Cygnet Farms Limited v ANZ Bank New Zealand Limited

[2016] NZHC 1373

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2013-485-10160 [2016] NZHC 1373

BETWEEN

CYGNET FARMS LIMITED

Plaintiff

AND

ANZ BANK NEW ZEALAND LIMITED Defendant

Hearing:	22 June 2016 (heard at Auckland)
Appearances:	M D Branch for Plaintiff C Hunter and M H A Ho for Defendant
Judgment:	23 June 2016

JUDGMENT OF FOGARTY J

This judgment was delivered by Justice Fogarty on

23 June 2016 at 12.00 p.m., pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Solicitors:

Harkness Henry, Hamilton

Gilbert Walker, Auckland

CYGNET FARMS LIMITED v ANZ BANK NEW ZEALAND LIMITED [2016] NZHC 1373 [23 June 2016]

Introduction

[1]      This judgment concerns the plaintiff’s application for leave to file a second

amended statement of claim and for particular discovery.

[2]      The plaintiff is a company owned by a husband and wife which operates dairy farms.  The defendant, ANZ Bank New Zealand Ltd (ANZ) sold interest-rate SWAP products (SWAPs)to the plaintiff, dealing with Mr and Mrs Swan as the company’s directors.

[3]      The plaintiff has brought proceedings in the High Court to recover losses as a result of entering into two SWAP contracts, totalling $1,243,038.  It has a number of causes of action.  The first is negligence.  The claim contends that the bank owed duties to the plaintiff to exercise care, diligence and skill that a reasonable financial advisor promoting SWAP transactions would exercise.  The term “financial advisor” is deliberately selected to distinguish between a person being a seller of financial products.

[4]      It is part of the case of the plaintiff that the distinction is recognised within ANZ.   The argument is that where the bank is in a position of being a financial advisor to a client, usually of longstanding, it has positive duties to explain to the customer  the  negative  aspects  of  a  SWAP transaction  so  as  to  ensure  that  the customer makes a fully informed decision before entering into such a transaction.

[5]      The second cause of action is a variation on the first one, of negligent mis- statement.  The third cause of action is misrepresentation.  The fourth cause of action is in contract alleging that the relationship between the bank and the customer was such that, if there were any change in circumstances which could affect SWAPs, the bank would be obliged to notify and to advise the client on what to do.  The fifth cause of action is brought under the Fair Trading Act and alleges misrepresentations were made, capable of misleading and deceiving the directors.

[6]      These proceedings have been set down for a seven day substantive fixture commencing on 22 August next.  The close of pleadings date was 7 October last, and

an application for leave to file an amended statement of claim and for particular discovery was filed on 27 May 2016.

Application for leave to file amended statement of claim

[7]      No particular issue was taken with the fact that this application was filed after the close of pleadings date. To the extent that leave is required, it is granted.

[8]      The main purpose of the proposed second amended statement of claim is to finalise quantification of the plaintiff’s losses.   There was no argument against a further statement of claim to that end.  Leave is granted.

[9]      The plaintiff also wishes to file a further reply to the existing ANZ defence. There was no argument in opposition to that.  Leave is granted.

Discovery orders

[10]     The hearing focused on the principal purpose of the application which is to obtain orders for particular discovery against ANZ.  ANZ opposes orders for further particular discovery.

[11]     Discovery  is  proceeding  by  way  of  “standard  discovery”  rather  than  by tailored discovery.  Rule 8.7 of the High Court Rules defines standard discovery as follows:

8.7      Standard discovery

Standard discovery requires each party to disclose the documents that are or have been in that party's control and that are—

(a)      documents on which the party relies; or

(b)      documents that adversely affect that party's own case; or (c)          documents that adversely affect another party's case; or (d) documents that support another party's case.

[12]     Counsel for the plaintiff complains that the ANZ has been following a policy of discovering only those documents which were generated in the course of the bank’s dealings with the plaintiff.  As a result it has not disclosed bank documents

relevant to the identification of customers as suitable purchasers of SWAPs and other general considerations going to the marketing of SWAP transactions.  Nor, has the bank discovered complaints made by other customers of SWAP transactions.

[13]     The core allegation is in paragraph 27 of the amended statement of claim:

27.The Bank, via its authorised agents Messrs Fleming and Esquilant, advocated the benefits of SWAPs and specifically represented:

(a)       The SWAP product was different from products offered by other banks as the level of service and help that came with the SWAP product was significant;

(b)       If there were any changes in the circumstances which could affect the SWAPs, there would be notification and advice on what to do;

(c)       In response to a query by Craig and Lisa Swan about the downsides of the SWAP product, that there were no real downsides as, looking back, historically interest rates had always risen;

(d)       That the SWAP product was the right product for Cygnet Farms as the company would be able to manage the rate being paid;

(e)       The SWAP product would keep the rate the same, like a fixed loan but with upside and flexibility;

(f)       That the SWAPs should be entered into before the settlement date for the Finnerty Road Property so as to take advantage of the good interest rates available;

(“the Representations”).

[14]     In opposition the defendant’s counsel submitted that:

ANZ  takes  the  view  that  documents  relating  to  other  customers  or complaints that other customers may have had are irrelevant to the question of what was said at the meeting.

[15]     Part of the context of this dispute is that Harkness Henry as solicitors were the solicitors for the plaintiffs in three other SWAP transactions.  There are a total of four SWAP claims pending.   The plaintiff’s solicitors wished to utilise some of the discovery in the other three proceedings which fall outside the policy position taken by ANZ in this case set out in the preceding paragraph.

