Fullerton-Smith v Fullerton-Smith HC Hamilton CIV 2011-419-615

[2011] NZHC 999

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV 2011-419-615

BETWEEN  GILLIAN MARY FULLERTON-SMITH Plaintiff

ANDMICHAEL ALEXANDER FULLERTON- SMITH

First Defendant

ANDGILLIAN MARY FULLERTON-SMITH, MICHAEL ALEXANDER FULLERTON- SMITH AND BAILEY INGHAM TRUSTEES LTD, AS TRUSTEES OF THE M A FULLERTON-SMITH NO. 2

TRUST

Second Defendant

Hearing:         25 August 2011

Counsel:         S J Rawcliffe and J Gilby-Todd for Plaintiff

C T Gudsell QC for Defendants

Judgment:      26 August 2011

JUDGMENT OF HEATH J

This judgment was delivered by me on 26 August 2011 at 4.15pm pursuant to Rule 11.5 of the High

Court Rules

Registrar/Deputy Registrar

Solicitors:

Harkness Henry, Hamilton Nielsen Law, Hamilton Counsel:

D A T Hollings QC, Auckland

C T Gudsell QC, Hamilton

FULLERTON-SMITH V FULLERTON-SMITH HC HAM CIV 2011-419-615 26 August 2011

The application

[1]      This application involves legal professional privilege.   Mrs Fullerton-Smith seeks  leave  to  refer  at  trial  to  three  letters  sent  by  a  barrister,  Mr  Hudson,  to Mr Fullerton-Smith.

[2]      Two substantive questions arise.   The first is whether Mr Fullerton-Smith received  the  legal  advice  in  his  personal  capacity,  or  as  a  trustee  of  the  M A Fullerton-Smith  No.  2  Trust  (the  Trust).    If  the  latter,  it  will  be  necessary  to determine whether Mrs Fullerton-Smith, as a co-trustee, can waive the privilege

attaching to the correspondence.1     The second is whether, if Mr Fullerton-Smith

holds the privilege, on the basis that the correspondence discloses a prima facie case that it came into existence for some dishonest purpose.2

[3]      The relevant correspondence was inadvertently forwarded to the solicitors for Mrs Fullerton-Smith by Mr Hudson’s secretary.  Evidence before the Court confirms that inadvertence.   Correctly, having regard to that evidence, Mrs Fullerton-Smith now accepts that Mr Fullerton-Smith has not, himself, waived privilege.

The proceeding in outline

[4]      Michael and Gillian Fullerton-Smith began living together in a de facto relationship in January 1996, married in March 1997 and separated in October 2008. They have three children, now aged 8, 11 and 13 years.

[5]      Although  there  are  relationship  property  issues  to  resolve,  the  present proceeding concerns the Trust.   At  the time that  it  was  launched,  Mr and  Mrs Fullerton-Smith  and  Bailey  Ingham  Trustees  Ltd  (the  trustee  company)  were trustees.   I was advised, at the hearing, that Mrs Fullerton-Smith has since been

removed by her former husband, exercising powers as “appointor” under the Deed of

1 Evidence Act 2006, ss 54, 65 and 66.

2 Ibid, s 67(1).

Trust.   The power of appointment conferred by the Deed includes an ability to remove co-trustees.

[6]      Mrs Fullerton-Smith has issued this proceeding in an endeavour to remove Mr Fullerton-Smith and the trustee company as trustees and to have someone independent  appointed  in  their  stead.     She  also  seeks  an  order  “removing” Mr Fullerton-Smith’s  power  of  appointment.    Consequential  orders  are  sought, requiring new trustees to report to the Court on the stewardship of the present trustees and authorising the new trustees to sell Trust property and to distribute in accordance with a regime suggested by Mrs Fullerton-Smith.  Mrs Fullerton-Smith alleges that, during the time that she held office as a trustee, she was excluded from its affairs.  Mrs Fullerton-Smith seeks to remove the trustee company, on the grounds that it is too closely aligned to Mr Fullerton-Smith personally and is unable to exercise its duties as a co-trustee independently.

[7]      The Trust is discretionary in nature.  It was settled on 15 July 1993, by Mr Fullerton-Smith’s father.  Those who may qualify as discretionary beneficiaries are described only in general terms.  For present purposes, the class includes any “future spouse” of Mr Fullerton-Smith.  When he and Mrs Fullerton-Smith married in 1997, she met that criterion.   Whether (after dissolution of the marriage) Mrs Fullerton- Smith continues to hold that status is in dispute.

