Fenwick v Naera
[2015] NZSC 68
•20 May 2015
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| IN THE SUPREME COURT OF NEW ZEALAND |
| SC 95/2013 [2015] NZSC 68 |
| BETWEEN | PIRIHIRA FENWICK, WIREMU KINGI AND HIWINUI HEKE |
| AND | JILLIAN NAERA, KEREAMA PENE, ANAHA MOREHU, WARWICK MOREHU AND ERIC HODGE TAI ERU |
| Hearing: | 18 November 2014 |
Court: | McGrath, William Young, Glazebrook, O'Regan and Blanchard JJ |
Counsel: | D G Hurd and J F Anderson for Appellants |
Judgment: | 20 May 2015 |
JUDGMENT OF THE COURT
AThe appeal is allowed in part and the matter remitted to the Maori Land Court to decide on the conflicts and on the consequences of a breach of s 227A of the Te Ture Whenua Maori Act 1993 in light of this judgment.
BThe reasonable costs and disbursements of the first respondents are to be paid by the Whakapoungakau 24 Ahu Whenua Trust (the Tikitere Trust).
CThe question of costs in the Maori Land Court, the Maori Appellate Court and the Court of Appeal should (if an application is made) be considered by those Courts in light of this judgment.
____________________________________________________________________
REASONS
| McGrath, Glazebrook, O’Regan and Blanchard JJ | [1] |
| William Young J | [145] |
McGRATH, GLAZEBROOK, O’REGAN AND BLANCHARD JJ
(Given by Glazebrook J)
Table of Contents
| Para No | |
| Introduction | [1] |
| Relevant statutory and trust provisions | [4] |
| More detailed background | [7] |
| Tikitere Trust | [7] |
| The trustees of the Tikitere Trust | [11] |
| Tikitere Geothermal | [13] |
| The other trust parties | [14] |
| The land and the geothermal resource | [15] |
| Joint venture agreement | [18] |
| Other agreements | [21] |
| Meetings | [25] |
| Procedural history | [26] |
| Maori Land Court | [26] |
| Maori Appellate Court | [31] |
| Court of Appeal | [32] |
| Leave application to this Court | [40] |
| The parties’ submissions | [43] |
| The Trustees’ submissions | [43] |
| The Beneficiaries’ submissions | [47] |
| Issues | [50] |
| What is the scope of ss 227 and 227A of the Act? | [52] |
| Alleged conflicts in this case | [56] |
| Pirihira Fenwick | [57] |
| Tai Eru | [58] |
| Winnie Emery | [59] |
| Application | [60] |
| Does the self-dealing rule apply? | [66] |
| Trustees’ duties | [69] |
| Is the self-dealing rule restricted to purchases? | [75] |
| Limited beneficial interest exception | [82] |
| Placed in position of conflict | [95] |
| Conclusion | [101] |
| Consequences of breach of s 227A | [102] |
| Submissions | [102] |
| Preliminary comments | [103] |
| Structure of the Act | [105] |
| Should rescission be automatic? | [113] |
| Further comments | [128] |
| Summary | [137] |
| Result | [139] |
| Costs | [140] |
Introduction
[1] This appeal concerns alleged conflicts of interest in relation to a joint venture. The joint venture agreement (and related royalty and option agreements)[1] were entered into by the Whakapoungakau 24 Ahu Whenua Trust, commonly referred to as the Tikitere Trust, with two other Maori trusts (the Paehinahina Mourea Trust[2] and the Manupirua Ahu Whenua Trust) and with a company owned by the Tikitere Trust, Tikitere Geothermal Power Co Ltd (Tikitere Geothermal).
[1]In this judgment we refer to the joint venture agreement and the related royalty and share option agreements as the joint venture arrangements.
[2]This is the shortened name of the trust used in the joint venture agreements, with its full name being the Paehinahina Mourea 1 and Tikitere A (Aggregated) Ahu Whenua Trust. For simplicity, and like the parties, we will refer to the trust as the “Paehinahina Mourea Trust”.
[2] The Court of Appeal held that two of the five trustees of the Tikitere Trust should not have participated in discussions and voting on the above joint venture arrangements because of interests in, and links with, the other trust parties to the joint venture.[3] The Court held that the remedy for such a breach is rescission (the setting aside of the transaction).[4] However, as that remedy is not available where the interests of innocent third parties are affected, the Court remitted the matter to the Maori Land Court for further evidence and consideration on that issue.[5]
[3]See Naera v Fenwick [2013] NZCA 353 (Arnold, Stevens and White JJ) [Naera (CA)] at [93]. The allegation that a third trustee was disqualified from voting was not upheld.
[4]At [94]–[103].
[5]At [104].
[3] On 19 May 2014, this Court granted leave to appeal to the Trustees (the appellants) against the Court of Appeal’s findings on the conflict of interest issue.[6] The Court refused leave to appeal by the Beneficiaries (the first respondents) on other issues.[7]
Relevant statutory and trust provisions
[6]Naera v Fenwick [2014] NZSC 58 [Naera (SC Leave)]. In this judgment on the substantive appeal we call the appellants “the Trustees” and the first respondents, “the Beneficiaries”.
[7]See below at [42] for a fuller description of the Court’s leave decision.
The Tikitere Trust was set up as an ahu whenua trust under, and governed by, the Te Ture Whenua Maori Act 1993 (“the Act”). Section 227A of the Act deals with conflicts of interest:
227A Interested trustees
(1)A person is not disqualified from being elected or from holding office as a trustee because of that person’s employment as a servant or officer of the trust, or interest or concern in any contract made by the trust.
(2)A trustee must not vote or participate in the discussion on any matter before the trust that directly or indirectly affects that person’s remuneration or the terms of that person’s employment as a servant or officer of the trust, or that directly or indirectly affects any contract in which that person may be interested or concerned other than as a trustee of another trust.
The wording of s 227A is incorporated into the Tikitere Trust Order under cl 4:
4Personal Interest of Trustees
Notwithstanding any general rule of law to the contrary no person shall be disqualified from being appointed or from holding office as a Trustee or as a representative of the Trust by reason of his employment as a servant or officer of the Trust or by his being interested or concerned in any contract made by the Trustees PROVIDED THAT he shall not vote or take part in the discussion on any matter that directly or indirectly affects his remuneration or the terms of his employment as a servant or officer of the Trust or that directly or indirectly affects any contract in which he may be interested or concerned PROVIDED FURTHER THAT if a Trustee is employed by the Trust in any capacity whatsoever he shall not be paid any fees, costs, remunerations or other emolument whatsoever until same has been approved by the Court.
Section 227 of the Act provides that trustees may act by majority:
227 Trustees may act by majority
(1)Subject to any express provision in the trust order and except as provided in subsections (2) and (3), in any case where there are 3 or more responsible trustees of a trust constituted under this Part, a majority of the trustees shall have sufficient authority to exercise any powers conferred on the trustees.
…
(6)Where any trustee dissents in writing from the majority decision of the trustees before the decision is implemented, that trustee shall be absolved from any personal liability arising out of the implementation of that decision.
More detailed background
Tikitere Trust
According to the Maori Land Court’s records,[8] Whakapoungakau 24 (held by the Tikitere Trust) is a block of Maori freehold land 32.0923 hectares in area. It was created by partition order on 15 December 2003. As at 27 August 2009, there were 1,222 owners in the land holding 83.63567 shares.[9]
[8]See Naera v Fenwick – Whakapoungakau 24 (2010) 15 Waiaraki MB 279 (15 WAR 279) [Naera (MLC)] at [16].
[9]The Maori Land Online register, as of 12 May 2015, records that there are currently 1,377 beneficial owners.
The objects of the trust are contained in cl 2 of the trust order, which states:
2 Objects
Except as hereinafter may be limited the objects of the Trust shall be to provide for the use management and alienation of the land to best advantage of the beneficial owners or the better habitation or use by beneficial owners, to ensure the retention of the land for the present Māori beneficial owners and their successors, to make provision for any special needs of the owners as a family group or groups, and to represent the beneficial owners on all matters relating to the land and to the use and enjoyment of the facilities associated therewith.
Clause 3(a) of the trust order allows the trustees, in furtherance of the objects of the trust, to do all or any of the things they would be entitled to do as absolute owners of the land, apart from alienating the whole or any part of the fee simple by gift or sale.[10] Clause 3(b) provides more specific powers including the power to develop and improve the trust lands and to effect improvements.[11]
[10]There are exceptions for land exchanges and Public Works Act 1981 acquisitions.
[11]Clause 3(b)(iii).
Amendments to the trust order were allowed by the Maori Land Court on 3 September 2004 and 4 December 2006.[12] The following sub-clauses were added, respectively:
(a)Clause 3(b)(xvi) grants the power to “develop the area to support the Geothermal Tourism Park concept”.
(b)Clause 3(b)(xviii) grants the power to “join with others and to undertake and form companies and enter into joint ventures with other Maori Authorities sited over the same field to investigate the possibility of establishing a Geothermal Power Station and to take advantage of the findings”.
The trustees of the Tikitere Trust
[12]See Naera (MLC), above n 8, at [25]–[28] and [65]–[75].
The Trustees at the relevant time were Hiwinui Heke, Pirihira Fenwick, Tai Eru (or Morehu), Winnie Emery and Wiremu Kingi. They voted unanimously in favour of the joint venture arrangements.
The alleged conflicts at the time the trustees entered into the transaction were as follows:
(a)Mrs Fenwick owned 1.57991 shares in the Tikitere Trust out of a total of 83.63567 shares (approximately 1.89 per cent). She was a trustee of the Paehinahina Mourea Trust and her family owned at least 20 per cent of the shares in that trust. She personally owned 93,187.322 out of 1,977,351 shares in the Paehinahina Mourea Trust (approximately 4.71 per cent).
(b)A whanau trust in which Mr Eru was both a trustee and beneficiary held 0.0964 shares in the Tikitere Trust (approximately 0.12 per cent) and 894.9 shares in the Paehinahina Mourea Trust (approximately 0.045 per cent).[13] Mr Eru was also a trustee of the Manupirua Ahu Whenua Trust.[14]
(c)Mrs Emery’s husband was a trustee of the Paehinahina Mourea Trust.[15]
Tikitere Geothermal
[13]We are not aware of the extent of his beneficial interest in the whanau trust or the extent of the interests of his close relatives in that trust.
[14]It is unclear whether Mr Eru was also a beneficiary of the Tikitere Trust and the Paehinahina Mourea Trust in his personal capacity. For example, see Naera (MLC), above n 8, at [155] where Judge Harvey appears to suggest that he was. However, there was no mention of these interests by the Court of Appeal.
[15]The Maori Land Court judgment does not indicate that she or her husband were beneficiaries of any of the trusts involved. We thus proceed on the assumption that they were not.