Resolving the issues

[16]     In the course of the hearing I rejected the proposition that discovery by ANZ was confined to ANZ’s dealings with the plaintiff and that documents relating to complaints made by other customers are irrelevant.  ANZ denies the representations pleaded in paragraph 27 set out above.   If other ANZ clients have made similar complaints alleging similar representations that is material capable of being corroborative and supporting the plaintiff ’s witnesses evidence on a similar fact

basis.1   Second, regard has to be had to the significant differences in complexity and

risk between taking out a mortgage at a fixed or flexible rate of interest and entering into a SWAP transaction.   It is inherently likely that there will be generic bank documents defining SWAP transactions and identifying the characteristics that make them  attractive  and  marketable  to  certain  customers  out  of  the  whole  set  of customers of the bank.  There may also be background papers and/or briefing papers guiding representatives of the bank in the sale of these SWAP products.  The content of these more general documents may be relevant to whether or not there was any negligence on the part of the bank in selling the products.

[17]   I was told from the Bar that there is no suggestion of any deliberate misrepresentation of the qualities of the SWAP.   Rather, as the quoted pleadings show, the focus is whether or not the bank had a duty of care to properly explain the risks of the transaction and the costs of exiting the SWAP consistent with a bank’s duty to the client as an investment advisor.

[18]     Counsel, having appreciated the point of view of the Court as outlined above, then focused on particular classes of documents that should or should not be further discovered accepting that discovery could not be confined simply to the particular

dealings between the bank and the plaintiff.

1      Cook v Evatt [1992] 1 NZLR 673 (HC).

Particular issues

Bonus payments to ANZ staff

[19]     The plaintiff’s counsel consider these documents relating to bonus payments are relevant if ANZ staff were incentivised to sell SWAP transactions.  The bank, for its part, is concerned to protect the confidentiality of its relationships between itself and its staff.   It has been agreed that the relevant financial rewards to bank staff selling SWAPs be provided on terms confidential to counsel, and to the experts and to the directors of the plaintiff.

[20]     In the case of the directors of the plaintiff, they will be obliged to promise not to reveal the identity of the bank staff revealed by the documentation, unless, of course, those names appear in the course of the trial and there has been no suppression order by the trial Judge.

[21]     This agreement between the parties came after I indicated that the trial Judge has to balance the interests of employees in having their personal terms of remuneration kept confidential and the interests of parties to civil litigation knowing of all the evidence before the Court and the evidence capable of being presented to the Court.  The directors of the plaintiff are in a special position in that latter regard and are entitled to know all the facts.  That can be done consistently with them being restricted in their dissemination of all the facts.

Personal disclosure statement – Security Markets Act

[22]     It  was  agreed  that  the  relevant ANZ  bank  personal  disclosure  statement complying with Securities Market Act and prepared for rural banking should be discovered, notwithstanding that, for normal purposes, it is confidential to staff of the ANZ  bank.   Again,  this  discovery can  be  made  consistently with  terms  of confidentiality accepted by the plaintiff ’s directors and the plaintiff’s experts.

General ANZ briefing/marketing/training documents

[23]     If there are documents in this category, which are material to the marketing of the transactions purchased by the plaintiffs, these are to be discovered.

Complaints

[24]     As one would expect, the ANZ bank has a system of recording complaints by customers.  These have come to the attention of the plaintiffs as part of the discovery and there has been an extract from a much larger file on client complaints which contains the bank’s record of the complaints by the plaintiff in these proceedings. These include notes of the progress of the complaint such as, for example, the date of the filing of the statement of claim in the High Court.  Thereafter the document is completely redacted so no other complaints can be seen.

[25]     Referring back to the similar fact law [see [16] above], if there are complaints by bank customers relating to SWAP transactions relying upon one or more of the representations being pleaded in this case, such complaints will be relevant.

Other bank publications

[26]     The subject SWAP transactions were negotiated by the bank and the plaintiff starting on or about 6 December 2007 when the bank was proposing to finance Cygnet Farms Ltd in the sum of around $6 million.  In December of that year it is pleaded that two bank employees (a local manager and an expert) advocated the benefit of SWAPs.  There was an oral agreement to take them up in December 2007 and formal entry into the SWAPs on 25 January 2008.

[27]     In July 2008 the ANZ bank’s head of Interest Rate Risk Management-Rural prepared a review of the financial markets as of July 2008.   This was about one month before the collapse of Leeman brothers and the start of the GFC.  It is agreed that this document is relevant.  Similarly it is agreed that an ANZ Financial Group publication entitled Franchise SWAPS Business, subtitled Markets, October 2009, is also relevant and discoverable.

Records of telephone discussions

[28]     It is also agreed that if there was any recording of any telephone discussion between the bank and the plaintiff’s directors, that is discoverable.

Archived email files

[29]     The affidavit of documents of the defendant of 19 July 2004 contained a qualification that it did not cover a search of the archived email files of the plaintiff’s relationship manager, which is being currently undertaken.  It was agreed that this matter would be followed up by the ANZ bank.

Ongoing issues of discovery

[30]     Counsel before the Court recognised that there may be further issues  of discovery between now and the trial.  Neither party wished to jeopardise the fixture date.  Leave is granted to either party to apply to the Court for a case management conference to be held at short notice to deal with any ongoing issues of discovery, whether discussed in this judgment or identified subsequently.  Where possible those case management conferences will be assigned to myself, as I am familiar with the discovery issues.  I will endeavour to be available outside the normal sitting hours, normally at 9.00 am in the morning, to deal with any unresolved ongoing discovery issues.

Costs

[31]     Costs are reserved.