[8]      In the absence of other substantial relationship property, access to assets held in the Trust has assumed significance to Mrs Fullerton-Smith.  Save for a debt owed by the Trust to Mr Fullerton-Smith, some family chattels and a claim for compensation for the absence of a family home, the Trust assets seem to be Mrs Fullerton-Smith’s main target.

[9]      Mrs  Fullerton-Smith  contends  that  her  former  husband  has  “exhibited hostility”  towards  her  and  their  children,  such  behaviour  extending  to  “being secretive regarding the operation of the trust” and “using his role as trustee of the ... Trust and [Mrs Fullerton-Smith’s] lack of knowledge in a tactical way to obtain his desired outcome in respect of the division of relationship property”.  Mrs Fullerton- Smith also alleges that Mr Fullerton-Smith has breached his fiduciary duty as a

trustee and appointor by (among other things) preferring his own interests to those of the beneficiaries and failing to act impartially as among beneficiaries.

[10]     Mr Ingham, the representative of the trustee company, is also alleged to have exhibited “clearly antagonistic” behaviour towards Mrs Fullerton-Smith and to have involved himself in “proposed sham transactions” designed “to remove [Mrs Fullerton-Smith] as a trustee and resettle the No. 2 Trust assets into a further trust in order  to  defeat  [Mrs  Fullerton-Smith’s]  entitlement  under  the  Property (Relationships) Act 1976”.

Analysis

(a)      Who holds the privilege?

[11]     The common law right to claim legal professional privilege in respect of communications with a legal adviser is now reflected in s 54 of the Evidence Act

2006 (the Act).   Generally, a privilege for such communications exists if it were intended to be confidential and was made in the course of and for the purpose of obtaining legal advice.3   Section 65 of the Act specifies the circumstances in which such a privilege may be waived.  Only the person who holds the privilege is entitled to waive the benefit of it.4

[12]     The Act provides for circumstances in which there may be joint interests in a privileged communication.5   In circumstances where a joint privilege is conferred, it may be waived by any one of those entitled to assert it against third parties.6    The circumstances in which a privilege held by two or more persons may be waived were

discussed in Gemini Personnel Ltd v Morgan & Banks Ltd.7

3 Evidence Act 2006, s 54(1).

4 Ibid, s 65(1).

5 Ibid, s 66.

6 Ibid, s 66(1)(b). See also Mahoney, McDonald, Optican and Tinsley, The Evidence Act 2006: Act & Analysis (Thomson Reuters, 2nd ed, 2010) at para EV 66.03.

7 Gemini Personnel Ltd v Morgan & Banks Ltd [2001] 1 NZLR 672 (CA) at paras [24] and [25]. This decision was given before the Evidence Act 2006 came into force.

[13]     Between 1 and 15 April 2011, Mr Fullerton-Smith received three letters from counsel instructed by Lamb Bain Laubscher, solicitors, Te Kuiti.   That firm had previously acted for the trustees of the Trust.  Evidence given by Mr Lamb explains the basis on which counsel was instructed.  Mr Lamb deposes that he was advised by Mr Fullerton-Smith, in or around December 2008, that Mrs Fullerton-Smith was living in Chile and was in a relationship with another man.   From that time, he deposes that he acted for Mr Fullerton-Smith in his personal capacity, until May

2011.  During that time he instructed Mr Hudson to act as counsel for Mr Fullerton- Smith “in trying to resolve issues between [Mr and Mrs Fullerton-Smith]”.   Mr Lamb states expressly that he did not instruct Mr Hudson to act for the Trust or any other entity.

[14]     Mr Fullerton-Smith has deposed that Mr Hudson was engaged to provide advice to him personally, about relationship property issues.

[15]     I have had the opportunity to review the three letters in issue.   They are addressed to Mr Fullerton-Smith.  They deal both with matters (legal and financial) relating  to  the Trust  and  relationship  property.   Without  going  into  detail,  they provide legal and tactical advice to Mr Fullerton-Smith in relation to those issues.

[16]     The first question is whether Lamb Bain Laubscher instructed Mr Hudson to provide advice for Mr Fullerton-Smith alone.  The only factor to which counsel for Mrs Fullerton-Smith can point, to suggest that the position was otherwise, is that Mr Ingham,  of  the  trustee  company,  received  copies  of  the  correspondence. However, the evidence seems to suggest that Mr Ingham was also involved in the provision of personal advice to Mr Fullerton-Smith.   While that aspect may be relevant to the removal issue, I do not consider it helps Mrs Fullerton-Smith on this application.