Tikitere Geothermal was incorporated on 7 July 2004 and the shares were wholly held on behalf of the Tikitere Trust. At the time of the Maori Land Court decision, the directors were Messrs Gray and Kingi. Mr Eru was a director from 19 March 2009 but had resigned prior to the Maori Land Court decision. The shareholders of the company, as at the date of the Maori Land Court hearing, were Messrs Eru, Heke and Kingi, along with Mrs Fenwick, in their capacity as trustees of the Tikitere Trust.
The other trust parties
The Paehinahina Mourea Trust owns and manages the Paehinahina Mourea 1 and Tikitere A (Aggregated) block (“the Paehinahina Mourea block”) which is 869.828 hectares and has some 4997 beneficial owners.[16] The Manupirua Ahu Whenua Trust owns and manages the Manupirua block which is only 0.3237 hectares and has some 2559 beneficial owners.[17]
The land and the geothermal resource
[16]As at 12 May 2015.
[17]As at 12 May 2015.
The Manupirua block, the Paehinahina Mourea block and the Whakapoungakau 24 block are situated north of State Highway 30, just northeast of Rotorua above the Tikitere Geothermal Resource, which is expressed on the earth’s surface through features such as steaming ground, boiling springs and vigorous steam and gas discharges.[18]
[18]Stephen Michener, an investment consultant, in an affidavit dated 2 February 2010 stated that “[t]he boundary of the Tikitere geothermal field is not known with certainty. Nor is there certainty on the distribution of the geothermal fluid or its heat and accessibility”.
The Whakapoungakau 24 block abuts State Highway 30 and contains the “Hells Gate” geothermal resource and attraction. The Paehinahina Mourea block partially envelops the Whakapoungakau 24 block and occupies a large part of the land between State Highway 30 and Lake Rotoiti. On the south shore of Lake Rotoiti, and also partially surrounded by the Paehinahina Mourea block, is the Manupirua block. Although small, this block of land contains the Manupirua hot springs – a geothermal resource and attraction only accessible by boat.
Mr Gray, Chief Executive of the Tikitere Trust and Project Manager, stated in his affidavit of 13 November 2009, that “[t]he Tikitere resource is extensive. That part of the resource which is beneath the lands of the [Tikitere Trust] and its adjoining trusts is predominantly under land owned by the [Paehinahina Mourea Trust]”. In his affidavit, Mr Gray also said that “[t]he proposed power station will be built not on [Tikitere Trust’s] land, but on [Paehinahina Mourea Trust’s] land.”[19]
Joint venture agreement
[19]The beneficiaries of the Tikitere Trust, at every stage, have argued that the Court needs to consider the conflicts of Mr Gray, and another advisor to the Tikitere Trust, Bruce Carswell (an energy specialist). However, given that leave was only granted with regards to the trustees’ alleged conflicts of interests, this issue is outside of the scope of this appeal.
The Tikitere Project Agreement was entered into on 5 November 2008 for the development of the Tikitere Geothermal Resource. The term of the agreement is 52 years. There are four parties to the Tikitere Project Agreement: the Tikitere Trust, the Paehinahina Mourea Trust, the Manupirua Ahu Whenua Trust and Tikitere Geothermal.
Under the agreement, Tikitere Geothermal is granted the exclusive right to investigate and, if feasible, develop and exploit by means of a power station the geothermal resource on or under the land of the trusts.
The trusts agreed to grant easements, licenses, leases and all other rights of access required to carry out the project. Under cl 12.2, in consideration for this exclusive right, Tikitere Geothermal is obliged to pay rent to the three trusts in accordance with Schedule 4. This Schedule provides that, for each hectare of “affected land”,[20] the trust whose land is affected is to be paid a set amount per hectare per annum.
Other agreements
[20]“Affected land” is defined in sch 4 of the agreement as “every part of the Land subject to any Improvements including (but not limited to) all Land utilised for wellheads, pipeline corridors ... any geothermal power station and its associated Facilities, transmissions line corridors ... and road or other access ways to Facilities of any kind”.
In addition to the joint venture agreement, there were also option and royalty agreements with the two other trusts.[21]
[21]There was also a third option and royalty agreement between Tikitere Geothermal and Green Energy Ltd. Green Energy Ltd was given a management role in the project, but as Mr Hurd, counsel for the Trustees, confirmed at the hearing, the management arrangements with Green Energy Ltd have been terminated and the option has been surrendered: see Naera v Fenwick [2014] NZSC Trans 24 [Naera (SC Transcript)] at 12.
Under the “Option and Royalty Agreement” between the Paehinahina Mourea Trust, Tikitere Geothermal and the Tikitere Trust, Tikitere Geothermal agreed to grant to the Paehinahina Mourea Trust an option to subscribe for ordinary shares in Tikitere Geothermal for nominal consideration[22] or, if the share option was not exercised, to receive substantial upfront fees and royalty payments.
[22]We understand that the nominal consideration was one dollar for all the shares to be purchased, payable on exercise of the option. This was confirmed at the hearing: see Naera (SC Transcript), above n 21, at 13 and 36.
The second relevant agreement is another “Option and Royalty Agreement” under which the Manupirua Ahu Whenua Trust had the option of subscribing for shares in Tikitere Geothermal or obtaining royalties. The level of royalties was lower than under the Paehinahina Mourea Trust’s agreement.[23]
[23]Counsel for the Trustees, Mr Hurd, at the hearing clarified that, under the Manupirua Ahu Whenua Trust’s option and royalty agreement, there were to be no upfront fees: see Naera (SC Transcript), above n 21, at 37.
The number of shares available under the share options varied depending on whether one or both trusts exercised the share option. At the hearing of the appeal, Mr Hurd, counsel for the Trustees, confirmed that the Manupirua Ahu Whenua Trust opted for the royalty option and thus does not have a shareholding in Tikitere Geothermal.[24] The Paehinahina Mourea Trust opted to exercise its share option and its trustees now have a 65 per cent shareholding in Tikitere Geothermal,[25] with the trustees for the Tikitere Trust holding the other 35 per cent.
Meetings
[24]At 11 and 37.
[25]At 42. This percentage seems higher than provided for under the original terms of the relevant Option and Royalty Agreement. We understand there have been some amendments to the agreements since they were entered into.
After the joint venture arrangements were entered into, the Maori Land Court directed a meeting of owners (beneficiaries). This was convened on 6 December 2009.[26] It was well attended and a quorum was achieved. At the meeting a presentation was made by the trustees of the Tikitere Trust and their advisers regarding the Tikitere Project Agreement. Following discussion, a resolution was put to the owners present for consideration – “that the meeting of shareholders [beneficiaries] approves the continuation of the Tikitere Geothermal Group”.[27] The resolution was lost 39 votes to 89.
Procedural history
Maori Land Court
[26]There were other meetings and these are detailed in the Maori Land Court’s judgment: see Naera (MLC), above n 8, at [21]–[23].
[27]As was noted by Judge Harvey in the Maori Land Court, while this resolution was not worded as precisely as it could have been, the intent of the resolution was clear enough: see Naera (MLC), above n 8, at [24].
Seven of the beneficiaries of the Tikitere Trust objected to the actions of the trustees in entering into the joint venture arrangements. They brought proceedings in the Maori Land Court,[28] objecting to the trustees’ actions on a number of grounds, including that the trustees had no power to enter into the joint venture arrangements[29] and that three of the trustees (Mrs Fenwick, Mr Eru[30] and Mrs Emery[31]) had failed to protect the interests of the Tikitere Trust and the beneficial owners of that trust by allowing their personal interests to conflict with their duties. All three allegedly conflicted trustees had participated in the decision making process and voted in favour of the joint venture arrangements.
[28]In the Maori Land Court, the applicant beneficiaries were Jillian Naera, Eric Hodge, Warwick Morehu, Anaha Morehu, Bunny Ormsby, Kurangaituku Farrell and Kereama Pene: see Naera (MLC), above n 8.
[29]At [4].
[30]Mr Eru formally raised concerns about the joint venture arrangements in June 2009. He did not support the position of the trustees before the Maori Land Court. We understand that he has maintained that position throughout the proceedings but he filed no submissions in this Court.
[31]Mrs Emery died on 21 June 2010 (before the Maori Land Court judgment, discussed below, was released).
In the Maori Land Court, the seven beneficiaries sought the removal of the then current trustees and the calling of a meeting of beneficial owners to elect replacements. They also sought a review of the trust and argued that an interim injunction, granted on 31 August 2009,[32] restraining the trustees from making decisions or taking any steps in relation to the geothermal power project and other matters should remain in force until the new trustees had a proper opportunity to take advice and consider their position as to the joint venture.
[32]Naera v Fenwick – Whakapoungakau 24 (2009) 344 Rotorua MB 115.
The beneficiaries were unsuccessful in the Maori Land Court. The Court held that the Trustees had the power to enter into the agreement under the terms of the trust order.[33]
[33]Naera (MLC), above n 8, at [111].
On the alleged conflicts of interest, the Court considered the positions of three of the five trustees of the Tikitere Trust:[34] Mrs Fenwick, Mr Eru and Mrs Emery:
(a)As to Mrs Fenwick, Judge Harvey said that because decisions can be made by majority under s 227 of the Act, Mrs Fenwick should have absented herself from the meetings and decisions.[35] However, he went on to hold that “it is also evident that her vote either way was immaterial to the actual decision, given the unanimous support of her colleagues”.[36] Judge Harvey also said that he did not accept the suggestion that Mrs Fenwick’s conduct was driven by personal financial considerations.[37] While there might be an appearance of conflict, Judge Harvey was not persuaded that such an appearance rendered the decision to enter into the agreement “nugatory”.[38]
(b)Judge Harvey said that, in light of Mr Eru’s connections to more than one trust, “conflicts will be presumed”. But he added that what mattered more was how conflicts are managed and whether the trustee participated in a decision that directly concerns his or her interest.[39]
(c)As to the late Mrs Emery, Judge Harvey said that, while the fact that her husband was a trustee of another party to the joint venture (the Paehinahina Mourea Trust) gave rise to the presumption of a potential conflict or at least the appearance of one, there was no real risk of an actual conflict arising.[40] From a practical perspective, given the power to decide by majority under s 227 of the Act, neither Mrs Emery nor her husband’s votes were determinative as to their respective trust’s decisions.[41]
[34]See at [16] where the five trustees of the Tikitere Trust are identified.
[35]At [146] and [148].
[36]At [148].
[37]At [149] and [151].
[38]See at [145]–[154].
[39]At [163].
[40]At [142].
[41]At [143].
The Court said that, while the trustees “did not adhere strictly to the trust order and general trust law principles from time to time”, those breaches were insufficient to warrant their removal.[42]
Maori Appellate Court
[42]At [230].
