Houghton v Saunders

[2012] NZHC 1828

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2008-409-000348 [2012] NZHC 1828

BETWEEN  ERIC MESERVE HOUGHTON Plaintiff

ANDTIMOTHY ERNEST CORBETT SAUNDERS

SAMUEL JOHN MAGILL JOHN MICHAEL FEENEY

CRAIG EDGEWORTH HORROCKS PETER DAVID HUNTER

PETER THOMAS JOAN WITHERS First Defendants

ANDCREDIT SUISSE PRIVATE EQUITY INC (FORMERLY CREDIT SUISSE FIRST BOSTON PRIVATE EQUITY INC)

Second Defendant

ANDCREDIT SUISSE FIRST BOSTON ASIAN MERCHANT PARTNERS LP Third Defendant

ANDFIRST NZ CAPITAL SECURITIES LIMITED

Fourth Defendant

ANDFORSYTH BARR LIMITED Fifth Defendant

Hearing:         7-8 December 2011, 21 March 2012 and 30 May 2012

Appearances: A Forbes QC and Ms Mills for the Plaintiffs

D Cooper for the First Defendant
A Olney and C Curran for the Second and Third Defendants
D McLellan for the Fourth Defendant
A Challis for the Fifth Defendant

Judgment:      1 August 2012

RESERVED JUDGMENT OF HON. JUSTICE FRENCH On Plaintiff ’s Application for Split Trial/Determination of Preliminary Questions

HOUGHTON V SAUNDERS & Ors HC CHCH CIV-2008-409-000348 [1 August 2012]

Introduction

[1]      The plaintiff, Mr Houghton, is a former shareholder of the failed company Feltex  Carpets  Limited.   He has issued representative proceedings on  behalf of himself and approximately 3000 shareholders against the former Feltex directors and others associated with a public float share issue that took place in May/June 2004.

[2]      The claim centres primarily on the prospectus which Mr Houghton alleges contained untrue and misleading statements.  The statement of claim pleads causes of action under s 9 Fair Trading Act 1986, s 56 Securities Act 1978 and negligence.

[3]      It is common ground that the only effective and manageable way to process litigation of this sort is to hear the claims in two stages.

[4]      What is in dispute is whether the first stage should include consideration of issues that may relate to the claims of other members of the represented class but not to Mr Houghton’s own case.

Background

[5]      In order to understand the competing arguments, it is necessary to set out some of the background history.

[6]      In November 2011, Mr Houghton’s counsel filed an application seeking an order under r 10.15 of the High Court rules, that all issues regarding liability be determined separately before any issues as to loss and individual reliance by any claimant.

[7]      The application was opposed and a hearing held in December 2011.

[8]      At the hearing, a consensus developed that, rather than stages 1 and 2 being a liability/loss split as proposed by the plaintiff, the more appropriate course of action was to have Mr Houghton’s own claim heard in its entirety (ie, both liability and loss) at stage 1.  That, of necessity, would involve resolution of all issues that were common to Mr Houghton and all the other claimants, as well as issues that were unique to Mr Houghton.  In the second stage, the individual aspects of the claims of all the other qualifying shareholders would be considered.

[9]      It was further agreed that a list of common issues (meaning issues common to Mr Houghton and all other claimants) to be traversed at the stage 1 hearing should be compiled in advance.  The list was to be compiled on the basis that findings on the listed issues would be binding as between the defendants and all members of the represented class. The findings would give rise to a res judicata.

[10]     The defendants were opposed to any non-common issues being considered at stage 1, other than those pertaining specifically to Mr Houghton.

[11]     While agreeing that Mr Houghton’s claim should be heard in its entirety at stage 1 and that stage 2 should be devoted to consideration of the individual aspects, Mr Forbes, however, also wanted stage 1 to include consideration of some additional issues  which  did  not  arise  out  of  Mr  Houghton’s  claim.    He  accepted  at  the December hearing that, insofar as any of these additional issues were not common as between Mr Houghton and all other claimants, the findings would not bind the parties but would, in his submission, provide significant guidance.

[12]     Mr  Forbes  had  identified  some  of  these  proposed  additional  issues,  but accepted the formulation of them needed reworking.

[13]     The  December  hearing  was  then  adjourned,   orders  being  made  that Mr Cooper would compile a list of what the defendants considered were the common issues and Mr Forbes would provide a revised list of his proposed additional non- common issues.  Within 15 days of receiving each other’s lists, the recipients were to

file responses.[1]

[1] In light of the consensus that emerged, the defendants decided to put their own application for

the representative order to be amended “on hold.”

[14]     Mr Cooper duly filed a list of the issues “which the defendants consider to be common as between the plaintiff and each of the qualifying shareholders and therefore in respect of which a judgment would result in res judicata as between the qualifying shareholders and the defendants.”   The list identifies the issues by reference to the pleadings.  In the main, it comprises issues of whether the statements in  the  prospectus  were  misleading  and  whether  the  defendants  had  reasonable grounds to believe and did believe that the statements were true.

[15]     At a subsequent conference call, Mr Forbes confirmed that he did not dispute the list of common issues identified by Mr Cooper.

