H v S

[2015] NZHC 310

THIS JUDGMENT IS SUBJECT TO THE SUPPRESSION/NON-

PUBLICATION ORDERS SET OUT IN PARAGRAPH [150] OF THE JUDGMENT

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-2404

[2015] NZHC 310

BETWEEN

H and H

First Plaintiffs

XYZ LIMITED
Second Plaintiff

AND

S

First Defendant

S and Others as trustees of the T Trust Second Defendants

Hearing:

28 February 2014; 13 August 2014

Further submissions 16 and 17 September 2014

Counsel:

K G Davenport QC and J W Wall for Plaintiffs R J Katz QC and C J Pendleton for Defendants

Judgment:

2 March 2015

Reissued:

2 April 2015

JUDGMENT OF ASSOCIATE JUDGE SMITH

Introduction

[1]                  This is a re-issued judgment on an application by the plaintiffs to strike out parts of the defendants’ pleadings in both their defence and counterclaim. Among other things, the plaintiffs contend that certain privileged and/or confidential matters had been wrongly included in the defence and counterclaim.

H and H v S [2015] NZHC 310 [2 March 2015]

[2]                  In a judgment on the strike-out application given on 2 March 2015, I declined to strike out the impugned allegations in the defence and counterclaim, and called for further written submissions from counsel on the extent to which the names of the parties and other relevant entities or facts should be “anonymised” in order to preserve any rights of privilege or confidentiality the plaintiffs might have pending the trial of the action. In the meantime, I directed that no part of the judgment issued on 2 March 2015 was to be published pending further order of the Court.

[3]                  I have received further submissions from counsel, and the judgment is now re- issued with certain additional “anonymising” which I am satisfied is necessary to preserve any rights to legal privilege and/or confidentiality pending trial. Specific suppression and non-publication orders are set out at the end of this judgment.

The Proceeding

[4]                  The plaintiffs sue their former solicitor (who I will refer to in this decision as Mr S) and the second defendants for damages and other relief, following the failure of a joint venture agreement entered into by the parties in 2011. Among the plaintiffs’ claims is a claim to recover the sum of $1.585 million invested in the joint venture by the second plaintiff.

[5]                  Mr S had acted as solicitor for the first plaintiffs (who I will refer to as       Mr and Mrs H) since February 2007. The second defendants, as the trustees of a family trust associated with Mr S, were participants in the joint venture with the plaintiffs and Mr S. For convenient reference I will refer to the second defendants as “the T trustees”.

[6]                  In their defence and counterclaim, Mr S and the T trustees plead that the funds which Mr and Mrs H invested in the joint venture (through the second plaintiff, which is the trustee of a trust created by Mr and Mrs H, which I will call the XYZ Family Trust) were illegally acquired, and are for that reason irrecoverable. The illegality is said to arise out of alleged breaches by Mr and/or Mrs H of the laws of foreign country A, and (by Mr H) of the tax laws of foreign country B.

[7]                  The plaintiffs now apply to strike out the defendants’ pleadings of illegality, in both the defence and the counterclaim.

[8]                  The strike-out application was adjourned part-heard following a one day hearing in Auckland on 28 February 2014, and each party then filed amended pleadings. The plaintiffs also amended their application to strike out, and the defendants filed an amended notice of opposition.

Background

[9]                  Mr and Mrs H immigrated to New Zealand in December 2006. Mrs H was a citizen of foreign country A, and Mr H a citizen of foreign country B. They had been living for some time in foreign country A before they moved to New Zealand.

[10]               Not long after their arrival in New Zealand, Mr and Mrs H retained Mr S as their solicitor, and he gave them legal advice on a variety of matters, including investment advice, tax advice and documentation relating to the XYZ Family Trust. The plaintiffs say that Mr S continued to act as their solicitor until November 2012.

[11]               Mr S says that at his initial meeting with Mr H, Mr H told him that in 2002 he had borrowed $1 million from an associate in foreign country B. With $250,000 of his own money, Mr H advanced these funds to Mrs H, to be used by her as his agent in the acquisition of shares in a company in foreign country A which I will refer to in this decision as Intco. Mr S says Mr H told him that these shares would be tradable, and that large profits were anticipated on resale. However, there was a problem: dealing in Intco shares was at the time restricted to citizens of country A, and Mr H was not a citizen of country A.

[12]               Mr S’ evidence is that Mr H told him that the transaction proceeded, with Mrs H using a company incorporated by her in foreign country A as the purchaser of the shares. But the use of Mrs H’s company was said to be merely a device, intended to mask the reality that Mr H was the real purchaser of the shares (and the person entitled to the profits on their subsequent resale).

[13]The Intco shares were later sold, at a very substantial profit.

[14]               Mr S says that he advised Mr H that, on the basis of what he had been told, he concluded that an oral trust had arisen, whereby Mrs H had purchased the Intco shares as agent or trustee for Mr H, using his purchase money, and that any profits earned on subsequent sale were held by Mrs H as trustee for Mr H.

[15]               There were apparently concerns on Mr H’s part that these arrangements had not been documented. It was not clear what would happen if Mr and Mrs H separated, or if Mrs H died. Mr S says that Mr H was also concerned about his position under the tax law of foreign country B, including his possible exposure to capital gains tax in country B.

[16]               Mr S says that he advised Mr H that, for his better protection, it would be necessary for the arrangements to be documented, recording the historical position and providing for the benefit and ownership of the proceeds of sale of the Intco shares.

[17]               Mr S prepared a draft opinion in which he set out his understanding of the background of the Intco share transactions, and he discussed the draft with Mr H. He says that Mr H confirmed the accuracy of the assumptions Mr S had made in the draft opinion, with only insignificant amendments. Mr S finalised the opinion and sent it to Mr H on 17 April 2007.

[18]Among the background assumptions listed by Mr S in the opinion was:

…Given your concerns, and the outright prohibition against your holding [Intco] shares, you transferred funds to [Mrs H] on the express understanding that she would acquire and hold the [Intco] shares in her name but as trustee for both you and any children from your relationship.”

[19]               Mr S says that, acting on Mr H’s instructions, he then prepared a deed of trust establishing “The [Intco] Trust”. The settlor was Mr H and the sole trustee was Mrs H. This trust deed was executed on 31 October 2007.

[20]The Intco Trust Deed contained the following definition of the “Trust Fund”:

“Trust Fund” means two original tranches in the sum of [$1,000,000] and [$250,000] respectively, settled on the trustee during July 2002 and October 2003 respectively, and for the specific purposes of investing in [Intco] shares, (ownership of which was then prohibited by [foreign country A’s] authorities)

and all property which may in the future be received or acquired by the Trustee from any source whatever for the purposes of the Trust and the money and investments from time to time representing such property and, unless inconsistent with the context, the income from such property.

[21]               Mr S’ law firm’s trustee company, which I will call S Ltd, was appointed an additional trustee of the Intco Trust in November 2007, with Mrs H. It was replaced as trustee by a relative of Mrs H in 2010, and in 2011 the then-trustees were replaced by a single trustee, an overseas-registered company which I will refer to as W Trustees Ltd. The Intco Trust appears to have been administered thereafter from one of W Trustees Ltd’s overseas offices.

[22]               Mr S later prepared a deed of trust for the XYZ Family Trust. It was completed on 9 December 2010. The sole trustee was the second plaintiff, XYZ Limited, the directors of which were Mrs H and Mr S.

[23]               In early February 2011, Mr S and Mr and Mrs H agreed to establish the joint venture. The plaintiffs subsequently invested funds in a number of companies or entities created or introduced by Mr S. The financial contributions introduced to the joint venture by Mr and Mrs H were made through the second plaintiff, as trustee of the XYZ Family Trust, as follows:

(a)$400,000 transferred to the T Trustees on 10 February 2011;

(b)$144,000 transferred to the T Trustees on 2 August 2011;

(c)Further sums totalling $1,041,500 paid to or for the purposes of the joint venture, between August 2011 and December 2012.

[24]               Mr S says that the XYZ Family Trust had no capital when it was established beyond the initial capital of $100 paid to it by Mrs H as settlor. His evidence is that all of the funding of the XYZ Family Trust was sourced from the Intco Trust, via Mrs H. That evidence is confirmed in a joint affidavit provided by Mr and Mrs H, in which they say that the Intco Trust made a loan to Mrs H in 2010, which she on-lent to the XYZ Family Trust in order to fund that trust. The XYZ Family Trust in turn made the capital investments referred to in the amended statement of claim.

[25]               Mr and Mrs H say they did not obtain independent legal advice on any of the joint venture investments.

[26]               It is not necessary for the purposes of this decision to refer to the detail of the various investments. It is enough to say that they failed, and it appears that most, if not all, of the money invested by Mr and Mrs H through the XYZ Family Trust has been lost.

