Gillespie v Guest
[2014] NZHC 2368
•26 September 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-001629 [2014] NZHC 2368
BETWEEN BRUCE JAMES GILLESPIE,
PRUDENCE JULIET GILLESPIE, CHRISTOPHER JAMES GILLESPIE, NICHOLAS JOHN GILLESPIE and JONATHAN PAUL GILLESPIE Plaintiffs
AND
ANDREW DEXTER GUEST First Defendant
VIRANDA PROPERTY NETWORK LIMITED
Second Defendant
RSM PRINCE & PARTNERS First Third Party
GRAEME HAMILTON SINCLAIR Second Third Party
Hearing: 18 August 2014 Appearances:
P Cogswell for First Defendant
Second Third Party in PersonJudgment:
26 September 2014
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 26 September 2014 at 4.30 pm
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date………………………..
GILLESPIE v GUEST & ORS [2014] NZHC 2368 [26 September 2014]
Introduction
[1] Andrew Guest is, among other things, an experienced property consultant. In
2006 one of his clients, the Gillespie Family Trust (GFT), loaned $1.83m to a developer. Graeme Sinclair was involved in the project. He guaranteed the loan, along with the developer’s two directors. The borrower defaulted. The guarantors compromised GFT’s claim under the guarantee for $1.1m, of which Mr Sinclair’s share was $314,000. GFT sued Mr Guest for the shortfall and that claim was also compromised, with Mr Guest paying $300,000. Mr Guest now seeks contribution
from Mr Sinclair.1
[2] The claim for contribution is brought on the alternative bases of Mr Sinclair and Mr Guest being concurrent tortfeasors for the purposes of s 17(1)(c) of the Law Reform Act 1936 or in equity on the basis that the nature and extent of their liability is the same.
[3] Mr Sinclair was unrepresented and did not made legal submissions. However, his position was that he had paid a fair contribution to GFT’s loss and should not be liable to pay more by way of contributing to Mr Sinclair’s settlement sum.
Background
[4] For many years Mr Guest carried on business as a property consultant through his family trust’s interest in a business known as Viranda Property Network Ltd which owns and manages commercial properties. Through Viranda Mr Guest advised and assisted GFT in relation to property investment, though it also invested independently of Viranda without Mr Guest’s input. Bruce and Prudence Gillespie controlled GFT. Mr Guest regarded Mr and Mrs Gillespie as personal friends.
[5] By 2005, following changes in the ownership structure of the Viranda Property Network the business was partly controlled by Mr Guest’s interests and partly controlled by interests associated with John Pendergast and Richard Chisholm,
who also controlled a business known as Titan 1.
1 Mr Guest is precluded from proceeding against the other guarantors by unrelated contractual arrangements.
[6] In 2005 GFT invested in a commercial property development in Christchurch. This investment had been introduced by Messrs Pendergast and Chisholm. It was a joint venture with Titan 1 and it was successful.
[7] In 2006 Titan 1’s financial controller, Peter Thompson, approached Mr Guest to discuss a new project, a residential subdivision in Taupo. The development was being undertaken by a partnership comprising Titan 1, Messrs Pendergast and Chisholm and Graeme Sinclair, who was an associate of Messrs Pendergast and Chisholm. Mr Guest had met Mr Sinclair when Messrs Pendergast and Chisholm acquired their interest in Viranda.
[8] Mr Guest raised the idea with Mr Gillespie, who was interested. It was proposed that GFT lend Titan 1 Finance Ltd $1.83m for a period of 12 months. Because a registered security would rank behind existing mortgages Mr Guest discussed the idea of personal guarantees by Messrs Pendergast, Chisholm and Sinclair. Mr Guest liaised with the Gillespie Family Trust’s account, Colin Wilson, regarding the guarantees. Although Mr Guest had a high degree of confidence in the three guarantors he sought further financial information about Titan 1 and about the guarantors.
[9] Mr Pendergast provided Mr Guest with a statement of his “group” position, showing a net worth of interests associated with him of $30m, though none of the assets were owned held by him personally. Mr Guest was not concerned by this but, in hindsight, considers that he put insufficient weight on this fact.