[16]     As directed, Mr Forbes also filed a memorandum detailing the additional questions which the plaintiff considered should be the subject of preliminary determination.

[17]     In the memorandum, Mr Forbes explained that the questions were directed towards establishing whether there are or may be differences between the position of Mr Houghton and the other qualifying shareholders on the relevant issues so as to provide future guidance for the parties.

[18]     The defendants maintained their opposition to any of the proposed additional questions being part of stage 1 and, accordingly, a further hearing was convened in

March 2012.

[19]   The defendants’ opposition included arguments about the nature of representative actions,[2]  the strict requirements for preliminary determinations under r 10.15,[3]  and the well established principle that it is not the role of Judges to issue advisories.[4]

[2] Relying on inter alia Prudential Assurance Co Ltd v Newman Industries Ltd [1979] 3 All ER 507 at 520

[3] As identified in Clear Communications v Telecom Corporation of NZ Ltd (1998) 12 PRNZ 333 at 334 (HC).

[4] Lever Bros and Unilever Ltd v Manchester Slip Canal Co (1945) 78 LLR 507 at 509-510.

[20]     In  the  course  of  reply  submissions,  Mr  Forbes  sought  to  overcome  the possible  limitations  of  r 10.15  by  invoking  the  inherent  jurisdiction.    He  also contended (contrary to his previous submissions) that four of his proposed additional questions could result in binding determinations.

[21]     Both points were new and, having only raised them in reply, he accepted that the defendants should be given a further opportunity to make supplementary submissions.

[22]     In   their   supplementary   submissions,   the   defendants   contended   that Mr Forbes’s argument about four of the questions involving binding determinations amounted to a new application, and that I should either determine the application without regard to the new arguments raised in reply or convene a further hearing.

[23]     I took the view that the better course of action was to convene a further hearing, and this was duly held on 30 May 2012.

The proposed additional questions

[24]     The  proposed  additional  questions  are  as  set  out  below.    The  questions marked with an asterisk are those which Mr Forbes contends would result in binding

determinations were the trial Judge minded to answer them.

1.1      To the extent that reliance by qualifying shareholders is required:

(i)      are there any circumstances in which the nature and extent of the reliance on the prospectus by qualifying shareholders or any group of them required under the first, third and fourth causes of action in the second amended statement of claim dated 22

July 2011 (ASOC) is, or is likely to be, different from that of the plaintiff?

*(ii)   are any of the forms of reliance alleged in the ASOC para 22.1-

22.5, which are not proven by the plaintiff as part of his case, sufficient?

*2.1In respect of the fourth cause of action, are qualifying shareholders who acquired their shares after the closing date of the public offer on

21 May 2004, but before the closing date for firm allocations on

2 June 2004, in a different position for the purpose of limitation?

2.2*(i)    Subject to para 2.1, did time start to run against all qualifying shareholders at the same time as it commenced to run against the plaintiff; or

(ii)     Are  there  any  circumstances  in  which  the  position  of  the qualifying shareholders or any group of them is or is likely to be different to that of the plaintiff in this regard?

2.3*(i)    Did time cease to run against all qualifying shareholders when the plaintiff filed this proceeding, including an application for a representative order, on 26 February 2008; or

(ii)     Are  there  any  circumstances  in  which  the  position  of  the qualifying shareholders or any group of them is or is likely to be different from that of the plaintiff in this regard?

3.Are there any circumstances in which the position of the qualifying shareholders or any group of them is or is likely to be different from that  of  the  plaintiff  in  respect  of  the  second  cause  of  action,  in particular as to the causative effect alleged in ASOC para 41?

4.Are there any circumstances in which the position of the qualifying shareholders or any group of them is or is likely to be different from that of the plaintiff in regard to:

(i)     the duty of care alleged in the ASOC para 49; and

(ii)     whether the defendants were negligent as alleged in the ASOC

para 51?

5.Are there any circumstances in which the position of the qualifying shareholders or any group of them is or is likely to be different from that of the plaintiff in respect of the affirmative defence claiming relief from liability under the Securities Act 1978 s63 pleaded by the first, fourth and fifth defendants?

[25]     The proposed questions primarily relate to reliance and limitation issues and, as explained by Mr Forbes, are directed towards establishing whether there are or may be differences between the position of Mr Houghton and the other qualifying shareholders.   This, he contends, will assist with settlement and with the stage 2 hearing.

[26]     An  immediate  objection  to  the  questions  about  limitation  is  that  I  have already answered those questions or expressed a view about them in a previous judgment.[5]    Moreover, the judgment in question is the subject of an appeal to the Court of Appeal, to be heard this month.  For those reasons alone, I do not consider it appropriate to include the questions at the stage 1 hearing.

[5] Houghton v Saunders (2011) 20 PRNZ 509 (HC).

[27]     As for the questions about reliance, they raise issues which to a certain extent have dogged these proceedings but which have never been resolved.   Reliance is integral to each cause of action, but the scope of the reliance required is highly contentious.  Is it necessary, for example, that in order to succeed a claimant must actually have read the prospectus at the time, or even, more specifically, have read and actually relied on the impugned passages in the prospectus in making their decision to invest?   Or does some lesser form of reliance suffice, such as simply signing the application form which referred to the prospectus, or relying on the advice of a broker or news report?