Four of the beneficiaries[43] unsuccessfully appealed to the Maori Appellate Court.[44] With regard to the conflict of interest issue, the Maori Appellate Court agreed with Judge Harvey and said that, “even without the involvement of the ‘conflicted’ trustees, the same decision would have been reached”.[45]
Court of Appeal
[43]Jillian Naera, Anaha Morehu, Warrick Morehu and Eric Hodge.
[44]Naera v Fenwick – Whakapoungakau 24 (2011) Maori Appellate Court MB 316 (2011 APPEAL 316) [Naera (MAC)].
[45]At [71].
Five of the beneficiaries[46] appealed against the Maori Appellate Court decision to the Court of Appeal. The issues dealt with by the Court of Appeal were whether cl 3 of the trust order empowered the trustees to enter into the agreement without reference to the beneficial owners or the Court, whether the variations of the trust order complied with s 244 of the Act,[47] whether the trustees were required to consult with the beneficial owners prior to entering into the agreement, whether the trustees’ conflicts of interest invalidated the agreement and finally whether the trustees should have been removed.[48]
[46]Jillian Naera, Kereama Pene, Anaha Morehu, Warrick Morehu and Eric Hodge.
[47]The variations are discussed above at [10].
[48]Naera (CA), above n 3, at [5].
As to the interpretive issues, the Court said that cl 3 permitted the trustees to enter into the agreement.[49] With regard to the variations of the trust order, the Court of Appeal held that the beneficiaries were outside of the time frame in which a challenge to a variation order could be brought, and, in any event, the variations were not needed by the trustees in order to enter into the joint venture arrangements.[50] As to the consultation issue, the Court said that, while it would have been best to keep the beneficial owners informed, there was nothing in the trust order, the Act or the common law that required consultation with beneficial owners.[51] The Court upheld Judge Harvey’s refusal to remove the trustees as it was not satisfied that the Judge’s conclusion was plainly wrong.[52]
[49]Clause 3 is discussed above at [9] and [10].
[50]Naera (CA), above n 3, at [47].
[51]At [52].
[52]See at [114]–[118].
On the conflicts of interest, the Court of Appeal held that trustees of Maori land are under the same obligations as other trustees, subject to any modification in the trust order or under the Act.[53] At common law, trustees have a clear obligation of single-minded loyalty.[54] It is sufficient to show that the trustee has placed him or herself in a position of potential conflict to show a breach of this duty.[55] This is because fiduciary doctrine is prophylactic in nature. Without the informed consent of all beneficiaries or the Court, any resulting transaction will be voidable regardless of the fairness or otherwise of that transaction.[56] The honesty or otherwise of the fiduciary is irrelevant.[57]
[53]At [85] and [86].
[54]At [87].
[55]At [87].
[56]At [90].
[57]At [90].
The Court considered that, while s 227A of the Act relaxes the application of the common law position on conflicts of interest, it is clear that conflicted individuals are not permitted to participate in decision making that has a direct impact on their interests.[58] The Court said that the Act is silent on the consequences if a trustee breaches this requirement and nevertheless participates in decision making. The Court considered that in such circumstances the common law position will apply and the trustee’s involvement will constitute a breach of trust.[59]
[58]At [97]. As the Court of Appeal said at n 43, “The only exception to this would be where the individual’s conflict arose solely from his or her position as a trustee of another trust”.
[59]At [97].
The Court considered this conclusion strengthened by the fact that s 227A(2) (and cl 4 of the trust order) prohibits an interested trustee from voting and from “participating in the discussion” on a transaction in which he or she is interested. Parliament recognised that by participating in the discussion, even if not voting, an interested trustee could (improperly) influence the decision of the non-interested trustees.[60] Thus, by prohibiting participation outright, the Act and trust order emphasise that a fact-based inquiry (such as was undertaken by the Maori Land Court) into whether or not the non-interested trustees were improperly influenced is not appropriate.[61]
[60]At [98].
[61]At [98].
The Court of Appeal also said that s 227 alters the common law position by providing that trustees may make decisions by majority. This provision is a necessary corollary of s 227A, as it allows trust business to continue when one trustee has absented him or herself from decision making. The Court held, however, that s 227 has no effect on the common law requirement that every trustee who participates in decision making must be free from conflict and bring to bear a mind unclouded by any contrary interest. Hence (again contrary to the position taken in the Maori Land Court), if a conflicted trustee participates in decision making, the decision will be voidable regardless of whether there is a majority of non-conflicted trustees. This is consistent with the prophylactic nature of the no-conflict rule.[62]
[62]At [99].
Accordingly, the Court considered that it was not open to Judge Harvey to engage in an inquiry into the overall circumstances of the transaction.[63] The Court recognised that applying these principles could cause administrative inconvenience to trustees because many trustees of Maori trusts are likely to be conflicted.[64] However, the Court was confident that the Act provides the appropriate tools for trustees to manage such conflicts. For example, trustees may remove themselves from decision making under s 227A or apply for a variation to the trust deed under s 244. Alternatively, an application for directions to the Maori Land Court might be appropriate. If those mechanisms are thought to be insufficient, the Court said that it may be necessary to consider legislative change.[65]
[63]At [101].
[64]At [103].
[65]At [103]. The Court of Appeal noted that the Act is currently under review: see below n 141 as to the proposed legislative changes.
Before the Maori Land Court, the beneficiaries had not sought a ruling that the conflicts of interest invalidated the joint venture arrangements.[66] However, the possibility was considered by Judge Harvey[67] and taken up unsuccessfully by the beneficiaries in the Maori Appellate Court.[68] In these circumstances the Court of Appeal considered it open to the beneficiaries to make an application to have the joint venture arrangements set aside (rescinded). However, the Court acknowledged that rescission will not be available where the agreement in question is with an innocent third party.[69] As there was disagreement between the parties as to whether any innocent third parties were, or have become, involved in the joint venture arrangements, the Court remitted the matter to the Maori Land Court for further evidence on and consideration of that issue.
Leave application to this Court
[66]Their argument rather was that the conflicted trustees should be removed.
[67]See Naera (MLC), above n 8, at [154].
[68]See Naera (MAC), above n 44, at [64].
[69]See Naera (CA), above n 3, at [104].
On 5 September 2013, five of the beneficiaries[70] (the first respondents in this appeal and called the Beneficiaries in this judgment) applied for leave to appeal against the Court of Appeal’s decision. The Beneficiaries sought leave to appeal on the interpretation of cl 3(a) of the trust deed. In the alternative, they sought leave to appeal the validity and scope of cl 3(a).
[70]Jillian Naera, Kereama Pene, Anaha Morehu, Warwick Morehu and Eric Hodge. As at 6 June 2014, counsel for the Beneficiaries informed the Court that they had not received renewed instructions from Eric Hodge, Anaha Morehu or Jillian Naera. However, counsel confirmed that Kereama Pene and Warwick Morehu still wished to oppose the appeal and, despite Jillian Naera being out of the country, based on previous instructions, counsel understood her to take the same position as Mr Morehu and Ms Pene.
On 25 September 2013, three of the trustees[71] (called the Trustees in this judgment) applied for leave to cross-appeal against the Court of Appeal’s judgment with regard to the conflict of interest issues. By the time of the hearing of the appeal, Pirihira Fenwick had resigned as a trustee of the trust and Hiwinui Heke had died in February 2014. The appeal was therefore conducted by Mr Kingi alone.[72]
[71]Pirihira Fenwick, Wiremu Kingi and Hiwinui Heke.
[72]We nevertheless refer to him as “the Trustees” in this judgment.
In a decision of 19 May 2014, this Court dismissed the Beneficiaries’ application for leave to appeal, but granted the Trustees leave to cross-appeal against the Court of Appeal’s decision on the conflict of interest issue.[73] The approved questions for determination were:
(a)Was the Court of Appeal correct to hold that the Tikitere Project Agreement was voidable because three[74] of the trustees were beneficially interested in other trusts which were parties to the Agreement?
(b)If so, was the Court of Appeal correct to hold that the remedy of rescission could be withheld only if third party interests were affected or should it have required general inquiry into whether rescission was in all the circumstances appropriate?
The parties’ submissions
The Trustees’ submissions
[73]See Naera (SC Leave), above n 6, at [9]–[12].
[74]Our understanding is that Mrs Emery had no beneficial interest in any other trusts: see above at [12](c) and n 15. Assuming this was the case, this means that only two of the trustees were beneficially interested in one of the other trusts.
The Trustees submit that ss 227 and 227A of the Act are intended to be a code to deal comprehensively with trustee participation and decision making where there are conflicting interests. The sections leave no room for the operation of the common law. It is submitted that any trustee of the Tikitere Trust, who is also one of the beneficiaries in the trust parties to the joint venture arrangements, is not a person who is “interested or concerned in any contract”. Those words are necessarily coloured by the previous categories of interest referred to in s 227A, each of which is a direct and specific interest (as an employee or officer of the trust).
The words in s 227A are also coloured by the context of the Act. In the Trustees’ submission, it cannot have been intended to preclude a trustee who is also a beneficiary of the relevant trust from voting on all contracts made by the trust because he or she has an interest in the contract through being a beneficiary in the trust. That would effectively disqualify any beneficiary from being a trustee, as it would be a general impediment in the administration of the trust property. Against this background and the reality of Maori land ownership structures, it is submitted that the words “contract in which that person may be interested or concerned” should be read narrowly.
Even if that is not the case, it is submitted that the circumstances do not come within the inflexible self-dealing rule, which only applies to transactions that squarely, or in substance, involve a trustee selling trust property to themselves. Further, there are two relevant, and applicable, exceptions to the rule. First, where a trustee sells to a company where he or she is a mere minority shareholder or to another trust in which he or she only has a limited beneficial interest. Secondly, where the trustee has been placed in a position of conflict expressly, or by necessary implication, by the settlor or by the terms of the trust.
Section 227A is silent as to the consequences of infringement. It is submitted that this silence does not mandate that, if trustees are in breach of the section, the dealing by the trust is voidable. Under s 237, the Act creates the broadest powers for the Maori Land Court to review trustees’ conduct. No doubt in doing so, and in determining the consequences of a particular infringement, the Court would have regard to the common law approach adopted where there is infringement of the
self-dealing rule. But it is submitted that the Act does not require rescission as the usual remedy.
The Beneficiaries’ submissions
The Beneficiaries do not accept that ss 227 and 227A are a code for all conflicts of interests for trusts administered under the Act.[75] The sections alter the common law in some respects by allowing decisions to be made by a majority of trustees and by adding an exception for trustees who are also trustees in another trust. But, because the term “trust” is not defined under the Act and the Act is largely silent about how trusts under the Act should operate, Parliament clearly intended to import the concept of a trust and the associated common law and equitable principles such as the self-dealing rule.