[10] The loan proceeded in November 2006. Interest payments were made and there were no problems. The following year Titan 1 enquired whether the loan could be extended for a further 12 months. Mr Gillespie was initially agreeable to this and an increase in the interest rate was negotiated. Before the re-advance was made, however, he expressed concern about the strength of the guarantees. It is apparent from the correspondence between Mr Gillespie and Mr Wilson that Mr Gillespie was fully alert to the risk of the guarantees being worthless if the guarantors did not own assets in their own names. It was agreed that Mr Guest and Mr Wilson would make further enquiries. Mr Guest and Mr Wilson then agreed that Mr Wilson would contact Peter Thompson.
[11] In response to these enquiries Mr Wilson received a letter from the accountants acting for Messrs Pendergast and Chisholm confirming that the “entities of John Pendergast and entities of Richard Chisholm have substantial assets behind their personal guarantees”. This letter was apparently provided to Mr Gillespie. On the basis of that information the loan was re-advanced for a further year. After the re-advance Mr Sinclair’s accountant wrote, advising that Mr Sinclair’s main assets were held by family trusts.
[12] Titan 1 made interest payments in February, May and August 2008 but by
November 2008 it was insolvent and defaulted on the November payment.
GFT claims against Mr Sinclair and Mr Guest
[13] GFT obtained judgment against Titan 1 for the amount of the loan, together with interest and costs. The guarantee was not put in evidence so I do not know whether the guarantors’ liability arose immediately or upon GFT’s default. In any event, Titan 1’s insolvency exposed the guarantors to a claim for the full amount of the debt and they settled those obligations for a total of $1.1m. As already noted, Mr Sinclair’s share of this figure was $314,000.
[14] Having settled with the guarantors GFT commenced the current proceedings against Mr Guest seeking an amount not less than $1.45m. In order to put an end to the ongoing costs and in recognition of the litigation risk, Mr Guest settled with GFT for $300,000. His claim for contribution against Mr Wilson’s firm, RSM Prince & Partners has been settled for $50,000.
[15] In its statement of claim GFT pleaded that Mr Guest had been the primary financial adviser for the Gillespie family and the GFT between 19872 and 2008 and that his services included providing advice and due diligence in relation to the purchase of commercial and residential investment properties, the management of property investments, the resolution of property disputes and advice on family
matters.
2 On Mr Guest’s evidence this would be incorrect; he says that he did not meet Mr and Mrs
Gillespie until 1994.
[16] It was further alleged that Mr Guest had, on a number of occasions, purported to act as a trustee of the GFT. This was clearly an issue between the parties; Mr Guest asserted that he had been asked to and agreed to act as a trustee, that no deed had formally been executed but that a deed was not required for the appointment to be effective. Mr Guest’s assertion and his claim to the benefit of the
limitation of liability under the GFT trust deed failed on a strike out application.3
[17] Four causes of action were pleaded. The first was for breach of fiduciary duty based on the alleged fiduciary relationship arising from the background between the parties. It was alleged that Mr Guest failed in his fiduciary obligations by failing to undertake adequate due diligence in relation to the Titan 1 loan, recommending the investment knowing it involved a high degree of risk, failing to ensure that the loan was properly secured and failing to advise the GFT when there were concerns as to whether the re-advance would be repaid. It was further alleged that he acted in a conflict position.
[18] The second cause of action alleged a breach of contract or retainer. This cause of action alleged obligations on Mr Guest under a general contract of retainer that included an obligation to exercise reasonable skill and care in undertaking due diligence in relation to potential investment opportunities, ensuring that all relevant information was provided, that investments were appropriately secured and monitored.
[19] The third cause of action was in negligence; this cause of action appears to be co-extensive with the breach of contract cause of action.
[20] The fourth cause of action alleged a breach of the Fair Trading Act by making false and misleading representations in advising that, amongst other things, the Titan 1 investment was fully secured, fully guaranteed, that the guarantors were of substantial personal worth and the investment was low-risk.