[28]     The defendants have argued that actual reliance is required, that reliance is a quintessentially individual issue and that there will be significant differences  as between claimants.

[29]     While the plaintiff’s position has always been that something less than actual reliance will suffice,[6] I had understood that the plaintiff accepted that reliance was an individual rather than a common issue.   That was the underlying basis of the distinction between the two lists which were prepared following the December hearing.  However, in reply submissions at the May hearing, Mr Forbes submitted

that reliance was a common issue.

[6] A position that derives some support from the Court of Appeal, Saunders v Houghton [2010]

3 NZLR 331 at [83]-[90].

[30]     It appears that what Mr Houghton will say at the stage 1 hearing is that he did read the prospectus and did actually rely on all of it in making his decision to invest.

[31]     It follows that his own claim will not turn on whether some lesser form of reliance will suffice, and that any statements the trial Judge might make about lesser forms of reliance in the judgment would, according to orthodox principle, be obiter (albeit helpful) and not binding.

[32]     Mr  Forbes  sought  to  overcome  this  difficulty  by  urging  pragmatism. Mr Forbes submitted it would be ludicrous to require each of the 3000 claimants to give evidence, and the reality is, as the defendants well know, that this simply will not happen.   He also drew my attention to an Australian case,[7]  where the Court allowed preliminary questions to be determined in a representative action that were not  common  to  the  lead  plaintiff  and  all  other  claimants.    The  questions  for

determination were qualified by adding the phrase, “leaving aside any fact relevant to the issues which are peculiar to any plaintiff or a particular group member?”

[7] Johnson Tiles Pty Ltd v Esso Australia Pty Ltd & Anor (No 3) [2001] VSC 372.

[33]     This appears to be the only Australian decision where questions have been formulated in such a way and it did not involve reliance.

[34]     That said, I am not unsympathetic to Mr Forbes’s argument.  This proceeding is indeed extraordinary, and, in the absence of specific class action rules, it is incumbent on the trial Judge to be flexible and creative.  For that reason, I would not rule out the use of the inherent jurisdiction.

[35]     I also accept it is desirable for the reliance issue to be resolved or clarified at the stage 1 hearing.

[36]     However, the litigation must still proceed in a principled and orderly way.  In my view, the plaintiff ’s additional questions as currently formulated will not be conducive to that end.   Further, the Court of Appeal has clearly signalled that the

reliance issue is not to be decided in a vacuum but only once the facts are known.[8]

[8] Houghton v Saunders [2010] 3 NZLR 331 (CA).

[37]     In my view, if lesser forms of reliance are to be traversed at the stage 1 hearing and binding rulings sought, then the appropriate course of action is to create sub-groups and decide the reliance issue in the cases of sample sub-group members with evidence.

[38]     As for questions 3, 4 and 5, I consider these questions lack the necessary precision required of a preliminary determination, even making allowances for the fact this is a class action.   To a significant extent, they invite speculation on hypothetical  facts  which  is  not  the proper  function  of the Court.    It  is  for the claimants’  representatives  to  identify  what  they  consider  to  be  the  differences between Mr Houghton and the other claimants and if appropriate to then seek directions including the possible creation of sub-groups.

Outcome

[39]     There will be a stage 1 hearing at which Mr Houghton’s claim is to be heard

in its entirety.

[40]     Rulings  at  the  stage  1  hearing  on  the  common  issues,  identified  by Mr Cooper in his list of 20 January 2012, will be binding as between all other members of the represented class and the defendants.

[41]     The plaintiff’s application to include additional questions as formulated in

Mr Forbes’s memorandum of 24 January 2012 is declined.

[42]     Leave is reserved to the plaintiff to apply for directions establishing a sub- group or sub-groups within the class.

[43]     Leave is reserved to any party to apply to vary the scope of the stage 1 hearing.

[44]     There  will  be  a directions  conference  call to  discuss  timetabling  for  the stage 1 hearing.  The conference call will not be convened until the Court of Appeal has delivered its decision.  At the conference call, subject to the Court of Appeal

decision, counsel will also be expected to discuss stage 2 and, in particular, whether any of the defendants are maintaining the stance that fresh proceedings are required for the other claimants once Mr Houghton’s claim is determined in its entirety (with all that this might entail for limitation purposes), or whether the remaining claims can be processed within this existing proceeding.

Costs

[45]     The absence of class action rules is creating difficulties for the parties in this case and, in particular, for the plaintiff, who bears the carriage of the litigation.  The way in which the current application morphed over time reflects those difficulties.

[46]     However, while taking that into account, I consider that the defendants are nevertheless entitled to costs on a 2B basis and I so award.

Solicitors:

Wilson McKay, Auckland

(Counsel: A J Forbes QC, Christchurch) Bell Gully, Auckland

Russell McVeagh, Wellington

Jones Fee, Auckland

(Counsel: D McLellan, Auckland) McElroys, Auckland

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