[75]The Beneficiaries submitted for example that s 227A would not cover grants, which Maori trusts often make. However, we comment that the wording of the section may well include most grants as grants would usually include conditions of use and would therefore arguably come within the term “contract”.
As to relief, the Beneficiaries oppose the Trustees’ contention that the Maori Land Court’s statutory powers obviate the need for the remedy of automatic rescission. They submit that the High Court has similar broad powers of review, but these do not supplant the specific rules of the common law and equity setting out what forms of relief ought to be available and in what circumstances.
The Beneficiaries submit that the Court of Appeal was correct to hold that rescission was the proper remedy (subject to there being no innocent third party interests).[76] While the self-dealing rule has a number of exceptions, none of them apply to the current facts. The Beneficiaries point to the fact that the trustees were contracting directly with themselves as trustees of other trusts and that they and/or their families have personal beneficial interests in those other trusts, which were not “limited” or “insubstantial”. The conflicted trustees took part in deliberations, voted and executed the joint venture arrangements.
Issues
[76]It is the Beneficiaries’ submission that there are no innocent third parties.
The issues arising from the submissions are:
(a)What is the scope of ss 227 and 227A of the Act?
(b)Does this case fall within the self-dealing rule?
(c)What are the consequences of a breach of s 227A?
To put the second and third issues in context, we examine the alleged conflicts in this case, after deciding on the scope of ss 227 and 227A.
What is the scope of ss 227 and 227A of the Act?
Section 227A(2) provides that a “trustee must not vote or participate in the discussion on any matter before the trust that directly or indirectly affects … any contract in which that person may be interested or concerned other than as a trustee of another trust”.
We do not accept the Trustees’ submission that s 227A must be construed narrowly. The wording is expansive. It applies to any contract. It applies to both an interest and a concern in a contract. It applies not only to a direct, but also to an indirect, interest or concern in any contract. The fact that specific types of contract are dealt with (as an employee or as an officer) in the subsection cannot colour the generality of the words that follow. These words are intended as a catch all.
Far from being restrictive, it seems to us that the wording is designed to mirror the position in equity, subject to excluding the situation where the only interest (or concern) in a contract is as a trustee of another trust.[77] This exclusion does not, however, mean that trustees of multiple trusts can put themselves in a position where their duty and interests conflict as Mrs Fenwick (and possibly Mr Eru) did in this case because they were also beneficiaries.[78]
[77]In the United States, the position accords with the s 227A(2) exception, as long as the transaction is fair. The commentary to the American Law Institute Restatement of the Law (Third): Trusts (3d) (2007), § 78 cmt c(7) states that “The duty of loyalty does not preclude trustees in their fiduciary capacity from dealing with other trusts … including trusts and estates of which the trustee is a fiduciary” as long the transaction is “consistent with the purposes of each fiduciary relationship and for a consideration that is fair to the beneficiaries of the relationships”. The same exception is recognised in the Uniform Trust Code (drafted by the National Conference of Commissioners on Uniform State Laws): § 802(h)(3).
[78]This too is the position in the United States: see American Law Institute, above n 77, at § 78 cmt a.
We also do not accept the Trustees’ submission that ss 227 and 227A constitute a code. That cannot be right as they do not deal with the consequences of any breach. We agree with the Court of Appeal that general trust law applies to trusts under the Act, but only (as will appear) to the extent that this is consistent with the scheme of the Act.
Alleged conflicts in this case
Three of the trustees were alleged to have conflicts of interest in the Maori Land Court. We set out the alleged conflicts and comment on them. As we are not sure we have all relevant information, we remit the issue to the Maori Land Court for any final decisions on the conflicts in light of this judgment.
Pirihira Fenwick
Mrs Fenwick would not have been considered “interested or concerned” in the joint venture arrangements if she had merely been a trustee of both the Tikitere Trust and Paehinahina Mourea Trust as she would have come under the exception in s 227A(2). However, she was “interested or concerned” in the joint venture arrangements due to the fact that she was a beneficiary of Paehinahina Mourea Trust (holding approximately 4.71 per cent of the shares of that trust).[79] As a result, Mrs Fenwick had a real and appreciable possibility of conflict between interest and duty and should not have taken part in the decision making process.
Tai Eru
[79]Mrs Fenwick’s family also held 20 per cent of the shares in the Paehinahina Mourea Trust. We have no information on how close the family members are who own those shares and thus make no comment on whether or not this would also constitute a conflict of interest. The role of family in Maori society would have to be considered in reaching a view on this issue. Also see below at n 97.
Mr Eru was a trustee of both the Tikitere Trust and the Manupirua Ahu Whenua Trust. Additionally, a whanau trust[80] in which Mr Eru was both a trustee and beneficiary holds 0.045 per cent interest in the Paehinahina Mourea Trust[81] and an approximately 0.12 per cent interest in the Tikitere Trust. If Mr Eru’s only interest in the Paehinahina Mourea Trust was through the whanau trust,[82] then it is likely that his interest in that trust would be classified as de minimis, or, in the words of Lord Upjohn, there may have been “no sensible possibility of conflict”.[83] The nature and extent of the joint venture arrangements would, however, be relevant to this question.[84]
Winnie Emery
[80]As noted above at n 13, we are not aware of the extent of his beneficial interest in the whanau trust or the extent of the interest of his close relatives in that trust.
[81]He was not, however, a trustee of the Paehinahina Mourea Trust.
[82]As noted above at n 14, it is unclear whether Mr Eru was also a beneficiary of the Tikitere Trust and the Paehinahina Mourea Trust in his personal capacity.
[83]See Boardman v Phipps [1967] 2 AC 46 (HL) at 124, discussed below at [74].
[84]A very small interest in a very large transaction could raise a possibility of a conflict between interest and duty. We are not sufficiently apprised of the details of the joint venture arrangements to make a definitive finding on this point.
The late Mrs Emery’s alleged conflict arises from the fact that her husband was a trustee of the Paehinahina Mourea Trust. It does not seem to have been suggested that Mrs Emery or her husband had a shareholding in any of the trust parties to the joint venture arrangements. If they did not, then it would have been acceptable, under s 227A(2), for Mrs Emery, had she been a trustee of both the Tikitere Trust and the Paehinahina Mourea Trust, to have taken part in the decision making. In such circumstances, the fact her husband was a trustee of the Paehinahina Mourea Trust would not render Mrs Emery conflicted under s 227A.
Application
Ms Fenwick (and possibly Mr Eru) had beneficial interests in another trust party to the Tikitere Project Agreement. Subject to the issue of Mr Eru’s interest being de minimis, this means that they were conflicted. By being beneficiaries in another trust they had something to gain from this transaction. Benefits to the other trust parties included lease payments from Tikitere Geothermal for the use of the trust land and also the share or royalty options. This means that s 227A(2) applied and Mrs Fenwick (and possibly Mr Eru) should not have participated in the discussions surrounding the transaction or in the voting. In this case there were sufficient trustees who had no conflict to consider and vote on the transaction.[85]
[85]Had there not been, the trustees should have put the matter before the Maori Land Court for approval (or for the appointment of non-conflicted trustees).
It is no answer, contrary to Judge Harvey’s view, that the breach of s 227A(2) had no effect, given the ability for decisions to be made by majority.[86] We agree with the Court of Appeal that all trustees participating in decision making must “bring to bear a mind unclouded by any contrary interest”.[87] Nor is it an answer that their fellow trustees all supported the transaction. Section 227A provides that a conflicted trustee must not “participate in the discussion” on a matter affecting his or her interests. The reason a conflicted trustee must not participate in discussions is to remove the risk that the other decision makers may be influenced (either consciously or subconsciously) by a person with divided loyalties.[88]
[86]See Naera (MLC), above n 8, at [154].
[87]See Naera (CA), above n 3, at [99].
[88]In a similar context P Watts, N Campbell and C Hare in Company Law in New Zealand (LexisNexis, Wellington, 2011) note at 534 that at equity, “[i]t mattered not even that there was a quorum of disinterested directors”. The Companies Act 1993 has altered the position. See s 144.
Equally, it is irrelevant that Mrs Fenwick (and Mr Eru) were not driven by personal financial considerations. That may have been so, at least at a conscious level. But it may not have been so subconsciously. Further, the beneficiaries were entitled to be assured that every trustee considering and voting in favour of the transaction did so without a conflict of interest and the risk of being influenced by that conflict (whether or not the person was in fact influenced).
We agree with the Court of Appeal that the rules against conflicts and s 227A are designed with prophylactic effect – to avoid the appearance, and risk, of conflict.[89] This applies both in terms of a conflicted trustee being influenced by the conflict (consciously or subconsciously) and of influencing fellow decision makers (again consciously or subconsciously).
[89]Naera (CA), above n 3, at [99], and [101]–[102].
In addition, courts are not well placed to decide the existence and the extent of any influence. Contemporary evidence on such points is likely to be sparse, meaning trustees will be reconstructing the decision-making process with the benefit of hindsight, which could cause distortion. And, if an influence has been subconscious, by its very nature the trustees will not have been aware of it.[90]
[90]We thus agree with the comments of William Young J in this regard at [179].
As the Court of Appeal said, there were in this case means of avoiding the conflict issue. The conflicted trustees could have withdrawn from the discussions in accordance with s 227A(2). They could have applied to the Court to approve the transaction.[91]
Does the self-dealing rule apply?
[91]The Court of Appeal suggested that the trustees could, possibly, have sought an amendment to the trust deed to allow trustees to vote in situations of conflict. We do not need to decide this issue, but arguably any trust deed amendment may not override the requirements of s 227A(2).
We now examine the Trustees’ submission that, in equity, the self-dealing rule only applies to purchases. We then examine whether this case falls within two exceptions to the strict self-dealing rule.
As noted above at [55], the position in equity would only apply to the extent not modified by the scheme, purpose, context and (of course) the wording of the Act. However, we think it unlikely that the Act was intended to impose stricter requirements than in equity. This means that, if the exceptions would apply in equity, then they will apply under the Act.
Before we examine the Trustees’ submission, we briefly discuss the general law on the extent of trustees’ duties and in particular the self-dealing rule.[92]
Trustees’ duties
[92]This is not meant to be a comprehensive discussion but merely a summary for background.
Because of the nature of trusts, equity imposes numerous duties on trustees. The obligations include: the duty of loyalty, the duty of impartiality, the duty to act personally, the duty to keep and render full and candid accounts and the duty to preserve trust property.[93]
[93]Andrew S Butler “Fiduciary Law” in Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) 471 at 476.