Mr Guest’s claim for contribution against Mr Sinclair
[21] In his amended statement of claim dated 7 March 2014 Mr Guest pleads the claim by GFT against him and his settlement of it as being a reasonable settlement.
3 Gillespie v Guest [2013] NZHC 669.
He pleads Mr Sinclair’s obligation as guarantor and asserts that in these circumstances he is entitled to a contribution to the extent of a complete indemnity pursuant to s 17(1)(c) of the Law Reform Act 1936 or in equity. A second cause of action is pleaded that effectively asserts that Mr Sinclair was or would, if sued, have been liable to GFT in deceit, grounding a claim for contribution as concurrent tortfeasors.
Contribution under s 17(1)(c)
[22] Section 17 of the Law Reform Act 1936 provides that for contribution between tortfeasors. A claim for contribution under s 17(1)(c) may be brought even against a party who is not actually liable in tort, provided that person could have been sued in tort.4 Section 17(1)(c) provides:
(1) Where damage is suffered by any person as a result of a tort
(whether a crime or not) –
…
(c) Any tortfeasor liable in respect of that damage may recover contribution from any other tortfeasor who is, or would if sued in time have been, liable in respect of the same damage, whether as a joint tortfeasor or otherwise, so, however, that no person shall be entitled to recover contribution under this section from any person entitled to be indemnified by him in respect of the liability in respect of which the contribution is sought.
[23] Mr Guest is properly viewed as a tortfeasor vis-à-vis GFT; his liability, although expressed variously, includes liability in negligence and negligent representation. However, Mr Sinclair is not properly viewed as a tortfeasor. He was liable only as guarantor and was sued as such. He could not have been sued on any other basis.
[24] I do not accept the assertion that Mr Sinclair could, if sued, have been liable in deceit. That claim is based on an assertion that during the course of Mr Wilson’s enquiries as to the financial strength of the guarantees, Mr Sinclair or his advisers falsely represented that he had sufficient financial ability to meet any guarantee obligation. The allegation is particularised by reference to two allegedly false
representations. The first was the letter from Mr Sinclair’s accountant, Mr Whittle,
4 Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30 (HC) at 122 – 124; ANZ Banking
Group (NZ) Ltd v Dairy Containers Ltd CA156/92, 17 December 1992 at 6 per Cooke P.
but Mr Guest himself pointed out in his evidence that this letter was written after GFT agreed to the re-advance. In any event, there was never any suggestion that the accountant’s letter was false. To the contrary, it made it abundantly clear that Mr Sinclair’s assets were largely held by a trust. It could therefore not have founded any liability by Mr Sinclair to GFT in deceit.
[25] The second false representation is said to have been made by Mr Thompson, the financial controller of Titan 1, when he “conveyed to GFT that the Titan 1 guarantors were of some substance and able to meet their obligations”. There is, however, no evidence of what Mr Thompson said and certainly none that Mr Sinclair knew what Mr Thompson said or authorised it. In cross-examination it was put to Mr Sinclair (who accepted) that Mr Thompson had specifically asked him to provide information to give the Gillespies assurance about the strength of the guarantee. Mr Sinclair responded that that was what had prompted him to get the letter from his accountant. But since the letter contained only true information and arrived after the re-advance was made I cannot see any significance in it. In these circumstances a cause of action in deceit could never have succeeded had it been brought by the Gillespies and Mr Sinclair’s claim for contribution as a concurrent tortfeasor with Mr Guest on that basis must fail.
Contribution in equity
[26] I turn then to the alternative argument that he should be entitled to contribution in equity, notwithstanding the respective liabilities arose from different sources. Mr Cogswell did seem to suggest that contribution might be available simply by virtue of both parties being liable in contract, citing Derring v Earl of
Winchelsea5 and Heaton v AXA Equity & Law Assurance Society plc.6 However, the
respective contractual obligations in this case are quite different and should simply be treated as creating a situation of mixed liability.