[27]               On 12 December 2012, Mr S withdrew from the joint venture, resigning as a director of all joint venture companies.

The plaintiffs’ claims

[28]               The plaintiffs plead five separate causes of action against Mr S and the T trustees. The second cause of action is not relevant to the plaintiffs’ strike-out application, and I will not mention it further.

[29]               In their first cause of action, they plead that Mr S owed fiduciary duties to Mr and Mrs H and to the XYZ Family Trust as their solicitor. They say that he entered into the joint venture with them without recommending or suggesting that they receive independent legal advice, and that between February 2011 and August 2011 he received $544,000 from Mr and Mrs H via the XYZ Family Trust which he applied to purposes other than the joint venture. Mr and Mrs H say they received no consideration for the $544,000, and that Mr S made a profit at their expense by retaining this sum. They plead that either he or one of his family trusts used the

$544,000 to purchase a property or properties, and/or for other purposes which will remain unknown until after discovery.

[30]               Mr and Mrs H seek judgment on this cause of action against Mr S, in the sum of $544,000 plus interest and costs. They also seek an order declaring that Mr S and/or the S family trust(s) hold any property acquired by them with the $544,000 on trust for Mr and Mrs H, and an order tracing the sum of $544,000 to the relevant S family trust(s) and to any property or fund into which the $544,000 may have been paid.

[31]               The third cause of action also pleads breach of fiduciary duty, this time arising out of the defendants’ roles as alleged joint venturers with Mr and Mrs H. The plaintiffs say that, in that capacity, Mr S and the T trustees owed them fiduciary duties to exercise due skill and care in the management of the joint venture, not to benefit the S family trust(s) at their expense, and to account for all monies invested in the joint venture. They allege that the defendants breached those fiduciary duties in various respects.

[32]               The plaintiffs seek orders against Mr S and/or the T Trustees declaring that the shareholding in one of the joint venture companies, C Limited, was obtained and maintained by Mr S in breach of his fiduciary duties to the plaintiffs, and that those shares are held on a constructive trust for the plaintiffs. They ask for orders tracing the monies paid by the XYZ Family Trust into the hands of the S family trust(s), the trustees of which are alleged to have knowingly received the money. Further, they seek equitable damages or compensation in the amount of their total losses, namely

$1,585,500.

[33]               The plaintiffs’ fourth cause of action is in misrepresentation, against Mr S. Mr S is said to have made a number of allegedly incorrect representations relating to the proposed joint venture.

[34]               The plaintiffs say that the representations were made by Mr S with the intention that Mr and Mrs H would rely on them in deciding whether to enter into and remain in the joint venture. They allege that, as a result of the representations, the XYZ Family Trust initially transferred the sum of $544,000, and then, on request by Mr S and/or C Limited, transferred further sums totalling $1,041,500 to the joint venture. They say these investments would not have been made if it were not for Mr S’ representations. They claim damages of $1,585,500, or such other orders as may be appropriate under the Contractual Remedies Act 1979.

[35]               In their fifth cause of action, the plaintiffs plead that Mr S was acting in trade, and is liable to them under s 9 of the Fair Trading Act 1986 for substantially the same matters as are pleaded in their first, third and fourth causes of action. They seek relief under s 43 of that Act, including damages in the sum of $1,585,500.

The defendants’ amended statement of defence

[36]               In their statement of defence and counterclaim dated 13 June 2014, the defendants deny the various alleged breaches of duty. Relevant to the present application, they plead affirmatively that the funds used by Mr and Mrs H and the XYZ Family Trust to invest in the joint venture were unlawfully obtained funds. The details of those affirmative defences are as follows.

[37]               The defendants contend that the XYZ Family Trust was a beneficiary of the Intco Trust, and that the funds which it invested in the joint venture were part of the profit made on the sale of the Intco shares. They say that the use of Mr H’s money to fund the purchase of the Intco shares was illegal under a government decree of foreign country A which was in force at the time, and also under the revenue law of foreign country B.

[38]               As to the alleged illegality under foreign country A’s law, the defendants say that a government decree which was in force at the times of the Intco share transactions precluded certain transactions in Intco shares by foreign persons or foreign participants who did not hold a special permit. They say that transactions involving Intco shares entered into in breach of this decree were deemed void under the civil code of foreign country A.

[39]               Mr H, as a citizen of foreign country B, required such a permit, but none was obtained.

[40]               Because of the alleged illegality under the government decree, and the deemed effect of the illegality under the civil code, the defendants say that the Intco Trust (and therefore the XYZ Family Trust) never acquired title to the Intco shares or the proceeds of sale of those shares, and accordingly did not own the funds that were invested through the XYZ Family Trust in the joint venture.

[41]               The second respect in which the acquisition and subsequent sale of the Intco shares is alleged to have been illegal is that Mr H, as a citizen of foreign country B, allegedly acted in contravention of the tax law of foreign country B. The defendants refer to a section of the revenue law of foreign country B, which provides that citizens

of foreign country B owe tax to the government of foreign country B on their worldwide income. They contend that, on realising the profits from the sale of the Intco shares, Mr H became liable to pay capital gains tax and/or income tax in foreign country B, which he has not paid. The result is said to be that neither Mr H nor Mrs H nor any entity acting on their behalf acquired or retained legal title to the profits. Alternatively, the defendants allege that the profits were subject to a statutory lien in favour of the government of foreign country B.

[42]               The defendants contend that the use of the illegally obtained funds tainted the transactions in which they were used. To the extent that the plaintiffs’ claims are based on the common law, they rely on the doctrine ex turpi causa non oritur actio (no action should arise from illegal acts). To the extent that the plaintiffs’ claims are based in equity, the defendants rely on the equitable doctrine that a plaintiff must come to equity with clean hands. Either at law or in equity, the legal consequence is said to be that the plaintiffs are unable to recover the funds invested by the XYZ Family Trust in the joint venture.

[43]               In making their allegations of illegality, the defendants plead extensively information obtained by Mr S in his capacity as solicitor acting for the plaintiffs. One of the bases for the strike out application is that these communications were privileged

– Mr and Mrs H say that Mr S was not entitled to disclose information obtained from the plaintiffs within the solicitor/client relationship without their consent.

[44]               In response to that point, the defendants say that the plaintiffs have waived their privilege by issuing this proceeding against their solicitor. Alternatively, they say that the information communicated to Mr S was communicated (or compiled or prepared) for a dishonest purpose, and that any claim the plaintiffs might otherwise have had to privilege should be disallowed for that reason.1

1      Citing s 67 of the Evidence Act 2006, which provides that a Judge must disallow a claim of privilege where there is prima facie evidence that the communication was made, received, compiled or prepared for a dishonest purpose.

The defendants’ amended counterclaim

[45]               In their amended counterclaim, the defendants plead the detail of the joint venture, and the subsequent investment of funds provided through the XYZ Family Trust to the various joint venture companies. They say that the terms of the joint venture agreement included a term that Mr and Mrs H would provide working capital to the joint venture as and when required, and that Mr and Mrs H, either individually or jointly, would be responsible for due diligence in relation to all acquisitions. They say that Mr S was to be responsible for facilitating introductions to business opportunities and contacts, both locally and internationally, and he was also to make available his existing premises, staff, fixed assets and goodwill, and make revenue from his legal practice available to one of the joint venture companies, C Limited, in proportions and on terms to be agreed. The profits of the various ventures and business opportunities were to be shared on an equal basis.

[46]               The defendants then allege that the plaintiffs breached one or more of the following alleged joint venture obligations owed by them to the defendants:

(a)the plaintiffs would work in the best interests of the various opportunities or entities;

(b)the plaintiffs would conduct their affairs openly and honestly and not do anything that would be prejudicial to the interests of the parties as participants in the various business opportunities;

(c)the plaintiffs would not do anything contrary or prejudicial to the interests of the various business opportunities;

(d)the plaintiffs would utilise money freely, openly and legitimately available to them to fund any business opportunities to be pursued.

[47]               Some of the plaintiffs’ alleged breaches are not relevant to this decision. Importantly for present purposes, however, the defendants allege that Mr and Mrs H, together or individually, failed or refused to disclose the true and correct source of, or legal entitlement to, funds settled on the Intco Trust which were utilised or to be

utilised as capital for the various joint venture enterprises, whether directly or via XYZ Limited or the XYZ Family Trust. Mr H is said to have failed or refused to disclose the true and correct position of his status with foreign country B’s tax authority, thereby creating an unnecessary risk of exposure to himself and the funding of the parties’ business in the event of an investigation being undertaken by the tax authority of foreign country B.

[48]               The defendants seek damages from the plaintiffs in the sum of $2.5 million, being the claimed loss of value on the defendants’ investment in C Limited. They also seek damages for diminution in Mr S’ income, and loss of goodwill and reputation, in a sum to be assessed, together with an order for the transfer of the plaintiffs’ shares in C Limited to the defendants.