The duty of loyalty and its prohibition on trustees (and other fiduciaries) from having conflicts of interests is a central tenet of the fiduciary relationship.[94] Some commentators have even referred to this as part of the “irreducible core” of the relationship.[95] Under the “self-dealing” rule, developed under the duty of loyalty, if a trustee sells the trust property[96] to him or herself,[97] the sale is voidable by any beneficiary ex debito justitiae (as of right),[98] however fair the transaction.[99]
[94]J Mowbray and others Lewin on Trusts (18th ed, Sweet & Maxwell, London, 2008) [Lewin on Trusts] at [20–01]. This may be subject to the relevant trust deed and to the provisions of any relevant legislation. Generally, the trust instrument is the principal authoritative source of relevant rules, and “[t]he general law and statute typically act as supplemental sources”: see Andrew S Butler “Trustees and Beneficiaries” in Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) 105 at 107. However, as the comments of Millet LJ in Armitage v Nurse [1998] Ch 241 (CA) illustrate, there is a debate as to the extent a trust instrument can alter the duties of a trustee. See further New Zealand Law Commission “Review of the Law of Trusts: Preferred Approach” (NZLC IP31, 2012) at [3.3]–[3.8].
[95]Ernest J Weinrib “The Fiduciary Obligation” (1975) 25(1) U Toronto LJ 1 at 16. In trust law, the same term was used by Millet LJ in Armitage v Nurse, above n 94, where Millet LJ described “an irreducible core of obligations owed by the trustees to the beneficiaries ... which is fundamental to the concept of a trust”.
[96]Unless (subject to what is said above) authorised by the trust instrument or where the purchase is authorised by statute or where all beneficiaries being of full age and capacity and fully informed, agree to the transaction: see Lewin on Trusts, above n 94, at [20–65].
[97]While there is no strict prohibition on a trustee’s sale to his or her spouse or to close relatives, such a sale gives rise to very strong suspicions, which if not dispelled, are justification for setting aside the transaction: Butler, above n 93, at 499 citing Robertson v Robertson [1924] NZLR 552 (SC) and Re McNally (deceased) [1967] NZLR 521 (SC). See also Lewin on Trusts, above n 94, at [20–76]–[20–77].
[98]The self-dealing rule (eg purchase from a trust) should be distinguished in this regard from the fair-dealing rule; the fair dealing rule (purchase from a beneficiary) is “[(]putting it very shortly) that if a trustee purchases the beneficial interest of any of his beneficiaries, the transaction is not voidable ex debito justitae, but can be set aside by the beneficiary unless the trustee can show that he has taken no advantage of his position and has made full disclosure to the beneficiary, and that the transaction is fair and honest”: Tito v Waddell (No 2) [1977] Ch 106 (Ch) at 241 per Megarry VC.
[99]Tito v Waddell (No 2), above n 98, at 241 per Megarry VC. See also Matthew Conaglen “Fiduciaries” in John McGhee (ed) Snell’s Equity (32nd ed, Sweet and Maxwell, London, 2010) 171 [Snell’s Equity] at [7–021]. The purchase of property cannot be set aside if the property has been resold to a purchaser for value without notice: see Lewin on Trusts, above n 94,There is another rule stemming from the duty of loyalty. Trustees, like other fiduciaries, are not in general allowed to retain a benefit acquired or profit made by them from the use of trust property or in the course of and by virtue of their trusteeship.
In explaining the no-conflict rule and its justifications, Lord Herschell stated in Bray v Ford:[100]
It is an inflexible rule of a Court of Equity that a person in a fiduciary position, … is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule.
[100]Bray v Ford [1896] AC 44 (HL) at 51.
Liability for the breach of the no conflict rule is generally strict.[101] It is usually no defence to show that any unauthorised profit was made “‘honestly’ or in good faith” or that the transaction was fair.[102] The use of strict liability in the context of a fiduciary relationship stems from fiduciary law’s traditional prophylactic approach: it is thought that prevention is better than cure in that this provides good protection to beneficiaries and removes temptation from fiduciaries.[103] As Professor Matthew Conaglen has put it, “removing the fruits of temptation is designed to neutralise the temptation by rendering it pointless”.[104]
[101]At least with regard to the self-dealing and unauthorised profits rules. See n 98 regarding the fair dealing rule.
[102]Butler, above n 93, at [17.2.4]. See Conaglen, above n 99, at 189.
[103]Butler, above n 93, at [17.2.4].
[104]Matthew Conaglen “The Nature and Function of Fiduciary Loyalty” (2005) 121 LQR 452 at 463. See also the comments of Lord Brougham in Hamilton v Wright (1842) 9 Cl & Fin 111 at 123, 8 ER 357 (HL) at 362.
There must, however, be a “real sensible possibility” of a conflict and not just a remote, speculative, or negligible risk. The standard is objective. As Lord Upjohn said: [105]
The reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you would imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.
Is the self-dealing rule restricted to purchases?
[105]Boardman v Phipps, above n 83, at 124.
The Trustees submit that the strict self-dealing rule applies only to purchases by trustees. It is submitted that, in other contexts, provided a transaction (other than a purchase) is fair, it will be upheld. The Trustees cite Jones v AMP Perpetual Trustee Company New Zealand Ltd[106] and Public Trustee v Cooper[107] for this proposition. We first examine this submission in terms of the general position in equity and then examine the submission in the context of the Act.
[106]Jones v AMP Perpetual Trustee Co NZ Ltd [1994] 1 NZLR 690 (HC).
[107]Public Trustee v Cooper [2001] WTLR 901 (Ch).
We do not accept the submission that in equity the self-dealing rule applies only to purchases. Jones dealt with a particular set of facts: a subsidiary company trustee appointing its parent company (a pre-eminent investment company) as its superannuation fund manager. It seems to us that the case was not decided on the basis of an exception to the self-dealing rule but was instead decided on the basis that there was no sensible possibility of a conflict.[108] It therefore does not support the submission that the self-dealing rule only applies in purchase situations.
[108]The case is cited in D Hayton (ed) Underhill and Hayton: Law Relating to Trusts and Trustees (18th ed, Lexis Nexis, London, 2010) at [55.19] only for the narrow proposition that a subsidiary company-trustee may employ its parent company if it does not create “a real sensible possibility of conflict which could impair the trustee’s ability to serve the best interests of the beneficiaries, as where the holding company is a pre-eminent company with an attractive investment record and where the equivalent fee would be payable to any similar company selected to be investment manager”.
In Public Trustee v Cooper, shares in one company held by a trust were to be sold to an unrelated company. One of the trustees also held a significant number of the shares of the first company in a private capacity and as a trustee for a separate charitable trust.[109] Hart J held that the strict self-dealing rule did not apply in these circumstances. The case does not support the proposition that the strict self-dealing rule only applies to purchases. The case could have been decided on the basis that, while there was a conflict, it was not self-dealing. This is because the trustee had no interest or other role in the unrelated company purchaser and thus was not “on both sides” of the transaction.
[109]There was another trustee for which the same conflicts were alleged, although Hart J recognised that his personal shareholding was much smaller.
The self-dealing rule has in any event been applied in commercial transactions other than sales.[110] For example, it has been applied to leases of trust property to trustees.[111] At its most basic level, the self-dealing rule is based on the no-conflict rule: having an interest or duty on both sides of a transaction.[112]
[110]See Re Thompson’s Settlement [1986] Ch 99 (Ch) at 115 per Vinelott J; Conaglen, above n 99, at 192; and Lewin on Trusts, above n 94, at [20–64] and [20–66]–[20–72].
[111]See for example Re John’s Assignment Trusts [1970] 1 WLR 955 (Ch) at 960.
[112]Lewin on Trusts, above n 94, at [20–63]. We note that Vinelott J’s broad statement of theIn terms of the Act, the argument that the self-dealing rule only applies to purchases does not accord with the statutory wording. Under s 227A(1) a trustee must not vote or participate in any discussions on “any contract in which that person may be interested or concerned” directly or indirectly. This is very wide wording and is not confined to purchases from the trust.[113]
[113]We accept, however, as discussed below at [115], that s 227A also covers situations other than those coming within the strict self-dealing rule.
In this case, the other trusts had the option to receive royalty payments.[114] Further, all three trusts granted exclusive access and use rights to Tikitere Geothermal and would receive rental from Tikitere Geothermal.[115] While these other transactions cannot be classified as “purchases”, they clearly fall within the words “any contract” in s 227A.
[114]In the end, only the Manupirua Ahu Whenua Trust exercised the option to receive royalty payments from Tikitere Geothermal.
[115]See above at [20] and n 20.
Even had the rule been confined to purchases, however, there were potential purchases involved in the joint venture arrangements. The other trusts could (for nominal consideration) elect to purchase trust property (shares of Tikitere Geothermal) from the Tikitere Trust. The Paehinahina Mourea Trust exercised that option and now owns 65 per cent of the shares in Tikitere Geothermal.
Limited beneficial interest exception
The Trustees submit that this case comes within a general exception in equity to the self-dealing rule. In their submission, the strict approach to the self-dealing rule, whereby a transaction is capable of being set aside by any beneficiary as of right, should not be taken where a trustee deals with a company in which the trustee is a mere minority shareholder or where a trustee deals with another trust in which the trustee has only a limited beneficial interest.
The authors of Lewin on Trusts state that, while a transaction in favour of a company in which the trustee is a substantial shareholder and managing director has been held to be within the self-dealing rule, in cases where the purchaser is a company and the trustee is a small minority shareholder, the transaction, though suspect, may be justified by showing that the consideration was adequate at the time.[116] The authors of Lewin on Trusts cite Farrar v Farrars Ltd[117] and Hillsdown Holdings plc v Pensions Ombudsman[118] for this proposition.
[116]Lewin on Trusts, above n 94, at [20-78].
[117]Farrar v Farrars Ltd (1888) 40 Ch D 395 (CA).
[118]Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862 (QB). See also Conaglen, above n 99, at 193 who also cites Farrar, above n 117, for the proposition that the strictThe authors also cite the case of Hickley v Hickley[119] for the proposition that, if two trusts do not share a common trustee, a sale between the trusts will not be set aside under the strict self-dealing rule merely because a trustee of the selling trust has a limited beneficial interest in the purchasing trust.[120]
[119]Hickley v Hickley (1876) 2 Ch D 190.
[120]See Lewin on Trusts, above n 94, at [20–82].
We doubt that any of these cases provide strong authority for a general exception of the breadth submitted by the Trustees. It is significant that Farrar was in the mortgagee context and was in any event founded on the genuine transaction rule[121] and not on self-dealing rule. Lindley LJ, when delivering the judgment of the Court of Appeal in Farrar, recognised that the position of a mortgagee is very different from that of a trustee:[122]
A mortgagee with a power of sale, though often called a trustee, is in a very different position from a trustee for sale. A mortgagee is under obligations to the mortgagor, but he has rights of his own which he is entitled to exercise adversely to the mortgagor. A trustee for sale has no business to place himself in such a position as to give rise to a conflict of interest and duty. But every mortgagor confers upon the mortgagee the right to realize his security and to find a purchaser if he can, and if in exercise of his power he acts bona fide and takes reasonable precautions to obtain a proper price, the mortgagor has no redress ... .