[17]     On the evidence before me (which, at this interlocutory stage, is necessarily unchallenged), I am satisfied that Mr Fullerton-Smith’s solicitors instructed counsel to provide personal advice to Mr Fullerton-Smith.   In those circumstances, no question of joint interest in a privilege arises.  Any privilege can be waived only by Mr Fullerton-Smith.  He has not done so.

[18]     Mrs Fullerton-Smith may (or may not) have some complaint about the fact that the solicitors whom she asserts previously acted for the trustees also purported to act as solicitor for her former husband.  That is a different point.  Whether any issue arises out of an alleged breach of the fiduciary duty of loyalty to an existing client may require separate determination, if raised.   I make no comment on the point, one way or the other.

(b)      “Dishonest purpose”

[19]     Section 67 of the Act provides for circumstances in which a Judge may disallow a claim for privilege.  Legal professional privilege is one of the privileges to which s 67 refers.  Section 67(1) provides:

67       Powers of Judge to disallow privilege

(1)       A Judge must disallow a claim of privilege conferred by any of sections  54  to  59  and  64  in  respect  of  a  communication  or information if satisfied there is a prima facie case that the communication was made or received, or the information was compiled or prepared, for a dishonest purpose or to enable or aid anyone to commit or plan to commit what the person claiming the privilege knew, or reasonably should have known, to be an offence.

....  (my emphasis)

[20]     To succeed on this aspect of the claim, Mrs Fullerton-Smith must point to a prima facie case that the three communications to which she refers were “made or received, ... for a dishonest purpose”.   Albeit before the Act’s codification of the principle, the ambit of the “dishonest purpose” exception was examined by the High Court and the Court of Appeal, in Gemini Personnel Ltd v Morgan & Banks Ltd.8

[21]     At first instance, in Gemini, Laurenson J attempted to identify the ambit of the “fraud” exception to privilege.  The cases that precede the Act speak of “fraud” rather than “dishonest purpose”, though nothing may turn on that.  Laurenson J said:

[68] The question is therefore, to determine, within the area of non-criminal fraud, the nature of the fraud which is sufficient to warrant removal of the protection of privilege. As I have already indicated, in my view, the answer

8 Gemini Personnel Ltd v Morgan & Banks Ltd [2001] 1 NZLR 14 (HC) at para [68] and Gemini

Personnel Ltd v Morgan & Banks Ltd [2001] 1 NZLR 672 (CA) at paras [26]–[34].

to  this  is  supplied  by  a  consideration  of  whether  or  not  the  fraudulent conduct,  eg  breach  of  a  fiduciary  duty,  is  attended  by  dishonesty,  ie conscious deception or sharp practice. In other words three elements are required before privilege can be excluded:

(a) The conduct must be prejudicial to the interests of another; and

(b) Sufficient to attract a civil remedy; and

(c) Be attended by dishonesty, ie conscious deception or sharp practice.

[69] On my analysis such a definition would not remove the protection of privilege  in any case  where  a client quite legitimately sought  advice in relation to breaching a contract or even committing a tort, even if the advice if acted upon, subsequently proved to be incorrect.

[22]     On  appeal,  the  Court  of Appeal  took,  as  its  definition,  a  passage  from O’Rourke v Darbishire9  cited with approval in Matua Finance Ltd v Equiticorp Industries Group Ltd,10 in which Viscount Finlay said:

This is clear law, and, if such guilty purpose was in the client's mind when he sought the solicitor's advice, professional privilege is out of the question. But it is not enough to allege fraud. If the communications to the solicitor were for the purpose of obtaining professional advice, there must be, in order to get rid of privilege, not merely an allegation that they were made for the purpose of getting advice for the commission of a fraud, but there must be something to give colour to the charge. The statement must be made in clear and definite terms, and there must further be some prima facie evidence that it has some foundation in fact. It is with reference to cases of this kind that it can be correctly said that the Court has a discretion as to ordering inspection of documents. It is obvious that it would be absurd to say that the privilege could be got rid of merely by making a charge of fraud. The Court will exercise its discretion, not merely as to the terms in which the allegation is made, but also as to the surrounding circumstances, for the purpose of seeing whether the charge is made honestly and with sufficient probability of its truth to make it right to disallow the privilege of professional communications. In the present case it seems to me clear that the appellant has not shown such a prima facie case as would make it right to treat the claim of professional privilege as unfounded.