5 Derring v Earl of Winchelsea (1787) 1 Cox Eq Cas 318 at 321, 29 ER 1184 at 1185 (EXCH).
6 Heaton v AXA Equity & Law Assurance Society plc [2002] UKHL 15.
[27] The principle upon which contribution might be available in such circumstances is described by Gaudron ACJ and Hayne J in their joint judgment in Burke v LFOT Pty Ltd:7
In general terms, the principle of equitable contribution requires that those who are jointly and severally liable in respect of the same loss or damage should contribute to the compensation payable in respect of that loss or damage, either equally or where they are liable in the same amount or proportionately, where the amount of their liability differs. The principle has regularly been applied between co-sureties, co-insurers, partners, co-owners, where payment is made by one in discharge of a common liability and co- trustees who are in pari delicto.
The doctrine of equitable compensation applies both at common law and in equity. It is usually expressed in terms requiring contribution between parties who share “co-ordinate liabilities” or a “common obligation” to “make good the one loss”. More recently, in BP Petroleum Development Ltd v Esso Petroleum Co Ltd, the right to contribution was said to depend on whether the liability was “of the same nature and to the same extent”.
(footnote omitted)
[28] To like effect, Tipping J said in Marlborough District Council v Altimarloch
Joint Venture Ltd that:8
Equity will order contribution when two or more parties are under what is conventionally called a co-ordinate liability (that is a liability of the same nature and extent) to make good one loss and one of them pays more than his or her proportionate share of that loss. In such circumstances the overpaying party can recover equalising contribution from the other party or parties. It is essential to the application of the equitable contribution that all parties involved in the contribution issue are under a co-ordinate liability for the same loss.
[29] In Altimarloch the Supreme Court considered a claim for contribution between vendors of land who were liable under the Contractual Remedies Act 1979 for misrepresentations and a local authority which was liable for negligent misstatements relating to a LIM report. The majority agreed that whether contribution could be obtained depended on whether the respective liabilities were “of the same nature and extent”, though they were not able to agree on exactly would meet this test.
[30] Tipping J, with whom Blanchard J agreed, said:9
7 Burke v LFOT Pty Ltd [2002] HCA 17, (2002) 209 CLR 282 at 292 – 293.
8 Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11; [2012]; 2
NZLR 726 at [129]
9 At [145] – [148].
In Burke Gaudron ACJ and Hayne J held that the liabilities of the parties between whom contribution may be ordered must be “of the same nature and to the same extent”. McHugh J used the same formulation in the course of his reasons. In this respect I accept that it is not fatal that the causes of action are not the same. But, if they are not, the matter requires careful analysis in answering the two questions inherent in the test: (1) is the nature of each liability the same; and (2) are the liabilities of the same extent?
The first question requires a comparison of the nature of the liability of each party, not the consequences of that liability. The nature of the liability of the vendors in the present case is a liability to compensate the purchaser for the vendor’s failure to perform the promise inherent in a contractual term. By contrast, the nature of the liability of the Council is to compensate the purchaser for the consequences of the Council’s negligent misstatement which induced the purchaser to enter into the contract of purchase. I do not consider that it can properly be said that these liabilities are of the same nature. One is based on a broken promis; the other is based on a negligent statement. Different duties underlie the two liabilities.
The second question requires a comparison of the extent of the liability of each party. The extent of the vendor’s liability is to compensate the purchaser in money for the absence of the promised water rights. As will appear later, the extent of the vendors’ liability in this respect is based on the sum of money necessary to put the purchaser into the same position as if the contract had been properly performed, that is as if the promise had been fulfilled. By contrast the extent of the Council’s liability is to put the purchaser into the same position as if it had not entered into the contract at all; that is, to compensate the purchaser for the amount by which it is worse off from having entered into the contract. In the present case the former is
$1.05m and the latter $125,000. The liabilities of the vendors and the
Council to the purchaser are neither conceptually nor actually of the same extent. The only recognised situation when contribution is ordered in respect
of unequal amounts is when there is a pro rata difference in sharing a
common liability.