[121]See Lewin on Trusts, above n 94, at [20–58]–[20–62] for a discussion of the “two party rule” and the “genuine transaction rule”. These two rules cover some of the same ground as the[122]Farrar, above n 117, at 410 and 411. The authors of Lewin on Trusts, above n 94, [20–78] fn 52 do note that Farrar should be “approached with a degree of caution” because it relates to purchases from mortgagees. The same can be said about the Privy Council case of Tse Kwong Lam v Wong Chit Sen, above n 118. That was also a mortgagee case. It relied on, and confirmed, the principle in Farrar: at 59.
As to Hillsdown, this involved the transfer of assets between two pension schemes that were associated with the same parent company. Two of the directors were directors of the parent company as well as of the two pension schemes and thus had “a foot in three camps”.[123] Knox J held that the self-dealing rule is not as “hard and fast as to require a negotiation between pension fund trustees and the employer to be set aside automatically without investigation if one or more of the trustees are directors of the employer”.[124]
[123]Hillsdown Holding plc, above n 118, at 894.
[124]At 895.
The Hillsdown case arose in particular circumstances and may be explicable because of the special position of pension funds (discussed in the next section).[125]
[125]We make no comment on whether or not the case would be decided in the same way in New Zealand.
In Hickley v Hickley, Mr Hickley was an executor under a will and, as such, was charged with selling a number of dwelling houses. The proceeds from these sales were for the benefit of the testator’s three daughters and their children and issue. One third of the proceeds were to go to a nuptial trust (under a marriage settlement) that the testator had earlier set up for one of his daughters and in which his son-in-law, Mr Hickley, had a reversionary interest. Mr Hickley and his wife were anxious to retain some of the property and reside in a house on one of the lots. The trustees of the nuptial trust authorised Mr Hickley to purchase a house and the adjoining lots for the nuptial trust.[126]
[126]Mr Hickley appointed an agent to act on behalf of the trustees and to purchase the property.
In the record of the oral argument it was recorded that “the plaintiffs do not desire to set aside the sale, unless it turns out to have been at an undervalue”.[127] Bacon VC held that Mr Hickley’s conduct had been perfectly proper, that full value had been received and declined to set aside the sale. Given the position taken by the plaintiffs, as well as the unusual facts, we do not consider this case provides strong authority for a general limited interest exception with regard to trusts.
[127]Hickley, above n 119, at 193. While Bacon VC says in his reasons at 197 that “I am asked to set aside this sale against the trustees”, that statement must be read in light of how the case was pleaded.
The rationale for a limited interest exception is presumably that, where there is only a very small conflicting interest in the transaction, it may not have influenced it, as long as the person is not also negotiating “on both sides of the transaction” by being a trustee or director of both contracting parties. However, the cases that are put forward by the Trustees and the texts as authorities for the existence of the exception are sparse. They involve singular facts, some are only at first instance and, in the case of the mortgagee cases, arose in a different context.
Further, recent cases have doubted the existence of a general limited interest exception. In Movitex Ltd v Bulfield, Vinelott J said:[128]
While the interest of the fiduciary may be so small that it can as a practical matter be disregarded, if the interest is sufficiently large to be capable of influencing the fiduciary's mind, the strict rule applies. … I think the true explanation of the decision of the Court of Appeal in Farrar v Farrars Ltd may lie in the fact that the sale was by a mortgagee. … The decision of Bacon VC in Hickley v Hickley is not susceptible of the same explanation, though it was treated by Chitty J in Farrar v Farrars Ltd as an authority he was entitled to follow and was mentioned by Lindley LJ without disapproval. … But the case is a very curious one, because it was made clear by counsel for the plaintiffs that they did not desire to set aside the sale unless it turned out to have been at an undervalue. … Insofar as the decision is founded on the proposition that the court has a discretion to refuse to set aside a transaction entered into in breach of the self-dealing rule if satisfied that the transaction was fair and honest, it is in my judgment inconsistent with cases of the highest authority which show that such a sale is voidable, even if a trustee claims to show that he gave full value or more than full value for the property: “So inflexible is the rule that no inquiry on the subject is permitted” (see Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 per Lord Cranworth at p 472).
[128]Movitex Ltd v Bulfield & Ors (1986) 2 BCC 99403 (Ch) at 99433–99434. See also the remarks of Nugee J in Barnsley v Noble [2014] EWHC 2657 (Ch), doubting the application of Farrar in the trust context.
We do not, however, need to decide whether there is a limited interest exception to the strict self-dealing rule. Even if the limited interest exception does exist, there are two reasons why the exception would not apply to Mrs Fenwick.[129]
[129]Mr Eru could, however, come within the exception (if it exists). He had (through the whanau trust) a beneficial interest in the Paehinahina Mourea Trust but was not a trustee of that trust and his interest in that trust, if not de minimis (see above at [60]), may have qualified as limited, despite the significance of the joint venture arrangements.
First, as indicated above, the limited interest exception (if it exists) does not apply if the person has a limited interest in the other party but is, at the same time, also a director or trustee of the other party and so effectively “on both sides” of the negotiations for the transaction. In this case, Mrs Fenwick was not merely a beneficiary of the Paehinahina Mourea Trust but was also a trustee of that trust. This dual role would mean she did not come within the exception even if her interest could have been deemed limited.[130]
[130]The situation is not saved by s 227A(2) which would only have allowed Mrs Fenwick’s participation in decision making if she had been a mere trustee of the Paehinahina Mourea trust and not if she was also a beneficiary of that trust. As the Maori Appellate Court said, in Rameka v Hall – Opepe Farm Trust, (2011) 2011 Maori Appellate Court MB 535 (2011 APPEAL 535) at [86], “section 227A(2) explicitly makes an exception for trustees whose only interest is as trustee of another trust” (emphasis added).
Secondly, (and more importantly) the exception, if it exists, would require a fact-specific inquiry into the nature and extent of the interest held and the nature and significance of the transaction. In this case, had such an inquiry been made, the level of interest Mrs Fenwick had in the Paehinahina Mourea Trust (at almost five per cent)[131] could not properly be termed a limited interest, particularly in light of the fact that the joint venture is a significant transaction.[132]
Placed in position of conflict
[131]Her family interests may well also have to be considered.
[132]The answer may have been different if the transaction had been a very small one.
The second key exception argued for by the Trustees is where the trustee has not placed him or herself in a position of conflict of interest and duty but has been placed in the position expressly or by necessary implication by the settlor or the terms of the trust. They cite Underhill and Hayton for this proposition.[133] The three key cases cited in support of this exception are Edge v Pensions Ombudsman,[134] Re Drexel Burnham Lambert[135] and Sargeant v National Westminster Bank.[136]
[133]Hayton, above n 108, at [55.30].
[134] Edge v Pensions Ombudsman [2000] Ch 602 (CA).
[135]Re Drexel Burnham Lambert UK Pension Plan [1995] 1 WLR 32 (Ch).
[136]Sargeant v National Westminster Bank Plc (1990) 61 P & CR 518 (CA).
The issue usually arises in the pension scheme context. Unlike the “limited interest” exception, the onus falls on those attacking the exercise of the function by the trustees to impeach it where this exception applies.
We accept that there is a policy in the Act supporting owner control and therefore trustees will often be in the position of being both beneficiaries and trustees of trusts. It could therefore be argued that the potential conflict between interest and duty by being both a trustee and a beneficiary of a trust under the Act arises by necessary implication from the Act where a trustee/beneficiary is making decisions about that particular trust. Of course in that situation there will rarely be a real conflict of duty and interest. What is in the best interests of the trustee/beneficiary will likely be in the best interests of all the beneficiaries, assuming no differential treatment of beneficiaries.
This argument, however, becomes much more difficult when it concerns an interest or trusteeship in another trust. Although many Maori are beneficiaries and trustees of multiple trusts and the Act may contemplate cooperation between trusts (as discussed in the next section), conflicts of interest cannot be said to arise as a necessary implication of the trust structure and therefore directly due to a policy in the Act. Cooperation between trusts is not mandated by the Act.
In addition, there will always be a conflict between interest and duty in such circumstances and it would be inappropriate to place the onus on beneficiaries to impeach the transaction where a conflicted trustee has participated. Section 227A is quite clear. Conflicted trustees cannot participate in decision-making.
We do, however, note that whether an interest in another trust does engage s 227A will depend on an assessment of the circumstances of the trustee and of the particular transaction and whether there is a “real sensible possibility” of a conflict. Whether this is so must be assessed in a practical manner, having regard to the scheme of the Act and the realities of Maori ownership. Where for example a transaction involved a joint venture amalgamating the existing operations of two trusts in order to gain economies of scale and a trustee’s interest in both trusts is small and of similar magnitude in each trust,[137] it is likely to be held that there would be no sensible possibility of a conflict.
Conclusion
[137]Which was not the case here for Mrs Fenwick. In addition, the joint venture arrangements had unusual features in this case.
For the above reasons, we do not accept the Trustees’ submission that the self-dealing rule applies only to purchases or that the joint venture arrangements came within any exceptions to the self-dealing rule under general equitable principles. Nor does s 227A apply only to purchases.
Consequences of breach of s 227A
Submissions
The Court of Appeal held that the joint venture arrangements were voidable as of right at the instance of the Beneficiaries, subject to the interests of any innocent third party.[138] The Trustees submit that rescission should not be an automatic remedy in the case of transactions between trusts that are governed by the Act. In the Trustees’ submission, this is because of the policy and structure of the Act and also the realities of Maori landholding. The Beneficiaries support the judgment of the Court of Appeal.
Preliminary comments
[138]Naera (CA), above n 3, at [104].
Before we deal with the parties’ submissions on this point, we comment that we are concerned that the appeal before us has been too narrowly confined. We make some further comment on this, after dealing with the submissions on whether rescission should be an automatic remedy in cases involving parties governed by the Act.
William Young J criticises the Court of Appeal for dealing with the
self-dealing issue on a second appeal and determining a number of matters without hearing from the other parties to the joint venture arrangements.[139] The fact is, however, that the Court of Appeal did deal with the self-dealing issue and we therefore must deal with it or the conclusion of the Court of Appeal stands.[140]
Structure of the Act
[139]At [173] and [180].