[23]     Recently, the issue was considered by Kós J in Red Bull GMBH v Manhass Industries Ltd.11   In that case, the plaintiffs suspected that two representatives of the defendants  were  (as  Kós  J  put  it)  “collectively  cooking  up  a  new  revocation

application” in direct breach of an obligation under a settlement agreement in respect

9 O’Rourke v Darbishire [1920] AC 581 (HL) at 604

10 Matua Finance Ltd v Equiticorp Industries Group Ltd [1993] 3 NZLR 650 (CA) at 653-654 (Cooke P).

11 Red Bull GMBH v Manhaas Industries Ltd HC Wellington CIV 2010-485-1866, 29 July 2011.

of  a  disputed  trademark.12      The Judge  stressed  two  factors.    The  first  was  the continuing importance of legal adviser privilege (as highlighted in B v Auckland District Law Society13) and the “very limited exception” where a communication is made  or  received  “for  a  dishonest  purpose”.14     Referring  to  Laurenson J’s articulation of the test in Gemini as “perhaps less stringent”, Kós J suggested that “fraud, sham or trickery” was required to defeat the privilege.15   I tend to agree with Kos J’s formulation, which appears more nearly to capture the sentiments expressed by Viscount Finlay that were cited with approval by the Court of Appeal in Gemini.16

I do not attempt to determine the correct test.

[24]     On any view, the evidence is insufficient to pass the relevant threshold.  On an interlocutory application such as this, there is no ability (as of right) to cross- examine a deponent on the reasons why certain advice was sought.  A skilful cross- examiner, at trial, might be able to establish a particular purpose, once viewed within the confines of a temporal context.  However, there is little in the evidence that can assist Mrs Fullerton-Smith, outside of the terms of the correspondence that has been produced to me.

[25]     I  readily  accept  that  there  are  aspects  of  the  correspondence  that  Mrs Fullerton-Smith might suspect reflects an intention on the part of her former husband to undertake certain acts with a view to  disadvantaging her financially, both in respect of relationship property claims and in relation to any beneficial interest in the Trust.  But, in my view, the evidence does not go far enough to establish a prima facie  case  of  “dishonest  purpose”,  of  the  type  contemplated  by  s 67(1).    The correspondence is equally consistent with frank advice provided by counsel to Mr Fullerton-Smith for his personal benefit.  Whether the subsequent exercise of powers as appointor amount to a fraud on a power (in a trust law sense) may (or may not)

require consideration later.

12 Ibid, at para [37].

13 B v Auckland District Law Society [2004] 1 NZLR 326 (PC).

14 Red Bull GMBH v Manhaas Industries Ltd HC Wellington CIV 2010-485-1866, 29 July 2011 at paras [39] and [40].

15 Ibid, at para [40]. See also Crescent Farm (SIDCUP) Sports Ltd v Sterling Offices Ltd (1972) Ch

553 (ChD) at 565. This view gains support from Mahoney, McDonald, Optican and Tinsley, The

Evidence Act 2006: Act & Analysis (Thomson Reuters, 2nd ed, 2010) at para EV 67.02.

16 See para [22] above.

[26]     The evidence is insufficient for a finding to be made which would defeat the privilege claimed by Mr Fullerton-Smith.  I do not exclude the possibility that the issue  may  require  review  at  trial  as  a  result  of  any  cross-examination  of Mr Fullerton-Smith or Mr Lamb that may be conducted.

Result

[27]     For the reasons given, the application is dismissed.

[28]     Partly at the request of counsel for Mr Fullerton-Smith and partly of my own volition, I make the following directions:

(a)      The Registrar shall remove, from the submissions of counsel for Mrs Fullerton-Smith, the letters dated 1, 6 and 15 April 2011 that are attached to them.   That correspondence shall be placed in a sealed envelope on the Court file, not to be opened without leave of a Judge of this Court.

(b)Subject to the ability of the Court to revisit the issue of “dishonest purpose” should additional evidence become available:

(i)The letters of 1, 6 and 15 April 2011 shall not be disclosed in any proceedings, and

(ii)No evidence shall be given in any proceeding of the three letters.

[29]     It will be necessary for counsel to confer with a view to redacting such evidence as is already before the Court, before a trial of the substantive claims. Should any particular difficulties arise in that regard, leave to apply for further directions is reserved.

[30]     There is no reason why costs should not follow the event.  Costs are awarded in favour of Mr Fullerton-Smith on a 2B basis, together with reasonable disbursements.  Both are to be fixed by the Registrar.

[31]     The  Registrar  shall  set  this  proceeding  down  for  a  case  management conference at the end  of the Chambers’ List  on Wednesday 7 September 2011. Arrangements can be made for counsel to attend by telephone, if necessary.  At that conference, the presiding Judge shall make any further directions that may be necessary to ready the substantive application for trial.   Counsel advise that time may be available in October 2011. That will need to be confirmed by the Registrar.

[32]     I thank counsel for their assistance.

P R Heath J

Delivered at 4.15pm on 26 August 2011