton, for Appellants
Minter Ellison Rudd Watts, Wellington, for Respondent