[140]Before this Court, Mr Kingi’s costs were paid by one of the parties to the joint venture, Tikitere Geothermal. 65 per cent of the shares in that company are held by the Paehinahina Mourea Trust, another party to the joint venture arrangements. It may be therefore that Mr Kingi has put before us all the arguments those parties would have made on the points argued before us.
It is convenient at this point to summarise other relevant provisions of the Act.[141]
[141]We note that, in 2013 and 2014, an expert review of the Te Ture Whenua Maori Act was undertaken and the final report was published in April 2014: see Matanuku Mahuika, Patsy Reddy and Dion Tuuta “Te Ture Whenua Maori Act 1993 Review Panel: Report” (Te Puni Kokiri, April 2014) available at < In April 2014, the Hon Chris Finlayson announced that the Government would be drafting a new Te Ture Whenua Maori Bill based on the findings of the expert review panel: see Chris Finlayson “Te Ture Whenua Maori Act review report released” (press release, 3 April 2014).
The preamble to the Act states:
Nā te mea i riro nā te Tiriti o Waitangi i motuhake ai te noho a te iwi me te Karauna: ā, nā te mea e tika ana kia whakaūtia anō te wairua o te wā i riro atu ai te kāwanatanga kia riro mai ai te mau tonu o te rangatiratanga e takoto nei i roto i te Tiriti o Waitangi: ā, nā te mea e tika ana kia mārama ko te whenua he taonga tuku iho e tino whakaaro nuitia ana e te iwi Māori, ā, nā tērā he whakahau kia mau tonu taua whenua ki te iwi nōna, ki ō rātou whānau, hapū hoki, a, a ki te whakangungu i ngā wāhi tapu hei whakamāmā i te nohotanga, i te whakahaeretanga, i te whakamahitanga o taua whenua hei painga mō te hunga nōna, mō ō rātou whānau, hapū hoki: ā, nā te mea e tika ana kia tū tonu he Te Kooti, ā, kia whakatakototia he tikanga hei āwhina i te iwi Māori kia taea ai ēnei kaupapa te whakatinana.
Whereas the Treaty of Waitangi established the special relationship between the Maori people and the Crown: And whereas it is desirable that the spirit of the exchange of kawanatanga for the protection of rangatiratanga embodied in the Treaty of Waitangi be reaffirmed: And whereas it is desirable to recognise that land is a taonga tuku iho of special significance to Maori people and, for that reason, to promote the retention of that land in the hands of its owners, their whanau, and their hapu, and to protect wahi tapu: and to facilitate the occupation, development, and utilisation of that land for the benefit of its owners, their whanau, and their hapu: And whereas it is desirable to maintain a court and to establish mechanisms to assist the Maori people to achieve the implementation of these principles.
Section 2 details how the Act should be interpreted. It provides:
2 Interpretation of Act generally
(1)It is the intention of Parliament that the provisions of this Act shall be interpreted in a manner that best furthers the principles set out in the Preamble.
(2)Without limiting the generality of subsection (1), it is the intention of Parliament that powers, duties, and discretions conferred by this Act shall be exercised, as far as possible, in a manner that facilitates and promotes the retention, use, development, and control of Maori land as taonga tuku iho by Maori owners, their whanau, their hapu, and their descendants, and that protects wahi tapu.
(3)In the event of any conflict in meaning between the Maori and the English versions of the Preamble, the Maori version shall prevail.
Section 6 of Act provides for the continuation of the Maori Land Court. The general objectives of that Court are:
17 General objectives
(1)In exercising its jurisdiction and powers under this Act, the primary objective of the court shall be to promote and assist in—
(a)the retention of Maori land and General land owned by Maori in the hands of the owners; and
(b)the effective use, management, and development, by or on behalf of the owners, of Maori land and General land owned by Maori.
(2)In applying subsection (1), the court shall seek to achieve the following further objectives:
(a)to ascertain and give effect to the wishes of the owners of any land to which the proceedings relate:
(b)to provide a means whereby the owners may be kept informed of any proposals relating to any land, and a forum in which the owners might discuss any such proposal:
(c)to determine or facilitate the settlement of disputes and other matters among the owners of any land:
(d)to protect minority interests in any land against an oppressive majority, and to protect majority interests in the land against an unreasonable minority:
(e)to ensure fairness in dealings with the owners of any land in multiple ownership:
(f)to promote practical solutions to problems arising in the use or management of any land.
Against that background, the trustee exemption in s 227A might be thought to presuppose that a trustee’s beneficial interest in the other trust in issue will likewise not necessarily engage the s 227A prohibition. It seems to me that the considerations just referred to can be accommodated by a robust application of the de minimis principle (discussed by Glazebrook J at [58], [74] and [100]).
Section 227A does not provide for the consequences of breach. It does not appear to be an offence to breach the negative duty imposed by s 227A.[192] As to non-criminal consequences, I think that the vote of a trustee who contravenes s 227A is to be disregarded and the presence of that trustee at the relevant meeting is not to be counted for quorum purposes.[193] Such consequences would sometimes be sufficient to result in the formal invalidity of a decision.
[192]The Te Ture Whenua Maori Act does not create offences. There is perhaps scope for debate whether a breach of s 227A might give rise to liability under s 107 of the Crimes Act 1961 (contravention of a statute). Given s 107(1)(b), I do not think that this is so, essentially because I am of the view that it would be inconsistent with the intent and object of s 227A to hold that contravention is a crime.
[193]See for instance art 84(2) of the third schedule to the Companies Act 1955 which provided that where a director voted in breach of the corresponding requirement, that director’s vote should not be counted and the director’s presence should not be counted for the purposes of quorum requirements.
In the Maori Land Court and Maori Appellate Court, the challenge to the joint venture agreement was on what I have just described as “formal invalidity grounds”. This challenge was rejected, in my view correctly, by both courts on the basis that majority voting is permitted by s 227 and that the disputed votes were not necessary to the adoption of the joint venture agreement.
If s 227A had been complied with to the letter and the joint venture agreement had been approved by an appropriate majority of the trustees, there would have been no scope for application of the self-dealing rule. On the other hand,
non-compliance with s 227A means that the self-dealing rule is potentially applicable. One of the purposes of s 227A is to reinforce, and provide a structure for adherence to, the fiduciary obligations of trustees – obligations which, in the case of ordinary trusts (and indeed ordinary fiduciary relationships) are enforced by the
self-dealing rule.[194] Against this background, the effect of the breach of s 227A is to provide scope for the application of the self-dealing rule. In other words the breach of s 227A would not in itself result in the joint venture agreement being voidable. Rather it means that what would otherwise be a complete answer to aself-dealing rule argument is not available.[194]Some assistance as to this is provided by cases on the disclosure and non-voting obligations of directors: see Woolworths Ltd v Kelly (1991) 22 NSWLR 189 (NSWCA) and the authorities discussed therein.
For the reasons just given, I think that the failure of the legislature to be specific as to the consequences of a breach of s 227A is not surprising and I do not see it as particularly relevant to the way in which the self-dealing rule is to be applied.
Was there a breach of s 227A?
In issue on this appeal is the decision made by the trustees of the Tikitere Trust to enter into a joint venture with the Paehinahina Mourea Trust and the Manupirua Ahu Whenua Trust and involving Tikitere Geothermal Ltd (which is owned by the Tikitere Trust) for the development of a geothermal power station.
Mrs Fenwick owned just under two per cent of the shares in the Tikitere trust and she was a trustee of the Paehinahina Mourea Trust in which she and her family had substantial interests (amounting to approximately 25 per cent of the shares). I accept that her interest in the Paehinahina Mourea Trust was sufficiently substantial to preclude resort to the de minimis principle. As well, given the other options available (most obviously not voting) I do not see her participation as permissible on the basis that her appointment inevitably placed her in a conflict of interest (see Glazebrook J at [95]–[100]). The result is that her participation in the decision-making in relation to the joint venture was in breach of s 227A(2).
Mr Eru was a trustee of the Manupirua Ahu Whenua Trust. Additionally, a whanau trust of which he both is a trustee and a beneficiary held 0.045 per cent of the Paehinahina Mourea Trust and approximately 0.12 per cent of the Tikitere Trust. His position as trustee of the Manupirua Ahu Whenua Trust is to be disregarded under s 227A(2) (and is thus immaterial in the present context) and I would be inclined to see his interests in the Paehinahina Mourea Trust as accommodated under the de minimis principle. On this basis, his participation would not have breached s 227A(2).
In the case of Mrs Emery, the only conflict alleged was that her husband was a trustee of the Paehinahina Mourea Trust. Given that her husband’s trusteeship of the Paehinahina Mourea Trust would have been irrelevant under s 227A if he had been a trustee of the Tikitere Trust, it seems to me that it could not sensibly be said to have disqualified Mrs Emery.
For ease of discussion I will address the case on the basis that it was only Mrs Fenwick who acted in breach of s 227A. I should say, however, that a conclusion that Mr Eru also acted in breach of s 227A (which may have been the view of Judge Harvey in the Maori Land Court)[195] would not affect my view as to the appropriate outcome of the case.
What is the consequence of Mrs Fenwick’s participation in the decision to enter the joint venture?
The approaches of the Courts below
[195]Judge Harvey did not expressly say that Mr Eru was in breach of 227A. Instead at [164] he just said that as was the case with Mrs Fenwick’s conduct, there was “cause for concern” in respect of Mr Eru’s involvement.
Judge Harvey in the Maori Land Court held that the breaches of s 227A (on the part of not only Mrs Fenwick but also Mr Eru) and the associated “appearance of conflict” did not render the joint venture agreement “nugatory”.[196] His reasons for this conclusion appear to have been that the joint venture agreement had the support of all trustees, a majority of whom were not conflicted. He also considered that Mrs Fenwick’s conduct was not affected by personal financial considerations.
[196]Naera (MLC), above n 178, at [154].
The Maori Appellate Court reached the same result but solely on the basis of its conclusion that the participation of Mrs Fenwick (along with that of Mr Eru) did not result in the invalidity of the decision because the same result would have been reached if they had not participated.[197]
[197]Naera v Fenwick – Whakapoungakau 24 (2011) 2011 Maori Appellate Court MB 316 (2011 APPEAL 316) (Isaac CJ, Coxhead and Reeves JJ) [Naera (MAC)] at [71].
As already noted, both Judge Harvey and the Maori Appellate Court were dealing with what I have called formal invalidity arguments. They were not dealing with the self-dealing rule itself. That said, some of the considerations referred to by Judge Harvey are of materiality in the present context.