The plaintiffs’ strike-out application

[49]               The plaintiffs apply to strike out the defendants’ affirmative defences based on alleged breaches of the laws of foreign country A and the revenue law of foreign country B, in their entirety. To the extent that those defences are repeated in the defendants’ counterclaim, the plaintiffs also ask for an order that the relevant counterclaim pleadings be struck out. In addition, the plaintiffs ask for orders striking out certain parts of the defendants’ amended statement of defence in which there are references to details of privileged communications between Mr S and one of the plaintiffs.

[50]The strike-out application is opposed by the defendants.

[51]               A joint affidavit in support has been filed by Mr and Mrs H, and there is an affidavit by Mr S in opposition. Mr and Mrs H have provided separate affidavits in reply.

Legal principles applicable to strike-out applications

[52]               The principles to be applied are well settled. The leading case is the decision of the Supreme Court in Couch v Attorney-General.2 The following principles are established by that decision:

(i)  Pleaded facts, whether or not admitted, are assumed to be true. This does not extend to pleaded allegations which are entirely speculative and without foundation.

(ii)                  The cause of action or defence must be clearly untenable. It is inappropriate to strike out a claim summarily unless the court can be certain that it cannot succeed.

(iii)                The jurisdiction is to be exercised sparingly, and only in clear cases (reflecting the court’s reluctance to terminate a claim or defence without a trial).

(iv)                The jurisdiction is not excluded by the need to decide difficult questions of law which may require extensive argument.

(v)                  The court will be particularly slow to strike out a claim in any developing area of the law, particularly where a duty of care is alleged in a novel situation.

[53]               I would add to that list of principles that an affidavit that does not contradict the pleadings and serves to establish the evidentiary basis for the pleaded facts will be admissible.3

The issues

[54]The following issues fall to be determined:

2      Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725.

3      Peerless Bakery Ltd v Watts & Hughes [1955] NZLR 339.

(1)Are the defendants’ arguments that

(a)    the doctrine of ex turpi causa precludes any recovery by the plaintiffs; and/or

(b)    the equitable doctrine that a plaintiff must come to court with “clean hands” precludes any recovery by the plaintiffs

so clearly untenable that their affirmative defences based on alleged illegality should be struck out?

(2)                  Should one or both of the defendants’ illegality pleadings be stuck out on the basis that the defence asks the court to enforce a foreign revenue law or penalty?

(3)                  Are those parts of the defendants’ counterclaims which are in issue so clearly untenable that they should be struck out?

(4)                  If one of the defendants’ affirmative defences which is in issue, or their counterclaim, is tenable, but the other defence (or the counterclaim) is not, is it appropriate to strike out only those parts of the impugned pleadings which do not meet the “tenable case” threshold?

(5)                  In respect of any part of the impugned pleadings which do raise a tenable defence or counterclaim and would not be struck out on other grounds, should that defence or counterclaim be struck out because the defence or counterclaim pleads matter derived from privileged communications between Mr S and one or more of the plaintiffs?

Discussion

My approach to the strike-out application

[55]               As a preliminary matter, I record that Mr and Mrs H do not accept many of the factual allegations made by the defendants in their statement of defence and counterclaim, and in Mr S’ affidavit. Mr and Mrs H contend that the Intco shares were acquired legally by a corporation domiciled in foreign country A in 2002 and 2003, using funds advanced to it by a corporation domiciled in foreign country B. They say that Mrs H and one of her relatives purchased the shares from a corporation in foreign country A, as they were entitled to do as citizens of foreign country A. They later sold the shares at a substantial profit. They say that there was never any intention to establish an oral trust of the kind alleged by the defendants; that was Mr S’ after-the- event construction of what had occurred, but his construction of the relevant events is quite wrong.

[56]               That is what Mr and Mrs H say, but in a strike-out application such as this I am required to assume that the various contested allegations made by the defendants in their statement of defence and counterclaim are capable of proof at trial. I approach the application on that basis.

Issues 1(a) & (b): Are the defendants’ defences of illegality based on ex turpi causa and/or the absence of “clean hands” so clearly untenable that they should be struck out?

The plaintiffs’ submissions

[57]               Ms Davenport’s principal submission is that alleged illegalities under the laws of foreign states are irrelevant. She submits that the plaintiffs have no need to rely on any illegality to make out their case, and in those circumstances the ex turpi causa and “clean hands” doctrines can have no application.

[58]               If the question of title to the invested funds is relevant, Ms Davenport submits that there is no basis on which the court can apply foreign country A’s law to determine the question of ownership of the funds that were settled on the Intco Trust and moved (via the XYZ Family Trust) into the joint venture. She submits that the proper law of

both trusts at the time they were settled was New Zealand law, and that the Court cannot apply foreign country A’s law to determine the legal and/or beneficial ownership of the funds. Whether the relevant law is the law governing the trust  (New Zealand law in accordance with both trust deeds), or the lex situs (again the law of New Zealand, given that the funds were located in New Zealand at the time that the Intco Trust was declared), foreign country A’s law simply has no part to play on the title question.

[59]               In her supplementary submissions, Ms Davenport submitted that the question of whether the Intco share acquisition was rendered void by the civil code of foreign country A is not a justiciable issue. Title to the property can only be determined by reference to the proper law – either the law governing the trust (as per the trust deed) or by the lex situs (New Zealand – given that the funds were located in New Zealand at the time the Intco Trust was declared). She acknowledged that the proper law of the Intco share acquisition was foreign country A’s law, but submitted that once the shares were sold and the proceeds transferred to New Zealand, the proper law (the lex situs) changed to New Zealand, and the law  to  be  applied  became  the  law  of New Zealand. There is no question of performance of any contract taking place in foreign country A, and the law of foreign country A is therefore inapplicable. Furthermore, by the time the Intco Trust was settled, the relevant government decree in foreign country A had been rescinded.

[60]               Ms Davenport submits that the defendants have no tenable argument that the plaintiffs did not have good title to the funds they invested in the joint venture.

[61]               In support of her principal submission, Ms Davenport refers to a number of authorities, including the House of Lords decision in Tinsley v Milligan4 and the recent decision of the New Zealand Court of Appeal in Leason v Attorney-General.5

[62]               In Tinsley v Milligan6, the parties had lived together for some years in a house which they ran as a lodging house. The purchase price of the house had been provided

4      Tinsley v Milligan [1994] 1 AC 340.

5      Leason v Attorney-General [2013] NZCA 509.

6      Above n 4.

by a bank mortgage and a sum of money to which the parties contributed jointly. It was agreed between them, however, that title should be taken in the sole name of  Ms Tinsley, in order to facilitate the respondent (Ms Milligan) making false benefit claims to the Department of Social Security. The parties fell out, and Ms Tinsley moved out of the house. She subsequently issued a proceeding claiming possession of the property, and Ms Milligan counterclaimed for a declaration that Ms Tinsley held the property on trust for the two women in equal shares. Ms Tinsley’s claims for possession were dismissed, and her appeals to the Court of Appeal and to the House of Lords were also dismissed. Ms Milligan’s counterclaim for a declaration was upheld.

[63]               In his judgment in the House of Lords, Lord Jauncey of Tullichettle reviewed a number of authorities, noting that it was well established that a party was not entitled to rely on his own fraud or illegality in order to assist a claim or rebut a presumption. However, his Lordship went on to note that it had for some years been recognised that a completely executed transfer of property (or of an interest in property) made in pursuance of an unlawful agreement is valid, and the court will assist the transferee in the protection of his interest provided that he does not require to found on the unlawful agreement.7 (my emphasis).

[64]               In his judgment in Tinsley, Lord Browne-Wilkinson considered that the crucial question in cases of property acquired under an illegal agreement is whether the claimant (in that case claiming a resulting trust) has to rely on the underlying illegality. His Lordship referred to the so-called Bowmakers rule – a party to an illegality can recover by virtue of a legal or equitable property interest if, but only if, he can establish his title without relying on his own illegality8 – and concluded that, in a case where the plaintiff is not seeking to enforce an unlawful contract but founds his case on collateral rights acquired under the contract (such as a right of property), the court is

7      At 366.

8      At 375, citing Bowmakers Ltd v Barnet Instruments Ltd [1945] 1 KB 65. Du Pacq LJ, delivering the judgment of the Court of Appeal in Bowmakers, stated the relevant principle as follows:

“In our opinion, a man’s right to possess his own chattels will as a general rule be enforced against one who, without any claim of right, is detaining them, or has converted them to his own use, even though it may appear either from the pleadings, or in the course of the trial, that the chattels in question came into the defendant’s possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek, and is not forced, either to found his claim either on the illegal contract or to plead its illegality in order to support his claim”.

neither bound nor entitled to reject the claim unless the illegality, of necessity, forms part of the plaintiff’s case.9

[65]               The principles discussed in Tinsley were considered by the New Zealand Court of Appeal in Leason v Attorney-General.10 The decision was given on appeal by the defendants against a judgment of Associate Judge Gendall, in which the Associate Judge had entered judgment against the defendants for trespass resulting in damage to the  Government  Communications  Security  Bureau  (GCSB)  facility   at   Waihopai Valley. The damage involved deflating a satellite dome by cutting it. The appellants argued that the Attorney-General’s claim for damages should be denied, in the exercise of the court’s discretion to deny relief to a plaintiff whose cause of action is found upon illegal action. The appellant argued illegality both in the acquisition of the Waihopai land, and in the subsequent use of the GCSB facility. Among the respondent’s allegations of illegality were that the GCSB facility was used to pass on raw intelligence to the National Security Agency of the United States (the NSA), and that the intelligence generated at the Waihopai facility assisted with wrongful acts in breach of domestic and international law, including, for example, the facilitation by others in the unlawful prosecution of the Iraq war and various instances of alleged torture and arbitrary detention in Iraq, Afghanistan and elsewhere. The appellant invoked the maxim ex turpi causa non oritur action (no cause of action should arise from illegal acts).