It is, with respect, not sufficient to say that the vendors and the purchaser made the same error in their representations and that each error was an operative clause of the purchaser’s entry into the contract. While these propositions are undoubtedly true, they represent a case of independent rather than common liabilities. The necessary commonality of liability is absent.
(footnote omitted)
[31] McGrath and Anderson JJ, whilst agreeing that contribution in a mixed liability situation should be available only where the liabilities were “of the same nature and extent” would have taken a less strict approach in determining whether the loss in question was of the same nature and extent. This difference in approach is not significany in the present case.
[32] The majority view that equitable contribution should be available where the parties’ liability is of the same nature and extent was applied by Winkelmann J in Financial Markets Authority v Hotchin.10 That case concerned a claim by the defendant in proceedings brought by the FMA for compensation under s 55G of the Securities Act 1978 in respect of allegedly untrue statements contained in prospectuses and investment statements, relied on by subscribers investing in debt securities. The debt securities were issued under trust deeds and the defendant sought contribution from the trustees to any compensation he might be required to
pay. Winkelmann J concluded that the defendant’s liability to the FMA and the trustees’ liability to the subscribers could not properly be regarded as co-ordinate liability. Her reasoning was:11
If it can be established that the trustees failed in their duty to monitor the affairs of the company for insolvency or breaches of the trustees deeds, the damage resulting will be the loss incurred by depositors while the trustees wrongfully failed to act. If it can be established that the directors made untrue statements, the damage resulting will be that the depositors invested in a company on reliance on untrue statements. These are different losses. Even if the trustees ought to have “pulled the plug” sooner, the trustees cannot be liable for the loss independently caused by the directors.
I heard argument also as to the precise measure of damages for each of the wrongs. For example, issue was joined between the parties as to whether the measure of damages under s 55G should be the whole of the depositor’s loss on investment (Mr Hotchin’s case) or the difference between the price paid for the securities on investment and their true value, also estimated as at that date. The assumption in forming this argument is that if the measure of loss is the same, contribution is available. I think that a mistaken view. The focus is upon whether the liability is of “the same nature and to the same extent” to use the language adopted in Burke cited earlier.
(footnote omitted).
[33] In the present case it is, likewise, clear that the respective liabilities of Mr Guest and Mr Sinclair are not of the same nature and extent. Mr Sinclair’s liability was of a primary obligor for the full amount of the debt. Depending on the terms of the guarantee he was liable for the full amount of the debt either from the date of the re-advance or from Titan 1’s default. The loss caused to the plaintiffs by his breach of his obligations was the amount of the debt (subject of course to
recovery from the other guarantors).
10 Financial Markets Authority v Hotchin [2013] NZHC 1611.
11 At [69] – [70].
[34] In comparison, the claims for breach of fiduciary duty, breach of retainer and negligence were based on Mr Guest’s failure to adequately assess and advise on the nature of the investment and level of risk posed by the advance to Titan 1 and the personal guarantees. The Fair Trading cause of action makes similar allegations but the cause of action is advanced on the basis of GFT’s reliance on representations made, leading to the re-advance. In a general sense these claims were based largely on the inadequacy of the guarantees and the complaint that, had the representations about the strength of the guarantees been correct GFT, would not have re-advanced the loan. GFT’s loss was its re-advancing of the money in the belief that the guarantors had sufficient assets to meet the debt. In fact, the guarantors had virtually no assets to their respective names and as a result the guarantees were worthless. GFT would have had a claim against its advisors at that point, albeit that its final loss
would not be quantified until the guarantee had been enforced.12
[35] The obligations on which Mr Guest and Mr Sinclair were each sued were entirely different. Their respective liabilities arising from the breaches of those obligations cannot be said to be of the same nature and extent. There is no basis on which Mr Guest can claim contribution from Mr Sinclair in respect of his payment to GFT.
Result
[36] The claim for contribution fails. Since Mr Sinclair was unrepresented no question of costs arises.
P Courtney J
12 Nyekredit Mortgage Bank Police v Edward Erman Group Ltd (No 2) [1997] 1 WLR 1627 (HL).
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