The Court of Appeal (which was asked to deal with the case on the basis of the self-dealing rule) noted that the Te Ture Whenua Maori Act was silent as to the consequences of a breach of s 227A and held that this meant that the equitable principles were applicable.[198] The prohibition in s 227A (and the trust order) on participation in discussions by interested trustees meant that “a fact-based inquiry into whether or not the non-interested trustees were improperly influenced is not appropriate”.[199] In the view of the Court, the beneficiaries were entitled to require a decision-making process in which each trustee would “bring to bear a mind unclouded by any contrary interest”.[200] And for these reasons, the Court was of the view that where a conflicted trustee has participated in the decision-making, the resulting decision is voidable “regardless of whether there is a majority of
non-conflicted trustees”.[201][198]Naera v Fenwick [2013] NZCA 353 (Arnold, Stevens and White JJ) [Naera (CA)] at [97].
[199]At [98].
[200]At [99].
[201]At [99].
The Court of Appeal recognised that its approach might cause some problems but saw these as manageable:
[103] We acknowledge that it might be said that applying these principles could cause administrative inconvenience to trustees because of the fact that many trustees of Māori trusts are likely to be conflicted. However, we are confident that the Act provides the appropriate tools for trustees to manage such conflicts. For example, trustees may remove themselves from decision making under s 227A, or apply for a variation to the trust deed under s 244. Alternatively an application for directions to the Māori Land Court might be appropriate. If those mechanisms are thought to be insufficient, it may be necessary to consider legislative change.
To my way of thinking, it is a distinctly odd feature of the case that the Court of Appeal felt able to express conclusions as to the voidability of the joint venture agreements (a) when this issue arose formally for the first time on what was a second appeal, and (b) in proceedings to which the other participants in the joint venture agreement were not parties. As well, the Court’s conclusion that it was open to the beneficiaries challenging the joint venture agreement to apply to set it aside is not obvious, at least to me. But, in agreement with the majority, I accept that this Court now has no choice but to engage with the reasoning of the Court of Appeal. On the other hand, and perhaps just as a sop to my anxiety on this issue, my preference is that such engagement should be expressed to be provisional only. Hence some caution in the expression of the views which follow.
The applicability of the self-dealing rule
On the basis of the review of the authorities by Glazebrook J,[202] I am inclined to accept that the self-dealing rule is applicable to joint venture agreements of the kind involved in this case. In other words, as presently advised, I do not see the
self-dealing rule as restricted to purchases.[202]See above at [75]–[81].
Mrs Fenwick’s very substantial interest in the Paehinahina Mourea Trust was well known to the trustees (and no doubt to many of the beneficiaries) of both trusts. The Maori Land Court judgment acquitted her of having acted in her own financial interests or other impropriety and likewise concluded that the other trustees were not influenced in their decision-making by her interest in the Paehinahina Mourea Trust.[203] In issue is whether these considerations, along with the fact that a
non-conflicted majority of the trustees supported the joint venture agreement, is an answer to the application of the self-dealing rule.[203]Naera (MLC), above n 178, at [150].
The only authority cited by the Court of Appeal in support of its conclusion that the joint venture agreement was voidable despite it being approved by a majority of non-conflicted trustees was Re Thompson’s Settlement.[204] There Vinelott J said:[205]
The principle [ie the self-dealing rule] is applied stringently in cases where a trustee concurs in a transaction which cannot be carried into effect without his concurrence and who also has an interest in or owes a fiduciary duty to another in relation to the same transaction. The transaction cannot stand if challenged by a beneficiary because in the absence of an express provision in the trust instrument the beneficiaries are entitled to require that the trustees act unanimously and that each brings to bear a mind unclouded by any contrary interest or duty in deciding whether it is in the interest of the beneficiaries that the trustees concur in it.
[204]Re Thompson’s Settlement [1986] Ch 99 (Ch).
[205]At 115 (emphasis added).
The passage which I have emphasised shows that the Judge had in mind a trust constituted on the basis that the unanimity of trustees is required. Re Thompson’s Settlement is therefore not directly on point in the present context.
Despite the absence of authority which is directly on point, I have reached the provisional view that the self-dealing rule is applicable in the present context and its operation is not excluded by the fact that a majority of non-conflicted trustees approved the transaction. As I have noted, trustees of ahu whenua trusts make decisions on behalf of others. There is thus every reason why ordinary fiduciary principles should apply.[206] Indeed, as explained, s 227A is an endorsement of their application. While the potential for conflicts of interest may be greater with trusts under the Te Ture Whenua Act than with other trusts, the Act provides mechanisms for addressing this, including s 227 and 227A and the availability of access to the Maori Land Court. All in all, it seems to me that to conclude that the self-dealing rule is not applicable in the present case would be likely to have an unsettling effect on the performance by trustees of their duties.[207]
[206]Indeed, the panel appointed to review the Te Ture Whenua Maori Act in 2014 recommended that the duties and obligations of Maori land trustees ought to align with the general law applying to similar entities, and that Maori land law should be clarified to achieve this end: see Te Ture Whenua Maori Act 1993 Review Panel, above n 191, at 29.
[207]There is academic support for the proposition that equitable rules apply other than to the extent to which s 227A permits conflicts of interest: see Chris Kelly and Greg Kelly Garrow and Kelly Law of Trusts and Trustees (7th ed, LexisNexis NZ, Wellington, 2013) at [29.36].
A rationale of the self-dealing rule is the desirability of avoiding after the fact assessment of decision-making processes of the kind engaged in by Judge Harvey. Those who were involved in challenged decisions can be expected to deny any suggestion of improper influence and such denials may be hard to refute. It is a striking feature of the case that the interest of Mrs Fenwick and her family in the Paehinahina Mourea Trust (at around 25 per cent) is distinctly greater than her interest in the Tikitere Trust (just under 2 per cent). As well, and as noted by Judge Harvey in the Maori Land Court,[208] it is unfortunate that the other trustees acquiesced in her participation despite being well aware of her involvement in the Paehinahina Mourea Trust.
The consequences of the application of the self-dealing rule
[208]Naera (MLC), above n 178, at [148].
As is apparent, I am distinctly uncomfortable with the Court of Appeal reaching a conclusion as to the voidability of the joint venture agreement in proceedings to which those potentially affected by that conclusion were not parties. That said, I am prepared to accept – subject to anything which might be said to the contrary by those yet to have been heard in this dispute – that the effect of the
self-dealing rule in the present circumstances is to render the joint venture agreement potentially voidable[209] but that its avoidance would be subject to the interests of innocent third parties. There nonetheless remain questions which, with respect, were not addressed by the Court of Appeal as to whether the joint venture agreement should be avoided and, if so, by whom.[209]Naera (CA), above n 198, at [90] and [102].
In the case of an ordinary trust and a breach of the self-dealing rule in which no third party is involved (eg where the trustee acquires trust property), the decision whether to avoid the transaction could be made by the trustees for the time being and by any beneficiary.[210] I am, however, inclined to the view that different considerations apply where, as here, in issue is a contract between the trust and a third party to the trust in which one of the trustees is interested and where such avoidance is likely to involve litigation which will have to be funded and possibly a restitutio in integrum by the trust if the litigation is successful. On this hypothesis, the beneficiary will not be directly in contract with the third party. It seems to me that where there is an intra-trust dispute (a disagreement among the trustees and beneficiaries as to what should be done) the question whether to avoid the contract (and engage in the ensuing litigation) would be best resolved by an application to the Court by the trustees under s 66 of the Trustee Act. As well, in the present context of the Te Ture Whenua Maori Act, I would see a conclusion that a single beneficiary under an ahu whenua trust has the power to insist on avoidance as inconsistent with what is envisaged by s 17(2)(d) (the “unreasonable minority”) of that Act and its scheme and purpose.
[210]See J Mowbray and others Lewin on Trusts (18th ed, Sweet & Maxwell, London, 2008)The joint venture could be avoided by new trustees appointed by the Court, albeit that if this happened, the actions of those trustees might themselves be subject to review under s 231. In this context, I can see two practical ways of addressing the problem:
(a)The Maori Land Court could, on the reconsideration which is now required, deal with the issue effectively as an application for directions as to whether to seek rescission, and thus, without the participation of the other parties to the joint venture, decide whether the trustees should take steps to avoid the joint venture agreement. If the trustees were directed to take such steps, they could then commence litigation against the other parties to the joint venture agreement.
(b)The Court could possibly conflate these steps by joining the other parties to the joint venture to the proceedings and conduct a single hearing. The first issue at the hearing would be to determine whether avoidance litigation is appropriate, when viewed from the perspective of the Tikitere Trust. If so, the second issue would be to determine whether, as between the Tikitere Trust and the other parties, the agreement is to be rescinded.
Such conflation would be dependent upon the Maori Land Court having jurisdiction to deal with the rescission proceedings, a point on which we did not hear argument.[211] And leaving aside this point, I suspect that a conflated process may in the end prove to be the sort of short cut that results in the long way home. For this reason and because of the potential for confusion as to what material may be relevant to what issue, I consider that a conflated hearing should occur only if all parties agree.
[211]See n 157 above.
Solicitors:
Dowthwaite Law, Rotorua for Appellants
Woodward Law Offices, Lower Hutt for First Respondents
at [20–110]. The parties in this case dispute whether there has been a sale to or other involvement by innocent third parties. The remedy can also be refused in the case of delay or waiver but those have not been alleged in this case.
self-dealing rule in Re Thompson’s Settlement, above n 110, at 115 covers not only a conflict between interest and duty but also a conflict of duties owed separately to entities involved in a transaction. We do not need to consider whether the rule extends this far, given that the alleged conflicts in this case are between interest and duty, except in the case of Mrs Emery where the exclusion in s 227A(2) for interests as a trustee of another trust applies by analogy.
self-dealing rule may not apply if the trustee is not a director but merely interested in the company. This same distinction, while not discussed in any depth, is also referred to in J E Martin Hanbury & Martin: Modern Equity (19th ed, Sweet & Maxwell, London, 2012) at [21–009] fn 53. The authors of Halsbury’s Laws of England (5th ed, 2013) vol 98 Trusts and Powers at [378] and n 13 also cite Farrar and Re Thompson’s Settlement, above n 110, when stating that if the sale is in all respects in good faith a trustee may sell to a joint stock company of which he or she is a shareholder but the situation is otherwise where the trustee is a director. Hayton, above n 108, at [55.10] and [55.18] also cites the more flexible approaches taken in Hillsdown and Public Trustee v Cooper and cites Farrar and the Privy Council case of Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54 (PC).
self-dealing rule but, rather than being based on the no conflict rule, are based on the proposition that a person cannot be both seller and buyer. If breached, these rules have the effect of rendering the transaction void. The genuine transaction rule closes a gap in the two party rule by ensuring that a sale to a nominee of the trustee is also caught. It stops a trustee from disguising the true nature of the transaction.
at [39–67]–[39–76]. The expression “any beneficiary” is used in Tito v Waddell (No 2) [1977] Ch 106 (Ch) at 241.
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