[66]               The Court of Appeal referred to a number of authorities from the United Kingdom, including Gray v Thames Trains11, a case in which Lord Hoffmann considered the ex turpi causa maxim to be not so much a principle as a policy, which policy was broadly based on a group of reasons, which might vary in different situations. Lord Hoffmann considered that there was an important distinction to be drawn between cases where the claimant’s claim is inextricably linked to the illegality, and those where the illegality merely gives occasion for the tortious conduct of the defendant.12 The Court of Appeal in Leason saw merit in Lord Hoffmann’s

9      Tinsley v Milligan, above n 4, at 377.

10     Leason v Attorney-General, above n 5.

11     Gray v Thames Trains Ltd [2009] UKHL33; [2009] AC 1339.

12     Leason v Attorney-General, above n 5, at [97]–[101], citing Gray v Thames Trains above n 11 at [53]–[54].

observation that the basis for, and application of, the defence of ex turpi causa will depend on the particular situations in which it is sought to be applied.13

[67]               Addressing situations involving property claims, the Court of Appeal noted that there is an established line of authority to the effect that the courts will not, on grounds of public policy or ex turpi causa, refuse to enforce the rights of an owner of property where the claim rests solely on ownership. Provided an individual is able to assert a proprietary or possessory title, it is not relevant that that title may be derived from an illegal contract.14 The defence is not available to meet property claims where the alleged illegality relates to the acquisition or derivation of the property.15

[68]               It appears that this latter statement is or may be subject to the proviso that good title must have passed to the plaintiff despite the illegality associated with the acquisition. The Court in Leason referred (with apparent approval) to the 1910 decision of the UK Court of Appeal in Gordon v Chief Commissioner of the Metropolitan Police, a case concerning a police seizure of money obtained by the appellant as a result of unlawful betting. Fletcher Moulton LJ stated:16

I know of no principle of law, or decision, or even dictum which renders money which has become the property of an individual liable to be taken and kept with impunity by any person who chances to get hold of it, merely because it has been acquired by some wrongful or prohibited act.

[69]               Ms Davenport referred also to the decision of Venning J in Lester v Greenstone Barclay Trustees Ltd, and in particular the statement of the judge that:17

The focus is on the purpose of the contract that is sought to be impeached or tainted. Where a party seeks to enforce a contract, their claim will be defeated if the contract was entered into for an illegal purpose…However, where the contract in issue is independent of the impugned transaction or contract…so that the party does not need to rely on it for any purpose, then the contract will be enforceable: Tinsley v Milligan at 86 per Lord Browne-Wilkinson. The agreements for sale and purchase are such independent contracts in this case.

13     Gray v Thames Trains Ltd above n 11 at [116].

14     At [117] and [125].

15 At [129].

16     Gordon v Chief Commissioner of the Metropolitan Police [1910] 2 KB 1080 at 1096–1097.

17     Lester v Greenstone Barclay Trustees Ltd [2010] 3 NZLR 67 at [308].

[70]               The most recent decision from the United Kingdom cited by counsel was the decision of the Court of Appeal for England and Wales in Patel v Mirza.18 Mr Patel paid money to Mr Mirza for the purposes of an illegal agreement for insider dealing in shares in Royal Bank of Scotland Plc. In the event the agreement could not be and was not carried out, because the expected inside information was not forthcoming. Nevertheless, the judge in the High Court held that Mr Patel’s claim for recovery of the £620,000 he had advanced was barred by illegality. The judge considered that the position would have been different if Mr Patel had withdrawn from the agreement before its implementation had become frustrated, but he had not. On appeal to the Court of Appeal, Mr Patel contended that the judge had been wrong to find that he needed to rely on the illegality in making his claim. He also contended that the fact that he had not withdrawn from the agreement before its performance was frustrated was no bar to his claim.

[71]               The Court of Appeal accepted those submissions, and the appeal was allowed. There does not appear to have been any question in the case over Mr Patel’s ownership of the £620,000 he had invested – his difficulties arose out of the fact that he had advanced the money for a direct purpose which was illegal.

[72]               In her judgment in Patel, Gloster LJ referred to the House of Lords decision in Stone & Rolls Ltd (in liquidation) v Moore Stephens,19 where Phillips LJ noted that Tinsley established the general principle that, once title has passed, it cannot be attacked on the basis that it passed pursuant to an illegal transaction. If title can be asserted without reliance on the illegality, the defendant company cannot rely on the illegality to defeat the title.

[73]               On the facts of the case, her Ladyship did not consider that the illegality principle was engaged. In her view, the correct question to ask was whether, of necessity, the pleading of the illegal purpose was an essential element of Mr Patel’s cause of action.

18     Patel v Mirza [2014] EWCA Civ 1047.

19     Stone & Rolls Ltd (in liq) v Moore Stephens [2009] UKHL 39; [2009] 1 AC 1391.

The defendants’ submissions

[74]               Whether the plaintiffs’ claims are based on some proprietary right, or on a tracing or similar claim, the defendants contend that the plaintiffs did not acquire title to the profits from the sale of the Intco shares, because the sale was illegal under the domestic law of foreign country A, and any profit was forfeit to the government of foreign country A. Mrs H never acquired title to the profits, and she was therefore unable to lawfully settle the money on the Intco Trust. Accordingly, the trustees of the Intco Trust could not advance those monies to Mrs H, she could not advance them to the second plaintiff, and the second plaintiff could not advance the same monies to the joint venture entities.

[75]               The defendants argue that the question of title, and whether or not Mr or Mrs H acquired any legal title to the profits on the Intco shares, turns solely on foreign country A’s law as the lex situs. Mr Katz submits that profits are “moveable property”, in respect of which the law governing title will be the law of the country where the title was acquired (in this case, foreign country A).20 He refers to the following statement by the authors of Dicey, Conflict of Laws: 21

…the proprietary effects of the transfer depends on the lex situs…If the lex situs says that no title passes to the transferee because the parties lack capacity or because of some defect of form or essential invalidity in the transfer, then other jurisdictions should, it is submitted, accept the fact that no title was passed, no matter what the applicable law of the transfer may say.

[76]               Mr Katz refers to Winkworth v Christie, Manson & Woods Ltd & Anor for the “general rule of private international law that the validity of a transfer of moveable property and its effect on the proprietary rights of any persons claiming to be interested therein are governed by the law of the country where the property is situated at the time of the transfer (the lex situs)”.22

[77]               In that case, the plaintiff owned certain works of art that were stolen from him in England and subsequently taken to Italy. There they were sold to the second

20 Citing Winkworth v Christie Manson & Woods Ltd [1980] 1 ALL ER 1121; Air Foyle Ltd v Centre Capital Ltd [2002] EWHC (Comm) 2535; Dicey, 14 ed at para [24] R-001; Lord Collins and others (ed) Dicey on the Conflict of Laws (14th ed, Sweet and Maxwell, London, 2006) at [24] R-001.

21     Lord Collins Dicey above n 20 at [24-006].

22     Winkworth v Christie, Manson & Woods Ltd & Anor above n 20 at 1125.

defendant, who was unaware that they were stolen. They were later sent back to England to be sold by the defendant art auctioneers. The plaintiff sued the defendants in detinue and conversion. A preliminary issue was tried as to whether English or Italian law applied to determine whether the plaintiff or the second defendant had title to the goods. Under Italian law, but not under English law, the second defendant had acquired a valid title to the goods as against the plaintiff. The second defendant argued, in accordance with the principle of private international law just referred to, that Italian law should apply.

[78]               Slade J upheld that submission, holding that Italian law applied. If personal property was disposed of in a manner binding according to the lex situs (Italy), that disposition was binding everywhere.

[79]               Mr Katz submits that the effect of this principle, applied in accordance with Regazzoni v K C Sethia23, and Ralli Brothers v Compania Navera Sota y Aznar24, is that a New Zealand court will apply (not enforce) foreign country A’s law, even if foreign country A’s law is penal.

[80]               Ralli Brothers was a decision of the United Kingdom Court of Appeal. The case involved a charterparty governed by English law, but with part of the contract to be performed in Spain. By the law of Spain, a contractual requirement for the payment of freight above 875 pesetas per ton was illegal. Although the contract was governed by English law, and would not have been illegal under English law, the Court of Appeal declined to enforce that part of the contract which required the payment of freight in excess of the limit prescribed under Spanish law.

[81]               In Regazzoni, the House of Lords considered a claim between private individuals in which the issue was whether the court would enforce a contract which involved the doing in a foreign country of an act which was illegal by, and violated, the law of that country. Viscount Simonds noted that, just as public policy avoids contracts which offend against the law of the United Kingdom, so public policy will avoid at least some contracts which violate the laws of a foreign State, and it will do

23     Regazzoni v K C Sethia (1944) Ltd [1958] AC 301.

24     Ralli Brothers v Compania Navera Sota y Aznar [1920] KB 287.

so because public policy demands that deference to international comity. His Lordship referred to Ralli Brothers. While the Spanish law under consideration in Ralli Brothers was not a revenue law, and the court would not enforce a revenue law at the suit of a foreign State, it did not follow that the court would refuse to enforce a contract which required the doing of an act in a foreign country which violated the revenue law of that country.

[82]               The defendants submit that the same rules will apply to a restitutionary or tracing claim like the present claim, where the original contract (the sale and purchase of the Intco shares) is illegal, but through a series of subsequent transactions a plaintiff seeks to trace funds. They say that it all turns on whether the plaintiff can establish good title under the laws of the country (in this case foreign country A) where title was acquired, so as to be able to trace, via the various intermediate transactions, the funds into the hands of the ultimate recipient who holds those funds pursuant to a constructive trust.25

[83]               On Ms Davenport’s second argument, the defendants’ broad submission is that the plaintiffs’ case confuses the questions of title to and ownership of the funds settled on the Intco Trust (and then on the XYZ Family Trust), with the question of jurisdiction in relation to issues under the two trusts.

[84]               The trust deeds of both the Intco Trust and the XYZ Family Trust contain the same clause 22 dealing with the topic of “Governing Law”. The clause relevantly provides:

22       Governing Law

22.1 The Trust is established under the law of New Zealand which shall govern the effect and construction of this deed and over which the courts of New Zealand shall have exclusive jurisdiction.

[85]               The defendants submit that their defence and counterclaim do not raise any question of the application of foreign country A’s law to the effect, or the construction, of the trust deeds of either the Intco Trust or the XYZ Family Trust. They are not

25     Citing MacMillan Inc v Bishopgate Investment Trust Plc (No 3) [1996] 1 All ER 585 (CA), where the principles in Dicey and the lex situs were applied to determine title (to shares) as moveables.

seeking a declaration that either trust is illegal; their contention is that the funds settled on the two trusts, having been obtained in breach of the laws of foreign country A and/or foreign country B, were not lawfully settled.

[86]               The defendants submit that a New Zealand court must recognise the relevant foreign law in this case. They say that they are not attempting to enforce either the Intco Trust deed or the XYZ Family Trust deed, and accordingly there can be no issue of the trustee of the Intco Trust deed being required to be a party in the proceeding.

[87]               The defendants’ illegality pleadings plead expressly that no title passed to the Intco Trust or to the XYZ Family Trust. In accordance with ordinary principles, they say that those pleadings must be accepted as being capable of proof.

Subsequent decision of the UK Supreme Court in Les Laboratoires Servier

[88]               Since the hearing in this case, the United Kingdom Supreme Court has given its judgment in Les Laboratoires Servier and Another v Apotex Inc and Others.26 Lord Sumption, with whom Lords Neuberger and Clarke agreed, confirmed that the present state of the law in the United Kingdom on ex turpi causa is as laid down by the majority in Tinsley v Milligan.27

[89]               Lord Sumption considered that the ex turpi causa principle is concerned with claims founded on acts which are contrary to the public law of the State, and engage the public interest. His Lordship considered criminal acts as the paradigm case, but the principle would also extend to “quasi-criminal” cases “which engaged the public interest in some way”.28 This additional category of non-criminal acts would include cases of dishonesty or corruption, which have always been regarded as engaging the public interest, even in the context of purely civil disputes, and the infringement of statutory rules enacted for the protection of the public interest which attracted civil sanctions of a penal character.29

26     Les Laboratoires Servier and Another v Apotex Inc and Others [2014] UKSC 55; 29 October 2014.

27 At [20].

28     Les Laboratoires Servier and Another v Apotex Inc and Others above n 26 at [25].

29 At [25].

[90]               His Lordship considered that torts (other than those in which dishonest, is an essential ingredient), breaches of contract, statutory and other civil wrongs, offend against interests which are essentially private, not public. “There is no reason in such a case for the law to withhold its ordinary remedies. The public interest is sufficiently served by the availability of a system of corrective justice to regulate their consequences as between the parties affected.”30

[91]               His Lordship noted that the application of the ex turpi causa principle commonly raises the questions: 31

(a)What acts constitute turpitude for the purposes of the defence?

(b)What relationship must the turpitude have to the claim?

[92]               On what constitutes turpitude for the purposes of the defence, his Lordship considered that the important matter is the legal character of the acts relied upon:32

It means criminal acts, and what I have called quasi-criminal acts. This is because only acts in these categories engage the public interest which is the foundation of the illegality defence. Torts (other than those of which dishonesty is an essential element), breaches of contract, statutory and other civil wrongs, offend against interests which are essentially private, not public. There is no reason in such a case for the law to withhold its ordinary remedies. The public interest is sufficiently served by the availability of a system of corrective justice to regulate their consequences as between the parties affected.

The application of the legal principles in this case – my conclusions on Issue 1

[93]               On their first argument, the plaintiffs invoke the Bowmakers rule as applied by the majority in Tinsley, submitting that any illegality forms no part of their claims against the defendants. No doubt with a view to bolstering that argument, references to the Intco Trust which appeared in the plaintiffs’ early statements of claim have been discarded from their most recent pleading (the second amended statement of claim filed in May 2014).

30 At [28].

31 At [22].

32 At [28].

[94]               The plaintiffs rely on Tinsley, and the proposition that the plaintiffs are not seeking to enforce an unlawful contract, but are relying on collateral property rights. In that situation, Tinsley is authority for the proposition that the court is neither bound nor entitled to reject the claim, as the illegality forms no part of the plaintiffs’ case. It is merely the enforceability of transactions which are directly proximate to the illegality which can be refused.

[95]               I do not read the judgments in Tinsley or Leason as being applicable to cases where there is an issue over the ownership of the property which is the subject of the rights the claimant seeks to enforce. In Leason, there was no issue over the respondent’s ownership of the GCSB land or facilities, and ownership of that land and those facilities was all that was required for the respondent to make out his claim in trespass. Similarly in Tinsley, Ms Milligan was able to prove that she had made contributions to the property sufficient to establish a presumption of a resulting trust: she had no need to rely on the illegality associated with the fraudulent claims to the Department of Social Security.

[96]               And in both Bowmakers33 and Gordon,34 and in the New Zealand Court of Appeal decision in R v Collis,35 it was accepted that property in the relevant goods (Bowmakers) or cash (Gordon and Collis) had passed to the plaintiff.

[97]               I am  not  persuaded  that  that  is  necessarily  the  position  in  this  case.  The plaintiffs are seeking a variety of equitable remedies, including tracing orders in respect of the funds invested through the XYZ Family Trust in the joint venture, and it seems to me to be implicit in their claim that they (or at least one of them) actually owned the money which was invested. (If they did not, the question arises: “what loss have they suffered?”)

[98]               The defendants’ allegation, which for the purposes of a strike-out application I must accept as being capable of proof, is that the original acquisition of the Intco shares, and their subsequent sale, were void under both foreign countries’ laws.

33     Bowmakers Ltd v Barnet Instruments Ltd, above n 8.

34     Gordon v Chief Commissioner of the Metropolitan Police, above n 16.

35     R v Collis [1990] 2 NZLR 287.

[99]               On the issue of alleged breach of the laws of foreign country A, I accept Mr Katz’s submission based on the passage from Dicey cited at paragraph [75] above, and the decision of Slade J in Winkworth,36 that it is reasonably arguable for the defendants that the question of whether Mr and Mrs H acquired good title to the proceeds of sale of the Intco shares is to be governed by the laws in force in the foreign country when the shares were acquired and later sold: that the proprietary effects of the transfer depend on the lex situs, which was arguably foreign country A.

[100]           I note also that in the Princess Olga case,37 the Soviet Government had passed decrees declaring that all of the contents of a palace in Russia were to become the property of the Soviet Republic. In 1928 the Soviet government sold some of the articles to a Mr Weisz, who brought them to England. The Princess claimed that they belonged to her, and sued to recover them in England. Scrutton LJ noted that: “Our Government has recognised the present Russian Government as the de jure Government of Russia, and our courts are bound to give effect to the laws and acts of that Government so far as they relate to property within that jurisdiction when it was affected by those laws and acts”.38

[101]           This passage from the judgment of Scrutton LJ in Princess Olga was referred to by Lord Denning in Attorney-General v Ortiz. The Master of the Rolls noted that:39

The confiscation by the Soviet Government was an exercise of sovereign authority within its own territory. It would therefore be enforced in England. If the Princess had removed the articles from the museum in St Petersburg and brought them to England, the English courts would have made her give them up to the Soviet Government.

[102]           In Winkworth, Slade J noted that the conflicts principle relating to dispositions of moveable property being governed by the lex situs, is said to be subject to five exceptions.40

36     Winkworth v Christie, Manson & Woods Ltd & Anor, above n 20, discussed at paras [75]-[78] of this judgment.

37     Princess Paley Olga v Weisz [1929] 1 KB 718.

38     At 725.

39     The Attorney-General of New Zealand v Ortiz [1984] AC 1 (HL) at 23.

40     Winkworth above n 20 at 1125.

[103]           None of the exceptions was applicable on the facts in Winkworth, and none appears to be relevant in this case. The closest would perhaps be the third exception, under which an English (or New Zealand) court may decline to recognise the particular law of the relevant situs because it considers that law contrary to English (or New Zealand) public policy.41 Whether a New Zealand court could or would apply such an exception is not in my view a matter to be resolved on a strike-out application, before the court has all of the evidence and heard full argument on the public policy issues. Another of the exceptions listed by Slade J arises where a statute in force in the country hearing the case obliges the court to apply the law of its own country.42 No such statute has been cited in this case.

[104]           If the principle applied by Slade J in Winkworth is applied in this case, it seems to me that there is no reason to suppose that this court, following United Kingdom authority as it could reasonably be expected to do on a matter involving conflicts of law issues43, would not apply the applicable law of foreign country A in force at the relevant time in determining whether Mrs H (personally or in her capacity as a trustee of the orally created Intco Trust) acquired good title to the Intco shares and the proceeds of sale of those shares.

[105]           Proof of foreign country A’s law, including its effect on the ownership of the proceeds of sale of the Intco shares, will be a matter for evidence at trial.

[106]           Ms Davenport submits that the validity of the Intco Trust, and the title to the funds held in trust, can only be determined in accordance with New Zealand law. She points to the fact that the Intco Trust was formally recorded in a deed executed in New Zealand on 31 October 2007, and the funds which were declared to be held on trust were already located in New Zealand and held in the name of Mrs H before that date. Ms Davenport submits that the proper law of the Intco Trust is New Zealand law; that is what the Intco Trust Deed records at cl 22, which also confers exclusive jurisdiction on the New Zealand courts.

41     At 1125.

42     At 1125.

43     See for example the decision of the Court of Appeal in Schumacher v Summergrove Estates Ltd  & Ors [2014] NZCA 412 at 31, citing the decision of the English Court of Appeal in MacMillan Inc v Bishopgate Investment Trust Plc, above n 25 at 391-392.

[107]           In respect of the XYZ Family Trust, Ms Davenport submits that the proper law of the trust is again New Zealand law, and that this trust, which was settled with an initial payment of $100, had no connection with the Intco share acquisition or sale. She submits that there is therefore no basis to suggest that the XYZ Family Trust is invalid under New Zealand law. On that basis, the subsequent distribution of funds into the XYZ Family Trust did not serve to deprive the trustees of the XYZ Family Trust of title, nor did it amount to illegal conduct capable of rendering the relevant transactions unenforceable.

[108]           I do not accept Ms Davenport’s submissions on this point. First, it was only questions of the effect and construction of the trust deeds that were to be governed by New Zealand law under cl 22 of the two trust deeds. Arguably the question of whether or not the Intco Trust acquired good title to a particular asset, namely the proceeds of sale of the Intco shares, does not require any consideration of “the effect and construction” of the Intco Trust deed. Secondly, it is not apparent to me how the mere presence of the proceeds of sale in New Zealand in October 2007 could have conferred ownership of those proceeds on Mrs H if they were not owned by her when they were removed from foreign country A. I accept Mr Katz’s submission based on Ralli Brothers that the New Zealand courts may receive evidence of and enforce relevant foreign laws in accordance with principles of comity, and in this case I consider it at least arguable that the Court hearing this case at trial should apply foreign country A’s law to the issue of the ownership of the proceeds of sale of the Intco shares, in accordance with that principle of comity.

[109]           Thirdly, there is no question of declaring either trust to be invalid – the only question is whether the trusts acquired ownership of particular assets which passed through the trustees’ hands.

[110]           Fourthly, I am unable to say on the limited evidence that the transfer of the proceeds of sale through the various stages before they were invested by the second plaintiff in the joint venture operated in some way to “cure” the initial illegality which is alleged in respect of the acquisition and subsequent sale of the Intco shares.

[111]           I conclude that neither the provisions of the Trust Deeds themselves nor the presence of the proceeds of sale of the Intco shares in New Zealand in October 2007 assists on the question of whether the second plaintiff acquired good title to the funds invested by it in the joint venture.

[112]           If the Intco Trust never had good title to the proceeds of sale of the Intco shares, it seems to be at least arguable for the defendants that the Intco Trust could not have conferred good title on Mrs H (and she on the XYZ Family Trust), and that the latter trust did not have title to the funds that were invested in the joint venture.

[113]           The question arising from those considerations is whether the plaintiffs’ claims can succeed without reliance on the [defendants’] pleaded illegalities.44 I am by no means certain that they can. And the defendants’ answer to the plaintiffs’ argument based on the “ownership” exception to the ex turpi causa principle (as discussed in Tinsley and Leason), namely that the plaintiffs do need to rely on their ownership of the funds invested, and may not be able to prove that ownership, is not in my view beyond reasonable argument.

[114]           In those circumstances, I am not satisfied that it would be appropriate to strike out the defendants’ defence based on alleged illegality under foreign country A’s law. In reaching that view I also take into account that this is a developing area of law, and that the precise metes and bounds of the ex turpi causa doctrine in New Zealand have not been authoritatively settled. Leason was an example of the exception to the principle, under which the claim of a plaintiff who seeks only to enforce collateral property rights (which the Court is satisfied the plaintiff has), and thus does not need to rely on any illegality, will not be defeated by the application of the doctrine. But that is not necessarily the position in this case, and if the plaintiff cannot rely on the “collaterally acquired property rights” exception, I do not think the law is settled on how far the doctrine may extend to catch a plaintiff’s prior illegalities. It may be that the answer will be found in the very recent United Kingdom Supreme Court decision in Les Laboratoires Servier, but even if that is so, I do not consider that the application

44 See the speech of Lord Phillips in Stone & Rolls Ltd (in liquidation) v Moore Stephens, above n 19 where his Lordship said, at [21] “If title can be asserted without reliance on the illegality, the defendant cannot rely on the illegality to defeat the title.”

of the principles in that case is an exercise to be undertaken on a strike-out application, without the benefit of all of the evidence. I accordingly find for the defendants on issue 1(a) at paragraph [54] above, insofar as the defence is based on alleged breaches of the laws of foreign country A.

[115]           I think the same result must follow with the defendants’ alternative formulation of the defence, in which they invoke the maxim that a plaintiff must come to equity with clean hands. The two defences are essentially based on the same facts, and while one might have its roots in the common law and the other in equity, the essential ingredients of the two defences seem to me to be largely the same.45 I also decline to strike out this defence, to the extent that it is based on alleged breaches of the laws of foreign country A.

[116]           In respect of the alleged breaches of foreign country B’s revenue law, the defendants plead that:

112.5          As  a  consequence  of  the  tax  owing   on   the   [Intco]  profits, [Mr and Mrs H] and any other person or persons or entities on their joint or several behalves did not acquire or retain legal title to the profits…of the [Intco] transaction.

112.6          As a result the trustees of the [Intco Trust] and the trustees of the [XYZ Trust] never acquired legal title to any funds settled on the [Intco Trust] or the [XYZ Trust] from money derived from the [Intco] transaction.

[117]           In accordance with ordinary strike-out principles I must accept that these allegations will be capable of proof at trial, no doubt by calling expert evidence on the relevant revenue law of foreign country B and the extent to which it (a) has extra- territorial application and (b) may affect ownership of profits made on sales of foreign shares. None of that evidence is before me on this strike-out application, and I have no basis on which I could conclude that these claims are so clearly untenable that they should be struck out.

45 The “unclean hands” defence provides essentially that a plaintiff seeking equitable relief may be denied that relief if he or she has been guilty of improper conduct (see Angell v Morresey, A 33/1985, HC New Plymouth, 1 April 1986, Hillyer J, at 5-6; Banks v Downing, AP 36/1989, HC Hamilton, 30 May 1990, Anderson J, at 13-14).

[118]           Ms Davenport points to the apparent tension between the illegality defences based respectively on alleged breaches of a foreign country A’s law and alleged breaches of foreign country B’s revenue law. If the defendants are correct in their argument that neither Mrs H nor Mr H acquired ownership of the Intco shares (or the proceeds of their sale), how could Mr H be liable for tax on the profit made on the sale? I think that is a fair question, but the answer may simply be that the defences are advanced as alternatives – the defence based on breach of the revenue law of foreign country B will only be relied upon if the defence based on breaches of foreign country A’s law does not succeed.

[119]           On that basis, if the allegations at paras 112.5 and 112.6 of the defendants’ amended statement of defence and counterclaim are accepted as being capable of proof at trial, I think the result on this issue must be the same for the defence based on alleged breach of the revenue law of foreign country B as it is for the defence based on alleged breaches of the laws of foreign country A. If the effect of the alleged breaches of the revenue law of foreign country B was that the XYZ Family Trust did not have title to the funds the trustees put into the joint venture, the plaintiffs are unable to rely on the “collaterally acquired property” rights exception discussed in Tinsley and Leason. And for the reasons discussed above in respect of the alleged breaches of foreign country A’s law, it cannot be said that the defence is so clearly untenable that it should be struck out. I accordingly find for the defendants on issues 1(a) and (b) at para [54] of this judgment insofar as their illegality defence is based on alleged breach of the revenue law of foreign country B.

[120]           As a footnote on this issue, I add that I do not think it assists the plaintiffs that they have removed references to the Intco Trust share transactions from their amended statement of claim. Their ownership of the monies invested in the joint venture has been put in issue by the defendants, and Lord Browne-Wilkinson noted in Tinsley, in the course of summarising a number of propositions emerging from earlier cases, that it is irrelevant whether the illegality of the underlying agreement was pleaded or emerged in evidence.46

46     Tinsley, above n 4 at 21.

Issue 2: Should one or both of the defendants’ illegality pleadings be struck out on the basis that the defence asks the court to enforce a foreign revenue law or penalty?

[121]           Ms Davenport concentrated her submissions under this heading on the affirmative defence based on the alleged breach by Mr H of the tax law of foreign country B. She submits that this affirmative defence requires the Court to apply and enforce the revenue law of foreign country B, and it is well settled that the Court will not adjudicate on matters which require the enforcement of foreign revenue laws, whether directly or indirectly.47 Secondly, she submits that the plaintiffs do not rely on any matters connected to tax liability in foreign country B in the statement of claim.

[122]           For the defendants, Mr Katz submits that the affirmative defences do not involve a request that the court should uphold and enforce a foreign fiscal or penal law. He submits that the same applies in respect of the counterclaim. In his submission, the Court is merely being asked to apply a principle of international comity, namely that a New Zealand court asked to enforce a contract, which may have been lawfully entered into in New Zealand and be subject to the exclusive jurisdiction of the New Zealand courts, will nevertheless recognise and pay due regard to foreign law if that foreign law dictates that the contract or some issue in relation to it is unlawful. He cites Regazzoni48 and Ralli Brothers,49 and Foster v Driscoll,50 in support of the proposition that a contract invalid according to a penal or revenue law of its applicable law, or the performance of which is prohibited by a penal law of the place of performance, may be held to be invalid and unenforceable.

My conclusions on Issue 2

[123]           First, I note that Government of India v Taylor and Attorney-General v Ortiz, cited by Ms Davenport, both related to a sovereign foreign state suing in the courts of England to recover foreign taxes or a penalty due under the laws of the foreign state. In both cases, the courts held that there was no jurisdiction to entertain such enforcement  actions.   In  Government  of  India,  Viscount  Simonds  noted  that the

47     Citing Government of India v Taylor [1955] AC 491, Attorney-General of New Zealand v Ortiz

above n 39, and Damburg v Damburg [2001] NSWCA 87.

48     Regazzoni v K C Sethia, above n 23.

49     Ralli Brothers v Compania Navera Sota y Aznar, above n 24.

50     Foster v Driscoll [1929] 1 KB 470.

essential characteristic of a penal action is that it should be an action on behalf of a government or community, and not an action for remedying a wrong done to an individual.51 Viscount Simonds considered that to be an apt description of a suit to recover taxes.

[124]           Ortiz was a case involving the Attorney-General for New Zealand seeking to enforce certain forfeiture provisions in the New Zealand Customs Acts, on the export of an historic article (a carving) contrary to the provisions of those Acts. The relevant New Zealand statutes provided for forfeiture of the carving to the New Zealand government on seizure, but the carving had been exported without any seizure taking place. In the Court of Appeal, Lord Denning MR noted that the courts of England would often recognize the existence of the laws of a foreign state in suits between private individuals or corporations (citing Foster v Driscoll, and Regazzoni), but that principle did not apply to an action brought by a sovereign state to enforce its laws in the English courts. The Master of the Rolls noted that no-one has ever doubted that English courts will not entertain a suit brought by a foreign sovereign, directly or indirectly, to enforce the penal or revenue laws of that foreign state.

[125]           Their Lordships in the House of Lords in Ortiz, in discussing the enforcement of penalties in the English courts, noted that the prohibition on enforcement by the courts would only apply in circumstances where the penalty was recoverable at the instance of the foreign state – the suit in question must be a suit in favour of the state whose law has been infringed (citing Huntington v Attrill52).

[126]           In this case, there is no question of the government of foreign country A suing in the New Zealand courts to recover a payment in the nature of a penalty for breaches of foreign country A’s law; nor is there any evidence that breach of the relevant laws of foreign country A in force at the time of the Intco share transactions would or might have resulted in an action by or on behalf of foreign country A’s community against Mr or Mrs H. As far as the evidence shows, breach may only have created rights of recovery by individuals who would have been entitled to the shares (or the proceeds

51     Government of India v Taylor, above n 47, at 507.

52     Huntington v Attrill [1893] AC 150.

of their sale) in the event of one or more of the transactions in which Mr and/or Mrs H were involved being void.

[127]           In those circumstances, I am satisfied that there is no basis to strike out the defence based on alleged illegality under foreign country A’s law as being a direct or indirect attempt to enforce a penalty in favour of a foreign state.

[128]           Does the defence of illegality based on the revenue law of foreign country B amount to a direct or indirect attempt to enforce a foreign revenue law?   I accept   Mr Katz’s submission that it does not. On this defence, the defendants are essentially asking the Court to prevent Mr H from following the Intco share sale proceeds (on the basis that he was the beneficial owner) into the joint venture companies or other places the funds were invested. There is no mention of direct or indirect recovery for the revenue authorities of foreign country B, and I accept Mr Katz’s submission that it is arguable for the defendants on the present strike-out application that the Court at trial may recognise and pay due regard to a foreign law, even if that law is a revenue law.

[129]I find for the defendants on Issue 2.

Issue 3: Are those parts of the defendants’ counterclaims which are in issue so clearly untenable that they should be struck out?

[130]           In the defendants’ submission, the issues surrounding the legality of the Intco share transactions are different with respect to the counterclaim. The relevant counterclaim allegations allege that the plaintiffs owed fiduciary obligations to the defendants, and in particular to Mr S, with respect to the various business ventures undertaken by the joint venture. The defendants say that, on a strike-out application, it must be accepted that joint venturers owe duties inter se.

[131]           The relevant duties which the defendants say were undertaken by the plaintiffs included duties not to use (for the purposes of the joint venture enterprises) funds sourced from some illegal or unlawful transaction. The defendants submit that the simple fact that the funds contributed by the plaintiffs were allegedly “tainted” was a breach of duty – it is not a question of relying upon any title, but simply a breach of the plaintiffs’ duties as pleaded by the defendants. For that reason, even if the plaintiffs

were to succeed on their Leason argument, that would not provide a basis to strike out the impugned paragraphs in the counterclaim.

[132]           I accept the defendants’ submission that, depending on the facts, co-venturers in a joint venture may owe fiduciary obligations to each other.53 The content of those fiduciary duties will vary according to the circumstances of the case.

[133]           I did not apprehend Ms Davenport to be contending that the fiduciary duties pleaded by the defendants in this case are in themselves so clearly untenable that the relevant parts of the counterclaim should be struck out. Rather, the argument is based on Mr S’ allegedly wrongful use of privileged communications with Mr and Mrs H in the pleading of the relevant parts of the counterclaim. The starting point in the argument is that the alleged illegalities that are pleaded as affirmative defences do not give rise to any arguable defence. If that is so, there is no basis on which the defendants can say that the plaintiffs have, by filing this proceeding, waived privilege in respect of the communications with Mr S on which he relies in mounting the illegality defence. The final step in the argument is that if Mr S has no basis for the affirmative defences, and therefore cannot use privileged communications in order to advance them, he can have no better right to rely on those communications in a counterclaim against the plaintiffs.

[134]           That is the argument as I understand it. But I have found that the defences of illegality cannot be struck out on a summary application such as this, and in those circumstances I do not believe that the defendants can be prevented from relying on privileged material which is essential to the defences they are running (a matter which I address in more detail under Issue 5 below).

[135]           If the defendants are entitled to rely on privileged material in order to mount an arguable defence, I think it would be unrealistic to find that they were unable to rely on precisely the same privileged material in support of a counterclaim which is dependent on essentially the same facts. Putting it in language appropriate to the determination of a strike-out application, I think that it is at very least arguable for the defendants that that must be the position.

53     Ross River Ltd v Waveley Commercial Ltd [2013] EWCA Civ 910 at [33].

[136]           Having regard to those considerations, the plaintiffs have failed to show that the impugned parts of the defendants’ counterclaim are so clearly untenable that they should be struck out.

Issue 4: If one of the defendants’ affirmative defences which is in issue, or their counterclaim, is tenable, but the other defence (or the counterclaim) is not, is it appropriate to strike out only those parts of the impugned pleadings which do not meet the “tenable case” threshold?

[137]           In the view to which I have come, there is no need to consider this issue: I have not been persuaded that either the affirmative defences which the plaintiffs apply to strike out, or the impugned parts of the amended counterclaim, have been shown to be clearly untenable.

Issue 5: In respect of any part of the impugned pleadings which do raise a tenable defence or counterclaim and would not be struck out on other grounds, should that defence or counterclaim be struck out because the defence or counterclaim pleads matter derived from privileged communications between Mr S and one or more of the plaintiffs?

[138]           In her supplementary submissions, Ms Davenport stated: “Should the Court strike out the affirmative defence based on foreign illegality, the defendants cannot seek to admit evidence otherwise privileged.”

[139]           I think Ms Davenport was correct in recognising that the “use of privileged material” argument for strike-out is really dependent on whether grounds exist for striking out the impugned pleadings on some other basis.

[140]Section 65(3) of the Evidence Act 2006 provides:

65       Waiver

3)A person who has a privilege waives the privilege if the person—

(a)acts so as to put the privileged communication, information, opinion, or document in issue in a proceeding; or

(b)institutes a civil proceeding against a person who is in possession of the privileged communication, information, opinion, or document the effect of which is to put the privileged matter in issue in the proceeding.

[141]           Have the plaintiffs put the privileged material in issue in this proceeding when it is only relevant to an affirmative defence or counterclaim pleaded by the defendants? In Lillicrap v Malder & Son,54 the English Court of Appeal considered the issue of waiver of privilege by filing a court proceeding against one’s solicitor. In that case, the plaintiff property developers claimed damages against their solicitors for negligence in respect of certain aspects of the title to a property which the developers had purchased. The solicitors admitted negligence, but contended that if the developers had been correctly advised they would have purchased the property anyway. The solicitors sought to plead as further particulars in support of that contention, certain privileged material arising out of the developers’ previous retainers given to the solicitors for work in similar transactions, in which the developers had ignored the solicitors’ advice. The Court of Appeal held that, where a client sued his or her solicitor, the client impliedly waived the right to privilege and confidence in relation to all matters which were relevant to an issue in the proceedings.

[142]           In his judgment in Lillicrap, Dillon LJ noted that the waiver must go far enough, not merely to entitle the plaintiff to establish his or her cause of action, but to enable the defendant to establish a defence to the cause of action if there is one.55 Russell LJ considered that, in bringing civil proceedings against his or her solicitor, a client impliedly waives privilege in respect of all matters which are relevant to the suit, most particularly where the disclosure of privileged matters is required to enable justice to be done.56

[143]           If and to the extent that the affirmative defences of illegality are arguable, as I have found them to be, it follows in my view that the defendants must be entitled to use the privileged material which they have pleaded. In the words of Dillon LJ in Lillicrap, use of the privileged material is required by the defendants to establish a defence to the plaintiffs’ causes of action.57

[144]I accordingly find for the defendants on issue 5.

54     Lillicrap & Anor v Malder & Son (a firm) [1993] 1 WLR 94.

55     At 99.

56     Lillicrap & Anor v Malder & Son (a firm) above n 54 at 99.

57     At 99.

Result

(a)The plaintiffs’ second amended interlocutory application to strike out parts of the defendants’ amended statement of defence and counterclaim dated 13 June 2014 is dismissed.

(b)Counsel may file memoranda on costs. Any memorandum from the defendants is to be filed and served within 21 days of the date of this judgment. The plaintiffs may file a memorandum in reply within 14 days after their receipt of the defendants’ memorandum.

Anonymising of names and other expressions

[145]           Both counsel submitted memoranda asking that certain redactions be made from this judgment. Ms Davenport pointed out that the affidavits and memoranda filed by the parties, and the details pleaded by the defendants in their statement of defence and counterclaim, contain material which is arguably privileged and for which a duty of confidence is arguably owed by Mr S to the plaintiffs. The extent to which the plaintiffs may have waived that privilege by filing that proceeding against Mr S is of course an issue in the proceeding, and will remain an issue until the proceeding has been tried – the findings made in this decision go no further than findings that the relevant parts of the amended statement of defence and counterclaim are not so clearly untenable that they should be struck out ahead of trial. Ms Davenport also submitted that the waiver of privilege (to the extent that one can properly be found) can only operate as between the parties, and cannot operate to make privileged material available to third parties or the world at large. She asked that this decision be made available for publication in such a way that all privileged material be redacted, or that the decision be published in anonymised form, with the parties being given aliases, as is done in a Family Court proceeding or other sensitive proceedings.

[146]           In his memorandum, Mr Katz accepted that some anonymising of the judgment would be appropriate.

[147]           In my judgment issued on 2 March 2015 I accepted that it was appropriate, at least pending further order of the Court, for the names of the parties to be anonymised

by referring to them simply by letters. The names of the parties, and certain other names (such as the name of Intco) were accordingly anonymised in the judgment as issued on 2 March 2015.

[148]           Both counsel have now filed further memoranda. Ms Davenport submitted that some further anonymising would be necessary; Mr Katz submitted that the level of anonymising employed in the judgment as issued on 2 March 2015 was sufficient to adequately protect any privilege or confidentiality rights the plaintiffs might have.

[149]           In the end, I have substantially accepted Ms Davenport’s submissions on this issue, and anonymised some additional names or other expressions used in the judgment. The principal changes in response to counsel’s further submissions are the anonymising of foreign country A and foreign country B (both were named in the judgment as issued on 2 March 2015), and the removal of specific references to the relevant laws of the foreign countries. If the purpose of the anonymising which both counsel regarded as appropriate was to preserve Mr and Mrs H’s rights of confidentiality pending trial, that purpose could easily be defeated if people knowing Mr or Mrs H were able to identify then by reference to the facts which are included in this judgment, and in particular by reference to the countries I have now identified as foreign country A and foreign country B (or the relevant laws of those countries). I am satisfied that the further anonymising is necessary to protect the rights of Mr and Mrs H pending the trial of the proceeding.

[150]I make the following orders:

(a)The order suppressing publication of any part of this judgment in the form in which it was issued on 2 March 2015 is to remain in force, pending further order of the Court.

(b)That order does not apply to this (re-issued) form of the judgment, in which further anonymising has been done following the receipt of counsel’s further submissions. Subject to subparas (e) and (f) below, this (re-issued) form of the judgment is issued without any restriction on publication.

(c)Pending further order of the Court, I make an order prohibiting any search of the Court file without the leave of a Judge.

(d)Leave is reserved to the parties to apply by memorandum to vary the foregoing orders relating to publication and/or the search of the Court file, in the event of new circumstances rendering the foregoing orders either no longer necessary or no longer appropriate.

(e)Pending further order of the Court, I make an order suppressing publication of the names of the parties to this proceeding and of any information which may tend to identify them or any of them.

(f)Without limiting the order at subparagraph (e) above, there will also be an order (pending further order of the Court) suppressing publication of the identities of each of the following, and of any information which may tend to identify them or any of them:

(i)Intco

(ii)the Intco Trust

(iii)the T Trustees

(iv)the XYZ Family Trust

(v)W Trustees Limited

(vi)C Limited

(vii)S Family Trust(s)

(viii)XYZ Limited

Associate Judge Smith